Money Management

Who should own your life insurance policy?

Q My life insurance policy names our daughter as beneficiary, but I'm told the proceeds will be taxed as part of my estate if I die before 2010. Can I avoid that by transferring ownership of the policy to my wife?

A Yes, as long as you don't die within three years of transferring ownership. In that case, the policy would still be included in your taxable estate.

Moreover, you can't transfer ownership without giving your wife the right to change the beneficiary. If she doesn't exercise that right, the law considers that she has made a gift of the proceeds to your daughter. Your wife can claim the annual gift tax exclusion ($10,000 currently), but the balance of the policy proceeds will be taxed, unless it's covered by the $1 million exclusion that takes effect in 2002. If a large estate is involved, a life insurance trust may be a better option.

When you pay too much Social Security tax

Q Last year, I earned $60,000 from salaried employment and $40,000 from my private practice. After I filed my tax return for 2000, I realized that I'd paid too much Social Security tax, because my employer and I each withheld the full amount. My employer says he can't refund the excess; I'll have to file an amended return to claim it. Is he right?

A Yes. Although only $76,200 of your total earnings in 2000 was subject to Social Security tax, your employer was required to withhold tax on the entire $60,000 he paid you. To take that into account, fill out the long form of Schedule SE for 2000 (even if you used the short form on your original return). This will show the correct amount of self-employment tax. Subtract the figure from what you actually paid to determine the excess.

Attach this schedule to Form 1040X to claim your refund. If you deducted half your self-employment tax on your original return, as you were entitled to do, you'll have to make appropriate adjustments as instructed on Form 1040X.

Claiming a tax credit for education expenses

Q When my wife started a Web site design course early this year, she was told that we could claim a Lifetime Learning credit for the cost. Will the newly enacted tax law interfere with that?

A It will, and it won't. Beginning in 2002, the new law won't allow you to claim a Lifetime Learning credit if you also deduct certain higher-education expenses for the same student in a single year.

But there's no change in the eligibility rules for the credit. So if you (or your spouse or a dependent) take courses to improve or acquire job skills, you can claim an annual credit—up to $1,000—for 20 percent of the cost. However, every $1,000 of joint adjusted gross income above $80,000 reduces the credit by $50, so it's completely phased out at $100,000 AGI. In contrast, the AGI limit for the new education deduction effective next year will be $130,000 for couples.

What happens if you delay your first IRA withdrawal

QI turned 70 1/2 in June, so I'll have to begin making annual minimum withdrawals from my IRA. I'm told that I can postpone the first one until next April 1, but will I lose any benefit from the new IRA distribution rules if I do that?

A No. Whether you withdraw the money in 2001 or later, the required amount will be based on the IRA's value as of Dec. 31, 2000, divided by the appropriate factor from the new IRS life-expectancy table. Since you'll celebrate your 71st birthday in 2001, the divisor is 26.2.

You must take a second minimum distribution by the end of 2002, even if your first withdrawal falls in the same year. To calculate the second one, you'll divide the year-end 2001 IRA balance (minus any delayed withdrawal) by 25.3.

Edited by Lawrence Farber,
Contributing Writer

Do you have a money management question that may be stumping other doctors, too? Write: MMQA Editor, Medical Economics magazine, 5 Paragon Drive, Montvale, NJ 07645-1742, or send an e-mail to memoney@medec.com (please include your regular postal address). Sorry, but we're not able to answer readers individually.

Lawrence Farber. Money Management.

Medical Economics

2001;24:54.