Frequently Asked Questions

Will you save money leasing instead of buying? It depends on four things: (1) how good a deal you can strike with the dealership, (2) how many miles you put on a car, (3) how much wear and tear you put on a car, and (4) what the car will be used for.

To decide whether to lease or buy, compare the costs and other factors involved with both leasing and buying. Consider the following factors:

• Your initial costs
• Your ongoing costs
• Your final costs and option rights
• Whether you will be able to deduct any of the costs of the car because it will be used in a business
• Whether having an ownership interest in the car is of overriding importance

First, decide on the size and type of car you want, and then decide what options you want (e.g., automatic, air conditioning, anti-lock brakes).

Second, find out what the car dealer is paying for the car(s) you’re interested in. This is known as the dealer invoice cost. this is important because the difference between the invoice price and the sticker price is the amount that can be negotiated.

There are two different ways to go about getting this information. The first (and best) way is to use an auto pricing service provided by a consumer group or an auto magazine such as Consumer Reports New Car Price Service. This service gives you a complete run-down of the invoice price and the sticker price, adjusted for various options, as well as any rebates or factory incentives. And it tells you how to use the information in negotiating your new car’s price. In addition, using an auto pricing service provides you with the most up-to-date information. The second way is to use pricing guides found on the Internet, such as Edmund’s New Car Prices.

If you have a car to trade-in, you’ll want to find out what it’s worth, too. You can do this by looking up your used car in the N.A.D.A Official Used Car Guide, available online (www.nadaguides.com) or at the library.

The next step is to begin negotiating with car dealers. Now that you know the invoice price, use that information to bargain for the lowest possible markup over the dealer’s cost.

Generally, $300 to $500 over the dealer’s cost is a reasonable mark-up, unless the car you want is either hard to get or an extremely popular, exotic or sporty model.

Resist any attempts by dealerships to sell you undercoating, rust-proofing, or other extras. Depending on the repair history of your model, however, you might want to invest in the extended warranty.

Remember that you are not only shopping for a car; you are choosing a dealer, with whom you will have a long-term relationship as you’ll bring your car in for servicing. So if you don’t like the dealership, go elsewhere.

As far as timing of purchase, the last Saturday of September, October, or December is generally a good time to get a good bargain on a car because sales managers are scrambling to meet their quotas for month and year-end.

Find out about financing alternatives before you begin shopping for a car. If you know what banks are charging, you will be prepared when the dealer talks about financing.

Here are some of the main points you’ll want to get across during your negotiations:

• You know the exact model you want, and which options you want.
• You are comparison shopping, and will obtain price quotes from other dealers.
• You will not discuss financing or trade-ins until the dealer has made you an offer (do not mention a trade-in until you have finished negotiating the price of your car).
• You know how much the car cost the dealer.

Finally, even if you get what sounds like a good price, go to other dealers to get quotes.

Similar to a loan, the monthly lease payment depends on the lease terms, the initial “purchase price” of the vehicle, and the interest rate. Unlike a loan, another important factor is the “lease-end” or “residual” value. This is the expected value of the car at the end of the lease term.

In a lease you are effectively paying for the difference between initial purchase price and residual value. You should negotiate the best possible (i.e. lowest) purchase price because this will lower your cost of leasing. If it is a closed-end lease and you do not intend to purchase the car at the end of the lease term, you should also try to negotiate a higher residual value.

If you walk into a dealership and ask to lease a car, they will often try to base the lease on the Manufacturer’s Suggested Retail Price (MSRP). You would never pay this sticker price to purchase a car for cash, so you should not do so in a lease situation.

The first step is to negotiate the lowest possible price on the vehicle and then negotiate the lease terms. For example, assume a Lexus sedan has an MSRP of $36,955 (and the lease provides for a term of 36 months, an implicit interest rate of 6.67% and a residual value of $25,895). Based upon this MSRP, the monthly lease payment would be $481.50, excluding sales/use tax, licenses, etc.

The invoice (dealer) cost on the same vehicle is $32,469. If you negotiated a price between MSRP and invoice, say $34,750; the lease payment would be reduced to $416.00.

There are two types of lease arrangements: closed-end (“walk-away”) and open-end (finance). Here’s how they work:

Closed-End: The Dealer Bears the Risk of Depreciated Value

When a closed-end lease is up, you bring the car back to the dealership and “walk away.” You must return the car with only normal wear and tear and with less than the mileage limit specified in your lease. Since the dealer is bearing the risk that the value of the car at the end of the lease will go down, your monthly payment is higher than with an open-end lease.

Open-End: You Bear the Risk of Depreciated Value

With the open-end lease the customer bears the risk that the car will have a certain value (called the “estimated residual value”) at the end of the lease. The monthly payment is lower because of this risk.

When you return the car at the end of the lease, the dealer will have the car appraised. If the car’s appraised value is at least equal to the estimated residual value in the agreement, you won’t need to pay anything at the end of the lease term. Under some contracts, you can even receive a refund if the appraised value is higher than the residual value stated in the contract. If the appraised value is lower than the residual value, however, you may have to pay all or part of the difference.

In deciding whether to lease or buy, find out what your total initial costs will be. This is part of the total dollar amount you will arrive at to compare with the cost of buying.

“Initial costs” are the down payment you must come up with when you lease a car. They include the security deposit, the first and last lease payments, the “capitalized cost reductions,” the sales taxes, title fees, license fees, and insurance. With a lease, the initial costs usually total less than the down payment needed to buy a car. Further, all initial costs are subject to negotiation during your bargaining with the dealer.

The Federal Consumer Leasing Act requires the Lessor to disclose all up-front, continuing and final costs in a standard, easy-to-read format.

Here is a list of questions you may want to ask the dealer before you enter into a car lease (you’ll know some of the answers):

• What kinds of leases are available and what are the differences? We explained the two main types of leases earlier, but dealers may have variations.
• What are the initial costs of leasing the vehicle?
• Are there any ongoing costs associated with leasing?
• Does a trade-in decrease initial or ongoing costs?
• What happens if I exceed the mileage specified in my lease?
• How will my mileage allowance be enforced if I take an early termination or a purchase option?
• Can I sublease if I fall behind in my payments or want to stop leasing?
• What happens if I want to terminate my lease before the agreement is up?

Look for a “premature termination” clause, which provides for termination prior to the end of the lease term.

• What are my options at the end of my lease?
• What costs and charges can I expect to pay at the end of the lease?

The Lessor is allowed to keep the security deposit if you owe money at the end of your lease or if you missed a monthly payment. The security deposit can also be used by the dealer to cover damage to the car or mileage in excess of the limit specified in the lease. If you do not owe any money on the lease at the end of the term, then your security deposit is returned to you.

The Consumer Leasing Act (CLA) limits how much the dealer can collect at the end of the lease period. The CLA says dealers cannot collect more than three times the average monthly payment. However, the dealer can collect a higher amount in the following circumstances:

• The vehicle has unreasonable wear and tear, or miles greater than specified in the lease
• You agreed to pay a greater amount than specified in the original contract; or
• The Lessor wins a lawsuit asking for a greater amount.

The dealer also has the option of selling the car at the end of the lease term. If the car is sold for less than the residual value stated in your leasing contract, you could be obligated to pay as much as three monthly payments to make up the difference.

Although dealers will generally not risk the goodwill of their customers and sell leased cars for less than the residual value just to move the car quickly, you may want to negotiate to include the right to approve the final sales price of the leased vehicle as part of your lease agreement.

Here are a few other things you should know:

• If you stay under the mileage limit, you don’t get a refund.
• If you buy a car at the end of a closed-end lease and you go over your mileage allowance, you probably won’t have to pay for excess mileage.

The Consumer Leasing Act requires dealers to disclose the total number of payments, the amount of each payment, the total amount of all payments, and the due date or schedule of payments. There is usually a penalty for late payment, which the Lessor must also disclose to you.

Maintenance is part of the lease and specifies whether the dealer assumes the maintenance expenses or the customer (you) assumes these expenses. If the dealer is to provide repair and maintenance, you will have to bring the car to the dealership in accordance with the manufacturer’s suggested schedule in order to keep the warranty coverage. Even if you have to pay for repair and scheduled maintenance, you usually have to observe the manufacturer’s scheduled maintenance in order not to jeopardize warranty coverage.

Final costs include:

Excess mileage charges

Mileage limitations usually occur with a closed-end lease. If you have gone over the allowable mileage at the end of your lease, you will have to pay a fee.

Consider carefully whether the mileage allowance is enough. Make some calculations of the miles you have driven per week, month, and year to find out whether the mileage allowance is sufficient.

Be aware that the low-mileage lease deals currently popular in certain areas offer mileage limits that are insufficient for many people. If you think you need more than the allowable mileage, negotiate a larger mileage allowance in your lease.

If you buy a car at the end of a closed-end lease and you go over your mileage allowance, you probably won’t have to pay for excess mileage.

If you stay under the mileage limit, you don’t get a refund.

With an open-end lease, although there is no penalty, if you exceed the mileage limit the appraisal value at the end of the lease term will usually be lower.

Default fees

These cover any payments or security deposits that the dealer does not receive from you and legal fees and costs the dealer incurs to repossess the car.

Excessive wear and tear charges

You’ll have to pay charges for excessive wear and tear when you return the car at the end of the lease unless the contract reads otherwise. The dealer must tell you in writing the specific definition of excessive wear and tear. Generally, it means anything beyond normal usage (mechanical or physical).

Disposition charges

These are the costs of cleaning the car, giving it a tune-up, and doing final maintenance. If the agreement does not state otherwise, the dealer may pass these costs on to you.

Your lease may include the option to purchase the car at the end of the lease term. This option is usually found in open-end rather than closed-end leases. The dealer must tell you the estimated residual value of the car and the formula that will be used to determine your purchase price at the end of the lease.

If you think you might want to buy the car, be sure the purchase option is in your lease before you sign it; otherwise you’ll have to renegotiate later, at which time you may have less bargaining power.

If you terminate your lease after, say, 36 months on a 48-month lease, you will have to pay an extra charge, based on the difference between the residual value of the car at that time and the estimated residual value at the end of the lease term (stated in the contract). The difference between these two may be great. In most lease agreements, you must keep the car at least 12 months. Before you sign the contract the dealer must tell you whether you can terminate early and what the cost is.

This is similar to a down payment. The dealer may ask you to put a certain amount of money down before leasing. The amount of the capitalized cost reduction varies with the business custom prevalent in the geographic area and the credit rating of the customer. The larger the down payment is, the smaller the monthly payment under the lease is; however, most people who want to lease instead of buy don’t want to put down a large down payment, which is one of the major advantages of leasing.

Trading in your old car can reduce your down payment and/or your monthly payments.

When it comes to legal rights and being married vs. unmarried, there are several major issues to consider. Specifically, unmarried couples do not automatically:

• Inherit each others’ property. Married couples who do not have a will have their state intestacy laws to back them up; the surviving spouse will inherit at least a fraction of the deceased spouse’s property under the law.
• Have the right to speak for each other in a medical crisis. If your life partner loses consciousness or capacity, someone will have to make the decision whether to go ahead with a medical procedure. That person should be you. But unless you have taken care of some legal paperwork, you may not have the right to do so.
• Have the right to manage each others’ finances in a crisis. A husband and wife who have jointly owned assets will generally be affected less by this problem than an unmarried couple.

The following steps are particularly important for couples who are not married:

Prepare a will. If both partners make out wills, the chances are that the intentions expressed in the wills will be followed after one partner dies. If there are no wills, the unmarried surviving partner will probably be left high and dry.

Consider owning property jointly. Joint ownership of property with right of survivorship is a way of ensuring that property will pass to the other joint owner on one joint owner’s death. Real property and personal property can be put into this form of ownership.

Prepare a durable power of attorney. Should you become incapacitated, the durable power of attorney will allow your partner to sign papers and checks for you and take care of other financial matters on his or her behalf.

Prepare a health care proxy. The health care proxy (sometimes called a “medical power of attorney”) allows your partner to speak on your behalf when it comes to making decisions about medical care, should you become incapacitated.

Prepare a living will. A living will is the best way to let the medical community know what your wishes are regarding artificial feeding and other life-prolonging measures.

The purpose of life insurance is to provide a source of income for your children, dependents, or whoever you choose as a beneficiary, in case of your death. Therefore, married couples typically need more life insurance than their single counterparts. If you have a spouse, child, parent, or some other individual who depends on your income, then you probably need life insurance. Here are some typical families that need life insurance:

Families or single parents with young children or other dependents. The younger your children, the more insurance you need. If both spouses earn income, then both spouses should be insured, with insurance amounts proportionate to salary amounts. If the family cannot afford to ensure both wage earners, the primary wage earner should be insured first, and the secondary wage earner should be insured later on. A less expensive term policy might be used to fill an insurance gap. If one spouse does not work outside the home, insurance should be purchased to cover the absence of the services being provided by that spouse (child care, housekeeping, and bookkeeping). However, if funds are limited, insurance on the non-wage earner should be secondary to insurance on the life of the wage earner.

Adults with no children or other dependents. If your spouse could live comfortably without your income, then you will need less insurance than the people in situation (1). However, you will still need some life insurance. At a minimum, you will want to provide for burial expenses, for paying off whatever debts you have incurred, and for providing an orderly transition for the surviving spouse. If your spouse would undergo financial hardship without your income, or if you do not have adequate savings, you may need to purchase more insurance. The amount will depend on your salary level and that of your spouse, on the amount of savings you have, and on the amount of debt you both have.

Single adults with no dependents. You will need only enough insurance to cover burial expenses and debts, unless you want to use insurance for estate planning purposes.

Children. Children generally need only enough life insurance to pay burial expenses and medical debts. In some cases, a life insurance policy might be used as a long-term savings vehicle.

You should notify all organizations with which you previously corresponded with your maiden name. The following is good list to start with:

• The Social Security Administration
• Driver’s license bureau
• Auto license bureau
• Passport office
• Employer
• Voter’s registration office
• School alumni offices
• Investment and bank accounts
• Insurance agents
• Retirement accounts
• Credit cards and loans
• Subscriptions
• Club memberships
• Post Office

Absolutely. Your will should be updated often, especially when such a significant life event occurs. Otherwise, your spouse and other intended beneficiaries may not get what you intended upon your death.

Once you are married you are entitled to file a joint income tax return. While this simplifies the filing process, you may find your tax bill either higher or lower than if each of you had remained single. Where it’s higher it’s because when you file jointly more of your income is taxed in the higher tax brackets. This is frequently referred to as the “marriage tax penalty.” Tax law changes in the form of marriage penalty relief were made permanent by the American Taxpayer Relief Act of 2012, and remained in place under the Tax Cuts and Jobs Act of 2017 with the exception of married taxpayers in the highest tax bracket.

You cannot avoid the marriage penalty by filing separate returns after you’re married. In fact filing as “married filing separately” can actually increase your taxes. Consult your tax advisor if you have questions about the best filing status for your situation.

Under a joint IRS and U.S. Department of the Treasury ruling issued in 2013, same-sex couples, legally married in jurisdictions that recognize their marriages, are treated as married for federal tax purposes, including income and gift and estate taxes. The ruling applies regardless of whether the couple lives in a jurisdiction that recognizes same-sex marriage or a jurisdiction that does not recognize same-sex marriage.

In addition, the ruling applies to all federal tax provisions where marriage is a factor, including filing status, claiming personal and dependency exemptions, taking the standard deduction, employee benefits, contributing to an IRA and claiming the earned income tax credit or child tax credit.

Any same-sex marriage legally entered into in one of the 50 states, the District of Columbia, a U.S. territory or a foreign country is covered by the ruling. However, the ruling does not apply to registered domestic partnerships, civil unions or similar formal relationships recognized under state law.

There are several ways of owning property after marriage, but keep in mind that they may vary from state to state. Here are the most common:

Sole Tenancy. Ownership by one individual. At death the property passes according to your will.

Joint Tenancy, with right of survivorship. Equal ownership by two or more people. At death, property passes to the joint owner’s. This is an effective way of avoiding probate.

Tenancy in Common. Joint ownership of property without the right of survivorship. At death your share of the property passes according to your will.

Tenancy by the Entirety. Similar to Joint Tenancy, with right of survivorship. This is only available for spouses and prevents one spouse from disposing of the property without the others permission. Community Property. In some states, referred to as community property states, married people own property, assets, and income jointly; that is, there is equal ownership of property acquired during a marriage. Community property states are AZ, CA, ID, LA, NV, NM, TX, WA, and WI.

If you are considering divorce, it’s vital to plan for the dissolution of the financial partnership in your marriage. This means dividing the financial assets and liabilities you have accumulated during the years of marriage. Further, if children are involved, the future support given to the custodial parent must be planned for. The time you take to prepare and plan for eventualities will pay off later on.

Here is what you can do:

1. Make a list of all of your assets, joint or separate, including:

• The current balance in all bank accounts
• The value of any brokerage accounts
• The value of investments, including any IRAs
• Your residence(s)
• Your autos
• Your valuable antiques, jewelry, luxury items, collections, and furnishings

2. Make sure you have copies of the past two or three years’ tax returns. These will come in handy later.

3. Inventory your financial debts and obligations. This helps you to prepare in two ways:

• It will provide you with preliminary information for an eventual division of the property.
• It will help you to plan how the debts incurred in the marriage are to be paid off. Although the best way of dealing with joint debt, such as credit card debt, is to get it all paid off before the divorce, often this is not possible. Having a list of your debts will help you to come to some agreement as to how they will be paid off.

4. Make sure you know the exact amounts of salary and other income earned by both yourself and your spouse.

5. Find any papers relating to insurance-life, health, auto, and homeowner’s, as well as pension and other retirement benefits.

6. List all debts you both owe, separately or jointly. Include auto loans, mortgage, credit card debt, and any other liabilities.

If you are a spouse who has not worked outside the home lately, be sure to open a separate bank account in your own name and apply for a credit card in your own name. This will help you to establish credit after the divorce.

It is important to immediately cancel all joint accounts once you know you are going to obtain a divorce. Creditors have the right to seek payment from either party on a joint credit card or other credit account, no matter which party actually incurred the bill. If you allow your name to remain on joint accounts with your ex-spouse, you are also responsible for the bills.

Your divorce agreement may specify which one of you pays the bills. As far as the creditor is concerned, however, both you and your spouse remain responsible if the joint accounts remain open. The creditor will try to collect the bill from whoever it thinks may be able to pay, and at the same time report the late payments to the credit bureaus under both names. Your credit history could be damaged because of the cosigner’s irresponsibility.

Some credit contracts require that you immediately pay the outstanding balance in full if you close an account. If so, try to get the creditor to have the balance transferred to separate accounts.

If your spouse’s poor credit hurts your credit record, you may be able to separate yourself from your spouse’s information on your credit report. The Equal Credit Opportunity Act requires a creditor to take into account any information showing that the credit history being considered does not reflect your own.

If for instance, you can show that accounts you shared with your spouse were opened by him or her before your marriage and that he or she paid the bills, you may be able to convince the creditor that the harmful information relates to your spouse’s credit record, not yours. In practice, it is difficult to prove that the credit history under consideration doesn’t reflect your own, and you may have to be persistent.

If a woman divorces and changes her name on an account, lenders may review her application or credit file to see whether her qualifications alone meet their credit standards. They may ask her to reapply, but generally the account remains open.

Maintaining credit in your own name avoids this inconvenience. It can also make it easier to preserve your own, separate, credit history. Furthermore, should you need credit in an emergency, it will be available.

Do not use only your husband’s name, for example, Mrs. John Wilson for credit purposes.

Check your credit report if you haven’t done so recently. Make sure the accounts you share are being reported in your name as well as your spouse’s. If not, and you want to use your spouse’s credit history to build your own, write to the creditor and request the account be reported in both names. If there is any inaccurate or incomplete information in your file write to the credit bureau and ask them to correct it. The credit bureau must confirm the data within a reasonable time period, and let you know when they have corrected the mistake.

If you have been sharing your husband’s accounts, building a credit history in your name should be fairly easy. Contact a major credit bureau and request a copy of your file, then contact the issuers of the cards you share with your husband and ask them to report the accounts in your name as well.

The best way to plan for the legal issues that must be faced in a divorce such as child custody, division of property, and alimony or support payments, is to come to an agreement with your spouse. If you can do this, the time and money you will have to expend in coming up with a legal solution — either one worked out between the two attorneys or one worked out by a court — will be drastically reduced.

Here are some general tips for handling the legal aspects of a divorce:

• Get your own attorney if there are significant issues dealing with assets, child custody, or alimony.
• There are several ways to find a good matrimonial attorney including referrals from other professionals, referrals from trusted friends, or lists obtained from the American Academy of Matrimonial Lawyers.
• Make sure the divorce decree or agreement covers all types of insurance coverage-life, health, and auto.
• Be sure to change the beneficiaries on life insurance policies, IRA accounts, 401(k) plans, other retirement accounts, and pension plans.
• Don’t forget to update your will.

Those who have trouble arriving at an equitable agreement, but do not require the services of an attorney, might consider the use of a divorce mediator. This type of professional advertises in the section of the classifieds titled “Divorce Assistance”, or “Lawyer Alternatives.”

The laws governing the division of property between ex-spouses vary from state to state. You should also be aware that matrimonial judges have a great deal of latitude in applying those laws as well.

Here is a list of items you should be sure to take care of, regardless of whether you are represented by an attorney:

1. Gain an understanding of how your state’s laws on property division work.
2. If you owned property separately during the marriage, be sure you have the papers to prove that it’s been kept separate.
3. Be ready to document any non-financial contributions to the marriage, e.g., your support of a spouse while he or she attended school or your non-financial contributions to his or her financial success.
4. If you need alimony or child support, be ready to document your need for it.

If you have not worked outside the home during the marriage consider having the divorce decree provide for money for you to be trained or educated.

After divorce each individual will file their own tax return. However, there are several areas where transactions between former spouses can result in tax consequences. The most common areas are:

Child Support

Child support is not deductible by the payer and is not taxable to the recipient. A payment is considered to be child support if it is specifically designated as such in a divorce or separation agreement or if it is reduced by the occurrence of a contingency related to the child (such as attaining a certain age).

Alimony

Alimony is a payment made pursuant to a divorce decree other than child support or designated as something in the instrument as other than alimony. Similar treatment is accorded separate maintenance payments made pursuant to a separation agreement. In order to qualify, payments must also cease upon the death of the recipient and must not be front-loaded.

Starting in 2019, alimony as well as separate maintenance payments were repealed by the Tax Cuts and Jobs Act of 2017 and are no longer deductible by the payer spouse.

For tax year 2018 and those years preceding it, alimony is deductible by the payer and is taxable to the recipient.

Property Settlements

Property settlements are not taxable events when pursuant to divorce or separation. Transfers of assets between spouses in this event do not result in taxable income, deductions, gains or losses. The cost basis of the property carries over to the recipient spouse. Be careful in a divorce, your spouse may give you an equal share of property based upon fair market value, but with the lower basis. This can result in a higher taxable gain upon a sale of the asset.

Generally, when these plans are split up there is no taxable event if pursuant to a qualified domestic relations order or other court order in the case of an IRA. This is true, however, only if the assets remain in a retirement account or IRA. Once funds are distributed they will be taxed to the recipient. At the time of division, the payer does not receive a deduction and the recipient does not have taxable income.

Generally, no; however, fees paid specifically for income or estate tax advice pursuant to a divorce may be deductible. Also, fees made to determine the amount of alimony or to collect alimony can be deducted. These deductions would be miscellaneous itemized deductions subject to the two percent limitation.

For tax years 2018 through 2025, miscellaneous itemized deductions (Form 1040, Schedule A) have been eliminated due to tax reform (Tax Cuts and Jobs Act of 2017).

Generally, the custodial parent is entitled to the deduction. However, this is often negotiated in the divorce settlement. If the parents agree in writing, the non-custodial parent can take the deduction.

For tax years 2018 through 2025, the personal exemption as well as dependent exemptions is eliminated due to tax reform (Tax Cuts and Jobs Act of 2017). However, the dependent exemption deduction for noncustodial parents still exists for 2018-2025 (that is, it was not repealed) but is reduced to $0.

Here is a list of the papers that you will probably need:

• Certified copies of the death certificate (at least 10). You can purchase them through the funeral director or directly from the County Health Department.
• Copies of all insurance policies, which may be located in the deceased’s safe deposit box or among his or her personal belongings.
• Social Security numbers of the deceased, the spouse, and any dependent children.
• Military discharge papers, if the deceased was a veteran. If you cannot find a copy, write to The Department of Defense, National Personnel Record Center, 1 Archives Drive, St. Louis, MO 63138.
• Marriage Certificate, if the spouse of the deceased will be applying for benefits. Copies of marriage certificates are available at the Office of the County Clerk where the marriage license was issued.
• Birth Certificates of dependent children. Copies are available at either the State or the County Public Health offices where the child was born.
• The Will, which may be with the deceased’s lawyer.
• A complete list of all property including real estate, stocks, bonds, savings accounts and personal property of the deceased.

If the death is not unexpected, you should try to gather these papers in advance (other than the death certificate, of course) to lessen the strain at the time of death.

You should check with your financial advisor as to how you should handle the following assets of the deceased, but some general rules of thumb include:

• • Insurance Policies. You may need to change the beneficiaries of policies held by the spouse of the deceased. Moreover, if the spouse does not have any dependents, it might be wise to reduce the amount of life insurance coverage. Auto and home insurance may also need revision.
  • Automobiles. Check with your State DMV to see if the title of the deceased’s car needs to be changed.
  • Bank Accounts. If the deceased and his or her spouse had a joint bank account, title will automatically pass to the surviving spouse. Notify the bank to change its records to reflect this change in ownership. If a bank account was held only in the name of the deceased, that asset will have to go through probate (unless it’s a trust account).
  • Stocks and Bonds. To change title to stocks or bonds, check with the deceased’s broker.
  • Safe Deposit Box. In most states, you will need a court order to open a safe deposit box that is rented only the name of the deceased.

In most states, only the will and other materials pertaining to the death can be removed before the will has been probated.

• Credit Cards. Any credit cards exclusively in the name of the deceased should be canceled (and any payments due should be paid by the estate). As to credit cards in the names of both the deceased and his or her spouse, the surviving spouse should notify the credit card companies of the death and ask that the card should be reissued in the survivor’s name only.

You should update your own will if it provides that any of your property will pass to the deceased upon your death.

The best way to avoid overpaying for a funeral is to plan ahead. Further, it pays to know about the “Funeral Rule,” the regulation of the Federal Trade Commission (FTC) concerning funeral industry practices. The Funeral Rule provides that:

• The funeral provider must give you, over the phone, price and other readily available information that reasonably answers your questions.
• The funeral provider must give you (1) a general price list, (2) a disclosure of your important legal rights and (3) information about embalming, caskets for cremation, and required purchases.
• The funeral provider must disclose in writing any service fees for paying for goods or services on your behalf (such as flowers, obituary notices, pallbearers, and clergy honoraria). While some funeral providers charge you only their cost for these items, others add a service fee to their cost. The funeral provider must also inform you of any refunds, discounts, or rebates from the supplier of any such item.
• The funeral provider must disclose in writing your right to buy, and make available to you, an unfinished wood box (a type of casket) or an alternative container for a direct cremation.
• You do not have to purchase unwanted goods or services or pay any fees as a condition to obtaining those products and services you do want. In addition to the fee for the services of the funeral director and staff, you need pay only for those goods and services selected by you or required by state law.
• The funeral provider must give you an itemized statement of the total cost of the funeral goods and services you selected; this statement must disclose any legal, cemetery, or crematory requirements for you to purchase any specific funeral goods or services.
• The funeral provider is prohibited from telling you that a particular funeral item or service can indefinitely preserve the body of the deceased in the grave or claiming that funeral goods such as caskets or vaults will keep out water, dirt, or other gravesite substances.

If you have a problem concerning funeral matters, and cannot resolve it with the funeral director, contact your federal, state, or local consumer protection agencies, the Funeral Consumers Alliance, or the International Conference of Funeral Examining Boards.

The deceased is considered covered by Social Security if he or she paid into Social Security for at least 40 quarters. Check with your local Social Security office or call 800-772-1213 to determine if the deceased was eligible. If the deceased was eligible, there are two types of possible benefits.

One-Time Death Benefit

Social Security pays a death benefit toward burial expenses. Complete the necessary form at your local Social Security office, or ask the funeral director to complete the application and apply the payment directly to the funeral bill. This payment is made only to eligible spouses or to a child entitled to survivors benefits.

Survivors Benefits for a Spouse or Children.

If the spouse is age 60 or older, he or she will be eligible for benefits. The amount of the benefit received before age 65 will be less than the benefit due at age 65 or over. Disabled widows age 50 or older are eligible for benefits. The spouse of the deceased who is under the age of 60 but who cares for dependent children under the age of 16 or cares for disabled children may be eligible for benefits. The children of the deceased who are under the age 18 or are disabled may also be entitled to benefits.

Probate is the legal process of paying the deceased’s debts and distributing the estate to the rightful heirs. This process usually entails:

• The appointment of an individual by the court to act as “personal representative” or “executor” of the estate. This person is often named in the will. If there is no will, the court appoints a personal representative, usually the spouse.
• Proving that the will is valid.
• Informing creditors, heirs, and beneficiaries that the will is probated.
• Disposing of the estate by the personal representative in accordance with the will or state law.

The spouse or personal representative named in the will must file a petition with the court after the death. There is a fee for the probate process.

Depending on the size and complexity of the probable assets, probating a will may require legal assistance.

Assets that are jointly owned by the deceased and someone else are not subject to probate. Proceeds from a life insurance policy or Individual Retirement Account (IRA) that are paid directly to a beneficiary are also not subject to probate.

Here is a summary of the various taxes that may have to be paid on the death of a family member:

Federal Estate Tax. Amounts passing to a surviving spouse, and amounts passing to charity, are generally exempt from estate tax. Estate tax is generally only due on estates which, after reduction for what goes to spouse and charity, exceed the unified credit exemption equivalent, which in 2021 is $11,700,000 ($11,580,000 in 2020).

Contact the IRS for a Form 706, United States Estate (and Generation-Skipping Transfer) Tax Return, if you need to file an estate tax return. A federal estate tax return must be filed and taxes paid within nine months of the date of death absent extension.

State Estate and Inheritance Taxes. State laws vary. Many states impose estate taxes, which may apply in addition to federal estate taxes, or may apply even when federal estate taxes don’t. Some states impose inheritance taxes on individuals who receive inheritances, rather than on the estate.

Income Taxes. The federal and state income taxes of the deceased are due for the year of death. The taxes are due on the normal filing date of the following year unless an extension is requested. The spouse of the deceased may file a joint federal income tax return for the year of death. A spouse with a dependent child may file jointly for two additional years. IRS Publication 559, Survivors, Executors, and Administrators, may be helpful.

The disclaimer or generation-skipping transfer tax is a way for you to refuse all or part of property that would otherwise pass to you, via will, intestacy laws, or by operation of law. An effective disclaimer passes the property to the next beneficiary in line.

The fact that the property is treated as if it had passed directly from the decedent to the next-in-line beneficiary may save thousands of dollars in estate taxes. The provision for a disclaimer in a will and the wise use of a disclaimer allows intra-family asset shifting and income shifting for maximal use of the estate tax marital deduction, the unified credit, and the lower income tax brackets.

Disclaimers can also be used to provide for financial contingencies. For example, you can disclaim an interest if someone else is in need of the funds.

Yes, the surviving spouse can elect to file a joint return provided they did not remarry prior to the end of the tax year.

Generally, no. Proceeds of life insurance policies are not taxable income unless the recipient paid for the right to receive them. For example, if you purchased a policy as an investment.

Generally, yes. This is known as income in respect of a decedent. Since the deceased has not paid income tax on the distribution, the tax is owed by the recipient. If the value of the account was included in the decedent’s estate tax return, you may be entitled to a deduction for a portion of the estate taxes paid.

Assets held jointly with right of survivorship will transfer by law to the joint holder. Insurance policies or retirement accounts with a designated beneficiary will go to that beneficiary. Assets owned solely by the decedent will transfer according to state law. This is known as intestacy. These laws vary by state, but generally, give preference to the spouse and children.

First, go to the seller of the item. Second, contact the relevant consumer agency. Finally, if neither of these results in satisfaction, you can file a lawsuit or use arbitration.

Contacting the Seller

Before you take your complaint to the store or other entity that sold you the service or product:

1. Gather any evidence you may need, such as the receipt, a canceled check, photographs showing the problem, a warranty, a contract, or a bill of sale.
2. Figure out what your goal is. Do you want the product replaced? Do you want your money back? Do you merely want an apology?
3. Call the store or service provider and ask to make an appointment with the manager, customer service representative, or another appropriate person. Meet face to face with that individual and explain as succinctly as possible the nature of the problem and what you want to be done about it. If you talk on the phone, follow up with a letter, and make notes of the dates of your calls and to whom you spoke.
   

   If the product is covered by a warranty, it’s usually better to follow up with the manufacturer instead of the merchant.

4. If this doesn’t produce results, take your problem to a higher authority. This might be a supervisor or a corporate president. You should put your complaint in writing at this point if you haven’t already done so. Your letter should include your name, address, phone numbers, and account number (if relevant). If a product is involved, include the date and place of purchase, and the model and serial number. Briefly, state the problem with the product or service, and write about what you have done so far to resolve it. Finally, tell the letter recipient what you want done, and give him or her a deadline. Include copies of relevant documents (not originals), and keep a copy of your letter. Keep copies of anything you receive from the company.

Contacting an Agency

If you still haven’t achieved the result you wanted, look in the phone book for a consumer complaint agency, such as the state, county, or city consumer protection office, or the Better Business Bureau.

Or, you might want to go the trade association route. Some industry trade associations offer help in mediating disputes concerning their members.

If your complaint involves a bank, you might wish to contact the appropriate state banking regulator. Similarly, you might want to contact the state insurance regulator if an insurer is involved, the securities regulator for a securities problem, or the public utility commission for utility-related problems.

If the problem involves a state-licensed trade (e.g., a general contractor or a plumber), call the state licensing department.

If you bought a “lemon” used car, investigate your state’s lemon laws by contacting your state consumer protection agency.

If the problem involves mail order or mail fraud, contact your area postal inspector, who can be found in the U.S. government section of the phone book.

There may also be a local television news program hotline for resolving consumer complaints.

Call the agency first to find out what procedures it wants you to follow.

Filing a Lawsuit

When all else fails, you might want to file a court case–either a small claims case, if the amount of money involved is small enough (generally, under $5,000)–or a regular lawsuit. More often than not, simply contacting an attorney and having him or her write a letter to the merchant or service provider indicating that you intend to file a lawsuit will get you the result you are seeking. If a small claims case is involved, you generally won’t need to hire an attorney, but if the case doesn’t qualify for small claims, you’ll probably need to hire an attorney.

There are many ways to reduce your bank fees. Here are a few of them:

• Are there fees associated with your checking account? If so, then call your bank and find out what you can do to get free checking and free ATM usage. For example, you might need to keep a minimum balance in the account and use only ATMs at your own bank. You may want to ditch banks altogether and join a credit union, which typically charges less for banking services.
• Don’t keep too much money in a low-interest savings account. Find out how much money you’ll need access to in an emergency (generally three to six months’ worth of expenses) and keep only that amount in your savings account. The rest of your funds should be invested in the stocks and mutual funds or in the high-interest rate CD (Certificate of Deposit) you can find (check out Bankrate.com).
• If you still write checks don’t order them through your bank. Many check printers charge less for check orders than the printers used by banks.

Here are some ways to save on insurance of all types:

• Shop around for a life insurance policy. It pays to check prices on life insurance policies periodically because rates change frequently. Also, if you’ve quit smoking, you may be entitled to better rates after a few years.
• Take a look at your life insurance needs to see whether you even need a policy or are paying for too much coverage.
• Insure your home and autos with the same insurer. You may be able to get a break by doing this.
• Shop for auto insurance to try to get a lower rate.
• Install smoke detectors, burglar alarms, and sprinkler systems to save on homeowner’s insurance. Don’t forget to ask your insurance agent about other cost saving measures.
• Get rid of private mortgage insurance. Once you have enough equity in the home, ask your lender to cancel your private mortgage insurance.

Here are some thoughts to keep in mind when trying to cut utility costs:

• Your utility company or state may have a program that subsidizes making your home more energy-efficient. If not, there’s plenty of information out there about making your home more energy efficient such as caulking your windows and making sure your insulation’s “R” factor is correct for your location.
• Install CFLs (compact fluorescent lights) or LEDs (light-emitting diodes) instead of incandescent bulbs to save energy and money.
• Keep the thermostat at the lowest temperature comfortable in winter and the highest temperature comfortable in summer.

Consider the following options to help you reduce the cost of your mortgage:

• Paying down your mortgage. For most people, paying down a mortgage is an effective way of saving and increasing net worth. Decide that you will pay $100 or $200 per month-or more-in mortgage principal, and do it faithfully.
• Refinancing your mortgage. You may be able to save money by refinancing your mortgage., but you need to go through the calculations and see whether the reduction in your monthly payments would be worth the costs involved with refinancing. The general rule is that a reduction of at least two points will make it worthwhile to refinance if you intend to stay in the house for at least five years.

Today’s cost-cutting competition among land-line and mobile phone service providers offers a few opportunities for savings on your phone bills, such as:

• Shopping around to make sure you’re paying as little as possible for long-distance and mobile phone charges. Take the time to investigate which service provider will save you the most and switch if it is a better deal.
• Consider getting rid of your land-line phone altogether.
• Use e-mail or Skype to correspond with relatives and friends.

For tax years 2018 through 2025 interest on home equity loans is only deductible when the loan is used to buy, build or substantially improve the taxpayer’s home that secures the loan. Prior to 2018, many homeowners took out home equity loans. Unlike other consumer-related interest expenses (e.g., car loans and credit cards) interest on a home equity loan was deductible on your tax return.

You may be able to take an immediate Section 179 expense deduction of up to $1,050,000 for 2021 ($1,040,000 in 2020), for equipment purchased for use in your business, instead of writing it off over many years. There is a phaseout limit of $2,620,000 in 2021 ($2,590,000 in 2020). Additionally, self-employed individuals can deduct 100 percent of their health insurance premiums. You may also be able to establish a Keogh, SEP, or SIMPLE IRA plan and deduct your contributions (investments).

You sometimes may benefit from filing separately instead of jointly. Consider filing separately if you meet the following criteria:

• One spouse has large medical expenses, miscellaneous itemized deductions, or casualty losses.
• The spouses’ incomes are about equal.

Separate filing may benefit such couples because the adjusted gross income “floors” for taking the listed deductions will be computed separately.

In 2021 (as in 2020), medical and dental expenses are deductible to the extent they exceed 7.5 percent of your adjusted gross income or AGI. If your employer offers a Flexible Spending Account (FSA), Health Savings Account, or cafeteria plan, these plans permit you to redirect a portion of your salary to pay these types of expenses with pre-tax dollars.

If you’re planning to make a charitable gift, it generally makes more sense to give appreciated long-term capital assets to the charity, instead of selling the assets and giving the charity the after-tax proceeds. Donating the assets instead of the cash avoids capital gains tax on the sale, and you can obtain a tax deduction for the full fair-market value of the property.

If you also have an investment on which you have an accumulated loss, it may be advantageous to sell it prior to year-end. Capital gains losses are deductible up to the amount of your capital gains plus $3,00 ($1,500 for married filing separately). If you are planning on selling an investment on which you have an accumulated gain, it may be best to wait until after the end of the year to defer payment of the taxes for another year (subject to estimated tax requirements).

For growth stocks you hold for the long term, you pay no tax on the appreciation until you sell them. No capital gains tax is imposed on appreciation at your death.

Interest on state or local bonds (“municipals”) is generally exempt from federal income tax and from tax by the issuing state or locality. For that reason, interest paid on such bonds is somewhat less than that paid on commercial bonds of comparable quality. However, for individuals in higher brackets, the interest from municipals will often be greater than from higher paying commercial bonds after reduction for taxes.

For high-income taxpayers, who live in high-income-tax states, investing in Treasury bills, bonds, and notes can pay off in tax savings. The interest on Treasuries is exempt from state and local income tax.

Consider setting up and contributing as much as possible to a retirement plan. These are allowed even for a sideline or moonlighting business. Several types of plans are available: the Keogh plan, the SEP, and the SIMPLE IRA plan.

Through the use of tax-deferred retirement accounts you can invest some of the money you would have otherwise paid in taxes to increase the amount of your retirement fund. Many employers offer plans where you can elect to defer a portion of your salary and contribute it to a tax-deferred retirement account. For most companies, these are referred to as 401(k) plans. For many other employers, such as universities, a similar plan called a 403(b) is available.

Some employers match a portion of employee contributions to such plans. If this is available, you should structure your contributions to receive the maximum employer matching contribution.

If you are due a bonus at year-end, you may be able to defer receipt of these funds until January. This can defer the payment of taxes (other than the portion withheld) for another year. If you’re self-employed, defer sending invoices or bills to clients or customers until after the new year begins. Here, too, you can defer some of the tax, subject to estimated tax requirements.

You can achieve the same effect of short-term income deferral by accelerating deductions, for example, paying a state estimated tax installment in December instead of at the following January due date.

Most individuals are in a higher tax bracket in their working years than during retirement. Deferring income until retirement may result in paying taxes on that income at a lower rate. Deferral can also work in the short term if you expect to be in a lower bracket in the following year or if you can take advantage of lower long-term capital gains rates by holding an asset a little longer.

Keep detailed records of your income, expenses, and other information you report on your tax return. A good set of records can help you save money when you do your taxes and will be your trusty ally in case you are audited.

There are several types of records that you should keep. Most experts believe it’s wise to keep most types of records for at least seven years, and some you should keep indefinitely.

Keep records of all your current year income and deductible expenses. These are the records that an auditor will ask for if the IRS selects you for an audit.

Here’s a list of the kinds of tax records and receipts to keep that relate to your current year income and deductions:

• Income (wages, interest/dividends, etc.)
• Exemptions (cost of support)
• Medical expenses
• Taxes
• Interest
• Charitable contributions
• Child care
• Business expenses
• Professional and union dues
• Uniforms and job supplies
• Education, if it is deductible for income taxes
• Automobile, if you use your automobile for deductible activities, such as business or charity
• Travel, if you travel for business and are able to deduct the costs on your tax return

While you’re storing your current year’s income and expense records, be sure to keep your bank account and loan records too, even though you don’t report them on your tax return. If the IRS believes you’ve underreported your taxable income because your lifestyle appears to be more comfortable than your taxable income would allow, having these loan and bank records may be just the thing to save you.

Keep the records of your current year’s income and expenses for as long as you may be called upon to prove the income or deduction if you’re audited.

For federal tax purposes, this is generally three years from the date you file your return (or the date it’s due, if that’s later), or two years from the date you actually pay the tax that’s due, if the date you pay the tax is later than the due date. IRS requirements for record keeping are as follows:

• You owe additional tax and situations (2), (3), and (4), below, do not apply to you; keep records for 3 years.
• You do not report income that you should report, and it is more than 25 percent of the gross income shown on your return; keep records for 6 years.
• You file a fraudulent return; keep records indefinitely.
• You do not file a return; keep records indefinitely.
• You file a claim for credit or refund* after you file your return; keep records for 3 years from the date you filed your original return or 2 years from the date you paid the tax, whichever is later.
• You file a claim for a loss from worthless securities or bad debt deduction; keep records for 7 years.
• Keep all employment tax records for at least 4 years after the date that the tax becomes due or is paid, whichever is later.

Yes, keep your old tax returns.

One of the benefits of keeping your tax returns from year to year is that you can look at last year’s return while preparing this year’s. It’s a handy reference and reminds you of deductions you may have forgotten.

Another reason to keep your old tax returns is that there may be information in an old return that you need later.

Audits and your old tax returns

Here’s a reason to keep your old returns that may surprise you. If the IRS calls you in for an audit, the examiner will more than likely ask you to bring your tax returns for the last few years. You’d think the IRS would have them handy, but that’s not the way it works. More than likely, your old returns are stored in a computer, in a storage area, or on microfilm somewhere. Usually, your IRS auditor has just a report detailing the reason the computer picked your return for the audit. So having your old returns allows you to easily comply with your auditor’s request.

How long should I keep my old tax returns?

You may want to keep your old returns forever, especially if they contain information such as the tax basis of your house. Probably, though, keeping them for the previous three or four years is sufficient.

If you throw out an old return that you find you need, you can get a copy of your most recent returns (usually the last six years) from the IRS. Ask the IRS to send you Form 4506, Request for Copy or Transcript of Tax Form. When you complete the form, send it, with the required small fee, to the IRS Service Center where you filed your return.

You need to keep some other types of tax records and receipts because they tell you how much you paid for something that you may later sell.

Keep the following types of records:

• Records of capital assets, such as coin and antique collections, jewelry, stocks, and bonds.
• Records regarding the purchase and improvements to your home.
• Records regarding the purchase, maintenance, and improvements to your rental or investment property.

How long should I keep these records? You need to keep these records as long as you own the item so you can prove the cost you use to figure your gain or loss when you sell the item.

There are other records you should keep, even though they don’t appear to have any use for your tax returns. Here are a few examples:

• Insurance policies, to show whether you were to be reimbursed in case you suffer a casualty or theft loss, have medical expenses, or have certain business losses.
• Records of major purchases, in case you suffer a casualty or theft loss, contribute something of value to a charity or sell it.
• Family records, such as marriage licenses, birth certificates, adoption papers, divorce agreements, in case you need to prove change in filing status or dependency exemption claims.
• Certain records that give a history of your health and any medical procedures, in case you need to prove that a certain medical expense was necessary.
• These categories are the most universal and should cover most of your recordkeeping needs. Everyone’s needs are unique, however, and there may be other records that are important to you. Skimming through our Tax Library Index might highlight other categories that apply to you.

Unless you own or operate your own business, partnership, or S corporation, recordkeeping does not have to be fancy.

Your recordkeeping system can be as casual as storing receipts in a box until the end of the year, then transferring the records, along with a copy of the tax return you file, to an envelope or file folder for longer storage.

To make it easy on yourself, you might want to separate your records and receipts into categories, and file them in labeled envelopes or folders. It’s also helpful to keep each year’s records separate and clearly labeled.

If you have your own business, or if you’re a partner in a partnership or an S corporation shareholder, you might find it valuable to hire a bookkeeper or accountant.

Do you contribute to charity?

If you donate to a charity, you must have receipts to prove your donation.

Starting in 2007, contributions in cash or by check aren’t deductible at all unless substantiated by one of the following:

1. A bank record that shows the name of the qualified organization, the date of the contribution, and the amount of the contribution. Bank records may include: a canceled check, a bank or credit union statement or a credit card statement.
2. A receipt (or letter or other written communication) from the qualified organization showing the name of the organization, the date of the contribution, and the amount of the contribution.
3. Payroll deduction records. The payroll records must include a pay stub, Form W-2 or other document furnished by the employer that shows the date and the amount of the contribution, and a pledge card or other document prepared by or for the qualified organization that shows the name of the organization.

Besides deducting your cash and non-cash charitable donations, you can also deduct your mileage to and from charity work. If you deduct mileage for your charitable efforts, keep detailed records of how you figured your deduction.

Are you employed by someone else?

If you work for someone else and spend your own money on company business, keep good records of your business expense receipts. You will need these records to either get a reimbursement from your employer or to prove business-related deductions that you take on your taxes.

Do you have income from tips?

If you make tips from your job, the hand of the IRS reaches here too, and if you are ever audited, the IRS will be interested in records of how much you made in tips.

Do you own property?

If you own property, be particularly careful to keep receipts or some other proof of all your expenses, especially for repairs and improvements.

Do you hire domestic workers?

It’s important to keep accurate information about who works for you, including nannies and housekeepers, when and where they worked for you, and how much you paid them for the work.

Do you have a business?

If you have a business, you must keep very careful records of all your business expenses, including vehicle mileage, entertainment expenses, and travel expenses.

If you have a business, just because you have cash in your pocket doesn’t mean you’re in the black on the books. Keeping up-to-date records of all transactions and costs will not only help you tax wise, it will tell you if your business is actually profitable.

Do you travel for your business?

If you travel for business, keep good receipts and logs of all your travel expenses, including those for meals and entertainment. You will need this information whether you work for yourself or for someone else.

A wide variety of tax relief is available, but you’ll need to choose which credit or deduction to claim or which savings plan to use based on your individual tax situation. You also can’t use two different kinds of relief for the same item. For instance, you can’t take the higher education credit and tuition fees deduction for the same student for the same year. You also can’t take the American Opportunity Tax Credit and the Lifetime Learning Credit for the same student for the same year. There may also be limits based on adjusted gross income.

Two tax credits are available for education costs – the American Opportunity Tax Credit and the Lifetime Learning Credit. These credits are available only to taxpayers with adjusted gross income below specified amounts, see Income Phase-Outs, below. Both credits were made permanent by the Protecting Americans from Tax Hikes Act of 2015 (PATH).

How Do These Credits Work?

The amount of the credit you can claim is either, $0, $2,000, or $4,000 and depends on (1) how much you pay for qualified tuition and other expenses for students and (2) your adjusted gross income (AGI) for the year.

You must report on Form 8863 the eligible student’s name and Social Security number on your return to claim the credit. You subtract the credits from your federal income tax. If the credit reduces your tax below zero, you cannot receive the excess as a refund. If you receive a refund of education costs for which you claimed a credit in a later year, you may have to repay (“recapture”) the credit.

If you file married-filing separately, you cannot claim these credits.

Which costs are eligible? Qualifying tuition and related expenses refer to tuition and fees, and course materials required for enrollment or attendance at an eligible education institution. They now include books, supplies, and equipment needed for a course of study whether or not the materials must be purchased from the educational institution as a condition of enrollment or attendance.

“Related” expenses do not include room and board, student activities, athletics (other than courses that are part of a degree program), insurance, equipment, transportation, or any personal, living, or family expenses. Student-activity fees are included in qualified education expenses only if the fees must be paid to the institution as a condition of enrollment or attendance. For expenses paid with borrowed funds, count the expenses when they are paid, not when borrowings are repaid.

If you pay qualified expenses for a school semester that begins in the first three months of the following year, you can use the prepaid amount in figuring your credit.

You pay $1,500 of tuition in December 2021 for the winter 2021-2022 semester, which begins in January 2022. You can use the $1,500 in figuring your 2021 credit. If you paid in January instead, you would take the credit on your 2022 return.

As future year-end tax planning, this rule gives you a choice of the year to take the credit for academic periods beginning in the first 3 months of the year; pay by December and take the credit this year; pay in January or later and take the credit next year.

Eligible students. You, your spouse, or an eligible dependent (someone for whom you can claim a dependency exemption, including children under age 24 who are full-time students) can be an eligible student for whom the credit can apply. If you claim the student as a dependent, qualifying expenses paid by the student are treated as paid by you, and for your credit purposes are added to expenses you paid. A person claimed as another person’s dependent can’t claim the credit. The student must be enrolled at an eligible education institution (any accredited public, non-profit or private post-secondary institution eligible to participate in student Department of Education aid programs) for at least one academic period (semester, trimester, etc.) during the year.

No “double-dipping.” The tax law says that you can’t claim both a credit and a deduction for the same higher education costs. It also says that if you pay education costs with a tax-free scholarship, Pell grant, or employer-provided educational assistance, you cannot claim a credit for those amounts.

Income limits. To claim the American Opportunity Tax Credit, for example, your modified adjusted gross income (MAGI) must not exceed $90,000 ($180,000 for joint filers). To claim the Lifetime Learning Credit, MAGI must not exceed $69,000 ($138,000 for joint filers). “Modified AGI” generally means your adjusted gross income. The “modifications” only come into play if you have income earned abroad.

The American Opportunity Tax Credit

The American Opportunity Tax Credit (AOTC) was made permanent starting with tax-year 2015. The maximum credit, available only for the first four years of post-secondary education, is $2,500. You can claim the credit for each eligible student you have for which the credit requirements are met.

Special qualification rules. In addition to being an eligible student, he or she:

• Must be enrolled in a program leading to a degree, certificate, or other recognized credential;
• Must be taking at least half of a normal full-time load of courses, for at least one semester or trimester beginning in the year for which the credit is claimed; and
• May not have any drug-related felony convictions.

Amount of credit. The maximum amount of the AOTC is $2,500. Generally, 40 percent of the AOTC is now a refundable credit for most taxpayers, which means that you can receive up to $1,000 even if you owe no taxes.

The Lifetime Learning Credit

You may be able to claim a Lifetime Learning Credit of up to $2,000 (20 percent of the first $10,000 of qualified expense) for eligible students (subject to reduction based on your AGI). Only one Lifetime Learning Credit can be taken per tax return, regardless of the number of students in the family.

• The credit can help pay for undergraduate, graduate and professional degree courses, including courses to improve job skills.
• For courses taken to acquire or improve job skills, there are no requirements as to course loads, so that even one or two courses can qualify.
• The number of years for which this credit can be claimed is not limited.

Choosing the Credit. You can’t claim both credits for the same person in the same year. But you can claim one credit for one or more family members and the other credit for expenses for one or more others in the same year – for example, an American Opportunity Tax Credit for your child and a Lifetime Learning Credit for yourself.

Electing Not to Take the Credit. There are situations in which the credit is not allowed, or not fully available, if some other education tax benefit is claimed – where the higher education expense deduction is claimed for the same student, see below, or where credit and tax exemption (under a Section 529 or 530 program) are claimed for the same expense. In that case, the taxpayer – or, more likely, the taxpayer’s tax adviser – will determine which tax rule offers the greater benefit and if it’s not the credit, elect not to take the credit.

For an academic period (quarter, semester, etc.) beginning in the first 3 months of a calendar year, you can pick which year to pay the expense and take the credit. That is, pay in December 2021 and take the credit in 2021 or pay in, say, February 2022 and take the credit in 2022.

Your family may be able to save tax by foregoing the education credit and taking an available exemption for program distributions instead.

Sometimes. Examples are for relief provided for Coverdell Education Savings Accounts (Section 530 programs), for Qualified Tuition Programs (Section 529), for withdrawals from traditional and Roth IRAs, and for student loans.

An education IRA differs from other IRAs in the following ways:

• No more than $2,000 a year can be contributed to any beneficiary of a single 530 account in any year and contributors are subject to income limits. Modified AGI cannot exceed $110,000 ($220,000 joint filers).
• Contributions aren’t deductible and excess contributions are subject to penalty.
• Withdrawals are tax-free to the extent used for qualified education expenses.
• Contributions can’t be made after the student reaches age 18, and the account generally must distribute all funds by the student’s age 30.

A 530 account may be used for primary and secondary education, including paying for room and board of children in private schools, and for computers and related materials whether or not away from home.

There can be a number of Section 530 accounts for any student. Various family members, such as grandparents, aunts, and uncles, and siblings–and persons outside the family–can contribute to separate accounts for a student.

The original student beneficiary for the Section 530 account can be changed to another family member, such as a sibling – for example, where the original beneficiary wins a scholarship or drops out.

Funds can be rolled over tax-free from one family member’s Section 530 account to another’s for example, to avoid distribution when the first family member reaches age 30.

The education tax credit (where applicable) can be waived in favor of tax-free treatment for Section 530 account distributions.

Also called Section 529 plans, these college savings plans have been established by almost every state and some private colleges. You invest now to cover future college or vocational school expenses, by contributing to a savings account or buying tuition credits redeemable in the future. Investments grow tax-free, and distributions to pay college expenses can also be tax-free. You may choose any state’s plan, regardless of where you live. Starting in 2018, funds from 529 plans can be used for up to $10,000 of qualified expenses related to K-12 education as well.

Even if a QTP is used to finance a student’s education, the student or the student’s parents still may be eligible to claim the American Opportunity Tax Credit or the Lifetime Learning Credit.

Section 530 plans limit investment to $2,000 a year per student; 529 plans allow a much larger investment. Section 530 plans allow a wide choice of investments; 529 investment choices are limited and conservative. Section 530 is a single nationwide program, whereas each 529 program is different. Both are available for higher education as well as primary and secondary education.

Yes. The 10 percent penalty on withdrawal under age 59-1/2 won’t apply, but ordinary income tax will apply to at least some of the withdrawal.

Yes, generally under the same terms as traditional IRAs. Also, ordinary income tax is somewhat less likely or may be smaller in amount, than with traditional IRAs.

You can choose to take a tax deduction rather than the college tuition tax credits noted above. A tax deduction is usually taken if income is too high for the tax credits. The tax deduction reduces your amount of income. The tax credits reduce the amount of tax you pay.

A $4,000 above the line deduction for qualified tuition expenses was extended through tax-year 2020, but repealed for 2021 and beyond under the Consolidated Appropriations Act (CAA). In 2020, the deduction was allowed if taxpayer’s (modified) adjusted gross income is $80,000 or less ($160,000 or less on a joint return).

A business expense deduction is also allowed without dollar limit, for education that serves the taxpayer’s business, including employment. The deduction is also allowed for student loan interest; however, a taxpayer may not take more than one deduction for the same item.

If it’s not part of a degree or certificate program, and not work-related, the limited deduction (up to $4,000 for qualified tuition and fees) was your only option; however, please note that this deduction expired at the end of 2020 and was repealed for tax years 2021 and beyond. It is possible that in some instances, a sideline interest might qualify for exclusion if paid for under an employer-provided education assistance program.

Since personal interest is generally non-deductible, deductions must meet several tests:

1. You must be the person liable on the debt and the loan must be for education only (not an open line of credit).
2. Your income can’t exceed $170,000 on a joint return or $85,000 for single filers. Married couples filing separately cannot take the deduction.
3. You can’t deduct if you’re claimed as a dependent.
4. Deduction ceiling is $2,500 (starting in tax year 2013).

For tax years prior to 2018, you could deduct interest form a home equity loan used to pay educational and other non-home improvement-related expenses, not as student loan interest. In this case, there was no income ceiling on your deduction, and certain other student loan limits didn’t apply. However, for tax years 2018 through 2025, taxpayers are no longer able to deduct interest on home equity loans taken out for non-home-related purposes.

Usually you’re taxed on the unpaid loan balance, but the tax can be waived if the debt is canceled if you worked:

• For a certain period of time,
• In certain professions, and
• For any broad class of employers.

Tax reform legislation passed in 2017 further stipulated that student loan debt forgiveness due to death or permanent and total disability is excluded from income.

Interest on redemption of Series EE bonds is tax-exempt if you redeem them in a year you have qualified education expenses. Exemption depends on the amount of your income in the year you redeem the bond.

For tax years prior to 2018, the answer was, yes, if it’s to maintain or improve skills in your present job, but no, if it was to meet minimum requirements of that job, or to qualify to enter a new business. Furthermore, employee’s deductions were subject to the two percent floor on miscellaneous itemized deductions. However, under the Tax Cuts and Jobs Act of 2017 (“tax reform”), for tax years 2018 through 2025, employee business-related deductions (including education expenses) are disallowed. That is, there are no miscellaneous deductions on Schedule A as there were previously. Self-employed individuals are still able to deduct qualifying educational expenses on Schedule C.

Maybe not. Starting in 2013, up to $5,250 can be tax-free. Exemption can apply to graduate level courses.