Author: Leon Clinton

Asset Protection Estate Financial Planning Investments

Should You Invest in Life Insurance?

The purpose of life insurance is to provide a source of income, in case of death, for your children, dependents, or other beneficiaries. Life insurance can also serve certain estate planning purposes, which we won’t go into here.

Buying life insurance is contingent upon whether anyone is depending on your income after your death. If you have a spouse, child, parent, or some other individual who depends on your income, then you probably need life insurance.

Because life insurance protects your family in the event of a death, it is important to determine the correct amount. Most people do not have the right amount of insurance.

There are two basic types of life insurance: term and permanent. Term insurance is insurance that covers a specified period. If you die within this time frame, your beneficiary receives the insurance benefit. Term policy premiums usually increase with age.

Permanent insurance such as universal life, variable life, and whole life, contains a cash value account or an investment element to the insurance.

Rules of Thumb

The younger your children, the more insurance you need. If both spouses earn income, then both spouses should be insured, with insurance amounts proportionate to salary amounts.

Tip: If the family cannot afford to insure both wage earners, the primary wage earner should be insured first, and the secondary wage earner should be insured later on. A less expensive term policy might be used to fill an insurance gap.

If one spouse does not work outside the home, insurance should be purchased to cover the absence of the services being provided by that spouse (child care, housekeeping, bookkeeping, etc.). However, if funds are limited, insurance on the non-wage earner should be secondary to insurance for the wage earner.

If there are no dependents and your spouse could live comfortably without your income, then you will still need life insurance, but you will need less than someone who has dependents.

Tip: At a minimum, you will want to provide for burial expenses and paying off your debts.

If your spouse would undergo financial hardship without your income, or if you do not have adequate savings, you may need to purchase more insurance. The amount of insurance you need depends on your salary level and that of your spouse, the amount of savings you have, and the amount of debt you both have.

If you need help figuring out the correct amount of life insurance you need, then give us a call. We’re happy to help.

Business Tax

Renting Out a Vacation Home

Tax rules on rental income from second homes can be complicated, particularly if you rent the home out for several months of the year, but also use the home yourself.

There is however, one provision that is not complicated. Homeowners who rent out their property for 14 or fewer days a year can pocket the rental income, tax-free.

Known as the “Master’s exemption”, because it is used by homeowners, near the Augusta National Golf Club in Augusta, GA who rent out their homes during the Master’s Tournament (for as much as $20,000!). It is also used by homeowners who rent out their homes for movie productions or those whose residences are located near Super Bowl sites or national political conventions.

Tip: If you live close to a vacation destination such as the beach or mountains, you may be able to make some extra cash by renting out your home (principal residence) when you go on vacation–as long as it’s two weeks or less. And, although you can’t take depreciation or deduct for maintenance, you can deduct mortgage interest and property taxes on Schedule A.

In general, income from rental of a vacation home for 15 days or longer must be reported on your tax return on Schedule E, Supplemental Income and Loss. You should also keep in mind that the definition of a “vacation home” is not limited to a house. Apartments, condominiums, mobile homes, and boats are also considered vacation homes in the eyes of the IRS.

Further, the IRS states that a vacation home is considered a residence if personal use exceeds 14 days or more than 10% of the total days it is rented to others (if that figure is greater). When you use a vacation home as your residence and also rent it to others, you must divide the expenses between rental use and personal use, and you may not deduct the rental portion of the expenses in excess of the rental income.

Example: Let’s say you own a house in the mountains and rent it out during ski season, typically between mid-December and mid-April. You and your family also vacation at the house for one week in October and two weeks in August. The rest of the time the house is unused.

The family uses the house for 21 days and it is rented out to others for 121 days for a total of 142 days of use during the year. In this scenario 85% of expenses such as mortgage interest, property taxes, maintenance, utilities, and depreciation can be written off against the rental income on Schedule E. As for the remaining 15% of expenses, only the owner’s mortgage interest and property taxes are deductible on Schedule A.

Questions about vacation home rental income? Give us a call. We’ll help you figure it out.

Tax

Special Tax Benefits for Armed Forces Personnel

Military personnel and their families face unique life challenges with their duties, expenses and transitions. As such, active members of the U.S. Armed Forces should be aware of all the special tax benefits that are available to them.

1. Moving Expenses. If you are a member of the Armed Forces on active duty and you move because of a permanent change of station, you may be able to deduct some of your unreimbursed moving expenses.

2. Combat Pay. If you serve in a combat zone as an enlisted person or as a warrant officer for any part of a month, military pay you received for military service during that month is not taxable. For officers, the monthly exclusion is capped at the highest enlisted pay, plus any hostile fire or imminent danger pay received. You can also elect to include your nontaxable combat pay in your “earned income” for purposes of claiming the Earned Income Tax Credit.

3. Extension of Deadlines. The deadline for filing tax returns, paying taxes, filing claims for refund, and taking other actions with the IRS is automatically extended for qualifying members of the military.

4. Uniform Cost and Upkeep. If military regulations prohibit you from wearing certain uniforms when off duty, you can deduct the cost and upkeep of those uniforms, but you must reduce your expenses by any allowance or reimbursement you receive.

5. Joint Returns. Generally, joint income tax returns must be signed by both spouses. However, when one spouse is unavailable due to military duty, a power of attorney may be used to file a joint return.

6. Travel to Reserve Duty. If you are a member of the US Armed Forces Reserves, you can deduct unreimbursed travel expenses for traveling more than 100 miles away from home to perform your reserve duties.

7. ROTC Students. Subsistence allowances paid to ROTC students participating in advanced training are not taxable. However, active duty pay, such as pay received during summer advanced camp, is taxable.

8. Transitioning Back to Civilian Life. You may be able to deduct some of the costs you incur while looking for a new job. Expenses may include travel, resume preparation fees, and outplacement agency fees. Moving expenses may be deductible if your move is closely related to the start of work at a new job location, and you meet certain tests.

We want to make sure you get all of the tax benefits you are entitled to as a member of the armed forces. Please call us if you need guidance or have any questions.

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