Obamacare 3.8% Investment Tax
Now that the Supreme Court has upheld most of the provisions in the Patient Protection and Affordable Care Act (otherwise known as Obamacare) high income investors can expect to pay higher taxes on most investments.
Legislative changes of this magnitude certainly come at a cost and in order to pay for Obamacare, investors must now share more of the burden in the form of a 3.8% surtax on investment income. This will be in addition to any future rollback of the Bush tax cuts already proposed for the wealthy.
Explain The Obamacare New Investment Tax
This new tax that was passed in 2010 when Democrats controlled the House, Senate and Executive branches and affects joint filers with adjusted gross income of more than $250,000 and single filers with income above $200,000. Earned income amounts above these thresholds will be subject to the new tax, but income below will remain at current levels.
The tax is slated to begin January 1, 2013 assuming Congress upholds the legislation and barring no significant changes to the political landscape in the November 2012 elections.
How Much Is The Obamacare Investment Tax?
In a nutshell, certain investment and income taxes will increase by 3.8% from their current levels assuming no other legislative changes or expiration of current tax rates. Capital gains for high earners will jump from 15% to 18.8% on long term holdings.
In addition, there are also changes to the payroll tax. What once was a flat tax is now a means adjusted, progressive tax that will raise the Medicare payroll tax for joint filers with income above $250k and singles above $200k.
The Medicare tax will increase 0.9% to 2.35% from the current 1.45% on wages and self employment income. The Medicare tax is uncapped, so this new tax will apply to all income and wages above the aforementioned thresholds. High earning self employed persons will pay this amount twice.
What Investments Are Subject To The Health Care Tax?
Most tax experts believe that ordinary dividends and income, interest income, short and long term capital gains, rents, royalties, taxable annuity income, sales of primary residences above the $250,000/$500,000 exclusion, gains from sales on second homes and passive income will all be counted and subjected to the 3.8% surtax.
That is to say that almost all investments, save for a few, will now be subjected to these higher rates. Primary residence sales that result in large capital gains will not avoid this new tax. Joint filers are afforded a $500,000 exemption on the sale of a primary residence and single filers are allowed $250,000.
However a couple with $200,000 in adjusted gross income who has a $100,000 capital gain above the $500,000 primary residence exclusion amount would have to pay an additional 3.8% on the extra $50,000 above the joint $250,000 limit. Income and capital gains tax are combined and not mutually exclusive.
Investment properties and second homes are offered no exclusion upon sale and capital gains above the $250k joint and $200k single amounts would be subject to the 3.8% tax increase. This can be problematic for those with significant real estate holdings, but read on.
How Can I Avoid Or Reduce The New Investment Tax?
For those who are selling investment properties and residences that will result in significant capital gains, one such strategy may be a structured sale. With a structured sale annuity, the owner can defer constructive receipt of the capital gains and defer them over several years.
At present, structured sales have been accepted by the I.R.S when setup and executed properly by qualified tax professionals along side annuity insurance agents. By taking payments over several years, the capital gains can be spread out and in many cases help to keep investors below the new tax thresholds.
What About Other Tax Deferred Insurance Products?
When considering investments with tax advantages, there are two insurance products that can be helpful for many investors.
The first is a simple and straightforward investment account known as a tax deferred annuity.
When compared to bank certificates of deposit, mutual funds, and dividend paying stocks (among others), a non-qualified tax deferred annuity can shelter income for the life of the owner. There are no forced distributions with a non-qualified annuity and the deferred income tax can be spread out over several years during the owner’s lifetime or amongst the annuity beneficiaries at settlement.
Perhaps even a better investment is life insurance. Life insurance policies grow tax deferred, but in contrast to an annuity, the proceeds are payable income tax free to the named beneficiaries. There is really no better investment when it comes to wealth transfer than a whole or universal life insurance policy.
What About A Roth IRA Conversion?
Converting your traditional IRA to a Roth IRA can be beneficial when done properly. Considering that time is running out in 2012 before the new investment tax takes hold, now is a good time to consider a Roth IRA conversion.
It goes without saying that you would want to speak with your tax advisor before converting any qualified account, but it should be noted that distributions from a Roth IRA are considered income tax free by the I.R.S. and thus would not be counted towards your adjusted gross income.
Those with sizable IRA accounts might consider a total or partial Roth IRA conversion now in order to potentially reduce taxable required minimum distributions at age 70 1/2 and beyond.
Contact Us To Discuss Tax Avoidance Strategies
Hyers and Associates Inc. is a full service, independent life and annuity insurance agency. We specialize in wealth transfer and tax avoidance strategies for those in higher income tax brackets.
Category: Articles, Health Care Reform, Wealth Transfer
Insurance Policies That Lower Your Income Tax Obligations
It’s April 15th and while many have already filed their tax returns, some are still scrambling to get their documents in on time. Thus, it is an appropriate time of the year to talk about different ways to reduce your income taxes.
If you wish to reduce the amount of taxable income on your 1040 or are contemplating additional deductions, then you need to keep certain insurance policies in mind. There are several insurance and investment accounts that can lower your tax burden when setup properly.
Listed below are a few of the most common strategies and policies.
Annuity Investment Accounts Defer Income Taxes
If you are a fixed income investor primarily using certificates of deposit, then you might be creating unneeded taxable income. Whether or not you withdraw the interest, your CD’s are taxable investments – plain and simple.
If you don’t need income on a regular basis, then you should consider investing in a fixed or indexed annuity account.
Annuities do not generate taxable income so long as you allow the interest to compound. You can defer taxes in a non-qualified annuity for your entire lifetime if you wish.
If regular income is unneeded, you can determine how much and when you want to withdraw it. Thus, you are in control of how much (if any) of your interest will be taxed.
It is also worth pointing out that fixed annuity accounts offer higher interest rates than most bank savings instruments. Additionally, your deposits are insured up to a total of $300,000 in most states. And no, the insurance company does not keep your principal or interest upon death. All accumulated funds are payable to your named beneficiaries at passing.
Life Insurance Proceeds Avoid Income & Inheritance Taxes
Life insurance may be the single best vehicle for tax avoidance. While these policies should not be sold as “investments” they certainly have all the attributes of a good one. Whole life insurance and indexed life policies are very safe and pay reliable interest based on the fixed internal returns declared by the policy or the chosen market index.
Life insurance grows tax deferred like an annuity account. If you do not withdraw the interest or gains, then no income taxes will be due – ever. But unlike an annuity, life insurance proceeds pass income tax free to your beneficiaries. That’s right, no income taxes are due whatsoever.
This is why single premium life insurance policies have become so popular. Rather than pay income taxes on the interest generated from your bank CD, you can easily purchase a life policy with the principal. Most single premium life contracts require very little underwriting.
The single deposit would create an immediate death benefit much larger than a CD or annuity account could ever promise and the cash value would grow each year. You would have access to the entire invested deposit (cash value) amount almost immediately if it was needed for an emergency or anything else. And many policies offer an accelerated death benefit that can pay for long term care expenses.
Finally, in states like New Jersey and Pennsylvania, life insurance proceeds made payable to a named beneficiary are not subject to the state inheritance tax. This is a significant advantage over almost all other accounts in states with this unique, additional tax.
Life policies offer guarantees, liquidity, long term care benefits, income tax avoidance and can avoid inheritance taxes as well. Talk about a win win “investment” vehicle.
Write Off Your Health Savings Account Contributions
If you are in the market for health insurance and you are comfortable paying incidental expenses out of pocket, then a health saving account might be right for you. A HSA is a separate account that you can contribute thousands of dollars to each year. And the best part, all contributions can be written off as a tax deduction up to certain individual and family limits.
The funds grow tax deferred and can be withdrawn tax free for qualified medical expenses! If you or your family is in need of additional deductions, then setup your health savings account and contribute the maximum amount each year. And make certain that it’s used to pay for the many qualified expenses that the I.R.S. allows. You should become familiar with what qualifies as a medical expense at the I.R.S. website.
And once again like an annuity, all funds belong to you. Should you later cancel your health insurance or switch to a different type of policy, then you can withdraw all accumulated funds from your HSA. But remember, if the funds are not used to pay for medical expenses then they would once again be subject to income taxes. No penalties would be due however.
Request More Tax Savings Information
In summary, these are three simple ways to reduce your tax liabilities each year. While one size does not fit all, the strategies can be beneficial for most.
It is always wise to talk with a knowledgeable agent about the “big picture” before purchasing a life insurance or annuity policy and to make sure that you understand any potential limitations of these products.
And you also want to make sure that you know exactly what to expect from your health insurance policy and health savings account as well. A tax advisor should be included in the discussion.
Please contact us to learn more about tax avoidance strategies that can help you preserve more of your hard earned wealth.
Category: Annuities, Articles, Life Insurance, Wealth Transfer
Whole Life or Term Life Insurance? Which One Is Best?
Life insurance shoppers want to know: What is the difference between whole and term life insurance and what type of policy should I purchase? The answer is usually simple depending on the circumstances.
Listed below are life insurance explanations as well as recommendations for purchasing a life policy, tax avoidance and estate planning strategies.
Whole Life Insurance Policies
Whole life is designed to cover the insured for his or her entire lifetime. A portion of the premiums pays for the cost of the insurance and a portion is invested in a fixed interest account usually referred to as the cash value account.
Over time the cash value will increase with additional premium deposits and interest credited in the fixed account. Eventually, the policy will be “paid up” meaning enough premiums have been deposited and the cash value has grown to cover the cost of insurance. When this occurs, the death benefit can also increase above and beyond the amount of insurance applied for.
Whole life has the advantage of covering the insured for life while also providing cash value for future needs. Owners can either withdrawal or borrow against their cash value for future monetary obligations. It is worth noting that there are several riders and versions of whole life insurance that can change the overall performance of the policy.
Term Life Insurance Coverage
Term life insurance is the least expensive type available. The insured pays the premiums for a set term (say 30 years) and in essence rents the insurance for that time period. There is no cash value built up in the policy and all benefits will cease to exist when the term has expired.
Consumers purchase term life to cover their families financial obligations in the event of an untimely passing. The insured might take into account future mortgage payments, college tuition, debt, the cost of raising children, and several other factors when purchasing term life. Like all life policies, there are variations and riders available in the term marketplace.
What Should I Buy A Term or Whole Life Policy?
In most cases, it is advisable to purchase term insurance. It is affordable and will provide peace of mind for the insured and his or her beneficiaries. Term will provide the cushion needed to in the event of a passing. Once the time period has expired, then conceivably the insured would be in a comfortable financial position – the kids are grown and out of the house and the mortgage is paid off.
Whole life makes more sense as a tax free investment that can be used to transfer significant amounts of wealth between generations. Life insurance benefits are tax free to the beneficiary(s) and can, in some states, also avoid inheritance taxes – Pennsylvania and New Jersey are two such states. Additionally, irrevocable life insurance trusts can be used to reduce federal estate taxes and to pare down owned assets.
Granted, this is a very simple explanation of the two most common types of life products. It is always best to work with a knowledgeable life insurance agency in order to find a suitable policy for your needs. Please contact our agency to learn more.
Category: Articles, Life Insurance, Wealth Transfer
Wealth Transfer Using Life Insurance
There are several strategies you can use to pass assets to the next generation while mitigating taxes. This article will focus on life insurance for wealth transfer as it’s one of the most efficient. Life policies immediately create a fully valued tax-free asset upon first premium receipt.
Our clients ask about cost effective ways to maximize the distribution of assets to their spouses, future generations and favorite charities. There may be no better asset class than life insurance.
Why Use Life Insurance For Wealth Transfer?
There are many reasons, but the most common ones are cost and tax avoidance. With life insurance, you are paying pennies on the dollar. When you consider that a healthy 60 year old can create a $100,000 death benefit with a one-time deposit of around $25,000, the numbers make sense.
And of course, life insurance proceeds are income tax-free to beneficiaries. Additionally, these policies can be structured to avoid federal estate and state inheritance taxes. There are very few asset classes that can do this much. That’s why life insurance policies are used so often in estate planning.
What Types Of Life Policies Work Best?
The two most common types are whole and universal life insurance. You rarely see term life insurance used as these types of policies have a defined ending point. A policy that expires after a 10-30 year term will have no benefits if the insured is still living.
Whole and universal policies each have their own advantages. Whole life policies are more conservative and generally offer more cash value. Universal life policies may have little cash value, but can create much larger death benefits with smaller premium deposits. And both types can be guaranteed to cover the entire life of the insured.
Single Premium Life Insurance & Life Pay Plans
Single premium life insurance is an often used strategy for wealth creation and transfer. With this type of life insurance, a single premium is deposited creating an immediate death benefit. The death benefit is guaranteed until the owner passes away. Typically single premium policies provide larger death benefit amounts when compared to lifelong or multi-pay policies.
Multi-pay or lifelong policies are just what you would guess – policies that are funded over a set number of years or a lifetime. These types eliminate the need for large upfront sums of money and can have additional tax advantages to the insured. One size does not fit all.
Accelerated Death Benefits – Access For The Insured
Single premium life insurance can also benefit the insured during his or her lifetime. The cash value in a fully funded policy will grow quickly and can provide income to the if needed. In turn, the owner can also surrender the policy for its cash value. Other policies have an option of an accelerated death benefit that can be to pay for long term care expenses.
By using this rider, the owner can access their death benefit while living. It might be used to cover long term care expenses or other costly healthcare needs. Many policies include an accelerated death benefit at no charge to the owner. This allows consumers to transfer wealth while also accounting for future healthcare costs.
Simplified Underwriting – Easier Setup & Enrollment
Many elderly consumers feel that they are not healthy enough to purchase life insurance. This is not always true. Simplified underwriting allows many seniors to qualify for life insurance. With simplified underwriting, there is no physical or blood work needed.
So long as the proposed insured can answer no to a few health questions, medical underwriting can be done with the application and a quick telephone interview. The fact is single premium life insurance is not difficult to purchase. Those who feel they are in extraordinary health can choose to go through advanced underwriting and may qualify for increased insurance benefits.
The Tax Advantages Offered By Life Insurance Policies
Certainly the advantage of life insurance over an annuity, a savings bond, a certificate of deposit or other investment is its favorable tax treatment. The entire death benefit is passed income tax free to the beneficiary. However, the death benefit can count toward the gross value of an estate for estate tax purposes.
To avoid estate taxes, some policies are owned by the beneficiaries or an irrevocable life insurance trust. It is crucial to work with a knowledgeable agent and attorney if estate taxes are a concern.
Often single premium life is considered a modified endowment contract or MEC by the IRS. The policy can be taxable to the owner if gains are withdrawn- just like an annuity or savings bond can be taxable to the owner. If the owner is under the age of 59 ½ the IRS can access a 10% early withdrawal penalty. Thus these policies are best utilized when the funds are likely not needed in the immediate future.
Contact Us To Learn More
In conclusion, life insurance is a safe and dependable asset for many families. Life insurance is especially valuable due to the favorable tax treatment and guaranteed returns associated with these policies. It is important to choose a well-rated company and an informed advisor to select the best policy for your wealth transfer needs.
Category: Life Insurance, Wealth Transfer
Hybrid Annuity & Life Insurance Policies
Up until a few years ago, consumers had few choices when it came to long term care insurance (LTCi).
Traditional policies that provided a certain amount monetary reimbursement were the norm. Policies could be designed to cover expenses for a few months or much longer period of time – even providing benefits for the insured’s lifetime.
For example, consumers could purchase coverage that would provide $100 a day in benefits for a period of three years. When calculated, the $100 daily benefit multiplied by 365 days in a year for 3 years would create a $109,500 “pool of money” available for care.
This pool of money would pay for care in a nursing home, assisted living facility, adult day care, or in the personal residence of the policyholder once certain criteria had been met. In some cases, these funds could be used to reimburse care provided by a family member.
When the pool of money was depleted, the traditional policy would provide no more benefits. If the policy was never used however, the owner would lose the investment of his or her premium payments. Thus, some seniors opted not to purchase these policies, deciding instead to rely on their families or current savings in the event that care became necessary.
Return Of Premium Insurance Rider
With the cost of health care rising rapidly, and a single day in a nursing home costing $175 or more in most major cities, self insuring is a risky proposition. Relying on family is an alternative, but not necessarily a viable one. Unfortunately, most families do not have the time, funds, or ability to provide around the clock care to a loved one.
The insurance industry realized that consumer needs were not always being met with long term care policies. While traditional policies were satisfactory for some, many seniors wanted more guarantees in the event their policy was never used.
Thus, these traditional policies added a “return of premium” rider. If the policy was not used over a set period of time, say 10 years, then the insurance company would return a portion (if not all) of the premiums to the policy owner or a family member. This, like any other rider, came at an additional expense to the purchaser.
Long Term Care Insurance Hybrid Policies
In response to customer and agent demand, insurance companies have designed what can be best described as hybrid or linked policies. These policies combine the benefits of an annuity or life insurance policy with a traditional long term care contract.
With hybrid policies, the consumer has the guarantee of long term care benefits, but if no care is needed, the contracts all offer the promise of monetary benefits to the insured and his or her beneficiaries.
Hybrid Life Insurance Policies for LTCi
Hybrid life policies come on a few different shapes and sizes. One policy links long term care to a single premium life insurance policy. With this plan, the insured deposits a desired one-time premium into a policy. Depending on the age, gender and health of the client, an immediate pool of money is created for long term care. At the same time, an immediate death benefit is created by the life insurance contract.
Take, for example, a healthy 65 year old non-smoking woman with $175,000 in liquid assets. If she deposits $50,000 into the single premium hybrid life account, approximately $87,000 in long term care benefits would be created immediately. There would also be a death benefit to her beneficiaries of approximately $87,000 created from the life insurance component of this account.
At an additional on time cost, this same woman can select a benefit rider that would provide approximately $260,000 in long term care benefits as oppose to the original $87,000. She would also have access to her original $50,000 investment should the funds be needed elsewhere.
In this example, she receives guarantees on her investment as well as protection from the high costs associated with a nursing home stay. In addition, she would still have $125,000 in assets at her disposal that could be used for a traditional or long term care annuity.
There are several types of hybrid life plans; this is but one example. Some allow for joint ownership while others must be purchased individually. Working with an independent agency like ours, consumers can compare several variations of these linked products.
Annuity Hybrid Long Term Care Accounts
Another example of combination type plans links long term care benefits to a single premium deferred annuity. This product begins as an annuity with either a lump sum single premium deposit. If no care is needed, the annuity gains interest like any other fixed annuity and is available for the insured’s financial needs.
However, if the owner/annuitant needs care in a nursing home or elsewhere, a formula will be used to determine the monthly benefit amount available. Continuing on the example used earlier, a healthy 65 year old woman who deposited $150,000 into this account would have the advantages of tax-deferred, safe and insured growth in the annuity and approximately $4,700 a month in long term care benefits for 36 months.
At an additional one-time cost, a benefit rider can be added to the policy providing a $4,700 monthly benefit for her lifetime. Concerning these types of policies, the additional benefit rider is usually a wise purchase in order to obtain maximum guarantees.
Hybrid Long Term Care Annuity Multiplier
The newest addition to the hybrid marketplace is another variation of the long term care annuity. This product also functions exactly like a fixed annuity, but has a long term care multiplier built into the policy.
There is no premium rider attached to this medically underwritten annuity policy. Instead, a portion of the internal return in the contract is used to pay for the long term care benefit. Long term care coverage is calculated based on the amount of coverage selected when the policy is purchased.
The insurance company offers a payout of 200% or 300% of the aggregate policy value over two or three years after the annuity account value is depleted. For example, a policyholder with a $100,000 annuity who had selected and aggregate benefit limit of 300% and a two year benefit factor would have an additional $200,000 available for long term care expenses after the initial $100,000 policy value was depleted.
The policy owner would spend down the $100,000 annuity value over a two year period and then receive the additional $200,000 over a four year period or longer. In this example the contract pays $50,000 a year for a minimum of six years, but care will last longer if less than the $50,000 benefit is needed each year. Again, if long term care is never needed the annuity value would be paid out lump sum to any named beneficiary.
These scenarios are only basic examples of how hybrid policies work. The coverage will be different from person to person depending on age, health, gender, premiums and benefits requested. In order to get an accurate proposal, an illustration would be required. We can help you compare illustrations from several carriers.
These innovative products can meet consumer demands and provide more guarantees by combining traditional long term care insurance with the advantages of life insurance or annuity policies. Thus, consumers who utilize hybrid policies can avoid self-insuring against catastrophic long term care related expenses while still providing living benefits to themselves and a legacy to their heirs
Long Term Care Insurance Providers
We offer traditional long term care coverage from Allianz Life, Genworth, John Hancock, Lincoln Financial Group, Mass Mutual, Mutual Of Omaha, Prudential, and others.
We work with American Equity, Genworth, Old Mutual, One America, Money Guard, and Mutual of Omaha to provide hybrid long term care policies.
Category: Articles, Long Term Care, Retirement Planning, Wealth Transfer