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A Tax Break for the Kids

It's a great tax-savings opportunity—for those who qualify. On Jan. 1 the rate for dividends and long-term capital gains fell from 5% to 0% for taxpayers in the 10% and 15% tax brackets. But before you transfer appreciated assets to your kids, consider this: Congress recently passed a law imposing a parent's tax rate on proceeds of sales of investments by children. When a child under 18 sells, profits over $1,800 are taxed at the parent's rate. That applies through age 23 if a child is a full-time student and a parent provides more than half of his or her support.

Still, shifting assets "is a great strategy" if the recipient is in one of the two lowest tax brackets (incomes below $31,850) and is older than 23. The recipient can also be 18 or older but without more than half of his or her support from you, says M. Holly Isdale, managing director at Lehman Brothers (LEH). "I can give stock to my niece, age 22, whom I don't support, and she can sell at a 0% capital gains rate as long as the proceeds don't push her into a higher tax bracket." If you can take advantage of this, don't procrastinate: The 0% rate is scheduled to disappear in 2011.

Don't Refi Till July

Students or former students tempted to join the refinancing wave and consolidate variable-rate government guaranteed student loans should wait until after July 1. The Fed's recent cuts mean that rates on these loans could be around three percentage points lower when rates are reset in July, says Mark Kantrowitz, publisher of FinAid (, a student aid Web site. "These projected decreases represent the largest decrease in federal education-loan interest rates since 1992, and maybe even in the history of the program," he says.

Federal student loans come in two types: Stafford and PLUS loans. Loans of both types made before July, 2006, have variable rates ranging from 6.62% for students in school (or those within a six-month grace period upon graduation) to 7.22% for students who have started paying off a loan.

A Stafford borrower who is repaying a loan and waits until the rates reset should shave at least 2.375 percentage points from current loans. A PLUS loan borrower should see a decrease of at least 3.125 percentage points. Although a wave of refinancing took place in July, 2005, when rates hit 2.88%, there are students who didn't lock in the lower rate. The typical graduate student, who has an estimated $50,000 in debt, could shave almost $75 from monthly payments and save some $9,000 by consolidating this summer.

Some ETFs Have Gotten Way Off Track

The point of an exchange-traded fund is to mirror the returns of the index it tracks. But some ETFs keep missing the mark by a wide margin. In industry-speak, this problem is called "tracking error," which is defined as the difference between an ETF's return and that of the index it's supposed to replicate.

While the discrepancy arises for many reasons, it's often specialized ETFs that run into tracking troubles. For example, foreign ETFs can't always buy all of the locally listed shares that are needed to more closely mimic their benchmark index.

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