fbpx

Grade-FPlanning for your future is something that everyone should be doing. From the time you are done with college, you should have your eyes set on the goal: retirement. This means investing your money, building your business or career, and making sure that you’re setting aside enough to live comfortably in retirement. Even with all of the education out there, a recent study by Genworth found that about half of Americans are not prepared for retirement. Your accountant in Billings, Montana looks deeper.

 

 

Americans’ Financial Concerns

The Genworth study looked into a lot of different variables and polled thousands of individuals on their savings and investment habits, as well as their outlook on where they will be during retirement. The focus was obviously on finances, but there are other major areas of concern as well.

For instance, when asked what their major concerns were concerning retirement and getting older, 71% listed health as a major concern. And there is good reason for it. American healthcare is in a transitional period. With the Affordable Care Act being rolled out slowly, people living longer than ever, and all of the other flair around healthcare and health insurance, it is reasonable that people wonder: what will healthcare look like in 10, 20, or 30 years?

The second ranking area of major concern was finances. Study after study after study shows that Americans simply are not good savers. So when they finally realize, at age 40, they need to start saving for retirement, it is too late to do it comfortably. In fact, the study found that the average age to start saving is age 33, and the average balance of a retirement plan is a mere $7,360. Considering that most people said they need about $1.7 million to retire comfortably, at the average savings rate they will have about 1/3 of what they need by the time they hit age 65. Here’s some of the math behind retirement.

Start at age 21 and save $5,000 per year. Compounding at 7%, by the time you are age 65 you will have $1.48 million. Bump your savings up to $6,000 per year and that grows to $1.78 million.

Start at age 31 and save $5,000 per year and you will have just $840,000 by age 65.

Start saving at age 41, and if you only put aside $5,000 per year, you will have just $374,000 when you want to retire.

The study dives into a lot of different aspects of Americans and their retirement goals. If you want to read the full study, it can be found on the Genworth website. It has a lot of good action steps to help you get going. Also, if you want to do your own retirement savings calculations, check out the Moneychimp Compound Interest Calculator.

It All Starts with Planning

Your accountant in Billings, Montana is a great resource for all of your finance and planning needs. He can obviously get you the best tax refund possible, but he can also point you in the right direction of who can help you with investment, insurance, and other financial planning needs.

Practical Taxes is a full service accounting firm in Billings, Montana. For the next couple weeks we are focusing on getting tax returns completed, but we offer a whole host of other services. For those going into business, we do business consulting; for those with employees we do payroll and have online payroll services. Give us a call at 406-894-2050 to learn more.

budget-289x300Most of us know the importance of a budget. We know we should watch our spending, track where our dollars go, and we know that when we do it properly it is easier to save money. But too often budgets get ignored, and we forget about trying to keep track anyway. So how do we make a budget that we know we will actually keep? It’s a whole lot easier than you think; your accountant in Billings, Montana explains how it can be done.

 

 

 

 

 

Two Different Budget Systems

There are two primary forms of budgeting, each one has its merits, and each one will help different people.

The Cash Envelope Budgeting System – This is Dave Ramsey’s favorite way to budget. The reason is that it’s highly controlled, and it works well. It’s hard to cheat this budget, so for those who want more structure, this is the way to go.

First, you must understand all of your bills. There are some that fluctuate, like utilities, but for the most part they are all pretty set bills. These should be set up to come out of your account automatically. For those who want to use the envelope method, you withdraw the cash needed to pay each bill, and you put it in an envelope. So you will have a dozen envelopes each marked with different items such as “cell phone bill” or “gas bill.”

Next you set up your savings and investments to come out of your account automatically. This should be seen as another bill, and not as something you do if you have the money left over. If you need more structure, you can make a “savings and investment” envelope as well. But there is little need to put money in an envelope if it is immediately going to go into your savings or investment accounts.

Now for the fun stuff. Let’s suppose you like to buy new clothes. You have an envelope that says “new clothes” on it, and every month you put a portion of your budget into that envelope. If you are planning a vacation, you make a vacation envelope. If you like to eat out, you have an eating out envelope. And so on and so forth.

The idea behind the envelope system is that when the envelope is empty, then you can’t spend any more on yourself. So if you give yourself $100 to eat out each month, if you deplete your eating out envelope, you can’t rob other envelopes.

There is another method for those who don’t need quite so much structure.

The Automatic Budgeting System – Rather than take the time to build the envelope system, and rather than keep that much cash on hand, many people choose an automated system. This one is very simple.

You have a good idea of how much you will make every month. Schedule your bills, savings, and investments around your paydays. This means that when you are paid a few days later a portion of that money goes to paying for your mortgage, some to your utilities, some to your savings and investments, and others to wherever else you might owe money. This is all built to go on behind your back. You don’t have to think about it at all.

The way this system works is that shortly after everything has come out, you will have the leftovers in your checking account. Obviously you will want to keep a few hundred in there to make sure you have a buffer, but for the most part that is all spending money. You can spend it on new clothes, travel, eating out, or whatever else you want. All of your needs have been met, so this is what you use to play with.

The automatic budgeting system is much easier than playing with envelopes, it allows for more freedom, and it still takes care of all your living expenses.

Your Accountant in Billings, Montana Can Help

When it comes time to prepare your taxes, an accountant can often get you a bigger refund than if you try to go it alone. This means that your savings and investments have a bigger buffer early in the year, and you can dedicate more to other areas of your life.

Practical Taxes can help you prepare your taxes, consult with you on all of your business needs, set up payroll services for your business and much more. We are a full service accounting firm in Billings, Montana; if you have a question or want to set up an appointment to get started, just give us a call at 406-894-2050.

Taxes3-300x224There are two schools of thought out there. Some believe that using the absolute cheapest is the best way to go. They know that buying the cheapest product means that it will likely wear out faster than buying a more expensive version, but they also understand that a cheaper product also means they can afford a replacement easier. This works great when buying a physical product, but how does it look when you are hiring a service? Your accountant in Billings, Montana looks at the differences between a cut rate accountant and an affordably priced accountant.

 

 

A Cut Rate Accountant Churns and Burns

There is an old saying in the stock industry of “churn ‘em and burn ‘em.” Basically it is getting a client, selling them a stock, and then burning the client, or dumping them. The idea is to make a quick commission and then turn them loose. Likely they will be upset, but you made your money right?

A cut rate accountant will often churn and burn. They want to make some money off preparing your taxes, and then once you’re out the door, you are on your own.

An Affordable Accountant Cares About You

In contrast to the churn and burn mentality, an affordable accountant cares about you and what you have going on. Your affordable accountant in Billings, Montana knows that you work hard for your money, so they don’t want to charge you an arm and a leg to prepare your taxes.

Unlike the churn and burn mentality, your affordable accountant is here all year round. Long after your taxes have been prepared, you can still stop by and get answers because we are here all year round, not just during tax season.

A Cut Rate Accountant Makes Mistakes

When you hardly charge anything for tax preparation services, you have to hustle through each tax return. What this means is that the likelihood of mistakes skyrockets.

But once the client is out the door, once the client has signed to accept the tax return, once the client indicates they are satisfied, all of this doesn’t matter anymore. With a cut rate accountant, your risk of audit could be higher, and they aren’t going to back up the work that they did.

An Affordable Accountant Double Checks

Despite having low prices, an affordable accountant in Billings, Montana will double check all of his work. He wants to make sure he earns you as a client for life; not just as a client for this year.

So instead of rushing through your tax return, Mike will sit down and double check the numbers. This means your return is picture perfect, and you won’t have to worry as much about an audit. Even if it does happen, Mike will provide all necessary documents to show his calculations were correct.

Your Affordable Accountant in Billings, Montana

If you have yet to do your taxes, don’t worry! There is plenty of time before your return must be filed. Instead of going somewhere that will get your tax return prepared quickly and cheaply with no guarantee to accuracy, go to Practical Taxes where you get years of training, education, and experience; and it won’t cost you an arm and a leg.

Practical Taxes is a full service accounting firm in Billings, Montana. We are here all year round, and can answer any questions that pop up; no matter what season.   On top of tax preparation services we also offer business consulting, online payroll services, and much more. Call us today at406-894-2050 to schedule an appointment.

tax extensionTax season is starting to wind down. With just a few more weeks left to get you taxes prepared by the April 15th deadline, you may be wondering if you will have time to get the done. Fortunately, the IRS is lenient enough to let you file later. But you have to let them know that you will be filing later in the year. Today your accountant in Billings, Montana tells you what you need to know about filing an extension on your taxes.

 

 

 

Your Liability Doesn’t Get a Break

By filing an extension on your taxes, you are able to put off the actual filing until October 15th. However, that does not mean that any taxes that you owe get to be put off until October 15th.

If you believe that you will owe on your taxes, you need to estimate the amount that you will owe and send that payment by the April 15th deadline. But there are some caveats to this.

Pay Too Little – If the IRS thinks that you are paying too little, for instance if you try to send $25, they may deny your request for extension.

Don’t Pay Enough – If you don’t pay at least 90% of what you end up owing, you will have to pay interest on the remaining amount. For instance, you pay $1,000 but it turns out you owe $2,000, then you owe .5% interest on the extra $1,000 every month until you file (in this case about $5 per month).

How to File Your Tax Extension

If you know that you won’t be able to have an accountant in Billings, Montana help you file your taxes before the April 15th deadline, you can file for a tax extension on your own. Then at any point before October 15th you can enlist our the help  to finish things up. There are two ways to file that extension.

E-File with the IRS

The IRS provides some software if you meet the income limits. They allow you to file all of your taxes online yourself through their partner site E-File.com (not to be confused with the for-profit website efile.com).

On that site you can begin your tax return, and then select “file an extension” to automatically file your tax extension.

Paper File with the IRS

Some people prefer to simply fill out a paper form rather than create yet another online account. To do so you just have to print off the e-file application by following the link.

It’s as easy as filling in the boxes and then mailing it in.

Pay Your Tax Bill

Even if you have no idea what your tax liability will be, you need to pay something. If you made $100,000 last year, and you didn’t pay any estimated taxes throughout the year, you can expect your liability will be around $25,000. Try to get as close to that as possible.

Because there are some complications that arise, it is probably best to get your taxes started with your accountant in Billings, Montana. Have him file the tax extension. And then work with him in a couple of months to get everything finalized.

Your Accountant in Billings, Montana Can Help!

If you are struggling to get everything together for your taxes, don’t worry! Make an appointment  to get your taxes done, and you will get top of the line service that helps walk you through the steps to filing your tax extension and paying at least some of your liability so you don’t get hit with late payment penalties. Set up your appointment today by calling 406-894-2050 today.

Scam-300x225Wherever there is money, there are those who are looking to scam you out of that money. From telemarketing scams, to phishing scams, to everything in between, we always have to be aware of those who don’t have our best interest in mind.

While there is plenty of education out there, some people still get swindled. And with good reason: scammers are constantly making their pitch and their game better. So what happens if you get taken advantage of? Assuming you go through the proper methods and you can’t recover your lost cash, can you write off the losses on your taxes? Your accountant in Billings, Montana explains how it works.

 

Can I Write Off Lost Money?

The short answer is: yes. But there is a little more to it that just writing off the loss as a whole; there are some complicated calculations that go into it. Here’s the formula:

Fair Market Value minus Decreased in Market Value (or $100) minus 10% of your Income.

So how does that look? Let’s suppose you have an adjusted gross income of $50,000. You are swindled out of $10,000. Since the decrease in market value is 100% you use the $100 value. Therefore $10,000 – $100 – $5,000 = $4,900. You can write off $4,900 of your lost money.

Let’s look at this another way. Suppose you have a $10,000 item sitting in your driveway. The neighborhood kids come by and smash it all up leaving it with a scrap value of $2,000. Your insurance declines to cover it for whatever reason, so now you’re sitting on a loss. Fair Market Value ($10,000) – Decreased Market Value ($2,000) – 10% of your income ($5,000) leaves you with an amount of $3,000 that you can write off.

Now to take it a step further, in case you are audited you need to make sure that you have reported the theft or loss to the police. Without a police report, you have no proof that a loss actually occurred.

Have Your Accountant in Billings, Montana Figure it Out

Sound complicated? It is. The IRS likes to make things complicated to reduce fraud. Too many people would be claiming all sorts of losses if it were easier; such as “I dropped $5 while buying ice cream the other day.” You can read up on Topic 515 on the IRS website.

Instead of trying to figure it all out, just bring that information in with the rest of your taxes. As your accountant in Billings, Montana prepares your tax return, he can determine what, if any, of your loss can be written off your tax return.

Practical Taxes is a full service accounting firm in Billings, Montana. If you have already filed your tax return this year, that’s great! We offer so much more than just tax preparation including a whole lineup of business services like payroll and consulting. Call us today at 406-894-2050. to learn more.

Finances-300x225Credit cards can be a boon or a curse. On the one hand they are convenient and easy to use; they also provide us with reward points and airline miles that can be redeemed for goods and travel. On the other hand, however, a credit card can be a dangerous thing if you don’t use it properly. The interest rates are sky high, often over 25%, and if you don’t take care you can find yourself in a heap of debt. What does that actually look like? Your accountant in Billings, Montana does the math to show you why you want to avoid paying interest on your credit card.

 

 

First, Let’s Rack Up Credit Card Debt

You don’t have to have the cash now to pay for your goods. Instead, just put it on the credit card. Let’s suppose that we have a brand new card with a $5,000 limit. The APR is 19.99%; we will call it 20%.

With your shiny new card you decide to hit the mall and redo your wardrobe. $1,200 later you have all new clothes. Afterward, you head out on the town with your friends to show off that new wardrobe. Again the card comes out, and before you know it, you have spent $500 on drinks and food. The next day you decide that you need some car accessories, new furniture, and again treat everyone to eating out. Before you know it, you have maxed out your new card, and back to cash you go.

When the bill arrives, you see that you only need to pay $150 each month. Not a bad deal and you write a check.

Calculating the Payments

Credit cards have minimum payments that are generally 3% of the balance, or $25; whichever is more. As time goes on your $150 payment keeps dropping, so you keep reducing how much your wardrobe, furniture, and other goodies are costing.

How long do you suppose it will take to pay off that credit card when you pay just the minimums?

The answer is 15 years, 3 months. Long after the clothes fall apart, the furniture is stained and possibly broken, and you can’t even remember the food you ordered, you are still paying on your card.

How much do you suppose you paid back over the years?

Your $5,000 spending spree will cost you, after all of the interest is paid, $10,602. You end up paying more in interest charges than you did on the goods in the first place. Calculate your payments on CreditCards.com.

What happens to many people is that they decide to get another credit card. They then max that one out as well. With promotional rates, such as 0% interest for 12 months, they feel they can easily make the minimums and not have to worry about the interest. But after 12 months, when all of that interest is suddenly tacked onto the card, they are struggling to make even the minimum payments.

A Financially Healthier Alternative

Your accountant in Billings, Montana offers this as an alternative. If you want to have a credit card, you should only charge the necessities, the things you are paying for anyway. This means food, gas, insurance premiums if possible, utilities, and the like. Everything else, you pay in cash. This will keep your credit card bill to a minimum, and you can pay it off at the end of every month. Never carry a balance, never pay interest charges.

If you do have credit card debt, use your tax refund this year to knock it down and save yourself thousands of dollars over the next several years.

Practical Taxes

Practical Taxes is a full service accounting firm in Billings, Montana. If you need an accountant for payroll services, tax preparation, or business consulting, we can meet your needs! Give us a call at 406-894-2050 to find out what we can do for you!

real-estate-agent-billings-montana-300x226When it comes to buying a house, you have a lot of different choices. There are so many types of home loans out there, that it can be difficult to choose the right one. Now, the best thing to do is to speak with a loan officer, they are the ones that will figure out what type of loan fits your budget and needs perfectly. If you want to do a little research before you go in to talk with them, then keep reading as your accountant in Billings, Montana explains the varying home loans.

 

 

 

Do You Want a Fixed or Adjustable Rate Home Loan?

No matter what style of mortgage you choose, you will have to decide if you want a fixed rate mortgage, or an adjustable rate mortgage. Here’s the difference between the two.

Fixed Rate – A fixed rate mortgage is exactly that. When you sign on the dotted line, you are locked into an interest rate that won’t change until you refinance or pay it off. These are the most popular types of loans and they come almost always in 15 and 30 year options.

Adjustable Rate – An adjustable rate mortgage (ARM), on the other hand, has interest rates that adjust periodically. Generally speaking they are fixed for a few years, and then readjust after that. For instance, a 5/1 ARM is a mortgage that is fixed for the first 5 years, and then adjusts every year thereafter based on the current interest rates.

Your particular financial situation will determine which is best for you.

Do you Want a Government-Insured or a Conventional Home Loan?

After deciding term and interest structure, you need to decide which type of loan you want. There are a lot of qualifying factors, which if you don’t meet those, then you have to go with a conventional home loan.

Conventional Loan – Basically this is just a home loan. It’s not government insured in any way.

Government Insured FHA Loan – The Federal Housing Administration (FHA) is an insurance program through the Department of Housing and Urban Development (HUD). Most people will qualify for this type of loan, even if they are not first-time home buyers. These loans help people get into houses even when they can’t meet the 20% down rule. The caveat, unless you put 20% down, you have to pay that pesky Private Mortgage Insurance.

Government Insured VA Loan – The Department of Veterans Affairs (VA) wants to make sure they take care of those who have served our country. Since many people returning from deployment don’t have the savings needed to put money down on a house, the VA loan allows for financing of up to 100% of the loan.

Government Insured USDA/RHS Loan – The US Department of Agriculture (USDA) has teamed up with the Rural Housing Service (RHS) to help those who live in rural areas that need homes. These are catered to those who have a low or modest income and don’t qualify for a conventional loan. These eligibility requirements are strict.

Do You Want a Jumbo or a Conforming Home Loan?

The final choice in loans is dependent on how big of a loan you are looking for. While most people are not going to need a jumbo loan, there are quite a few out there.

Conforming Loan – A conforming loan is simply one that conforms to the guidelines of Fannie Mae or Freddie Mac. Most of the guidelines have to do with the size of the loan; for many areas, like here in Billings, Montana, the loan must be under $417,000 in order to be conforming. That number adjusts periodically to account for inflation, and it varies depending on where you live in the country.

Jumbo Loan – A jumbo loan is simply one that is bigger than the limits imposed by Fannie and Freddie. These types of loans represent a larger risk to the issuer, so those obtaining them need to prove themselves worthy. That means a good high income, a great credit score, and a sizeable down payment.

Who knew that getting a home loan would have so many options? Fortunately, most people don’t need to worry about the majority of this. In fact, after speaking with your mortgage lender, you will likely only need to decide if you want a 15 year fixed rate, 30 year fixed rate, or adjustable rate mortgage.

When you do get your home loan, keep in mind that you can write off the interest that you pay on it. For 2015, you can deduct up to $1,000,000 off your taxes. Most people will never come close to hitting that mark. As your accountant in Billings, Montana, I can help you determine exactly what can be deducted and what cannot.

Practical Taxes is a full service accounting firm here in Billings, Montana. We don’t do home loans or initiate mortgages, but we do know the tax implications behind them. If you have recently bought a house, and you are worried about your tax situation, then we are here to help.

Health-Savings-Account-244x300HSA Health Savings AccountLet’s face it, health costs are skyrocketing. They increase far faster than inflation, and to offset the costs, health insurance companies have to charge more or drastically increase deductibles. For those who have their own insurance, and they have to have a plan that has a high deductible, there are options. A Health Savings Account (HSA) might help you to pay for your health bills, and be able to deduct the costs off your insurance. Here is how they work.

 

 

 

Qualifying for an HSA

There is really only one requirement for you to be able to utilize an HSA: you have to have an individual insurance policy with a deductible of at least $1,300 (for a single person policy) or $2,600 (for a family policy). If you meet that requirement (for calendar year 2015, these number adjust every year), then you can open an HSA through your local bank and start funding it. There are some rules on how much you can put into your HSA though.

Your HSA will have an annual contribution limit of $3,350 for a single person policy, or $6,650 for a family plan. This means that every year you can put as much as you want into your HSA, as long as you don’t go over the contribution limit.

How to Use an HSA

The nice part about money in your HSA is that it never expires. There are some plans, like employer flex plans, that are use-it-or-lose-it. With those plans you have to use all of the money in your account, or it will expire at the end of the year (meaning you will essentially give the money back to your employer or insurance company that manages the plan).

In order to avoid a 20% penalty, you must use your HSA money for qualified medical expenses. These expenses include items such as prescription medication, hospital co-pays, hospital payments until your deductible is met, and a few others. What is not included, however, are insurance premiums.

Many people choose to use their HSA in this manner: They receive a bill from the hospital for $500. They go to their bank and transfer $500 into their HSA, and then write a check to the hospital out of their HSA account. That way they don’t have money tied up in the HSA account that isn’t being used for anything.

Tax Consequences of an HSA

Here’s the best part about the HSA. Any money that goes into your account is completely tax deductible. It helps to give you a little break on your taxes by providing just one more write-off. It’s money that was going to be spent anyway, so you might as well get to see a tax deduction from it.

HSA’s earn a small amount of interest. Any interest added to the HSA is tax-free. You never have to pay a dime in taxes on that money (unless it goes to something other than a qualified medical expense).

Even if you start a new job and no longer have the high deductible insurance policy, you can still use your HSA (you simply can’t add to it any longer).

Practical Taxes Can Help

Here at Practical Taxes we can help you get the taxes side of your HSA sorted out. It is up to you, however, to get the account set up. Your accountant in Billings, Montana can’t set up the HSA for you.

A+ does more than just taxes though! We are a full service accounting firm in Billings, Montana. We can help with payroll services, business consultation, and much more! Any of your accounting needs can be handled through us, and that frees up a lot of your time. Call 406-894-2050 to learn more.

Savings-Bond-300x214Without investing your money, there is very little chance that you will have enough for retirement. Social Security was only ever designed to replace about 60% of your income, and very few people want to work past age 70 or so. But investing often comes with negative tax consequences; you have to figure out cost basis, pay taxes on capital gains, and worry that rebalancing will trigger a taxable event. Fortunately there are a few ways to invest and eliminate most of these tax worries. This means less work every year for your accountant in Billings, Montana, and it means fewer headaches for you to come up with the cash to pay your tax bill.

 

Investments in a Roth IRA

This one comes first on the list because it is the best option out there for reducing your taxes. As long as you meet the income requirements for a Roth IRA, you can put in as much as $5,500 in 2015 (this number changes periodically to compensate for inflation). You pay taxes on the money now, but then after you turn age 59.5, you can pull the money out without worrying about taxes. Any gains or rebalancing in the account are done without tax worries.

Investments in a Traditional IRA

A traditional IRA is the next best option for reducing your taxable investments. The income requirements are similar to a Roth IRA, but they are a little different. With a traditional IRA you get to deduct the contributions off of your taxes the year you contribute, you can rebalance and not worry about the gains in the account until it comes time to withdraw the money. At that time anything that comes out of the account is taxed at your current tax rate.

Investments in an Annuity

Annuities are largely underused investment vehicles today. But they do have a great number of benefits, especially for those who make too much money to invest in an IRA. Any money going into an annuity is taxable, but once inside it can grow and be rebalanced without worry. When it comes time to annuitize, or withdraw, the money, you pay taxes based on how much of the account is gains and how much was cost basis.

Investments in Government Issues

The government, both local and federal governments, issues bonds and other investment products. Money that is used to buy these investments is taxable, but then the gains are usually free from taxes. Whether or not they are taxable at the time varies by product, so it is best to talk with your accountant in Billings, Montana to determine which product is best to suit your needs.

Investments in Real Estate

This is one that is often overlooked, and usually because it takes a bit more work than investing in securities. If you buy a house, and you live in it as your primary residence for at least two years, you can fix it up and sell it for far more than you paid for it. The great thing is that you get to keep all of those gains, and not worry about paying a dime in taxes (so long as you meet the requirements). Find a Realtor in Billings, Montana that knows the market if you think this is a challenge that you want to take on.

We knows all about the tax laws surrounding investments. If you want to grow your wealth, but you don’t want to mess around with taxes and all that goes with them, then one of these investment vehicles may work well for you. We can help you decide which one is right for you.

Practical Taxes is a full service accounting firm located here in Billings, Montana. We can help with tax needs, tax preparation, business consulting, online payroll services, and much more. Give us a call at 406-894-2050 to get learn more about how we can help you.

china lock horizontalThe estate tax, referred to many as the death tax, can be a burden for those who reach a certain net worth. While many see it as a good problem to have, others just find it cumbersome to deal with. Fortunately there are some estate planning tactics that you can use to minimize the impact that estate taxes will have on your legacy. Your accountant in Billings, Montana explains how an irrevocable Life Insurance Trust, or an ILIT, helps.

 

 

 

What is an ILIT?

Essentially the ILIT works to remove money from your estate in order to reduce its overall value. Because the ILIT would own the life insurance (almost always a second-to-die policy) on you and your spouse, the value of that insurance will no longer be included in your estate (or taxable when both of you should pass). Here is how that looks:

You and your spouse have a net worth of $10 million, $2 million is an insurance policy. There is a $5.43 million exemption for 2015, so anything over that amount is taxed at a rate of 40%. What this means is that if you and your spouse both died in 2015, your estate would have to come up with $1,828,000 within 9 months.

However, if you had the ILIT own that $2 million insurance policy, your estate would be considerably smaller. If you both died in 2015, your estate would be valued at just $8 million and the taxes due would total $1,028,000. Keeping your life insurance in an ILIT saves you $800,000.

Who Pays for the ILIT?

There are ways to even get around the taxes that pay the premiums on your insurance. Since the ILIT does not have an income or cash of its own, you have to pay the insurance premiums. Because you are giving away the insurance premiums, they are subject to gift taxes.

In 2015 you can give up to $14,000 to any individual or entity, and claim that on your gift tax exemption. If your insurance premiums are higher than that amount, you can set it up where you pay up to $14,000 and your spouse pays up to $14,000 as well. If you still need a higher exemption, you can dip into your $5 million lifetime exemption.

Estate taxes are one of those problems that many people would love to have. It means that you are successful, you have worked hard, and you planned well throughout your life. But without making sure that you have a plan to take care of those estate taxes, your heirs may be in trouble.

Practical Taxes is a full service accounting firm in Billings, Montana. We can help you determine your estate taxes, reduce your annual gift taxes, and conduct other strategic tax consultations. Call us at 406-894-2050 to learn more.