Life Insurance

Our 2013 Annual Year-End Tax Planning Letter

 

Tax planning advice from cpa in scarsdale ny

 

Fall, 2013

To our clients and friends,

As a follow up to the first of our year-end tax planning letters, we provide here specific strategies for your consideration. The implementation of just one of these strategies can save you meaningful dollars.

Remember tax rates for many are now higher than they were last year. We all have a serious opportunity to save taxes now by devoting time to reviewing our tax situation. Please contact us shortly to see which strategies can benefit you.

The old standby strategies, now with some modification: 

1. Postpone income 

In most years, it usually pays to postpone income to a subsequent year. This gives you the use of the money for a year before having to pay tax.

If it makes sense to delay income to the following year, you might defer compensation, defer year-end bonuses, defer the sale of capital gain property (or take installment payments rather than a lump-sum payment) or postpone receipt of distributions (other than required minimum distributions) from retirement accounts.

2. Accelerate your deductions 

The phasing out of itemized deductions is now back in the tax law starting this year. If you itemize deductions, consider paying medical expenses in December rather than January, if doing so will allow you to qualify for the medical expense deduction (now a higher threshold at 10% of your adjusted gross income). Charge deductible expenses on credit cards to get the current deduction even if the payment of the charge will not be made until 2014. Also, you can prepay your January mortgage payment in December, so you can deduct the interest included in that payment this year. Pay your final state estimated tax payment before year-end as long as you are not in an AMT situation. If you are likely to be paying taxes under the AMT rules, hold off this payment until January as you will get no benefit at all this year by paying it early and you’ll lose the deduction for next year.

You also can make alimony payments early or make charitable contributions in advance, subject to certain limitations. If you are planning to donate property, consider whether to do it before or after the end of the year. Remember substantiation rules for donations. If the property is valued at more than $5,000, a “qualified” written appraisal is mandatory. You must get receipts for contributions over $250. Your cancelled check alone will not satisfy the IRS. Instead of putting cash in the collection basket, you may want to put a check in! If you want to make a donation but won’t have the money until next year, consider charging your gift on a credit card before the end of the year. The gift will be deductible on your 2013 return!

Remember that you can’t deduct contributions of clothing or household items unless the property is in at least “good condition.”

3. Distributions from IRA’s 

Whenever possible, withdraw money you need from taxable savings and investments accounts. IRA accounts should be left to grow tax-free as long as possible. Once you reach the age of 70, you MUST begin taking distributions and paying income tax on the monies withdrawn. Distributions taken before age 59. are subject to a 10% penalty in addition to the tax due.

4. Incentive stock options 

Exercise ISO’s early in the year. Exercise of ISO’s may put you in the AMT unless you dispose of the stock in the same calendar year it was purchased. Exercising your options early in the year gives you the full year to see if the shares are down, get rid of them and not get hit with the AMT. You may have heard the horror stories of people who converted their options, then held the stock they got until it subsequently went down. They ended up with an AMT bill higher than the value of their stock. A nightmare scenario.

For more tips now and throughout the year follow us on . . . 

Facebook at facebook.com/hermancpa

Twitter at twitter.com/hermancpa

Linkedin at linkedin.com/in/newyorkcpa

Our blog at blog.hermancpa.com 

5. Capital gains and losses 

If you have realized capital gains this year, be sure to take capital losses now to offset those capital gains. Anyone sitting with net gains in 2013 should take action now if possible.

Even under the new law, long-term gains are taxed at a lower rate than short-term gains and ordinary income. Planning for investment gains can reduce your taxes significantly. Beginning on January 1, 2013, the long-term capital gains tax can be as much as 24%. An asset must be held for more than a year to be considered long-term.

Here is an easy way to save some potential taxes that every investor should take the time to check out. Review the securities you have sold so far this year to see if you have a net gain or loss. Net any carry-forward losses from last year against 2013 trades. If the result is a short-term capital gain, it will be taxed as ordinary income unless you offset it with additional losses. If you have a net loss, remember that the maximum net capital loss you may deduct in any one year is $3,000. Losses in excess of this limit may be carried forward to 2014 and beyond, if necessary.

What to do? If you have net gains, review your current holdings for sales that would result in a loss and which will reduce or eliminate your net gain. If you have losses already and are holding some positions with gains that you no longer wish to own, sell them to use up your existing losses or just keep the losses to use in the future when rates are higher. Remember that capital losses realized in an IRA account are not deductible.

Although you can choose when to realize capital gains and losses, we advise you to consider the worth of investments and not let tax consequences alone dictate when to sell.

6. Watch out for the “wash sale” rule 

To accelerate a loss without significantly changing your investment position, you can “tax swap” securities. That is, sell securities to recognize a loss and replace them with the same or similar securities. But watch out for the “wash sale” rule. If you sell a stock to recognize a loss, you may not repurchase the same stock for a 30-day period before or after the date of sale or the loss will be disallowed. You can replace it with a similar, but different security. The wash sale rule does not apply to gains.

If you like a particular stock for the long term, but would like to sell it this year to get the benefit of the loss, double up on the position more than 30 days before selling the original position. After at least 31 days, sell the higher cost shares. You’ll create a tax loss and be left with the same number of shares you originally owned. You must act quickly so as to have owned the shares for at least 31 days and be able to sell the shares prior to December 31st.

7. Contribute to a Qualified Tuition Program (“QTP”) for your child’s future college costs 

These so-called Section 529 plans let you establish a savings plan from which tuition can be paid. Contributions are generally deductible for state tax purposes and distributions are tax-free as long as used for qualified higher education costs. The income earned in such accounts will not be taxed. This definitely is worth a look for those with young children. Speak to us as we can help you setup and manage such an account.

8. Take losses on your 529 plans! Yes, that’s what I said, take losses on the college savings plan you set up for your child. 

This is not widely publicized. You may be able to take a loss on your investment in a QTP, if you distribute all of the amounts in an account and the total distributions are less than the amounts contributed. The loss is not taken as a capital loss, but rather as a miscellaneous itemized deduction which is an ordinary deduction (i.e. not subject to the $3,000 capital loss limitation). All miscellaneous itemized deductions must exceed 2% of adjusted gross income to be of benefit. Of course if you find yourself in the AMT, this strategy won’t help you at all. You can reinvest the money taken out into another 529 plan account, but there are some rules to be dealt with.

Among the services we provide . . . When you are considering life, health or long-term care insurance, we can help find the right policy for you. We’ll help you analyze your needs, determine the appropriate amount of coverage necessary to protect your family and determine the right policy to suit your needs. 

9. Reduction of tax on certain dividends 

If you are an owner of a closely held ‘C’ corporation and the company is in the 15% bracket and you are in at least the 25% bracket, taking a dividend payout in place of salary can result in more money in your pocket after taxes. Note that dividends on stocks are taxed at a lower rate than interest paid on bonds.

10. Keep track of accrued interest you paid 

Keep accurate records for any accrued interest you paid when you bought bonds. You received interest from the last date the bond paid interest. This interest will be reported on your 1099 Form. Since you purchased the accrued interest, it’s not taxable to you. Speak to us for information on how to write-off the accrued interest on your 2013 return.

11. Get a receipt from your charity 

As previously noted, the Internal Revenue Service requires that you have a written receipt from charities for each contribution. The receipt must be for a donation made in 2013. If you are examined and you do not have a receipt, your deduction will be disallowed; the check will not be enough. You can make more than one contribution to a charity in one year each of less than $250 (that cumulatively exceed $250 for the year) without a receipt, but the Internal Revenue Service has the authority to curb abuses such as with multiple checks issued on the same day. Also, a charity is required to give you a breakdown of the deductible portion of your contribution when goods or services are purchased in connection with a charitable event (dinners, tickets, etc.).

12. Donations of used cars 

Remember that you are now only able to deduct an amount equal to what the charity sells the car for.

13. Donate appreciated securities 

Consider using appreciated securities that you’ve owned at least a year to make your charitable contributions. You can deduct the fair market value of the securities and avoid paying the capital gains tax you would incur if you sold the securities. There are limits related to your income on the amount of charitable contributions that can be deducted.

Contributions in excess of the deductible amount can be carried to subsequent years. Note that gifts of appreciated assets sometimes affect the alternative minimum tax.

If you have losses in securities you want to donate, sell the securities to recognize the loss for your taxes and then donate the proceeds.

14. Pay off nondeductible interest with a home equity loan 

You can benefit by paying off your credit card balances (which typically carry high interest charges and are non-deductible) with a home equity loan, the interest on which may be deductible. Interest is deductible on home equity loan balances up to $100,000.

15. Casualty losses 

A casualty loss occurs when your property is damaged as a result of a disaster such as a storm, flood, car accident, theft or similar event. The general rule is that such a loss is deductible only after it has been reported to your insurance company. Then the unrecovered loss less $100 may be deducted to the extent that it exceeds 10% of your adjusted gross income. Losses occurring in declared disaster areas have additional rules but give us some flexibility to enhance the tax benefit.

16. Look into tax advantaged health care accounts or flexible spending accounts 

Participation allows you to use pre-tax income for medical expenses that were not covered by insurance or for other eligible expenses. This includes co-pays.

17. If eligible, contribute to an IRA 

If you are not an active participant in an employer-provided retirement plan and have wages or self-employment income, you are eligible to make a tax deductible contribution of up to $5,500 ($6,500 if you are age 50 older) per year to an Individual Retirement Account (IRA) up until the year that you turn 70½, subject to phase-outs based on your income. This money will earn income tax-free and is taxable only when you withdraw funds from the account. If you withdraw the money before age 59½ there may be a penalty tax of 10%. You must begin withdrawing from the account based on a formula at age 70½. You (and/or your spouse) must have wages or self- employment income at least equal to the amount you contribute. Payment can be made to the IRA anytime up until April 15, 2014 to be deductible on your 2013 return.

If you are covered by a retirement plan at work, you can take a full IRA deduction in 2013 if your modified adjusted gross income is less than $59,000 if you are single or $95,000 if you are married and filing jointly. Above these income levels, the ability to deduct an IRA contribution is reduced and eventually fully phased out. If you have self-employment income, you should consider establishment of a SEP, SIMPLE or Keogh retirement plan before year-end. You can contribute significantly more than $5,500 to these plans and you may not have to make any contributions to the plans until the filing date (including extensions) of your personal tax return.

Retirement plan contribution limits for 2013 are as follows: 401(k) Plans IRA’s Keogh’s/SEP’s SIMPLE Plans
Taxpayers under 50 $17,500 $5,500 $51,000 $12,000
Taxpayers over 49 22,500 6,500 51,000 14,500

18. Consider Roth IRA contributions or rollovers 

See our comments earlier in this letter. A Roth IRA is one of the few items in the tax law that is too good to be true. Monies put in a Roth accumulate tax-free. No taxes must be paid on future earnings or withdrawals as long as distributions are made more than five years after the first contribution and after the individual has reached the age of 59. An individual with earned income may make a nondeductible contribution to a Roth IRA of up to $5,500 plus a $1,000 “catch-up” contribution if you are at least 50 in 2013 (reduced by any amount contributed to a regular IRA). Unfortunately, married taxpayers with adjusted gross incomes (“AGI”) over $188,000 (singles over $127,000) can’t make a contribution to a Roth. Under those amounts you can make at least a partial contribution.

19. Start your child’s savings with a tax-smart Roth IRA 

If your child earns income from babysitting, an after-school job, a summer job or from helping out in your office, he or she is eligible for a Roth IRA. Although your teenager is probably not thinking about retirement, a Roth IRA is perfect for a child in a low tax bracket who has many years to let their account grow tax-free. You can contribute for your child as long as you don’t exceed the annual gift tax limits. This is a great savings strategy.

20. Consider your family’s total tax bill. Shift income to your children. Consider making gifts to family members. Put your kids on the payroll! 

Income taxes can be saved by shifting income-producing assets from parents or grandparents who are in a high income tax bracket to their children and grandchildren who are in lower tax brackets.

Planning considerations include asset protection (accomplished through the use of trusts) and the “kiddie tax” for beneficiaries under age 24.

Therefore, any assets should not be sold until your child reaches these ages. For children under age 24 without earned income, the first $1,000 of income will not be taxed and the next $1,000 will be taxed at the child’s lower tax rate. Any amount of income above $2,000 is taxed at the parents’ rate. Therefore, instead of gifting to a child’s custodial account, put cash into a 529 plan. Earnings in a 529 plan are never taxed if used to pay for college, graduate school or post high school vocational education.

18. Consider Roth IRA contributions or rollovers 

See our comments earlier in this letter. A Roth IRA is one of the few items in the tax law that is too good to be true. Monies put in a Roth accumulate tax-free. No taxes must be paid on future earnings or withdrawals as long as distributions are made more than five years after the first contribution and after the individual has reached the age of 59.. An individual with earned income may make a nondeductible contribution to a Roth IRA of up to $5,500 plus a $1,000 “catch-up” contribution if you are at least 50 in 2013 (reduced by any amount contributed to a regular IRA). Unfortunately, married taxpayers with adjusted gross incomes (“AGI”) over $188,000 (singles over $127,000) can’t make a contribution to a Roth. Under those amounts you can make at least a partial contribution.

19. Start your child’s savings with a tax-smart Roth IRA 

If your child earns income from babysitting, an after-school job, a summer job or from helping out in your office, he or she is eligible for a Roth IRA. Although your teenager is probably not thinking about retirement, a Roth IRA is perfect for a child in a low tax bracket who has many years to let their account grow tax-free. You can contribute for your child as long as you don’t exceed the annual gift tax limits. This is a great savings strategy.

20. Consider your family’s total tax bill. Shift income to your children. Consider making gifts to family members. Put your kids on the payroll! 

Income taxes can be saved by shifting income-producing assets from parents or grandparents who are in a high income tax bracket to their children and grandchildren who are in lower tax brackets.

Planning considerations include asset protection (accomplished through the use of trusts) and the “kiddie tax” for beneficiaries under age 24.

Therefore, any assets should not be sold until your child reaches these ages. For children under age 24 without earned income, the first $1,000 of income will not be taxed and the next $1,000 will be taxed at the child’s lower tax rate. Any amount of income above $2,000 is taxed at the parents’ rate. Therefore, instead of gifting to a child’s custodial account, put cash into a 529 plan. Earnings in a

529s plan are never taxed if used to pay for college, graduate school or post high school vocational education.

See the important discussion regarding gifting in our first letter.

Anyone is permitted to make gifts of up to $14,000 per year to an unlimited number of people without having to pay gift taxes. Married couples can make combined gifts of up to $28,000. A married couple wishing to make gifts to two married children and four grandchildren can make gifts of up to $224,000 per year ($28,000 to each child, grandchild and child’s spouse) without paying any gift taxes. This is a simple way to reduce the size of one’s future taxable estate. There are a number of other ways to reduce your taxable estate. Please contact us for further insight. Planning Tip: Income can also be shifted upwards. For example, a high-earning professional can make the gift to his/her elderly parents who are in a lower tax bracket. The additional income can be used to help pay for medical and/or assisted living expenses. After the parents die, the assets can go to the original donor’s children (if the “kiddie tax” does not apply) for additional income shifting.

Be aware that direct payments of tuition and medical expense for another individual are not subject to gift tax. There is an unlimited exclusion of amounts paid directly to educational organizations for tuition and to health care providers for medical expenses.

If you own your own business, you can hire your kids and fully deduct their pay. And, if your business is unincorporated and your children are under the age of 18, you won’t owe any payroll taxes on their wages.

21. Let Uncle Sam pay part of your kid’s college tuition bill

Don’t pay your children’s college tuition bill by selling appreciated securities you own. Rather, give your children the shares of appreciated stock or mutual fund and have them sell the shares to pay for school. Assuming they have limited income, neither of you may have to pay any capital gains tax at all. That’s letting your Uncle Sam pay part of the tuition bill!

This is one of my favorites and makes so much sense if grandma or grandpa have sizeable estates and are facing a large estate tax bill. They should be paying your child’s college tuition! Payments made directly to the school are not counted towards the $14,000 annual gift limit. This is a great way to reduce estate taxes!

College Tuition Credit. If you have kids in college listen up. The American Opportunity Tax Credit expanded and renamed the old Hope Credit. The credit can be claimed for qualified undergraduate education expenses paid for an eligible student.

Unlike the Hope credit, which was only available for qualified tuition and fees for just the first two years college, the new credit includes related expenses such as books and other required course materials. Additionally, the credit can be claimed for those qualified expenses paid for any of the first four years of post-secondary education.

The credit is equal to 100% of the first $2,000 spent and 25% of the next $2,000 per student each year. The maximum $2,500 credit is possible for a taxpayer who pays $4,000 or more in qualifying expenses. The credit is available to individual taxpayers who make less than $80,000 or $160,000 for married couples. Above those levels, sorry, it’s phased out.

The Lifetime Learning Credit of up to $2,000 (20% of tuition of up to $10,000) applies to graduate classes as well as undergraduate. It is also subject to phase out at higher income levels.

Although we’ve done our best to keep our annual letter as short as possible, it is again considerably lengthier than we would have liked, and it is far from complete. We wish we could summarize

in just a couple of pages, but the tax law keeps changing. We hope it proves to be more than just good bedtime reading. Please devote some time before the end of the year to review your tax situation and call us for analysis and recommendations. 

As always we are available to help you with any tax, accounting, bookkeeping, investment, insurance or estate planning needs. But don’t wait until mid-December! If you are not a client of our office and wish to consider implementing any of these strategies, or just want to talk about your particular situation, please call us for a free consultation.

Our best wishes to you and to your family for the holidays. 

Sincerely,

Paul S. Herman,

Scarsdale accountant Paul Herman CPA logo

 

Death of a Loved One: FAQs

Scarsdale accountant Paul Herman has all the answers to your personal finance questions!

Death and finance questions and tips from scarsdale tax preparers

Eliminate stress from this difficult time by getting to know these FAQs.

While the death of a loved one is an unpleasant topic that nobody likes to think about, the truth is that two things in life are inevitable: Death and taxes. The best way to prepare yourself for the inevitable and to ease some of the stress that comes with it is by getting to know the following FAQs.

 What will I need if a member of the family dies?

The following is a list of papers that will be necessary:

  • Copies of all insurance policies.
  • Marriage Certificate (if the deceased’s spouse will be requesting benefits). You may obtain copies at the Office of the County Clerk where the marriage license was issued.
  • Certified copies of the death certificate (a minimum of 10). These can be bought from the funeral director or from the Health Department in your county.
  • Birth Certificates of dependent children. These may be obtained at either the County or State Public Health offices where the child was born.
  • Social Security numbers of the spouse, deceased and any dependent children.
  • Military discharge, if the deceased was a veteran. Write to The Department of Defense if you are unable to find copies.
  • A complete list of all property, including stocks, savings accounts, real estate, and personal property of the deceased.
  • Will, which will more than likely be with the lawyer of the deceased.
▼ Should I take any particular steps with regard to the assets of the deceased?

To learn how to hand the following assets of the deceased, speak with your financial advisor.

General rules are as follows:

  • Automobiles. Find out if the title of the car of the deceased needs to be modified by checking with the State DMV.
  • Insurance Policies. The beneficiaries of policies held by the deceased’s spouse may need to be modified. (It might be smart to lessen the amount of life insurance coverage if the spouse doesn’t have any dependents.) Revision of home and auto insurance may also need to be done.
  • Bank Accounts. The title of a joint bank account will automatically pass to the surviving spouse. Advise the bank to change the ownership records. If the name of the deceased was the only name on the bank account, the asset will go through probate unless it is a trust account.
  • Safe Deposit Box. A court order is necessary, in most states, to open a safe deposit box that is only in the deceased’s name.
  • Stocks and Bonds. Verify with the broker of the deceased to change title of stocks and bonds.
  • Credit Cards. If the credit cards are only in the deceased’s name, they should be cancelled and the estate should pay outstanding payments. If the cards are in both names, the surviving spouse should inform the credit card companies of the death and ask for cards only in the survivor’s name to be reissued.
▼ What can I do to avoid overpaying for a funeral of a member of my family?

Planning ahead is the best way to avoid overpaying for a family member’s funeral. You should know about the Federal Rule or the regulation of the Federal Trade Commission (FTC) dealing with practices of the funeral industry. It provides that:

  • You must be given, over the phone, price and other relevant information by the funeral provider to answer your questions.
  • You must be given 1) a disclosure of important legal rights, 2) a general price list, and 3) information about caskets for cremation, embalming and required purchases by the funeral provider.
  • You must be given, in writing, any service fees for the payment of goods or services such as flowers, obituary notices, and pallbearers, on your behalf by the funeral provider. Some funeral providers add a service fee to the cost, while other charge you only the cost of the item. You must also be given any information from the funeral provider about refunds, discounts or rebates from the supplier.
  • You must be given by the funeral provider, in writing, information regarding your right to purchase and what is available to you – an unfinished wood box, a type of casket, or an alternative for direct cremation.
  • In getting the products and services that you do want, you are not obligated to buy unwanted goods or services or pay any addition fees. You only need to pay for the goods and services you selected or that the state law requires in addition to the fee for the services of the funeral director and staff.
  • You must be given an itemized list of the total cost of the funeral goods and services selected by you. It must inform you of any cemetery, legal, or crematory requirements that you must meet to buy any funeral goods or services.
  • You are not allowed to be told that a certain funeral item or service can preserve the deceased’s body for an indefinite time in the grave or claim that funeral goods (caskets or vaults) will not allow dirt, water, or other gravesite substances to enter.

Contact your federal, state or local consumer protection agencies, the Conference of Funeral Examining Boards, or the Funeral Service Consumer Assistance Program (FSCAP) if you are having a funeral problem that cannot be resolved with the funeral director.

▼ Are surviving family members entitled to Social Security benefits?

If the deceased has paid Social Security for a minimum of ten years, he/she is covered. Contact your local Social Security office or call 800-772-1213 to find out if the deceased was eligible. There are two types of available benefits, if eligible:

One-time death benefit - A death benefit is paid by Social Security towards burial expenses. To apply the payment to your funeral bill, simply complete the form necessary at your local Social Security office or ask the funeral director to complete the application. This is only available to eligible spouses or a child that is entitled to the benefits of the survivor.

Benefits of a survivor for a spouse or children - The spouse will be eligible for benefits if he/she is 60 years old or older. The benefit amount collected before the age of 65 will be less than that due at the age of 65 or older. Widows who are disabled are eligible for benefits at age 50. If the deceased’s spouse cares for dependent children under the age of 16 or for disabled children, they may qualify for benefits before age 60. The deceased’s children who are disabled or younger than 18 may also qualify for the benefits.

▼ What is probate?

It is the legal process of allocating the estate to the lawful heirs as well as paying the debts of the deceased. The process typically includes:

  • An individual being appointed by the court to function as the personal representative or executor of the estate. The person is usually mentioned in the will. The court will appoint a personal representative, typically the spouse, if there is no will.
  • Validating the will.
  • Letting all heirs, beneficiaries and creditors know that the will has been probated.
  • In accordance with the will or state law, organizing the estate by the personal representative.

A petition must be filed by the spouse or the selected personal representative with the court following the death. A fee for the process of probate will be charged.

Probation of a will might require legal assistance, depending on the size and complexity of the assets to probate.

If the deceased and someone else jointly owned assets, they are not subject to probate. The proceeds of a life insurance policy or Individual Retirement Account (IRA) will be paid to the beneficiary and are not subject to probate.

▼ Upon a family member’s death, what taxes are due?

The following sums up the different taxes that may need to be paid upon death of a family member:

  • Federal Estate Tax. Amounts that are given to the surviving spouse or to a charity are typically exempt from estate tax. Normally, the estate tax is only owed on estates (which, after decreasing the amount by what is given to the spouse and charity, surpasses the unified credit exemption equivalent).
  • If you need to file an estate tax return, get in touch with the IRS to get a Form 706. Within nine months of the death, absent extension date, a federal estate tax return must be filed.
  • State Estate Taxes. These differ by state. States may enforce estate taxes that may be applied on top of the federal estate taxes while others may be utilized when federal estate taxes don’t. There are inheritance taxes that some states impose, which are on the individuals that receive the inheritance, rather than on the estate itself.
  • Income Taxes. The deceased’s state and federal income taxes are due for the year of death. Unless an extension is solicited, the taxes are due on the regular filing date of the coming year. For the year of the death, the deceased’s spouse may file a joint federal income tax return. If the spouse has a dependent child, he/she may file for an additional two years. It might be helpful to look at the IRS’s Publication 559, “Information for Survivors, Executors and Administrators. “
▼ May I refuse inherited property in order to reduce taxes?

To refuse all or part of the property that is being passed on to you by a will, intestacy laws or the operation of law, you should make use of the disclaimer. The property is passed to the next beneficiary in line with an effective disclaimer.

By the property passing directly from the decedent to the next beneficiary, it could possible save thousands of dollars in estate taxes. The wise use of the a disclaimer and the condition for a disclaimer in a will permits the shifting of assets and income to maximize the estate tax marital deduction, unified credit and the lower income tax brackets.

To provide for financial contingencies, disclaimers may also come in handy. For instance, if someone needs funds, you can disclaim an interest to them.

▼ My spouse died this year; may I file a joint return for this year?

Of course. If the surviving spouse didn’t remarry before the end of the tax year, he/she may choose to file a joint return.

▼ Do I owe taxes on life insurance profits payable to me?

Typically not. Unless the recipient paid for the privilege to collect the life insurance policies, they are non-taxable income. For instance, if a policy was purchased as an investment.

 Are distributions of a retirement plan or IRA of the deceased taxable?

Typically, yes because it is considered income with regards to the decedent. The tax is due by the recipient because the deceased had not paid the distribution’s income tax. You may be entitled to a deduction for a segment of the estate taxes paid, if the account’s value was incorporated in the estate tax return of the decedent.

▼ If my spouse died without a will, how will his/her assets be distributed?

The law will pass on the jointly held assets with right of survivorship on to the joint holder. The designated beneficiary of the insurance policies and retirement accounts will be awarded to said individuals. The assets owned only by the decedent will be dealt with according to state law, known as intestacy. Generally, the preference is given to the spouse or children, but the laws differ from state to state.

Our Scarsdale tax preparers here at Herman & Company CPA’s are here for all your financial needs. Please contact us for all inquiries and to receive your free personal finance consultation!

Herman and Company CPA’s proudly serves Bedford NY, Armonk NY, Chappaqua NY, Katonah NY, Scarsdale NY, Rye NY, Greenwich CT and beyond. 

Photo Credit: Kratka Photography via Photopin cc

Life Insurance: FAQs

Scarsdale accountant Paul Herman has all the answers to your personal finance questions! The following are frequently asked questions our Westchester CPA firm receives regarding life insurance. Get to know these important facts, as well as our previous life insurance discussion, to make sure you choose the best possible life insurance for you!

▼ How are people classified for rate purposes?

To ensure that you receive the best rate possible it is useful to understand how these premiums are calculated by insurers. Firstly insurers will place people into four main categories:

  • Preferred
  • Standard
  • Substandard
  • Uninsurable

Someone who has a semi-serious illness such as diabetes or heart disease can be insured but will pay a higher premium. People with a chronic illness will be placed in the substandard category. Someone with a terminal illness will be rendered uninsurable.

People with high risk jobs or hobbies will be considered substandard as well.

The premiums that you are charged will correlate with the category that you are placed in.

Life Insurance FAQs from Scarsdale CPA

Life insurance can be a real life-saver for your dependents!

Since the categorizing is not an exact science, one company may place you in a different category than another, thus drastically changing the prices of your premiums.

Once you are approved for coverage from a company, they cannot deny you coverage for any reason unless you cease payment.

 What should I be on the lookout for when I am purchasing life insurance?

First of all, beware that many insurance salespeople work on a commission basis, and may want to persuade you to purchase the policy that brings them the largest commission, rather than getting you the policy that makes the most sense for you.

Most of all, be sure that the company you are buying from will be in existence when you need them. Make sure that you check the insurer’s rating before you consider doing business with them.

Always review the costs of any recommended policy. The commissions will be stated, and you can see exactly where the money that you contribute will go.

Ask the insurance agent to explain the different policies and why the one you agree on is the best for you considering your circumstances.

▼ How can I easily compare prices between insurance companies?

In most states there will be a set of rules laid down by a group of insurance regulators. Agents may be required to calculate two different types of indexes to aid in price shopping.

  • Net payment index
  • Surrender cost index

The net payment index calculates the cost of carrying the policy for ten to twenty years. This can be judged easily by remembering that the lower this number is, the more inexpensive the policy is. This is most helpful if you are more concerned with the death payout than the investment.

On the other hand, the surrender cost index is more useful to those who are concerned with the cash value of the investment. The lower this number is, the better.

The cash surrender value is what you will receive in return if you were to surrender the policy, which is different than the cash accumulation value. If you are checking the prices of universal life policies, if the policies have different premiums and death benefits, the policy with the higher cash surrender value would be the better investment.

▼ Why should I have life insurance? Do I really need it?

The main reason that people purchase life insurance is to know that in the event of their passing, their children and loved ones will be taken care of. Life insurance can also help with the distribution of your estate. Your payout could go to family, charity, or wherever you choose to distribute it.

The main reasons to buy life insurance would be because you have dependents that would be put in a tough position without you providing for them. For example, if you have a spouse, a child, or a parent who is dependent on your income, you should have life insurance.

If you have a spouse and young children, you will need more insurance than someone with older children, because they will be dependents for a longer amount of time than older children. If you are in a position where you and your spouse both earn for the family, then you should both be insured in proportion to the incomes that you garner.

If you have a spouse and older children or no children, you will still want to have life insurance, but you won’t need the same level of insurance as in the first example, just enough to ensure that your spouse will be provided for, to cover your burial expenses, and to settle the debts that you have accumulated.

If you don’t have children or a spouse, you will only need enough insurance to make sure that your burial expenses are covered, unless you would like to have an insurance policy in order to help in the distribution of your estate.

 What amount of life insurance should I have?

In order to figure out how much insurance you need, you will need to explore your current household expenses, debts, assets, and streams of income. If you need assistance in this, consult either your accountant or financial advisor.

The amount of money that you want to leave behind for your dependents should allow them to use some of the money to maintain their current standard of living, then reinvest another lump sum to ensure that they will be well off in the future.

When attempting to calculate the amount of money that you need to leave behind, be extremely meticulous. If you err low, your family may not receive the help that they need from the insurance company, and if you err the other way, you will be spending more than necessary in insurance premiums.

Our Scarsdale tax preparers here at Herman & Company CPA’s are here for all your financial needs. Please contact us for all inquiries and to receive your free personal finance consultation!

Herman and Company CPA’s proudly serves Bedford Hills NY, Bronxville NY, Harrison NY, Mt. Kisco NY, Larchmont NY, Scarsdale NY, Rye Brook NY, Stamford CT and beyond.

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Any U.S. tax advice contained in the body of this website is not intended or written to be used, and cannot be used, by the recipient for the purpose of avoiding penalties that may be imposed under the Internal Revenue Code or applicable state or local tax law provisions.