Dwayne K Dowell, MBA(Tax), CPA/PFS Blog

Welcome 2012! As the new year rolls around, it's always a sure bet that there will be changes to the current tax law and 2012 is no different. From health savings accounts to retirement contributions here's a checklist of tax changes to help you plan the year ahead.

Individuals

The current tax rate structure ranging from 10% to 35% remains the same for 2012, but tax-bracket thresholds increase for each filing status. Standard deductions and the personal exemption have also been adjusted upward to reflect inflation. For details see Tax Brackets and Exemptions for 2012 below.

Alternate Minimum Tax (AMT) 
Alternate Minimum Tax (AMT) limits decrease for all taxpayers at $33,750 for singles, $45,000 for married filing jointly, and $22,500 for married filing separately.

"Kiddie Tax" 
For taxable years beginning in 2012, the amount that can be used to reduce the net unearned income reported on the child's return that is subject to the "kiddie tax," is $950. The same $950 amount is used to determine whether a parent may elect to include a child's gross income in the parent's gross income and to calculate the "kiddie tax". For example, one of the requirements for the parental election is that a child's gross income for 2012 must be more than $950 but less than $9,500.

For 2012, the net unearned income for a child under the age of 19 (or a full-time student under the age of 24) that is not subject to "kiddie tax" is $1,900, the same as 2011.

Health Savings Accounts (HSAs) 
Contributions to a Health Savings Account (HSA) are used to pay current or future medical expenses of the account owner, his or her spouse, and any qualified dependent. Medical expenses must not be reimbursable by insurance or other sources and do not qualify for the medical expense deduction on a federal income tax return.

A qualified individual must be covered by a High Deductible Health Plan (HDHP) and not be covered by other health insurance with the exception of insurance for accidents, disability, dental care, vision care, or long-term care.

For calendar year 2012, a qualifying HDHP must have a deductible of at least $1,200 for self-only coverage or $2,400 for family coverage (unchanged from 2011) and must limit annual out-of-pocket expenses of the beneficiary to $6,050 for self-only coverage (up $100 from 2011) and $12,100 for family coverage (up $200 from 2011).

Medical Savings Accounts (MSAs) 
There are two types of Medical Savings Accounts (MSAs), the Archer MSA created to help self-employed individuals and employees of certain small employers and the Medicare Advantage MSA, which is actually an Archer MSA as well, and is designated by Medicare to be used solely to pay the qualified medical expenses of the account holder. To be eligible for a Medicare Advantage MSA, you must be enrolled in Medicare and both MSAs require that you are enrolled in a high deductible health plan (HDHP).

Self-only coverage. For taxable years beginning in 2012, the term "high deductible health plan" means, for self-only coverage, a health plan that has an annual deductible that is not less than $2,100 (up $100 from 2011) and not more than $3,150 (up $150 from 2011), and under which the annual out-of-pocket expenses required to be paid (other than for premiums) for covered benefits do not exceed $4,200 (up $150 from 2011).

Family coverage. For taxable years beginning in 2012, the term "high deductible health plan" means, for family coverage, a health plan that has an annual deductible that is not less than $4,200 (up $150 from 2011) and not more than $6,300 (up $250 from 2011), and under which the annual out-of-pocket expenses required to be paid (other than for premiums) for covered benefits do not exceed $7,650 (up $250 from 2011).

Eligible Long-Term Care Premiums 
Premiums for long-term care are treated the same as health care premiums and are deductible on your taxes subject to certain limitations. For individuals age 40 or less at the end of 2012, the limitation is $350. Persons over 40 but less than 50 can deduct $660. Those over age 50 but not more than 60 can deduct $1,310, while individuals over age 60 but younger than 70 can deduct $3,500. The maximum deduction $4,370 and applies to anyone over the age of 70.

Adoption Assistance Programs 
For taxable years beginning in 2012, the amount that can be excluded from an employee's gross income for the adoption of a child with special needs is $12,650. In addition, the maximum amount that can be excluded from an employee's gross income for the amounts paid or expenses incurred by an employer for qualified adoption expenses furnished pursuant to an adoption assistance program for other adoptions by the employee is $12,650 (down from $13,360 in 2011).

The amount excludable from an employee's gross income begins to phase out under for taxpayers with modified adjusted gross income (MAGI) in excess of $189,710 and is completely phased out for taxpayers with modified adjusted gross income of $229,710 or more.

Taxpayers adopting children are eligible for both the adoption credit (see below) and the adoption assistance exclusion of adoption expenses paid for through an employer's adoption assistance plan. However, the same adoption expense cannot qualify for both the adoption credit and the adoption assistance exclusion.

Foreign Earned Income Exclusion 
For taxable years beginning in 2012, the foreign earned income exclusion amount is $95,100, up from $92,900 in 2011.

Estate Tax 
For an estate of any decedent dying during calendar year 2012, the basic exclusion amount is $5,120,000, up from $5,000,000 in 2011. Also, if the executor chooses to use the special use valuation method for qualified real property, the aggregate decrease in the value of the property resulting from the choice cannot exceed $1,040,000, up from $1,020,000 for 2011. The maximum tax rate remains at 35%.

Individuals - Tax Credits

Adoption Credit 
For taxable years beginning in 2012, the credit allowed for an adoption of a child with special needs is $12,650. For taxable years beginning in 2012, the maximum credit allowed for other adoptions is the amount of qualified adoption expenses up to $12,650. The available adoption credit begins to phase out for taxpayers with modified adjusted gross income (MAGI) in excess of $189,710 and is completely phased out for taxpayers with modified adjusted gross income of $229,710 or more.

Child Tax Credit 
For taxable years beginning in 2012, the value used to determine the amount of credit that may be refundable is $3,000.

Earned Income Credit 
For tax year 2012, the maximum earned income tax credit (EITC) for low- and moderate- income workers and working families rises to $5,891, up from $5,751 in 2011. The maximum income limit for the EITC rises to $50,270, up from $49,078 in 2011. The credit varies by family size, filing status and other factors, with the maximum credit going to joint filers with three or more qualifying children. In addition, for taxable years beginning in 2012, the earned income tax credit is not allowed if certain investment income exceeds $3,200.

Additional Child Credit 
The $1,000 per-child additional child tax credit has been extended through 2012. The credit will decrease to $500 per child in 2013.

Individuals - Education

Hope Scholarship - American Opportunity, and Lifetime Learning Credits 
The maximum Hope Scholarship Credit allowable for taxable years beginning in 2012 is $2,500.

The modified adjusted gross income (MAGI) threshold at which the lifetime learning credit begins to phase out is $104,000 for joint filers, up from $102,000, and $52,000 for singles and heads of household, up from $51,000.

Interest on Educational Loans 
For taxable years beginning in 2012, the $2,500 maximum deduction for interest paid on qualified education loans begins to phase out for taxpayers with modified adjusted gross income (MAGI) in excess of $60,000 ($125,000 for joint returns), and is completely phased out for taxpayers with modified adjusted gross income of $75,000 or more ($155,000 or more for joint returns).

Individuals - Retirement

Contribution Limits 
The elective deferral (contribution) limit for employees who participate in 401(k), 403(b), most 457 plans, and the federal government's Thrift Savings Plan is increased from $16,500 to $17,000. Contribution limits for SIMPLE plans remain at $11,500. The maximum compensation used to determine contributions increases to $250,000 (up $5,000 from 2011 levels).

Income Phase-out Ranges 
The deduction for taxpayers making contributions to a traditional IRA is phased out for singles and heads of household who are covered by a workplace retirement plan and have modified adjusted gross incomes (AGI) between $58,000 and $68,000, up from $56,000 and $66,000 in 2011.

For married couples filing jointly, in which the spouse who makes the IRA contribution is covered by a workplace retirement plan, the income phase-out range is $92,000 to $112,000, up from $90,000 to $110,000. For an IRA contributor who is not covered by a workplace retirement plan and is married to someone who is covered, the deduction is phased out if the couple's income is between $173,000 and $183,000, up from $169,000 and $179,000.

The AGI phase-out range for taxpayers making contributions to a Roth IRA is $173,000 to $183,000 for married couples filing jointly, up from $169,000 to $179,000 in 2011. For singles and heads of household, the income phase-out range is $110,000 to $125,000, up from $107,000 to $122,000. For a married individual filing a separate return who is covered by a retirement plan at work, the phase-out range remains $0 to $10,000.

Saver's Credit 
The AGI limit for the saver's credit (also known as the retirement savings contributions credit) for low-and moderate-income workers is $57,500 for married couples filing jointly, up from $56,500 in 2011; $43,125 for heads of household, up from $42,375; and $28,750 for married individuals filing separately and for singles, up from $28,250.

Businesses

Standard Mileage Rates 
The rate for business miles driven is 55.5 cents per mile for 2012, unchanged from the mid-year adjustment that became effective on July 1, 2011.

Section 179 Expensing 
For 2012 the maximum Section 179 expense deduction for equipment purchases is $139,000 (down from $500,000 in 2011) of the first $560,000 (down from $2 million in 2011) of business property placed in service during the year.

Transportation Fringe Benefits 
If you provide transportation fringe benefits to your employees, for tax years beginning in 2012 the maximum monthly limitation for transportation in a commuter highway vehicle as well as any transit pass is $125 (down from $230 in 2011). The monthly limitation for qualified parking is $240 (up from $230 in 2011).

Work Opportunity Credit 
The work opportunity credit has been expanded to provide employers with new incentives to hire certain unemployed veterans. Businesses claim the credit as part of the general business credit and tax-exempt organizations claim it against their payroll tax liability. The credit is available for eligible unemployed veterans who begin work on or after November 22, 2011, and before January 1, 2013.

While this checklist outlines important tax changes already in place for 2012, additional changes in tax law are more than likely to arise during the year ahead.

Don't hesitate to call us if you want to get an early start on tax planning for 2012. dkdowell@dkdcpa.com

Many states offer tax incentives to encourage the purchase of LTCi. Below is a general summary of state specific tax information for your reference. This information is current through December 2011 and is subject to change.

Taxpayers may need to meet state specific requirements to qualify for deductions or credits for LTCi. For information regarding the tax liability of a case, consultation with a tax consultant or legal advisor is recommended.

What The Coding Means
* = No Credit Or Deduction. No Broad-Based State Income Tax.
** = Same As Federal Tax Law (see above for details).

ALABAMA
Deduction Individuals are allowed an itemized deduction for qualified long term care insurance contract to the extent that the amount does not exceed specified limitations. These amounts are indexed. Businesses, whether incorporated or not, may deduct LTC insurance as reasonable compensation expenses.

ALASKA*
No tax benefits presently.

ARIZONA*
No tax benefits presently

ARKANSAS**
Deduction A deduction is allowed to the limits provided in the federal Internal Revenue Code (see above for details)

CALIFORNIA
Deduction A deduction is allowed to the limits provided in the federal Internal Revenue Code (see above for details)

COLORADO
Credit A Credit is allowed for 25 percent of the premiums paid for long term care insurance during tax year for the individual and spouse. The Colorado credit is only applicable to thoise with federal taxable income of less than $50,000; to two individuals filing a joint return with a federal taxable income of less than $50,000 if claiming the credit for one policy; or less than $100,000 if claiming the credit for two policies.

CONNECTICUT*
No tax benefits presently

DELAWARE*
No tax benefits presently

DISTRICT OF COLUMBIA
Deduction A deduction for long term care insurance premiums paid annually ius allowed from gross income provided that the deduction does no exceed $500 per year, per individual. It does not matter whether the individual files joiuntly and the LTC poilicy must meet District of Columbia's definitions.

FLORIDA*
No tax benefits presently

BACK to TOP OF STATE LISTING

GEORGIA*
No tax benefits presently

HAWAII
Deduction Same as federal tax law, except subject to 7.5% of HI adjusted gross income, instead of federal adjusted gross income.

IDAHO
Deduction A deduction is allowed for premium paid by a taxpayer for LTCi which is for the benefit of the taxpayer, a dependent of the taxpayer or an employee of a taxpayer and the amount can be deducted from taxable income to the extent the premium is not otherwise deducted by taxpayer.

ILLINOIS*
No tax benefits presently

INDIANA
Deduction Deduction up to full cost of premium paid for qualified LTCi for taxpayer and taxpayer's spouse paid in the taxable year.

IOWA**
Deduction A deduction is allowed to the limits provided in the federal Internal Revenue Code (see above for details)

KANSAS
Deduction For tax years beginning in 2005,a subtraction from federal adjusted gross income for $500 in the tax year 2005, increasing each year by $100 until 2010. After 2010, it is a $1000 subtraction from the federal adjusted gross income for premium costs for qualified LTCi.

KENTUCKY
Deduction Deduction from adjusted gross income allowed for any amount paid during the tax year for LTC premiums.

LOUISIANA
Credit A credit against the individual income tax is allowed for amounts paid as premiums for eligible long term care insurance. The amount of the credit equals 10 percent of the total amount of premiums paid each year by each individual claiming the tax credit and the policy must meet the specific qualification requirements.

MAINE
Deduction The Superintendent of the State must certify the policy you purchase as a qualifying long term care policy. Then you are pemitted a deduction as long as the amount subtracted is reduced by the amount claimed as a deduction for federal income tax purposes. Sounds more complicated than it really is. Employers providing long term care benefits to employees may also qualify for a tax credit which follows a formula equal to the lowest of $5,000, 20 percent of the costs or $100 for each employee covered.

MARYLAND
Credit Taxpayer is allowed a one-time credit against the state income tax in an amount equal to 100% of eligible LTCi premium paid. The credit may not exceed $500 for each insured, may not be claimed by more than one taxpayer with respect to the same individual and may not be claimed if the insured was covered by LTCi before July 1 2000. No carryover is allowed. For employers, a credit up to an amount equal to 5% of the costs incurred by the employer during the taxable year for providing LTCi as part of the benefit package. The credit may not exceed $5000 or $100 for each employee covered by LTCi under the benefit package.

MASSACHUSETTS*
No tax benefits presently

MICHIGAN*
No tax benefits presently

MINNESOTA
Credit A credit is allowed for LTCi premiums equal to the lesser of: (1) 25% of premiums paid to the extent not deducted in determining federal taxable income; or (2) $100 (which equals $200 for married couples who file joint tax returns.)
.
MISSISSIPPI
Credit A credit equal to 25% of premium costs paid during the taxable year for a qualified policy for self, spouse, parent, parent-in-law, or dependent. The credit cannot exceed $500.

MISSOURI
Deduction Taxpayers may deduct 100% of all non-reimbursed amounts paid for qualified LTCi premiums to the extent such amounts are not included in itemized deductions.

MONTANA
Deduction - Credit Montana offers both a deduction for entire amount of qualified LTCi premiums covering taxpayer, taxpayer's parents, grandparents & dependents. A tax credit is now allowed for for premiums paid for long term care insurance coverage for a qualifying family member. The amount of the credit shall be based on the taxpayer's adjusted gross income and can not exceed $5,000 per qualifying family member in a taxable year. Or, $10,000 for two or more family members.

NEBRASKA
Deduction Nevada now permits a tax deduction for Long Term Care Savings Plan contributions of up to $2,000 per married filing jointly return or $1,000 for any otrher return to the extent that it is not deducted for federal income tax purposes.

NEVADA*
No tax benefits presently

BACK to TOP OF STATE LISTING

NEW HAMPSHIRE*
No tax benefits presently

NEW JERSEY
Deduction Deduction of LTC insurance premiums may be taken if they exceed 2% of adjusted gross income and cannot be reimbursed.

NEW MEXICO
Credit / Deduction. New Mexico permits taxpayers who are age 65 and older and who are not a dependent of another taxpayer to claim a credit of $2,800 for medical care expenses which includes long term care insurance premiums paid for the filing taxpayer, spouse or dependents if expenses equal $28,000 or more within the particular taxable yeare (and so long as the expenses are nopt reimbursed). A deduction allows taxpayers an additional exemption of $3,000 for medical expenses if expenses (including the cost for LTC insurance) equal $28,000 or more within the taxable year and if expenses are not reimbursed or otherwise covered.

NEW YORK
Credit Credit for 20% of premium paid for qualifying LTCi premiums. Taxpayer is permitted to carry over to future tax years any credit amount in excess of taxpayer�s tax liability for the year. Employers are eligible for a credit equal to 20% of the premiums paid during the tax year for the purchase of, or for continuing coverage under, a LTCi policy. The credit is not refundable and the credit may not reduce the tax to less than the minimum tax due.

NORTH CAROLINA
Credit A credit is allowed for premiums paid on LTC insurance for taxpayer, taxpayer's spouse or dependent in an amount equal to 15% of the premium costs, up to $350 for each policy on which the credit is claimed as long as adj. gross income meets the following limitations: Married Filing Separately <$50,000; Single <$60,000; Head of Household <$80,000; Married Filing Jointly or Qualifying Widower <$100,000.

NORTH DAKOTA
Credit A credit is allowed for premiums paid on LTC insurance for taxpayer and or spouse up to $250 within any taxable year.

OHIO
Deduction Deduction of federally qualified LTCi premiums for taxpayer, taxpayer's spouse and dependents to the extent deduction is not allowed in computing federal adj.gross income.

OKLAHOMA**
No tax benefits presently

OREGON
Credit Credit equal to the lesser of 15% of premiums paid during the tax year or $500 for LTC insurance coverage for individual, dependent or parents. For employers, a credit of $500 is allowed for each employee covered by an employer-sponsored policy.

PENNSYLVANIA*
No tax benefits presently

PUERTO RICO*
No tax benefits presently

RHODE ISLAND**
No tax benefits presently

SOUTH CAROLINA**
No tax benefits presently

SOUTH DAKOTA*
No tax benefits presently

TENNESSEE*
No tax benefits presently

TEXAS*
No tax benefits presently

UTAH*
No tax benefits presently

VERMONT**
No tax benefits presently

VIRGINIA
Deduction Virginia statutes permit a deduction from federal adjusted gross income for the amount paid in long term care insurance premiums provided the individual has not claimed a deduc tion for federal tax puposes or a credit under Virginia tax code 58.1-339.11. This code permits a credit against the individual's income taxes that shall not exceed 15 percent of the amount of long term care insurance premium paid during the taxable year. And, the credit can not be claimed to the extent that the individual has claimed a deduction for federal tax purposes. This one is worth having your CPA decide as a tax credit can be worth far more than a tax deduction.

WASHINGTON*
No tax benefits presently

WEST VIRGINIA
Deduction Deduction for LTCi premiums covering taxpayer, taxpayer's spouse, parents and dependents to the extent the amount paid for LTCi is not deducted in determining federal income tax.

WISCONSIN
Deduction Deduction allowed for taxpayer & taxpayer's spouse for 100% of the amount paid for a LTCi policy to the extent the same deduction is not taken for federal income tax purposes.

WYOMING*
No tax benefits presently

What The Coding Means
* = No Credit Or Deduction. No Broad-Based State Income Tax.
** = Same As Federal Tax Law (see above for details).

BACK to TOP OF STATE LISTING

If you would like to capitalize on tax advantaged savings available to those purchasing LTC insurance protection, now is the time to start the process. Click here to complete our simple online questionnaire and get the ball rolling.

Acknowledgements: The American Association for Long-Term Care Insurance does not provide tax advice and does not warrant the information provided herewith. As mentioned previously, always seek the counsel of a professional tax advisor.

Brokers must track and report cost basis to both you and the IRS

 

 

Anyone who has ever been baffled by calculating the net proceeds from the sale of an investment will find some relief, starting with the 2011 tax return due April 17. If you bought any stocks after January 1, 2011, and sold them later in the year, you should be receiving information from your broker shortly that tells you the adjusted cost basis of those stocks. Your adjusted cost basis, which affects the amount of tax you may owe on the sale, represents the original purchase price plus any commissions or other fees, and takes into account factors such as stock splits, corporate acquisitions or spinoffs, and reinvested dividends.

 

In the past, cost basis information has sometimes been available as a service; the Emergency Economic Stabilization Act of 2008 now requires all broker-dealers and other financial intermediaries to report the information on your 1099-B form. However, you won't be the only one to receive that information; your broker also is required to report the same information to the Internal Revenue Service. Individual taxpayers (or their tax preparers) will still be responsible for accurately reporting the net proceeds of a sale on their federal income tax returns, but the IRS will now have a better way to double-check those figures.

 

 

In some cases, you're still on your own this year

 

The new reporting requirements don't mean you can empty your files completely. Because they're being phased in, the rules don't apply to stocks bought before January 1, 2011, for which you'll still need to do your own calculations, or to securities held in retirement accounts. Cost basis reporting does go into effect this year for mutual funds and stock bought as part of a dividend reinvestment plan; however, it will apply only to shares bought after January 1, 2012, and will be reported on the 1099-B that will be available in 2013 for the tax year 2012. And cost basis for bonds, options, and other securities won't have to be reported until 2013, so those will still need to be monitored independently.

 

Brokers also will be required to report losses that are disallowed as a result of a wash sale (which occurs when shares are sold and then repurchased within 30 days). However, they only have to do so if the newly acquired securities are identical to the securities sold (meaning the securities share the same CUSIP identification number). They also are not required to report adjusted cost basis for wash sales when the purchase and sale transactions occur in different accounts.

 

 

You can tailor your reporting method to suit your tax situation

 

Investors sometimes use cost basis to help manage their tax liability on a securities sale. If you're one of them, the reporting requirements make it more important to determine in advance what accounting method you wish to use for each sale. Most broker-dealers will designate a default option to use if you do not specify a method. That default will typically be the so-called FIFO method (an acronym for "first in, first out"), which means that the first shares of a security purchased are considered the first shares sold. However, your broker might also allow you to specify LIFO ("last in, first out") or designate specific shares as the ones sold. In some cases, such as shares bought through a direct reinvestment program, using an average cost basis for all shares may be most convenient (most mutual fund companies already employ this method of calculating cost basis).

 

If you don't want to use your broker's default method, you may be able to put in a standing order specifying the method you want to use for all trades, or choose on a case-by-case basis; you may also authorize your financial professional to make that decision for you. The rules permit investors to change the designated method for a given trade until the settlement date (the date on which money actually changes hands, which for a typical stock sale is three business days after execution of the trade). After the trade settles, you cannot change your mind about the method used.

 

Brokers also will be required to report to the IRS the cost basis of a short sale in the year in which the short is closed (in the past, it was done for the year a short sale was opened).

If you have any questions, please contact me at dkdowell@dkdcpa.com

I am very pleased that I am now affiliated with Long Term Care Advisors.  For more information, please visit my website at www.ltcadvisor.info/dkdowell

My Mission Statement is as follows-

About Long Term Care Advisors
"...OUR MISSION STATEMENT"

To deliver to those who are thoughtfully preparing for their retirement, the gift of peace of mind for themselves, their family and their community. We do this by offering the added financial security and independence afforded by custom designed, quality Long Term Care Insurance and related products and services.

We realize that in today's fast changing world the number one priority to most of our clients is to protect what they have spent a lifetime accumulating.

Since we have gained the respect of our clients and many others, we take our job very seriously. This is one reason why we are so committed to doing everything we can to stay in front of our competition by continuing to be familiar with the newest products in the industry.

We realize that helping our clients achieve their goals is the only way we can reach our own. That is why the needs of our clients always come first.

If you have any questions, please do not hesitate to contact me at dkdowell@dkdcpa.com

Understanding the importance of life insurance is one thing. Understanding the tax rules is quite another. As insurance products have evolved and become more sophisticated, the line separating insurance vehicles from investment vehicles has grown blurry. To differentiate between the two, a mix of complex rules and exceptions now governs the taxation of insurance      products. If you have neither the time nor the inclination to decipher the IRS regulations, here are some life insurance tax tips and background information to help you make sense of it all.

 

Life insurance contracts must meet IRS requirements

 

For federal income tax purposes, an insurance contract cannot be considered a life insurance contract--and qualify for favorable tax treatment--unless it meets state law requirements and satisfies the IRS's statutory definitions of what is or is not a life insurance policy. The IRS considers the type of policy, date of issue, amount of the death benefit, and premiums paid. The IRS definitions are essentially tests to ensure that an  insurance policy isn't really an investment vehicle. The insurance company must

comply with these rules and enforce the provisions.

                       

Keep in mind that you can't deduct your premiums on

 your federal income tax return

 

Because life insurance is considered a personal expense, you can't deduct the premiums you pay for life insurance coverage.

 

Employer-paid life insurance may have a tax cost

 

The premium cost for the first $50,000 of life insurance coverage provided under an employer-provided group term life insurance plan does not have to be reported as income and is not taxed to you. However, amounts in excess of $50,000 paid for by your employer will trigger a taxable income for the "economic value" of the coverage provided to you.

                       

You should determine whether your premiums were paid

with pre- or after-tax dollars

 

The taxation of life insurance proceeds depends on several factors, including whether you paid your insurance premiums with pre- or after-tax dollars. If you buy a life insurance policy on your own or through your employer, your premiums are probably paid with after-tax dollars.

                       

 

Different rules may apply if your company offers the option to purchase life insurance through a qualified retirement plan and you make pretax contributions. Although pretax contributions offer certain income tax advantages, one tradeoff is that you'll be required to pay a small tax on the economic value of the "pure life insurance" in the policy (i.e., the difference  between the cash value and the death benefit) each year. Also, at death, the  amount of the policy cash value that is paid as part of the death benefit is taxable income. These days, however, not many companies offer their employees  the option to purchase life insurance through their qualified retirement plan.

 

Your life insurance beneficiary probably won't have to

pay income tax on death benefit received          

 

Whoever receives the death benefit from your insurance policy usually does not have to pay federal or state income tax on those proceeds. So, if you die owning a life insurance policy with a $500,000 death benefit, your beneficiary under the policy will generally not have to pay income tax on the receipt of the $500,000. This is generally true regardless of whether you paid all of the premiums yourself, or whether your employer subsidized part or all of the premiums under a group term insurance plan.

                       

 

Different income tax rules may apply if the death benefit is paid in installments instead of as a lump sum. The interest portion (if any) of each installment is generally treated as taxable to the beneficiary at ordinary income rates, while the principal portion is tax free.

 

In some cases, insurance proceeds may be included in

 your taxable estate  

 

If you hold any incidents of ownership in an insurance policy at the time of your death, the proceeds from that insurance policy will be included in your taxable estate. Incidents of ownership include the right to change the beneficiary, the right to take out policy loans, and the right to surrender the policy for cash. Furthermore, if you gift away an insurance policy within three years of your death, then the proceeds from that policy  will be pulled back into your taxable estate. To avoid having the policy included in your taxable estate, someone other than you (e.g., a beneficiary or a trust) should be the owner.  

 

Note: If the owner, the insured, and the beneficiary are three different people, the payment of death benefit proceeds from a life insurance policy to the beneficiary may result in an unintended taxable gift  from the owner to the beneficiary.

 

If your policy has a cash value component, that part

will accumulate tax deferred               

 

Unlike term life insurance policies, some life insurance policies (e.g., permanent life) have a cash value component. As the cash value  grows, you may ultimately have more money in cash value than you paid in premiums. Generally, you are allowed to defer income taxes on those gains as long as you don't sell, withdraw from, or surrender the policy. If you do sell, surrender, or withdraw from the policy, the difference between what you get back and what you paid in is taxed as ordinary income.

                       

You usually aren't taxed on dividends paid       

 

Some policies, known as participating policies, pay dividends. An insurance dividend is the amount of your premium that is paid back to you if your insurance company achieves lower mortality and expense costs than it expected. Dividends are paid out of the insurer's surplus earnings for the year. Regardless of whether you take them in cash, keep them on deposit with the insurer, or buy additional life insurance within the policy, they are considered a return of premiums. As long as you don't get back  more than you paid in, you are merely recouping your costs, and no tax is due.

 

However, if you leave these dividends on deposit with your insurance company

and they earn interest, the interest you receive should be included as taxable

interest income.

 

Watch out for cash withdrawals in excess of

basis--they're taxable

 

If you withdraw cash from a cash value life insurance policy, the amount of withdrawals up to your basis in the policy will be tax free. Generally, your basis is the amount of premiums you have paid into the policy less any dividends or withdrawals you have previously taken. Any      withdrawals in excess of your basis (gain) will be taxed as ordinary income.

 

However, if the policy is classified as a modified endowment contract (MEC) (a

situation that occurs when you put in more premiums than the threshold allows),

then the gain must be withdrawn first and taxed. Keep in mind that if you withdraw part of your cash value, the death benefit available to your survivors will be reduced.

You probably won't have to pay taxes on loans taken against your policy

                  

 

If you take out a loan against the cash value of your  insurance policy, the amount of the loan is not taxable (except in the case of an MEC). This result is the case even if the loan is larger than the amount of the premiums you have paid in. Such a loan is not taxed as long as the policy is in force.

 

If you take out a loan against your policy, the death  benefit and cash value of the policy will be reduced.

                       

 

 

You can't deduct interest you've paid on policy loans

 

The interest you pay on any loans taken out against the cash value of your life insurance is not tax deductible. Certain loans on business-owned policies are an exception to this rule.

 

The surrender of your policy may result in taxable gain

                  

 

If you surrender your cash value life insurance policy, any gain on the policy will be subject to federal (and possibly state) income tax. The gain on the surrender of a cash value policy is the difference between the gross cash value paid out (plus any loans outstanding) and your basis in the policy. Your basis is the total premiums that you paid in cash, minus any policy dividends and tax-free withdrawals that you made.

                       

You may be able to exchange one policy for another

without triggering tax liability

 

The tax code allows you to exchange one life insurance policy for another (or a life insurance policy for an annuity) without triggering current tax liability. This is known as a Section 1035 exchange. However, you must follow the IRS's rules when making the exchange.

 

When in doubt, consult a professional

 

The tax rules surrounding life insurance are obviously complex and are subject to change. For more information, contact me at dkdowell@dkdcpa.com

Definition

In a Medicaid planning context, an outright transfer of the principal residence simply means a gift of the home; you freely deed your home to your loved ones (or to the recipient of your choice). By gifting the home to someone else, you eliminate the house from your financial picture entirely, unless the transfer is made within the applicable "look-back" period.

Prerequisite

• Transferring your principal residence may help you if you want to qualify for Medicaid, you want to potentially preserve your house for your loved ones, and you anticipate the need for long-term care

Key Strengths

• You potentially preserve the house for your loved ones
• You avoid probate
• May assist in qualifying for Medicaid, if necessary
• If you give your home to certain relatives, you will not create a Medicaid ineligibility period
• You will usually not incur federal gift taxes

Key Tradeoffs

• You lose the right to live in the house
• You lose control over the asset
• Your beneficiaries don't receive a stepped-up cost basis
• A transfer of the home may trigger the ineligibility period

Variations from State to State

• None

How Is It Implemented?

• Gather information about your income, assets, and transfers of same for the previous five years
• Consult a Medicaid law attorney who will advise you and draft the deed

Please contact me at dkdowell@dkdcpa.com for questions. 

Definition

 

A charitable lead trust is a trust with both charitable and noncharitable beneficiaries. It is called a lead trust because it is the charity that is entitled to the lead interest in the trust property. After a specified term, the remaining trust property passes to you or another noncharitable beneficiary you designate.

 

Prerequisites

 

·         A desire to donate to charity

·         A substantial asset to donate to charity

 

Key Strengths

 

·         Provides a gift and estate tax haven for assets expected to appreciate in value

·         Allows you to donate to charity and keep trust assets within the family

·         Allows you to postpone the noncharitable beneficiary's receipt of the trust assets 

·         Allows you to choose the payment method to charity

·         Does not require any minimum percentage payout to charity

·         Reduces potential federal estate tax liability

 

Key Tradeoffs

 

·         No income tax deduction unless you are also the "owner" of the charitable lead trust

·         Requires an irrevocable commitment

·         Requires the charitable payment to be made each year, regardless of whether there is sufficient trust income available

 

Variations from State to State

 

·         Community property states may affect any gift tax due

·         In certain instances (when the trust document is silent), state law may determine the source of payments made from the trust to charity and the order they are to be used

 

How Is It Implemented?

 

·         Consult a legal professional to draft the charitable lead trust document

·         Select a noncharitable beneficiary, a charitable beneficiary, and a trustee

·         Select the assets you want to use to fund the charitable lead trust

·         Select an appraiser or other professional to value unmarketable assets

·         Select the term of the trust and the payment method (annuity or unitrust)

 

For more information contact me at dkdowell@dkdcpa.com.  Thanks

Whether they're snatching your purse, diving into your dumpster, stealing your mail, or hacking into your computer, they're out to get you. Who are they? Identity thieves.

Identity thieves can empty your bank account, max out your credit cards, open new accounts in your name, and purchase furniture, cars, and even homes on the basis of your credit history. If they give your personal information to the police during an arrest and then don't show up for a court date, you may be subsequently arrested and jailed.

And what will you get for their efforts? You'll get the headache and expense of cleaning up the mess they leave behind.

You may never be able to completely prevent your identity from being stolen, but here are some steps you can take to help protect yourself from becoming a victim.

Check yourself out

It's important to review your credit report periodically. Check to make sure that all the information contained in it is correct, and be on the lookout for any fraudulent activity.

You may get your credit report for free once a year. To do so, contact the Annual Credit Report Request Service online at www.annualcreditreport.com or call (877) 322-8228.

If you need to correct any information or dispute any entries, contact the three national credit reporting agencies:

1.Equifax: www.equifax.com

(800) 685-1111

2.Experian: www.experian.com

(888) 397-3742

3.TransUnion: www.transunion.com

(800) 916-8800

Secure your number

 

Your most important personal identifier is your Social Security number (SSN). Guard it carefully. Never carry your Social Security card with you unless you'll need it. The same goes for other forms of identification (for example, health insurance cards) that display your SSN. If your state uses your SSN as your driver's license number, request an alternate number.

 

Don't have your SSN preprinted on your checks, and don't let merchants write it on your checks. Don't give it out over the phone unless you initiate the call to an organization you trust. Ask the three major credit reporting agencies to truncate it on your credit reports. Try to avoid listing it on employment applications; offer instead to provide it during a job interview.

Don't leave home with it

Most of us carry our checkbooks and all of our credit cards, debit cards, and telephone cards with us all the time. That's a bad idea; if your wallet or purse is stolen, the thief will have a treasure chest of new toys to play with.

Carry only the cards and/or checks you'll need for any one trip. And keep a written record of all your account numbers, credit card expiration dates, and the telephone numbers of the customer service and fraud departments in a secure place--at home.

Keep your receipts

When you make a purchase with a credit or debit card, you're given a receipt. Don't throw it away or leave it behind; it may contain your credit or debit card number. And don't leave it in the shopping bag inside your car while you continue shopping; if your car is broken into and the item you bought is stolen, your identity may be as well.

Save your receipts until you can check them against your monthly credit card and bank statements, and watch your statements for purchases you didn't make.

When you toss it, shred it

Before you throw out any financial records such as credit or debit card receipts and statements, cancelled checks, or even offers for credit you receive in the mail, shred the documents, preferably with a cross-cut shredder. If you don't, you may find the panhandler going through your dumpster was looking for more than discarded leftovers.

Keep a low profile

The more your personal information is available to others, the more likely you are to be victimized by identity theft. While you don't need to become a hermit in a cave, there are steps you can take to help minimize your exposure:

•To stop telephone calls from national telemarketers, list your telephone number with the Federal Trade Commission's National Do Not Call Registry by calling (888) 382-1222 or registering online at www.donotcall.gov

•To remove your name from most national mailing and e-mailing lists, as well as most telemarketing lists, write the Direct Marketing Association at 1120 Avenue of the Americas, New York, NY 10036-6700, or register online at www.dmachoice.org

•To remove your name from marketing lists prepared by the three national consumer reporting agencies, call (888) 567-8688 or register online at www.optoutprescreen.com

•When given the opportunity to do so by your bank, investment firm, insurance company, and credit card companies, opt out of allowing them to share your financial information with other organizations

•You may even want to consider having your name and address removed from the telephone book and reverse directories

Take a byte out of crime

Whatever else you may want your computer to do, you don't want it to inadvertently reveal your personal information to others. Take steps to help assure that this won't happen.

Install a firewall to prevent hackers from obtaining information from your hard drive or hijacking your computer to use it for committing other crimes. This is especially important if you use a high-speed connection that leaves you continuously connected to the Internet. Moreover, install virus protection software and update it on a regular basis.

Try to avoid storing personal and financial information on a laptop; if it's stolen, the thief may obtain more than your computer. If you must store such information on your laptop, make things as difficult as possible for a thief by protecting these files with a strong password--one that's six to eight characters long, and that contains letters (upper and lower case), numbers, and symbols.

"If a stranger calls, don't answer." Opening e-mails from people you don't know, especially if you download attached files or click on hyperlinks within the message, can expose you to viruses, infect your computer with "spyware" that captures information by recording your keystrokes, or lead you to "spoofs" (websites that replicate legitimate business sites) designed to trick you into revealing personal information that can be used to steal your identity.

If you wish to visit a business's legitimate website, use your stored bookmark or type the URL address directly into the browser. If you provide personal or financial information about yourself over the Internet, do so only at secure websites; to determine if a site is secure, look for a URL that begins with "https" (instead of "http") or a lock icon on the browser's status bar.

And when it comes time to upgrade to a new computer, remove all your personal information from the old one before you dispose of it. Using the "delete" function isn't sufficient to do the job; overwrite the hard drive by using a "wipe" utility program. The minimal cost of investing in this software may save you from being wiped out later by an identity thief.

Be diligent

 

As the grizzled duty sergeant used to say on a televised police drama, "Be careful out there." The identity you save may be your own.

If you have any questions, please e-mail me at dkdowell@dkdcpa.com.

Introduction If you haven't done any asset protection planning, your wealth is vulnerable to potential future creditors and, should the worst happen, you could lose everything. Lawsuits, taxes, accidents, and other financial risks are facts of everyday life. And though you'd like to believe that you're safe, misfortune can befall even the most careful person. What can you do? First, identify your potential loss exposure, then implement strategies that are designed to help reduce that exposure without compromising your other estate and financial planning objectives. First, a word about fraudulent transfers Part of your overall asset protection plan might include repositioning assets to make it legally difficult for potential future creditors to reach them. This does not, however, extend to actions that hide assets or defraud creditors. If a court finds that your asset protection plans were made with the intent to defraud, it will disregard those plans and make the assets available to creditors. How can you avoid running afoul of the fraudulent transfer laws? Make sure your plans are made for legitimate business purposes or to accomplish legitimate estate planning objectives Carefully document the legitimate business and estate planning purposes of any arrangements you make Put your plans into effect before you have any problems with creditors Do not implement a plan at a time when a lawsuit is imminent or pending or at a time when you have an outstanding debt that you believe you may be unable to pay Where the dangers lie Unexpected liability can come from just about anywhere: The IRS and other tax authorities Accident victims, including victims whose injuries were caused by the actions of minor children or employees Doctors, hospitals, nursing homes, and other health-care providers Credit card companies Business creditors, including employees and former employees, governmental agencies, suppliers, customers, partners, shareholders, and the general public Creditors of other individuals, where you have cosigned or guaranteed obligations for those individuals Marital or other live-in partners Asset protection techniques There are three basic asset protection techniques: insurance, statutory protection, and asset placement. None of these techniques is a complete solution by itself, but may make sense as one limited component of an asset protection plan. Insurance The simplest way to cope with risk is to shift the risk to an insurance company. This should be your first line of defense. Before you do anything else, review your existing coverage. Then consider purchasing or increasing coverage on your insurance policies as appropriate. You should be adequately insured against: Death and disability Medical risk, including long-term care Liability and property loss (both personal and business) Other business losses Statutory protection Creditors can't enforce a lien or judgment against property that is exempt under federal or state law. While exemption planning can't offer total protection, it can offer some shelter for certain assets. Both federal and state laws govern whether property is exempt or nonexempt in nonbankruptcy proceedings (separate federal and state laws govern whether property is exempt or nonexempt in bankruptcy proceedings). Generally, you can choose whether the federal exemption or the state exemption applies. When looking at exemption laws, be sure to find out how much of an exemption is allowed for a particular type of property--it may be completely exempt, or exempt only up to a certain amount or restricted in some way. Types of property often receiving an exemption include: Homestead (principal residence) Personal property Motor vehicle IRAs, pension plans, and Keogh plans Prepaid college tuition plans Life insurance benefits and cash value Proceeds of life insurance Proceeds of annuities Wages Tip: In those jurisdictions that recognize ownership by tenancy by the entirety (TBE), creditors of the husband or creditors of the wife cannot reach TBE assets. Asset placement Asset placement refers to transferring legal ownership of assets to other persons or entities, such as corporations, limited partnerships, and trusts. The basis for this technique is simple--creditors can't reach property that you do not own or control. Shifting assets to the spouse who is less exposed to claims If you have high exposure to potential liability because of your occupation or business, it may be advisable for you to shift assets to your spouse. Your spouse would retain the assets that are subject to the exposure as his or her separate property, and you would retain assets that enjoy statutory protection, such as the homestead, life insurance, and annuities, as separate property. Furthermore, the shifting of assets to a spouse or children may help accomplish other estate planning goals. Caution: To avoid complications in the event that your marriage ends in divorce, both you and your spouse should agree to the division of assets in writing. This is especially important in community property states. C corporations If you own a business and aren't already a C corporation, changing your business structure to a C corporation will make it a separate legal entity in the eyes of the law. As such, a C corporation owns the business assets and is responsible for all business debts. Thus, incorporating your business separates your business assets from your personal assets, so your personal assets will generally not be at risk for the acts of the business. Caution: The limited liability feature may be lost if, for example, the corporation acts in bad faith, fails to observe corporate formalities (e.g., organizational meetings), has its assets drained (e.g., unreasonably high salaries paid to shareholder-employees), is inadequately funded, or has its funds commingled with shareholders' funds. Caution: A number of issues should be considered when selecting a form of business entity, including tax considerations. Consult an attorney and tax professional. Limited liability companies (LLCs) and partnerships (LLPs and FLPs) An LLC is a hybrid of a general partnership and a C corporation. Like a partnership, income and tax liabilities pass through to the members, and the LLC is not double-taxed as a separate entity. And, like a C corporation, an LLC is considered a separate legal entity that can be used to own business assets and incur debt, protecting your personal assets from other nontax claims against the LLC. Professionals (e.g., doctors, lawyers, and accountants) face liability for damages that result from the performance of their professional duties. While no business structure will protect you from personal liability for your professional activities, an LLP will protect you from the professional mistakes of your partners. That is, if one of your partners is sued, and the LLP is also named in the lawsuit, any malpractice judgment is the personal liability of the partner who's been sued, but a business liability for you and the other partners. Your personal assets aren't at stake if your partner commits malpractice, although your investment in the business may still be at risk. An FLP is a limited liability partnership formed by family members only. At least one family member is a general partner; the others are limited partners. A creditor can't obtain a judgment against the FLP--it can only obtain a charging order. The charging order only allows the creditor to receive any income distributed by the general partner. It does not allow the creditor access to the assets of the FLP. Thus, a charging order is not an attractive remedy to most creditors. As a result, the limitation to seeking a charging order can often convince a creditor to settle on more reasonable terms than might otherwise be possible. Protective trusts in general A protective trust can protect both business and personal assets from most creditors' claims. A trust works because it splits ownership of trust assets; the trustee has equity ownership and the beneficiaries have beneficial ownership. Essentially, a protective trust works like this: Example(s): Harry would like to leave property to Wendy. However, Harry is afraid that his creditors might claim the property before he dies and that Wendy will receive none of it. Harry establishes a trust with both himself and Wendy as the beneficiaries. The trustee is instructed to allow Harry to receive income from the trust until Harry dies and then to distribute the remaining assets to Wendy. The trust assets are then safe from being claimed by Harry's creditors, so long as the debt was entered into after the trust's creation. Under these circumstances, any of Harry's creditors would be able to reach assets in the trust only to the extent of Harry's beneficial interest in the trust. Say that Harry's interest in the trust is a fixed income distribution each month in the amount of $1,000. Assuming Harry's creditors obtained a judgment, they would only be entitled to the $1,000 per month. Irrevocable trusts As the name implies, an irrevocable trust is a trust that you can't revoke or change. Once you have established the trust, you can't dissolve the trust, change the beneficiaries, remove assets from the trust, or change its terms. In short, you lose control of the assets once they become part of the trust. But, because the assets are out of your control, they're generally beyond the reach of creditors too. You may further protect those assets from your beneficiaries' creditors by using special language (known as a spendthrift clause) in the trust. Caution: Unlike an irrevocable trust, a revocable trust provides the assets in the trust with absolutely no legal protection from your creditors. Offshore (foreign) trusts It's possible to transfer assets to trusts that are formed in foreign countries (certain countries are preferred). While the laws of each country are different, they share one similarity--they make it more difficult for creditors to reach trust assets. Here's how it works: In order for a creditor to be able to reach assets held in a trust, a court must have jurisdiction over the trustee or the trust assets. Where the trust is properly established in a foreign country, obtaining jurisdiction over the trustee in a U.S. court action will not be possible. Thus, a U.S. court will be unable to exert any of its powers over the offshore trustee. So, the creditor must commence the suit in the offshore jurisdiction. The creditor can't use its U.S. attorney; it must use a local attorney. Typically, a local attorney will not take the case on a contingency fee basis. Therefore, if a creditor wants to pursue litigation in the offshore jurisdiction, it must be prepared to pay the foreign attorney up front. To make matters even less convenient, many jurisdictions require the creditor to post a bond or other surety to guarantee the payment of any costs that the court may impose against the creditor if it is unsuccessful. Taken as a whole, these obstacles have the general effect of deterring creditors from pursuing action. Domestic self-settled trusts The laws in Alaska, Delaware, and a few other states enable you to set up a self-settled trust. Alaska was the first state to enact such an anti-creditor trust act, and Delaware quickly followed. Hence, this type of trust is often called an Alaska/Delaware trust (sometimes also referred to as a domestic asset protection trust, or DAPT). A self-settled trust is a trust in which the person who creates the trust (the grantor) can name himself or herself as the primary beneficiary. These trusts give the trustee wide latitude to pay as much or as little of the trust assets to any or all of the eligible beneficiaries as the trustee deems appropriate. The key to this type of protective trust is that the trustee has the discretion to distribute or not distribute the trust property. Creditors can only reach property that the beneficiary has the legal right to receive. Therefore, the trust property will not be considered the beneficiary's property, and any creditors of the beneficiary will be unable to reach it. Caution: Domestic self-settled trusts may not be as effective as a foreign trust, because a judgment from an individual state must be honored by another state under the United States Constitution.

If you have any questions, please contact me at dkdowell@dkdcpa.com

Dwayne K. Dowell, CPA/PFS, CLTC

9900 Corporate Campus Drive

Suite 3000

Louisville KY 40223

Phone 502.657.6428 Fax 800.899.0084

 

PRESS RELEASE

 

 

PRESS RELEASE - FOR IMMEDIATE RELEASE

 

Debut of Kentucky Veterans Benefits Website

 

http://www.kentuckyveteransbenefits.com

 

“I am very pleased to announce the formation of the Kentucky Veterans Benefits website.  I look forward to educating and working with Veterans in this very unique area.”

 

On being an Accredited Veteran’s Benefit Agent

  

Dwayne will be specializing in educating and helping veterans, members of a veteran's family, or the surviving spouse of a veteran understand how to obtain long term care benefits from the Department of Veterans Affairs. Most veterans are not aware of the benefits available through veteran’s health care, through state veteran’s homes, through home renovation grants, or for two disability income programs called Compensation and Pension.

Founder of National Care Planning Council and author of three books on Veterans Benefits, Thomas Day states, “It's astounding that roughly 1/3 of all seniors can qualify for up to $1,949 a month in additional income through Pension under the right conditions. Yet government statistics shows only 5% of potentially eligible veterans are actually receiving the Pension benefit.”

The Aid & Attendance Benefit can help you pay anyone including your child for home care. It can also be used to help you pay for professional care in the home, for assisted living, or for nursing home. Imagine having an extra $1,949 a month that you didn't even know existed.