Money
Tax Advice for Teachers

Q: Can teachers claim expenses on their taxes for school supplies purchased during the year?

A: The IRS has some good news for teachers this year with the passing of the "Job Creation and Worker Assistance Act of 2002."

This year and next, eligible teachers can take an Educator Expenses Deduction of up to $250 for out-of-pocket expenses for books and classroom supplies. The amount is subtracted when figuring out your adjusted gross income. But you need to keep records including the date, amount, and purpose of each purchase.

Details on this and other new tax law changes are in IRS Publication 3991, available on the IRS Website, www.irs.gov, or by calling 800/TAX-FORM.

Q: My house is paid for but I'd like to borrow $50,000 to build an addition. Should I get a traditional mortgage or home equity loan, and could I use my 403 (b) money to pay off the loan?

A: I would not put your retirement money into the house. The tax-deferral in your 403 (b) makes it a valuable asset. You should let it grow for as long as possible.

A home equity line seems to make the most sense. A home equity loan is a fixed loan for a fixed time period. A home equity line is a revolving line of credit, which you can tap into and pay off as you like. My husband and I set one up two years ago when we refinanced our house, and we have used it twice for major purchases and then paid it off as quickly as possible. Because interest rates are so low, this is probably your best option.

Q: I will receive $20,000 as part of an early retirement package. Would it make sense to buy a home in a distant city where my grown child would live in it?

A: I don't want to give you a flat "no," because I don't know the city or your situation. But I'm always reluctant about investment plans that try to do "double duty."

I assume you are thinking that you will do your child a favor by helping him find a place to live and make a good investment for yourself at the same time. Those double-duty goals can be tough to pull off.

Suppose your investment de-clines in value. Would you regret it? Also, is the money eligible for a roll-over into a tax-sheltered IRA? If so, you should certainly consider that.

Q: When I retire, should I take a lump sum or use some other strategy?

A: Because this is one of the most important financial decisions you will make, you should get some individual advice. Programs vary so much that it is impossible to give a broad answer.

The difference comes largely from how the lump sum is figured. Suppose your pension is $1,000 per month for life. To convert that to a single lump sum, an actuary must make assumptions about your life expectancy and the interest rate she might get on the money if it's kept in the pension plan rather than paying it out in a lump sum. Her assumptions make a big difference in your lump sum.

Some pensions reward the pensioner for taking an annual pension by subsidizing the amount or by subsidizing the joint and survivor benefit. Some plans provide medical care to those who take an annual pension but not to those who take a lump sum. What you should do depends on your type of pension plan as well as your health and life expectancy.

Mary Rowland is an author and contributor to several financial planning magazines. E-mail your personal finance questions to MoneyQuestions@neamb.com.

Here are two follow-up comments on earlier columns:

In the February 2002 NEA Today (page 37), you listed some good Websites for teachers. I'd like to suggest my Teachers and Money site at www.angelfire.com/ca/ hennings1/, which has links to good teacher retirement sites. I don't recommend specific funds but try to help teachers become better informed.

In response to the member who asked about her son taking a year off between high school and college (May 2002, page 43): AmeriCorps programs allow for travel and service to American communities. A year in this program would enhance his image to colleges and employers. For more information, see the AmeriCorps site at www.americorps.org.

Thrifty Educator

This month's tips come from Susan Wood, sixth-grade teacher in Elk Grove, Illinois; Derek Haroldson, a teacher from Sauk City, Minnesota; and Lois Barreto, a third-grade teacher in Detroit, Michigan.

Wood: I encourage my students to recycle, and as part of a real-world application, I use recycled items in my classroom. I take the cup holder trays I get from fast food restaurants and place yogurt containers in them. I fill them with paints and use them as paint trays. It's good to leave one container on the tray filled with water so the students can rinse their brushes. The yogurt containers are easy to clean, and the trays become nicely decorated.

Haroldson: My class collects milk rings to learn about place value. The children really enjoy turning 10 ones into a group of 10, 10 tens into a group of 100, and 10 hundreds into a group of 1,000.

Barreto: I go to the armed services recruiting offices and ask for book covers and pencils. They are usually glad to oblige and have other free things for classrooms, too. I use the free pencils as rewards for 100 percent on tests.

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