Got a personal finance question? Ask our experts
byNov 10th 2009 11:00AM
To help, WalletPop is launching an occasional series in which your personal financial questions will get answered by our experts. Leave your questions in the comments section below.
Question: As a single, self-employed mother of two, I need to buy life insurance. How much should I buy?
--Laurie W., 51, psychologist
Answer from Dr. Scott Testa, professor of business administration
Cabrini College, Philadelphia, PA
"You must first determine what your family needs are, should you die. That means coming up with a realistic figure that will pay off all your debts, your funeral expenses, and big-ticket items like college for your two children. It is always better to overestimate rather than underestimate. Then I would recommend shopping for term life rather than whole life, because it is generally easier to comparison shop and, for most people, is the best option.
"Look for reputable companies with good ratings from rating companies like A.M. Best, Moody's, Standard & Poor's or Fitch. You should look for the highest ratings by these organizations. Good websites for comparision shopping include insweb.com and Quotesmith.com.
"But before you schedule that meeting, make sure you're putting your best foot forward. That means getting in shape, quitting smoking, and doing what you must to be an ideal candidate. Life insurance companies will ask for your medical history and give you a physical. They will view you as less of a risk if you are healthy, because, invariably, you are less of a risk to die."
Question: My husband and I have two young children. We would like to set up their college funds. Is there any formula to use to determine how much to put in a 529 plan each year per dependent?
--Andrea Zaretsky, 37
Answer from: Jason Whitby, senior financial advisor
Investor Solutions, Inc., Coral Gables, FL
"There is a formula, but even better, there are online college savings calculators! Online calculators like Savingforcollege.com can provide you with all the required estimates and walk you through the process to attain costs as well as a monthly savings rate that is tailored to your specific situation. But before you actually open up the 529 plan, I'd strongly recommend that you figure out how much you can afford to save for college after you have everything else covered first. Meaning, you should have no consumer debt, have an emergency cash reserve and are already saving each month for your retirement. If all that is covered and cash flow still isn't a problem, I'd recommend you look at maximizing the state income tax deduction for funding a 529 plan. New York provides an above-the-line exclusion from income of $5,000 single and $10,000 joint. If cash flow starts getting tight, I'd recommend you go ahead and open a 529 plan for each and look to save at least $25 a month. I would recommend $25 per month to keep the hurdle low. Once you get the account set up and get used to contributing $25 a month, you can increase the monthly.
Question: I am expecting my first child next year. How can I, having paid the Alternative Minimum Tax for the past two years, reduce my AMT burden?
--Matt Carola, 35, an IT professional
Answer from Jay Brennan, CPA, CFP
Brennan Financial Group LLC, Princeton, NJ
"When confronted with the AMT, there is no one-size-fits-all approach to try to minimize its effect. You need to sit down and look at how the AMT would affect your taxes over a 2- to 3-year period. Things that will put you into the AMT are what we call adjustments, such as living in a high tax state like New York, and the number of personal exemptions or miscellaneous itemized deductions. For example, is there some flexibility to when you get paid? You may elect the income to come in this year because you already know you will pay higher taxes. Potentially next year, you will have a lower income, so you may not be in the AMT bracket. Of if you were to prepay some taxes or defer some taxes, is there a benefit? You may consider postponing or accelerating paying certain addback itemized deductions, such as nonqualified mortgage interest. Under the regular tax and AMT, you can deduct the interest on a mortgage up to $100,000 if it is used to buy, build or improve on your home. If you drew on it to pay for things like bills, cars or college, you can claim it on your regular taxes but not on the AMT.
"Another adjustment is for miscellaneous itemized deductions such as unreimbursed business expenses. When you calculate them, there is usually a nice benefit under regular taxes. With the AMT, there is no benefit. But if you don't make those deductions, your regular taxes will be higher while your AMT will be the same. So if you feel comfortable asking, you should ask your employer if he will pay for the expenses if you reduce your income by X amount."
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