Fact vs Fiction

Financial Planning Tips

view more Fact vs. Fiction and Financial Planning Tips

Test Your Knowledge of New 529 Plan Rules
(Updated: 2/2/2018)

True or False?
529 plans can now be used to pay for tuition at elementary or secondary schools.

Answer:

True.

The Tax Cuts and Jobs Act of 2017, which went into effect on January 1, 2018, expanded the definition of a “qualified higher education expense” to include tuition for K—12 schools. This means withdrawals to pay for a child’s private school will be federally tax free, up to a maximum of $10,000 per beneficiary, per year.

Before you start taking advantage of this change to the 529 plan structure, however, check with your state and your plan. Savingforcollege.com reports that as many as 30 states have not yet changed their own laws to comply with the federal law, which means you could face an unexpected tax bill if you withdraw 529 plan funds to pay for K—12 tuition.

Do you know the difference between wills and trusts?
(Updated: 1/29/2018)

Fact or Fiction?
Wills and trusts govern all property that you own.

Answer:

Fiction.

A will governs only probate property; a trust governs only assets owned by the trust. Some assets pass outside of probate by virtue of a beneficiary designation or the manner in which title is held. To ensure that your assets (such as jointly held property and retirement benefits) will be distributed according to your wishes, regularly review their ownership and beneficiary designations.

Test Your Knowledge of Grantor Trusts
(Updated: 1/09/2018)

A grantor trust is a trust in which the grantor (i.e., the person who establishes the trust by gift or grant) or the grantor’s spouse retains certain powers or rights, such as:

  • A reversionary interest that exceeds more than 5 percent of the trust’s value when the reversionary interest is created
  • The power to determine who will receive income or principal
  • The right to buy, borrow, or substitute trust property under terms that favor the grantor
  • The right to revoke
  • The right to use income to pay life insurance premiums on the life of the grantor or the grantor’s spouse


True or false?

A grantor trust can be irrevocable for gift and estate tax purposes and still cause the grantor to recognize taxable income, even if he or she does not receive trust income.

Answer:

True.

A grantor trust uses the tax identification number of the grantor for income tax reporting purposes. The trustee reports trust income, deductions, and credits to the grantor. In turn, the grantor discloses these items on his or her personal tax return. A revocable trust is a grantor trust while the grantor is alive, but it becomes a separate tax entity after the grantor dies—even if the name of the trust remains the same.

Recognizing taxable income and paying income taxes on income that may not be received by the grantor may seem like negatives; however, they free the beneficiaries from the burden of paying income tax and allow the trust assets to grow for the beneficiaries’ benefit. In this way, the grantor is able to make tax-free gifts to the beneficiaries. If the grantor decides the trust is sufficiently funded, or if it is no longer desirable to pay the trust’s income taxes, the grantor trust powers can be forfeited or waived—converting the trust to a nongrantor trust that becomes its own tax entity. With a nongrantor trust, the distributed income is taxed to the beneficiary who receives it.

This material has been provided for general informational purposes only and does not constitute either tax or legal advice. Although we go to great lengths to make sure our information is accurate and useful, we recommend you consult a tax preparer, professional tax advisor, or lawyer.

How involved should you be in your elderly parents’ affairs?
(Updated: 12/04/2017)

Fact or Fiction?
If your elderly parents live on their own, you should let them be fully independent and avoid pestering them.

Answer:

Fiction.

When you worry that your parents may not be able to decide on their own when they need more help, then regular check-in meetings are a good way to gauge how they’re doing. Accompanying your parents to meetings with their doctors, attorneys, and other professional advisors can also provide insights into their ability to continue living on their own.

 

Test Your Knowledge of Social Security Benefits
(Updated: 11/07/2017)
Social security can provide benefits for you, your spouse, and other eligible members of your family.
True or false?
Social security benefits are always exempt from federal income taxes.
Answer:

False.

About 40 percent of people who receive social security pay federal income taxes on their benefits. To determine whether you will owe taxes on your benefits, you must first calculate your combined income, which is:

Your adjusted gross income
+ Nontaxable interest
+ ½ of your social security benefits
= Your combined income

Once you have calculated your combined income, the tax you owe depends on your filing status.

  • If you file an individual return and your combined income is:
    • Between $25,000 and $34,000: You may have to pay income tax on up to 50 percent of your benefits.
    • More than $34,000: Up to 85 percent of your benefits may be taxable.
  • If you file a joint return, and you and your spouse’s combined income is:
    • Between $32,000 and $44,000: You may have to pay income tax on up to 50 percent of your benefits.
    • More than $44,000: Up to 85 percent of your benefits may be taxable.
  • If you are married and file a separate tax return, you probably will have to pay taxes on your benefits.

If you anticipate owing taxes on your social security benefits, you can ask the Social Security Administration to withhold federal taxes from the benefits you receive each month. You can withhold 7, 10, 15, or 25 percent of your monthly benefit. Only these percentages can be withheld; flat dollar amounts are not accepted. You can also make quarterly estimated payments.

This material has been provided for general informational purposes only and does not constitute either tax or legal advice. Although we go to great lengths to make sure our information is accurate and useful, we recommend you consult a tax preparer, professional tax advisor, or lawyer.

Test Your Knowledge of Qualified Charitable Distributions
(Updated: 10/09/2017)

A qualified charitable distribution (QCD) is a direct transfer of funds from your IRA to a qualified charity.

True or false?
A QCD can be used to satisfy all or part of your required minimum distribution (RMD), and you won’t have to pay taxes on the amount distributed.

Answer:

True.

If all of the requirements are met, a QCD is not a taxable event, meaning you won’t pay taxes on the distribution to a qualified charity, and the amount will be excluded from your income, which could help you avoid moving into a higher tax bracket. In addition, a QCD can satisfy all or part of your RMD for the year. The maximum QCD is $100,000 per taxpayer (not per account), per year.

To be eligible to make a QCD:

  • You must be at least 70½ years old on the date of the distribution (not simply turning 70½ during the tax year when the distribution is made).
  • QCDs must be made from an individual IRA; they cannot come from SEP and SIMPLE IRAs or from any other type of employer retirement plan.
  • The distribution must be for the benefit of a 501(c)(3) organization. Private foundations, support organizations, and donor-advised funds do not qualify.

In order for the QCD to satisfy your RMD for the current tax year, you must make the distribution (and ideally have the check cashed by the charity, completing the donation) by your RMD deadline, which is generally December 31.

For more information about QCDs, see IRS Publication 590-B.

Have You Considered a Donor-Advised Fund?
(Updated: 3/14/2016)

For those who are charitably inclined, establishing a donor-advised fund (DAF) allows you to:

  1. Make a charitable contribution to the fund and receive an immediate tax deduction.
  2. Recommend donations to qualified charities at any time while still receiving the up-front tax deduction.
  3. Assign the fund a name of your choosing.
  4. Have your contributions to the fund managed by your financial advisor and grow tax-free.
  5. All of the above.
Answer:

E.

Upon establishing a DAF, a donor makes an irrevocable charitable contribution to the fund and immediately receives the maximum tax deduction that the IRS allows. The donor can then recommend charitable grants from the fund at any time. The DAF bears whatever name the donor chooses, grows tax-free, and can be managed by the donor’s preferred financial advisor.

Test Your Tax Knowledge
(Updated: 08/10/2015)

What is the alternative minimum tax (AMT)?

A. The AMT prevents individuals from paying too little tax by limiting deductions and exemptions.
B. The AMT is an additional tax for individuals who surpass certain income thresholds.
C. The AMT is a minimum tax that applies to sales of real estate for personal use.
D. The AMT applies only to corporations to ensure that income generated within the United States is taxed at a minimum rate.

Answer:

A.

The AMT imposes a limit on the amount of tax benefits you can claim to reduce your regular tax burden. In other words, if exemptions and deductions reduce the total tax you owe below the AMT limit, you must pay the higher AMT amount. Exercising incentive stock options and claiming a large number of personal exemptions are two common factors that may trigger the AMT.

This material has been provided for general informational purposes only and does not constitute either tax or legal advice. Although we go to great lengths to make sure our information is accurate and useful, we recommend you consult a tax preparer, professional tax advisor, or lawyer.

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