San Diego, CA. "Negative equity", "qualifying child" and "critical illness" are six words you may start to hear a lot more about in 2006. Here is why...

"Negative equity" is a term coming into the main stream as a result of a surprisingly number of homeowners reporting minimal and even negative equity holdings. The so-called housing pricing bubble, which some experts say is a misnomer because as long demand fueled by new households remains high and supply being curtailed by restrictive zoning remains low, prices will continue to grow and not collapse. In some markets prices have stabilized and homes remain on the market longer. Negative equity is something that will be experienced by many for the first time homebuyers who got into a hot housing market while prices were on the rise, without making a down payment. Included in that group will be many speculators who bought property with 100% equity loans, hoping the rental income will be more than the monthly payments. When that equation goes negative, usually the negative equity follows. Many real estate speculators will flood the market new property re-sales, most of which will be condos which will depress prices and homes will stay on the market longer. According to Kenneth Harney, a nationally syndicated real estate columnist, in 2004-2005 nearly ten percent of the borrowers were in zero or negative equity and five percent of that group were more than ten percent negative. He also reported that state-by-state net equity holdings found more than 28 percent of Colorado buyers or refinancers, for example, had less than five percent equity in their properties and nearly 24 percent of Ohio owners were in the same boat. He contends equity levels are vital measures of household financial health and a key component of net worth.

"Qualifying child" is a relatively new term courtesy of the IRS. The uniform definition is: A "qualifying child" may enable a taxpayer to claim several tax benefits, such as head of household filing status, the exemption for a dependent, the child tax credit, the child and dependent care credit and the earned income tax credit. Prior to 2005, each of these items defined a qualifying child differently, leaving many taxpayers confused.

The Working Families Tax Relief Act of 2004 set a uniform definition of a qualifying child, beginning for Tax Year 2005. This standard definition applies to all five of the tax benefits noted above, with each benefit having some additional rules.

In general, to be a taxpayer's qualifying child, a person must satisfy four tests:

Relationship -- the taxpayer's child or stepchild (whether by blood or adoption), foster child, sibling or stepsibling, or a descendant of one of these.
Residence -- has the same principal residence as the taxpayer for more than half the tax year. Exceptions apply, in certain cases, for children of divorced or separated parents, kidnapped children, temporary absences, and for children who were born or died during the year.
Age -- must be under the age of 19 at the end of the tax year, or under the age of 24 if a full-time student for at least five months of the year, or be permanently and totally disabled at any time during the year.
Support -- did not provide more than one-half of his/her own support for the year.
Additional Rules
While the four qualifying child tests generally apply for the five tax benefits noted above, there are some additions or variations for particular provisions:
Dependent -- a qualifying child must also meet these tests:

Nationality -- be a U.S. citizen or national, or a resident of the U.S., Canada or Mexico. There is an exception for certain adopted children.
Marital status -- if married, did not file a joint return for that year, unless the return is filed only as a claim for refund and no tax liability would exist for either spouse if they had filed separate returns.
Credit for Child and Dependent Care Expenses -- a qualifying child must be under the age of 13 or permanently and totally disabled. A qualifying child is determined without regard to the exception for children of divorced or separated parents and the exception for kidnapped children.
Child Tax Credit -- a qualifying child must be under age 17 and a U.S. citizen or national or a U.S. resident.

Earned Income Tax Credit -- a qualifying child does not have to meet the support test. Also, a qualifying child must have lived with the taxpayer in the United States for more than half the year and have a social security number that is valid for employment in the United States. A qualifying child is determined without regard to the exception for children of divorced or separated parents. If a qualifying child is married, he or she must also meet the marital status and nationality tests for a dependent (above).

"Critical Illness" is another term brought about by necessity - the lack of health insurance coverage. "Critical illness" insurance" pays cash to help patients and families fill a financial hole caused by health problems. It is usually a lump sum cash payment to the insured to be used anyway they choose, after the beneficiary is diagnosed with one of a number of pre-specified serious health problems such as cancer or a stroke. Policies do vary in cost and benefits. Critical illness insurance was not designed as a substitute for comprehensive health insurance, but rather as a supplement. Critical illness policies began to appear in 1999 and have become more popular as health care costs increase and many insurance plans now require insured individuals to pick up more of the expenses. The National Association for Critical Insurance says this is not an outgrowth of cancer insurance, which has been around for many years, and paid benefits relative to what the patient spent on care. Critical illness policies have become more widespread because of the range of diseases they cover. Premiums depend on a variety of factors including age,, the number of diseases the policy holder wants covered and the amount of the coverage. About 75 percent of critical illness policies are purchased through employers as an additional benefit. Consumers Reports, on the other hand, says these policies are too restrictive and besides it is impossible to judge what diseases an individual may get.
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Paul Richard, RFC (Registered Financial Consultant)
Executive Director
Institute of Consumer Financial Education (ICFE)

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