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A twisted version of the classic American success story made news in the Times earlier this month. According to documents filed in Pinellas County Court, an apparently hard-working immigrant won the trust of fellow Polish-Americans, convinced them to invest in his business ventures and walked off with $4-million of their money.
The details of the case made it seem unusual. The victims included a man who sold his St. Pete Beach motel and invested nearly $1-million. The phony business ventures were mostly coffee kiosks and pizza shops back in Poland.
Unfortunately, the outcome was quite predictable. Ripping off fellow members of a religious, ethnic, professional or social group is so common that securities regulators label it one of the top investment scams in the country. They call it "affinity fraud." One time it's Polish Americans, and another time it's Baptists. Scamsters cultivate a trusting relationship, then exploit it.
The shared bond prompts members of a group to let down their guard. Members of religious groups are particularly vulnerable because they typically expect someone of the same religion to follow its moral principles. Greater Ministries International in Tampa, one of the largest affinity frauds, quoted the Bible to separate its followers from more than $400-million of their money. Some victims refused to believe they had been wronged and would not cooperate with investigators.
Many affinity frauds, including Greater Ministries, are Ponzi schemes, which use money from new investors to repay old ones. Ponzi schemes work well in the beginning because early investors get their money and enthusiastically refer their friends. They collapse when the flow of new money dwindles.
How do you avoid affinity fraud? The same way you avoid other types of investment fraud. Check out potential investments and avoid those that tout outlandish returns or "once-in-a-lifetime" opportunities. Don't let your confidence in the salesperson lull you into complacency. Florida State University football coach Bobby Bowden recently lost $1.5-million investing in unregistered securities sold by his son Stephen. What should have been a red flag was the "guaranteed" 14 percent return.
Most people should stick with plain vanilla investments such as stocks, bonds and mutual funds and do their investing with reputable companies. Don't get involved with other people's private business ventures unless you are prepared to kiss your money goodbye. If you are tempted to stray from the routine in your investing, get an opinion from a knowledgeable third party.
Q. I read that people who make a certain amount of income and contribute to an IRA this year are going to get money back on their taxes next year. Could you please explain? I think I qualify for this tax refund. I contribute $250 a month to a Roth IRA.
You have heard about the Saver's Credit. If you are eligible, you can get a credit of up to $1,000 a year for contributions to individual retirement accounts and/or company savings plans such as 401(k)s.
To qualify you must be at least 18 by the end of the year and not be a student or someone else's dependent. The credit is based on a percentage of your retirement contributions up to $2,000. The percentage starts at 50 percent for people with incomes of $15,000 or less ($30,000 on joint returns) and dwindles to 10 percent for those with incomes between $16,250 and $25,000 ($32,500 to $50,000 on joint returns). To claim this credit, fill out Form 8880 and attach it to your tax return.
Q. How do you handle reporting tax on savings bond interest when part of the interest was taxed as part of an estate? How do you show that the dollars were already taxed? The bonds were transferred via co-ownership.
You don't have to pay income taxes twice. The question is whether you paid income tax on the accumulated interest or whether you paid estate tax on the value of the bonds. If you already paid income tax, show an adjustment on your 1040 for the amount previously reported and taxed. If you just paid estate tax, report the interest on your return, then take a separate deduction based on the estate tax paid. Consider getting professional help preparing this return, and keep copies of returns to show what was taxed when.
- Helen Huntley writes about investing and markets for the Times. If you have a question about investments or personal finance, send it to On Money. We'll try to answer those we think are of greatest reader interest. All questions must be submitted in writing, but readers' names will not be published. Send questions to Helen Huntley, Times, P.O. Box 1121, St. Petersburg, FL 33731.