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The importance of updating beneficiary designations

This article was originally published in Hershey Advisors’ monthly Tax and Business Alert.

Most of us have more than enough to do. We’re on the go from early in the morning until well into the evening — six or seven days a week. Thus, it’s no surprise that we may let some important things slide. We know we need to get to them, but it seems like they can just as easily wait until tomorrow, the next day, or whenever.

A U.S. Supreme Court decision reminds us that sometimes “whenever” never gets here and the results can be tragic. The case involved a $400,000 employer-sponsored retirement account, owned by William, who had named his wife, Liv, as his beneficiary in 1974 shortly after they married. The couple divorced 20 years later. As part of the divorce decree, Liv waived her rights to benefits under William’s employer-sponsored retirement plans. However, William never got around to changing his beneficiary designation form with his employer.

When William died, Liv was still listed as his beneficiary. So, the plan paid the $400,000 to Liv. William’s estate sued the plan, saying that because of Liv’s waiver in the divorce decree, the funds should have been paid to the estate. The Court disagreed, ruling that the plan documents (which called for the beneficiary to be designated and changed in a specific way) trumped the divorce decree. William’s designation of Liv as his beneficiary was done in the way the plan required; Liv’s waiver was not. Thus, the plan rightfully paid $400,000 to Liv.

The tragic outcome of this case was largely controlled by its unique facts. If the facts had been slightly different (such as the plan allowing a beneficiary to be designated on a document other than the plan’s beneficiary form), the outcome could have been quite different and much less tragic. However, it still would have taken a lot of effort and expense to get there. This leads us to a couple of important points.

If you want to change the beneficiary for a life insurance policy, retirement plan, IRA, or other benefit, use the plan’s official beneficiary form rather than depending on an indirect method, such as a will or divorce decree.

It’s important to keep your beneficiary designations up to date. Whether it is because of divorce or some other life-changing event, beneficiary designations made years ago can easily become outdated.

One final thought regarding beneficiary designations: While you’re verifying that all of your beneficiary designations are current, make sure you’ve also designated secondary beneficiaries where appropriate. This is especially important with assets such as IRAs, where naming both a primary and secondary beneficiary can potentially allow payouts from the account to be stretched out over a longer period and maximize the time available for the tax deferral benefits to accrue.

Tax Rules for Gamblers

This article was originally published in Hershey Advisors’ monthly Tax and Business Alert.

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If you’ve done some gambling, you may need to know about the applicable federal income tax rules. They can be summarized as follows.

You must report 100% of your wagering winnings as taxable income on your Form 1040. The value of complimentary goodies (“comps”) provided by gambling establishments must also be included in taxable income because comps are considered gambling winnings. These amounts are subject to your regular federal income tax rate, which can be as high as 39.6%.

If you itemize deductions, you can write off wagering losses on Schedule A of Form 1040. However, allowable wagering losses are limited to your winnings for the year, and any excess losses cannot be carried over to future years. Also, out-of-pocket expenses for transportation, meals, lodging, and so forth do not count as gambling losses and, therefore, cannot be written off at all.

If you qualify as a professional gambler, your wagering winnings and losses are reported on Schedule C of Form 1040. However, deductions for wagering losses are limited to your winnings, and any excess wagering losses cannot be carried over to future years (same as for amateurs). The good news here is that you can also deduct travel expenses and other out-of-pocket costs of being a professional gambler.

In any case, you must adequately document wagering losses (and out-of-pocket nonwagering expenses if you are a professional) to claim a deduction. The government says you must compile the following information in a log or similar record:

  1. The date and type of specific wager or wagering activity.
  2. The name and address or location of the gambling establishment.
  3. The names of other persons (if any) present with you at the gambling establishment. (Obviously, this is not possible when the gambling occurs at a public venue such as a casino, race track, or bingo parlor.)
  4. The amount won or lost.

For example, the IRS says you can document income and losses from wagering on table games by recording the number of the table that you played and by keeping statements showing casino credit that was issued to you. For lotteries, your wins and losses can be documented by winning statements and unredeemed tickets.

Last but not least, be aware that amounts you win may have to be reported to you on IRS Form W-2G (“Certain Gambling Winnings”). In some cases, federal income tax may have to be withheld, too. Anytime a Form W-2G is issued to you, the IRS gets a copy. So the government will expect to see the winnings show up on your tax return.

Please call us if you have questions or want more information on the tax rules for gambling activities.

Tax Planning

Please note his sign does NOT read “Tax Evasion Advice.” That would be illegal.