Our weekly roundup of tax-related investment strategies and news your clients may be thinking about.
Pros and cons of cashing out life insurance policies
Beneficiaries of a life insurance policy will owe no federal tax on insurance payouts that they collect after the policyholder dies, according to this Fox Business article. Policyholders who have terminal illness may not also be required to pay any taxes for withdrawing up to 60% of the policy's value. Those who intend to designate their grandchildren as beneficiaries of their health insurance are advised to consult a tax professional, as the move could have a tax consequence thanks to the so-called generation-skipping transfer tax.
HSAs provide stability and solutions as health care changes
Owning an HSA can protect clients from the rising cost of health care and future changes that could translate to higher medical bills, according to this article on Kiplinger. HSAs are a good tax-saving tool, as they are funded with pre-tax dollars and help reduce taxable income. Clients can carry forward their HSA balance to the succeeding years and tap into the account to cover their Medicare supplement premiums and other health care when they reach the age of 65.
Think twice before using tax-deferred dollars to pay off a mortgage
Tapping into a 457(b) deferred compensation plan to pay off a home mortgage can be a bad idea, according to this Los Angeles Times article. Although paying off the debt could mean saving on mortgage interest, clients could lose the tax deduction on future payments. Tapping into a tax-deferred account could also trigger a liability, which means that making a big withdrawal could result in a substantial tax burden.
How much money can you gift tax-free?
Taxpayers can give up to $14,000 in cash gifts to each of their loved ones without incurring a penalty, thanks to the annual gift tax exclusion, according to this article on Motley Fool. They are also entitled to the lifetime exclusion, which is $5.49 million this year. This means that taxpayers who give away $100,000 to a loved one can expect their lifetime exclusion amount reduced by $85,000, which is the amount that exceeds their annual gift tax exclusion.
ETFs vs. ETNs: What investors need to know
Exchange-traded notes are not to be confused with ETFs, as these options have different tax implications, according to this article on Nasdaq. A lack of investor interest in ETNs could prompt liquidation that creates a tax event for investors. Compared with ETFS, ETNs become more tax-efficient if they hold MLPs and commodities.