Reader Question: Your recent article on identity theft was very informative, but in trying to put together end of life info for my spouse (or me) to use in the event of the other’s death, I was trying to find the process for notifying the three credit bureaus of a death, so as to prevent anyone from trying to obtain credit in the deceased’s name, as I understand identity theft of the deceased is not unusual. All I could find was how to put a credit freeze on a credit report. Is this all that is needed? Can a surviving spouse or descendent put a freeze on the deceased account, or does the freeze have to be requested by the account owner (which would be impossible if the person is deceased)? G.M.
Answer: A deceased person can become an easy target of identity theft and wreak havoc on surviving family members. The best defense is to immediately send a certified letter to all three credit bureaus (TransUnion, Equifax, and Experian) and request that their account be tagged “Deceased. Do not issue credit.” This can be done by either the surviving spouse or the estate representative of the deceased. A spouse should include a copy of his or her marriage certificate and the estate representative should include a copy of his or her affidavit of representation of the deceased’s estate. In the letter, you’ll need to include the deceased’s name, Social Security number, most recent address, date of birth, date of death and a copy of the death certificate. Be sure to retain a copy of all three letters for your files. For a sample letter, visit the Resource Center at www.WelchGroup.com; click on ‘Links’; then ‘Credit Report Bureaus – Notification of Death Letter’.
Reader question: In the past you have written about the Alabama Accountability Act where the taxpayer can receive tax credits for contributions to a Scholarship Granting Organization (SGO). In that column, you stated that one of your clients made a $7,500 contribution to an SGO and because he was subject to the alternative minimum tax, he received a net tax benefit of $2,100. Can you explain how that works? L.L.
Answer: My partner, Michael Wagner, CPA responded, “Assuming you follow the process as outlined under the Alabama Accountability Act and you donate $7,500 to a SGO, you’ll receive a State of Alabama income tax credit of $7,500…meaning it didn’t cost you anything to ‘re-direct’ your state income tax dollars to scholarships for children of low-income families who are stuck in failing public schools.
You also get to take a charitable tax deduction on your federal income tax return for $7,500. However, since you received a state income tax credit, your state tax deduction is $7,500 lower on your federal return, making it a ‘wash’ on your federal return.
If, however, you are subject to the alternative minimum tax, you must perform a separate tax calculation to ensure that you are paying a minimum amount in taxes each year at a flat 28% tax rate. In this separate tax calculation you are not allowed to take a deduction for Alabama income tax paid, but you are allowed to take a deduction for charitable donations. So by making the gift you have lowered your income under the separate tax calculation by $7,500 and at the 28% tax rate you receive a $2,100 net tax benefit.”
Complicated enough? My recommendation is to ask your CPA if he or she expects you to be subject to the alternative minimum tax. If the answer is ‘yes’, then you are likely to benefit from a donation under the Alabama Accountability Act. For more information visit www.alabamakids.net.
Reader Question: A question I have concerns the taxability of the interest earned on U.S. Treasury Bonds held in a brokerage IRA (traditional) account. I realize that distributions from a traditional IRA are treated as ordinary income by the IRS. Does the fact that the treasury bonds are in a traditional IRA negate the tax exempt status of the interest derived from these bonds in the eyes of the state of Alabama? I believe that the special consideration of this source of income by the state trumps the federal consideration of IRA withdrawals. What do you think? P.S.
Answer: Unfortunately, distributions from your traditional IRA will be subject to both federal and state income taxes even if the money is invested in U.S. Treasury Bonds.