01/31/2008

Estate Planning

Estate planning is a process of setting goals and objectives to help you manage and preserve your assets while you live, and to conserve and control their distribution after you die. Your age, health, wealth, lifestyle, and life goals determine your particular estate planning needs. Let’s look at some components of estate planning that can affect all of us and consider the taxes associated with them.

If you're young and single, you may not need much estate planning, but if you have some material possessions, you should at least write a will. A will lets you leave your possessions to anyone you choose.

Incapacity can hit at any time. Anyone over age 18 should have: A durable power of attorney which lets you name someone to manage your property in case you become incapacitated; An advanced medical directive in one of three forms: (1) a living will, (2) a durable power of attorney for health care, and (3) a Do Not Resuscitate order.

Married couples can essentially give or leave your entire estate to your spouse tax free. The federal gift and estate taxes treat married couples as one economic unit using the unlimited marital deduction rule. The deduction allows spouses to shift wealth between each other without incurring gift or estate taxes.

If you're married with children, each spouse should have their own will. Wills can name a guardian for your minor children in case both parents die simultaneously. Without a will, a court may appoint someone else. A will can also direct your assets to a trustee whom you choose to manage a trust for your minor children. You will also need life insurance to help your surviving spouse support the family on his or her own.

Estate planning overlaps with retirement planning at some point. It's just as important to plan to care for yourself during retirement as it is to plan to provide for your beneficiaries after your death. Even though Social Security may be available, those benefits alone may not provide enough income for your retirement years.

Estate taxes will be a priority if you have accumulated wealth. The 2001 Tax Act gradually eliminates estate taxes over several years (from $1 million in 2002-2003 to $3.5 million in 2009); reducing the top estate tax rate over several years (from 50 percent in 2002 to 45 percent in 2007-2009); and finally repealing estate taxes for persons dying after 2009. Note that pre-2001 Tax Act rules will return after 2010.

01/22/2008

Personal Tax Credits

April 15th is just around the corner. Tax credits can help significantly reduce your tax liability. Let’s discuss tax credits, tax deductions, and discuss some of the more common tax credits available to you.

A tax credit is a dollar-for-dollar reduction of your tax liability. Once you've determined how much federal tax you owe, you can subtract the amount of your eligible tax credits from what you owe. A tax credit of $100 will reduce what you owe by $100.

A tax deduction reduces your taxable income, so that when you calculate your tax liability, you're doing so against a lower amount. What you owe is reduced by the same percentage as your tax rate. If you're in the 28 percent tax bracket and you have $1,000 in deductions, your tax liability will be reduced by $280.

The child and dependent care credit enables you to claim up to 35 percent of qualifying expenses paid to provide care for dependent children under the age of 13, disabled spouses, or other disabled dependents. A limit of $3,000 applies to the amount of work-related expenses you can use for one qualifying person and $6,000 for two or more qualifying persons.

The child tax credit provides relief for parents with dependent children. The maximum is $1,000 per child. A qualifying child is a child, grandchild, stepchild, or foster child under the age of 17 who lives with you for more than half the year and provides less than half of their own support.

The earned income credit benefits working taxpayers who have low income. The credit amount is based on your adjusted gross income, filing status, and the number of qualifying children you have.

The Hope education credit provides a maximum of $1,650 per year and is available to each student in the household who is in their first two years of undergraduate education, provided the student is attending at least half time.

The Lifetime Learning education credit is more widely available and provides a maximum of $2,000 per year, regardless of how many students in the family qualify.

Other federal tax credits include: the adoption tax credit, tax credit for the elderly or disabled, the foreign tax credit, tax credits for IRAs, retirement plans, health insurance costs, clean-fuel vehicles, and energy-efficient home improvements.

Consult your friendly home-town banker for a personal referral to a tax professional.

01/14/2008

Taxes & Long-term Care Insurance

Last week we looked at long-term care insurance to see how it works and when you become eligible. This week we’re looking at tax implications involved with LTCI policies. You need to know whether your premiums will be deductible and your benefits taxable.

You may be able to deduct all or part of the LTCI premiums you pay for yourself, your spouse, or a dependent, but only if your policy meets the IRS criteria for a qualified policy. If you bought the policy before January 1, 1997, and it met the requirements of the state where it was issued, it is automatically considered a qualified policy. If you bought the policy later, it must satisfy several requirements to be considered qualified.

First, the policy must provide coverage only for qualified long-term care services. These include necessary services described and covered in your policy that are in connection with a plan of care prescribed by a licensed health-care practitioner. Also, your policy must satisfy the following conditions:

• It must be guaranteed renewable
• It must not have a cash surrender value or any provision that allows you to cash in, pledge, assign, or borrow against the policy
• It must provide that any refunds and dividends can be used only to reduce future premiums or increase future benefits
• It must not pay for (or reimburse) expenses that are reimbursable under Medicare
• It must meet certain consumer protection requirements set out in the Internal Revenue Code

If your LTCI policy meets the conditions listed above, or if it was issued before January 1, 1997, at least part of your premium may be tax deductible as a medical expense.

The tax treatment of benefits under a LTCI policy can be tricky. A qualified LTCI policy is generally treated as an accident and health insurance policy, meaning the benefits are typically tax free. However, if your policy pays a set dollar amount per day, the tax-free treatment is subject to a certain threshold, indexed annually for inflation. Benefits over and above this threshold are generally considered taxable income. The IRS requires you to calculate the non-taxable amount under this threshold (the excluded amount) to determine the taxable amount over the threshold.

Consult a trusted financial services professional for help in deciding what LTCI policy is right for you. Trust your hometown banker for a professional referral.

01/10/2008

Long-term Care Insurance

It's a fact: People today are living longer. Although that's good news, the odds of requiring some sort of long-term care increase as you get older. As the costs of home care, nursing homes, and assisted living escalate, you may wonder how you're going to afford long-term care. One solution is long-term care insurance (LTCI).

Most people associate long-term care with the elderly. But it applies to the ongoing care of individuals of all ages who can no longer independently perform basic activities of daily living (ADLs)-- such as eating, bathing, dressing, continence, toileting (moving on and off the toilet), and transferring (moving in and out of bed)-- due to an illness, injury, or cognitive disorder. This care can be provided in a number of settings, including private homes, assisted-living facilities, adult day-care centers, hospices, and nursing homes.

Even though you may never need long-term care, you'll want to be prepared in case you ever do, because long-term care can be expensive. Although Medicaid does cover some of the costs of long-term care, it has strict financial eligibility requirements--you would have to exhaust a large portion of your life savings to become eligible for it. And since HMOs, Medicare, and Medigap don't pay for most long-term care expenses, you're going to need to find alternative ways to pay for long-term care. One option you have is to purchase a LTCI policy. Whether or not you should buy it depends on a number of factors, such as your age and financial circumstances. Consider purchasing a LTCI policy if some or all of the following apply:

• You are between the ages of 40 and 84
• You have significant assets that you would like to protect
• You can afford to pay the premiums now and in the future
• You are in good health and are insurable

Generally, LTCI policies works like this: You pay a premium, and when benefits are triggered, the policy pays a selected dollar amount per day (for a set period of time) for the type of long-term care outlined in the policy. Most policies require that certain physical and/or mental impairments trigger benefits. Some policies will only begin paying benefits if your doctor certifies that the care is medically necessary.

Always consult a trusted financial services professional when considering purchasing LTCI. Your friendly hometown bank is a great place to start!

01/03/2008

Start 2008 with a Budget

Do you ever wonder where your money goes each month? Does it seem like you're never able to get ahead? If so, you may want to establish a budget to help you keep track of how you spend your money and to help you reach your financial goals.

First, you should examine your financial goals. Start by making a list of your short-term and long-term goals. Next, ask yourself: How important is it for me to achieve this goal? How much will I need to save? With this information, you can work toward establishing a budget that can help you reach your goals.

To develop a budget, you'll need to identify your current monthly income and expenses. You can do this manually, or use one of the many software programs now available. Start by adding up all of your income. Next, add up all of your expenses. It will help to divide you expenses into fixed and discretionary. You'll also want to make sure that you have identified any out-of-pattern expenses, such as holiday gifts, insurance payments, car maintenance, home repair, etc. Once you've added up all of your income and expenses, compare the two totals. To get ahead, you should be spending less than you earn. If you are spending more than you earn, you'll need to make some adjustments. Look at your expenses and cut down on your discretionary spending. Remember, if you find yourself coming up short, don't worry! All it will take is a little self-discipline, and you'll eventually get it right.

Here are some tips to help you stay on track:

Involve the entire family. Agree on a budget up front and hold each other accountable. Stay disciplined by trying to make budgeting a part of your daily routine. Start your new budget at a time when it will be easy to follow and stick with the plan. Find a budgeting system or software that you prefer to use. Distinguish between expenses that are "wants" and expenses that are "needs". Monitor your budget and make changes when necessary, keeping in mind that you don't have to track every penny. And be flexible. Any budget that is too rigid is likely to fail.

Don’t get overwhelmed with the budgeting process. If you get stuck, you can always contact your friendly hometown banker for help. Have a successful 2008!

Back to President's Articles

01/31/2008

Estate Planning

Estate planning is a process of setting goals and objectives to help you manage and preserve your assets while you live, and to conserve and control their distribution after you die. Your age, health, wealth, lifestyle, and life goals determine your particular estate planning needs. Let’s look at some components of estate planning that can affect all of us and consider the taxes associated with them.

If you're young and single, you may not need much estate planning, but if you have some material possessions, you should at least write a will. A will lets you leave your possessions to anyone you choose.

Incapacity can hit at any time. Anyone over age 18 should have: A durable power of attorney which lets you name someone to manage your property in case you become incapacitated; An advanced medical directive in one of three forms: (1) a living will, (2) a durable power of attorney for health care, and (3) a Do Not Resuscitate order.

Married couples can essentially give or leave your entire estate to your spouse tax free. The federal gift and estate taxes treat married couples as one economic unit using the unlimited marital deduction rule. The deduction allows spouses to shift wealth between each other without incurring gift or estate taxes.

If you're married with children, each spouse should have their own will. Wills can name a guardian for your minor children in case both parents die simultaneously. Without a will, a court may appoint someone else. A will can also direct your assets to a trustee whom you choose to manage a trust for your minor children. You will also need life insurance to help your surviving spouse support the family on his or her own.

Estate planning overlaps with retirement planning at some point. It's just as important to plan to care for yourself during retirement as it is to plan to provide for your beneficiaries after your death. Even though Social Security may be available, those benefits alone may not provide enough income for your retirement years.

Estate taxes will be a priority if you have accumulated wealth. The 2001 Tax Act gradually eliminates estate taxes over several years (from $1 million in 2002-2003 to $3.5 million in 2009); reducing the top estate tax rate over several years (from 50 percent in 2002 to 45 percent in 2007-2009); and finally repealing estate taxes for persons dying after 2009. Note that pre-2001 Tax Act rules will return after 2010.

01/22/2008

Personal Tax Credits

April 15th is just around the corner. Tax credits can help significantly reduce your tax liability. Let’s discuss tax credits, tax deductions, and discuss some of the more common tax credits available to you.

A tax credit is a dollar-for-dollar reduction of your tax liability. Once you've determined how much federal tax you owe, you can subtract the amount of your eligible tax credits from what you owe. A tax credit of $100 will reduce what you owe by $100.

A tax deduction reduces your taxable income, so that when you calculate your tax liability, you're doing so against a lower amount. What you owe is reduced by the same percentage as your tax rate. If you're in the 28 percent tax bracket and you have $1,000 in deductions, your tax liability will be reduced by $280.

The child and dependent care credit enables you to claim up to 35 percent of qualifying expenses paid to provide care for dependent children under the age of 13, disabled spouses, or other disabled dependents. A limit of $3,000 applies to the amount of work-related expenses you can use for one qualifying person and $6,000 for two or more qualifying persons.

The child tax credit provides relief for parents with dependent children. The maximum is $1,000 per child. A qualifying child is a child, grandchild, stepchild, or foster child under the age of 17 who lives with you for more than half the year and provides less than half of their own support.

The earned income credit benefits working taxpayers who have low income. The credit amount is based on your adjusted gross income, filing status, and the number of qualifying children you have.

The Hope education credit provides a maximum of $1,650 per year and is available to each student in the household who is in their first two years of undergraduate education, provided the student is attending at least half time.

The Lifetime Learning education credit is more widely available and provides a maximum of $2,000 per year, regardless of how many students in the family qualify.

Other federal tax credits include: the adoption tax credit, tax credit for the elderly or disabled, the foreign tax credit, tax credits for IRAs, retirement plans, health insurance costs, clean-fuel vehicles, and energy-efficient home improvements.

Consult your friendly home-town banker for a personal referral to a tax professional.

01/14/2008

Taxes & Long-term Care Insurance

Last week we looked at long-term care insurance to see how it works and when you become eligible. This week we’re looking at tax implications involved with LTCI policies. You need to know whether your premiums will be deductible and your benefits taxable.

You may be able to deduct all or part of the LTCI premiums you pay for yourself, your spouse, or a dependent, but only if your policy meets the IRS criteria for a qualified policy. If you bought the policy before January 1, 1997, and it met the requirements of the state where it was issued, it is automatically considered a qualified policy. If you bought the policy later, it must satisfy several requirements to be considered qualified.

First, the policy must provide coverage only for qualified long-term care services. These include necessary services described and covered in your policy that are in connection with a plan of care prescribed by a licensed health-care practitioner. Also, your policy must satisfy the following conditions:

• It must be guaranteed renewable
• It must not have a cash surrender value or any provision that allows you to cash in, pledge, assign, or borrow against the policy
• It must provide that any refunds and dividends can be used only to reduce future premiums or increase future benefits
• It must not pay for (or reimburse) expenses that are reimbursable under Medicare
• It must meet certain consumer protection requirements set out in the Internal Revenue Code

If your LTCI policy meets the conditions listed above, or if it was issued before January 1, 1997, at least part of your premium may be tax deductible as a medical expense.

The tax treatment of benefits under a LTCI policy can be tricky. A qualified LTCI policy is generally treated as an accident and health insurance policy, meaning the benefits are typically tax free. However, if your policy pays a set dollar amount per day, the tax-free treatment is subject to a certain threshold, indexed annually for inflation. Benefits over and above this threshold are generally considered taxable income. The IRS requires you to calculate the non-taxable amount under this threshold (the excluded amount) to determine the taxable amount over the threshold.

Consult a trusted financial services professional for help in deciding what LTCI policy is right for you. Trust your hometown banker for a professional referral.

01/10/2008

Long-term Care Insurance

It's a fact: People today are living longer. Although that's good news, the odds of requiring some sort of long-term care increase as you get older. As the costs of home care, nursing homes, and assisted living escalate, you may wonder how you're going to afford long-term care. One solution is long-term care insurance (LTCI).

Most people associate long-term care with the elderly. But it applies to the ongoing care of individuals of all ages who can no longer independently perform basic activities of daily living (ADLs)-- such as eating, bathing, dressing, continence, toileting (moving on and off the toilet), and transferring (moving in and out of bed)-- due to an illness, injury, or cognitive disorder. This care can be provided in a number of settings, including private homes, assisted-living facilities, adult day-care centers, hospices, and nursing homes.

Even though you may never need long-term care, you'll want to be prepared in case you ever do, because long-term care can be expensive. Although Medicaid does cover some of the costs of long-term care, it has strict financial eligibility requirements--you would have to exhaust a large portion of your life savings to become eligible for it. And since HMOs, Medicare, and Medigap don't pay for most long-term care expenses, you're going to need to find alternative ways to pay for long-term care. One option you have is to purchase a LTCI policy. Whether or not you should buy it depends on a number of factors, such as your age and financial circumstances. Consider purchasing a LTCI policy if some or all of the following apply:

• You are between the ages of 40 and 84
• You have significant assets that you would like to protect
• You can afford to pay the premiums now and in the future
• You are in good health and are insurable

Generally, LTCI policies works like this: You pay a premium, and when benefits are triggered, the policy pays a selected dollar amount per day (for a set period of time) for the type of long-term care outlined in the policy. Most policies require that certain physical and/or mental impairments trigger benefits. Some policies will only begin paying benefits if your doctor certifies that the care is medically necessary.

Always consult a trusted financial services professional when considering purchasing LTCI. Your friendly hometown bank is a great place to start!

01/03/2008

Start 2008 with a Budget

Do you ever wonder where your money goes each month? Does it seem like you're never able to get ahead? If so, you may want to establish a budget to help you keep track of how you spend your money and to help you reach your financial goals.

First, you should examine your financial goals. Start by making a list of your short-term and long-term goals. Next, ask yourself: How important is it for me to achieve this goal? How much will I need to save? With this information, you can work toward establishing a budget that can help you reach your goals.

To develop a budget, you'll need to identify your current monthly income and expenses. You can do this manually, or use one of the many software programs now available. Start by adding up all of your income. Next, add up all of your expenses. It will help to divide you expenses into fixed and discretionary. You'll also want to make sure that you have identified any out-of-pattern expenses, such as holiday gifts, insurance payments, car maintenance, home repair, etc. Once you've added up all of your income and expenses, compare the two totals. To get ahead, you should be spending less than you earn. If you are spending more than you earn, you'll need to make some adjustments. Look at your expenses and cut down on your discretionary spending. Remember, if you find yourself coming up short, don't worry! All it will take is a little self-discipline, and you'll eventually get it right.

Here are some tips to help you stay on track:

Involve the entire family. Agree on a budget up front and hold each other accountable. Stay disciplined by trying to make budgeting a part of your daily routine. Start your new budget at a time when it will be easy to follow and stick with the plan. Find a budgeting system or software that you prefer to use. Distinguish between expenses that are "wants" and expenses that are "needs". Monitor your budget and make changes when necessary, keeping in mind that you don't have to track every penny. And be flexible. Any budget that is too rigid is likely to fail.

Don’t get overwhelmed with the budgeting process. If you get stuck, you can always contact your friendly hometown banker for help. Have a successful 2008!

Back to President's Articles