Roanoke Times
Copyright (c) 1995, Landmark Communications, Inc.
DATE: MONDAY, October 25, 1993 TAG: 9310250011
SECTION: MONEY PAGE: A-8 EDITION: METRO
SOURCE: MAG POFF
DATELINE: LENGTH: Medium
I recently heard that Congress is considering a change in the law so that the government would impose a federal income tax on use of frequent-flier miles. Presumably the state would then tax the miles as well.
I was told that I should take my trip before this year has ended if I want to avoid paying income taxes on the free trip. Is this true? If so, what is the basis on which this tax would be paid?
A: Harry Schwarz, a certified public accountant with Schwarz and Co. in Roanoke, said such legislation is indeed pending before a committee in Congress. There is, however, no date scheduled for it to be reported out of the committee.
More to the point, however, the Internal Revenue Service is considering issuing a ruling that would subject frequent-flier miles to federal income tax without waiting for congressional approval. This could happen much faster than enacting a new law, if the IRS gets cranked up to take action.
He believes the legislation and the ruling have been pending for such a long time because of the many questions involved.
For instance, when would it become a taxable event? When you earn the miles? When you buy a ticket? When you take a trip?
Is the purpose of the trip business or personal pleasure? And what impact should that have on the taxation? With the proliferation of all types of air fares, which level of fare would be the tax basis? It could be the regular published fare or the lowest discounted rate.
He advised you not to worry about it until it happens. He compared it to President Clinton's tax bill - there were lots of rumors in advance, but nobody knew the specifics with certainty until it passed Congress.
On the other hand, the IRS could issue such a ruling, effective either immediately or in the future. The timing of such a ruling also is an unknown.
Nobody could predict what will happen. Only you can decide the amount of risk you want to take with your frequent-flier miles, but it appears you probably won't have to act by the end of this year.
Lock into fixed rate
Q: I currently have a $34,000 mortgage with an interest rate of 8 1/2 percent and a remaining life of 13 1/2 years. In discussing with my bank the possibility of refinancing at the current rate of 6 1/2 percent and dropping the life to 10 years, they suggested that I might consider an equity loan for either 10 or 15 years at the current rate of 7 percent. They said the total costs for this equity loan would be about half of the costs for a mortgage. Is this a desirable option?
A: You don't include information about terms and payments, but without those details, an equity line would not seem to be a good idea. You would be trading in a fixed-rate loan for one with a floating rate that could change many times over the life of the debt. Interest rates will rise again; it's just a question of when that is going to happen.
Michael Hincker, manager of Mortgage Service America in Roanoke, recommends taking a floating rate when interest is high. When interest rates are low, as they are now, you should lock in a fixed rate.
Hincker would take the 6 1/2 percent mortgage at 10 years.
But he also pointed out that many banks are giving equity loans without charging any closing costs. And closing costs are always high relative to a low mortgage amount such as your $34,000.
Still, he said, you should be able to get a 6 1/2 percent loan today without any discount points or origination fee.
So your closing costs - appraisal, credit report, attorney's fee, recording fee and administrative costs - should not exceed $1,000.
The exact time period would depend on your detailed figures, but Hincker calculates that you should be able to recoup the closing costs from your savings on the loan within three years.
He is suggesting to some customers with small amounts to be financed that they try a loan amortized over 30 years with a balloon payment at the end of seven years for the full amount due. The rate for this type of loan is very low, but he warned it is suitable only for families with very tight discipline in handling their budgets.
That's because it works only if the family pays enough extra principal each month to retire the loan within seven years. By following that plan, the amount due is zero when the balloon payment comes due seven years down the road.
If you lack that discipline, he said, you should go for the 10-year loan at
Mag Poff will help find answers to your personal finance questions. Send them to her at the Roanoke Times & World-News, P.O. Box 2491, Roanoke 24010.
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by CNB