Tax Q & A

Q & A - Tax & Life Events & Financial         Q & A - Business & Banking & Insurance

Taxes
▼ Being self-employed, what sort of deductions can I take?
▼ If I have a large capital gain this year, what can I do?
▼ What investments can I make to help defer taxes?
▼ What retirement plans are available to aid in the deferral of taxes?
▼ What other ways can I defer this year's income?


Record Keeping for Taxes
▼ What do I need to keep for tax reasons?
▼ How should I separate and organize these?
▼ How long should I hold onto these documents?
▼ How long should I keep old tax returns?
▼ What other records should I keep?
▼ What recordkeeping system should I have?


Education Expenses
▼ Are there available tax breaks for my children's education?
▼ What is the education tax credit?
▼ What is a Coverdell (Section 530)?
▼ How can I best use the Coverdell (section 530)?
▼ What is a qualified tuition program?
▼ What differentiates the Coverdell Section 530 and the Section 529?
▼ Can I take money from my traditional or Roth IRA to fund my child's education?
▼ What tax deductions can be used for college education?
▼ Is student loan interest tax deductible?
▼ Can I deduct for education that helps at the workplace?


Life Events
Buying or Leasing Your Next Car
▼ Which is better, buying or leasing my next car?
▼ When buying a car, how can I get the "best buy"?
▼ How can I negotiate for a new car?
▼ Do I negotiate on a car lease the same as I could on a car purchase?
▼ How does an auto lease function?
▼ What is included in the initial costs of leasing a car?
▼ What should I ask about the car lease?
▼ When I lease a car, why is a security deposit required?
▼ How much will I be charged at the end of an auto lease?
▼ What must the dealer disclose about ongoing lease items?
▼ What type of lease is a "maintenance lease"?
▼ Are there final costs and if so, what are they?
▼ What is an option for a lease-purchase?
▼ What are my options for early termination of the lease?
▼ What is implied by a capitalized cost reduction?


Getting Married
▼ How does legal treatment differ between married and unmarried couples?
▼ How should unmarried couples protect their estate and financial holdings?
▼ Is more insurance necessary for married couples?
▼ Who needs to be notified if a spouse changes their name after marriage?
▼ Should I update my will when I get married?
▼ After marriage, what are the tax implications?
▼ Can married couples hold property?


Getting Divorced
▼ Is it possible to financially prepare for divorce?
▼ How should credit card accounts be dealt with during a divorce?
▼ What can I do when my current or former spouse's bad credit affects me?
▼ After a divorce, what happens to my credit history?
▼ During a divorce, what are the legal issues that must be handled?
▼ How does the division of property in a divorce work?
▼ With a divorce, what are the tax implications?
▼ When retirement plans or IRAs are divided in a divorce, what happens?
▼ Is the cost of getting a divorce a deduction?
▼ Am I entitled to deduct the dependency exemption of a child after divorce?


Death of a Loved One
▼ What will I need if a member of the family dies?
▼ Should I take any particular steps with regard to the assets of the deceased?
▼ What can I do to avoid overpaying for a funeral of a member of my family?
▼ Are surviving family members entitled to Social Security benefits?
▼ What is probate?
▼ Upon a family member's death, what taxes are due?
▼ May I refuse inherited property in order to reduce taxes?
▼ My spouse died this year; may I file a joint return for this year?
▼ Do I owe taxes on life insurance profits payable to me?
▼ Are distributions of a retirement plan or IRA of the deceased taxable?
▼ If my spouse died without a will, how will his/her assets be distributed?


Other Situations
▼ What can I do to resolve a consumer complaint?
▼ What can I do to reduce my bank fees?
▼ What can I do to save money on my insurance costs?
▼ What can I do to cut my utility costs?
▼ What can I do to reduce the cost of my phone bill?
▼ What can I do to reduce the cost of my mortgage?


Financial
Developing a Financial Plan
▼ What should my long-term financial goals be?
▼ Are there simple guidelines to follow towards a comfortable retirement?
▼ What should I take into account when I start investing?
▼ Risk vs. Return
▼ Asset Allocation
▼ Diversification
▼ Monitoring Progress
▼ What risks will I be exposing myself to by investing?
▼ How can I avoid taking unnecessary risks?
▼ What factors should I consider before making a stock investment?
▼ What factors should I consider before making a mutual fund investment?
▼ What investment pitfalls should I be on the lookout for?
▼ How should I allocate my IRA investments?
▼ What are derivatives and options?
▼ What are the biggest mistakes investors make?
▼ Starting Too Late
▼ Paying High Fees
▼ Investing Emotionally
▼ Using a One-Size-Fits-All Plan
▼ Not Taking Taxes Into Consideration
▼ Overly Risky Investing
▼ What is the difference between Cumulative vs. Annualized Return?
▼ What is the Rule of 72?
▼ What is significance of total return?
▼ What is a yield?
▼ What is an annuity?
▼ What do I need to beware of when investing in an annuity?
▼ What types of annuity are available?
▼ How and when do I collect my annuity?
▼ How are the annuity payments taxed?
▼ What taxes will my annuity be subject to after death?
▼ What should I take into consideration when shopping for annuities?
▼ What hidden costs may be associated with the annuity?
▼ What about other fees?


Bonds FAQ
▼ What is a bond?
▼ What is bond quality?
▼ How does the bond rating system work?
▼ How do interest rates affect bond prices?
▼ How does maturity affect bond prices?
▼ What is a bond call provision?
▼ Should I buy bond funds directly or go through a mutual fund?
▼ What are the different issuing organizations?


Mutual Funds FAQ
▼ How are mutual funds taxed?
▼ Can I avoid tax by reinvesting mutual fund dividends?
▼ What taxes apply to my return-of-capital distributions?


Stock FAQ
▼ How does stock trading work?
▼ What is the difference between Preferred and Common Stock?
▼ How can I invest in foreign stocks?



Taxes

▼ Being self-employed, what sort of deductions can I take?
To be deductible, a business expense must be both ordinary and necessary. An ordinary expense is one that is common and accepted in your trade or business. A necessary expense is one that is helpful and appropriate for your trade or business. An expense does not have to be indispensable to be considered necessary.

▼ If I have a large capital gain this year, what can I do?
If you have a large capital gain this year from an investment, it may be advisable to hold onto the investment until next year to put the gain into next year's taxes. You may also want to sell off any investments that you have that are losing value at the moment to claim your losses.

▼ What investments can I make to help defer taxes?
The interest gained from state and local bonds is usually exempt from federal income taxes. These investments generally pay back at a lower interest rate than commercial bonds of similar quality.
Since Treasury Bonds are similarly exempt from state and local income tax, they can be a particularly good investment for those who are in high tax brackets and live in high-income-tax states.

▼ What retirement plans are available to aid in the deferral of taxes?
You have the ability to invest some of the money that you would have paid in taxes to add to your retirement fund. Many employers will offer the opportunity to defer a portion of your earnings and contribute them directly to your retirement account. Some of them may even match a portion of your savings. If this is the case, it is always advisable to save at least the amount that your employer will match. This will give you an automatic 100% gain on your money.
If you are self-employed, look into getting a Keogh, SIMPLE or a SEP IRA.

▼ What other ways can I defer this year's income?
If you own your business you may want to postpone sending certain invoices to ensure that you will receive payment in the following tax year. This can help greatly if some of this income would push you into a higher tax bracket. You may want to accelerate paying for expenses to cover your taxes in the current year.

 


Record Keeping for Taxes
▼ What do I need to keep for tax reasons?
It is a good idea to keep all of your receipts and any other records that you may have of your income and expenses. These will come in very handy if you are audited.

▼ How should I separate and organize these?
It is advantageous to categorize your expenses:

▼ How long should I hold onto these documents?
It is recommended that you keep these documents for three to seven years, depending on the document. Check the Retention Guide on this site for additional details.

▼ How long should I keep old tax returns?
If you are audited, it is very likely that the auditor will ask to see the last few tax returns. It is recommended to keep these tax returns forever.
An added benefit of keeping your tax returns is that you can see what you claimed last year, allowing you to adjust for the current year.

▼ What other records should I keep?
If you purchased goods that you plan to sell later, you should keep the receipts to calculate your gain or loss on it correctly.

▼ What recordkeeping system should I have?
If you are an employee of a company, your system needn't be complex - you can keep your records separated in folders.
If you are a business owner, you may want to consider hiring a bookkeeper or accountant. Check the Financial Guide for Business on this website.

Education Expenses
▼ Are there available tax breaks for my children's education?
There are many different ways to use tax breaks for the higher education of your children. Be aware that you can only receive one type of relief for one item. It is best to consult with a professional to determine which would be the most advantageous.

▼ What is the education tax credit?
You must make a choice between two types of tax education credit.

▼ What is a Coverdell (Section 530)?
An education IRA is different than a standard IRA in these ways:

▼ How can I best use the Coverdell (section 530)?
It is possible to have various 530 accounts for the same student, each opened by different family members or friends. There is no limit to the number of people that can open an account like this for a child.
The account can be transferred to another family member at any time. If the original child decides against going to college or is granted a scholarship, another family member can still utilize the money that has been saved.

▼ What is a qualified tuition program?
The Section 529 is a college savings program available in most states. Money is invested to cover the costs of future education. These investments grow tax free and the distributions may also be tax-free.

▼ What differentiates the Coverdell Section 530 and the Section 529?

▼ Can I take money from my traditional or Roth IRA to fund my child's education?
Yes, you can take distributions from your IRAs for qualifying education expenses without having to pay the 10% additional tax penalty. You may owe income tax on at least part of the amount distributed, but not the additional penalty. The amount of the distribution that is more than the education expense does not qualify for the 10% tax exception.

▼ What tax deductions can be used for college education?
There is a limited deduction allowed for higher education and related expenses. In addition, business expense deductions are allowed, without a dollar limit, for education related to the taxpayer's business, employment included.

 

▼ Is student loan interest tax deductible?
In certain instances, yes, although deductions need to adhere to a few guidelines. The deduction is also subject to income phaseouts.

▼ Can I deduct for education that helps at the workplace?
If you are receiving this education to maintain or improve skills at your current job, yes, but not if it is to meet the minimum requirements.


Buying or Leasing Your Next Car
▼ Which is better, buying or leasing my next car?
It depends on factors such as 1) what kind of deal you can make with the dealership, 2) the typical mileage you put on your car, 3) how much you wear down a car, and 4) the primary use for the car.
To determine whether leasing or buying is best, compare the costs and other issues involved in a lease or purchase. The following factors should be considered:

 

▼ When buying a car, how can I get the "best buy"?
You first need to decide on the type, size and options of the car you would like (such as manual, automatic windows, airbags).
You then need to decide what the car dealer has to pay for the car of your choice - the "invoice cost". The difference between the sticker price and the invoice price can be negotiated.
You can obtain this information two different ways. The best way is to look at an auto pricing service supplied by a consumer group or an auto magazine. For instance, Consumer Reports New Car Price Service (http://www.consumerreports.org/cro/car-prices-build-buy-service/index.htm), will give you details of the invoice price and the sticker price that can be adjusted for options or rebates as well as tell you how to use the data for negotiating. This is the best way because it gives you the most recent information.
Another way is to use pricing guides that can be found on the Internet. Two popular sites are Intellichoice (www.intellichoice.com) or Edmund's New Car Prices (www.edmunds.com). You may also be able to obtain these books at the library and they will give you an idea about the information that you need instead of exact data.
If you have a trade-in, you will want to find the value of that car too. You can use the N.A.D.A. Official Used Car Guide (check your local library or www.nada.org) to look up your used car.
Now it's time to begin negotiating with dealers. Because you know the invoice price, you can use that information to bargain for the lowest mark-up from the dealer's cost.
An amount like $300 to $500 above the dealer's cost is a sensible mark-up, unless the car you want to buy is either difficult to get or very popular.
Any attempts by the dealership to sell you rustproofing, undercoating, or other extras should be refused. You may want to invest in an extended warranty, depending on the model's repair history.

 

▼ How can I negotiate for a new car?
Keep in mind that you are not just looking for a car. You also have to select a dealer with whom you will continue a long-term relationship with, as you usually have to service your car at the dealership. If you aren't comfortable with the dealership, go somewhere else.
A good time to try for a good bargain on a car is the last Saturday of September, October, or December.
Before you start looking for a car, learn about the financing options. You can be prepared when the dealer starts to discuss financing if you are aware of what the banks are charging.
Some points you will want to highlight during the negotiations are:

Lastly, go to other dealerships even if you think you have a great price.

 

▼ Do I negotiate on a car lease the same as I could on a car purchase?
Like a loan, the monthly lease payment is reliant on the term of the lease, the implied interest rate and the initial "purchase price" of the car. The "lease-end" or "residual" value varies from a loan, but is still important. This is the value that is expected at the end of the lease term.
You are paying the difference between the initial purchase price and the residual value in a lease. The lowest purchase price should be negotiated, which will lower the cost of leasing. If you don't intend to buy the car at the end of the lease term and it is closed-end, you might want to negotiate a higher residual value. Make sure that your expected mileage during the lease aligns with the allowed mileage in the agreement. If it doesn't, you may pay significant penalties when you turn the vehicle back in to the dealer.

 

▼ How does an auto lease function?
Lease arrangements come in two different types: open-end or "finance" and closed-end or "walk-away." This is how they work:
Open-End: The Risk of Depreciated Value Falls on You
At the end of the lease, the customer accepts the risk that the car will have a particular value or "estimate residual value" at the end of the lease. Due to this, the monthly payment is lower.
At the end of the lease and your return of the car, it will be appraised. If the appraised value of the car is equal to at least the estimated residual value stated in the agreement, it will not be necessary to pay anything. With certain contracts, it is possible to receive a refund if the appraised value is lower than the residual value, although, you might have to pay part or all of the difference.
Closed-End: The Risk of Depreciated Value Falls onto the Dealer
At the end of the closed-end lease, the car is returned to the dealership and you simply walk away. It must be returned with only normal wear and tear, and with less than the mileage limit that is stated in the lease. The monthly payment is higher than an open-end lease because the dealer bears the risk that the car's value will decrease by the end of the lease.

 

▼ What is included in the initial costs of leasing a car?
Learn what the total initial costs will be when determining if you want to lease or buy. You will use this total amount to compare to the cost of buying.
Initial costs are the amount you will need to come up with for the down payment when you lease a car. The security deposit, the first and last lease payments, the "capitalized cost reductions," the sales taxes, title fees, license fees, and insurance are included. Usually the initial costs amount to less than the down payment that is necessary to purchase a car. During the bargaining with the dealer, all initial costs are open for negotiation.
The Lessor must disclose all up-front, continuing, and ending costs in a standard, understandable format according to the Federal Consumer Leasing Act.

 

▼ What should I ask about the car lease?
Here are a few questions that should be answered before you sign a car lease:

▼ When I lease a car, why is a security deposit required?
If you owe money at the end of the lease or if you miss a monthly payment, the Lessor is permitted to keep the security deposit. It may also be used to cover the car's damage or excess mileage from the limit stated in the lease by the dealer. Your security deposit is given back to you if you do not owe anything at the end of the lease's term.

▼ How much will I be charged at the end of an auto lease?
At the end of the lease period, the federal Consumer Leasing Act (CLA) puts a limit on how much the dealer can collect. The dealer cannot collect more than three times the average monthly payment.
For the following reasons, a dealer may collect a higher amount:

At the end of the term of the lease, the dealer may opt to sell the car. If the car is sold for less than the residual value specified in the leasing contract, you may be obligated to pay as much as three monthly payments to make up the difference.
You may want to negotiate to have the right to approve the final sales price as part of the lease agreement, so the dealer does not sell the leased car for less than the residual value just to get the car off the lot.
A few other things to keep in mind:

▼ What must the dealer disclose about ongoing lease items?
Dealers must disclose the total number of payments, total amount of those payments, a schedule of payments, and the amount of each payment in accordance with the Consumer Leasing Act. The Lessor must inform you if there is a penalty for late payment.

▼ What type of lease is a "maintenance lease"?
The dealer bears the maintenance expenses in a maintenance lease. The opposite is true in a non-maintenance lease. If the dealer provides repair and maintenance, you will need to bring the car to the dealership in line with the suggested schedule by the manufacturer to maintain the warranty coverage. (You will typically have to obey the manufacturer's scheduled maintenance in order to guarantee warranty coverage, even if you have to pay for the repairs.)
You pay the dealer a set amount for maintenance each month in what is called a budget maintenance provision. The dealer subtracts maintenance expenses that are incurred from your maintenance account. When the lease ends, you will make up the difference or receive a refund if more was deposited than used.

 

▼ Are there final costs and if so, what are they?
The final costs include:

 

▼ What is an option for a lease-purchase?
At the end of your lease term, you may have the option to purchase the car. This is more commonly found in open-end rather than closed-end leases. The dealer must inform you of the estimated residual value of the car and formula to be used to figure out the purchase price at this time.

▼ What are my options for early termination of the lease?
You will need to pay an extra charge if you end the lease before the completion date based on the difference between the estimated residual value at the end of the lease and the actual residual value at the given time. This may be a large difference. Most agreements state that you must have the car for a minimum of 12 months.
Before you sign the contract, the dealer must tell you whether you may terminate early, and the cost of early termination.

 

▼ What is implied by a capitalized cost reduction?
It is very similar to a down payment. You may be asked by the dealer to put a certain amount of money down before the lease begins. The capitalized cost reduction varies with the geographic area and the customer's credit rating. The smaller the monthly payment, the greater the down payment will be. Those that want to lease instead of buy normally don't want to pay a large down payment - not having a down payment is one of the major benefits of a lease.


Getting Married
▼ How does legal treatment differ between married and unmarried couples?
Unmarried couples don't:

▼ How should unmarried couples protect their estate and financial holdings?
Here are some important steps to take for couples that are unmarried:

▼ Is more insurance necessary for married couples?
In the case of death, life insurance will provide a form of income for your dependents, children or whoever is your beneficiary. Because of this, married couples usually require more life insurance than singles.
Having someone dependent on your income will determine if you need to have life insurance. If someone such as a child, parent, spouse or other individual is dependent on your income, you should have life insurance. The following are situations where life insurance is necessary:

▼ Who needs to be notified if a spouse changes their name after marriage?
All organizations that you had correspondence with while using your unmarried name should be notified. You can begin with the following list:

▼ Should I update my will when I get married?
Definitely. When an important life event occurs such as marriage, it should be updated. If not, your spouse and other beneficiaries will not get what is meant for them at the time of your death.

▼ After marriage, what are the tax implications?
You are entitled to file a joint income tax return upon marriage. Although this simplifies the filing process, you will more than likely discover that your tax bill is either higher or lower than when you were single. It's higher when you file together, as more of your income is taxed in the higher tax brackets. This is commonly known as the marriage tax penalty. In 2003, a tax law that intended to reduce the marriage penalty went into effect, but this law didn't get rid of the penalty for higher bracket taxpayers.
Once married, you may not file separately in an attempt to avoid the marriage penalty. Actually, filing as married filing separately can raise your taxes. For the optimal filing status for your situation you should speak with your tax advisor.

▼ Can married couples hold property?
Yes. After marriage, there are many ways of owning property. They differ from state to state.

 


Getting Divorced
▼ Is it possible to financially prepare for divorce?
A plan for the termination of the financial partnership of the marriage is crucial if you are thinking of divorce. All financial assets and liabilities that have been acquired during the years of marriage will need to be divided. If children play a role, the support that will be paid to the custodial parent in the future should be taken into account.
The time put into organizing this will be worth it in the long run. The following are a few steps to consider:

 

▼ How should credit card accounts be dealt with during a divorce?
As soon as you know you are going to be getting a divorce, immediately cancel all joint accounts.
Regardless of who accumulated the bill, creditors can legally try to collect payment from either party on the joint credit card or other credit account. You will be responsible for payment as long as your name appears on the joint accounts.
The agreement that is reached during the divorce may state who must pay the bills. From the creditor's point of view, both your spouse and you are responsible as long as the joint account stays open. The creditor will attempt to receive payment from who they think are most likely to pay while reporting late payments to the credit bureaus in both names. Due to the irresponsibility of the co-signer, your credit history could be harmed.
You may be required to pay the remaining balance in full upon closure of the account. If this is the case, ask the creditor to distribute the outstanding balance to separate accounts.

 

▼ What can I do when my current or former spouse's bad credit affects me?
It is possible to separate yourself from your spouse on your credit report, if the spouse's credit is hurting yours. If you can prove that he/she opened the shared accounts prior to marriage and that he/she pays the bills, you might succeed in convincing the creditor that the damaging information is relevant to your spouse and not you.
It may take persistence to demonstrate that the credit history in question doesn't reflect your own.

 

▼ After a divorce, what happens to my credit history?
If the name on your account changes, lenders may appraise the application and credit line to decide if your qualifications meet the credit standards. You may be asked to reapply.
To avoid inconvenience, maintain credit in your own name. Preserving your own, separate, credit history makes things easier in the future. In an emergency, if you need credit, it will be available.
Avoid using your spouse's name - i.e. Mrs. Peter Johnson - for purpose of credit.
Get an update on your credit report. Be sure that your name, as well as your spouse's, is being reported correctly. If you would like to use your spouse's credit history to your benefit, simply write a letter to the credit agency and request that both names be put on the account.
Find out if there is any incomplete or inaccurate data in your account. Send the credit bureau a letter asking them to correct this information. They need to confirm receipt within a normal time period and inform you when the mistake is fixed.
Improving your own credit history in your name should be simple if you have been sharing accounts with your spouse. Make a call to a major credit bureau and ask for copies of your account information. Get in touch with the issuers of the cards with whom you share accounts with your spouse and request to have your name on the account as well.

 

▼ During a divorce, what are the legal issues that must be handled?
Make an agreement with your spouse to plan for the legal issues that will be dealt with in the future, such as division of property, alimony or support payments and child custody. The amount of time and money that will be spent trying to reach a legal solution will be lessened dramatically if this can be done, either with the help of lawyers or court.
The following are general tips to face the legal aspects of divorce:

 

▼ How does the division of property in a divorce work?
Each state has their own laws regarding the division of property between ex-spouses. When it comes to applying those laws, matrimonial judges have a great amount of flexibility.
Whether or not an attorney represents you, you should make sure to have done the following:

Consider having the divorce agreement supply you with funds if you have not worked outside of the home during the marriage.

 

▼ With a divorce, what are the tax implications?
Upon completion of a divorce, individual tax returns will be filed. There are a few areas that may result in tax consequences. The following are the most common:

 

▼ When retirement plans or IRAs are divided in a divorce, what happens?
If in accordance with the qualified domestic relations order or other order of the court in the case of an IRA, these plans are separated as non-taxable. However, this is the case only if the assets stay in the retirement account or IRA. Once the funds are allocated, they will be taxed to the recipient. The payer does not get the benefit of a deduction and the recipient does not have taxable income when divided.

 

▼ Is the cost of getting a divorce a deduction?
Typically no, although specific fees paid for income or estate tax advice due to the divorce may be deductible. The fees used to decide the alimony amount or to collect the alimony may be deducted. These would be subject to the 2% limitation under the miscellaneous item deductions.
▼ Am I entitled to deduct the dependency exemption of a child after divorce?
Typically, the custodial parent has the right to the deduction. This is normally discussed in divorce agreement negotiations. If agreed to in writing, the non-custodial parent may have the deduction.


Death of a Loved One
▼ What will I need if a member of the family dies?
The following is a list of papers that will be necessary:

 

▼ Should I take any particular steps with regard to the assets of the deceased?
To learn how to handle the following assets of the deceased, speak with your financial advisor.
General rules are as follows:

 

▼ 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:

Contact your federal, state or local consumer protection agencies, the Conference of Funeral Examining Boards (www.theconferenceonline.org), or the Funeral Service Consumer Assistance Program (FSCAP) (www.funeralservicefoundation.org) 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:

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:

 

▼ 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.

 

Other Situations



▼ What can I do to resolve a consumer complaint?
You should first approach the seller of the item. Then, get in touch with the relevant consumer agency. If neither of the previous provides adequate results, a lawsuit can be filed or you may use arbitration.
Approach the Seller

  1. Compile all necessary evidence such as canceled checks, receipt, photographs showing the issue, a warranty, bill of sale or contract.
  2. Determine your goal. Would you like the product replaced? Would you like a refund? Are you just looking for an apology?
  3. Schedule a meeting with the manager, customer service representative or other appropriate person by calling the store or service provider. In this meeting with the individual, describe as clearly as possible the nature of the issue and what your goal is. If you can only speak by phone, write a letter as follow-up and keep detailed notes of the dates and with whom you spoke with. It is important to note that if there is a valid warranty for the product, it is best to follow-up with the manufacturer and not the merchant.
  4. Take the issue to a higher level, if this doesn't find a solution. This could be the corporate president or supervisor. At this point, you should put your complaint in writing if you have yet to do so. This letter should detail your name, phone numbers, address, and account number (if applicable). Include the date and place of purchase as well as the model and serial number if a product is involved. Concisely describe the issue at hand and the process you have gone through so far to reach a solution. Lastly, you should include what outcome you want and state a deadline for this outcome. Keep a copy of the letter for yourself and include relevant copies of documents. Make sure you keep the originals and retain copies of any correspondence you receive from the company.

Get in touch with an agency
If your desired goal has yet to be reached, you will want to look in the phone book or online for a consumer complaint agency, such as the county, city or state consumer protection office or the Better Business Bureau.
Another option is to go with the trade association method. There are industry trade associations that will offer to aid in mediating issues with regards to their members.
You may want to get in touch with the appropriate state-banking regulator if your issue deals with a bank. If an insurer is involved, you will want to get in touch with the state insurance regulator, for a securities problem contact the securities regulator or for utilities problems contact the public utilities commission.
Call the state-licensing department if you the issue deals with a state-licensed trade, such as a plumber.
Research the lemon laws of your state, unless you reside in Arkansas or South Dakota, by getting in touch with your state consumer protections agency in the event that you purchased a bad used car.
Get in contact with your area postal inspector, whose information can be located in the U.S. government section of the telephone book, for issues that pertain to mail order or mail fraud.
Look into finding a local television news program hotline for resolving consumer complaints.
Filing a lawsuit
When there are no more options, you will want to file a court case in either small claims court, if the amount is small (usually less than $5000) or if not, a regular lawsuit.
More than likely speaking with an attorney and having them draft a letter to the merchant or service provider giving the details about the lawsuit will resolve the issue.
You probably won't need to hire a lawyer if a small claims case is involved. If the case is bigger than small claims, you will want to hire a lawyer.

 

▼ What can I do to reduce my bank fees?
The following are a few ways to lessen your bank fees:

 

▼ What can I do to save money on my insurance costs?
These tips will help you save on all types of insurance:

 

▼ What can I do to cut my utility costs?
These are a few tips to remember to help save money with utility costs:

 

▼ What can I do to reduce the cost of my phone bill?
There are many opportunities due to today's cost-cutting competition among phone service providers, such as:

 

▼ What can I do to reduce the cost of my mortgage?
The options that follow will help in reducing the cost of your mortgage:

 


Developing a Financial Plan
▼ What should my long-term financial goals be?
The first step is to figure out a realistic financial goal for yourself and your family. Talk with your loved ones to ensure that everyone has the same goals in mind. Clearly not all families will have the same end goal - figure out what is important to you, whether it is early retirement, financial comfort, children's education, travel, taking care of elders, or your children.

▼ Are there simple guidelines to follow towards a comfortable retirement?
Someone starting their savings in their early 20s can save 10% of their income and have a sufficient nest egg, while someone starting in their 40s may have to bump that number up more towards 20%. This is all dependent on the time of your life that you choose to start, the size of your current nest egg, and the amount of money that you will need to retire comfortably.
It is always a good idea to contribute as much as possible to retirement plans, to take advantage of tax deferral and employer matches.
Generally people need around 80% of their pre-retirement income after they have retired for the first few years and then learn how to live on less. This will greatly depend on the expenses that you plan on having:

Another strategy worth following is to always have an emergency fund of at least 6 months of expenses. Considering your situation and the situations of the people that you depend on or depend on you, you can adjust the number of months accordingly, but 6 is a good ballpark number. This will also depend on how many bills you need to pay.

▼ What should I take into account when I start investing?

▼ Risk vs. Return
The first step in the investment process is to figure out what sort of Return on Investment (ROI) that you are seeking and to determine what level of risk that you are willing to take.
The risk that you are willing to take and the size of the ROI that you receive are correlated. In order to take a higher risk, you must have a reasonable chance of a higher return. The size of the risk will be affected by many factors in the market, and it is recommended that you consult trusted professionals.
These professionals will have ideas and recommendations for your investment portfolios, but never invest more aggressively than you feel comfortable with.

▼ Asset Allocation
Asset Allocation is the selection of assets from across the asset classes: stocks, bonds, and mutual funds. This is a way to minimize risk. It ensures that if one of these groups takes a drastic downturn, you still have investments in the other sections and hopefully won't take large losses. It is recommended to allocate through at least 5 types of classes.

▼ Diversification
Diversification is similar to asset allocation, but within the asset class. For instance, diversification would be buying 15 or 20 different stocks, with the same purpose in mind as asset allocation, to minimize risk and to make sure that if something tanks, it doesn't take your entire portfolio down with it.

▼ Monitoring Progress
You can start by examining your trading records and ensuring that all of the trades went through at the prices that you instructed and with the correct commissions. Make sure to keep a good paper trail of all the transactions that occur in your portfolio just in case you ever need to contest anything.
Keep tabs on how your assets are performing. If they seem to be underperforming, you may want to change your investments to some that may be more lucrative. You may want to also check to make sure that the investments that you own are in line with your current investment strategy. Your strategy may change over time. Be sure to compare your investments to your current situation.

 

▼ What risks will I be exposing myself to by investing?
There are definite risks to investing, but educating yourself can drastically limit your exposure to these risks.

 

▼ How can I avoid taking unnecessary risks?

▼ What factors should I consider before making a stock investment?

 

▼ What factors should I consider before making a mutual fund investment?

▼ What investment pitfalls should I be on the lookout for?

▼ How should I allocate my IRA investments?
IRAs are just like any other investment - you should take into consideration how much risk you are willing to take on and act accordingly.
For people who are more risk-averse, fixed short-term investments could be more fitting.
Be careful about investing in municipal bonds - by doing so you will sacrifice return that would convert tax free income into taxable income.

▼ What are derivatives and options?
Derivatives are investments whose values derive from the security which they are based on. Options can be useful in making a portfolio less risky. Derivatives can also be futures contracts or swap agreements.
Stock options are a contract that allows one to sell or buy 100 shares of stock at a given price and in a specific time frame. These can be traded on numerous exchanges.
When an option is bought, an investor will buy a premium, which is the commission plus the price of the option. If an investor is to buy a "call" option, they are predicting that the price of the security will increase before the option period expires; on the other hand, if the investor buys a "put" option, then they are predicting that the price will decrease.
This can be a useful tool in an investment portfolio, but not recommended for beginners, if you are interested in trading options, be sure to do your homework.

▼ What are the biggest mistakes investors make?

▼ Starting Too Late
The time to start is now. The power of compound interest is astounding - the earlier you take advantage the more it will work for you. If you start out earlier, you can start with less, invest less and still end up making more than if you started out later.

▼ Paying High Fees
Broker's commissions can negate all of the hard-earned interest that you have accumulated. Don't let this happen to you - pay attention to what you are being charged. The more you pay, the less you keep.
▼ Investing Emotionally
Successful investing consists of planning and reason. Once emotion gets involved, it can ruin all of the planning and reason that you had used to construct your investment strategy. Keep using the strategies that have consistently made people rich over the years, don't look to follow the new and exciting strategies that haven't yet stood the test of time.

▼ Using a One-Size-Fits-All Plan
Your individual needs should trump any ideas of blindly following any plan. Keep an account of how much risk you are willing to take, and what your time frame is. Your portfolio should match your needs.

▼ Not Taking Taxes Into Consideration
The net profits from stocks are taxable as capital gains. Being in a tax-deferred investment account will stop this from eating away at your savings.

▼ Overly Risky Investing
Being extremely risky can pay off big time, but it can also leave you with a diminished nest egg it you gamble wrong. There are many great investments that offer decent returns without putting your funds in excessive danger.

▼ What is the difference between Cumulative vs. Annualized Return?
Annualized return is the return on investment received that year. Cumulative return is the return on the investment in total.
For instance, the money gained in the first year of an investment would be the annualized return. The total return of investment accumulated at the end of the second year would be the cumulative return.

▼ What is the Rule of 72?
The rule of 72 is a quick way to calculate how long it will take your investments to double at different interest rates.
Take the rate of yearly return on your investment and divide 72 by that number. The result is the number of years it will take for you to double your investment.

▼ What is significance of total return?
The total return is the amount of money that a fund makes after reinvesting and receiving dividends. This will deliver the most benefit from the compounding interest. The total return is a way to accurately gauge the real return on investment that you will get with a mutual fund.

▼ What is a yield?
The yield is the amount paid annually by an investment. The yield is most commonly a percentage of the market price of an investment, which does not take into account the appreciation. Since money market funds and certificates of deposit don't fluctuate like stocks and bonds do, the yield would be the same as the total return.

▼ What is an annuity?
An annuity is an insurance contract - the insurance company invests in stocks and bonds on behalf of the purchaser with the tax deferred money.
When the purchaser turns 65 the purchaser will begin to receive payments, which will fluctuate with the prices of the underlying securities. An annuity will guarantee that the purchaser will receive payments until their death.
Annuity contracts will often carry various charges which vary from one company to another, and would be worth reading before purchasing. Since these are not securities, they are not regulated by the SEC.

▼ What do I need to beware of when investing in an annuity?
You will not be able to withdraw any of the money in an annuity during its tax deferred growth period without incurring large fees. You will be charged 10% for tax code and the insurance will usually charge "surrender charges" on top of that.

▼ What types of annuity are available?

▼ How and when do I collect my annuity?
There are a few choices that you have when choosing to collect your annuity. Some people opt for a lump sum, even though it negates one of the major features of the annuity: payments until death.
The amount of the monthly payments that you receive depends on:

There are various different settlement options. Be absolutely sure when you choose, because the decision will be final when you make it.

▼ How are the annuity payments taxed?
The tax rates will differ for qualified and non-qualified plans.
An annuity that is tax-qualified is one that funds a qualified retirement plan. When this qualified annuity is used it follows the same tax laws as these retirement vehicles, such as:

A non-qualified annuity is bought with after-tax dollars, but the benefit of tax deferred savings still applies.

▼ What taxes will my annuity be subject to after death?
Annuity payments to beneficiaries are subject to the same taxes that would have been collected from you.

▼ What should I take into consideration when shopping for annuities?

▼ What hidden costs may be associated with the annuity?

▼ What about other fees?

These fees should be stated plainly in the prospectus.

 

Bonds FAQ
▼ What is a bond?
A bond is simply a certificate which the borrower promises to repay within a certain time period. For the privilege of using the money, the government entity, municipality or company will agree to pay a certain amount of interest per year, usually an exact percentage of the amount loaned.
Bondholders do not own any part of the companies they lend to - they do not receive the benefits of dividends or the privilege to vote on company matters as stockholders would, and the success of the investment isn't related to that company's record in the market either. A bondholder is entitled to receive the amount that was agreed upon, as well as the principal of the bond.
Corporate bonds are generally issued in the denominations of $1000. This price is referred to as the face value of the bond - this is the amount that is agreed to be paid by the company at the time that it matures. Bond prices can differ from their face values, because the prices of the bonds are correlated to the current market rates. When these rates change, the value of the bond will as well. If one were to sell the bond before the time that it matures, the bond may be worth less than was initially paid. A callable bond is one that the issuer may choose to buy back at full face value before the maturity date.
There are three major features of bonds:

Short Term Bonds mature in two years or less and long term bonds mature in ten or more. Intermediate is between two and ten years.

▼ What is bond quality?
Bond quality is the rating of the creditworthiness of an issuing organization. There are organizations that specialize in judging bond quality. The higher the rating, the lower the risk of the investment. The rating system uses letters A through D. The only bond considered to be risk free is the U.S. Treasury Bond.

▼ How does the bond rating system work?


Highest Quality

Moody's

Standard & Poor's

High Quality

Aaa

AAA

Good Quality

Aa

AA

Medium Quality

Baa

BBB

Speculative Elements

Ba

BB

Speculative

B

B

More Speculative

Caa

CCC

Highly Speculative

Ca

CC

In Default

-

D

Not Rated

N

N

▼ How do interest rates affect bond prices?
Generally bond prices and interest rates have an inverse relationship - as interest rates drop, bond prices rise and vice versa.

▼ How does maturity affect bond prices?
Bond prices are heavily influenced by maturity - the longer the maturity, the greater the change in price for a change in interest rates. If interest rates rise, it would make a larger difference in the 20 year bond, as opposed to a 10 year bond. Because of this, bond fund managers will attempt to change the fund's average maturity to anticipate changes in interest rates.

▼ What is a bond call provision?
A "call" is when the issuer of the bonds has an opportunity to redeem the bonds after a certain specified amount of time has passed. This doesn't guarantee a continuation of a high yield after the call date - it limits the appreciation of the bonds, and it makes the investment more risky. These call provisions can be complex, so it is best for investors that don't have strong knowledge to avoid bonds with a call feature.

▼ Should I buy bond funds directly or go through a mutual fund?
A bond mutual fund has within it multiple bonds, and for that reason it is impossible to lock in the payment rate or the principal, which you would be able to do if you were directly buying a fund.
A bond mutual fund is an investment company which manages a portfolio of individual bonds. The investors buy ownership in the company, and each share represents ownership in all of the company's holdings. Managers will use these investments to buy and sell bonds that align with the objective of the fund.
Because a bond fund manager has more resources to deal with, they can invest in a vast array of bonds - many more than could any individual investor. There are also certain investments that cost tens of thousands of dollars a share - a bond fund costs far less.
Liquidity plays a major role in bond buying. If you purchase a bond individually and wish to sell it, you must find a buyer for your bond, but if you are invested in a bond fund, that fund has to buy your shares back at any time you wish.

▼ What are the different issuing organizations?

Mutual Funds FAQ
▼ How are mutual funds taxed?
All mutual funds distributions should be reported as income, whether you reinvest or not. Taxable distributions come in two forms, ordinary dividends and capital gains. The distributions of ordinary dividends represent the net earnings of the fund and are paid out periodically to the shareholders. Since these payments are considered to be dividends to you, they must be accounted for accordingly.
Capital Gain Distributions are the net gains of the sales of securities in the fund's portfolio and will be taxed at a different rate than that of ordinary dividends. Yearly, your mutual fund will send you a form, called the 1099-DIV, which will have a detailed breakdown of all of these.

▼ Can I avoid tax by reinvesting mutual fund dividends?
Funds will generally give you the opportunity to automatically reinvest in the fund. This does not prevent you from paying tax on your assets, but this reinvestment will prevent you from paying more "buy" fees to get into the fund, so it is advantageous.

▼ What taxes apply to my return-of-capital distributions?
Mutual funds sometimes will distribute back to shareholders monies that haven't been attributed to the funds earnings. This is a non-taxable distribution.

Stock FAQ
▼ How does stock trading work?
Stocks are traded in quantities of 100 shares, called round lots. Any quantity of stock under 100 shares will be considered an odd lot.

▼ What is the difference between Preferred and Common Stock?
Most stocks are common stocks. However, there is another type (known as preferred) which gives certain advantages regarding dividends. Generally, preferred stock holders do not have the same voting rights that the holders of common shares do. Common stocks are based on company performance, while preferred stocks will usually have a stated dividend.

▼ How can I invest in foreign stocks?
It is fairly easy to invest in foreign corporations, because these corporations need to register these securities with the SEC. These companies are subjected to the same rules as U.S. companies.


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