Company-Provided Life Insurance

Does your company provide you with life-insurance?

If your employer sponsors a group term-life insurance policy, you can receive up to $50,000 of coverage tax-free.

Any coverage in excess of $50,000 is taxable to the employee, and the taxable amount is based upon an IRS formula.

Your spouse and dependents may also be covered by the group life insurance policy.  Up to $2,000 of coverage is tax-free.  An IRS formula is used to determine the amount of taxable income you will treated as earning for any coverage in excess of the $2,000 amount.

When the life insurance proceeds are eventually paid due to the death of the insurance, the life insurance proceeds are not subject to taxation.  This is even true if the benefits are received before death if the insured is terminally or chronically ill.

Your employer may even take a tax deduction for a portion of the premiums paid as long as the plan does not discriminate between employees and your employer is not a beneficiary under the life insurance contract.

All this sounds great, right?

There are significant limitations for self-employed individuals (which general includes sole proprietors, partners, members of an LLC, and more than 2% S-corporation shareholders).  As a self-employed individual, you are not treated as an employee for these purposes, and therefore you are not allowed to take a business deduction for the life insurance premiums relating to coverage on you or your family.

Also, if the employer owns the life-insurance contract, the business must include the death benefit proceeds paid (to the extent they exceed the premiums paid) in its gross income.  There are 3 exceptions to this:

1. The insured individual was an employee within 12 months before death;
2. The proceeds are paid to buy back an equity interest; or
3. The insured was a highly compensated employee at the time the contract was issued.

If you have questions about employer provided life insurance coverage, please do not hesitate to send me an e-mail.

If you would like a referral to talk to someone licensed to sell life insurance policies, I would be happy to do that as well.

As always, please do not hesitate to leave your feedback in the comments section below.

Tax Consequences of a Personal Injury Settlement

Have you been injured in a car accident?

Hopefully you have been financially compensated for your injuries through a settlement, but the last thing you want to do now is have to pay taxes on this money.  The good news is that you likely won't have to.

Whether your settlement is taxable depends upon how the settlement is classified.

Personal Injury
If you receive a settlement for personal physical injuries, and did not take an itemized deduction for medical expenses related to the injury in prior years, the full amount is non-taxable.  However, if you claimed medical expenses related to the injury in a prior year, you must include that portion of the settlement in income.

Emotional Distress or Mental Anguish
If a portion of your settlement is for emotional distress or mental anguished originating from a personal physical injury, then it too is non-taxable.  However, the emotional distress or mental anguish must originate from a personal physical injury.

Lost Wages
If a portion of your settlement is for lost wages, that portion is fully taxable.

Property's Loss-in-Value
The taxable portion of a settlement relating to your property's decrease in value depends upon your basis in the property (original purchase price less any allowable deprecation).  If the decrease in value is less than the adjusted basis of your property, that portion of the settlement is not taxable.  However, if the property settlement exceeds your basis in the property, the excess is taxable income.

Punitive Damages
Punitive damages are fully taxable, even in personal injury cases.

It is very important when your attorney is negotiating a settlement that he/she classifies the settlement in a way that minimizes your tax burden.  The IRS will generally respect the classification of the settlement as long as it is consistent with the type of injury suffered.

If you have any questions about the taxability of a legal settlement, or if you would like a referral to a great personal injury attorney, please do not hesitate to send me an e-mail.

As always, I appreciate you leaving your feedback in the comment section below.

Adoption Tax Credit

Are you considering adopting a child?

Adopting a child can be truly rewarding, but the process can be expensive.  However, the cost can be partially offset through the Adoption Tax Credit.

For 2015, families can claim an adoption tax credit worth up to $13,400.  You may qualify for the adoption credit if you adopted a child and paid qualified expenses relating to adoption.  While this tax credit is non-refundable, any unused portion may be carried forward for up to 5 years.

Qualified adoption expenses are reasonable and necessary adoption fees.  They include:

• Court costs;
• Attorney fees;
• Travel expenses; and
• Other expenses directly related to the legal adoption of an eligible child.

An eligible child is a child under the age of 18 (who is not the child of your spouse or from a surrogate parenting arrangement), or an individual of any age who is physically or mentally incapable of caring for him or herself.

If you are adopting a U.S. child with special needs, you may qualify for the full $13,400 regardless of your actual qualified adoption expenses once the adoption becomes final.

For adopting children without special needs, when you are eligible to claim the adoption tax credit depends both upon whether the child is a U.S. citizen or resident and when the qualified expense is paid.

1. If you are adopting a child who is a U.S. citizen or resident:
• Any qualifying expenses paid before the year the adoption becomes final can be claimed the year after the year of the payment;
• Any qualifying expenses the year the adoption becomes final can be claimed that year; and
• Any qualifying expenses paid after the year the adoption becomes final can be claimed in the year of payment.
2.  If you are adoption a foreign child:
• Any qualifying expenses paid before the year the adoption becomes final cannot be claimed until the year the adoption becomes final;
• Any qualifying expenses paid the year the adoption becomes final can be claimed that year; and
• Any qualifying expenses paid after the year the adoption becomes final can be claimed in the year of payment.

Basically, if you are adopting a child who is a U.S. citizen or resident you can use the qualifying expenses to claim the adoption tax credit even if the adoption does not become final, but if you are adopting a foreign child the adoption must become final.

Additionally, if your employer has a qualified adoption assistance program, any amounts paid to you or on your behalf for the purposes of adopting a child may be excluded from your income.

The adoption tax credit does phase out based upon income.  In 2015, if your modified adjusted gross income is greater than $201,010 it begins to phase out and will be completely phased out when your modified adjusted gross income reaches $241,010.

If you are thinking about adopting a child and would like to learn more about the adoption tax credit, please do not hesitate to send me an e-mail.

As always, I appreciate your feedback in the comments section below.

Estate Tax Planning

Congress radically changed the estate planning landscape in 2010 when it introduced the portability election, and it is time for you to learn how to take advantage of it.

 

Prior to 2010, the estate tax regime ignored the reality that married couples think of themselves as a single economic unit, and instead treated them as individuals.  Every individual was entitled to a basic exclusion amount (an amount of assets the value of which would not be subject to gift or estate taxes) which could be used by transferring their assets to any individual other than to a spouse (transfers to spouses were already excluded through the marital deduction).  This structure placed individuals in the difficult position of deciding how much of their assets to leave to their spouses for their support and well-being, and how much to leave to their children in order to take advantage of the basic exclusion amount.  This was a "use it or lose it" system because any unused portion of the basic exclusion amount would disappear.

 

This all changed in 2010 with the creation of the portability election.  If a valid portability election is made, a spouse may take the unused portion of their last deceased spouse's basic exclusion amount and add it to their own.

 

For example, Jacob and Sarah are a married couple.  Jacob dies in 2013 without having made any taxable gifts in his life, and his will directed his executor to leave his entire estate to his wife and to make the portability election.  This allows Sarah to inherit his $5.25 million basic exclusion and add it to her own basic exclusion.  Sarah would then be able to make gifts of up to $10.5 million in 2013 to her children without having to pay gift or estate taxes.

 

I would encourage you to talk to an estate planning attorney regarding your specific needs and desires.  The portability election is a great estate planning tool, but it should be used in conjunction with a will and trusts in order to ensure that your assets are disposed of in the manner that you want.

 

There are a number of issues relating to the portability election that I have not discussed here.  If you would like to learn more about this election or have any questions, please do not hesitate to send me an e-mail.

 

Also feel free to contact me if you would like a referral to a great estate planning attorney.

 

As always, I appreciate your feedback in the comments section below.

End of Year Tax Planning

Its already October, which means that time is quickly running out for you to minimize your 2013 tax liability.  While there are a number of tax-saving strategies that can be employed before year end, after December 31st the only viable way to reduce your tax liability would be to make a contribution to a qualified retirement plan (Plan For Your Retirement; What is an IRA?).

End of year tax planning is more important this year than it has been in a long time.  Here is why:

• Tax rates have gone up for high-income earners.  Single individuals making more than $400,000 per year and married couples (filing jointly) making more than $450,000 per year will have to be a top federal tax rate of 39.6%.
• Those same individuals will now be paying a 20% federal capital gains rate on qualified dividends and long-term capital gains.
• Single individuals making more than $200,000 per year and married couples (filing jointly) making more than $250,000 per year will be subjected to the 3.8% Medicare Surtax on net investment income.
• In addition to all this, California has raised its top tax rate to 12.3%, plus a 1% surtax on taxable income above $1,000,000.

There are ways to minimize the impact that these additional taxes will have on you!

The first thing you need to do is talk to a CPA.  There is plenty of advice you can find online about how to reduce your taxes, but this is not a "one size fits all" issue.  You are a unique individual with a unique financial situation.  What may work for Joe down the street may not be the ideal tax-minimization strategy for you.

Here is what a CPA can do for you:

1. Explain the New Tax Laws.  The Medicare Surtax is a brand new tax that operates in a different manner than the income taxes that you are used to.  A CPA can explain exactly how it works in a way that will make sense to you.
2. Prepare a Tax Projection.  A tax projection will allow you to see what your tax situation will be if you do not employ a new tax-minimization strategy. This will allow your CPA to identify what issues affect your tax situation and begin to develop a strategy to minimize your taxes.
3. Develop a Personalized Tax-Minimization Strategy.  A CPA will work with you to determine the best way to reduce your taxes in a way that best fits your life and desires.

If you have any questions, or would like to talk to me about your end-of-year tax planning, please do not hesitate to send me an e-mail.

As always, I appreciate you leaving any feedback you have below.

How does the Government Shutdown affect Taxes?

As I am sure you already have heard, as of October 1st, 2013, the federal government has "shut down" until a budget can be passed.  As you have been seeing on the news, this means that among other things national parks are closed and nearly 800,000 federal employees are on furlough.  But how does the government shutdown affect your taxes?

For individuals who have filed a tax extension, they must still file their tax returns by October 15th.

 

The IRS will only be processing tax returns that are filed electronically.  Any tax returns that are mailed to the IRS will not be deemed late, as long as they are still mailed by October 15th, but will not be processed until after the government shutdown ends.

 

The IRS will not be issuing any tax refunds.  Sorry, but this means that if the federal government owes you money you will not receive it until after the government shutdown ends.  I would expect that there will be delays even after the government is back to operating normally because it will take the IRS some time to process all of the tax returns.

 

Most customer service assistance will not be available.  There will not be any live telephone assistance and the IRS walk-in taxpayer assistance centers will be closed.  However, most automated telephone applications will still work.

 

IRS audits are on hold.  The IRS's auditors have been furloughed, so any meetings related to IRS audits, collections, or appeals have been cancelled.  If you are currently involved in an IRS audit, you should assume that it will resume once the government shutdown ends, but you have some extra time now to prepare for it.

 

Automated IRS notices will continue to be mailed.  This means that despite the government shutdown you may receive a notice from the IRS.  However, the IRS will not be working on any paper correspondence during this time.  If you receive an IRS notice, talk to your CPA about it just like you normally would.

 

If you would like to talk privately about how the government shutdown will affect your tax situation, please do not hesitate to send me an email.

 

What are your thoughts about the tax consequences of the government shutdown?  Please leave your comments below.

 

 

What is an IRA?

Everyone keeps telling you that you need to save for your retirement, but your company does not have a 401(k).  What are you supposed to do?  You can contribute to an Individual Retirement Account (IRA)!

 

The advice that everyone is giving you is right, you need to make sure you save for your own retirement.  One estimate projected that the Social Security trust fund will be exhausted by 2037 if not sooner.  I discussed this and provided advice for your retirement savings plan in Plan for Your Retirement: No One Else Will.

 

If your employer does not provide a company 401(k) plan, you will want to talk to your financial advisor about establishing an IRA.  But what is an IRA?

There are 2 basic types of IRAs:

 

1) Traditional IRA

 

Qualified contributions to a Traditional IRA help to reduce your taxes because they are tax-deductible.  Contributions to a Traditional IRA are one the few ways in which you can actually reduce your tax bill after the year ends.  The governments allows you to make a contribution up until April 15th of the following year, and to take the deduction in the preceding year.

 

The amount you are allowed to contribute to a Traditional IRA changes frequently as it is adjusted for inflation, but in 2013 you are allowed to make a contribution up to $5,500, or $6,500 if you are age 50 or over.

 

Once invested into a Traditional IRA, all of the funds grow without being taxed.  You will not be taxed until you withdraw the funds! 

 

There are a few basic requirements in order to make a contribution to a Traditional IRA:

• The contributor must be an individual (not a trust, company, etc.)
• You must be under the age of 70.5
• You must have sufficient earned income or compensation (at least as much as you contribute to your IRA)

 

Be careful though.  The ability to make a tax-deductible contribution phases out based upon whether or not your employer provides a company retirement plan, your tax filing status, and your income level. 

 

2) Roth IRA

 

The principal difference between Traditional IRAs and Roth IRAs are that with Traditional IRAs the contributions are tax-free while with Roth IRAs the distributions are tax-free.

 

In 2013, you are allowed to make a contribution up to $5,500 or $6,500 if you are age 50 or over.  However, the contribution limitation changes based upon your tax filing status and your income level.

 

Once invested into a Roth IRA, all the funds grow tax-free.  Furthermore, all of the distributions are tax-free provided that you are over the age of 59 1/2 and have had the Roth IRA account for at least 5 years.

 

Again, there are a few basic requirements in order to make a contribution to a Roth IRA:

• The contributor must be an individual (not a trust, company, etc.)
• You must have sufficient earned income or compensation (at least as much as you contribute to your IRA).

 

You will notice that unlike with Traditional IRAs, there is no age restriction on being able to contribute to a Roth IRA.

 

Of course these are only the 2 most basic types of IRAs.  You may want to discuss non-deductible IRAs, SEP IRAs, and SIMPLE IRAs with a financial advisor to determine what type of IRA makes the most sense for your situation.  If you need a referral to a great financial advisor, please do not hesitate to ask me.

 

If you have any tax questions that I can answer, please send me an e-mail.

 

Please feel free to leave your feedback below.