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Jackpot (Mis)Fortune

Thursday, February 17, 2005;

If you ever thought that hitting the lottery could definitely change your life for the better, then you need to read April Witt's Jan. 30 Washington Post Magazine cover story on Jack Whittaker, a West Virginian man who hit the Powerball in 2002.

Whittaker, as Witt reports, won $314 million, the largest undivided lottery jackpot in history. He opted to take a lump sum payment of more than $113 million after taxes.

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All that money wound up creating a big mess in Whittaker's life, Witt reports. As one person who knew Whittaker said: "It was like the money was eating away at whatever was good in him."

Another friend of Whittaker's said: "It seems like money brings out the ugly in people."

How many times have you said, "If only I could win the lottery"? Or, "I could do better if I just made more money"? Then what? Would you spend it better than the money you already have? Most wouldn't.

Let me tell you, if you're not handling well what you have now, getting a bigger raise or windfall will just make your problems more expensive.

For more on Witt's article and what others thought, read the transcript of Witt's Jan. 31 Web chat about her article.

Love and Money

If you missed my online discussion yesterday about how couples should strive to manage their money, you should definitely read the transcript. My guest was Jeff D. Opdyke, author of February's Color of Money Book Club selection -- "Love & Money: A Life Guide for Financial Success" (John Wiley & Sons).

I will announce the winners of my annual "Honey, I Need Some Money!" contest in my Sunday, Feb. 27 column. So stay tuned!

The Social Security Debate

If you're following the debate on President Bush's plan to restructure Social Security, take note of a recent Washington Post story on how the public views the issue.

Based on two surveys, one by The Post and the other by the Henry J. Kaiser Family Foundation and Harvard University, Americans believe there is a crisis looming for Social Security, but they are largely unaware of the cost of President's Bush's proposal to allow personal investment accounts. The Post's Richard Morin and Dale Russakoff reported that nearly half of those surveyed wrongly believed that the costs of creating personal accounts would be negligible.

One worker, when told that the Bush administration estimates the government initially would have to borrow more than $700 billion to set up such a system, was incredulous. He said: "That seems very excessive. I would be less inclined to favor it if it costs that much. That much money could serve a lot of good purposes." Read the full story here.

Chile's public retirement system is often held up as a model for what the United States should do with Social Security. The Post's Outlook section ran a piece by Estelle James last Sunday in which she provided more details on exactly how Chile implemented private accounts and why that country's model might not be the best fit for ours. James was a member of President Bush's 2001 Social Security commission. You can read her piece here: "How It's Done in Chile."

Sounding Off on Social Security

I asked if we could talk, and boy have you talked (or more precisely e-mailed). Here's what everyday folks are saying about the Social Security debate:

* Nancy Glover of Burke, Va., asked: "How will taking money out and investing in the stock market SAVE the Social Security program? It's double talk once again from the Bush administration. I think I'm better off saving $20 each paycheck, investing it on my own, and leaving my sure-thing Social Security benefits as is."

May I suggest for an answer to Glover's question you read Robert J. Samuelson's column from yesterday's Post -- "Lots of Gain and No Pain." Samuelson does a good job of pointing out that establishing personal investment accounts will come at a hefty cost for the government (that means you, taxpayers!).

* Charles B. Bonner of Sun Valley, Idaho, wrote: "Reform is necessary, either today, or more painfully for our children, in 20 years. It would be simple to limit private investment funds to a selected number of index funds that carry low (0.2 or 0.3 percent) expense charges, that have had historic low volatility, and that over 30 or 40 years of contributions would dwarf the returns that our current Social Security system produces. But again, this administration must outline the details, and must carefully limit risky individual decisions, and toughest of all, must privatize without bankrupting our budget or current Social Security recipients."

* Tom Nicholson of Brighton, Mich., doesn't like all the ranting against the president's plan. He said: "I doubt that this kind of complaining will help Congress in crafting a worthwhile plan (or deciding to leave S.S. alone). I don't think that anyone knows for sure what shape any 'reform' might take, so no one can possibly know what the results might be. I guess that most of the negativity results from fear."

* Finally, Suzanne Doerr, who lives in Pacifica, Calif., made some good points and asked some excellent questions: "Social Security was intended to be a back up plan -- an insurance policy, if you will -- just in case one was laid off 3 months before being eligible for a pension, or was seriously injured, or there was a stock market crash. It was never intended to be an investment program for retirement. Franklin Delano Roosevelt himself said that each individual should have and maintain his or her own private account for his or her retirement. Social Security was just a social contract with the nation to insure that old people wouldn't have to live in poverty. Why are we now trying to make it 'all about me'? There are 401(k)s and IRAs and savings accounts and one's own mattress where individuals can put money toward their own retirement. Are they doing that? If not, why not? What makes people think they'll pay more attention to their own 'personal' 'private' Social Security account?"

Answering Your Tax-Time Questions

Each week, Jim Dupree, the IRS spokesman for Maryland and Metropolitan Washington, is answering readers' basic tax questions in this e-letter. If you have a tax question, send it to colorofmoney@washpost.com with "Tax Question" in the subject line.

Q: My partner and I bought a house in 2004. Are we allowed to equally divide the interest and taxes we paid and deduct them on our separate tax returns?

Dupree: Yes, you can deduct home mortgage interest only if you both meet all the following conditions:

* You both must file Form 1040 and itemize deductions on Schedule A (Form 1040).
* You both must be legally liable for the loan. You cannot deduct payments you make for someone else if you are not legally liable to make them. There must be a true debtor-creditor relationship between the two of you and the lender.
* The mortgage must be a secured debt on a qualified home. A secured debt is one in which you sign an instrument (such as a mortgage, deed of trust, or land contract) that makes your ownership in a qualified home security for payment of the debt. It provides, in case of default, that your home could satisfy the debt, and it is recorded or is otherwise perfected under any state or local law that applies. A qualified home is your main home or your second home.

See IRS Publication 936, "Home Mortgage Interest Deduction," for more information.

Q: I'm employed full time, but I also established a home business in Nov. 2004. I've received some income from the home business, but it has been offset by business purchases. Since the business was established at the end of 2004, what (if anything) do I have to include on my 2004 taxes?

Dupree: Since you have business income you should file your income tax return on Form 1040 and attach Schedule C or Schedule C-EZ. Small businesses and statutory employees with expenses of $5,000 or less may be able to file the simpler Schedule C-EZ instead of Schedule C. For details and other requirements you must meet, see Schedule C-EZ. You can also check IRS Publication 334, "Tax Guide for Small Business," which addresses filing requirements, and self-employment tax.

You might also want to look at Publication 587, "Business Use of Your Home," to determine if you are eligible to claim a deduction for business use of your home. Visit the IRS Web site's "Starting a Business" section, which provides links to basic federal tax information for anyone who is starting a business.

Dupree's tax tips are compiled online here.

You are welcome to e-mail comments and questions to singletarym@washpost.com. They may be used in a future column or newsletter with the writer's name unless otherwise requested.

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