This month Kim responds to questions on capital gains, tax credits, ETF resources, among others. By Kimberly Lankford, Contributing Editor March 1, 2008 Last year my unit was on a 15-month deployment to Iraq. I had contacted T-Mobile before I left and was assured that there would be no problems with my account while I was deployed. But then I learned that an unpaid charge for an early-termination fee of $218 had gone to collection, causing my credit score to drop 75 points. A T-Mobile representative told me to pay the bill, which I did, and then figure it out from there. But now a representative from the collection agency says that I should make another payment through her. The whole point of having a "military suspension" is to avoid problems like this. Can you do anything to help? -- 1st Lt. Robert Hamilton, Fort Richardson, AlaskaWith pleasure. After we contacted T-Mobile, the company credited the disputed amount to your account and removed the collection account from your credit report. A T-Mobile spokesperson said the company "regrets this isolated incident," but declined to comment further on your account due to customer privacy concerns. Many companies, including T-Mobile, have military-suspension policies -- special payment rules for members of the military who are deployed. Customers in the military who are sent to an area not served by T-Mobile can suspend their service for up to 18 months, with no suspension fee, and have their cell-phone number and rate plan reinstated when they return. Under the Servicemembers Civil Relief Act -- a 1940 law that was updated in 2003 -- military personnel who are deployed have additional rights. Advertisement For instance, you have the right to terminate an apartment lease if you have a permanent order for a change of station or are deployed to a new location for 90 days or more. You can terminate a car lease without an early-termination fee if you are deployed for 180 days or longer. And in some situations involving military personnel, the interest rate on a mortgage, credit card, car loan or other debt can be capped at 6% if military service affects your ability to pay (this rule applies only to debt incurred prior to military service). For more information, go to www.servicemembers.gov or www.military.com/deployment. How much in bonds? I own Dodge & Cox Balanced, T. Rowe Price Capital Appreciation and Vanguard Star mutual funds, as well as five pure stock funds and one bond fund. When I calculate the percentage of my investments in stocks and bonds, should I include the portion of bonds in my balanced funds as part of my total allocation? Sean Soong, McLean, Va. Absolutely. Think of it this way: If you have $1,000 in a pure stock fund and $1,000 in a fund that's 60% in stocks and 40% in bonds, you effectively have $1,600 in stocks and $400, or 20% of your portfolio, in bonds. The quick way to calculate your bond allocation: For each fund, multiply the percentage that the fund represents in your portfolio by the percentage of the fund that's invested in bonds. Then add those totals together. If you like to know how your assets are allocated, holding balanced funds mucks up the math. Another problem with balanced funds is that many investors treat their bond holdings as an afterthought. A fund may hold short-term taxable bonds, but if you're in a high tax bracket and want a high yield, you might be better off investing in long-term municipal bonds. Advertisement Balanced funds are a fine solution for investors with modest resources who can afford to buy only one or two funds. But if you have the wherewithal to buy five funds or more, you're better off assembling a balanced portfolio with great stock funds and the best, most appropriate bond funds. Divorce and financial aid. My parents are divorced, and I am wondering who should file the financial-aid forms for college. My primary address is with my mother, who makes $15,000 a year and receives $20,000 in child support. My father and stepmother make $170,000 a year. Should my mom file the forms, even though my dad says he will pay for my college? If my dad and stepmother file, won't their income hurt my chances of receiving financial aid? S.C., via e-mail You're probably in luck. The Free Application for Federal Student Aid considers only the finances of the custodial parent (the parent with whom you spent the most time during the past 12 months). If the custodial parent is remarried, the stepparent's income and assets are considered, too. But the federal aid formula does not include the financial resources of the noncustodial parent, regardless of any agreements the parents have made about who will pay for college. State aid formulas are generally the same. However, some private colleges do ask about the noncustodial parent's income and assets on their own aid forms. They consider the resources of both parents, as well as the custodial parent's spouse. And a few colleges use a totally different formula to distribute their own financial aid, factoring in the income and assets of both natural parents but not stepparents. Ask upfront about each school's financial-aid formula. Advertisement Limits on capital gains. My husband and I bought our home together in the 1980s. He died four years ago, and I'm considering selling our house. Will my capital-gains exclusion be $250,000 because I now file as a single taxpayer, or $500,000 because I purchased the house with my husband? G.P., via e-mail Thanks to a new law passed by Congress, starting in 2008 a surviving spouse can qualify for the $500,000 exclusion as long as the house was owned jointly and sold within two years of the first spouse's death. However, because your husband died four years ago, you will be limited to $250,000 of tax-free profits when you sell the house. But the taxable gain may be smaller than you anticipate because the IRS will ignore part or all of the profit that built up while your husband was alive. When the owner of a home dies, the property's tax basis -- the amount by which gain or loss is determined at the time of sale -- is "stepped up" to the value at the date of death. When a married couple owns a home jointly, at least half of the basis is stepped up (or the entire basis in community-property states). Advertisement To see how this works, let's assume that you and your husband owned the home jointly in a state where half of the basis is stepped up. Let's further assume that you originally purchased the house for $50,000 (and didn't roll any profit from a previous home into the deal, as was permitted under the old law). If the house was worth $150,000 when your husband died, the original $50,000 tax basis would be stepped up to $100,000 -- your original $25,000 plus $75,000, representing half of the home's value at the time your husband died. If you get $350,000 or less when you sell (after paying sales expenses), you'll owe no tax because the entire $250,000 profit will be covered by your exclusion (see IRS Publication 523, Selling Your Home. Under the new law, a surviving spouse who sells the home within two years of the first spouse's death can also step up the basis to the value as of the date of death. Tax credits for grandparents. Our son's grandparents have volunteered to pay his remaining college tuition directly to the school. Can they get a tax credit for any portion of this, even though he is not their dependent child? L.J.C., Anaheim, Cal. Grandma and Grandpa won't get any rewards from Uncle Sam for their generosity, but you might. Grandparents qualify for the Hope and Lifetime Learning tax credits only if they're paying college bills for themselves or for a dependent they claim on their tax return, which isn't the case in your situation. However, as the parents, you may be able to take the Hope or Lifetime Learning credit for the grandparents' contribution. To be eligible, the bill must be paid directly to the college and you must claim your son as a dependent, says Mark Steber, vice-president of tax matters for Jackson Hewitt. Your son's grandparents do get one tax benefit, especially if they're trying to shift money out of their estate. Because they're paying the college directly, rather than giving the funds to your son, the money doesn't count toward the $12,000 gift-tax limit for 2008. Read more about education deductions. Go for a Roth. I am 60 and semi-retired, making about $25,000 per year as a consultant. I am finally under the income limitations to invest in a Roth IRA. Should I? Robert Renuart, via e-mail That's a great idea. Many people who earned too much to invest in a Roth IRA while working full-time forget that they may become eligible after they downshift to a part-time job. For more on the eligibility requirements and benefits of a Roth, see Why You Need a Roth. Comparing ETFs. Is there an online investment tool that lets me compare an exchange-traded fund, or several ETFs, side by side against mutual funds that invest in the same sector? William Luisi, Clinton, Mass. As a matter of fact, Kiplinger's offers a powerful tool that rates ETFs alongside traditional mutual funds in the same sector. The software is called Steele Mutual Fund Expert/Kiplinger's Special Edition, and it uses monthly data provided by fund researcher Morningstar. The program lets you easily analyze more than 21,000 funds. You can filter fund facts within 92 database fields to find the ETFs and mutual funds that fit your needs. (We're sorry, Mac users, the program requires a computer that runs Windows.) The program, which regularly sells for $45 per issue, is available for just $32 (plus $4 for an optional CD) to Kiplinger's readers. Order and download the program at www.mutualfundexpert.com, or call 800-315-9002. If you don't mind toggling between screens or printouts, you can also cobble together an analysis using free Web tools. Use the fund screener at Morningstar.com to compile a list of data on traditional sector funds. Then go to the ETF screener at www.indexuniverse.com and search for the same information on sector ETFs. A Roth boo-boo. I made my 2007 contribution to my Roth IRA last July. When I started working on my taxes, I discovered that my year-end bonus put me over the income limit to contribute ($114,000 in 2007 for single filers like me). What should I do? Is there any way to avoid the penalty? T.O., via e-mail Fortunately, there is, because you caught the mistake before your 2007 taxes were due. You can avoid the 6% excess contribution penalty by withdrawing your 2007 contribution -- plus all the earnings on that money -- by the due date of your 2007 return plus extensions (October 15, 2008). You still need to report the earnings as a taxable distribution on Form 1040. You'll owe tax on that amount in your top bracket, plus a 10% early-withdrawal penalty if you're younger than 59. But there is a way for you to avoid that penalty and the tax bill, too. Contact your IRA administrator right away and switch your 2007 Roth contribution, plus any earnings on the money, into a traditional IRA before October 15, 2008 (your IRA administrator should be able to help you calculate your earnings on a pro-rata basis). Most IRA administrators have a form that makes it easy to "recharacterize" your IRA (the official term for switching from one type of IRA to another). If you are switching the Roth to a nondeductible IRA, you'll also need to file IRS Form 8606 to report the non-deductible contributions. You need to recharacterize only your 2007 contributions plus the earnings on that money. You don't have to touch the remainder of your Roth account. My thanks to Tom Anderson, Mary Beth Franklin, Joan Goldwasser and Manny Schiffres for their help this month. Got a qestion? Ask Kim at kiplinger.com/askkim. Kimberly Lankford is the author of ask Kim for Money Smart Solutions (Kaplan, $18.95).