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I inherited a Traditional IRA from my mother. Do
I have to take a lump sum distribution and pay
taxes and penalties on all the money or is there
some way I can make it my own IRA and let it
grow tax deferred? |
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You cannot rollover an inherited IRA and make it
your own, but you do not have to take the lump
sum either. If she had not started to take her
required minimum distributions before her death
then you can take distributions based on your
life expectancy. This means, you would only have
to take out a portion of the IRA every year and
pay tax on that portion. In addition, you will
not owe any penalties on any of the
distributions. You can take the money out and
pay taxes whenever you want, but if your goal is
to defer the tax bite as long as possible, then
take the distributions based on your life
expectancy. |
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I am currently purchasing a $500,000 Term Life
policy from the Insurance Clearinghouse. My
estate is already over $1,000,000 and I want to
keep the value of this policy out of my estate
without giving up control. Does the organization
have any strategies to accomplish this?
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We
have strategies for just about every financial
situation, including yours. The best way to
control an insurance policy, but keep the
ownership (and value) out of your estate is to
use an Irrevocable Life
Insurance Trust (ILIT).
You make an irrevocable election as to who the
beneficiary is and the ILIT owns the insurance
policy and pays the premiums. This strategy
removes the insurance from your estate and your
named beneficiary receives all the proceeds
tax-free. |
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It
is that time of year again when I must decide
whether it is better to fund a Traditional IRA
and deduct it or fund a Roth IRA. Which do you
recommend? |
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We
love the Roth IRA. Generally, we think it is
best to give up the current tax deduction you
would receive from the Traditional IRA for the
future tax-free benefits of the Roth. The Roth
IRA also gives you more leeway in estate
planning and distributions. |
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I
have followed your strategies and I have
purchased an investment real estate property in
the town where my son is going to college. Can I
let my child live there tax free and still claim
it as a rental? |
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Yes,
if you hire your child as the property manager.
Parents can give free rent in exchange for the
childs management services. In fact, under
Section 119, the free rent is can also be
excluded from the child income.
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I know I get favorable tax treatment on
qualified dividends. I bought a lot of stocks
last year that pay dividends. How do I know if
the dividend is qualified and if I qualify for
the lower tax rates? |
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The
lower dividend tax rates apply to dividends
received from Domestic (U.S.) corporations and
certain qualified foreign corporations. The
dividends can come from the corporations
directly or through mutual funds, partnerships
or other regulated investment companies. Tax on
a qualified stock dividend is the same as a
long-term capital gain, which means you will pay
no more than 15% tax. In addition, you must have
held the stock for at least 61 days before the
ex-dividend date. This new law allows investors
buying stock the day before the ex-dividend date
to qualify for the lower tax rate. |
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I heard a speaker on the radio talking about a
charitable remainder trust (CRT) and how great
it was. I did not quite follow everything he was
saying and did not buy his services. Could you
explain what a CRT does? |
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A charitable remainder trust is an estate
planning tool that allows an individual to gift
income-producing assets to an irrevocable trust.
The donor of the gift can claim income and gift
tax deductions for the current value of the
asset. In addition, they can also receive an
income stream for life or a period of years. The
two big
benefits of the CRT are the current tax
deduction and a life income stream. But beware,
because the CRT is an irrevocable trust so once
you give the gift you generally cannot get it
back, so deciding on whether to use a CRT should
not be taken lightly.
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I am looking to diversify my portfolio and
wanted to have more exposure to stocks outside
of the United States. Is there a difference
between a Global fund and an International fund? |
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Many funds that are called Global funds often
have large holdings in the United States. Global
funds invest in companies all over the world,
including the United States. Most International
funds, on the other hand, invest primarily in
companies outside the U.S. Since many global
funds can have as much as 75% of their portfolio
in U.S. stock, this type of fund may not give
you the international exposure you were trying
to create, so your best bet it to pick an
international fund for diversification into
foreign stocks. |
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I heard income averaging is back again. Is
this true? I havent been able to use that
strategy since the 1980s. |
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It is back for a select group of taxpayers.
Effective 2004, Fisherman and Farmers can now
elect to use income averaging on Schedule J to
reduce their taxes. This strategy is not
available to anyone else. |
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My employer last year set up a deemed IRA plan
for everyone. The plan allows us to make
voluntary contributions via a payroll deduction.
I contributed $3,000 last year to my deemed IRA.
Can I also make another $3,000 into another IRA
for 2004 tax year? |
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No. The deemed IRA is just a more convenient way
for employees to contribute to IRAs. They are
treated as regular IRAs whether they are Roth
contributions or Traditional. The deemed IRA
does not allow you invest more than the maximum allowed for the tax year, which was $3,000 for
2004 ($3,500 is age 50 or older). If you did
make your deemed contributions into a
traditional IRA and your income was within the
correct limitations, you will not have to pay
tax on those contributions. |
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My
husband and I were preparing our estate plan and
were amazed that our estate would actually be
subject to estate taxes. Our advisor recommended
a second-to-die policy to make sure our estate
has enough liquidity to pay any estate taxes.
What do you think of these policies? |
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There
are many estate planning techniques a couple can
use to deal with estate taxes. Secondto- die
policies (also called Joint and Survivor Life
Policies) are often used for this reason. If
your estate warrants this strategy, we recommend
using Term Insurance and have the policy owned
by a Life Insurance Trust (ILIT), so the death
benefit is not included in your final estate.
These policies are designed to solve the common
problems of not having the needed cash available
upon the death of the second spouse for tax
bills, needs of heirs, and to make sure there is
not a forced sale of assets. |
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I
am a sole proprietor and plan on putting my 13
and 15-year-old daughters on payroll. How much
can I pay them in 2005 and have them not pay any
income taxes? |
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For
2005, assuming your children have no other
income you can pay your children up to $5,000
and not have them owe any Federal income tax.
Have them fill out a W-4 and claim EXEMPT. Keep
this form in your files. Pay them a fair wage,
have them fill out timesheets for hours worked
and pay them on a regular schedule such as
weekly or monthly. The wages you pay your
children through the sole proprietorship is also
not subject to Social Security, Medicare and FUTA tax and you still are able to claim them as
a dependent on your tax return.
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I
went on a cruise last year in conjunction with a
business convention. Can I deduct my expenses
from this cruise? The majority of my time was
spent at the convention. |
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You
can deduct up to $2,000 per year for expenses
incurred in connection with a business
convention or seminar held on a cruise ship as
long as the ship is a U.S. flagship and all
ports of call are located within the United
States or its
possessions. |
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Two
friends and I are starting a business and we are
each investing about $15,000 to start the
business. We anticipate that some years one
partner will be doing a lot more work than
others and vice versa. Can we split profits
based on time spent working in the company and
how would we set this up? |
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There
are many things to consider when starting a
business, but based on the different levels of
participation of you and your business partners,
you should consider forming the business as a
Limited Liability Company (LLC). This will allow
you (and your partners) to have the flexibility
in your profit/loss allocation every year. In
addition to the flexibility, the LLC gives each
of you a level of protection. With general
partnerships, each partners personal assets are
at risk for claims against the partnership, but
members of an LLC are generally only at risk for
their investment in the LLC. |
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I
have been investing in no-load mutual funds for
my two young children (ages 10 and 8) for the
past few years and the funds have grown quite a
bit. A heard about a kiddie tax I may have to
pay. What is a kiddie tax? |
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If
children under the age of 14 have investment
income greater than $1,600, the investment
income over $1,600 may be subject to tax based
on your tax rate (parents) instead of the
childs tax rate. Most of the time, the parents
tax rate is higher than the childs is and this
tax is referred to as the kiddie tax. |
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I
will be 62 years old in September and I plan to
retire on my birthday and start drawing Social
Security retirement benefits. The problem is
that I will have earned about $40,000 by that
time. I know the maximum you can earn is $12,000
before
you start losing benefits if you are
under age 65. Is there any way around losing
these benefits? |
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Yes,
there is a special rule that applies to earnings
in your situation. The earnings limit only
applies to the months after you begin collecting
Social Security benefits. So if you retire in
September, the $12,000 yearly limit will only
apply to the months after your start receiving
the Social Security benefits. The monthly amount
you could make for those months is $1,000
($12,000 yearly limit divided by 12 months).
This monthly limit only applies for the year you
are retiring. In future years, the earnings
limit applies on a yearly basis until you reach
full retirement age.
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