Ask Kim


ID Theft Red Flags

Kimberly Lankford

Kimberly Lankford describes the ploys identity thieves use to get access to your credit cards.



My credit-card company called me and said that somebody tried to charge a penny to my account. When I explained that it wasn't my charge, the issuer canceled my card and sent me a new one. Was this an identity thief at work? In the future, what can I do to protect myself from identity theft? -- R.G., Alexandria, Va.

This is a common ploy for ID thieves, who test out your credit card with a small charge and then, if it goes through, start making big purchases. Crooks may even use programs with algorithms that run 16-digit numbers until they get a hit. Then they try to charge a penny or a dollar or two, making it look as if a charity is the recipient, says Adam Levin, chairman of Identity Theft 911, which sells ID-theft prevention services to businesses. "They're hoping that because of the small size of the transaction, it will slip through filtering systems."

Another trick ID thieves use is to impersonate an employee of your bank's fraud department and fish for your sensitive information. After offering enough of your personal details to gain your trust, they may ask you for your Social Security number or the security code on your credit card. If you get a suspicious call, call the customer-service number on the back of your credit card.

It's a good idea to regularly check your bank and credit-card balances online for suspicious transactions. You should also check your credit report to see whether anyone has applied for credit in your name. You can get one free credit report per year from each of the three credit bureaus at www.annualcreditreport.com. You could also put a credit freeze on your account, which blocks potential lenders from getting access to your credit report without your authorization. (Your current creditors are exempt from the freeze, and you can make charges to your current cards without unfreezing your account.) The protection works only if you freeze your credit at all three bureaus (Equifax.com, TransUnion.com and Experian.com). It generally costs $10 at each bureau to freeze the account and $10 to unfreeze it.

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Better medigap policies

I understand that two new types of Medicare-supplement policies were just introduced and that other changes were made to policies. Do I need to do anything to keep my current medigap coverage? -- A.H., via e-mail

No. Two new plans, M and N, were introduced on June 1, and insurers can no longer sell plans E, H, I and J. If you currently have a policy, even if it's a Plan E, H, I or J, you can keep it and your coverage won't change. But no matter what plan you have, it may be worthwhile to consider the new plans, which add some cost-sharing in return for lower premiums.

Both of the new plans are similar to the most popular medigap policy, Plan F, except that Plan M provides only 50% of the Part A deductible (which is $1,100 in 2010) and none of the Part B deductible ($155). Also, Plan M does not provide coverage for Part B "excess charges," which pays the difference if your doctor charges more than Medicare allows. Plan N is the same as Plan M, except that it covers the $1,100 Part A deductible in full, and it charges a $20 co-payment for doctors' office visits and a $50 co-payment for emergency-room visits. Plan N, which is being offered by more insurers than Plan M, costs 25% to 35% less than Plan F, says Chris Hakim, of eHealthMedicare.com, a marketplace for medigap policies.

If you're within six months of signing up for Medicare Part B for the first time, you can qualify for any medigap policy regardless of your health. After that, you could be rejected because of your health. Hakim says some insurers are offering Plan M and Plan N regardless of health to people who have plans E, H, I or J.

A model fund from the feds

I currently have money in the federal government's Thrift Savings Plan G Fund, but I am considering moving the money to a Roth IRA to avoid taking required minimum distributions. What mutual fund would be an appropriate substitute? -- Douglas P. Broome, McLean, Va.

Sorry, but no other mutual fund offers quite what the TSP's G Fund does. There aren't many free lunches, but the G Fund is one of them.

The G Fund holds a specific kind of Treasury security that is issued specially for it -- and unfortunately, no one can invest in these securities outside of a TSP. These special Treasury securities come with interest rates that reset once a month according to current market yields -- just as if, say, you owned a one-month Treasury bill that you kept rolling over each month. However, rather than paying measly short-term yields, the rates on these securities reset according to long-term Treasury yields (specifically, they cue off the average yield of all Treasury securities with four or more years until maturity).

So the G Fund gives you the return of long-term bonds -- which almost always yield more than short-term bonds -- with all the safety of short-term bonds. (Bond prices fall when interest rates rise, but prices of short-term bonds are less volatile than those of long-term IOUs.) Over the past ten years through the end of 2009, the G Fund returned 4.6% annualized. Its annual expense ratio of 0.03% is lower than anything you'll find elsewhere.

That said, you have plenty of fine mutual fund options, although all are costlier and entail more risk than the G Fund. A good alternative might be to put part of your money into a conservative bond fund, such as Harbor Bond (symbol HABDX), a member of the Kiplinger 25, and part in one or more flexible funds that can be more aggressive in fighting inflation and rising interest rates. Flexible bond funds worth considering include Loomis Sayles Bond (LSBRX), Osterweis Strategic Income (OSTIX) and T. Rowe Price Strategic Income (PRSNX). (To learn more about these funds, see The Best All-in-One Bond Funds.)

Health-care reform and taxes

I heard that everyone who sells their house will now have to pay a 3.8% tax on the proceeds from the sale because of the new health-care law. Is this true? -- M.A., Kansas City, Mo.

No. There is an extra tax included in the legislation that could affect some people who sell their home, but it is a very small number of people and a limited portion of their home-sale profit.

Starting in 2013, the health-care-reform law adds a 3.8% Medicare tax to unearned income -- including interest, dividends, capital gains (potentially including profits from the sale of a home), rents and royalties. But this extra tax applies only to people with modified adjusted gross incomes of more than $200,000 if single, or $250,000 if married filing jointly. Tax-exempt interest and retirement-plan distributions are not included in the income level that determines the tax.

There's a special caveat for real estate sales: When you sell your primary residence, you can exclude up to $250,000 of your home-sale profit from capital-gains taxes if you're single, or $500,000 if married filing a joint return, as long as you've lived in the house for at least two out of the past five years. This amount will be excluded from the new 3.8% tax, too. So a married couple who bought their home for $300,000 more than two years ago can sell it for up to $800,000 without having to pay taxes on the sale -- no matter how high their income is. (The exclusion does not apply to vacation homes.)

If they sold the home for $900,000, however, the $100,000 above the capital-gains exclusion would be taxable at the 15% rate and could be subject to the 3.8% surtax. The surtax is limited to net investment income or the amount of modified adjusted gross income above $250,000, whichever is less. If the couple's modified AGI was $260,000, they'd have to pay the 3.8% tax on only $10,000.

If your income exceeds the limits for this tax and you expect to have a large home-sale gain above the capital-gains exclusion, or you plan to sell a vacation property in the next few years, you still have three tax years to make the sale before the tax goes into effect in 2013, says William Massey, senior tax analyst with Thomson Reuters.

My thanks to Elizabeth Ody for her help this month.

Got a question? Ask Kim at askkim@kiplinger.com.



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