Dear Liz: I am unemployed and have put my job search on hold. I have enough savings in a diversified portfolio to last me for years if needed, but my adjusted gross income is low (mostly capital gains from gradual sales of assets). I think I may qualify for the Low Income Assistance Program for utilities and medical assistance, but I’m hesitant to apply. These programs are supposed to be for people in need, but it doesn’t seem appropriate for me to participate. Is there a legal reason why high-net-worth/low-income households cannot apply for assistance? Is it ethical?
Answer: If you meet the program’s income requirements and there are no asset limits that exclude participation, there is no legal reason not to participate.
However, if a program has finite resources, there may be ethical concerns about receiving help when others need it more.
But there’s no reason to ignore the tax credits that help reduce the cost of health insurance purchased through the Affordable Care Act exchanges. This program was intentionally designed to ensure that most Americans, not just those most in need, receive help paying their health insurance premiums.
Questions about what to do with the cash after a windfall?
Dear Liz: After selling my house and downsizing at age 84, I became cash-rich for the first time in my life. My goal now is not to grow my money significantly, but rather to avoid paying taxes on my investments, as with certificates of deposit. Are tax exempt municipal bonds the best option or what do you suggest?
Answer: Even if you’re in a high tax bracket, around 32% or higher, the low interest rates paid on municipal bonds can provide enough income to make purchasing municipal bonds worthwhile. If you’re in a lower tax bracket, the math doesn’t work out so well.
Also, unlike certificates of deposit, municipal bonds are not FDIC insured. Investing in bonds involves a certain degree of risk. Choosing a high-quality bond will minimize the chance of default, but if interest rates rise, the value of the bond may fall.
Consider using some of your cash to consult a trusted fee-only planner who can help you develop a strategy that reflects all aspects of your financial situation, not just taxes.
Your first paycheck means getting to know Uncle Sam.
Dear Liz: My child, who recently graduated, got a job and will be given a 1099 tax return for his income. I know he has to file his taxes differently and pay both state and federal income taxes, but will he also pay Social Security? For months (and probably years) Will it be used as a “credit” towards his lifelong Social Security payments?
Answer: The company pays your son as an independent contractor, not as an employee. That means he has to file his taxes as a self-employed person. Yes, he will pay into Social Security. And you’ll pay twice as much as an employee receiving a W2.
Typically, Social Security and Medicare taxes are split 50-50 between the employee and the employer. Both pay 7.65% of the employee’s wages, for a total of 15.3%. Self-employed people must pay half of both.
Since taxes are not withheld from your son’s income, he will likely need to make quarterly estimated tax payments to avoid penalties. A tax professional can help you set up these payments and suggest legitimate expenses that you can use to reduce your taxes.
Eliminate confusion about self-funding
Dear Liz: Your recent column about self-funding confused me. You mentioned that selling these funds could result in capital gains taxes. Isn’t it true that you can move your investments directly from one asset manager to another and not earn any capital gains as long as your funds remain invested?
Answer: If a fund can be moved from one investment company to another, the fund may not be a unique fund. For example, Schwab, Fidelity, Vanguard, and many other companies have created funds in their names, but these investments can also be bought and sold by other brokerages.
In contrast, proprietary funds typically lock customers into investments that cannot be transferred to another company. To withdraw funds, you will need to sell the Fund, which may result in tax charges. This is a significant drawback that investors should understand before putting money into this type of fund.
Liz Weston, a Certified Financial Planner®, is a personal finance columnist. Questions can be directed to 3940 Laurel Canyon, No. 238, Studio City, CA 91604 or by using the “Contact” form at asklizweston.com.
