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Mid-Year Tax ConsiderationsAbel Financial Strategies Though it may seem as if own rates and rules. While the DecemberAugustus W. Abel, CFP® the ink has barely dried on legislation extended regular income tax rates your 2010 federal income through 2012, it only extended AMT relief (inFinancial Advisor tax return, the end of 2011 the form of increased AMT exemption amounts)3775 Attucks Dr. is now visible on the through 2011. You can probably expect anotherPowell, OH 43065 horizon. Here are some AMT fix in legislation later this year, sincephone (614) 389-2075 things to consider as you without it there would be a dramatic increase inCell (614) 499-1201 take stock of your current tax situation. the number of individuals subject to AMT firstname.lastname@example.org 2012. But that leaves a fair degree of The 2% differencewww.awabelfinancial.com uncertainty today, however, as you consider If youre an employee, 6.2% of your wages (up your overall tax situation. to the taxable wage base--$106,800 in 2011) would normally be withheld for your portion of Also worth notingHi Everyone, the Social Security retirement component of Small business stock: Generally, individuals FICA employment tax. But legislation passed in may exclude 50% of any capital gain from theWell the rain has finally stopped December 2010 included a temporary one-year sale or exchange of qualified small businessand now the drought begins. 2% reduction in this tax. That means for 2011, stock provided they meet certain requirements,The extremes in the weather youre paying the tax at a rate of 4.2%. If youre including a five-year holding period. Forhave been all too common self-employed, the 12.4% you would normally qualified small business stock issued andrecently. pay for the Social Security portion of your acquired after September 27, 2010, and before self-employment tax is reduced to 10.4%. January 1, 2012, however, 100% of any capitalExtremes in your investments Have you earmarked the resulting extra dollars gain may be excluded from income if the stockperformance can be wonderful is held for at least five years and all otheron the upside and depressing in your paycheck efficiently by, for example, paying down high-interest debt or saving for requirements are met.on the downside. Proper retirement? If you havent, consider making up IRA qualified charitable distributions: Absentdiversification of your accounts for it by contributing an extra 4% of your income additional legislation, 2011 will be the last yearcan help you reduce the to your 401(k) or an IRA for the remainder of that youll be able to make qualified charitabledownside effects on your the year. By applying the extra money toward a distributions (QCDs) of up to $100,000 from anaccounts. long-term goal, the potential benefit of the IRA directly to a qualified charity if youre ageBest wishes for a beautiful temporary tax reduction can extend beyond 70½ or older. Such distributions may bemonth of June! 2011. excluded from income and count toward satisfying any required minimum distributionsA.W. Tax rates (RMDs) that you would otherwise have to The same federal income tax rates that applied receive from your IRA in 2011. in 2010 continue to apply in 2011 and 2012 Depreciation and IRC Section 179 expensing: If (depending on your taxable income, youll fall youre a business owner or self-employed into either the 10%, 15%, 25%, 28%, 33%, or individual, youre allowed a first-year 35% rate bracket). And, as in 2010, long-term depreciation deduction of 100% of the cost of capital gains and qualifying dividends in 2011June 2011 qualifying property acquired and placed in and 2012 continue to be taxed at a maximum service during 2011 (the "bonus" first-yearMid-Year Tax Considerations rate of 15%; if youre in the 10% or 15% additional depreciation deduction will drop to marginal income tax brackets, a special 0%Life Insurance Policy Loans: Tax and 50% for property acquired and placed in service rate will generally apply. So, unlike this time lastOther Implications during 2012). For 2011, the maximum amount year, you dont have to contend with the that can be expensed under IRC Section 179 isDeciphering Health Savings Vehicles uncertainty of not knowing what next years tax $500,000, but in 2012 the limit will drop to rates will be.What is a funeral trust? $125,000. That consistency, however, does not apply to the alternative minimum tax (AMT)--essentially a parallel federal income tax system, with its Page 1 of 4, see disclaimer on final page
Life Insurance Policy Loans: Tax and Other Implications As the owner of a life insurance policy, you can of disability, or as part of a series of generally borrow the policys cash surrender substantially equal periodic payments. value and use the proceeds for any purpose. Example(s): You have a MEC with a cash Before you take a policy loan, be sure you surrender value of $100,000. You have paid understand the implications of the loan on the premiums of $50,000. You take a policy loan for policy itself as well as any tax implications, now $60,000. The first $50,000 ($100,000 cash and in the future. surrender value - $50,000 investment in the Effect of policy loan on policy contract) of the loan is taxable income to you. You can generally borrow an amount up to the Lapse or surrender of policy policys cash surrender value (less an An outstanding loan is generally treated as an adjustment for interest) from the insurer. The amount received if a policy lapses or isWhat is a MEC? insurer will charge you interest on the loan. surrendered and may result in taxable income. Generally, interest is not actually paid, but is A policy can lapse if premiums are not paid andA life insurance policypurchased after June 20, added to the amount of the loan. Interest the policy terminates when any policy benefits1988, is a modified charged on a policy loan is not generally are exhausted as a result. Also, as notedendowment contract if the deductible for income tax purposes. There above, if the amount borrowed plus interestaccumulated premiums paid could be other adjustments as well under the ever equals or exceeds the cash surrenderat any time during the first contract; for example, a participating policy may value, the policy can terminate if additionalseven years exceed the sum restrict the payment of dividends to you while aof the net level premiums amounts are not paid into the life insurance loan is outstanding. policy. You can cash in a policy by surrenderingfor a policy that would bepaid up after seven years. A You are not required to repay a life insurance the policy to the insurer in return for the policyssingle premium policy is policy loan. But you can generally repay a life cash surrender value (as reduced by theone example of a modified insurance policy loan at any time while the amount of the loan plus interest).endowment contract. (Your insured is alive. If you do not repay the loan,life insurance company or If you surrender your policy to the life insurance the cash surrender value paid to you or the company or the policy lapses, any gain realizedlife insurance agent can tell policy proceeds at death will be reduced by theyou if a policy is a modified is taxable at ordinary income tax rates. The amount of the loan (plus interest). Thus, a loan gain is the excess of the amount you receiveendowment contract.) generally reduces life insurance protection. over the net premium cost. The net premium If the amount borrowed plus interest ever cost is the total premiums you paid less any equals or exceeds the cash surrender value, tax-free distributions received. An outstanding the policy can terminate if additional amounts loan is generally treated as an amount received are not paid into the life insurance policy. Life if a policy is surrendered or lapsed and may insurance protection could be lost. result in taxable income. If you have any incidents of ownership in a life Example(s): You have a life insurance policy insurance policy on your life, proceeds paid at with a cash surrender value of $200,000. You death are includable in your gross estate for have paid premiums of $75,000. You also have federal estate tax purposes. The right to obtain an outstanding policy loan of $175,000. There a policy loan is an incident of ownership. have been no distributions from the policy. You Generally, life insurance proceeds received at surrender the policy to the insurer for $25,000 death by your beneficiary are received income cash. You have taxable ordinary income of tax free. $125,000 ($25,000 cash + $175,000 loan - $75,000 premiums). If you have not prepared Taxation of policy loan for it, it may come as quite a shock. You can borrow against your life insurance Example(s): You have a life insurance policy policy, and the loan proceeds are generally not with a cash surrender value of $200,000. You taxable to you (unless the policy is a modified have paid premiums of $75,000. You also have endowment contract (MEC), see sidebar). an outstanding policy loan of $200,000. There A loan from a MEC is treated as a distribution have been no distributions from the policy. The from the MEC. A distribution from a MEC is policy lapses. You have taxable ordinary subject to the income-out-first rule. As amounts income of $125,000 ($200,000 loan - $75,000 are distributed, they are treated as consisting of premiums). Once again, if you have not taxable income to the extent that they do not prepared for it, it may come as quite a shock. exceed the excess of the cash surrender value of the policy over the investment in the contract (generally, premiums paid less tax-free distributions). The taxable income will also be subject to a 10% penalty tax unless the distribution is made after age 59½, on account Page 2 of 4, see disclaimer on final page
Deciphering Health Savings Vehicles Health savings accounts (HSAs), Archer FSAs medical savings accounts (MSAs), health If you dont participate in an HDHP, you still can reimbursement arrangements (HRAs), and set money aside for uninsured medical flexible spending arrangements (FSAs) are all expenses through an employer-established personal health accounts that may help you FSA. Unlike an HSA, you must be an employee control your health-care costs. But trying to of the employer providing the FSA in order to figure out whats what can be confusing. Heres participate (self-employed persons are not a brief description of each type of account, eligible and certain limitations may apply if you including some of their major features and are a highly compensated participant or key benefits. employee). Pretax contributions can be made MSAs/HSAs by either you, your employer, or both of you As of January 1, 2008, the MSA program (except employer contributions used to payBeginning January 1, 2011,for HSA, MSA, FSA, and expired and no new MSAs can be established, long-term care premiums must be included in although if you already participate in an MSA, income). You determine how much money youHRA programs, a drug ormedicine is considered a you can continue to receive contributions. want deposited each year up to the plansqualified medical expense HSAs have generally taken the place of MSAs maximum dollar amount or percentage ofonly if it is obtained with a because of their greater flexibility and options. compensation; funds in the account are notprescription, or is insulin. In fact, in most instances you can roll over an subject to tax; and distributions are tax free if existing MSA into an HSA. MSAs and HSAs are used to pay for qualified, unreimbursed medical set up in a trust account with a financial entity. expenses youve incurred (no advance Contributions made through your employer are payments for anticipated expenses). Unlike pretax dollars (or you can contribute to the HSAs, if you leave your employer, you cant account directly and deduct the contribution), keep the money in the account or take it with no tax is due on funds in the account, or on any you to another employer (its not portable). earnings until withdrawn, and if funds are used Also, what you dont spend on medical for qualified medical expenses, the withdrawals expenses by the end of the plan year is are not taxed. However, account withdrawals forfeited and not available the following year that arent used for qualified medical expenses (i.e., you must use it or lose it). are subject to a tax penalty of 20%, in addition HRAs to regular income tax. Your account is portable, Like FSAs, HRAs are only available to meaning if you change employers or leave the employees, not to self-employed individuals. workforce, you can keep the account. To beEffective January 1, 2013, And HRAs must be funded solely by an eligible, you must be insured by a highcontributions to a flexible employer; you cant contribute directly to thespending account will be deductible health plan (HDHP) that you account. The terms of the HRA are generallylimited to $2,500 per year, maintain (if self-employed) or thats provided determined by the employer. For example, yourincreased annually by through your employer. employers plan may or may not require you tocost-of-living adjustments. However, there are also differences between have health insurance in order to participate. MSAs and HSAs. Generally, anyone with an The plan sets the maximum amount of HDHP can participate in an HSA. But to qualify contributions, and determines whether a credit for an MSA, you must have been either an balance in the account can be rolled over from employee of a company that employs 50 or year to year, and if so, how much of the fewer people, or be self-employed (or the account can be rolled over. But contributions spouse of such an employee or self-employed and reimbursements for qualified medical person). With an HSA, contributions can be expenses are tax free. Reimbursements can be made by you, your employer, or anyone else on made to current and former employees, your behalf within the same plan year. But MSA including spouses and dependents of contributions can only be made by either your employees and deceased employees. employer or yourself, but not both, in the same However, if the plan allows for any distribution plan year. Contribution amounts also differ. In to you or anyone else (e.g., spouse, dependent, 2011, maximum HSA contributions are limited estate at your death) for other than to $3,050 for single HDHP coverage and reimbursement for qualified medical expenses, $6,150 for family HDHP coverage. MSA then any distribution, whether for qualified contributions can be up to 75% (65% if you medical expenses or not, is included in gross participate in a self-only plan) of the annual income. deductible of your HDHP, but no more than your annual earnings from employment. Page 3 of 4, see disclaimer on final page
Ask the ExpertsAbel Financial Strategies What is a funeral trust?Augustus W. Abel, CFP® A funeral trust is a contract right before entering the nursing home--theresFinancial Advisor you enter into with a provider no "look-back" period for these transfers.3775 Attucks Dr. of funeral or burial services. Another advantage of funding your trust with lifePowell, OH 43065 Often, the trust is entered into insurance is that the trust will have no taxable directly with the funeral home, income to report, since life insurance cashphone (614) 389-2075 which may agree to "lock in" costs for future values grow tax deferred. Otherwise, incomeCell (614) 499-1201 funeral or burial services at an agreed email@example.com from trust assets may be taxed to you as the price. The funeral home sometimes serves as trustor (creator of the trust) unless the trusteewww.awabelfinancial.com trustee (manager of trust assets), and you elects to treat the trust as a qualified funeral usually fund the trust with cash, bonds, or life trust by filing form 1041-QFT with the IRS, in insurance. A revocable funeral trust can be which case trust income is taxed to the trust. changed and revoked by you at any time. An irrevocable trust cant be changed or revoked, But what if you want to change funeral homes,Securities offered through First and you generally cant get your money out or the facility you selected goes out ofHeartland Capital® , Inc. Member except to pay for funeral services. business? Does your irrevocable trust allow youFINRA/SIPC. Advisory Services to change beneficiaries (e.g., funeral homes)?offered through First Heartland® Irrevocable funeral trusts may also help you Are trust funds protected from creditors of theConsultants, Inc. (Abel Financial qualify for long-term care benefits through funeral home? States have laws regulatingStrategies is not affiliated with First Medicaid. These trusts may be funded with prepaid funeral trusts that often require funeralHeartland Capital® , Inc.) assets that would otherwise be countable homes to keep trust assets separate from their resources for Medicaid. They are also often own business assets--keeping them safe from sold through insurance companies, in which funeral home creditors. And most irrevocable case they are typically funded with trusts are transferable to another funeral home single-premium whole life insurance. Trust should the initial business fail or you change assets, including life insurance death benefits, funeral homes. are not countable resources when trying to qualify for long-term care benefits through Medicaid. And you can fund the funeral trust What is a pet trust? A pet trust is a contract you Some of the instructions to consider for your use to provide for the care and pet trust include: provisions for food and diet, financial support of your pet daily routines, toys, medical care and grooming, upon your disability or death. how the trustee or caregiver is to document As the trustor (creator) of the expenditures for reimbursement, whether the trust, you fund the trust with property or cash trust will insure the caregiver for any injuries or that can be used to provide for the care and claims caused by your pet, and the disposition protection of your pet based on the instructions of your pets remains. you lay out in the trust. You may also want to name a person or Your pet trust should name a trustee, who will organization to take your pet should your trust carry out your instructions for the care of your run out of funds. Also, consider naming a pet, including handling and disbursement of remainder beneficiary to receive any funds or trust funds and turning your pet over to the property remaining in the trust after your pet person or entity you designate to serve as your dies. pets caregiver. A potential problem arises if your pet is As with most trusts, you can create your pet expected to live for more than 21 years after trust while youre alive (an inter vivos or living your death. Thats because the "rule against trust) or at your death through your will (a perpetuities" forbids a trust from lasting beyond testamentary trust). In either case, you can a certain period of time, usually 21 years after generally change the terms of your pet trust at the death of an identified person. However, any time during your lifetime to accommodate almost every state has laws relating to pet changing circumstances. If you create an inter trusts that address this issue in particular and vivos trust, you can fund it with cash or property allow for the continued maintenance of the trust either during your life or at your death through even if its terms would otherwise violate the your will. A testamentary trust is only funded rule. after you die. Page 4 of 4 Prepared by Forefield Inc. Copyright 2011