With wines, does price = pleasure?

Researchers at the California Institute of Technology and Stanford University published a recent study showing that people were more likely to prefer a wine they thought was expensive, versus the same wine labeled at a lower price. Even their brains reacted differently; they registered more activity in an area of the brain related to pleasure when they thought they were drinking a $90 bottle of wine than when they drank the same stuff labeled at $10.

But here's the kicker: When they didn't know the price of the wines, they preferred the least-expensive one.

Keep that in mind when you're shopping for wines. Don't automatically equate high price with high quality. It's true that many pricier wines are superb, and that the world's very best wines never cost $5 or $10. But in Consumer Reports blind wine tests, in which our expert testers know neither the label nor the price, some relatively inexpensive wines earn the highest Ratings. Conversely, some $20 or even $30 wines garner mediocre scores.

For Ratings of 10 varietals, most at $20 a bottle or less, check our Wine hub.

--Tobie Stanger

Refund anticipation loans still troublesome for taxpayers

An annual report issued today by the Consumer Federation of America and the National Consumer Law Center once again underlines the insidiousness of refund anticipation Loans, or RALs: short-term, high-interest loans marketed by tax preparers and lenders and often pitched as a way to get your refund immediately.

Trouble is, refund anticipation loans can carry an effective annual interest rate of from 50% to 500%. When application fees are included in the calculation, the interest cost can range from 80% to nearly 1,200%. On a positive note, fewer people took the loans in 2006, the most current year for data, the report says.

Separately, the New York State Division of Human Rights filed civil suits yesterday against tax-prep companies Jackson-Hewitt and Liberty Tax Service for what it called "predatory lending practices targeted to communities of color and military families." The suits allege that the two companies disproportionately target and sell the "abusive" RALs to these populations.

In The New York Times today, officials from both companies denied the allegations.

Taxpayers who opt for these loans may not realize that if they could wait just 10 days, many would get their refunds directly from the IRS, without any interest or high processing fees. The agency says that's how long it typically takes for electronically filed returns with the direct-deposit option. (Without direct-deposit, it's another week, on average.) And any tax return showing an adjusted gross income of $54,000 or less can be prepared and filed online for free.

But I wonder whether more taxpayers than usual will use RALs this year out of concern that their refunds will be late. The IRS says early filers who use certain forms cannot even file until Feb. 11 this year, to accommodate computer system updates. Once returns are filed, they're subject to normal processing speed, the IRS asserts. But people who are vulnerable and in need of cash may be easily convinced that an RAL is a surer thing.

Today's report acknowledges that some people may not be able to wait. For those folks, it notes that H&R Block and JP Morgan Chase have lowered their RAL fees relative to other lenders.

"Taxpayers should avoid RALs in the first place; but if they insist on getting one, they should shop around," the report says.

--Tobie Stanger

 

The latest IRS e-mail scams

Two e-mail scams purportedly from the IRS recently landed in my “in” box from baffled friends. Like all e-mail attributed to the IRS, these were phonies.

One had an official-looking e-mail address with irs.gov on the end. The subject line said, “IRS USA for Businesses: Important messages to all business Accountants and Treasury Managers!” The main message told recipients to download information on recent changes to business and corporate tax laws, and offered an address to click on for more information, including “www1.irs.gov” in the URL.

Point 1:  There is only one official IRS Web site: www.irs.gov.

The other e-mail was scarier because it looked so real. It, too, was sent from an e-mail address with irs.gov on the end, and informed the recipient that she was due a tax refund of $93.60. To add to its verisimilitude, a copyright line for the IRS was posted at the bottom.

Clicking on the provided link led to a Web page with official-looking IRS letterhead, and that very familiar san serif typeface that says “I’m not kidding.” And what did the “IRS” want from my friend? Her Social Security number and a current credit card number—for who knows what kind of mischief. The only thing that gave away the scam was the URL that popped up on that second page: www.drunkenmedia.com.

Point 2: The IRS never communicates with taxpayers via e-mail. Even the electronic confirmation you get after filing electronically comes through the tax-prep software provider, not the IRS.

I checked later and both offending Web pages had been taken down. Someone had obviously reported them, a wise move.

Point 3: Never respond to e-mails that purport to be from the IRS.

Otherwise, you could become the victim of identity theft. Report any e-mails you receive from the IRS to phishing@irs.gov. Check the IRS Web site for more examples of common e-mail schemes.

--Tobie Stanger

Taxes: How low (or high) can they go?

There was a fascinating (to us, anyhow) table in a recent issue of the Journal of Financial Planning. It showed the top marginal tax rates for married couples from 1913 through 2003. Those, you’ll recall, are the highest rates at which income over a certain amount is taxed.

The rates ranged from a low of 7 percent (on income over $500,000) in 1913 to 94 percent (on income over $200,000) in the war year of 1944.

Top marginal rates stayed in the 80 to 90 percent range until the early 1960s, then dropped into the 70 to 77 percent range. Starting in 1980, rates started down, spending most of the 1990s at 39.6 percent. Since 2003 the top marginal tax rate has been 35 percent.

Lesson here? That tax rates can rise and fall over time and today’s relatively low rates may not be with us forever. So, for example, those of us who are still in the workforce can’t assume we’ll be taxed at a lower rate after we retire.

For some tips on paying less tax this year, click here.

Time to plug in the shredder and tame the clutter

If your list of 2008 New Year’s resolutions includes a vow to tackle the mounds of financial paper you’ve been collecting, here’s some advice from Rosanne Grande, a financial planner with R.W. Rogé & Co., in Bohemia, N.Y., on what to keep and what to shred:

• Bank records. Keep deposit and withdrawal slips until you get your bank statement each month. Retain monthly statements for at least seven years, in case the IRS audits you. Ditch CD records after the accounts mature and you collect the interest you’re due. The same advice applies to loan documents after you’ve paid back all the money that you borrowed, with one exception. Don’t burn your mortgage after you’ve paid it off. Keep it as proof of how much you paid for your house so you can calculate the tax, if any, on your gain when you sell it.
• Investment account documents. Shred the statements you receive each month or quarter as new ones arrive, but keep annual statements for seven years. If you still hold stock in certificate form, ask your broker to hold them for you electronically. You can also convert U.S. Savings Bonds from paper to electronic using the U.S. Treasury’s SmartExchange program at TreasuryDirect.
• Retirement-plan records. Retain your annual 401(k), IRA, and Keogh statements. If you’ve made nondeductible IRA contributions, keep Form 8606, which you must file with your tax return. It proves that you’ve already paid taxes on money in those IRAs.
• Credit-card receipts and bills. After you pay your bills each month, staple receipts for credit-card purchases to your statements and keep them for one year. They’ll come in handy if you need to return defective goods that you bought with a credit card. After one year, shred the receipts. You can do the same with your credit-card bills unless you need them to support tax deductions. In that case, hold them for seven years.—Denise Topolnicki
  

Will the IRS say it's sorry?

National Taxpayer Advocate Nina E. Olson’s annual report, released today, includes a proposal that Congress authorize IRS “apology payments” in cases where an error by the IRS “excessively burdens or harms” the taxpayer. The payments would range from $100 to $1,000.

Olson, a Treasury Department employee whose job is to monitor IRS operations and recommend changes to benefit taxpayers, notes that other countries, including the United Kingdom and Australia, make such payments.

It’s unclear from the report precisely who would be eligible for such payments, which are called “symbolic” and aren’t meant to completely compensate taxpayers.

While this isn’t likely to placate a taxpayer who’s spent many months and lots of money trying to clear his or her name in a tax dispute, it’s an interesting proposal. Indeed, imagine if other government bodies—the U.S. Postal Service, FEMA, the Department of Interior, the Department of Defense—had to do the same.

Don’t get us started!

--Tobie Stanger