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Filed under: Family Money, Insurance - Life Insurance, Tax - AMT, Tax - Advice
The recession may be over, but many families are still feeling the effects. Unemployment is at a record 10.2% and wages are flat. The cost of gas is taking a bigger bite out of paychecks, and home foreclosures were one fifth of home sales in September. To help, WalletPop is launching an occasional series in which your personal financial questions will get answered by our experts. Leave your questions in the comments section below.
Question: As a single, self-employed mother of two, I need to buy life insurance. How much should I buy?
--Laurie W., 51, psychologist
Answer from Dr. Scott Testa, professor of business administration
Cabrini College, Philadelphia, PA
"You must first determine what your family needs are, should you die. That means coming up with a realistic figure that will pay off all your debts, your funeral expenses, and big-ticket items like college for your two children. It is always better to overestimate rather than underestimate. Then I would recommend shopping for term life rather than whole life, because it is generally easier to comparison shop and, for most people, is the best option.
"Look for reputable companies with good ratings from rating companies like A.M. Best, Moody's, Standard & Poor's or Fitch. You should look for the highest ratings by these organizations. Good websites for comparision shopping include insweb.com and Quotesmith.com.
"But before you schedule that meeting, make sure you're putting your best foot forward. That means getting in shape, quitting smoking, and doing what you must to be an ideal candidate. Life insurance companies will ask for your medical history and give you a physical. They will view you as less of a risk if you are healthy, because, invariably, you are less of a risk to die."
Question: My husband and I have two young children. We would like to set up their college funds. Is there any formula to use to determine how much to put in a 529 plan each year per dependent?
--Andrea Zaretsky, 37
Answer from: Jason Whitby, senior financial advisor
Investor Solutions, Inc., Coral Gables, FL
"There is a formula, but even better, there are online college savings calculators! Online calculators like Savingforcollege.com can provide you with all the required estimates and walk you through the process to attain costs as well as a monthly savings rate that is tailored to your specific situation. But before you actually open up the 529 plan, I'd strongly recommend that you figure out how much you can afford to save for college after you have everything else covered first. Meaning, you should have no consumer debt, have an emergency cash reserve and are already saving each month for your retirement. If all that is covered and cash flow still isn't a problem, I'd recommend you look at maximizing the state income tax deduction for funding a 529 plan. New York provides an above-the-line exclusion from income of $5,000 single and $10,000 joint. If cash flow starts getting tight, I'd recommend you go ahead and open a 529 plan for each and look to save at least $25 a month. I would recommend $25 per month to keep the hurdle low. Once you get the account set up and get used to contributing $25 a month, you can increase the monthly.
Question: I am expecting my first child next year. How can I, having paid the Alternative Minimum Tax for the past two years, reduce my AMT burden?
--Matt Carola, 35, an IT professional
Answer from Jay Brennan, CPA, CFP
Brennan Financial Group LLC, Princeton, NJ
"When confronted with the AMT, there is no one-size-fits-all approach to try to minimize its effect. You need to sit down and look at how the AMT would affect your taxes over a 2- to 3-year period. Things that will put you into the AMT are what we call adjustments, such as living in a high tax state like New York, and the number of personal exemptions or miscellaneous itemized deductions. For example, is there some flexibility to when you get paid? You may elect the income to come in this year because you already know you will pay higher taxes. Potentially next year, you will have a lower income, so you may not be in the AMT bracket. Of if you were to prepay some taxes or defer some taxes, is there a benefit? You may consider postponing or accelerating paying certain addback itemized deductions, such as nonqualified mortgage interest. Under the regular tax and AMT, you can deduct the interest on a mortgage up to $100,000 if it is used to buy, build or improve on your home. If you drew on it to pay for things like bills, cars or college, you can claim it on your regular taxes but not on the AMT.
"Another adjustment is for miscellaneous itemized deductions such as unreimbursed business expenses. When you calculate them, there is usually a nice benefit under regular taxes. With the AMT, there is no benefit. But if you don't make those deductions, your regular taxes will be higher while your AMT will be the same. So if you feel comfortable asking, you should ask your employer if he will pay for the expenses if you reduce your income by X amount."
Got questions for WalletPop experts? Leave them in the comments space below.
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Reader Comments (Page 1 of 1)
11-11-2009 @ 12:12PM
toomuchstuff said...
I'm trying to find a budgeting program that meets our needs.
Because I am a freelancer, we have highly variable income and expenses from month to month, and our cash flow varies tremendously. Most of the online budget software I can find only allow you to budget really one month at a time, and they suggest that you take all your monthly expenses and average them out (e.g. if you estimate that you're going to spend $120 in December, start saving $10 a month in January.)
While I aspire to saving enough money up that we can ideally live that way, the reality is that in some months, our immediate expenses wipe out the money we'd otherwise have saved for expenses that happen later. So it would be GREAT to find something that allowed us to look at a varying budget over time, and also that allowed us to project future cash flow so we knew how much we had to save from each month's surplus to avoid the tidal wave of next month's expenses.
Does Quicken Home & Business 2010 even do that? Do any programs? Mint, Wesabe, and Yodlee unfortunately do not - and it looks to me like You Need A Budget doesn't, either. Help!
Reply
12-02-2009 @ 2:37PM
Gary Anders said...
My wife and I are in debt that I no longer can tolerate. I am retired and have burned through my 401K and my annuity to pay the $6,000 a month in mostly credit cards and home mortgages. (2, his & hers)
What are my options...I don't think we qualify for chapter 7 bankruptcy. What about chapter 13 and what does that entail?? Do i Need an attorney? How do I keep creditors from calling me day and night?
GA
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12-16-2009 @ 9:37PM
CHarper said...
I've accidentally been contributing to a single IRA for both my wife and myself. I always thought that we only needed one shared IRA with the IRA proceeds going to the survivor if one of us dies. I didn't know that I had to create a separate IRA for each of us. I've been contributing the legal limit each year for a married couple for years and only discovered this mistake when I got a notice recently from the IRS saying I contributed more than what I stated on my tax return in 2007! They say we owe the g'ment $2K because I declared the contributions for my wife as tax deductible. How do I fix this mess? IRS hasn't responded to letters with documentation of my mistake and for directions on what to do to fix the problem. I'd like to simply split the IRA into two equal halves but then the g'ment will probably say that I over-contributed to my wife's IRA for this year and assess me for even more money than I already owe.
Reply
12-21-2009 @ 10:30AM
Corbett said...
I sold stock at a $15K long term loss this year. I never have enough deductions fort the long form itemization but was told that I couldn't deduct the losses. I have some long term gains that could be sold. How much loss can I take in a year? How much gains can I sell? Will I itemize if, say, I take $10K in gains and offset $10K in losses and carryover $5K to next year.
Reply
1-04-2010 @ 3:04AM
darlene mccreary said...
I am looking for the best way to begin resolving back taxes
owed to the IRS. It has been over 4yrs, do I need to find
an attorney?
Reply
1-04-2010 @ 3:16PM
tom said...
i have always filed married filing jointly. this year my wife started receiving soc security. no taxes taken out so this puts me in a higher bracket. i usually pretty much break even but fear this may cause me owing money. is my situation a case where we could file married filling seperatly, and if so what are the pitfalls or do and donts when filing this way. regards and thanks...
Reply
1-04-2010 @ 4:44PM
paula said...
I have 3 adult sons still living here, one 23,making about 900/month take home, the other 21, not ever having a steady job, me paying his car, car insurance and phone, the other pays all his own bills, and makes a good living ( especially with no living expenses to pay. Is there a way to claim the first two as dependants? I havent since they turned 18 or ended college, but I was just wondering
Reply
1-11-2010 @ 1:15PM
SHERRI said...
ive been getting disability since may of last yr. i was not aware i had to tell them to tax it, so no taxes have been taken out.my income for the yr is $19537.96. i have a son hes 17 and still in school.what happens in a case like this?
Reply
1-17-2010 @ 6:03PM
Fernando said...
I'm a non-resident alien, and had opened an account to trade stocks. I don't live in the USA, but I already have a Social Security Card. I have no idea about what I have to do about takes. Please, could someone give me an advice?
Reply
1-20-2010 @ 1:40PM
lori a gower said...
question: i just started a new job this year working road contruction, the job is 18 months at this location then will move to another. can i deduct my commute to and from this location?
Reply
1-22-2010 @ 3:48PM
Marcy Hrazanek said...
What taxes are due on annual leave paid after retirement?
Reply