Dear Liz: I am out of work and taking a pause on my job search. While I have plenty of savings in a diversified portfolio, enough to last many years if needed, my adjusted gross income is small (mostly capital gains from gradual sales of assets). I think I qualify for low-income assistance programs for utility bills and healthcare subsidies but I’m reluctant to apply. These programs are supposed to be for people in need and it doesn’t feel right for me to participate. Are there legal reasons why a high-wealth/low-income household can’t apply for assistance? Is it ethical?
Answer: If you meet the income requirements for a program — and there are no asset limits that would rule out your participation — then there’s no legal reason for you not to participate.
If the program’s resources are finite, though, you might well feel an ethical qualm about taking assistance that someone else needs more.
However, there’s no reason to pass up the tax credits that help reduce the cost of health insurance purchased through Affordable Care Act exchanges. The program was deliberately designed so that most Americans, not just those in the greatest need, could get help paying their health insurance premiums.
After a windfall, questions on what to do with the cash
Dear Liz: After selling my house and downsizing at age 84, I am cash rich for the first time in my life. My goal now is not so much to grow the money substantially, but to avoid paying taxes on my investments, as I would have to do with certificates of deposit. Are tax-free municipal bonds my best option, or what would you suggest?
Answer: If you’re in a high tax bracket — roughly 32% or higher — the lower interest rates paid on municipal bonds can still give you a good-enough return to make buying them worthwhile. If you’re in a low tax bracket, the math doesn’t work so well.
Also, municipal bonds aren’t covered by FDIC insurance the way a certificate of deposit would be. Investing in bonds involves some risk. The chances of default are minimal if you choose highly-rated bonds, but your bonds could lose value if interest rates rise.
Consider using some of your cash to consult a fiduciary, fee-only planner who can help you figure out a strategy that reflects all aspects of your financial situation, not just your tax bill.
A first paycheck means getting to know Uncle Sam
Dear Liz: My recently-graduated child got a job and he will be given a 1099 tax form for his earnings. I know he will have to file his taxes differently and will need to pay both state and federal income taxes, but will he also make payments toward Social Security? Will these months (and maybe years) go toward his lifetime “credits” of paying into Social Security?
Answer: The company is paying your son as an independent contractor rather than as an employee. That means he will need to file his taxes as someone who is self-employed. So yes, he’ll be paying into Social Security — and he’ll be doing so at twice the rate of employees who receive W2s.
Normally, Social Security and Medicare taxes are split between employees and employers. Both pay 7.65% of the employee’s wages, for a total of 15.3%. Self-employed workers must pay both halves.
Your son won’t have taxes withheld from his earnings, so he’ll likely need to make quarterly estimated tax payments to avoid penalties. A tax pro can help him set up these payments and suggest legitimate expenses he can use to reduce his tax bill.
Clearing up some confusion over those proprietary funds
Dear Liz: Your recent column about proprietary funds confused me. You mentioned that selling these funds can trigger capital gains tax. Is it not true we can move investments directly from one money manager to another and not take a capital gain as long as the funds remain invested?
Answer: If you can move a fund from one investment company to another, then it likely is not a proprietary fund. For example, Schwab, Fidelity, Vanguard and many other firms create funds that bear their names, but these investments can be bought and sold at other brokerages.
Proprietary funds, by contrast, typically lock customers into investments that can’t be transferred to another firm. To get your money out, you have to sell the fund, which can trigger a tax bill. This is a significant downside and one investors should understand before committing their money to this type of fund.
Liz Weston, Certified Financial Planner®, is a personal finance columnist. Questions may be sent to her at 3940 Laurel Canyon, No. 238, Studio City, CA 91604, or by using the “Contact” form at asklizweston.com.
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