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Liz Weston

Q&A: Are IRS quarterly payments mandatory?

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Dear Liz: I live totally on my investment income. I receive the majority of my income at the end of the year, mostly dividends from my brokerage account.

A couple of years ago, when talking to an IRS agent about another matter, I asked when I should make my estimated tax payment. I was told that I had to make the payments quarterly. This year, when I was talking to my accountant, she told me that I could make a lump-sum payment at the end of the year without incurring a penalty. Who is correct, the IRS agent or my accountant?

Answer: Ours is a pay-as-you-go system, and the IRS assumes that your income is received evenly throughout the year, says Mark Luscombe, principal analyst for Wolters Kluwer Tax & Accounting. Therefore, the agency typically expects four estimated tax payments of roughly equal size, with the payments due April 15, June 15, Sept. 15 and Jan. 15. If the payments aren’t made as expected, you can get hit with an underpayment penalty.

However, the IRS allows a taxpayer to show that their income is not earned equally throughout the year by filing a Form 2210 with a related Schedule AI (Annualized Income Installment Method), Luscombe says. Schedule AI allows you to show when income was earned during the year so you can match your estimated payment dates to when you actually received the money.

Schedule AI is more work, since it requires you to report adjusted gross income for each of the four quarters, as well as your itemized deductions and other tax details items, Luscombe notes. But if your income comes at the end of the year and the corresponding estimated tax payment was made on Jan. 15 of the following year, filing this paperwork may be sufficient to avoid a penalty for underpaying estimated taxes, he says.

Q&A: How to find an estate planning attorney

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Dear Liz: Is there a specific website to research estate planning attorneys in Southern California? Our attorney has retired and I elected not to have my file transferred to her successor attorney. Our trust documents are only six years old and there have been no material changes to our financial situation or beneficiaries.

Answer: The internet is overloaded with lawyer directories of limited value. Either the sites themselves are questionable or they return so many options that choosing feels like an impossible task.

So the best way to find a good estate planning attorney is the old school way: word of mouth. If you have a CPA or other financial professional, ask who they recommend. Know any lawyers? Check with them. Friends, relatives and neighbors also may be able to offer referrals.

Once you have a few names, the internet becomes a bit more helpful. The state bar of California offers an attorney search function that allows you to confirm the attorney’s license status, education and any disciplinary history. The attorney’s website can also provide information about their background, experience and approach.

Since estate planning is a complex area, you’ll want an attorney who specializes rather than dabbles. Ideally, estate planning is their sole or primary focus, not an add-on to other areas of practice. For more complex needs, you can consider seeking out an attorney who is certified by the California State Bar as an estate planning, trust and probate law specialist. If you need help with issues around aging, such as Medicaid planning, long-term care or protection against exploitation, consider seeking the help of an elder law attorney. You can get referrals from the National Academy of Elder Law Attorneys at www.naela.org.

Q&A: How do I find out if an advisor is a fiduciary?

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Dear Liz: You often emphasize the importance of using a financial planner or advisor who is a fiduciary. But how does one know whether a given planner or advisor is a fiduciary? Is it just the planner or advisor claiming to be one? Are there any licensing laws or professional organizations that grant such a designation?

Answer: Many people assume financial advisors are required to put their clients’ best interests first, but that’s typically not the case. Most advisors are held to a lower “suitability” standard, which means their recommendations must be suitable for the client’s situation but not necessarily the best choice. The advisor can recommend an investment that is more expensive or that doesn’t perform as well as available alternatives, simply because the recommended investment pays the advisor a higher commission.

Fiduciary advisors commit to putting their clients’ interests ahead of their own. Certified financial planners (CFPs), certified public accountants (CPAs) and attorneys all have fiduciary duties to their clients, as do registered investment advisors (RIAs).

The gold standard for fiduciary advice is the fee-only model, in which the advisor is compensated only by fees the client pays. Fee-only means the advisor does not accept commissions or other compensation paid by third parties. Fee-only compensation can take a number of forms, including hourly, retainer or flat fees or a percentage of assets the advisor manages for the client.

The first step in determining whether an advisor is a fiduciary is to simply ask. The answer should be yes, full stop, and the advisor should be willing to put that commitment in writing. Next, ask to see the advisor’s Form ADV, which details how the advisor is compensated.

Theoretically, a fiduciary advisor may be able to accept commissions, but they’re obligated to clearly disclose the compensation to clients and maintain the clients’ interests as their top priority.

The phrase “fee-based” is sometimes used by advisors who want to appear to be fiduciaries when they’re not. An ethical advisor is crystal clear about how they’re getting paid.

Before hiring any financial advisor, you should also use BrokerCheck at https://brokercheck.finra.org/ to research their backgrounds and look for any disciplinary history. Also, check with the organization that granted their credentials to verify that those credentials are current.

Q&A: How do I avoid a Medicare surcharge?

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Dear Liz: I will be applying for Medicare next year. Last year I received an inheritance, and also sold a second home which increased our taxable income for the year. I once read that there is a form that needs to be completed to let Medicare know that this is only a one-time occurrence. However, my tax advisor said that there is no need to let Medicare know and he had not heard of any such form. I feel he does not understand that the higher income might affect our Medicare premiums. My understanding is that if I don’t submit the form, my Medicare payment will be a lot higher than expected. Can you suggest what I should do?

Answer: There is such a form, but it’s unlikely to help in your situation.

Medicare premiums are based on your income from two years earlier, as shown on your tax returns. People with higher incomes face “income related monthly adjustment amounts” (IRMAA) that can substantially increase their Medicare Part B and Part D premiums. (Part B covers doctor’s visits and Part D covers prescriptions.)

Form SSA-44 is designed to help people whose income has taken a hit because of major life changes, such as retirement, divorce or the death of a spouse. It’s not designed to spare people who had taxable windfalls, such as capital gains from a property sale.

Inheritances generally aren’t taxable events, however, with a few exceptions. If you inherit someone’s IRA, for example, you generally must start withdrawals which are typically taxable. Otherwise, inherited money and assets typically don’t show up on your tax returns or affect your Medicare premiums.

Q&A: Why tell the IRS if you sell gold coins?

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Dear Liz: Regarding the inherited gold coins question, why would anybody tell the IRS they inherited coins and subject themselves to a 28% capital gains tax? That seems very illogical.

Answer: To clarify, the original reader was asking about selling gold coins which had risen dramatically in value since she inherited them. Coins are considered collectibles so the difference between the inherited value and the sale price would be subject to a 28% federal capital gains tax.

How would the IRS know if you’ve sold gold coins for a profit? A dealer who buys the coins might be required to file a form with the IRS that’s designed to thwart money laundering. Also, payments are typically made through bank transfers or checks, unless you’re planning to walk out with a bag of cash like a cartoon bank robber. Bank transactions could be examined if you’re ever audited.

Even if you calculate the odds of getting caught as low, the question remains: Do you only do the right and lawful thing when you have to?

Most people who aren’t sociopaths have a sense of integrity. Doing something they know to be wrong damages that integrity, even if no one else ever knows. You may be able to save a bit of money by cheating on your taxes, but you can’t put a price on a clear conscience.

Q&A: Is a spouse responsible for a cosigned loan?

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Dear Liz: Before we were married, my spouse co-signed for two student loans for a relative. The loans have not been paid off. Occasionally the former student is late and my spouse is contacted. If I survive my spouse, who has end stage kidney disease, will I be responsible for the debts if the relative defaults?

Answer: Because your spouse co-signed the loans before marriage, the debt isn’t considered community debt. In other words, you can’t be held directly responsible if the relative defaults.

Unpaid student loan debt could become a claim against your husband’s estate, however. Some lenders might push to get reimbursement this way, while others won’t. Creditors typically have a limited period in which to make such claims (the period varies by state).

To complicate matters further: some older student loans have automatic default clauses that make the entire balance due if a co-signer dies. That means the lender could demand immediate repayment from the relative and from your spouse’s estate. It would be smart to check the promissory note to see if it contains such language. If it does, the relative can ask the lender or lenders about a “cosigner release,” which would remove your spouse’s name from the debt. Another and even better option would be for the relative to refinance the loans in their own name if possible.

An estate planning attorney can help answer your questions about the potential impact of these loans as well as other steps you can take now to protect your spouse’s estate.