Statutes Need Not Have a Rationale

Q. Can you please explain why there is no sales tax on food items sold in grocery stores but ‘here is on food sold in restaurants? H.L .

A. We are entering the Twilight Zone here, an uncharted area of state legislation that even a spokesman for the state Board of Equalization acknowledges when he answers: “Statutes don’t have to have a rationale. They just exist.”

Still, there may be some thread of reason we can offer. In general, lawmakers have tried to distinguish between food that is a necessity of life and food that isn’t and to tax the latter and not the former. So, you don’t pay tax on food purchased in grocery stores, and in general, you do pay tax on restaurant meals.

That said, you may also be interested to know that state law does not require sales tax on cold takeout food but that it does on hot takeout. However, because of the hassle this difference created for clerks at fast-food chains, the industry persuaded the state to permit it to charge sales tax on all items sold when 80% or more of the menu is hot.

Finally, hot food served at sporting events, movie theaters or any other place where admission is paid is not subject to sales tax.

What to Do for When Mortgage Holder Fails

Q. We have a 30-year variable-rate mortgage that was assumed by a bank when our previous lender, a savings and loan, went under. The bank has held the mortgage for the last three years, during which we have made regular monthly payments as well as additional payments on the outstanding principal. The bank recently sent us a copy of an audit or our loan showing that we have an outstanding balance on the principal of about $8,000 more than we thought. What can we do? --R.O .

A. You should contact your lender, of course, but first collect all the information you can about your situation. You should thoroughly understand your loan repayment terms, including the scheduled adjustments in the loan’s interest rate, the amount of those changes, how regular monthly payments are credited to your account and how your accelerated principal payments were credited. Your loan documents should provide this information, although it may be in the fine print and you skipped over it.

In addition, you should gather records indicating when you sent your loan repayments and when those payments were credited to your account. This may be difficult without canceled checks, and collecting those could prove costly and time-consuming, but with $8,000 at stake, you have more than a little incentive.

Absent more information to go on, our experts suspect that you may face one or both of these situations: You believe a greater portion of your payments was being credited to principal repayment than was actually done; your loan’s remaining balance was incorrectly stated at the time it was transferred from the S&L; to the bank.

How payments are divided between principal and interest is especially tricky on variable-rate loans, particularly those that adjust frequently. Furthermore, many institutions credit interest and principal depending on the actual date a check clears, not the date on the check or the date the check arrives in the mail. Even though these differences seem small at the time, over a period of years, they can add up to big numbers.

Your task won’t be easy. Once you have collected all your records, you must prove your case. Books with amortization schedules and computer programs can provide some help. You may also retain a service to audit your records if you want to spend the money. Mortgage Monitor in Norwalk, Conn., evaluates adjustable-rate mortgages and impound accounts. Fees vary according to the complexity of the task, but don’t expect anything for less than $100. For information, call (800) 283-4887.

Don’t Confuse Rollover and Contributory IRA

Q. I am a public schoolteacher who belongs to a 403(b) plan. My salary is such that I am ineligible for tax-deductible IRA contributions. However, a financial adviser told me I could transfer my 403(b) account into an IRA without penalty. How can this possibly be true? Can I be ineligible for an IRA and still transfer funds to one? Please clarify. --R.P .

A. You are confusing two different types of IRAs: contributory and rollover. While taxpayers may be ineligible for a tax-deductible contributory IRA, they could still be able to transfer funds from one type of tax-deferred savings account to an IRA. The two steps are not mutually exclusive.

To take the matter one step further: Even though a taxpayer might be ineligible to make a tax-deductible IRA contribution because he already is covered by a qualified pension plan or because he fails to meet the earnings test, he may still make an IRA contribution with after-tax funds. The interest earned by such contributions are tax deferred.

Also, you should know that you may not automatically transfer funds from your 403(b) plan to an IRA just because it suits you to be in another type of investment. Your choices are guided by the rules on your plan, and these rules generally restrict fund transfers to “terminating events” such as retirement or a job change.

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Tips for Coping With Credit Woes

* Maintaining good credit is as important as maintaining your good name in today’s increasingly cashless economy. If your credit record is a bit blemished, if you’re trying to avoid a credit crunch or if you just want to learn how to build a strong credit record, Times on Demand has compiled answers to some of the most-asked questions about credit from Money Talk readers. To buy, call (800) 440-3441. Order Item No. 2843. To order by mail, send a check to Times on Demand, P.O. Box 60395, Los Angeles, CA 90060. Cost: $5, plus $1 delivery. Please allow two weeks for mail delivery.