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-Eleanor Blayney, CFP®, CFP Board's Consumer Advocate

It's June, the beginning of summer and hot weather. We can only wish our economy would heat up as well, which would be good for employment rates and our federal debt burden. However, as many of us remember from Econ 101, there can be a trade-off between full employment and stable prices. With increasing economic activity, we usually expect our consumer price index � the common measure of inflation � to go up as well. But what exactly is inflation, and is it always a bad thing? According to the noted economist Milton Friedman, inflation can be defined as "too much money chasing too few goods." When I was once asked to explain inflation to a fifth-grade class, I chose Friedman's simple definition as one that ten-year olds could understand. I gave each student $100 in ten-dollar bills, and then held a mock auction for a car. After a few preliminary bids, the price of the car quickly went to $100. I then handed out $1000 to each student, and held the auction again. No surprise when the car now sold for $1000. "What's happened here?" I asked the kids. Though they did not identify it as inflation, they did get the idea that more money in the system can result in higher prices. In my simple exercise, the impact of inflation was benign � it did not matter if the car cost $100 or $1000 or even $1 million, as long as everyone in my classroom economy shared equally in the increased money supply. But the real world is not so egalitarian. In an inflationary environment, there are winners and losers. Those more likely to win are wage earners (particularly those who receive cost-of-living increases), holders of foreign currency from countries with stable prices, and owners of commodities or real or tangible assets. Another winner is the government. Because interest rates usually rise with inflation, the outstanding federal deficit that was issued at lower, pre-inflationary interest rates costs less for the government to pay. The biggest losers are, of course, those who live on fixed income, such as retirees who rely on corporate pensions, non-indexed annuities, or portfolios of long term bonds. Furthermore, because rising prices do not impact the costs of goods and services uniformly, some individuals are more adversely impacted than others depending on their consumption mix. For example, the recent health care legislation has us all quite aware of the cost increases in medicine that have been trending well above the overall consumer price index. The same has held true for energy costs, particularly for oil. Those with chronic health problems who do a lot of travel may be scratching their heads when they hear that inflation is not currently a problem in the U.S. There are many who believe a bigger current threat than inflation is "deflation" � a condition where prices start falling. Yes, everyone likes a bargain, but not the economic conditions that bring these falling prices about. High unemployment can cause former wage earners to consume less, causing industry to cut production and to lower prices to rekindle demand. A deflationary spiral can be set up when consumers start expecting continued price declines, and therefore postpone their purchases until a later time when prices might be even lower. The example of Japan in the 1990s illustrates a deflationary cycle where saving rates were extremely high and the economy was at a standstill. At the moment, many in this country consider themselves stuck between a rock and a hard place when it comes to inflation and deflation. Both seem like plausible scenarios for our economy. The massive federal stimulus and injection of money into the economy sends up inflationary red flags. At the same time, stubborn high unemployment, foreclosures on mortgages, and the continued decline in home prices spell deflation. For investors � those, in other words, who have a choice as to what to do with their money � the conundrum is especially troubling. Buy inflation-indexed securities and commodities, or invest in long-term Treasuries? Sell your current home and downsize, or grab a mansion, perhaps in Greece, at a rock-bottom price? The questions change depending on that evening's CNBC report, but the answer stays pretty much the same. Diversification � or building a portfolio or even a lifestyle � that anticipates either scenario makes the most sense. Investing in both short and longer term fixed income, holding domestic as well as foreign securities, and making some discretionary expenditures now and putting some money aside for future consumption, is a winning strategy that any successful sport coach would endorse. You need both a strong offense as well as a good defense, whatever the game.

First-Time Homebuyer Credit Fraud

Today, the IRS releases a notice to warm taxpayers to beware of First-Time Homebuyer Credit fraud after the agency's first successful prosecution on fraudulent reporting of the credit. On July 23, 2009, a tax preparer pled guilty on falsely claiming the credit on a client's federal tax return. He faces up to three years in jail, a fine up to $250,000, or both.

The IRS claims that they have developed a number of computer programs to identify this type of fraudulent reporting. The IRS also confirms that taxpayers are ultimately responsible for the accuracy of the return even if paid preparers prepare the return for them. For details on qualifications of the First-Time Homebuyer Credit and how to report the credit, you could either read my prior posts or visit the IRS website.

According to the IRS, taxpayers are not allowed to claim the credit until they file a tax return in a following year after the home purchase. However, the U.S Department of Housing and Urban Development (HUD) provides state assistant programs to help out first-time homebuyers by allowing certain lenders to offer bridge loan on the expected amount of credit to use as a downpayment or closing costs. The taxpayers are still required to file the tax return to claim the credit as the IRS will only refund the credit directly to the qualified taxpayers instead of other third parties, including lenders.
Before considering the bridge loans, taxpayers should find out more about the loans. There are some advantages and drawbacks. It provides immediate cash flow to taxpayers. The taxpayers can apply the amount of credit immediately on home purchase, and pay it back when receiving the refund after filing the return. Some bridge loans may not require monthly payment for the first few months. However, it may cost more than other financing options. Taxpayers should shop around and find out more detail on the website of the HUD which offers Assistance Programs by States. It includes information on home buying, selling, foreclosure and other legal advice.

Unmarried taxpayers purchase a house together may be able to claim the First-Time Home Credit as long as the taxpayers satisfy the requirements of the credit. You can check out my last post for detail of requirements.
According to the IRS, the credit could be allocated based on the taxpayers’ contributions to the purchase price, ownership interests in the residence or “any other reasonable method”. The reasonable method only include allocating the credit between taxpayers who are eligible to claim the credit based on the taxpayers' contributions to the purchase price as either tenants in common or joint tenants or the taxpayers' ownership interests as tenants in common. The total credit is limit to $8,000 if the eligible purchase occurs during 2009 or up to $7,500 if it was between April 9, 2008 to December 31, 2008. Tenants in common give the owners right to leave his or her interests upon death to beneficiaries who he or she chose. If the property owns by owners as join tenants, when one owner dies, ownerships of the deceased owner will automatically be allocate to other owners.
The IRS provided a guideline in the notice 2009-6 to explain the reasonable method on allocation of the credit with several examples.

The first-time homebuyer credit, first introduced by the Housing and Economic Recovery Act of 2008, was extended and revised by the American Recovery and Reinvestment Act of 2009. It provides two different treatments for the first-time homebuyers who buy a house in different periods. The credit is a refundable credit, and was invented in an effort to stimulate the economy and housing market.
Under both rules, An eligible taxpayer (and if married, both individuals) is the one has not owned and used a personal principal residence located in the United States during the three years prior to the date of purchase. Ownership of a home in a U.S. territory is not considered located in the U.S. which would not disqualify a taxpayer from claiming the credit. The credit also applies to people who are unmarried but purchase a house together. The allocation of the credit among these eligible co-owners is calculated in a reasonable and flexible way. I will provide details on this topic in future post. The credit is not available for a taxpayer who is a nonresident alien. The credit is not allowed for a purchase from a close relative, including a spouse, parent, grandparent, child, and grandchild.
For most taxpayers, the purchase date is the closing date. For taxpayers who construct their own house, the first purchase date is the date they first occupies the home.
The credit can be claimed on Form 5405. The taxpayer can elect the credit of a 2009 purchase on the 2008 tax return. The credit is treated as a 2009 credit under the ARRA of 2009 even if the election is made to claim on a 2008 return.
A table below summarizes the differences of first-time homebuyer credit as originally enacted by the 2008 act and as revised by the 2009 act.

Looking for a job may help you save taxes because you may be able to deduct some job search expenses on your tax return, even if you don’t find one during a year. The deduction is limited to 2% of your adjusted gross income and can be claimed if you itemize the deduction.
In order to qualify for the deduction, 1) the expenses must be related to a job search in your current occupation. For instance, deduction is not allowed if you try to change your job from a teacher to a journalist. 2) the job expenses must not be for a first job. 3) you must not wait for too long to begin looking for a new job after your last one. However, the IRS does not define how long is considered substantial for losing the deduction. You should seek advice on your situation with your tax preparer.
You can deduct fees paid to employment agencies and recruiters. However, if your employer pays you back next year, you must include the amount reimbursed by your employer in your gross income up to the amount of your tax benefit in the earlier years. You can deduct the amount of expense in excess of the amount reimbursed by your employer in the same year.
You can deduct expenses paid for typing, preparing, and mailing resumes to prospective employers, advertising for a new job, and long distance phone calls. You can also deduct travel expenses connected to job searching. These expenses include transportation, meals, and lodging. The expenses must be primarily for job searching but not for personal activities. In this case, time is usually a key to determine the purpose of a trip.
Always, you should keep records of all the expenses, such as all the receipts, if you think that you may be able to claim the deduction on your 2009 tax return.

Image by Getty Images via Daylife

You see and hear the subject of unemployment everywhere in any TV news report and the internet. The unemployment number in June released by the Labor Department today hammered the stock market heavily. The unemployment number rose from 322,000 in May to 467,000 in June. According to an updated U.S. Economic Statistics-Monthly Data published by U.S. Department of the Treasury, the unemployment rate climbed from 9.4% to 9.5%, the highest rate since August 1983.

In June, the majority of job cuts occurred in the sectors of manufacturing, construction, and professional services. Health services and education were hiring while other sectors were cutting jobs. Below is a breakdown of the number of job losses and growths in every sector.

Private Sector = - 415,000
o Natural Resources & Mining = - 8,000
o Construction = - 79,000
o Manufacturing = - 136,000
§ Durable goods = - 112,000
§ Non-durable goods = - 24,000
o Services = - 244,000
§ Wholesale Trade = - 15,900
§ Retail Trade = - 21,000
§ Transportation = - 13,900
§ Utilities = - 200
§ Information & Media = - 21,000
§ Financial Svcs & Real Estate = - 27,000
§ Professional & Business Svcs = - 118,000
§ Education = + 14,900
§ Health Svcs = + 18,600
§ Leisure = - 18,000
Government = - 52,000
Source is from CNBC

This unemployment number again tells us that the recovery will be in a very slow pace. It will take at least a year or two for the U.S. economy to easy this unemployment pain. Apparently, the confidence level of investors was in a downgrade trend as stocks tumbled today. The Dow Jones industrial average (INDU) fell 212 points, or 2.5%. The S&P 500 (SPX) index lost 27 points, or 2.9% and the Nasdaq (COMP) fell 49 points, or 2.7%.