On this week’s Marketplace Money, Chris and Tess answer questions about freeing up assets to purchase an online business, buying foreign real estate, paying Social Security taxes while self-employed and financing options for study abroad.
TEXT OF GETTING PERSONAL (FIRST SEGMENT)
Tess Vigeland: All right, it is time to Get Personal. It’s our weekly look into the situations that affect your wallets and bank accounts and with me again is our economics editor Chris Farrell. Hello again, Chris.
Chris Farrell: It’s good to be back, Tess.
Vigeland: Excellent. Well, let’s start off very quickly with clarifying a couple elements from last week’s show.
Farrell: Oh please, yes.
Vigeland: OK. So first of all, we had the question about how to go about reducing your property taxes and you mentioned a web site and I think we got a couple of the words wrong, so let’s help folks out here. What is the actual web site that can help them out?
Farrell: Well Tess, I misspoke. It’s The American Homeowners Association and I apologize for that. There’s another thing that I’m upset at myself that I did not emphasize that is extremely important and I always do it. In order to get the property tax kit, it’s almost $30. Obviously, I should have mentioned that there is a cost associated with this kit. For most people, they don’t have to do that, but that option does exist.
Vigeland: OK; and we also got a couple of responses. We had talked to a woman named Candace who bought savings bonds for her child’s education, put it both her name and her children’s and we had some advice on transferring that bond and tell us briefly what your advice was and then we’ll expand on that.
Farrell: Right. My advice was that you needed to make an electronic transfer. So, in other words, you would make a transfer from paper to electronic and then you could change the name without triggering any tax consequences. Take it from there Tess.
Vigeland: OK; and we actually heard from someone who works at the Federal Reserve and they said that you actually don’t have to do electronic.
Farrell: That’s correct.
Vigeland: All right. Well, let’s go to the questions. Our first caller of the day is Shelby and she is in Fort Collins, Colorado. Hi Shelby.
Shelby: Hi, Tess.
Vigeland: And Chris is with me as well if you’d like to say hello.
Shelby: Hi Chris.
Farrell: Hi.
Vigeland: So what’s your question for us today?
Shelby: OK. My husband and I are purchasing an online business. It’s an ergonomic office product web site. It’s been on the Internet since ’96.
Vigeland: So this is a web site that’s currently owned by someone else?
Shelby: Yes.
Vigeland: OK.
Shelby: So my question is we’re looking into different ways to finance it — it’s a cash purchase. Possibilities include getting a home equity line of credit, refinancing our house and getting some cash out, selling some stock or borrowing against some investment.
Vigeland: All right. Well Chris, let’s go through these options for them. First of all, selling stock?
Farrell: Well, the big advantage to selling stock — and of course, then you’ll pay capital gains taxes — but you’ll have equity, you’ll have a chunk of money. What concerns me about some of the other options… what if it does fail? Then you put your house at risk, your personal finances at risk.
Vigeland: That’s if they were to take out a home equity line of credit?
Farrell: Exactly. To own a small business is a risky endeavor as it is and my main piece of advice would be first, work with or hire a lawyer that is used to working with small businesses that will work with you in terms of isolating the risk of this business from your personal assets as much as possible so that if it does go under, a lifetime of work doesn’t go poof at the same time.
Shelby: OK.
Vigeland: Shelby, can I ask you a quick question? The money that you have in stocks right now, is that separate from your retirement funds?
Shelby: No, it’s not.
Vigeland: So this is your retirement that you’re talking about potentially cashing out?
Shelby: Some of it, yes.
Vigeland: Chris, does that change the calculation at all? I mean if they’re looking at taking out money from what is going to fund their retirement, what do you think?
Farrell: Two quick thoughts. I mean one, sometimes people do this. This is a really bad idea if you’re taking the money out of a retirement account because then you pay ordinary income taxes plus you have to pay the 10 percent penalty. In this case, it’s in a taxable account. It’s set aside for retirement so you don’t have that 10 percent penalty but I mean, you really got to raise some questions about the risk. If this succeeds, they’re going to have a very good retirement. If it doesn’t succeed, money is going to be very tight.
Vigeland: Chris, as a general rule we tend to tell people not to touch their retirement funds.
Farrell: Exactly; absolutely.
Shelby: OK.
Vigeland: OK Shelby, does that help you out?
Shelby: Yeah.
Vigeland: OK. Thanks for the call.
Shelby: All right, thank you very much. Bye-bye.
Vigeland: Bye-bye. All right, Andy from Washington, DC has our next question and he recently vacationed in Salvador, Brazil.
Farrell: Oh, I’m jealous.
Vigeland: Yeah, I am too. He fell so much in love that he’s considering buying a home there. However, he can’t afford to pay for it in cash, so he wants to get a home loan. So the question here is does he borrow in U.S. dollars from an American lender or does he try to look for an American bank that’s involved in the international home loan market? I guess my question would be are there American banks that are involved in loaning for homes in other countries?
Farrell: It’s pretty small. I think your skepticism is valid. Look, I have a couple quick reactions. You know Tess, we’ve gotten variations on this question, so my first and initial reaction is go back to Salvador, Brazil and then go back again. Put the financing aside for the moment.
Vigeland: Make sure you absolutely love it?
Farrell: Absolutely, because all of us have had that experience, but there’s a lot to learn about the Brazilian market and the home mortgage market in Brazil is not the same as it is here in the U.S. by and large and some of the major multi-national banks have a small but growing lending presence, but here’s the real trick: it tends to be for the wealthier clients who have a lot of collateral and a lot of assets. The banks that I would approach and that he could approach would be a Citigroup, HSBC. There are also some Latin American banks that have a large presence here in the U.S. and that’s another route that you could take.
TEXT OF GETTING PERSONAL (SECOND SEGMENT)
Vigeland: We’re back again with Getting Personal. I’m Tess Vigeland. With me is our personal finance expert Chris Farrell and Chris, let’s reach into the e-mail bag once again. Rick writes in from Omaha, Nebraska, and a few years ago, his company downsized and he was let go, a story that we’re hearing more and more these days with the economy the way it is.
Farrell: Yeah.
Vigeland: He says that his company did what a lot of others have done: they got rid of all their older and experienced workers first to bring in all the young ones who work for nothing. But now he’s running his own home remodeling business — says he loves it — but he’s wondering about his Social Security and here is why: he hasn’t paid into it for years and Chris, he’s wondering if that will have an effect on the payment he’ll receive. I’m going to make a wild guess and say yeah.
Farrell: The self-employment tax rate on net earnings is 15.3 percent, so I’m a lot less concerned right now about what you’re going to be able to draw upon when you retire. What I’m really concerned about is you’re not paying your Social Security taxes and the self-employed do pay Social Security taxes.
Vigeland: So in other words, the taxman is not going to be happy about this?
Farrell: He’s not going to be happy, so get yourself to an accountant, work with somebody or an enrolled agent, someone who is used to working with the IRS. We’re going to have to do some amended returns, so get yourself professional help and let’s deal with the situation and then put it behind us. And by the way, then you will be credited for those years you’ve been working when you do eventually retire and draw on your Social Security check.
Vigeland: So you cannot get away with not paying your Social Security taxes?
Farrell: No; the government does not like that. You know it’s the cost of doing business as a self-employed.
Vigeland: So if he’s been filing his taxes on a regular basis, how did the IRS not catch this?
Farrell: I have no idea, although I’ve done some looking on the Internet on some previous times and there have been a number of court cases surrounding this kind of an issue, so I’m not sure how it falls through the cracks, but it’s something that you really don’t want to fall through the cracks.
Vigeland: All right, so Rick, you’re going to need to pay those back Social Security taxes and once you do, the IRS will be happy and Social Security will pay out to you what you deserve when you retire. Thanks for writing in. All right, let’s go to the phones. Megan is with us from Minneapolis, Minnesota. Hi Megan.
Megan: Hi.
Vigeland: What do you do there in Minnesota?
Megan: I go to school right now for Art and Design.
Vigeland: Oh terrific. So what are you planning to do with your degree?
Megan: Well I’m not quite sure yet, but next year I’m hoping to study abroad in Denmark.
Vigeland: And what would you be studying?
Megan: Architecture and just general European design.
Vigeland: Sounds lovely. All right, so what’s your question for Chris today?
Megan: Well, I was wondering if the market right now, the economy, has any adverse effects on student loans and also with the studying abroad, if there’s any options for financing that besides student loans?
Vigeland: That wouldn’t be with your school? It would be a separate study opportunity?
Megan: Right, separate from the school.
Vigeland: OK, first of all, the answer is yes. The economy is making it tough for some folks to get student loans, the credit crunch of course affecting that. Chris, what are her options?
Farrell: Well, there are a couple of options. One I’m usually reluctant to recommend is a private student loan and the reason why I’m reluctant with private student loans is you don’t have a lot of the benefits that you do with student loans that are underwritten by the federal government. For example, once you graduate boy, you got to start paying them fast! There’s no such thing as forbearance and a number of protections that if you are having a hard time getting a job or a hard time making an income that the regular student loans give you. There’s always the option of there’s a very large architecture community in the Twin Cities and whether there might be some work that you could do while you’re over in Denmark for one of the architecture firms. Maybe there’s some little bit of research, give you a little bit of a stipend. It might not pay for the whole trip over there, but perhaps there is a deal that you could strike with one of the architectural firms.
Megan: That sounds really good actually. Thanks.
Farrell: I don’t know whether you can, but it’s worth a try and at the University you’re at — the School of Art and Design — I would imagine that they might be able to strike some contacts for you.
Megan: Yeah.
Vigeland: So when are you thinking you might go?
Megan: This coming fall.
Vigeland: Well, good luck.
Megan: All right, thank you very much.
Vigeland: Take care.
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