Tax Law Changes Don’t Affect Wills

QUESTION: Is there anything in the new tax laws that makes it important for people to change their wills? -- H. H. W.

ANSWER: Good question, since the overhaul touched virtually every aspect of consumers’ personal finances. But, surprisingly, none of the tax law revisions directly affect wills and estates.

Financial planners who have fielded this same question, however, say they are using this opportunity to remind consumers about the importance of factoring federal estate and gift tax credits into their will and estate planning.

Under federal laws, every spouse may leave his or her entire estate to the surviving spouse without any tax liability, and every couple may pass along to heirs as much as $1.2 million in assets before a tax is assessed.

For single taxpayers, the credit is $600,000.

That sounds like a lot of money. But keep in mind that the combination of a residence and life insurance proceeds is often enough these days to push even seemingly small estates over the $600,000 per-person limit.

That is why many consumers give large gifts of cash or other assets during their lifetime to friends and relatives whom they intend to include in their will.

The rule on such gifts is this: You can give away, tax free, up to $10,000 per person every year. Married couples may give twice that amount. If you choose to give someone more than $10,000, you don’t actually pay the tax out of your pocket. The excess amount is simply subtracted from your $600,000 lifetime estate and gift tax credit.

Q: I am a newcomer to the newspaper’s Business section and I am puzzled by the tables listing bond yields. I can’t seem to figure out how these yields are calculated and why newspapers call bond yields current yields. Can you explain?--Y. H.

A: The current yield is so called because it is figured by dividing the bond’s annual interest payment by the bond’s current market price. In newspaper financial tables, the current market price will likely not appear as a dollar figure but as a fraction, and the annual interest payment will appear as a single number after the stock’s name.

Say you see this entry in the bond listings: ATT 7s01. That means AT&T; offers a 7% coupon bond maturing in the year 2001. To translate that to annual interest payments, just multiply the 7% times $1,000--$70.

Your next step is to locate the current market price. That is the entry titled “close,” and it is a number expressed as a percentage. Say the listing is 81 7/8. Again, just multiply 81 7/8% (or 0.81875) by $1,000 to get the current market price. In this case, it is $818.75.

Divide $70 by $818.75 and you get 8.5%, the current yield.

Keep in mind that, unless you hold a bond until it matures, you don’t actually learn what your total return is from this calculation. Potential capital gains and losses--critical to the actual return of an investment in bonds--aren’t factored into the equation. But you do learn how much income your investment will generate, and for many investors, that is sufficient.

Q: I am toying with the idea of going back to school for an MBA. I would already be enrolled except that my employer refuses to pick up the expenses. Can you tell me what the rule is on deducting educational expenses now?--K. F.

A: The longstanding IRS rule on reimbursing educational expenses is that schooling costs are deductible if they just keep you up to date for your current line of work and are not deductible if they qualify you for a new trade or business.

A fine line, certainly. But, basically, an accountant who takes courses before taking the CPA exam can’t justify a tax writeoff. The same is true of a paralegal who works for a law firm and studies law in his spare time.

In your case, the question of deductibility depends entirely on what you do for a living and how good an argument you make to the IRS. Keep in mind that the agency is wary of such arguments, and you should expect any schooling deduction you take to be challenged. But you probably stand a good chance if you already are a manager or supervisor, especially if your work also involves some administration. If that is the case, you’ll have an easier time demonstrating that the courses improved the skills needed for your current job in addition to giving you skills for a new job.

To further support your case, you probably will be expected to stay at your current job for at least a year after you get the MBA.