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What to Consider When Purchasing Life Insurance

What if the unthinkable happens? Ensuring loved ones are financially secure when you are no longer here to provide for them means choosing the right life insurance policy.

TERM VS. PERMANENT

Term policies pay out a specific death benefit and remain in effect for a set period. Term life insurance can typically be purchased for a 5- to 30-year term.

On the other hand, permanent life insurance stays in effect over the course of your life—often to age 100. Whole life, variable life, and universal life are all types of permanent insurance.

BENEFIT AMOUNT

Several factors come into play when calculating how much your life insurance policy will cost. Some of these include your age, overall health and life expectancy.

You may not need as much coverage if you’ve already built a sizable nest egg and don’t have much debt. On the other hand, if you have a family you’ll need enough insurance to help provide for them financially for the long term.

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Generation-Skipping Transfer Tax Basics

The generation-skipping transfer tax (GSTT) is another transfer tax akin to the gift and estate tax.

WHAT IS THE GSTT

The GSTT applies to all transfers made by gift or inheritance to any person considered a “skip person”. A skip person is someone who is at least two generations below you. The most common skip person is a grandchild because you’re skipping over your child.

One example would be writing a $30,000 check to a grandson for a down payment on a house. This gift would skip your own child, thus avoiding the possible gift tax that would apply if the gift had passed from you to your child and then from your child to your grandchild. Therefore, it is subject to the GSTT.

The GSTT ensures that grandchildren end up with the same value of assets that they would have had if the inheritance was transferred to them directly from their parents rather than their grandparents.

LIMITS

A taxpayer can gift up to $17,000 tax-free to a recipient in 2023. And the total estate and gift tax exemption is $12.92 million. Only the value of the taxpayer’s estate at death that is over this exemption amount is subject to the GSTT. Any GSTT due is paid by the donor’s estate.

THE FUTURE

The provisions relating to the GSTT exemption in the current tax law will sunset at the end of 2025. This means that as of January 1, 2026, the GSTT exemption will revert to the amount that was allowed under the law effective in 2017 (an inflation-adjusted $5 million, or about half of what is currently allowed). Therefore, if you are considering taking advantage of the higher current exemption amounts, the time to do so is limited, unless Congress acts to change the law once again.

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2023 Tax Updates

Note these 2023 tax updates for both businesses and individuals.

PAYROLL TAXES

For 2023, the limit on wages subject to Social Security Tax increases to $160,200. All wages are subject to the 2.9% Medicare Tax, which was not changed and has no ceiling.

CHILD TAX CREDIT

The enhanced child tax credit from 2021 is no more. Congress has not been able to agree to make it permanent. Just like in 2022, the credit remains $2,000 per qualifying child. But for 2023, a maximum of $1,600 is refundable. There are income phase-out rules starting at $200,000.

AMT INCREASES

The alternative minimum tax (AMT) exemptions increase for taxpayers in 2023. Single taxpayers are allowed up to $81,300 in taxable income, and jointly filing taxpayers are allowed up to $126,500 before the AMT needs to be considered.

ENERGY EFFICIENCY IMPROVEMENTS

Purchasing a new electric vehicle (EV) may qualify you for a $7,500 tax credit for cars assembled in North America. And buying a used EV could provide partial tax credits.

There are price caps on the type of EV purchased and income phase-outs for the EV tax credits starting at $75,000.

Making energy-efficient improvements to your home can qualify for up to a $1,200 annual tax credit. Previously there was a $500 lifetime tax credit per taxpayer.

EXPENSE DEDUCTION FOR BUSINESS

In 2023, businesses can deduct up to $1.16 million for assets purchased this year.

Bonus depreciation for 2023 will drop to an 80% immediate deduction, with the remaining 20% depreciated over the life of the asset.

The 100% expensing of business meals eaten in a restaurant that was in effect for 2021 and 2022 is gone. For 2023, business meals will be 50% deductible. Entertainment expenses remain non-deductible.

There are many other changes to tax laws. Your tax professional can clarify which changes apply to you.

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A Look at Stock Market Returns Over 30 Years

Based on the S&P, the average annual return of the stock market is approximately 10%. However, when adjusting that for inflation, it is closer to 6-7%. Looking at the chart, you’ll see how the market fluctuated over the past three decades. Most financial professionals recommend holding onto investments when the market takes a dip rather than selling at a loss because chances are, with time, you’ll gain back losses.

Here’s what the average stock market return looks like for the last three decades.

Source MoneyChimp, 2022

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February 2023 Question and Answer

QUESTION:

How do I begin accepting credit card payments from my customers?

ANSWER:

First, analyze how many credit card transactions you might receive each month and whether they will be online, in-person, or over the phone. Also, think about if you plan to accept all cards (Mastercard, Visa, Discover, American Express) because processing fees vary by card type.

Next, find a credit card processor that offers competitive fees for the volume and type of transactions you’ll process. If you operate online, be sure the processor can easily integrate with your website.

Finally, after you choose a processor, you’ll open a merchant account.

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February 2023 Client Profile

Chris was 39 years old when he inherited a traditional IRA from his grandfather. Chris is not planning to retire anytime soon, so he’s unsure what to do with the account. What are his options?

With the passage of the SECURE Act in 2019, Chris will generally need to deplete the balance of the IRA within ten years of his inheritance. And depending on his grandfather’s age at the time of his death, Chris may be required to take a required minimum distribution by December 31 of the year his grandfather passed.

Also, Chris won’t be able to make additional contributions to the IRA account or roll over the account balance to an IRA he already owns. That’s because non-spousal beneficiaries are not allowed to treat the inherited IRA as their own. He’ll need to set up a new inherited IRA unless he wants to take a lump sum distribution. At which time, he’ll receive a Form 1099-R, and the entire distribution amount will be taxed at his ordinary income rates.

Client Profile is based on a hypothetical situation. The solutions discussed may or may not be appropriate for you.

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401(k) Loans

Although your plan may allow you to borrow from your account, you should be aware of what it means to take out a loan from your 401(k) account.

You’ll generally have to repay the loan amount plus interest. If you don’t repay the loan, including interest, according to the loan’s terms, any unpaid amounts become a plan distribution to you. Your plan may even require you to repay the loan in full if you leave your job.

Also, you’ll generally have to include any previously untaxed amount of the distribution in your gross income in the year in which the distribution occurs. You may also have to pay an additional 10% tax on the amount of the taxable distribution unless you are at least age 59 ½ or qualify for another exception.

Any unpaid loan amount also means you’ll have less money saved for your retirement.

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Retiring in a Slowing Economy

A well-thought-out plan for a comfortable retirement is important, even more so in a tough economy.

EXAMINE THE PAST

Start by looking at your spending habits for the last three years and determine if it’s sustainable for the next 20 years. Keeping in mind that most retirees take on a new hobby or activity that usually costs money. Travel, large home improvements, or restoring a classic car can cost thousands of dollars and stress your financial plan.

TIMING IS EVERYTHING

Plan to keep your portfolio diversified, and don’t try to time the market. Selling investments because they are down means you could miss out on a recovery. Stripping emotions out of financial decisions is vital but not always easy. If you’re not confident doing this on your own, work with your financial professional for guidance.

STAY FLEXIBLE

Spending in retirement requires flexibility. You may need to reduce your withdrawals when the market is slowing, but you can increase them when it recovers. Be sure to notice the warning signs of a slowing market, like rising interest rates and higher inflation.

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Fractional Executives for Small Businesses

Outsourcing leadership roles can offer your company insights without the price tag of a full-time employee.

FRACTION OF TIME

Fractional executives give you a fraction of their time but all of their experience. You may be able to hire an individual for a specific project or retain their services on an hourly or ongoing basis.

WHO TO HIRE

While it makes sense to have the central leader of your business, the CEO, as an in-house full-time employee, you may need help with things like finances, marketing, information technology, or human resources. But you may not have enough work to keep them busy. This is when using a fractional consultant makes sense. You can use staffing companies that specialize in fractional relationships or find a retired professional who’s doing consulting.

IS IT RIGHT

Many professionals who take on outsourced or fractional roles have served as executives before, sometimes for multiple companies. However, you also want to ask about their industry experience and why they think they can help your business.

While you won’t be taking on a full-time salary and don’t need to pay for their benefits, executives with several decades of experience don’t come cheap. So, budget accordingly.

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Making Estimated Payments Each Quarter

Since the U.S. uses a pay-as-you-go tax system, you must pay income taxes as you earn money. Making estimated payments throughout the year helps you avoid paying penalties.

WHAT ARE ESTIMATED PAYMENTS

Estimated tax payments are taxes paid to the IRS throughout the year on earnings that are not subject to federal tax withholding. This can include self-employment or freelancer earnings, or income you’ve earned on the side, such as dividends, realized capital gains, prizes and other non-wage earnings.

You may also be liable for making estimated tax payments if you are an employee, if the withholding on your earnings doesn’t fully cover your tax liability. The amount of money withheld on your paycheck depends on the information you provided to your employer on your Form W-4.

CALCULATION MATTERS

Generally, calculating estimated payments involves estimating your annual tax liability based on what you expect to earn. You’ll annualize your tax at the end of each quarter based on a reasonable estimate of your income and deductions so far this year. Your tax pro can assist you or the IRS has a worksheet to help you do the math.

TIMING OF PAYMENTS

Estimated taxes are due as income is earned, and the IRS sets quarterly deadlines for their collection. You can opt to send four payments per year following the IRS schedule, pay in smaller increments more frequently, or cover your estimated yearly liability in your first quarterly payment — just make sure you’re covering your tax liability for each quarter to avoid penalties.

AND IF YOU FORGET

The IRS will charge penalties if you don’t pay enough tax throughout the year. And it can charge you a penalty for late or inadequate payments even if you’re due a refund.

The calculations can get complicated quickly, so it’s a good idea to consult with your tax professional if you have questions.