Warning: Tax Economic Stimulus Rebate Fraud

If you haven’t heard the good news, Congress has approved a measure that will put money into your pockets starting sometime in May. In a previous post, we discuss how big of a rebate you should expect to receive as well as possible financial savvy ways to spend them. The bad news is, wherever there is money, there are scammers. Scammers are posing as the IRS through emails and phone calls promising earlier delivery of your rebate checks, in addition to direct deposits. Milk Your Money has come up with some warning signs to be appraised of in order to avoid becoming a victim.

Phone Calls from the IRS
First, the IRS is not going to be cold calling taxpayers in an attempt to pay them earlier or to offer some type of a direct deposit of your rebate. Last time I checked, the Federal Government has never being itching to put more money into our pockets. Hang up on these phonies. Common sense will prevail, if you let it, when dealing with fraudsters like these.

Emails Requesting Personal Information
A true warning sign of fraudulent emails are ones asking for you to reveal personal information. Financial institutions or government entities will never send you an email asking for things like your social security number, bank account numbers and address. Keep this in mind to avoid frauds down the road. Taxpayers are now receiving emails from IRS posers promising, again, earlier delivery of your stimulus rebates if you give up some personal information. Do not reply to these emails, report them and delete. The most important thing to remember is if you qualify for a rebate, you will receive a check sometime this summer and all you have to do is cash it, no strings attached.

You can report suspicious phone calls and emails to IRS web site.$

Bush Administration’s Next Rescue Plan: Project Lifeline

As we all know by now, this country is in a rapidly increasing downward spiral in real estate, credit and mortgage lending. About a week after Bush released the economic stimulus plan, he and six large mortgage lenders unveiled a plan to come to the rescue of a majority of foreclosing families. The question is, how will this plan work out? Will it be effective? Will it turn our economy around? (Image credit to Rick LaForce)

How Bad Is It?
It seems difficult to fathom the severity of this drop in value across the board. Some refer to it as nothing but a “slump” or a “correction,” while others think of it as a “free fall” and a recession. Both have arguments have valid points. One the one hand, we can say that we have seen this sort of behavior before. It happened in the 70s as well as the 90s. In the early 2000s we saw a major rush into real estate that some say we are paying for now. The other side of this coin however is much more negative. Depending on who you talk to, we are headed straight for a recession (which is defined in macroeconomics as a decline in the nations Gross Domestic Product or negative economic growth for more that two quarters, or six month). Basically it means that we, as Americans, are not spending as much as we should be and demand dwindles, regardless of whether prices move up or down. A famous news paper columnist, Sydney J. Harris, is quoted as saying “A recession is when your neighbor loses his job; a depression is where you lose yours.” Personally, I have not noticed any reports, at the time of this writing, of an over all, wide spread loss in jobs. If you find differently, feel free to leave a comment and weigh in.

Little Help?
So what is the government’s reaction to this? Initially we saw the Federal Reserve lower the prime rate. Then they lowered it again. And again. They have continued to do this until the global markets began to take notice and start to fall. Then they cut it some more. The rate that it is at now has not been this low in a number of years. Not as low as what Alan Greenspan had in 2001, but still pretty darn low. What does this percentage rate mean? Basically it boils down to the interest rate at which one bank can borrow money from another. A lower rate means that more money is easier to borrow, but when it raises, the lending bank will make more money. Easy enough right? Right. But what does this mean for you?

What Does That Rate Mean, Anyway?
It means that the banks are getting cheaper money in order to turn around and lend it you, the home buyer. The theory behind this is that you will then go out and buy a house and that bank will make more money in the long run, if at all, since you might have kept right on renting. You will hear a good number of people saying that there are going to refinance now, since rates are lower. There are pros and cons to this that we will get into later, but for now, lets move forward with the big picture.

With this background we are better able to understand what the governments actions are attempting to do: pump life back into the country’s economy. After the rate cuts, Bush decided that best way to move more cash would be to directly inject it by putting it squarely in the wallet of the common citizen. We discuss elsewhere as to what we think you should do with it. As a side note, the tally for the amount of money being milked out was just about $150 billion dollars and there was a motion to add a another measly $40 billion so that the elderly and military vets could also participate. This barely passed at the 11th hour. How nice of them.

Beginning of the End or Just the Beginning?
Now we are the latest step in the governments’ intervention. Project Lifleline. This turns out to be a simple freeze on the time required to allow those families who are facing foreclosure, to renegotiate with their lender and get some time to get their finances in order. Those homeowners that are late by 90 days or more are the main targets of this resolution; however, homeowners in bankruptcy will not be eligible. Investment properties and vacant homes are also not included. The focus is valiantly centered on those that actually live in the troubled home. It makes more sense to save these first, as they are more able to pay, not to mention the money is much more guaranteed. Members of this program are Countrywide, JP Morgan, Washington Mutual and Wells Fargo.

There are naysayers (of course!) that believe that this is simply the beginning and this is a fruitless effort. Will the changes that these lenders are proposing be enough to put the brakes on this drop? It will be interesting to see where we can go from here. It also leads to a whole other discussion on investing. Have you taken a good look at the financial market lately? $

Milk Your Economic Stimulus Rebates

The U.S. House of Representatives and the Senate have finally passed H.R. 5140, an economic stimulus measure that will put money into taxpayer’s hands. President Bush is expected to sign the bill into law in the coming days. The IRS thinks they should get the checks in the mail sometime in May, which leaves us plenty of time time start thinking about how we should spend this unexpected income.

How Big Will My Refund Be
Most families should expect to receive a $600 rebate for each individuals in the family that filed taxes last year that made at least $3,000 and less than $75,000 a person. An additional $300 will be included for each child in the family. Low-income people, including retirees on Social Security and disabled veterans who pay no income taxes, would also receive checks of $300. For those making over $75,000 a year, your rebate will be phased out as appropriate. In other words, we are not sure how much you will get; let us know when you get it.

It’s Patriotic to Splurge

When the checks are mailed in May, I'm sure it will be considered patriotic to splurge in order to burst our struggling economy. As fun and tempting as this may sound, it's probably not the best idea for most of us. So how should your family spend your extra $1,500? The answer for many depends.

Credit Card Debt

Are you one, like many, that has accumulated credit card debt that you can’t shake? Perhaps this refund will be a good place to plop your money. If you haven’t already done so, you should call your credit card company and request a smaller interest rate. I just recently did this and saw my rate drop from 21%to 9%, for just simply asking! Place your refund on the card with the highest interest rate, even if this amount does not pay off the balance, it will save you hundreds if not thousands in long-term interest payments. To become wealthy you have to stop paying interest and start making it, this is a great place to start.

No Savings?

Having a savings of at least two months of living expenses is recommended for everyone. It's ideal to have this money in something you can access very easily like a money market fund and not in assests such as individual stocks or a mutual funds. Even if you have built up debt to pay off, it may be best for you to put your rebate in savings. It's better to have a back up in case something unfortunate happens, although less debt is nice, you will not be able to make payments on anything if you lose your source main of income and have not built up a solid savings.

Pay More on Student Loans or Mortgage?

Although it sounds like a good idea to post an extra $1,000 on your mortgage payment or on your student loans, in reality this will not do much for you. Most mortgages and student loans have interest rates are around 5-9% (the lowest APR loans you can really get), although a lump sum extra payment on these accounts will be beneficial, the benefit is very minimal. If you are going to pay more on these loans, do it monthly with a goal of paying off the loans in x amount of years sooner than your current loan requires.

Max Out an IRA

We realize your rebates will not be in your hands before April 15, 2008 (the last day you can contribute to your 2007 IRA), but consider putting some of your rebate in your IRA for 2008. Sound boring, well it is, but consider this, $2,000 invested today growing at 8% annually would give you $21,871.46 in 30 years. Ah yes, the power of compound interest.

Treat Yourself

Making smart financial decisions everyday should be a top priority for you, but every once in awhile we deserve a treat! We would suggest taking about 20% of your rebate if this is reasonable for you, and buy something you have wanted for a while, perhaps a small flat screen for your bedroom or piece of art. I recently put a small LCD TV in our bedroom and I consider it the best art hanging in our place!

Like any unexpected windfall of money, what to do with it depends on our current situation. You'll have to take a step back and look at where the money can work best for you. Have some good ideas we didn't mention? Let us know about them! $