State Income Tax: Depends on Where You Live or Work
Eight states have no state income tax. Of the 42 states with a state income tax (and the District of Columbia), the top marginal income tax rate ranges from 2.9% to 13.3%. Most states (and D.C.) with an income tax have multiple tax brackets with graduated rates; nine states have only a single tax rate.
Source: Tax Foundation, 2021
Four Reasons to Review Your Life Insurance Needs
You may have purchased life insurance years ago and never gave it a second thought. Or perhaps you don’t have life insurance at all and now you need it. When your life circumstances change, you have a fresh opportunity to make sure the people you love are protected.
When you were single, life insurance might have seemed like an unnecessary expense, but now someone else is depending on your income. If something happens to you, your spouse will likely need to rely on life insurance benefits to meet expenses and pay off debts.
The amount of life insurance coverage you need depends on your income, your debts and assets, your financial goals, and other personal factors. Even if you have some low-cost life insurance through work, this might not be enough. Buying life insurance coverage through a private insurer could help fill the gap.
When children arrive, revisiting your life insurance needs could help you protect your growing family’s financial security. Life insurance proceeds might help your family meet both their current obligations, such as a mortgage, child care, or car payments, and future expenses, including a child’s college education. Even if you already have life insurance, children are among the most important reasons to review your policy limits and beneficiary designations.
As you prepare to leave the workforce, reevaluate your need for life insurance. You might think that you can do without it if you’ve paid off all of your debts and feel financially secure. But if you’re like some retirees, your financial picture may not be so rosy, especially if you’re still saddled with mortgage payments, student loan bills, and other obligations. Life insurance protection could still be important if you haven’t accumulated sufficient assets to provide for your family, or you want to replace retirement income lost when you are no longer around.
Life insurance can also be an important tool to help you transfer wealth to the next generation. Or perhaps you’re looking for a way to pay your estate tax bill or leave something to charity. You may need to keep some of your life insurance in force or buy a different type of coverage.
A common concern is that life insurance coverage will end if your insurer finds out that your health has declined. But if you’ve been paying your premiums, changes to your health will not matter.
Consumers Understand the Value of Life Insurance
Source: 2021 Insurance Barometer Study, Life Happens and LIMRA
Some life insurance policies even offer accelerated (living) benefits that you can access in the event of a serious or long-term illness.
You may be able to buy additional life insurance if you need it, especially if you purchase group insurance through your employer during an open enrollment period. Purchasing an individual policy might be more difficult and more expensive, but check with your insurance representative to explore your options.
Of course, it’s also possible that your health has improved. For example, perhaps you’ve stopped smoking or lost a significant amount of weight. If so, you may now qualify for a lower premium.
The cost and availability of life insurance depend on factors such as age, health, and the type and amount of insurance purchased. Before implementing a strategy involving life insurance, it would be prudent to make sure that you are insurable. As with most financial decisions, there are expenses associated with the purchase of life insurance. Policies commonly have mortality and expense charges. Any guarantees are contingent on the financial strength and claims-paying ability of the issuing insurance company. Optional benefits are available for an additional cost and are subject to contractual terms, conditions, and limitations.
Grandparent 529 Plans Get a Boost Under New FAFSA Rules
529 plans are a favored way to save for college due to the tax benefits and other advantages they offer when funds are used to pay a beneficiary’s qualified college expenses. Up until now, the FAFSA (Free Application for Federal Student Aid) treated grandparent-owned 529 plans more harshly than parent-owned 529 plans. This will change thanks to the FAFSA Simplification Act that was enacted in December 2020. The new law streamlines the FAFSA and makes changes to the formula that’s used to calculate financial aid eligibility.
Current FAFSA Rules
Under current rules, parent-owned 529 plans are listed on the FAFSA as a parent asset. Parent assets are counted at a rate of 5.64%, which means 5.64% of the value of the 529 account is deemed available to pay for college. Later, when distributions are made to pay college expenses, the funds aren’t counted at all; the FAFSA ignores distributions from a parent 529 plan.
By contrast, grandparent-owned 529 plans do not need to be listed as an asset on the FAFSA. This sounds like a benefit. However, the catch is that any withdrawals from a grandparent-owned 529 plan are counted as untaxed student income in the following year and assessed at 50%. This can have a negative impact on federal financial aid eligibility.
Example: Ben is the beneficiary of two 529 plans: a parent-owned 529 plan with a value of $25,000 and a grandparent-owned 529 plan worth $50,000. In Year 1, Ben’s parents file the FAFSA. They must list their 529 account as a parent asset but do not need to list the grandparent 529 account. The FAFSA formula counts $1,410 of the parent 529 account as available for college costs ($25,000 x 5.64%). Ben’s parents then withdraw $10,000 from their account, and Ben’s grandparents withdraw $10,000 from their account to pay college costs in Year 1.
In Year 2, Ben’s parents file a renewal FAFSA. Again, they must list their 529 account as a parent asset. Let’s assume the value is now $15,000, so the formula will count $846 as available for college costs ($15,000 x 5.64%). In addition, Ben’s parents must also list the $10,000 distribution from the grandparent 529 account as untaxed student income, and the formula will count $5,000 as available for college costs ($10,000 x 50%). In general, the higher Ben’s available resources, the less financial need he is deemed to have.
New FAFSA Rules
Under the new FAFSA rules, grandparent-owned 529 plans still do not need to be listed as an asset, and distributions will no longer be counted as untaxed student income. In addition, the new FAFSA will no longer include a question asking about cash gifts from grandparents. This means that grandparents will be able to help with their grandchild’s college expenses (either with a 529 plan or with other funds) with no negative implications for federal financial aid.
However, there’s a caveat: Grandparent-owned 529 plans and cash gifts will likely continue to be counted by the CSS Profile, an additional aid form typically used by private colleges when distributing their own institutional aid. Even then it’s not one-size-fits-all — individual colleges can personalize the CSS Profile with their own questions, so the way they treat grandparent 529 plans can differ.
Source: ISS Market Intelligence, 529 Market Highlights, 2019 and 2020
When Does the New FAFSA Take Effect?
The new, simplified FAFSA opens on October 1, 2022, and will take effect for the 2023-2024 school year. However, grandparents can start taking advantage of the new 529 plan rules in 2021. That’s because 2021 is the “base year” for income purposes for the 2023-2024 FAFSA, and under the new FAFSA a student’s income will consist only of data reported on the student’s federal income tax return. Because any distributions taken in 2021 from a grandparent 529 account won’t be reported on the student’s 2021 tax return, they won’t need to be reported as student income on the 2023-2024 FAFSA.
Consider the investment objectives, risks, charges, and expenses associated with 529 plans before investing. This information and more is available in the plan’s official statement and applicable prospectuses, including details about investment options, underlying investments, and the investment company; read it carefully before investing. Also consider whether your state offers a 529 plan that provides residents with favorable state tax benefits and other benefits, such as financial aid, scholarship funds, and protection from creditors. As with other investments, there are generally fees and expenses associated with participation in a 529 plan. There is also the risk that the investments may lose money or not perform well enough to cover college costs as anticipated. For withdrawals not used for higher-education expenses, earnings may be subject to taxation as ordinary income and a 10% federal income tax penalty.
Bankruptcy Changes Throw a Lifeline to Sinking Small Businesses
The Small Business Reorganization Act of 2019 (SBRA) added a new Subchapter V to Chapter 11 of the Bankruptcy Code, which was intended to “streamline the process by which small business debtors reorganize and rehabilitate their financial affairs.” Prior to the SBRA, using a Chapter 11 bankruptcy to restructure took a long time and was often cost-prohibitive for small businesses, forcing many to liquidate instead.
Just weeks after the SBRA took effect in February 2020, Subchapter V eligibility was temporarily expanded by the Coronavirus Aid, Relief, and Economic Security (CARES) Act in a bid to help more businesses survive the pandemic. The debt limit to qualify as a small-business debtor was increased from $2,725,625 to $7,500,000 through March 27, 2021. At the last minute, Congress extended the higher debt limit once again through March 27, 2022.
Fewer Hurdles and Lower Costs
As always, filing for bankruptcy protection under Chapter 11 halts creditor collections and buys time for owners to renegotiate the terms of their debt, leases, and other contractual obligations. Subchapter V loosens many of the requirements that make the traditional process difficult and expensive for small businesses to navigate.
Debtors who elect to proceed under Subchapter V must file a Chapter 11 plan (consensual or nonconsensual) within 90 days of filing, reducing the amount of time spent in bankruptcy. Debtors don’t have to pay U.S. Trustee fees or file disclosure statements, creditors are not allowed to file competing plans, and certain committees have been eliminated — all of which helps to reduce the overall cost.
Forging a New Path
The Chapter 11 plan must include a brief history of the debtor’s business operations, a liquidation analysis, and projections that demonstrate the debtor’s ability to make plan payments. The debtor is required to contribute all net operating income (after expenses such as rent, payroll, and goods) to pay creditors for the next three to five years.
A specialized trustee is appointed to monitor the case and facilitate the confirmation of a viable reorganization plan — not to control the debtor’s assets or operations. While the emphasis is on the development of a consensual plan, the court can confirm a nonconsensual plan that it views as “fair and equitable” even if creditors don’t like it, and the owners can keep their equity and continue running the business. Still, creditors must be paid at least as much as they would in a Chapter 7 liquidation.
Bankruptcy may offer a fresh start, but there are many potential financial and legal consequences to consider. Be sure to consult a qualified legal professional.
IRS Circular 230 disclosure: To ensure compliance with requirements imposed by the IRS, we inform you that any tax advice contained in this communication (including any attachments) was not intended or written to be used, and cannot be used, for the purpose of (i) avoiding tax-related penalties under the Internal Revenue Code or (ii) promoting, marketing or recommending to another party any matter addressed herein.
Prepared by Broadridge Investor Communication Solutions, Inc. Copyright 2021