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After the Wildfires

I live in Colorado Springs, near where the Waldo Canyon fire destroyed homes this past summer. My home was spared, but now that the foothills west of town have burned, flash flooding and mudslides in nearby neighborhoods are possible. Homeowners insurance doesn’t cover flooding, so how can homeowners protect themselves? -- Jennifer Kulier, Colorado Springs

DOWNLOAD: 7 Steps to Prepare for Disaster

Damage from the fires was covered by homeowners insurance. But to cover the risk of floods and mudslides, you need to buy a flood insurance policy from the National Flood Insurance Program. You can buy coverage through your insurance agent, or find agents and price quotes for your address at www.floodsmart.gov.

Although the chances of flood and mudslide damage grew after the wildfires, flood insurance prices have yet to rise, says John Prible, of the Independent Insurance Agents and Brokers of America. Some people in the area are paying just $313 a year for $150,000 in structural coverage and $60,000 of coverage for possessions.

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The Federal Emergency Management Agency is letting residents of some areas near the Waldo Canyon and High Park wildfires buy flood coverage that kicks in immediately rather than after a 30-day waiting period. (FEMA is approving residents for this exemption on a case-by-case basis. The waiting-period exemption will also apply on a case-by-case basis to people affected by future wildfires.)

But flood insurance is important even if you don’t qualify for immediate coverage. Floods and mudslides can occur years after a fire. For instance, vegetation is still sparse after the Hayman Fire in Colorado in 2002, and “those hills are susceptible if we have heavy rains,” says Fred Lautenbach, an independent insurance agent in Littleton, Colo.

If you live in a federal disaster area and have damage that isn’t covered by insurance, you may qualify for a FEMA grant, a Small Business Administration disaster loan (even if you don’t own a business) or tax breaks for uninsured-casualty losses. Whether you had coverage or not, you may be eligible for disaster-related unemployment benefits, crisis counseling and other programs, says Micki Trost, of the Colorado Division of Homeland Security and Emergency Management. (Find out about benefits at DisasterAssistance.gov or a FEMA disaster recovery center, or contact your county.)

Also, people who were evacuated because of the wildfires may have coverage for hotel costs and other living expenses under their homeowners policy, even if their homes weren’t damaged, says Lautenbach.

Series EE bonds for college costs

My son is starting college, and I would like to use his Series EE bonds tax-free for his expenses. The way I read the rules, however, I don’t think I can. The bonds were purchased by various family members since 1994 and have my son listed on the “to” line of the bonds. If I can’t use them tax-free, will the interest be taxed at my son’s rate? -- Brian Prusinski, Jermyn, Pa.

You’re correct about missing out on the tax break. To qualify, the bond owner must have been at least 24 years old when the bond was issued and must use the money to pay qualified education expenses for himself, his spouse or a dependent. (Tuition and fees are qualified expenses; room and board are not.) Because your son is listed as the owner, you can’t exclude the interest on your income tax return.

The interest subject to the tax when the bonds are redeemed should be reported on your son’s tax return. He won’t be able to take the tax break by using the money for college costs, either, because he wasn’t 24 years old or older on the bond’s issue date. And some of the interest might be taxable at your tax rate rather than your son’s. That’s because the “kiddie tax” applies the parents’ rate to a child’s investment income if it exceeds $1,900 this year. The kiddie tax usually disappears when a child turns 18, but it applies to full-time students until the year they turn 24.

For more information about Series EE bonds and I-bonds, visit TreasuryDirect.gov.

Undoing a Roth IRA conversion

I converted my IRA to a Roth in 2011, but now I need the money that I paid in taxes. Is it too late to undo the conversion and get the money back? -- Name withheld

No, it isn’t too late. You have until October 15, 2012, to undo a Roth conversion made in 2011. The process is simple: Ask your IRA administrator to recharacterize the account (the term for undoing the conversion), then file an amended return with the IRS (Form 1040X, available at www.irs.gov), and you’ll get a refund of the taxes you paid.

Some people undo a Roth conversion if they have unexpected expenses. Others make the switch if their investments have lost money since they made the conversion; they can reconvert at the lower value and pay a smaller tax bill. For example, if you converted a $100,000 account in 2011 and reconvert it at $80,000, you could save $5,000 in taxes if you’re in the 25% bracket. To reconvert, you have to wait until the calendar year after the original conversion and at least 30 days after the recharacterization. Don’t wait too long to reconvert, though. Tax rates could go up in 2013.

This article first appeared in Kiplinger's Personal Finance magazine. For more help with your personal finances and investments, please subscribe to the magazine. It might be the best investment you ever make.

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