Buy Umbrella Liability Insurance to Cover Your Assets

I already have $300,000 in liability coverage on my auto-insurance policy. How do I determine whether or not I need to add an umbrella liability insurance policy to my coverage? How much would an umbrella policy cost? -- K.B., Hinckley, Ill.

Umbrella liability insurance is an inexpensive way to protect you and your property from lawsuits. You don't need it if you have relatively little at stake, but if you've accumulated some assets and have a home, it makes sense to have the policy, says Rob Seltzer, a CPA in Los Angeles. He recommends that you add an umbrella policy, which starts at $1 million of coverage, to protect against lawsuits even if your net worth is far less than that. The policies protect future income as well as assets and also cover legal fees.

CALCULATOR: How Much Umbrella Insurance Do I Need?

Insurers generally require that you have at least $300,000 in liability coverage on your home and automobile before you can buy umbrella coverage, which picks up after you've exhausted your homeowners and auto liability limits. The first $1 million of coverage generally costs $200 to $400 a year; the next $1 million runs an additional $75 to $100.

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Raising your auto and homeowners deductibles from, say, $250 to $1,000 would offset the cost of $1 million in umbrella coverage, says Seltzer. "If you are in a car accident and have to come up with an extra $750 for the deductible, that's not going to kill you. But if something really bad happens, that $1 million umbrella policy is a savior."

To buy the coverage, start with your auto- or homeowners-insurance company, which may give you a discount for keeping your business in-house. If your company doesn't offer affordable umbrella coverage, ask an independent insurance agent for quotes.

RMD strategies

I'm going to be turning 70 ½ and will need to start taking required minimum distributions from my IRAs. Does it make sense to take the money out monthly, or should I wait as late in the year as possible? -- R.E., Plymouth, Mass.

If you can afford to do so, wait until the end of the year so that your earnings can accumulate tax-deferred as long as possible, says Joshua Kadish, a financial planner in Riverwoods, Ill. You must take required minimum distributions from your traditional IRAs by December 31 of each year after you turn age 70 ½ (you're given an extension until April 1 of the following year to make your first withdrawal). Use our RMD calculator at Kiplinger.com to figure out the amount.

Also wait if you're interested in making a tax-free transfer from an IRA to a charity. For the past few years, people older than 70 ½ have been able to donate up to $100,000 from their IRAs to a charity, which counts as their RMD but doesn't increase their adjusted gross income. This tax break hasn't yet been extended for 2012, but typically Congress reauthorizes it close to year-end.

Taxes for freelancers

I had freelance income in 2011, in addition to wages from my full-time job. What tax forms do I need to file, and what can I deduct? -- A.C., Mamaroneck, N.Y.

You'll need to submit Schedule C along with your Form 1040. (You can use the shorter Schedule C-EZ if you have business expenses of $5,000 or less, no employees and no home-office deductions.) If your net earnings are more than $400 for the year, you'll also need to file Schedule SE to figure your self-employment tax, which includes Social Security and Medicare taxes.

But on Schedule C you can deduct a lot of your expenses, including a portion of your rent or mortgage interest and utilities if you use a space in your home exclusively for a home office. For details, see the IRS's Small Business Tax Center.