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Credit Cards

Watch Out for Balance Transfer Cards

The interest rates on these cards can jump as high as 20.99% after the teaser rate expires.

I’ve received several offers from credit card companies recently to transfer my existing account balance to a new card interest-free. I’d like to take advantage of one of these 0% balance transfers to pay off my holiday bills. Is there a catch? -- C.T., Houston

A balance transfer can be a great way to pay off your holiday bills, but you need to weigh the offers carefully. Most cards charge an upfront transfer fee of 3% to 4%, says Bill Hardekopf, of LowCards.com, so it would cost $300 to $400 to transfer a $10,000 balance. That makes sense only if the transfer fees are less than what you expect to pay in interest on your existing balance.

SEE ALSO: 11 Credit Card Mistakes to Avoid

After a hiatus during the economic downturn, interest-free balance-transfer offers are back and better than ever. Most cards charge no annual fees and offer lengthier introductory periods—some as long as 21 months—during which you pay no interest. But you’re likely to get one of these tempting offers only if you have a stellar credit score. Be aware that if you use the card for new purchases, you will incur interest charges unless you pay off the purchases in full during the billing cycle. And pay close attention to the length of the introductory period. The interest rates on these cards can jump as high as 20.99% after the teaser rate expires.

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Selling a house that was a gift

Our mother, who is still alive, transferred the deed of her house to her children in 2006. We are now selling the home. Will we be taxed on the proceeds? -- R.J., Madison, Wis.

Because your mom gave you and your siblings the house during her lifetime, you will have to use her basis—what she paid for the house plus any improvements she made—to calculate the gain. So if she bought the house in 1970 for $50,000 and made $25,000 in improvements, and you net $600,000 on the sale, then the $525,000 difference could be taxable.

Had she left you the house in her will, the tax implications would be quite different. The cost basis of an inherited property is based on the fair-market value of the house at the time of death—which would probably be much higher, resulting in a smaller taxable gain. However, if a house is your primary residence and you live in it for at least two out of the five years before you sell it, you may be able to exclude up to $250,000 in gains from taxes if you are single or up to $500,000 if you are married filing a joint return.

CLASS dismissed

I heard that the government scrapped the CLASS Act, which I was counting on to cover potential long-term-care expenses. What are my options now? -- M.V., Falls Church, Va.

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The CLASS Act (which stands for Community Living Assistance Services and Supports) was a part of the health-care-reform law that would have created a voluntary long-term-care insurance program that workers could pay for through payroll deductions. Under the now-defunct program, any worker could sign up for the plan, which would provide a daily cash benefit if he or she needed long-term care. But the U.S. Department of Health and Human Services later determined that the CLASS Act was financially unsustainable and pulled the plug on the program.

The CLASS Act may be gone, but ever-increasing long-term-care costs are still a threat to your retirement plan. A stand-alone long-term-care insurance policy can provide valuable protection against these expenses. But it is becoming tougher to qualify for long-term-care insurance. Several large insurers have left the business recently, and others have raised rates for current policyholders. Rates have jumped even higher for new buyers.

If you can’t qualify for a stand-alone policy or you worry that you’d pay increasing premiums for years and might never get a payout, consider a policy that combines long-term care and life insurance, or long-term care and an annuity. It is generally easier to qualify for these combo policies than it is for stand-alone long-term-care coverage. They provide a guaranteed payout to you or your heirs, regardless of whether you ultimately need long-term care. And because you normally need to invest a lump sum or pay premiums for a limited period of time, insurance costs are unlikely to increase.

Misleading utility payout

Why haven’t you written about Gabelli Utilities AAA Fund? The fund currently yields a dividend of 13.8%, has no sales charge and has earned a respectable return since its inception. -- M.M., Lakin, Kan.

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Although Gabelli Utilities AAA (symbol GABUX) pays 7 cents per share each month—that translates to 13.8% on its net asset value of $6.09—it’s not a “yield,” and the 84 cents of annual income is not a “dividend.” It is actually a distribution. Most of the income is a return of capital, which means you and the other shareholders are merely getting your own money back from the fund in dribs and drabs. To raise cash for the monthly payout, the fund sells new shares and liquidates existing assets. Its actual dividend yield is closer to 1%.

The only plus to such a return of capital is that you don’t owe income taxes in the year you receive the money. But the tax relief is temporary. The return of capital reduces your cost basis, which will result in a bigger taxable gain or smaller tax-deductible loss when you sell shares.

My thanks to Jeffrey Kosnett for his help this month.