BRUINBUSINESSREVIEW

VOLUME II ISSUE VIII

PERSONAL FINANCE
2008-2009 BBR STAFF
Shannon Kung Grace Chan Gloria Ho
President Vice President of Finance Marketing Department

Fred Kim Christine Liu Stefanie Ju

Advisor Vice President of Marketing Finance Department

Joanne Hou Julie Chen Eric Park

Editor Corporate Relations Department Marketing Department

Benjamin Lo Sonia Bhasin Jaeman Kim

Assistant Editor
Sunny Wong
Vice President of Operations
Marketing Department Vice President of Corporate
Relations
Erika Solanki
Creative Development
Department Head

ABOUT US

Bruin Business Review is a student-run online publication established in

2007 for the purpose of providing the UCLA student body with a conven-
ient source of business news and career information. We publish every
two weeks on the Internet and by subscription, allowing our content to
be accessible to everyone. Our goal is to enrich our readers’ knowledge of
the business world and the career options within it by presenting a wide
range of business-related topics in a non-technical style. Our broad range
of topics encompasses current business news, resume tips, employer and
MBA program profiles, industry insight, and others. For more information
about BBR, visit www.bruinbusinessreview.com.

QUESTIONS, COMMENTS, CONCERNS?

E-mail: bruinbusinessreview@gmail.com
Mailing address:
Bruin Business Review
118 Kerckhoff Hall
308 Westwood Plaza 2
Los Angeles, CA 90024-1641
February 2009
Stock Market Competition
Start Date: January 29, 2009
End Date: March 9th, 2009
Email: ubsmarketcompetition@gmail.com
Description: Learn about investing
in the stock market! Teams of 3 students put together a portfolio
using a base of $100,000; winners get cash prize.

March 1

PricewaterhouseCoopers-So Cal and National Summer Leadership

Programs- Resume Drop deadline
Description: Takes place from June 29-30 in Los Angeles. All sopho-
mores interested in accounting should apply. Minimum GPA: 3.0.
Submit by 11:59pm.

March 4

Student Accounting Society- Mentor Application Due

Description: A great way to help other students going through the
recruiting process and meet new people.

Future Business Leaders of America- Phi Beta Lambda

Training Grounds: Delivering Effective Presentations
Time: 7pm
Location: Royce 152
Description: Hosted by UCLA Phi Beta Lambda and Kaplan. Kaplan
will show what it takes to create an effective and impressive profes-
sional presentation. Members will then form teams to present and
analyze a simple case study.

April 11

Ernst & Young Summer Leadership Program- Resume Drop dead-

line
Description: All sophomores interested in accounting should apply.
Minimum GPA: 3.2. Submit by 11:59pm.

April 15

Deloitte- National Leadership Conference -Resume Drop deadline

Description: Takes place from July 14-17 in Scottsdale, Arizona. All
interested sophomores should apply. Minimum GPA: 3.25. Submit
by 11:59pm.

3
table of
CONTENTS
5 News of the Week: The Housing Bailout

6 News Briefs

9 The Budget: A Guide to Your Personal Finances

11 Financing Your College Degree

13 How to Deal With Your Credit Score

15 Credit Cards 101

19 Tax Credits & Reductions for College Students

21 Seeking Help from Tax Professionals

23 “Nothing is certain but death & Taxes” -B.F.

25 Buying A House? How About Renting?

29 The Future of Social Security

31 Individual Retirement Accounts

4
 THE HOUSING BAILOUT

By Jaeman Kim
Staff Writer

In a move sure to help many, and also anger others, President Barack Obama promised to help up to nine million
homeowners to refinance or modify their mortgages. The plan, which could cost up to $275 billion, will allow
homeowners who have little to no equity, or worth, on their homes to refinance their loans through Fannie Mae and
Freddie Mac, the two mortgage giants that were taken over by the government last year. It is important to note that the
only people who qualify for this are those who currently have a loan through Fannie Mae and Freddie Mac. The
government will also spend $75 billion dollars to encourage lenders to modify mortgages for at-risk lenders.

Those who might benefit from the $75 billion are homeowners who are behind on their
payments, or those who are currently in foreclosure proceedings. Others, who are still on
time with their payments, may also qualify if they have a high debt-to-income ratio. The
other $200 billion will be used to help homeowners who’s mortgages are worth between
80-105% of their home’s value, which makes it difficult to make payments. Also, as stated
earlier, the only people who qualify for the plan are those who currently have loans
through Fannie Mae and Freddie Mac. Unfortunately, people who have already lost their
homes will not receive any type of aid.

While the plan has drawn praise from some, it is also receiving criticism from others who
say that it does not address loans that are a part of securities, or packages of different
types of debts that are traded on the market as investments. Another criticism is that the
plan does not do enough for the people that have been hit the hardest, owing much more
on their mortgages than their houses are actually worth. These people would be those
whose mortgages are about the 105% threshold for qualifying for aid. Given that those
who want to take advantage of the plan must not have too much negative equity, most
people in hard hit states such as Florida and California will not qualify for the plan.

Yet another point that people are disappointed with is the fact that the housing bailout plan does absolutely nothing to
remedy the problem of the excess supply of homes. Many economists were hoping that President Obama would push a
plan that would subsidize an interest-rate reduction for borrowers, which would help increase demand for homes.

One particular group of people who are angry, however, are homeowners who have made all their payments and can
continue to afford to do so, despite how much their homes have lost value. Many are angry at the fact that their tax
money is being used to help those who cannot afford their payments, while they are forced to continue making payments
on their own. Others say that people who have lived their lives conservatively are being punished by being forced to help
homeowners who bought houses that they could not afford to begin with. Even President Obama has stated that there
may be a potential backlash from homeowners who have so far been making their payments. Still, despite all criticism,
this plan may be the beginning of the path towards the nation’s recovery.
5
NEWSBRIEFS Grace Chan
Staff Writer

GLOBAL ECONOMIC CRISIS POSES A SECURITY THREAT

Dennis Blair, the new Director of National Intelligence warns that the global economic crisis could threaten trade wars,
increase political instability in several countries, and undermine the ability of American allies to help with war and re-
construction efforts in Afghanistan and other places. Already, at least a quarter of the world’s countries have experi-
enced some form of low-level instability, such as anti-government demonstrations or shifts in power. For example,
Pakistan has lost some control in parts of its North-West Frontier Province, as economic hardships have radicalized
groups all over the nation. On Feb. 19, a truce was signed between Pakistan’s Taliban and the secular Pakistani govern-
ment. It is likely that American allies will no longer have the money to aid defense and humanitarian obligations. U.S.
intelligence analysts also worry that there will be a backlash against American promotion of free markets, largely be-
cause this crisis was triggered by the United States.

JAPAN’S FOURTH QUARTER GDP POSTS LARGEST DROP IN NEARLY 35 YEARS

Japan’s 4Q gross domestic product fell 3.3% between October and December of
2008, or 12.7% on an annualized basis, reflecting the worst drop in three dec-
ades. This is the fastest contraction since 1974, when the oil crises pushed up
inflation and weakened demand. These grim numbers show how exports play a
large role in driving Japan’s economy, and how this reliance on exports has dis-
proportionately affected its GDP in comparison to other industrialized nations.
The global recession has hit all of Japan’s biggest export markets, with exports
falling 13.9% in the fourth quarter as overseas demand for Japanese automobiles
and electronic gadgets plummeted. This sharp decline in exports has also pushed
business investment down by 5.3%.

$787 BILLION DOLLAR STIMULUS PACKAGE SIGNED

After a month of intense debate, Congress voted to pass an economic stimulus
package comprising of spending programs, tax cuts, and unemployment benefits.
In the House, no Republicans voted for the package while seven Democrats
joined their side. The final vote in the House was 246-176. In the Senate, three
Republicans broke ranks to join the Democrats making the final vote 60-38. Key
components of the package include: tax-cuts for businesses and individuals, a
measure to keep 26 million middle-income Americans from getting hit with the
alternative-minimum tax, and incentives for automobile purchases and first time
homeowners. Additionally, President Barack Obama has decided to let the Bush
tax cuts expire by the end of 2010 instead of ending them earlier. Money was
also set aside to help cash-strapped states avoid cuts in education,
6 health care
policies, and other important social programs. A large emphasis was placed on
job-creation in many sectors such as scientific research and renewable energy.
 MAJOR INDEXES FALL MORE THAN SIX PERCENT
Despite the $787 billion dollar stimulus package recently signed into effect as
well as talks of a mortgage bailout, bleak fourth quarter reports, high unem-
ployment levels, fears of bank nationalization, and reports showing the GDP
falling at a faster than expected annual rate of 6.2% at the end of last year
spooked investors, pushing major indexes to close at their lowest levels in six
years. Bank stocks tumbled as investors feared that nationalizing banks would
have wiped out any interest held by shareholders. On Feb. 27, the U.S. govern-
ment converted $25 billion of its Citigroup preferred stock into common stock,
raising its ownership share from 8% to 36%. The government’s investment has
already fallen to half of its worth to about $11.5 billion. Congressman Brad
Sherman (D-CA) said, “Taxpayers are being ripped off. The only thing worse
than nationalizing a bank is to pay for the entire bank and only get one-third of
it.” This is Citigroup’s third rescue, and it might not be its last.

Staggering numbers:
 The DJIA closed at 7,062.93 its lowest level since May 1, 1997. It is
down 50.1% from its all time high of 14,164.53 reached in Oct. 2007.
 S&P 500 fell to 735.09, to its lowest level since Dec. 1996
 NASDAQ closed at 1,377.84
 The Russell 2000 index fell to 389.02
 Since its October 2007 peak, the Wilshire 5000 is down 52.7 percent,
or $10.4 trillion.

CALIFORNIA’S BUDGET BATTLE

After a frustrating deadlock lasting longer than 100 days, Governor
Schwarzenegger signed a $130-billion dollar budget that raises sales and
income taxes for the first time in 17 years, while sharply slashing spend-
ing. This measure erases the projected $41.6 billion dollar projected
deficit through a scaled back budget and $6.7 in immediate cuts. The
gap will be closed through 36% in spending cuts, 30% in new taxes and
other revenue, 19% in federal money, 13% in new borrowings and 2% in
vetoes. While this ends the immediate crisis, California still remains in a
precarious financial situation. If $2 billion more dollars in federal aid is
not secured by April, it would result in major cuts to welfare, aid to the
blind and disabled, and money given to colleges and university. As the
world’s eighth-largest economy, California’s woes stem in part from its
inability to sell bonds for several months. Additionally, the budget dead-
lock occurred because California requires 66% majority support, and no
Republicans were willing to vote for a plan that increased taxes, as it
would have resulted in political suicide. Ultimately Senator Dave Cogdill
(R-Fresno), was ousted as the Senate Republican leader after agreeing to tax hikes. Unfortunately, the UC
and Cal State systems will take a considerable hit. At the 23-campus Cal State system, Chancellor Charles B.
Reed said plans to reduce enrollment by about 10,000 students will go ahead.

7
 $8 BILLION DOLLAR FRAUD PERPETUATED BY R. ALLEN STANFORD
Stanford International Bank (SIB), an offshore bank based in Antigua, claims that
$8B of investors’ money has disappeared. Its founder, Robert Allen Stanford, has
been accused of running a multi-billion dollar fraud at his offshore bank in Antigua
and his Houston-based brokerage firm. Apparently for several years the SEC, FBI,
DEA, IRS, and other regulators have been investigating allegations of fraud and
other illegal activities.

Stanford was first investigated over 20 years ago as part of a joint Scotland Yard-
FBI investigation. The small Caribbean island of Montserrat had been targeted by
criminals who quickly set up 300 banks and became a center for worldwide money
laundering operations. One of the banks was Guardian International Bank, created
by non-other than Stanford himself. The bank supposedly laundered drug money
from the Medellin and Cali drug cartels. Eventually the investigation ended, due to
lack of man power. Stanford then switched his attentions to the neighboring country of Antigua, and went on to
foster a close relationship with the Antigua’s former Prime Minister Lester Bird. During the late 1990s, members of
the Juarez (Gulf) cartel opened 10 accounts at SIB to launder $3M amassed under one of Mexico’s most infamous
drug lords, Amado Carrillo Fuentes. In 1999, Stanford turned over the $3M from his bank after federal authorities
discovered that it had come from a drug cartel, his cooperation won him praise from authorities. SEC investigations
beginning in 2006 were hampered, because Antiguan authorities did not fully cooperate. Additionally, last summer
two employees filed lawsuits citing irregularities, prompting the Financial Regulatory Authority (FINRA) to take ac-
tion. The investigation against Stanford intensified after the Madoff scandal came to light in December. In January,
clients tried to redeem $500M and the bank rushed to liquidate its private equity and real estate assets. On Feb.
19, FBI agents found Stanford in Fredericksburg, Virginia, and served him with civil papers after trying unsuccess-
fully to flee the country; Stanford agreed to turn in his passport to authorities. Banking authorities in Antigua have
seized control of the bank. On Feb. 26 the Department of Justice arrested Laura Pendergest-Holt, the chief invest-
ment officer on charges of obstructing the SEC's investigation.

US LAWSUIT CLAIMS THAT UBS HELPED 52,000 CUSTOMER CONCEAL ACCOUNTS

Feb. 19: Swiss investment bank UBS agreed to pay $780M in fines and disclose the names of 250 U.S. clients that had
committed tax fraud. Despite tough Swiss laws protecting privacy, Switzerland had no choice but to let UBS hand
over the names and data to avoid a criminal lawsuit which would have imperiled the bank’s existence and conse-
quently, negatively affect the Swiss economy. Tax fraud is a criminal offense, while tax evasion is a civil offense.
Feb. 20: In a separate case, the Department of Justice is trying to force UBS
to disclose the names of 52,000 account holders, who have allegedly hidden
an estimated $14.8B in assets. The Department of Justice launched a civil
lawsuit alleging that UBS helped customers set up dummy offshore compa-
nies. UBS said that it would challenge the “John Doe” summons, because
Swiss law protects banking privacy. Banking details of eight additional Ameri-
can clients were released, despite a Swiss court order blocking the move. The
tribunal “forbade Swiss bank regulator FINMA from giving the plaintiffs'
‘banking documents to third parties, particularly US authorities,’” or else they
would risk legal proceedings. This pits the Swiss tribunal against the U.S. De-
partment of justice. Switzerland’s strict bank secrecy laws have made the
country the world’s largest offshore banking center. Nearly one-third of the
money accumulated in tax havens are in Swiss bank accounts, an estimated
$2.2 trillion. Tax-dodging schemes are being more closely scrutinized by gov-
ernments trying to find revenue to finance economy recovery programs and
packages.
Feb 27: Oswald Gruebel, a former Credit Suisse CEO known 8 as “Saint Ossie”, becomes the new CEO of UBS. UBS stock
rose 16%, as investors strongly believe in Gruebel’s ability to return the company to profitability. When Gruebel took
over as sole CEO of Credit Suisse in 2004 he doubled the bank’s profit and share price in three years.
The Budget: A Guide to Your Personal Finances
By Dmitry Shuster
Staff Writer

You have a limited amount of money to spend, so how do you manage it wisely? Budgeting. In today’s economy, a per-
sonal budget is perhaps the most critical component of one’s finances. The main purpose of a budget is to effectively
manage your income in a way that enables you to cover your expenses, while simultaneously saving a portion of in-
come and using another part to repay debt.

Step 1: Goals and Objectives

The first step towards an effective budget is to identify your financial
goals and objectives. Do you want to minimize your debt upon gradua-
tion? Do you desire to own a home within a certain period of time? Do
you want to pay off your credit card debt before a specific date? Do
you want to pay for your daily expenses and still have money left to
put into a savings account? If so, you need to maintain a budget for
your income, as well as enough savings for unexpected emergency
situations. Another important goal to consider is to stay out of debt
(especially for the long term) as this can negatively impact your credit
score as well as your future ability to cover all expenses.

Step 2: Identification of Revenues and Expenses

A personal budget begins with the total income that you earn on a
monthly basis. After taxes are deducted, you are left with your net
spendable income, which is the amount of income that you can spend
on expenses, bills, leisure, savings, and debt. After you determine your monthly income, you need to identify your ex-
penses. This is often difficult because expenses can vary from month to month and it is not so easy to determine exact
expenditures. You can use a spreadsheet to organize your expenses into different categories (i.e. Housing, Food, Auto-
mobile Insurance, Debt Repayment, Entertainment, Recreation and Clothing). You should also account for ‘hidden’ or
unexpected expenses.

Step 3: Recording Revenues and

Expenses
The next step is to record the revenues (inflows of cash)
and expenses on monthly basis. Most budgets are on a
monthly basis because this is the most convenient and
reasonable time period. You can later choose to split
your budget into weekly periods. As we learned from our
accounting professors, record revenues and expenses in
the period in which they are incurred. This way, you will
be able to match your (incoming) revenues with your
(outgoing) expenses, thereby allowing you to determine
if your monthly income exceeds your expenses or vice
versa.

9
Step 4: Estimating Expenses
When creating a budget, most people do not know exactly how much they allocate or spend for every expense. It is
easier to estimate reoccurring expenses (i.e. food, telephone, college tuition, insurance payments) rather than vari-
able expenses or expenses that may vary month to month (i.e. credit card bills). It is wiser to overestimate rather
than underestimate the expenses, because the latter will provide added financial pressure and you may come up
“short” while the former will leave you with flexibility and a positive cushion. It is also beneficial to split up certain
expenses, such as dividing the “utilities” expenses into specific categories of electricity, water, and gas.

Step 5: Keep Consistent Track of Expenses

The last part of maintaining an effective budget is to keep track of the expenses that you incur. You can record ac-
tual expenses once the bills arrive, although it is more difficult to keep track of and manage the cash expenses that
occur spontaneously. For those small out-of-pocket expenses, it is best to either estimate them or to write down the
expenses in a small notebook. Regardless of how you do it, it is important to make your estimates as close as possi-
ble to make your budget as accurate as possible.

Fortunately, there are many tools and programs designed to help you maintain a budget. The easiest way is to cre-
ate a spreadsheet using Microsoft Excel, iWork Numbers or OpenOffice.org. There is also a convenient budget calcu-
lator located at: http://cgi.money.cnn.com/tools/budget101/budget_101.jsp

Sample Budgets

10
 FINANCING YOUR
COLLEGEDEGREE
By Stefanie Ju
Staff Writer

Paying for college has become increasingly difficult for students with less money. Not only are tuition costs constantly
on the rise, but after adding the costs of books, room and board, and spending money, few students can actually afford
attending an institution of higher education. However, there is hope for students determined to go to college; there
are resources available in the form of scholarships, student loans, and government grants that are helping students
finance their education. However, because students are busy with schoolwork and filling their resumes, not many have
time to research what these types of financial aid have to offer or how to go about applying for them.

LOANS
Many college students apply for and receive countless student loans within their four years in college. An education
loan is a form of financial aid that must be repaid with interest. These loans come in three major types: student loans,
parent loans, and private loans.

The federal government handles many student loans; this allows rela-
tively low interest rates and a greater variety of payment options and
extended repayment terms. One of the main federal student loans is
called the Stafford Loan. This specific type of loan is available in order
to supplement personal and family resources, scholarships, grants, etc.
Stafford Loans are convenient because nearly all students are eligible
to receive them, regardless of credit or financial need. But for students
who demonstrate pre-specified levels of financial need, there are gov-
ernment subsidized loans that cater to them; in these cases, the gov-
ernment pays interest (currently fixed at 6.8%) while the student is
attending school. In order to receive this loan, students should submit
a Free Application for Federal Student Aid (FAFSA). Students are gener-
ally expected to pay these loans off in 10 years, although, as afore-
mentioned, the government works with students who struggle with
this deadline—usually extending their repayment terms.
London Stock Exchange

Parent loans require parents of dependent students (those who depend on their
parents to finance their education) to take out loans to supplement a student’s
financial aid, up to the full cost of attendance. The federal Parent Loan for Un-
dergraduate Students (PLUS) has a yearly limit on borrowing, which equals the
cost of attendance minus any other financial aid received. The interest rate for
PLUS loans is fixed at 8.5%, and parents have from 60 days after the loan is given
to 10 years to repay it in its entirety. In order to be eligible for PLUS loans, par-
ents taking these loans for their children are subjected to a modest credit check;
they must then file a loan application and sign a promissory note.

11
Private education loans exist to help students bridge the gap between actual costs of schooling and the limited
amount that government programs provide to students. Private lenders offer students loans, and they do not re-
quire any federal forms. Many students turn to private loans when the government loans do not cover education
costs in their entirety, or they are looking for more flexible repayment plans. Private lenders have the time to try to
help tailor repayment plans based on students’ needs. Because the government handles such large volumes of loan
requests, it has more stringent rules. However, the downsides to private loans are the more expensive interest
rates and thus higher payments students will have to contend with after graduation. Eligibility for a private loan
depends on student and cosigner credit scores. Credit scores measure past ability to make timely payments and
are used by lenders to determine how likely someone is to pay back money loaned to them. These are also used to
help determine interest rates and fees that students will be charged. In order to apply for these loans, it is perti-
nent to research each private lender’s application process and later fees and repayment plans in order to deter-
mine a best fit.

SCHOLARSHIPS
Undergraduate scholarships and graduate fellowships are types of
financial aid that help students pay for their education fees; however,
unlike loans, scholarships do not need to be repaid. Generally, schol-
arships are reserved for students with specific qualifications. De-
pending on what a sponsor is looking for, a student’s academic, ath-
letic, or artistic talents may be highlighted. A few of the main types
of scholarships can be classified as merit, need, and institutional.
Merit based scholarships may be determined by any special talents
that a student may possess that sponsors are looking for. Need-
based scholarships look closely at a student’s financial situation—
students that need more aid are given more consideration. Institu-
tional scholarships are usually awarded by specific universities to students that plan on attending. The amount of
scholarship money that a student receives is usually closely related to the number of hours put into searching for
scholarships and the number of applications a student completes. Scholarship search engines such as FastWeb
have been created to connect sponsors and students who need aid. Most universities have their own financial aid
offices where students can get information about different scholarships. Here in UCLA, students can find help at
the scholarship resource center, located in 233 Covel Commons. There are a great number of sponsors waiting for
students to apply; it is simply a matter of students taking the time to find specific scholarships they are eligible for,
and putting the effort into completing applications.

GRANTS
Lastly, there are federal grants, which differ greatly from both scholarships and loans. Unlike loans, federal grants
do not need to be repaid, and unlike traditionally merit-based scholarship, grants are primarily need-based. The
majority of grants are funded through federal and state governments, universities, and public and private organiza-
tions. The Pell Grant is one of the most important grants for college students, and is funded by the federal govern-
ment. Through this grant, the U.S Department of Education provides students with financial aid that does not re-
quire repayment. The Pell Grant is awarded to students who can prove the most financial need; in order to apply,
students must complete paperwork to determine their Estimated Family Contribution (EFC) for college. Based on
this assigned number, the grant is awarded to millions of students annually. In order to apply for a federal grant,
students must first fill out a FAFSA. Most federal grants are awarded based on the information given on this appli-
cation.

12
 HOW TO DEAL WITH YOUR CREDIT SCORE
By Shannon Kung
Senior Staff Writer

Every time you turn on the television, there are commercials asking you if you know your credit score, or question-
able ads promising to lend you money despite your credit. With such a large emphasis on the three digit number
known as a credit score, it is important to have a good grasp on what it entails.

A credit score is a number based on information from a credit report, which

is a compilation of an individual’s past borrowing history. Lenders such as
banks utilize this score to see if a person qualifies for a loan, the interest
rate, and the credit limits. The credit score lets banks evaluate whether
loaning money to someone is risky or not. The higher the credit score, the
better. Credit scores are based on credit reports from one of the three ma-
jor credit bureaus: Experian, TransUnion, and Equifax. Although the three
credit bureaus each have their own credit scores, VantageScore, Experian’s
PLUS score, TrasnUnion’s credit score, and Equifax’s ScorePower, the most
popular credit score is the FICO score. The FICO score was developed by the
Fair Isaac Corporation and uses a system to gauge risk in order to conclude
whether or not the borrower is likely to default on, or not pay back, any
monetary sums owed to the lender. Aside from banks, many other organiza-
tions such as insurance companies, landlords, etc. use credit scores. Thus,
having a low FICO score could potentially make or break a potential loan and
subsequent purchase. FICO scores are traditionally between 300 and 850,
with around 60% of the scores between 650 and 799. The median of these scores, according to the Fair Isaac Cor-
poration, is 723. Credit scores are not free, although Americans can receive one free credit report each year from
annualcreditreport.com, which is run by the three credit bureaus. Credit scores can be added on to the report for a
fee. Borrowers used to be able to obtain FICO scores from all three credit bureaus, but as of February 14, 2009,
Experian has decided to only provide their data to lenders. Borrowers will be at a disadvantage because lenders
can pull their Experian FICO score, while they cannot.
Breakdown of the Credit Score:
The exact formula for calculating a credit score is closely
 35%- punctuality of payment in the past
guarded as each bureau uses a slightly different method
of calculation. However, the Fair Isaac Corporation has  30%- the amount of debt
released a rough estimate of the different weighted com-  15%- length of credit history
ponents of a credit score. Looking at the percentages,  10%- types of credit used
however, show that there still is much clarification  10%- recent search for credit and/or amount
needed. For example, the 10% impact that “types of of credit obtained recently
credits used” has on the credit score gives no indication
of what type of credit is better or an optimal mix of types
of credit. Also, certain factors such as bankruptcies, foreclosures, and judgments are not included in the break-
down provided by the Fair Isaac Corporation, although they would undoubtedly affect a person’s credit score.

The first component of the credit score, weighing in at a hefty 35% is determined by past payment history. Basi-
cally, this means that to keep a high credit score, you should, above all else, make sure to pay your bills on time.
Your credit report will actually show whether you were 30, 60 or 90 months late with a payment. A history of late
payments can hurt your score dramatically, so if you forget to pay the bills every month, it might be wise to look
into automatic bill pay. Conversely, your score can dramatically improve if you pay your bills in a timely manner.

13
The second part of the credit score is the amount of debt you owe, which has a 30% bearing on your overall
credit score. The amount of debt is usually shown as the ratio of current revolving debt (i.e. credit card balances)
to total available revolving credit (i.e. credit limits). Thus, it is important, for this component, to focus on two
aspects- your outstanding balances and your credit limit. If you are reaching or even exceeding your credit limit,
this is seen as risky behavior, which lowers your credit score. However, even if you are not anywhere close to
your credit limit, you want to make sure that your credit limit is in proportion to your income. If your credit limit
is much higher than lenders think you can reasonably afford to pay, your credit score may suffer.

The third component of a credit score, worth 15%, depends on how long you have had a credit history. The
greater number of years you have had credit building, the better. However, this area also takes into account how
long you have or have not used certain accounts. For example, if you opened a credit card 10 years ago, but do
not use it at all, it is not going to improve your credit score very much. On the other hand, be careful not to open
too many new credit cards all at once, as it will lower the average account age factor and thus lower your score.

The fourth component of your credit score is the types of

credit used, which is worth 10% of the overall score.
Types of credits can include credit cards, retail accounts,
car loans, mortgages, etc. Some people erroneously think
that using, or overusing these types of credit will show
that they are good borrowers, and that it racks up credit
score points. However, this is often seen as risky con-
sumer behavior to lenders. On the flip side, if you do not
have any credit, lenders will see you as an even higher risk
that someone who has managed their credit responsibly.
This is because having no credit makes you an unknown
variable and the lenders can not predict whether or not
you will display risky consumer patterns.

The fifth factor that credit scores are based on revolves

around the amount of new credit that you have. Every
time you apply for new credit, whether it is a new home
loan or a new credit card, an inquiry shows up on your
credit report. Too many of these inquiries may cause your
score to be negatively affected. Having so much new
credit causes worry because lenders are unsure if you will all of a sudden use all of this newly available credit in a
spending binge. This unpredictability makes them veer on the side of caution, and thus they will take the new
credit into consideration. To help deal with these inquiries in your credit, it is important to note that there are
two types of inquiries, hard and soft. Hard inquiries typically come from lenders when you apply for a loan and
stay permanently on your credit report. Soft inquiries, on the other hand, happen when you request a copy of
your credit report. However, soft inquiries do not stay on your credit report. If you are shopping around, for ex-
ample, a mortgage loan, there will be a lot of hard inquiries made on your report. However, if they are made in a
concentrated period of time (i.e. a month) FICO will not count it against you. Nonetheless, it still might be wise
to ask lenders if they are going to making a hard inquiry into your credit history.

The Fair and Accurate Credit Transactions (FACT) Act entitles all United States residents to one free credit report
each year. This report can be obtained an annualcreditreport.com, by calling 1-877-322-8228, or by mailing an
Annual Credit Report Request Form.

14
CREDITCARDS101 By Eric Park
Staff Writer

It is the beginning of the quarter, and your checking account is running on empty after paying for tuition, books,
and rent. You are sitting at home watching T.V. and your stomach begins to growl. It is then you realize that
there is no food at your apartment. Luckily, you just received your first credit card in the mail and you decide
to use it to quell your hungry stomach. Credit cards can provide college students with financial flexibility in
tight situations, but these benefits also come with potentially negative consequences as well.

WHAT IS A CREDIT CARD?

Credit cards serve primarily as agreements between its holder and the issuing company. In exchange for a
promise to re-pay charges, the holder can use a credit card to make purchases, and even cash advances. A
credit card has a spending limit or credit line based on numerous factors such as credit scores, annual incomes,
and current debts. It extends a specific amount of available credit to a borrower. Credit cards have due dates
for payments which are dependent on the terms of the contract between the holder and the company. The
period between when a transaction is made and when the payment is due is known as the grace period. After
the full balance has been paid, the card holder again has his/her full credit line available for use. Cash ad-
vances are options to withdraw cash using the credit card at a se-
lected interest rate. They are usually significantly lower than the
credit limit on a given card but allow holders the options for emer-
gency cash withdrawals.

CARD TYPES AND BENEFITS

When applying for a credit card, consumers have a wide range of op-
tions to choose from. Many retail companies such as Bloomingdales
and Costco offer rewards programs for its company’s credit card
holders. These rewards are not limited to but usually range from gift
certificates, coupons, and discounts. Other types of rewards cards
are designed to give travel points, rewards points, and even cash
back. There are travel cards sponsored by various travel related
companies such as Hilton Hotels and American Airlines. There are
also credit cards that provide few to no rewards but provide lower
interest rates on card balances. For those who have high credit
scores and high incomes, there is the black card offered by American Express which has no designated spend-
ing limit. Finally, there are cards specifically designated towards college students. For example, Visa offers a
dividends card with Citibank that gives money back on purchases and is geared towards college students.
These cards have lower spending limits but provide the opportunity for its holders to raise his/her credit score
and spending limits by practicing financial responsibility. This occurs when individuals develop a history of mak-

15
CREDIT CARD GIMMICKS AND PITFALLS
Credit card companies send out card offers to households in hopes of secur-
ing another card applicant. On top of offering various reward incentives
such as gift certificates and vouchers many companies offer personalized
credit cards with their favorite sports teams, schools and pictures. However
a strong method of drawing in customers for credit card companies is offer-
ing 0% interest rates. These 0% rates are only fixed for a set amount of time
and can lead consumers into the trap of credit card debt. Many individuals
become more willing to spend on these cards due to the low interest rate.
However, they are unable to pay off the balance when the introductory rate
is set to expire.

If a balance is not paid off at the end of each month’s grace period, a charge
based on the interest rate is added to the balance. The debt then continues to grow monthly until the balance is
paid in full. Credit card debt is a common and widespread problem in the U.S. In 2007, the average American
household’s credit card debt was $9,840. Major credit card companies such as Visa and American Express are only
able to generate revenue from consumers and offer rewards through the interest received on their cards. Credit
card companies have come under fire by various publications such as USA Today by increasingly targeting college
students. They argue that college students are already in debt due to loans. This can handicap their future ability
to attain loans because of decreased credit scores. The card balances can grow due to interest, but if students are
late on payments or unable to make the minimum payments, then their credit scores will be lowered.

CREDIT CARD SECURITY ISSUES

Credit card numbers are 16 digits long and contain a designated expiration date, security code, and holograms.
These pre-cautions are all used to protect against credit card theft. However, credit cards are still an easy target for
identity thieves. They do this by simply hacking into the systems of retailers and by phishing. Phishing is the act of
thieves creating emails that contain websites similar to bank websites in order to gain login information.

16
If identity thieves are able to acquire your credit card information, they will be able to create counterfeit credit cards
and make purchases as if they were you. Also, they can use your credit card information to find out personal infor-
mation such as your address, credit history, and social security number. They can also use this information to sign up
for other credit cards and further damage your credit. However, most card companies do offer full refunds on au-
thorized purchases and issue new cards when cards have been reported stolen or missing. Personal finance compa-
nies are taking prevention measures against phishing by creating measures as personalized pictures and other user
specific security items. Many companies have also taken initiative to raise awareness and education about credit
card theft to its holders by distributing information about the issue. Many browsers such as Microsoft’s Internet Ex-
plorer and Mozilla Firefox have warnings when a site is detected as a possible threat to personal security.

17
WHAT TO DO WHEN YOUR CREDIT CARD IS LOST OR STOLEN
As previously mentioned, stolen or lost credit card information can cause a significant amount of potential damage
to your credit. If this happens the first action a credit card holder should take is to immediately contact his or her
issuer. During contact with the company, cardholders should explain that their card has been lost or stolen and the
company will take action by suspending or canceling the card. This prevents the use of the card and protects the
card holder from unauthorized transactions and purchases. If the card is cancelled the account is closed and the
card holder has the option of attaining a new credit card. The company will issue a new card with a different num-
ber, and security code. The balance and all other aspects such as rewards point balances of the previous card will
be transferred as well. Consumers are protected from having to pay for unauthorized purchases under the Fair
Credit Billing Act. If unauthorized purchases are made with your card the maximum liability you can have is $50. If
the charges are made after you have reported a card stolen, you have no liability for unauthorized purchases.

CONCLUSION
Credit Cards can provide financial flexibility, a means to build your credit, and various rewards for spending. How-
ever, if you get in the habit of making purchases that you cannot pay back, you can also severely handicap your
financial future by creating increasing debts, which lowers your credit score. If an individual is responsible he or
she will increase their credit scores, along with other possible benefits. It is up to the card holder to control debts
and spending on the way to developing financial responsibility.

18
TAX CREDITS & DEDUCTIONS FOR STUDENTS
By Sonia Bhasin
Staff Writer

Contrary to popular belief, there are ways for cash-strapped students to save money through tax
breaks from the money they spend to finance their education. These deductions were implemented by
the federal government to assist students, who already struggle financially. However, most of these
available deductions are unknown or misunderstood to students. Here we attempt to eliminate the
confusion and describe some of the most relevant tax breaks available.

The Hope Scholarship Tax Credit

The Hope Scholarship is a tax credit that reduces the amount of taxes a student owes to the govern-
ment. This credit is only available to a student in their first two years of postsecondary education,
which would be during the first two years they are pursuing an undergraduate degree. To be eligible, a
student must be enrolled at least half-time in college, must file a tax return and owe taxes. That is, if a
student does not end up paying taxes, he/she cannot receive this tax credit. In addition, a student can
only claim the credit if he/she has not been claimed as a dependent by another taxpayer, such as a par-
ent or guardian. The exact amount of the credit that a student receives is dependent upon their in-
come, the amount of tuition and fees paid, and the amount of scholarships a student receives, but can
only receive up to $1,800 in each of the two years for which the student is eligible. A taxpayer cannot
claim this credit if his/her modified adjusted gross income is greater than $58,000 for a single filer or
$116,000 for those married couples filing a joint return. To apply for this credit, a taxpayer must report
the amount of tuition and fees paid, as well as the amount of scholarships, grants, and income used to
pay the tuition. Schools are required to send this information to the student each year in the form
1098-T. Taxpayers fill out IRS form 8863 to claim the credit. A student cannot claim both a Hope
Credit and a Lifetime Learning Credit, described next, in the same year.

The Lifetime Learning Tax Credit.

This tax credit, like the Hope Scholarship, is also subtracted directly from the taxes a student owes. To
be eligible to receive this tax credit, a student must file a tax form and owe taxes. That is, if a student
does not pay taxes, they cannot receive this tax credit. Also, a student cannot claim this credit if they
have been claimed as a dependent. The amount of the Lifetime Learning credit is 20% of the first
$10,000 spent on qualified educational expenses, so a student can claim up to a maximum of $2,000
per tax year, for an unlimited number of years. This credit differs from the Hope Credit because it is
available for all years of postsecondary education, not just the first two years of pursing an under-
graduate degree, and is also available for courses taken to acquire/improve job skills. Also, unlike the
Hope Scholarship, the Lifetime Learning tax credit can be taken by graduate students as well. The ac-
tual amount of this credit is also dependent upon income, tuition and fees paid, and the amount of
scholarships and allowances a student receives. To be eligible, a student must be enrolled in college,
pursing either an undergraduate or graduate degree, or be taking instructional courses to acquire job
skills. To apply for this credit, a taxpayer must report the amount of tuition and fees paid, as well as
the amount of scholarships, grants, and income used to pay the tuition. Schools are required to send

19
 this information to the taxpayer each year in the form 1098-T. Taxpayers fill out IRS form 8863 to claim the credit. Once
again, a student cannot claim both a Hope Credit and a Lifetime Learning Credit in the same year. Students who are eligi-
ble for both should claim the Hope Credit first, since it is only available for the first two undergraduate years.

Hope Lifetime Learning

Availability First 2 years of Undergraduate Education All years of Postsecondary Education
Must go to school at least half time for one aca-
demic period for the tax year
Must be pursing an Undergraduate Degree
Amount 100% of first $1,200 spent on qualified expenses 10% of first $10,000 of qualified expenses
50% of the second $1,200 spent on qualified ex- Up to $2,000 per year
penses
No more than $1,800 per year
Restrictions Must not have a felony for possession of distribu- Do not have to be pursuing any degree
tion of controlled substance Subjected to phase out for single filers
Subjected to phase out for single filers making btw making btw 48-58K (96-116k for MFJ
48-58K (96-116k for MFJ) Not available for dependents whose par-
Not available for dependents whose parents claim ents claim them
them

Tuition & Fees Tax Deduction

This tax deduction was supposed to expire in December 2008, but has been extended for one more year, until December
2009, as a result of the recent Economic Stimulus Package. Unlike a tax credit, this tax deduction reduces the amount of
taxable income by up to $4,000, and may be available to taxpayers who do not qualify for either the Hope Credit or the
Lifetime Learning credit because of the higher income cap. The exact amount is dependent on the amount of tuition and
related expenses paid. The amount of the deduction is $4,000 for those single filers making a modified adjusted gross
income of $65,000 or less (or $130,000 or less for those filing jointly), and $2,000 for those single filers making a modified
adjusted gross income of between $65,000 and $80,000 (or $130,000 to $160,000 for those filing jointly). Single taxpay-
ers with a modified adjusted gross income of $80,000 ($160,000 for married filing jointly) or greater are not eligible to
receive this tax deduction. A student must be enrolled in one or more courses at an eligible postsecondary institution to
receive this deduction. A student cannot claim this deduction if they paid their tuition and fees with tax-free scholarships
and grants.

Student Loan Interest Deductions

Students can deduct the interest they pay on their qualified student loans from their taxable income. The loans must
have been taken out to pay for the cost of attending college. Many loans qualify for this deduction, such as the Federal
Stafford, PLUS, and Consolidated Loans. Some private loans may also qualify, but students should check directly to verify
if the interest paid on their private loans is tax deductible. Students may deduct up to $2,000 paid per year for the inter-
est on student loans. This deduction only applies during the first five years of loan repayment. If you are a single tax filer
making more than $60,000, or a joint filer with income greater than $80,000, you are not eligible for student loan inter-
est deductions.

Income Caps Hope Lifetime Learning Tuition & Fees Student Loan
Single Filer $58,000 $58,000 $80,000 $60,000
Joint Filer $116,000 $116,000 $160,000 $80,000

20
 SEEKING HELP FROM
TAX PROFESSIONALS
By Gloria Ho
Staff Writer
With tax season coming around the corner, workers across
the U.S. have begun receiving W-2s (statement of yearly wage
earnings) and 1099s (statement of income other than wages)
in preparation for their federal and state income tax returns.
Yet, when faced with the daunting prospect of having to file
taxes and knowing the inevitable forms and sometimes com-
plexity that is involved, some individuals have elected to have
their returns filed by third parties. With a thriving industry
centered on federal, state, and local taxes, such individuals
have no shortage of options to choose from.

H&R Block
Perhaps one of the most well known tax service
companies, H&R Block offers a variety of venues
from which customers can do their taxes. Employ-
ing 90,000 tax preparers and claiming more than 22
million customers worldwide, H&R Block has pro-
claimed itself the Nation’s Tax Leader. With 12,500 retail offices nationwide and another 1,400 abroad, this 54 year
old company offers in-house services as well as an online tax preparation and electronic filing service on its website.
With so many locations around the country, one of the advantages H&R Block offers is its easy access to trained tax
professionals at nearby local offices. In addition to these services, the franchise has also produced its own tax
preparation software (available online or as a CD) called TaxCut, which helps individuals prepare their tax returns.
With TaxCut online, customers are encouraged to file their federal taxes online free of charge for simple returns
only (excludes: self-employment income, rental and royalty income, farm income, and shareholder or partnership
income or loss). Customer can also upgrade the online service by purchasing a Premium package that includes
itemized deductions and investments for $40, or a Signature package that includes a tax professional’s oversight
for $80.

Liberty Tax Service

Liberty Tax Service, like H&R Block, is also a franchise company spe-
cializing in income tax preparation services for individuals and small
businesses. The company was founded in 1972 in Canada and be-
gan expanding into the United States in 1997. Currently the fastest-
growing international tax preparation company in the world, Liberty
Tax claims to have over 3,000 offices in North American and to have
21
prepared over six million individual returns. Ranked number one by Entrepreneur Magazine for tax prepara-
tion, Liberty Tax Service provides computerized income tax preparation, electronic filing, and even loans for tax
refunds. Emphasizing quality customer service, accuracy, and a money back guarantee, Liberty Tax Service pro-
claims itself the best choice for tax preparation services. The firm also offers audit assistance and complimen-
tary checking of completed income tax returns.

IRS Volunteer Income Tax Assistance Program

Volunteer Income Tax Assistance (VITA) is a program created by the Internal Revenue Service (IRS) to help low
and moderate-income individuals file their federal and state income tax returns at zero cost. Every year, volun-
teers receive multiple month-long training from the IRS to help prepare basic tax returns in communities across
the U.S. Usually situated at local libraries, community centers, schools, and shopping malls, VITA sites gener-
ally aid people with incomes below $42,000, those who are eligible for the Earned Income Tax Credit, Child Tax
Credit, Credit for the Elderly or other low
income tax benefits. Sites usually offer both
paper and electronic filing services. Indi-
viduals interested in visiting a VITA site
should bring with them their: ID, Social Secu-
rity card, W-2s and 1099s, Bank Routing
Numbers and Account Numbers for Direct
Deposit of returns, and other documenta-
tion of income and expenses. For UCLA stu-
dents and others near the Westwood are,
there is a VITA site located on campus in
Ackerman Union during the first two and
half weeks of spring quarter, as well as off-
campus sites around the West LA area from
early February to April 15th.

Turbotax
Turbotax is an income tax preparation software package
designed to lead taxpayers step by step through their
state and federal returns. Like H&R Block, Turbotax of-
fers a free downloadable version of the software for
simple returns (1040EZ), and upgraded versions ranging
from $30 to $110. There are four different upgrades,
each adding more complex tax situations. These prod-
ucts target different tax players from those who itemize,
to those who own investments and investment proper-
ties, to those who have some sort of business, whether
sole proprietorships or corporations. Though tax ser-
vices are limited to the software, this do-it-yourself op-
tion is usually cheaper than hiring tax professionals.

22
“Nothing is certain
but Death and Taxes”
-Benjamin Franklin
By Christine Liu
Senior Staff Writer

Even in death one can not escape taxes. In addition to

all the taxes the government imposes on us during
our lifetime, we still have to pay taxes after death.
The estate tax (also known as a death tax or inheri-
tance tax) is imposed on a person’s “taxable estate,”
which is the portion of all his/her net worth (total as-
sets minus liabilities) that exceeds a certain amount
set by law. Included in the taxable estate are all assets,
including insurance, businesses, stocks, and real es-
tate. However, if the deceased leaves the assets to his
or her surviving spouse or to a charitable organization,
then the estate is not taxed at all.

But if you think you are smart enough to just give away all your
property and assets before you die, the government has an-
other tax for that—the gift tax. The gift tax is imposed on the
transfer of property during a person’s life, which prevents peo-
ple from avoiding the estate tax by giving away their estate just
before dying. Thus, the gift tax rate is generally the same as the
estate tax rate, which is 45% in 2009. In order to avoid the gift
tax, an individual has to give no more than $13,000 worth of
gifts to each recipient, not to exceed a total of $345,800 for the
entire year. Also, over a person’s lifetime, the total nontaxable
gift allowed is $1 million.

The estate tax must be paid within nine months after death.
This can be a problem for estates that consist largely of real
estate because there is not enough actual cash from life insur-
ance or liquid assets to pay the tax. In many cases, loved ones
and heirs are forced to sell property or other belongings at be-
low market value in order to pay for the estate tax. But be-
cause the minimum amount of an estate ($2 million) is so high,
the estate tax only affects the wealthiest two percent of the
population. According to the Tax Relief Act, the estate tax will
be repealed for one year, 2010. If it is not renewed, the rate
will go up to 55 percent in 2011.
23
Inheritance Taxes
Inheritance taxes are imposed by the states and are separate from the federal government’s estate taxes. While
the estate tax is levied on the deceased’s estate as a whole, the inheritance tax deals with those who receive a por-
tion of the deceased’s property. Each beneficiary is responsible for paying his/her inheritance taxes. The tax rate is
a graduated rate and differs from state to state, but the spouses and children of the deceased are usually taxed at
a lower rate than other beneficiaries.

Ways to Avoid Federal Estate Taxes

For most people, estate taxes do not apply to them.
But if your assets are above the $3.5 million mini-
mum of 2009 or even the $1 million of 2011, you can
reduce your taxable estate by giving money to a
charity or by paying someone’s tuition or medical
bills. Another way to avoid estate taxes is to set up
trusts. A trust is an agreement where the property or
assets of the creator of the trust are managed by
another person, the trustee. Here are the different
types of trusts you can set up:

AB trust
In an AB trust, or marital bypass trust, spouses can leave property in a trust for their children, but the sur-
viving spouse has the right to use it for life. Basically each spouse puts his/her assets, including half of
jointly-owned assets, into his/her own trust, so that there are two trusts, A and B. Although the surviving
spouse does not technically own the decreased spouse’s assets in the trust, he/she usually has full rights to
use the assets in the trust of the deceased until death, when both the A and B trusts go to the final benefi-
ciary, who are usually the children. This allows each spouse’s taxable estate to be half the size of the total
assets between the two because the assets got divided into two separate and independent parts.
“QTIP” trust
A QTIP trust is like an AB trust with more restrictions. Basically, the spouses still divide up all the assets into
an A and B trust, but the surviving spouse has limited access to the money in the trust. The survivor cannot
make decisions regarding the assets in the trust and usually cannot touch the principle of the trust; they
just get some predetermined income from it. This type of trust is used to make sure that the trust property
is eventually received by the final beneficiaries. However, it still allows the surviving spouse to make use of
the trust property tax-free.
Life Insurance trusts
If you own a life insurance policy, the proceeds of the policy are subject to the estate tax. However, if the
ownership of the policy is transferred to a trust, the surviving spouse or children can receive the proceeds
free of tax. In a life insurance trust, the beneficiary of the life insurance is the trust, and the proceeds are
managed by a trustee, who then hands out the life insurance money according to the deceased’s wishes.
The insurance proceeds can go to as many people as the deceased wants and relieves the beneficiaries
from having to deal with a large sum of money right after the death.

24
BUYING A HOUSE?
HOW ABOUT RENTING?
By Joanne Hou
Senior Staff Writer

When it comes to finding a place to live, people often debate whether to buy or rent the place. For many, the Ameri-
can Dream may be to own a dream house with a white picket fence. Indeed, since the beginning of the formation of
the United States, public officials have extolled the virtues of homeownership, and a large proportion of the Ameri-
can population has actually realized that goal. However, owning a home, especially in an areas of expensive real es-
tate, like California, can be a tremendous financial burden and not affordable to many. The alternative becomes rent-
ing a house or apartment. Let us now take a deeper look at the advantages and disadvantages of owning versus rent-
ing a home.

WHY HOMEOWNERSHIP IS ATTRACTIVE

Why is it that for over four decades, 60-70% of Americans have owned their homes? In fact, according to the Census
Bureau, 68% of all Americans were homeowners in 2005. What is it about buying ones own house that has been so
attractive? There are a number of factors that lead
people to prefer to buy their primary residence in-
stead of renting one.

PRIDE OF OWNERSHIP
For many Americans, owning a home goes beyond
any tangible benefits such as tax savings or a means
of investments. The American Dream of private
homeownership is still a big motivator in people’s
decisions to buy houses. By buying a house, the
homeowner feels a sense of personal ownership that
comes about as a result of years of work and savings.
The feeling of owning something, especially some-
thing as important financially and sentimentally as a
home, is very strong and is actually one of the biggest
driving factors for home ownership.

There is no such sense of ownership for renters. They

make monthly payments to a landlord, but the rent is
not accumulating towards ownership of the housing
unit. For many Americans, there is less pride and
sense of accomplishment from paying others and not
getting any closer toward owning the piece of prop-
erty. They also know that payments for rent will not stop as long as they continue to live on a property they do not
own. For homeowners, the mortgage is expected to be paid off sometime in the future and it is possible to go into
retirement without monthly mortgage payments.
25
TAX BENFITS
One major benefit of owning a house is the tax benefits afforded to homeowners. Homeowners get to deduct the in-
terest payments of their mortgages from their taxable income, which lowers the income amount on which income
taxes are calculated. That means that the interest payments are not taxed for income tax purposes. Homeowners are
also able to deduct the cost of property taxes that are levied by local governments. This reduces the real out of pocket
cost of homeownership since the tax burden of those who own homes can be significantly reduced. The benefits are
especially pronounced in California, where home prices are traditionally high, and buyers have to borrow more, as well
as face higher property taxes. These tax policies are also costly to the government. It is estimated by the Congressional
Joint Committee on Taxation that just the deductibility of mortgage interests has cost the government $403 billion on
tax revenue foregone between 2006 to 2010.

Another tax benefit of homeownership is the favorable tax treatment upon the sale of the house. For most homeown-
ers, under current tax law, capital gains from selling the house is mostly, if not all, tax free. For single tax filers, the capi-
tal gain from selling the personal residential home is tax free for up to $250,000. This means that unless you made over
$250,000 in gains from selling your house, the entire proceeds from the sale is essentially tax free. If you are married
and filing a joint return with your spouse, the tax free allowance for capital gains on selling the residence doubles to
$500,000. You can then take the entire net proceed from the sale to put into your next house, and in this way, you can

increasingly pool your money into buying ever more expensive property without paying any taxes in the interim.
In contrast, there are no tax advantages of renting. The rent paid is not tax deductible, nor does it have any preferential
tax treatments. However, California does have a Nonrefundable Renters’ Credit in which $60 in tax credits are given to
qualified residents who pay rent to nongovernment housing. This includes regular apartments and private homes, but
excludes housing like school dormitories. The tax credit is basically a $60 off coupon on your California state income tax
and is taken when you file a tax return.
26
INVESTMENT OPPORTUNITY
Another important reason for some people to own houses is that residential real estate is a vehicle of invest-
ment just like stocks and bonds are. People pour their savings into their primary residence and gradually pay off
the house until they own it completely. Having a mostly or wholly owned home is often the biggest part of one’s
personal wealth and the most valuable asset one owns. The current housing market notwithstanding, housing
prices in the long run tend to increase steadily and usually does not end up in permanent losses in value. In this
sense, a house is a safer asset than say the stock market where prices are volatile and stock values can some-
times plunge, leading to permanent loss on that investment. This does not mean that one cannot lose big on
housing, but when considering the very long run, housing prices tend to recover. Thus, residential real estate is
thought to be a safe place to put one’s money and have it grow over a lifetime.

Having a home can also mean having an extra asset that can be used to borrow money to fund more spending.
This is known as home equity loan. When housing was boomed a few years ago, many people took out loans
that were backed by the equity in their houses. Home equity refers to the part of the house that the owners
have already paid for either in the down payment or from the mortgage already paid in the past. If the home is
considered a company, then
home equity is the equity sec-
tion of the balance sheet. The
mortgage is the total liability,
and the purchase price of the
home is the asset. Because
those who have made some
mortgage payments already
own part of their home, they
then have this financial asset
to use to borrow money. The
lenders would take the house
if the borrower defaults on
payment. Thus, home owner-
ship affords owner another
means of financing them-
selves.

For renters, their residence is

not an investment asset at all.
They continue to pay rent,
but the rent does not go to-
wards a part of their financial assets. They cannot use it as a means of getting money, and the rent paid never
accumulates to anything that belongs to them. In this sense, homeownership does offer some more financial
options of flexibility, though it is also very inflexible in some other aspects.

WHY RENTING IS ATTRACTIVE

While homeownership has its benefits, renting also has advantages that owning does not have. As the housing
market continues to plummet, more and more people are returning to renting. And because the housing market
has been so poor for a couple years now, many of the advantages that are traditionally associated with home
buying are temporarily, if not permanently, gone.

27
FINANCIAL FLEXIBILITY
One of the main problems that have surfaced with respect to homeownership is the lack of financial flexi-
bility with keeping up mortgage payments. One good thing about renting an apartment or home is that if
rent gets too high for the renter, then he/she can easily move out and find another place to live. There are
generally no strings attached to moving, and so there is less pressure on the renter to have to keep up rent
payments each month. There is always a way out—find a cheaper place.

The same cannot be said about owning a home. Mortgages are not easily forfeited. Banks lend to home
buyers with the serious expectation that they would be repaid with interest at a preset schedule and this
becomes a business transaction with serious financial implications for both sides. When homeowners can
no longer continue mortgage payment for their agreement with the bank, the bank can take possession of
the home in a foreclosure. The homeowners would then be without a home and also lose all the mortgage
payments they had already paid. In addition, their credit rating is likely to suffer significantly, which is bad
because bad credit means higher risk of default, which leads to higher interest rates charged by lenders to
compensate for this increased risk. Having really high interest rates make borrowing expensive for the indi-
vidual, and sometimes the individual is not able to afford the extra interest payments.

Foreclosures in areas of high real estate prices are especially painful to the owners. In Southern California,
for example, a decent home in a relatively safe neighborhood is much more costly than a comparable
home in say the Midwest. Consequently, homeowners in Southern California tend to take out bigger mort-
gages to pay for the house. The monthly mortgage payments can be a few thousand dollars, which can
double or even triple the monthly rent of an apartment unit if the buyers rented instead. When foreclo-
sures happen to these home buyers carrying expensive mortgages, the mortgage payments lost to the
foreclosure is far greater than the rent paid per month. This makes the financial loss of homebuyer greater
than the rent expense by not buying a home.

On the flip side, the sense of loss when people move or are kicked out their homes during foreclosures can
be quite pronounced. A purchased home represents an important asset that is bought with accumulated
savings over many years, as well as a symbol of accomplishment financially and personally. Homeowners
tend to take better care of the place they have bought and now own, and many are willing to put more
money and effort into building that home into their dream home. Enormous amounts of money are spent
each year remodeling, adding to, landscaping, and otherwise beautifying the home. It is ownership at its
greatest height for ordinary people, and to lose that property is understandably one of traumatic loss both
financially and emotionally. If they then have to move to an apartment, the downgrade in life quality and
status is also a potential source of humiliation or embarrassment among peers and co-workers. The overall
emotional effect is very negative when they involuntarily leave their homes.

Some people would then prefer to not buy a home and rent instead. They do not have to worry about the
maintenance aspect of homeownership. The insurance, regulations, fixes and repairs are the responsibility
of the apartment owners. They can live in the home relatively without care. When they need to move or
walk away from the unit, it is usually easier emotionally. They lose little and their quality of life is not so
significantly impacted. These advantages are sufficient to outweigh the decision to buy a home.

28
THE FUTURE OF SOCIAL SECURITY By Julie Chen
Staff Writer

Social Security’s future problems approach slowly, but their arrival is inevitable. As millions of baby boomers ap-
proach retirement, the program’s annual cash surplus will shrink and then disappear. Soon, Social Security will not
be able to pay full benefits from its payroll and other tax revenues. It will need to consume ever-growing amounts
of general revenue dollars to meet its obligations. Eventually, either benefits will have to be slashed or the rest of
the government will have to shrink to accommodate Social Security. Presently, Social Security collects more in
taxes than it pays in benefits. The excess is borrowed by the U.S. Treasury, which in turn issues special-issue Treas-
ury bonds to Social Security.

Social Security currently pays an inflation-adjusted

monthly retirement, disability and survivors' benefit
based on a worker's highest 35 years of earnings. Past
earnings are indexed for average wage growth in the
economy before calculating the benefit. The benefit for-
mula is progressive, meaning that lower-income workers
receive a benefit equal to a higher proportion of their
average income than higher-income workers receive. In
other words, low income individuals get more back for
each dollar they contribute than high income individuals
do.

Social Security's financing problems are long term and will

not affect today's retirees and near-retirees for many
years, but they are very large and serious. People are liv-
ing longer, the first baby boomers are nearing retirement,
and the birth rate is lower than in the past. The boomer
retirements are estimated to cost $50 trillion in future
obligations over the next 75 years. The number of taxpaying workers is shrinking. The result is that the worker-to-
beneficiary ratio has fallen from 16.5-to-1 in 1950 to 3.3-to-1 today. Within 40 years it will be 2-to-1. At this ratio
there will not be enough workers to pay scheduled benefits at current tax rates. Demographic trends do not
change rapidly. It takes about 25 years to grow a new taxpayer.

Most reform plans preserve scheduled benefits, including cost-of-living increases, for near-retirees. A "near-
retiree" is defined as someone aged 55 and older. However, without change it is expected that the program will
no longer be able to pay current benefits in full starting 2041. At that time it is expected that only 78 percent of
currently scheduled benefits will be payable.

Social Security was never meant to be the sole source of income in retirement. It is often said that a comfortable
retirement is based on a "three-legged stool" of Social Security, pensions, and savings. American workers should
be saving for their retirement on a personal basis and through employer-sponsored or other retirement plans.

Today, about half of all workers are covered under an employer-sponsored pension, and many people are not sav-
ing as much as they should. While Social Security replaces about 40 percent of the average worker’s pre-
retirement earnings, most financial advisors say that you will need 70 percent or more of pre-retirement earnings
to live com- 29
fortably. Even with a pension, you will still need to save. If you will not have a private pension, you will need to
save more—and start saving sooner.

The 2008 Trustees Report states that

without Social Security reform, pay-
roll taxes will have to be increased
around 2041, while the benefits of
today's younger workers will have to
be cut, or some other source of reve-
nue, like transfers from general reve-
nues, will be required. Addressing
the problem now allows the burden
of reform to be spread over more
generations, and gives younger peo-
ple more time to adjust their own
retirement planning decisions.

Rather than trying, probably unsuc-

cessfully, to redeem the trillions of
dollars in bonds accumulated over
several decades, policymakers would likely enact a package of revenue increases and benefit reductions that
would bring Social Security's income into balance in 2018 or shortly after. The four basic alternatives that are
likely to be included in such a package are: (1) increasing payroll taxes, (2) decreasing benefits, (3) using other
financing sources such as general revenues or (4) prefunding future benefits through either personal savings ac-
counts or direct investments of the trust funds.
Principles for Social Security Reform:
 The benefits of current retirees and those
close to retirement must not be reduced.
 The rate of return on a worker's Social Secu-
rity taxes must be improved.
 Americans must be able to use Social Security
to build a nest egg for the future.
 Personal retirement accounts must guaran-
tee an adequate minimum income.
 Workers should be allowed to fund their So-
cial Security personal retirement accounts by
allocating some of their existing payroll tax
dollars to them.
 For currently employed workers, participa-
tion in the new accounts must be voluntary.
 Any Social Security reform plan must be real-
istic, cost-effective and reduce the unfunded
liabilities of the current system.

To help plan and secure your retirement, visit

www.socialsecurity.gov today!

30
INDIVIDUAL RETIREMENT ACCOUNTS

By Sunny Wong
Senior Staff Writer

An individual retirement account (IRA) is a retirement plan that provides individuals tax-free or tax-deferred ways of
saving for retirement. Therefore, anyone who receives some form of taxable compensation is eligible for an IRA. One
can open up an account at a variety of locations, including banks, insurance companies, and brokerages. There are a
number of IRA plans, which may either be provided by one’s employer or self-provided. Because each plan has its own
special characteristics, it may be helpful to consult the advice of a financial advisor to determine the one that caters the
best to one’s needs. Although there are officially 10 types of IRAs, the following are some of the more widely-used and
known IRAs.

TRADITIONAL IRA
The traditional IRA allows earnings and tax-deductible contributions to grow tax-deferred, but is fully taxed at regular
rates upon withdraw during retirement. In other words, this enables one to bypass income taxes on the earnings and
tax-deductible contributions until the money is taken out in the future. Individuals can invest the money they put into a
traditional IRA in a variety of investment vehicles including mutual funds, stocks, bonds, and CDs (certificate of depos-
its).

Investments in a traditional IRA are also tax-deferred until the time of withdrawal, which is after the age of 59 ½ . If
money for whatever reason is withdrawn before the age of 59 ½ , there will a 10% penalty on whatever amount has
been withdrawn, in addition to the regular income tax that is levied on the withdraw.

The main advantage of the traditional IRA is that contributions are tax-deductible. For instance, if an individual contrib-
utes $4,000 to their traditional IRA in a year, he/she can lower his/her taxable income by $4,000 that year.

31
Contribution amounts vary from year to year. For 2009, one may contribute up to $5,000 or 100% of one’s in-
come, depending on which one is less. Individuals over 50 can typically contribute $1,000 more each year in
order to “catch-up.” Therefore, the maximum contribution in 2009 for people over 50 was $6,000. Although
one can set up multiple IRAs, these maximum contributions limits apply to the aggregate contribution amount,
not to the individual account. Contributions can be made to the account beginning January 1st until the tax-
filing deadline, usually April 15th of the next year.

ROTH IRA
In general, the Roth IRA offers more flexibility than the
traditional IRA, and is in many ways, the reverse of a
traditional IRA. Unlike the traditional IRA, contributions
to a Roth IRA are not tax-deductible. However, because
taxes have been paid on the contributions, withdrawals
are tax-free, which can be beneficial for investors with a
longer-term focus.

Like the traditional IRA, the contribution rules for the

Roth IRA are identical. For instance, individuals can con-
tribute up to $5,000 or 100% of earned income, depending on which one is less. But in the case of the Roth IRA,
no minimum withdrawal age is set. Contributions can be withdrawn at any time without a tax or penalty.
Therefore, a Roth IRA is a good choice for individuals who expect to end up in a higher tax bracket and for
those who need to withdraw their money before the 59 ½ . Additionally, it benefits those workers who plan to
retire much later. Individuals can contribute to their Roth IRA account beginning January 1st through the tax-
filing deadline, usually April 15th of the next year.

TRADITIONAL VS ROTH

Traditional IRA Roth IRA

Contributions are tax deductible
Withdrawals begin at age 59 ½ & mandatory by 70 1/2
Regular income tax upon withdraw
Available to everyone (no income restrictions, but if in-
come gets too high, the contribution is no longer tax de-
ductible)
Any withdrawal (including principal) withdrawn before 59
½ is subject to a 10% penalty
Contributions are not tax deductible
No mandatory withdrawal age
No withdrawal taxes
Income restrictions (MAGI $116,000 for single filers,
MAGI $169,999 for married filing jointly)
Contributions can be withdrawn anytime without pen-
alty

SEP IRA
A variation of the traditional IRA, the Simplified Employee Pension IRA (SEP IRA) is a retirement plan designed
specifically for small-business owners and self-employed people. The primary difference between the SEP IRA
plan and a traditional IRA is the contribution limit. For instance, up to 25% of one’s compensation or $46,000
can be contributed to the account while the maximum for a traditional IRA is $5,000. One of the main advan-
tages of this retirement plan is the absence of complicated forms that need to completed, such as annual re-
ports that need to be filed to the IRS.

32
SIMPLE IRA
The Savings Incentive Match Plan for Employees (SIMPLE IRA) is an employer-sponsored retirement plan that
allows for both employee and employer contributions. Like the SEP IRA, this plan functions much of the same
way as a traditional IRA. The main difference is the contribution limit. Up to $10,500 can be deposited into
the account provided that one is under 50.

COVERDELL EDUCATION SAVINGS ACCOUNT

Originally known as the Education IRA, the Coverdell Education Savings Account (ESA) allows the individual to
contribute up to $2000 in any year, no matter how many accounts are established. The contributions are tax-
free as long as they are used for legitimate education expenses, such as tuition, required books, and room
and board. There is also no tax on distributions if the funds are used at eligible educational institutions. This
includes many public, private and religious schools as determined by state law. Once the beneficiary reaches
the age of 30, the contributions must be distributed or rolled over to another family member.

401k
A 401k is an employer-sponsored re- The 10 Types of IRAs
tirement savings plan that allows eligi- The individual Retirement Annuity
ble employees to contribute a portion
of their paycheck to this account be- Employer and Employee Association Trust Account
fore they pay their taxes. These contri-
Simplified Employee Pension ( SEP IRA)
butions are exempt from the federal
income tax and are allowed to grow Savings Incentive Match Plan for Employees IRA (SIMPLE- IRA)
federally tax-free and usually state
income tax-free as well. However, it is Spousal IRA
important to note that a withdrawal Rollover (Conduit) IRA
of these funds before 59 ½ is subject
to a federal income tax as well as a 10 Inherited IRA
percent penalty. In some special and
dire circumstances, such as a death Education IRA (Coverdell Education Savings Account)
within the family, individuals can with-
Traditional IRA
draw contributions without penalty.
Roth IRA
Like an IRA, a 401k plan allows inves-
tors great flexibility in choosing their
preferred investment vehicle. Selections include mutual funds, bonds, annuities, and stock. However, target-
funds (investments that gradually become more conservative when one is heading towards retirement) tend
to be the most popular option available.

For the most part, companies allow their employees to enroll in a 401k right away. However, there are some
smaller companies that might delay the process for a year or more. If this is the case, it is advisable to contact
the Human Resources department to file a complaint.

33