Sunday, November 18, 2012

Entitlements

Noun:
  1. The fact of having a right to something.
  2. The amount to which a person has a right
529 or Coverdell
Home Mortgage Interest Deduction
Hope or Lifetime Learning Tax Credit
Student Loans


 Politicians talk about entitlement programs, but they are never specific. The only problem I see with entitlement programs, is the abuse of them.

1. 529 program: I know this one well. A college savings account that is great for taxes. I'm guessing this is considered an entitlement because of the tax situation. You pay no taxes on earnings, and you can roll the whole investment into other tax deferred accounts, such as IRA and other retirement accounts. However, you do invest your own money, after taxes. I have paid no taxes on the earnings since opening this account in '04. My financial adviser (loving brother) assures me that I will not pay taxes until retirement age, as long as I keep rolling it over. But that's if the Princess doesn't attend college. If she goes to college, the fund is transferred, 100% tax free.
 Verdict:  I feel that my daughter is entitled to not have to worry about paying for college. But that entitlement is paid for by her work horse Father, and financially brilliant Uncle.
2. Home Mortgage Interest Deduction:  Most of us know this one. There have been two arguments on the deduction. The arguments against is that the deduction inflates property values, as well as creating a sort of welfare state. In fact, Alan Mallach, a senior fellow at the Center for Community Progress and a visiting scholar at the Federal Reserve Bank of Philadelphia, argues that the deduction artificially inflates home prices and is in effect a government subsidy of the real estate industry. Of course, eliminating this deduction could lead to a better revenue stream for the Federal Government, which I'm sure will be wasted. The argument in favor of  is obviously led by the National Association of Realtors. The standard justification for the deduction is that it gives an incentive for home ownership. The NAR strongly opposes eliminating the mortgage interest deduction, claiming, "Housing is the engine that drives the economy, and to even mention reducing the tax benefits of home ownership could endanger property values. Home prices, particularly in high cost areas, could decline 15 percent if recommendations to convert the mortgage interest deduction to a tax credit are implemented. I think this statement alone proves that the Home Mortgage Deduction does inflate real estate value.
 Verdict: Not sure if I would call this an entitlement. In order to receive the benefits of this deduction, you still have to invest your own money into a home. I would also like to add that the home mortgage deduction had nothing to do with my decision to purchase property.
3. Hope or Lifetime Learning Tax Credit: This is available to taxpayers who have incurred education expenses. For this credit to be claimed by a taxpayer, the student must attend school on at least a part-time basis. The credit can be claimed for education expenses incurred by the taxpayer, the taxpayer’s spouse, or the taxpayer’s dependent. This credit allows for a 20% tax credit for first $10,000 of qualified tuition and expenses to be fully creditable against the taxpayer’s total tax liability. The maximum amount of the credit is $2000 per household. The credit is available for net tuition and fees (less grant aid) paid for post-secondary enrollment. The credit is available on a per-taxpayer (family) basis, and is phased out at the same income levels as the Hope Scholarship Credit.
 Verdict: From what I read, my biggest issue with this entitlement is that it seems like a reward for going into debt. This credit may also be responsible for inflating the cost of higher education.
4. Student Loans: Student loans come in several varieties in the United States.
Federal student loans made to students directly: The student makes no payments while enrolled in at least half time status. If a student drops below half time, the account goes into a six-month grace period. If the student re-enrolls in at least half time status, the loans are deferred, but when they drop below half time again they no longer have access to a grace period. Amounts are quite limited as well. There are many deferments and a number of forbearances one can get in the Direct Loan program. For those who are disabled, there is also the possibility of 100% loan discharge if you meet the requirements. Due to changes by the Higher Education Opportunity Act of 2008, it became easier to get one of these discharges after July 1, 2010. There are loan forgiveness provisions for teachers and health professionals serving low-income areas. Currently, certain loan forgiveness or discharges are considered income by the Internal Revenue Service due to 26 U.S.C. 108(f).
Federal student loans made to parents: Much higher limit, but payments start immediately
Private student loans made to students or parents: Higher limits and no payments until after graduation, although interest starts to accrue immediately. Private loans may be used for any education related expenses, such as tuition, room and board, books, computers, and past due balances. Students can also use private loans to supplement federal student loans when federal loans, grants, and other forms of financial aid are insufficient to cover the full cost.
The federal student loan program has been criticized for not adjusting interest rates according to the riskiness of factors that are under students' control, such as choice of major. Critics have contended that this lack of risk-based pricing contributes to inefficiency and misallocation of resources in higher education, and lower productivity in the labor market. However, recent research indicates that while high levels of student loan debt, coupled with high default rates, present a number of challenges for individual student loan borrowers, they do not necessarily place a substantial burden on society at large.
 Verdict: This one is tricky, because it is a loan that needs to be repaid. However there is evidence of abuse. I like to play poker. One night at the local casino I was playing a $5-$10 NL Hold em game. Across from me was a guy and girl who were wearing New York Giants jerseys. After a few hours someone at this table asked about the jerseys. Turns out they were both from New York. They came to Chicago to go to college. Why? Because Illinois has the BEST debt forgiveness programs. So here I am playing poker with two kids who are worried about not being able to pay back their loans. Or are they planning on just defaulting so they don't have to pay back that loan? I should mention that they both bought into the game for the maximum amount, which is $1000. I believe this would be a case of abuse, and maybe should be viewed as an entitlement, considering default would only place a bigger burden on the tax payer.

 ................To be continued. We have a lot more to cover.

2 comments:

  1. I like the pic of your daughter. I taught both my daughters to play. My youngest makes a lot of money playing here at the Jersey Shore or what's left of it. I did NOT send her to college. I don't think it's worth it. The huge student debt problem has many variables. One of which is the hyper inflated cost of tuition. Don't know if you are aware of the The Student Aid and Fiscal Responsibility Act (SAFRA) would end the $87 billion worth of bank subsidies and move all student lending to the federal government. This legislation has been stalled by some centrists democrats like Ben Nelson (can you believe it?) Also there is the terrible job situation, graduates can't pay back loans if they can't get a job. Can't wait to see what else you'll cover.

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  2. Thanks Patricia. I started Princess out on Piano after her Second birthday. I was teaching her for about three years when she decided she wanted to try guitar. She dod very well at that, but over the Summer time decided she wanted to switch to violin, which is what she is currently doing. She is taking to it very well. It's funny, she hates classical music, but gravitates to the classical instruments. Maybe she'll decide to go to Julliard. I can only hope.
    I am very aware of the SAFRA act. However, you might like to know, That the SAFRA act was passed in 2010. This act was included as a rider on the Reconciliation Act of 2010, which was an amendment to the Patient Protection and Affordable Care Act.

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