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Real Life Planning © Contact Golden Gate Advisors, Inc. to find out the Five Factors needed to obtain and keep wealth. Amid all the market information, We're the source for sound advice.
Financial Planning for the Newly Married: Some Pitfalls To Watch Out For How To Avoid Becoming a Victim of Credit-Card Fraud Pyramid Schemes on the Rise: How Savvy Investors Get Stung Agencies That Keep Tabs On Your Finances and How To Check Up On Them Two Ideas for Minimizing Your Tax Bill What To Do When You Are Approached For Charitable Donations Should You Use a Living Will To Spell Out Your Health-Care Wishes in Case You Become Incapacitated? What Type of Medical Plans are Available for Employees? What Not to Put in a Safe Deposit Box Why Tax Credits Are More Valuable Than Tax Deductions When Travel Expenses Can Be Deducted: A Quick Review What Type of Life Insurance Should You Buy? When to Review your Life Insurance Coverage How Much Life Insurance Do You Need? Should You Take Out Life Insurance for Your Children? A Slip of the Lip May Bring on a Tax Audit If An IRS Agent Calls, Get It In Writing Taxpayers Short on Funds at Tax-Filing Time Should Not Delay Filing Return
In addition to credit bureaus, which keep records of individuals’ credit habits, did you know that there is an electronic database that keeps files on your auto insurance dealings? There is also a large medical-file bureau. Just as the information in your credit bureau file can stop you from getting credit, data in the auto insurance database can stop you from getting car insurance and data in the medical-file bureau can stop you from getting health insurance. That’s why it’s a good idea to check up on these three record-keepers to make sure their records on you are correct. Here’s how to do it: Credit Bureaus To get a copy of your credit report from each of the three main credit bureaus, call or write them and request a report. For an additional fee, you can obtain your FICO score which lender's use to rank you and base their loan pricing.
The best course of action is to request a report periodically from each of the three bureaus. Check your report carefully. If you find an error, write to the bureau requesting a correction. If the bureau doesn’t agree to fix the mistake, you have the right under federal law to add a statement to the credit report, disputing the information. Or you can ask the creditor who reported the error to correct its report. Auto Insurance If you’ve been denied auto insurance, or charged more than you thought you were going to pay, it’s a good idea to check your Motor Vehicle record. To do so, call ChoicePoint at 800-456-6004, or click here. Medical Reports The Medical Information Bureau (MIB) keeps files on about 15 million individuals. More than 600 insurance companies supply MIB with data. An insurer uses an MIB report in deciding whether to issue a health policy to an individual, and how high premiums should be. The MIB report contains information on chronic health conditions, and on accidents you’ve had, among other things. If you’ve been denied health insurance, check your MIB report to make sure it’s accurate. Even if you have health coverage, it’s a good idea to check out the MIB report to avoid problems in the future. Call 617-426-3660, or click here.
The more recruits, the more the investor receives. The merchandise or service to be sold is irrelevant. The main focus is to get an investor to recruit three or more other participants, each of whom recruit three or more others, and so on. Why don't pyramid schemes work? In order for everyone to profit in a pyramid scheme, there would have to be a never-ending supply of potential (and willing) participants. There is no such thing. When the supply runs out, the pyramid collapses and most participants lose their investments. Here are some of the reasons these investors got stung: 1. They were lured into investing by promises of very high investment returns in a short time. 2. Their ordinary caution went astray because the promoter was connected to a charity, shared similar religious or political interests, or had connections to well-known individuals. (There are many examples of fraudulent activities masterminded by "pillars of the community"). 3. They failed to ask the questions they ordinarily would have asked if approached by an investment promoter. 4. They succumbed to pressure to "reinvest" or let the money "roll over" instead of cashing out. 5. They failed to ask for a prospectus, offering circular, or similar document.
How much life insurance coverage do you need? Determining how much insurance to buy requires you to invest some time in calculating, first, your current annual household expenses, and then your assets, debts, and other sources of income. Your financial advisor can assist you in this computation. The ideal amount of coverage is the amount that would allow your dependents to invest it after your death and maintain their desired standard of living without touching the principal. Although the old rule of thumb — to buy five, six or seven times your annual salary — may serve as a starting point, it is no substitute for making the calculations to find out how much you really need. It’s important to be as accurate as possible in estimating your family’s needs, since an underestimation could lead to your being underinsured, and an overestimation will lead to money wasted on unnecessary coverage.
Life insurance can provide protection in case of death, and can also function as an investment. Although many insurance companies offer a wide range of policies, there are really only two basic types of coverage: (1) term insurance and (2) policies that generate cash values. The choice of insurance product depends, of course, on what you wish to accomplish. 1. Term coverage: Term life insurance provides death protection for a specific time period. Premiums are based on the insured's age and may increase each year, but they are generally cheaper than other types of insurance such as whole life (discussed below). Some forms of term insurance include:
2. Cash-value insurance: Life insurance may be used to generate a forced savings or a rate of return as an investment.
We have only outlined general considerations in analyzing the type of insurance that's right for you. You should seek the advice of a financial professional such as Buser Brothers for your specific situation. Further, it is vital that the estate planning implications of owning life insurance (not addressed here) be discussed with us or your tax advisor.
What is a "main home" for this purpose? Usually, the home you live in most of the time is your main home. It can be a houseboat, a mobile home, a cooperative apartment, or a condominium. To exclude your gain, you must generally have owned and used the property as your main home for at least two years during the five-year period ending on the date of sale.
If you have more than one home, only the sale of your main home qualifies for excluding the gain. If you have two homes and live in both of them, your main home is the one you live in most of the time.
An indemnity plan allows the employee to choose his or her own physician. The employee typically pays for the medical care and then files a claim form with the insurance company for reimbursement. These plans use deductibles and coinsurance as well. Coinsurance is the percentage of medical expenses that the employee pays, with the plan paying the remaining portion. A typical coinsurance amount is 20%, with the plan paying 80% of approved medical expenses. The most common types of indemnity plans, which provide health care to groups of employees, are: 1. A basic health insurance plan that covers hospitalization and surgery and physicians' care in the hospital. The deductible can range from $100 to $1,000 a year. 2. A major medical insurance plan that supplements a basic plan by reimbursing charges not paid by that plan. Here there would be a much higher deductible. 3. A comprehensive plan that covers both hospital and medical care with one common deductible and coinsurance feature. Some employers self-insure their plans, meaning they pay expenses directly. Typically, they will still have stop-loss insurance to cover catastrophic claims.
An informer's "tip" to the IRS will often trigger a tax audit. Even though the taxpayer has done nothing improper, he or she may have to suffer through the audit. Not only is this time-consuming, it can also result in additional taxes due to the discovery of an innocent error on the return or the disallowance of a marginal deduction.
If a taxpayer doesn’t have the funds to pay the tax due at the time of filing (either the return itself or the extension request), he or she should still file on or before the due date and pay as much as possible to keep down the interest payments and to show good faith.
Where a taxpayer cannot, in good faith, pay the tax, IRS will generally work out a payment schedule after it has reviewed the taxpayer’s financial condition.
Dexter had been divorced from Dora for a number of years, and had dutifully paid alimony the entire time, according to what was in his divorce decree. He rightfully deducted these payments every year on his tax return. Those who pay alimony are allowed a deduction, while those who receive it must report it as income. In 2001, Dexter wanted to help Dora, who was experiencing financial difficulties. He agreed to increase the payments he made to Dora, and that year he paid $20,000 more to Dora than he had paid in previous years. When Dexter told his tax advisor that his alimony deduction would be $20,000 higher for 2001, he received the bad news: None of the extra alimony was deductible. To be deductible under the tax law, alimony payments must be "under a divorce or separation instrument" — such as a divorce decree, temporary order of support, or a written separation agreement. If alimony payments are not found in one of these three writings, they are not deductible alimony for tax purposes. (Alimony payments must also meet certain other tax law requirements to be deductible.) With regard to the $20,000 extra he had paid, Dexter was out of luck.
With today's frequent changes in financial circumstances and goals, it's a good idea to re-examine your life insurance coverage on the occurrence of any of the following:
TIP: In addition to the amount of coverage, you may need to make a change relating to beneficiaries, policy ownership, or type of coverage. You may need to consult with a professional.
One: Keep all receipts and records that will help identify the credits and deductions to which you might be entitled:
Two: Try to make the maximum contribution to any qualified retirement plan that you participate in—whether 401(k) plan, IRA, or other qualified retirement vehicle. Contributions that are deductible (to self-employed retirement plans and some IRAs) and pre-tax contributions to 401(k)s and other qualified plans, will cut your taxes this year. And allowable after-tax contributions, though not deductible or excludable this year, earn income that will be tax-deferred until withdrawn.
The reason: Upon someone's death, the safe deposit box may be sealed for weeks, resulting in delays and needless costs spent getting a court order to open the box. Even if the box is not sealed, the executor of the deceased's estate will have no access to the box without the will that shows that he is the executor, resulting in headaches and delays. No legal documents should be placed in a safe deposit box if they will be needed by anyone who cannot gain access to them.
For instance, assume you have two securities which we will call Stock A and Stock B. Securities are defined as stocks, bonds, and options. Stock A has a gain but you don’t want to sell it because you think it is going higher. Stock B has a loss and it is time to sell it. You could sell Stock B at a loss but you can only deduct a $3,000 capital loss on 2001’s tax return and carrying over the excess to future years. Bonds could be substituted for a stock because interests rates will probably go up from here and thus bond prices will fall. So
you sell all or a portion of Stock A and all of Stock B and
use the loss in Stock B to completely offset the gain in
Stock A. Result- no tax paid. But, you want to continue holding
Stock A. What to do? If
you want to sell Stock B but stay in Stock A, you must
avoid the IRS Code’s Wash Sale Rule. The Wash Sale
Rule says you can not take a capital loss on a security
sale if you buy “substantially the same security” within 30
days before or after the close of the security sale. You
can purchase an equal amount of new Stock A now more than
30 days in advance of when you what to sell old Stock
A prior to yearend and avoid the Wash Sale Rule. You can sell
Stock B at any time as long as it is before yearend. After 31
days from when you bought new Stock A, you sell old Stock A and
offset the gain with the loss on Stock B. This also creates a
new basis for new Stock A and would qualify in five years for the
lower 18% capital gains rate that became effective January 2001. Next year, you owe no taxes, you have the proceeds from the sale of both old Stock A and Stock B less what you paid for new Stock A, and you have adjusted your basis on new Stock A. This is called harvesting your losses and is an example of yearend tax planning.
1. Ask for the charity's full name and address and demand identification from the solicitor. 2. Ask if the contribution is tax-deductible as a charitable donation.
3. Ask if the charity is registered or licensed by state and local authorities (required by most states and many communities).
4. Watch out for statements such as "all proceeds will go to charity." This can mean that money left after expenses, such as the cost of written materials and fund-raising efforts, will go to the charity. These expenses can make a big difference, so check carefully. 5. When you are asked to buy candy, magazines, or show tickets to benefit a charity, be sure to ask what the charity's share will be. Sometimes the organization will receive less than 20% of the amount you pay.
6. Call your local Better Business Bureau if a fund raiser uses pressure tactics, such as intimidation, threats, or repeated and harassing calls or visits. Such tactics violate the Council of Better Business Bureau's recommended standards for charitable solicitations.
Although you do not need an attorney to prepare the forms, it is a good idea to consult with both your physician and an attorney in preparing the forms. Your doctor can help to ensure that you have covered all the medical contingencies you want to cover, and the attorney can ensure that there are no inconsistencies between your health-care documents and the rest of your estate plan.
With an annuity, you will receive a series of periodic payments that are guaranteed as to amount and payment period. Thus, if you choose to take the annuity payments over your lifetime (there are many other options), you will have a guaranteed source of "income" until your death. As a person with life insurance approaches retirement age, and sees their children go out on their own, he or she may choose to convert all or some of the life insurance to an annuity, which can be done tax-free. If you "die too soon" (that is, you don't outlive your life expectancy), you may get back less from the annuity than you paid in. On the other hand, if you "live too long" (and do outlive your life expectancy), you may get back far more than the cost of your annuity (and the resultant earnings). By comparison, if you put your funds into a traditional investment, you may run out of funds before your death.
1. Life Insurance. A basic rule of insurance planning is that you need enough coverage to sustain your family’s present income level should you die. If you are the only breadwinner or plan on starting a family soon, you should probably purchase or increase your life insurance. 2. Property Ownership. If you and your spouse intend to buy or already own a residence or other major asset, you will need to consider the best way to hold that property. Will the property be held solely by one spouse? By both spouses jointly? Because of the complex legal implications of the various forms of property ownership, you should consult a lawyer about this issue. 3. Money Management. It’s important to consider carefully how your day-to-day finances will be handled. You should discuss financial goals, resolve differences, and establish a budget and/or saving and investment plan. Will you have joint bank accounts, separate accounts, or both? How much do you want to spend on vacations? On monthly food bills? Entertainment? Gifts? What are your long-term financial goals? Do you have a financial plan, even an informal one? These are just a few of the areas that should be considered. Other areas that might need to be addressed are post-mortem planning and planning for the future of any children. Professional guidance will be helpful in resolving many of the financial planning issue that flow from a marriage.
Example: Taxpayers in the 35% tax bracket would save $350 in taxes if they made a $1,000 charitable contribution (a deduction), while taxpayers in the 15% bracket would save only $150. (This assumes that their itemized deductions are more than the standard deduction, thus making it worthwhile to itemize deductions—a pre-requisite for benefiting from most deductions.) If instead they have a $1,000 credit, both taxpayers would save $1,000.
Gratuities related to the above expenditures are also deductible (subject to the 50% limit for gratuities connected with meals and entertainment).
On the other hand, the following expenses cannot be deducted:
These costs may be deductible if your residence is also your business headquarters.
The T&E provisions are, of course, more complex, but the above discussion will serve as a basic review of the rules
TIP: If someone claiming to be an IRS Agent calls, saying that your return has
been selected for audit (or for any other reason), ask for written notification.
If you receive it, talk to your tax advisor before proceeding further.
Should kids have policies? Let’s take a critical look at why people buy life insurance for their children — in many cases, unwisely: 1. Investment. In some cases, a life insurance policy might be used as a long-term savings vehicle. Some parents or grandparents buy kids a variable universal life policy, in which part of the premiums is put toward a tax-deferred portfolio of stocks, bonds, and money-market funds. The investment is kept over the long term, and the child can borrow from it later, usually at a better-than-market rate. TIP: Because of the death benefit feature of life insurance, there are extra costs to the policy that eat into your returns. Thus, a mutual fund is almost always a better long-term investment for a child’s savings. Parents can invest in funds that pay out little or no taxable income (e.g., growth stock funds), thus mimicking the tax-deferred feature of the life insurance policy. 2. Low Cost. Advocates of children’s life insurance argue that coverage for children is much less costly than comparable coverage for adults. True, but the premiums are paid over a much longer period (if they start when the insured is a child) and the coverage during childhood is of limited value (since the economic loss from the death of a child is usually minimal). Note: Life insurance statistically favors the insurance company. It covers not only actuarial risk but also agent commissions and insurance company overhead and profits. It makes sense only if the family would suffer great economic loss and is willing to pay the loads to protect against such eventuality. If no such economic suffering would occur, life insurance is an unwise expenditure. 3. Ensuring future insurability. Maintaining a cash-value policy on a child will ensure that he or she will have coverage later—even if the child becomes uninsurable. Thus, the purchase of a minimum amount of insurance for this purpose—and to cover burial expenses—might be a good idea.
TIP:
Other ways of covering the costs of a child’s death include (1) using funds
already set aside for college and (2) taking out a rider on a parent’s policy
(if available).
Individual retirement accounts (IRAs) were designed to serve
as retirement nest eggs, and for many people they are just that. But IRA owners
often pass some or all of their IRAs on to others. That’s when things get
sticky. Deciding who to name as your IRA beneficiary can be fraught
with land mines, particularly if you want to “stretch out” the IRA into future
generations or you want to name a charity or trust. You’ll be best off if
you—and your beneficiaries—consult with a financial advisor familiar with IRAs.
In the meantime, here are some key points to think about. Name someone. If there’s one mistake you don’t want to
make, it’s failing to name a beneficiary at all. If you don’t name a
beneficiary by April 1 of the year following the year you turn 70 1/2, the
minimum distributions you must take from the IRA will be based solely on your
life expectancy. Naming a beneficiary allows you to stretch out the payments
over the joint life expectancy of you and the beneficiary. Die before you begin mandatory minimum distributions and the
IRA goes into your estate if you haven’t named a beneficiary. All assets in the
IRA must then be distributed within five years to the estate’s beneficiaries,
potentially triggering a large tax bill. Name your spouse.
Of course, not everyone is married, and this isn’t always the best choice even
if you are. However, for most people, naming their spouse offers the most
flexibility. First, you have the advantage of the joint life expectancies,
which makes minimum payouts smaller. Second, your spouse will receive the IRA
free of estate taxes. Third, the surviving spouse can roll the IRA proceeds
into his or her own IRA. Distributions don’t have to begin until the spouse
turns 70 1/2, and the spouse has the option of naming a new beneficiary, such
as children. When they inherit, they can continue minimum distributions over
their lifetime. (One caution here: Some IRA custodians don’t allow
beneficiaries to name their own beneficiaries.) The surviving spouse, by the way, doesn’t have to roll your
IRA over. He or she can leave it in your name, and not start taking
distributions until December 31 of the year you would have turned 70 1/2. This
might be the best option in some situations, particularly if you are younger
than your spouse and there’s no desire to pass it on to children. Name a Non-spouse.
If you aren’t married or you don’t want to name your spouse as beneficiary,
perhaps for estate tax reasons, you may want to name other heirs, such as your
children or grandchildren. Again, by naming them you can stretch out your
required payouts. However, non-spouse beneficiaries don’t have as much
flexibility as your spouse does. First, they can’t roll the IRA into their own IRA when they inherit. If you die after 70 1/2, when required distributions have begun, the beneficiary must continue taking minimum distributions at the pace you would have been required to take them if you hadn’t died. If you die before distributions begin, the beneficiary can take minimum distributions based on their own life expectancy as long as they start withdrawals by the end of the year after your death. They also have the option of withdrawing all the funds within five years—and paying the taxes. Name a trust. A
trust as an IRA beneficiary might be useful if you want to name a minor as
beneficiary of the trust, the person isn’t capable of managing the trust, there
is a second marriage, or if you have an
estate tax problem. However, naming a trust as a beneficiary is very tricky,
and should be done, if at all, only with great care and expert advice. Name a charity. If you have an estate tax problem, naming a charity as an IRA beneficiary can provide significant tax benefits. But don’t name a person and a charity as co-beneficiaries within the same IRA. Keep the charity in a separate IRA. A charity doesn’t have a life expectancy like a person, so the distributions to the IRA owner cannot be based on joint life expectancy, and the minimum required payouts will be larger. (January 2000— Financial Planning Association)
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