DON’T DIG YOURSELF INTO A DEEPER HOLE! IT IS TAX TIME, AND TIME TO COMPLY…

For many years, US taxpayers have been able to avoid paying taxes by placing or receiving assets into offshore accounts. Rules regarding reporting and disclosure were ambiguous and enforcement by the IRS was weak. As a result, offshore planning became synonymous with tax-free planning. Unfortunately, most advisors have been conditioned to equate offshore with tax avoidance as well, which results in bad advice being given to US taxpayers. Better advice is as follows:

• Offshore planning is taxable under the Internal Revenue Code;
• Offshore structures and assets must be fully disclosed to the IRS;
• Enforcement by the government is at an all-time high;
• Penalties for failing to comply are significant – large civil penalties as well as criminal prosecution; and,
• The time has come for all US taxpayers with foreign structures to become tax compliant!

While the Code is complex and the terminology can be befuddling, the rules pertaining to offshore planning can be simplified and are actually quite clear. The most important things for you to know are:

1)     Yes, You Really are Taxed on Worldwide Income. To be clear, US taxpayers are taxed on their worldwide income, from whatever source derived! This applies to all individuals carrying a US passport, regardless of where in the world they reside, and all residents of the US, regardless of where in the world they hold a passport.  While certain structures may afford better tax treatment than others, they are all still subject to the tax rules under the Internal Revenue Code. Do not be fooled by foreign advisors who declare that the foreign account is not subject to taxation because it is located in a tax-free jurisdiction. While this may be accurate as it pertains to the tax-free jurisdiction, it is not true with respect to the US. Unless and until you relinquish your US passport, you will always be taxed on worldwide income.

2)     You Must Disclose Your Offshore Assets. There is no shortage of IRS Forms for US taxpayers with foreign components in their structure. The most commonly discussed forms are the “FBAR” (Form TDF 90-22.1) and the “Shadow FBAR” (Form 8938). The FBAR is required when you have a financial interest in or signature authority over a foreign account in excess of $10,000 – in aggregate at any time during the year. This form must be received by the Department of Treasury by June 30 each year. The Shadow FBAR is required when you have “foreign financial assets” in excess of a stated threshold amount, regardless of your signature authority over them. The threshold amounts vary based on the nature of the taxpayer, but for individuals it is an amount in excess of $50,000 on the last day of the tax year, or more than $75,000 at any time during the year. The Form 8938 gets attached to your annual return. In addition to these, you must also ensure that you “check the box” on your annual 1040 where it asks if you have any offshore accounts. Other potential forms for international structures include: 3520, 3520A, 8858, 8865, 5471, and 5472 to name a few…

3)     If You Don’t Disclose, Your Foreign Institution Will Likely Disclose For You. Under the new Foreign Account Tax Compliance Act (“FATCA”), the US made a dramatic statement by broadening its reach and imposing reporting obligations on those foreign financial institutions that have accounts for US taxpayers. While met with initial resistance for many reasons, the foreign financial community has for the most part resigned itself to the fact that it must comply with the demands of the US and report US account owners. To be sure, the US is a formidable adversary, and if given the choice between keeping a taxpayer’s account secret or avoiding the wrath of the US government, most institutions are quickly buckling to the threats of the US government. In addition, a multitude of countries are rapidly entering into Tax Information Exchange Agreements (“TIEAs”), which require the participating countries to share information on their respective taxpayers if they have assets or income the other country. This is not just a US issue, countries are adopting a cooperative effort around the globe to stop tax evasion and to increase their collection revenues. Therefore, with these other parties making disclosures about you to the US, it is ill-advised for you not to.

4)     If You Don’t Disclose, the Penalties are Severe. Once upon a time, the IRS seemed complacent just collecting the taxes that were owed on foreign accounts, with a reasonable amount of interest that oftentimes could be negotiated. Not anymore. Noncompliant taxpayers can expect penalties, and severe ones at that. For example, the maximum penalties for failing to file the FBAR can be up to 50% of the account value for civil penalties, and criminal penalties of up to $500,000 and 10 years in prison. In addition, with respect to FATCA, the understatement penalties under IRC 6662 increase from 20% to 40% and the statute of limitations can run up to 12 years. Each form and corresponding failure to file has its own set of penalties. They are draconian, and they can be stacked on one another. The longer one waits to come clean, the more the penalties will hurt the taxpayer and wipe out most of the account.

5)     There is an Amnesty Program to Help You Become Compliant Without Going to Jail. Due to the success of the offshore amnesty programs of 2010 and 2011, the IRS launched its third amnesty program in 2012, and it is still available in 2013. Provided that the taxpayer is not under investigation or audit already, the taxpayer may come forward and report all years from 2003 on and avoid criminal prosecution. However, in addition to paying the tax that should have originally been paid, the taxpayer must pay the following: a) interest, b) a penalty of 27.5% of the highest aggregate balance during the unreported years, and c) a penalty of 20% of the income tax owed. While the penalties do add up, liberty does have a value.

In sum, if you have offshore assets, entities, trusts, accounts, or income in your structure, it is a new day for tax compliance. You must report and pay any applicable taxes, or you may suffer severe consequences. Given all the opportunities the IRS has provided for US taxpayers to come forward, it is becoming less tolerant and forgiving of those who don’t. Based on experience, becoming compliant is a much easier and affordable proposition for those taxpayers who hire counsel and get to the IRS first. If the IRS gets to you first, you are in for far greater pain.

So, as tax time approaches, let this serve as your reminder that the offshore stuff you’ve ignored to date should be ignored no longer. It’s time to comply and get out of your hole, before it’s too deep…

Jim Duggan, JD

 

Investing in real estate is probably the most popular choice most people make.  This type of investment can offer capital protection, appreciation and regular income.  Not too many investments can offer this combination and one the best parts is you are in control. Those investors, who have the uncanny ability to time the investment well, may also generate super normal returns out of real estate investment.

If you are a participant in a traditional 401(k) plan, be aware that real estate is not normally allowed as an investment.  The plan administrator will offer many choices, mainly mutual funds but not real estate.  To invest in real estate, you need to have a true self-directed 401(k) plan.

There is a wide array of real estate options that you can select from. For instance, you can buy raw land, a residential property (apartment, single family homes or duplexes) or a commercial property (offices), tax liens and private mortgages.

Non-Recourse Loans – If the price of the investment property is more than the funds you have in your self-directed 401(k) account, what do you do?  You have the option to borrow the balance required.  This borrowing will be in the form of a non-recourse loan. With a non-recourse loan, the plan participants / investors do not have to sign a personal guarantee. If there is a default, the lender’s recourse is the property.  A non-recourse loan is generally at a slightly higher interest rate than recourse loans and the investor has to put a higher down payment. Non –recourse loans can be private funds or commercial lenders.

Investing in real estate with a self directed 401(k) requires plan participants to understand and adhere to some simple but important rules.

All transactions should be at arm’s length – This means that whatever investment the plan makes, there has to be no undue influence that impacts the fairness of the deal value.  For example, the investment must stand on it’s own merits and not depend upon the plan participant to make the deal go through.

There should be no self-dealing – self-dealing amounts to entering into a transaction with a disqualified individual. A disqualified individual to the self directed 401 k plan would include the plan participants, their relatives (spouse, father, mother and kids, grandparents, investment advisors and fiduciaries). Thus, you are not allowed to sell or buy a property to/from your parents or your spouse. Under self-dealing, you cannot invest in a property where you or any other disqualified person are currently living.

When rental income is generated out of any of your real estate investments, it must be reinvested in your self-directed 401(k). Expenses related to proper maintenance and upkeep of property has to be borne from the funds in the self-directed 401(k) account.  An analogy we have used for many years is:  think of the 401 k plan as the “mix-master”, all fund activities must originate from the plan and return to the plan.

As with all 401k planning strategies, seek an advisor who knows the lay of the land. You need to make sure you are in full tax compliance with the various IRS rules. As most know there can and most likely will be abuses in this application. To ensure minimal risk of exposure to an audit, you should limit your real estate investment activities to truly passive investment opportunities with minimal debt financing.

Rick Pendykoski

More and more I see folks who were ‘helped’ to get the Aid and Attendance (A&A) pension by a financial advisor only to have the plan blow up in their faces when they need skilled nursing care

These plans use a number of techniques to achieve eligibility.  While some styles vary, the two most common elements are divesting (i.e., giving away) assets to achieve financial eligibility and doing a personal service contract with a family member to show that the expenses for care eat up the regular income.  As effective as these techniques can be, if done improperly they can be like setting the timer on a bomb that goes off years later and causes financial devastation.

While there has been much debate about making it harder to qualify for A&A,[1] the VA rules currently allow gifting of assets in order to reach the financial limits for eligibility.  So when an advisor instructs the veteran (and/or his or her spouse) to give away an asset it can work like a charm to establish the A&A; however, Medicaid put severe restrictions on gifting two decades ago that got even stricter in 2006.[2]

A veteran has to receive care and show the continuing costs in order to receive the A&A.  If no additional care was ever needed, this would not become a problem.  But invariably their care level rises to the need for real Home and Community Based Services (HCBS) or in-facility skilled care.  When the time comes to pay the bill, the ordinary income and the A&A pension are usually not nearly enough by far.  So then the veteran spends down his or her remaining assets until the financial limit is met – except Medicaid still won’t let them qualify.  Why?  Because the penalties for the gifts made do not start running until the patient is below the financial limits, has the medical need for the skilled care, and applies for Medicaid.  So now they’re broke and ineligible for Medicaid.

On the care contract side of things, it’s not much prettier.  It is a viable and legitimate technique to use a personal service contract to pay a family member for care.  That has the advantage of increasing the care expense bill so that the veteran is “upside down” on income (i.e., paying out more than they take in).  But the problem here is that the care contract used to establish that can cause huge problems if not done correctly.

The VA is not too particular about the terms of a care contract, and usually a very simple version is provided that suffices for A&A eligibility. But state Medicaid rules can be very strict as to what they allow or don’t allow in a care contract:

• Texas, for instance, states in § I-4140 of its Medicaid Handbook that: “Compensation [in a personal service contract] is not allowed for services that would normally be provided by a family member (such as house painting or repairs, mowing lawns, grocery shopping, cleaning, laundry, preparing meals, transportation to medical care).”

• Georgia’s Medicaid Manual, § 2349-1, places a plethora of limits on the contract and even states that the patient’s authorized representative (i.e., power-of-attorney, guardian or conservator) may not be a beneficiary from a care contract.

• Most states require proof that payments were made and require that the payments be reported to the IRS for income tax purposes by both the applicant and the caregiver. Their position is that if the family member treats the payment like a gift for tax purposes, then so will Medicaid. Very few families are equipped to handle this, which is why a payroll or staffing company is often used to legitimize the care contract.

So what’s the big deal? Any care contracts done for VA planning purposes that don’t meet the Medicaid rules can cause the treatment of each payment made in the last five years to be counted towards a prospective penalty. The penalty becomes a waiting period for how long the patient must wait to get Medicaid coverage after they have met the financial and medical requirements and applied for care.

Most state rules don’t let you go back and fix the problem, either. Payments that avoid a penalty are only allowed to be made after a proper care contract is in place, and many states require the contracts to be notarized so as to obviate back-dating the contract. So, what you end up with is a total mess — one that is difficult for the Medicaid planner to clean up and is likely to cost the veteran (and his or her family) a boatload of money to fix.

Don’t get me wrong. I’m all for helping someone to legally get VA benefits. I even applaud those who consistently use creative strategies to achieve this outcome — and do it right. But any advisor planning for the VA pension who fails to take into account the ramification of Medicaid eligibility is dong their client a disservice and is likely to get sued. The VA approves over 30,000 cases for A&A each year.[3] No doubt, the timer has been set and these will likely blow up in the faces of unsuspecting veterans and their myopic advisors.

One of my favorite VA planners is always quick to say: “Every VA pension planning case is a Medicaid planning case.” When done right, VA planning and Medicaid pre-planning can be done in perfect harmony. If you are concerned about how to get the VA pension without sacrificing your Medicaid eligibility, our team can help you.  If you have been advised to use these techniques to get the VA A&A pension and would like to find out how to get it squared up with the Medicaid rules, click here for more information.

If you have not yet inserted a limited liability company (“LLC”) into your overall wealth planning structure, it is time to reconsider. The LLC has emerged as the preferred cornerstone for the private client wealth planning structure because it provides: 1) enhanced asset protection, 2) wealth transfer with estate tax minimization, and 3) the underpinnings of a client’s “family office” structure.

ASSET PROTECTION

If the bulk of your wealth is currently owned in your individual name or by your living trust, it is exposed. A creditor has the ability to readily freeze, attach, and/or liquidate any such assets. When planning for the private client, a principal objective must be to ensure that wealth is insulated and not exposed in this manner. A simple way to achieve this is to retitle the assets away from the individual or living trust into the name of the family LLC.

An LLC is a business entity that affords asset protection on two important levels. First, it protects the owners from any claims against the assets or activities of the LLC. Second, and more importantly, it also protects the assets of the LLC from any claims against the owners (“members”) of the company. This second level of protection, which is not available to corporations, is achieved through what is known as a “charging order.”

A charging order is a specific type of remedy which essentially provides that the creditor of a member cannot attach the assets of the LLC; rather, the creditor may only “step into the economic shoes” of the debtor member. This remedy is very limited and practically useless in the family LLC context. The charging order holder has no right to manage, control, compel, or participate in the LLC in anyway. Therefore, the assets of the LLC (i.e., the private client’s wealth) are safe. However, if, and only if, the manager of the LLC (which is still the client) elects to make a distribution of profits, then, and only then, will the charging order holder actually receive an economic distribution to pay out the judgment.

The client/manager of the LLC will not likely entertain any such distribution of profits during a time when a charging order exists, thereby thwarting the creditor’s attempt to collect into perpetuity. Instead, the client/manager will either elect to retain all profits for further investment, or prefer to distribute funds to family members in the form of compensation, loans, or through direct investment – none of which are available to the claims of the charging order holder. Therefore, with a properly formed LLC, the creditor should have no ability to attach the assets or compel a distribution while the members maintain access to the wealth for their own benefit.

In addition, while unsettled, the current law allows for the position that the charging order holder, while not enjoying any actual distributions, is the appropriate party to receive the proportionate K-1 statement of profits for the economic interest so charged. The result is that the charging order holder, while not receiving any distribution of profits, is obligated pursuant to the issued K-1 statement to pay the taxes associated with the income allocation for such charged interest. Yes, that means that the creditor could pay the taxes of the debtor member. So, confronted with the prospects of never actually receiving any distribution while simultaneously being obligated to pay the taxes for the debtor member, most creditors (and more importantly, their lawyers) are not interested in “winning” a charging order. These charging order benefits can apply equally to business creditors, personal injury plaintiffs, and spouses of descendants in a divorce proceeding – the LLC can serve as a viable substitute to a prenuptial agreement.

In order to achieve this result, it is critical that the client organize the LLC in a jurisdiction which provides the charging order is the “exclusive remedy” for any creditor of a member, and that no other remedies are available at law or in equity. In addition, the drafting of the governing documents is very sensitive to ensure the appropriate asset protection provisions appear in the operating agreement and minutes to effect the desired result.

WEALTH TRANSFER AND ESTATE TAX MINIMIZATION

The ongoing challenge of the private client is to determine when and in which manner wealth should be transferred to the next generation and beyond. Instead of directly transferring the asset, or transferring through one of the many available trust options, the LLC should be interposed as owner of the assets. Using an LLC as a wealth transfer mechanism offers the following advantages: 1) the LLC management retains control of the assets, 2) the assets are more easily divisible, 3) the gifted interest is likely subject to significant valuation discounts.

Gifting an LLC membership interest is superior to gifting the actual assets since the LLC retains ownership of the underlying assets while management of the LLC remains separate. This fundamental split in ownership and control allows a donor to “part” with the economic value of assets for wealth transfer purposes, while still ensuring the assets are under the desired control and not subject to depletion by the donee. In addition, the LLC provides a practical benefit in that it is much easier to carve up assets by doling out fractional membership interests in the entity that owns the asset as opposed to actually carving up the assets (e.g., physically carving up boats, vacation homes, and collectibles may not be possible or practical).

From a tax perspective, perhaps the most compelling aspects of the LLC are found in the ability to take significant valuation discounts when assessing the value of the LLC membership interest subject to a gift or sale. Specifically, it is well established that the reported value of the typical LLC membership interest may be reduced for: 1) lack of marketability, and 2) lack of control. Since the LLC interests are not “marketable” in that they are not traded on an exchange and do not have a readily ascertainable fair market value, and since the transferred membership interests are likely minority interests without control over the entity, the interests may be reported to be worth much less than their proportionate share of the LLC’s book value. Reasonable discounts for each of the foregoing items generally results in a 25%-35% reduction in value of the asset transferred.

The effect of such discounts can be quite dramatic. For example, assuming a 30% valuation discount and an LLC with $15 M of portfolio assets, the reportable value of the membership interests gifted to descendants would be reduced to $10M. With today’s gifting exemption of $5.25M per taxpayer ($10.5M for a married couple), this means that a client could effectively transfer $15M, reported as $10.5M – with no gift tax whatsoever.

FAMILY OFFICE PLANNING

Managing one’s personal wealth has become a business in and of itself. Therefore, it is logical that the wealth plan should reach beyond wills and trusts, and pull from corporate law for a more elegant solution. Transitioning wealth from your typical trust structure into an LLC provides the core platform to establish a customized “family office” or “virtual family office.”

As wealth planning has become more sophisticated, the private client is more commonly leveraging the notion of a family office to better plan for dynastic wealth. Whether the client is large enough for a dedicated single family office structure, in which the multiple functions are internally employed and managed, or whether much of the professional and administrative function is substantially outsourced in a “virtual” family office structure, the long-term results are compelling.

With the well-documented trend toward dissipation of wealth and family harmony through the generations, most private clients are seeking to establish a mechanism whereby they can be assured that their wealth is not a destructive and fleeting inheritance, but rather a long-term investment and development opportunity for descendants. An entity form, with carefully crafted governance provisions, can provide the perfect solution to counter the typical trustee-beneficiary imbalance that often plagues the private client’s multigenerational plan.

The LLC is the most flexible legal form available from both a legal and a tax perspective. It can be managed by the owners (“members”), or by an appointed manager, or by a board of managers. In larger family mandates, a board of advisors may also be incorporated. In addition, it is not uncommon to include both family and nonfamily members on either the management committee or the advisory board. Inclusion of professionals from different disciplines who do not have an emotional tie to the wealth or the family members involved can be very instrumental in protecting the progress of the family wealth. The management of the LLC, generally governed by the “business judgment rule,” allows greater flexibility for investing in family members or in alternative investments than with the “prudent investor” rules followed by a typical trustee. This can allow the family wealth to better serve the family as a “family bank” offering, or allow for enhanced return in investments that a typical trustee may avoid for its own protection.

The goal with the family office is to bring a business discipline to the forefront of the wealth plan. A properly formed and implemented LLC can ensure that the next generation is better engaged, better reared, and better prepared to handle the wealth with a higher level of involvement and responsibility. Most importantly, it formalizes the wealth plan as a family business mission and not as a trust entitlement.

 

By: James M. Duggan, JD

 

I just got my hands on this, and I’m sending it out today to my hot-list. It will be my primary newsletter next week to my main database.

I’ve been pounding the drum pretty hard now for over six months that EVERY insurance-only licensed advisor better get his/her Series 65 to avoid just the issue discussed in this newsletter.

If this isn’t your wake-up call, you need to get a hearing aid.

This is the very reason I’ve been suggesting/pleading with advisors to go check out www.pomplanning.net. If you have not checked out this site (one that explains further the reasons insurance agents need to become IARs (and the opportunities/revenue that awaits)), please do so.

If you’ve read my newsletters, you should know that the Arkansas Insurance Department (Bulletin No. 14-2009) and the Iowa Insurance Department (Bulletin 11-4) are two states that are overt in their position that it is a violation of their state securities laws for a non-licensed person to tell a client to sell a stock, mutual fund, bond, etc., to fund a fixed annuity (or any fixed product). Please click on the following link to read more fully about this Source of Funds (SOF) issue: www.pomplanning.net/sourceoffunds.

Consent Order in the State of Illinois

This is the first I’ve heard about the State Department of Securities (DOS) in Illinois going after insurance agents on the SOF issue.

To read the actual Consent Order (which I recommend everyone do), please click on the following link: http://www.pomplanning.net/10kilfine.

In summary, it appears that the insurance agent did what most insurance agents do when selling an FIA. He informed the client about the product but then had to figure out where the money would come from to fund it. It appears that in the case at hand the money to fund the annuity would be coming from the sale of a security.

To make a long story short, the DOS in Illinois somehow got this case on their desk and negotiated a Consent Order with the following amazing terms:

1) $10,000 fine

2) Forced language that must be used on the insurance agent’s website and in the emails he sends (this is truly amazing and scary that the agent agreed to use certain language not only on his website but also in every email he sends). This should scare everyone who reads this.

It is my opinion that ALL agents eventually will need a securities license in order to sell fixed products (sad but true).

I believe that the State Securities Commissions will continue to pursue actions against non-securities licensed agents who are telling clients to move money from mutual funds, stocks, etc., into FIAs, EIULs, or other fixed instruments.

It is for this reason that from a compliance point of view I  believe EVERY non-licensed agent should protect his/her ability to make a living by obtaining a Series 65 and becoming an IAR.

Roccy

I’ve been on the record for nearly 15 years with my position that buying Life Insurance (hereinafter “LI”) in a Qualified Plan (hereinafter “QP”) is not only a bad idea, it’s a terrible idea. To read my newsletter titled Why Buying Life Insurance in a Qualified Plan is a Terrible Idea!, please click on the following link: http://www.pomplanning.net/life-Insurance-qualified-plan .

My past newsletter focused in on the use of cash value LI as an “investment” in a QP. This newsletter will focus on something that is almost universally ignored by those selling LI in a QP and that’s the “real” out-of-pocket costs for the death benefit coverage provided. Most advisors are under the misimpression that buying life insurance for the death benefit (vs. as an investment) inside a qualified plan with “tax-deductible dollars” is a no brainer. As you will read, it is not.

Let’s start with a little question and answer:

1) Can you buy LI in QP? Yes.

2) Is the purchase of LI in a QP tax-deductible? Partially. The premiums are 100% deductible to the business, but employees have to recapture the “costs of insurance” every year as income. Those who sell LI in QPs typically ignore this or tell the client that it’s just a miscellaneous cost (which you’ll see is not true).

3) How do you calculate the costs an employee must recapture as income? Use the Table 2001 one-year term costs and do a little calculation.

For example: For a 40 year old, the table indicates that for every $1,000 of death benefit coverage, the cost for recapture purposes is $1.10. Therefore, if an employee has a $1 million policy inside the QP, he/she would have to recapture $1,100 as income. I call the recapture of this income “phantom” income because the employee doesn’t get the money (just the tax bill for it as if he/she did get the income).

4) Does the employee receive an offset for receiving imputed income at some point in the future? Yes. The imputed income is used as a “basis;” and when the employee takes a distribution from the QP, that income can be offset by the basis.

5) The big question: Is buying something as simple as a term life policy a good idea in a QP? Answer: NO!

This is really the question I want to answer with this newsletter. With the estate tax exemption being codified at over $5 million per person (thanks to the fiscal cliff deal), I thought this would mean that millions of modestly affluent (couples with estates under $10 million) would be able to buy LI in a QP in a tax-deductible manner and have it make economic sense. I was wrong.

What factors/variables need to be used when determining if it is a good idea to buy term LI in a QP?

-Table 2001 costs employees need to recapture (which increase each year)

-Client’s current and future income tax-brackets

-Actual cost of the LI (I used 30 year level term for my example) (which becomes the employee’s basis)

-Assumed rate of return (ROR) on a side fund

A side fund is needed because the Table 2001 costs make buying LI in a QP slightly more expensive over time vs. simply taking income home, paying tax on it, and buy LI with after-tax money.

Example and outcome without that math: The math behind the following outcome is complicated. I strongly recommend you download my summary of the calculations so you can see for yourself how I arrived at the numbers. To download the summary and numbers, please click on the following link: http://www.pomplanning.net/qualified-plans-real-costs

Example: 40-year-old male in good health. I assumed he purchased $1 million of 30-year level term LI inside the QP. The annual level premium is $1,185.

How much more did it cost the employee to buy LI inside a QP taking into account “all” the expenses vs. paying for it after tax?

After 30 years of paying premiums, it cost the employee (assumed to be the business owner) $7,221 more to buy the LI inside the QP.

If my math is correct, why would anyone buy LI inside a QP? Because it’s deductible and seems less painful? The reality is they shouldn’t. The real problem is that most advisors do not understand the math behind making this decision (which is why I wrote my book www.badadvisors.com).

I welcome anyone and everyone to pour over my numbers to poke holes in them. If you have any questions about them or want to debate/discuss them, feel free to give me a call.

Bottom line: We have thousands of insurance agents who recommend LI in QPs and have no idea of the variables involved or the math supporting or not supporting the recommendation. To be good at your craft, you have to know this type of information; and, hopefully, the majority of readers will find this newsletter both thought provoking and helpful.

Roccy

PART II.

The American Taxpayer Relief Act of 2012, (Act), affects American, Foreign and International businesses by extending expired or soon to be expiring temporary business tax concessions, referred to as “extenders”.  Generally, this Act for businesses is based on a condensed version of the U.S. Senate Finance Committee’s Bill created on August 2, 2012.  Therefore, extenders have breathed life in already expired tax concessions.  Extenders also are keeping tax concessions alive that were to have become expired on December 31, 2012.  Remember from Part I. of my article on the Act, I specifically noted that this Act refers to temporary and permanent tax modifications, which in all likelihood will continue to change the “permanent” tax modifications to an almost perpetual re-modification.

These extenders extend the life of the tax concessions, even though many of these concessions had already expired at the end of December 31, 2011, more than a year earlier from their re-instatement!  Therefore, your tax advisor may want to be alerted to this re-instatement and question the possibility of filing Amended U.S. Individual and Corporate Tax Returns for 2011.

These extenders are as the following and I will mark those concessions that had expired in 2011 with an asterisk (*) to indicate that they are now retroactively effective to the beginning of tax year 2012:

GENERAL BUSINESS CONCESSIONS:

1.         Tax credit for research and experimentation expenses (extending and modifying Internal Revenue Code, IRC, section 41(h)(1)(B))*

2.         50% Bonus depreciation for qualifying property purchased and placed in service before January 1, 2014 (2015 for certain property) (IRC section 168(k))

3.         Election to accelerate AMT credits in lieu of bonus depreciation (IRC section 168(k)(4))

4.         Exceptions under subpart F for active financing income (IRC sections 953(e)(10) and 954(h)(9))*

5.         Look-through treatment of payments between related controlled foreign corporations under the foreign personal holding company rules (IRC section 954(c)(6))*

6.         15-year straight-line cost recovery for qualified leasehold improvements, qualified restaurant buildings and improvements, and qualified retail improvements (IRC sections 168(e)(3)(E)(iv), (v), (ix), 168(e)(7)(A)(i) and (e)(8))*

7.         Increased expensing limits ($500,000/$2 million) and expanded definition of section 179 property (IRC sections 179(b)(1) and (2) and 179(f))*

8.         Credit for certain expenditures for maintaining railroad tracks (IRC section 45G(f))*

9.         Mine rescue team-training credit (IRC section 45N)*

10.       Employer wage credit for activated military reservists (IRC section 45P)*

11.       Seven-year recovery period for motorsports entertainment complexes (IRC section 168(i)(15) and 168(e)(3)(C)(ii))*

12.       Accelerated depreciation for business property on an Indian reservation (IRC section 168(j)(8))*

13.       Election to expense advanced mine safety equipment (IRC section 179E(a))*

14.       Special expensing rules for certain film and television productions (IRC section 181(f))*

15.       Deduction allowable with respect to income attributable to domestic production activities in Puerto Rico (IRC section 199(d)(8))*

16.       Treatment of certain dividends of regulated investment companies (RICs) (IRC sections 871(k)(1)(C) and (2)(C), and 881(e)(1)(A) and (2))*

17.       RIC qualified investment entity treatment under the Foreign Investment in Real Property Tax Act (FIRPTA) (IRC section 897(h)(4))*

18.       Special rules for qualified small business stock (IRC section 1202(a)(4))*

19.       Reduction in recognition period for S corporation built-in gains tax (IRC section 1374(d)(7))*

20.       Temporary increase in limit on cover over of rum excise tax revenues (from $10.50 to $13.25 per proof gallon) to Puerto Rico and the Virgin Islands (IRC section 7652(f))*

21.       Temporary minimum low-income tax credit rate for non-federally subsidized new buildings (IRC section 42(b)(2))

22.       Exclusion of military housing allowance for purposes of low-income housing tax credit (section 3005 of the Housing Assistance Tax Act of 2008) *

ENERGY TAX CONCESSIONS:

23.       Placed-in-service date for wind facilities eligible to claim electricity production credit (extending and modifying IRC section 45(d) to allow a facility to be considered placed in service in 2013 so long as construction commences during the year)

24.       Election to claim the energy credit in lieu of the electricity production credit for wind facilities (IRC section 48(a)(5))

25.       Credit for construction of new energy-efficient homes (IRC section 45L(g))*

26.       Credit for energy-efficient appliances (IRC section 45M(b))*

27.       Credit for energy-efficiency improvements to existing homes (IRC section 25C(g))*

28.       Alternative fuel vehicle refueling property (non-hydrogen refueling property) (IRC section 30C(g)(2))*

29.       Incentives for biodiesel and renewable diesel*

− Income tax credits for biodiesel fuel, biodiesel used to produce a qualified mixture, and small agri-biodiesel producers (IRC section 40A)

− Income tax credits for renewable diesel fuel and renewable diesel used to produce a qualified mixture (IRC section 40A)

− Excise tax credits and outlay payments for biodiesel fuel mixtures (IRC sections 6426(c)(6) and 6427(e)(6)(B))

− Excise tax credits and outlay payments for renewable diesel fuel mixtures (IRC sections 6426(c)(6) and 6427(e)(6)(B))

30.       Special rule for sales or dispositions to implement Federal Energy Regulatory Commission (FERC) or state electric restructuring policy (IRC section 451(i))*

31.       Incentives for alternative fuel and alternative fuel mixtures (other than liquefied hydrogen)*

− Excise tax credits and outlay payments for alternative fuel (IRC sections 6426(d)(5) and 6427(e)(6)(C))

− Excise tax credits and outlay payments for alternative fuel mixtures (IRC sections 6426(e)(3) and 6427(e)(6)(C))

32.       Cellulosic biofuel producer credit (IRC section 40(b)(6)(H)) (effective for fuel produced after date of enactment)

33.       Special depreciation allowance for cellulosic biofuel plant property (IRC section 168(l)) (effective for facilities placed in service after date of enactment)

34.       Credit for production of Indian coal (IRC section 45(e)(10)(A)(i))

35.       Credit for plug-in electric motorcycles and three-wheeled highway vehicles (modification and extension of IRC section 30D)*

COMMUNITY ASSISTANCE, INFRASTRUCTURE & ECONOMIC DEVELOPMENT CONCESSIONS:

36.       New markets tax credit (IRC section 45D(f)(1))*

37        Work opportunity tax credit (IRC section 51(c)(4))*

38.       New York Liberty Zone tax-exempt bond financing*

39.       Qualified zone academy bonds: allocation of bond limitation (IRC section 54E(c)(1))*

40.       Empowerment zone tax incentives*

− Designation of an empowerment zone and of additional empowerment zones (IRC sections 1391(d)(1)(A)(i) and (h)(2))

− Increased exclusion of gain (attributable to periods through 12/31/16) on the sale of qualified business stock of an empowerment zone business (IRC sections 1202(a)(2) and 1391(d)(1)(A)(i))

− Empowerment zone tax-exempt bonds (IRC sections 1394 and 1391(d)(1)(A)(i))

− Empowerment zone employment credit (IRC sections 1396 and 1391(d)(1)(A)(i))

− Increased expensing under sec. 179 (IRC sections 1397A and 1391(d)(1)(A)(i))

− Non-recognition of gain on rollover of empowerment zone investments (IRC sections 1397B and 1391(d)(1)(A)(i))

4.1       Indian employment tax credit (IRC section 45A(f))*

42.       American Samoa economic development credit (section 119 of the Tax Relief and Health Care Act of 2006 as amended by section 756 of The Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010)*

BRIEF EXPLANATION OF SPECIFIC CONCESSIONS:

With 42 major concession areas to report on in this article, the specific and detailed analysis will be beyond the scope by the author.  However, I will try to elaborate on some of the more salient concessions to help the reader understand their implications:

RESEARCH CREDIT CONCESSIONS:

The credit for research and experimentation expenses under IRC section 41 expired at the end of 2011. The Act retroactively extends the credit through the end of 2013 and makes changes including:

• Modifications to the rules for calculating the credit when there is a change of ownership for a portion of the trade or business and

• Modifications to the rules for aggregation of research expenses within a controlled group.

BONUS DEPRECIATION CONCESSIONS:

The Act extends for one year the 50 percent bonus depreciation for qualified property under IRC section 168(k). The provision applies to qualified property placed in service before January 1, 2014 (before January 1, 2015 for certain longer-lived and transportation assets).

The provision makes some modifications, notably decoupling bonus depreciation from allocation of contract costs under the percentage of completion accounting method rules for assets with a depreciable life of seven years or less that are placed in service in 2013. For regulated utilities, the provision clarifies that it is a violation of the normalization rules to assume a bonus depreciation benefit for ratemaking purposes when a utility has elected not to take bonus depreciation.

Generally, qualified property includes:

• Property with a MACRS recovery period of 20 years or less;

• Certain computer software;

• Water utility property; or

• Qualified leasehold improvement property.

ALTERNATIVE MINIMUM TAX CREDIT CONCESSION:

In addition, the Act provides for another temporary election to accelerate some AMT credits in lieu of bonus depreciation for property placed in service in 2013. This election allows corporations to effectively “monetize” a portion of their AMT credits in lieu of claiming bonus depreciation.

LEASEHOLD IMPROVEMENTS DEPRECIATION CONCESSION:

The Act retroactively extends the 15-year straight-line cost recovery for certain leasehold, restaurant, and retail improvements, and new restaurant buildings that are placed in service before January 1, 2014. The provision had originally expired at the end of 2011.

IRC Section 179 Expensing Limitation:

The Act increases the maximum amount and phase-out threshold in 2012 and 2013 for small business expensing under section 179 to the levels in effect in 2010 and 2011. For tax years beginning in 2013, the limitation is raised to $500,000 and would be reduced if the cost of IRC section 179 property placed in service exceeds $2 million. Within those thresholds, the Act allows a taxpayer to expense up to $250,000 of the cost of qualified leasehold improvement property, qualified restaurant property, and qualified retail improvement property. Those limitation amounts will return to $25,000 and $200,000, respectively, after 2013.

ACTIVE FINANCING INCOME EXCEPTION & CONTROLLED FOREIGN CORPORATION, CFD, LOOK-THROUGH

The exception in subpart F allowing deferral of the active financing income of a controlled foreign corporation (CFC) engaged predominantly in banking, financing, or similar business activity expired at the end of 2011. The Act retroactively extends the exception through the end of 2013.

Similarly, the IRC section 954(c)(6) look-through treatment for payments between related CFCs expired in 2011. The Act retroactively extends the treatment through 2013.

IGNORED IRC SECTIONS

Leaders of the House and Senate tax-writing committees indicated throughout 2012 that the days of routine extension of expiring tax provisions may be coming to an end. This sentiment was, at least in small measure, reflected in the Act’s extenders package.

The Act does not include Treasury 1603 grants for specified energy property in lieu of tax credits enacted in the American Recovery and Reinvestment Act of 2009. Several other provisions that typically have been part of tax extenders legislation — such as the enhanced charitable deduction for contributions of book inventories to public schools and for corporate contributions of computer inventory for educational purposes — also are excluded.

ENERGY PROVISIONS

The Act extends tax credits for construction of energy-efficient new homes, energy-efficiency improvements to existing homes, and the manufacture of energy-efficient appliances, as well as various incentives for biodiesel and renewable diesel, alternative fuel, and alternative fuel mixtures.  Incentives for biodiesel and renewable diesel and the extension and modification of the wind production tax credit are also included in the legislation.  Additionally, the Act extends the production tax credit for wind through 2013 and includes a modification to allow renewable energy facilities that begin construction before the end of 2013 to claim 10 years of credits—a substantial change from the prior placed in service rules that applied to such projects. It also disallows commonly recycled paper from qualifying for the section 45-production tax credit.

SUNDRY PROVISIONS

Other extended business provisions include the New Markets Tax Credit, the Work Opportunity Tax Credit, and the special exclusion rules for certain small business stock.

IN-DEPTH ANALYSIS OF THE SECTIONS OF THE ACT SELECTED BY THE AUTHOR:

I.

Among the taxpayer-favorable aspects of the American Taxpayer Relief Act of 2012 (Act), the 100 percent exclusion from gross income of gain on the sale of Qualified Small Business Stock (QSBS), provided for in section 1202 of the Internal Revenue Code, was extended for an additional year. Therefore, gain from the sale of QSBS purchased during the period between September 2010 and December 31, 2013 will not be subjected to tax, provided certain requirements are met.

Historically, this exclusion only provided taxpayers with a 50 percent exclusion (75 percent for QSBS purchased between February 2009 and September 2010) from gross income attributable to gain from the sale of QSBS, with the remaining non-excluded gain taxed at the 28 percent rate. The 50 percent exclusion and higher 28 percent rate resulted in an effective tax rate of approximately 14 percent (7 percent for QSBS purchased between February 2009 and September 2010).

The purpose of this exclusion is to encourage investment in new ventures. Therefore, certain requirements for qualification exist, which include the following:

The stock must be purchased or acquired by a contribution of property or services at the time of its original issuance by the corporation and must be held for a period of more than five years;

The interest held must actually be stock in the Qualified Small Business (not warrants, etc.);

The holder of QSBS may be any taxpayer, including a partnership; however, corporations are not eligible to claim this exclusion;

The maximum amount of gain eligible for exclusion with respect to a single issuer is the greater of $10 million or 10 times the taxpayer’s basis in the QSBS; and

The corporation issuing the stock must be a “Qualified Small Business,” which among other requirements means the corporation is a C corporation, has no more than $50 million in gross assets prior to the issuance of such QSBS, and employs at least 80 percent of its assets (measured by value) in the active conduct of one or more trades or businesses, but generally excluding service businesses.

Barring any further extensions of this 100 percent exclusion, the 50 percent exclusion will return for QSBS purchased after December 31, 2013. This is an important development for those taxpayers that are interested in making investments in startup or otherwise qualifying small corporations during the 2013 calendar.

II.

The Act permanently extends the benefits provided by the Jobs and Growth Tax Relief Reconciliation Act of 2003. This Act allows companies in certain foreign jurisdictions to be treated as “Qualified Foreign Corporations” (“QFCs”) and allows for dividends received from QFCs by U.S. persons to be taxed at long term capital gain rates and not ordinary income tax rates, which is typical. Pursuant to the Bill, the long-term capital gain rates will be raised from 15% for those taxpayers earning income in excess of $400,000 (individuals), $425,000 (heads of households), and $450,000 (married filing jointly) to 20%. Taxpayers below the 25% income tax bracket will continue to be taxed at zero percent and those in the middle income tax bracket will continue to be taxed at 15%. This permanent extension provides for significant income tax planning alternatives and options.

III.

Another aspect of the Act with international tax implications is the one-year extension of the look-through treatment of payments between related controlled foreign corporations (“CFCs”) under the foreign personal holding company rules. The extension allows the tax deferral of certain payments, such as interest, dividends, rents, and royalties, between CFCs and applies until January 1, 2014. As a result, CFCs will be able to continue transferring certain payments between one another without triggering current year U.S. income tax.

IV.

The Act also extends through 2013 the subpart F exception for active financing income. This provision allows a U.S. parent of a foreign subsidiary engaged in a banking, financing, or similar business to defer tax on such subsidiary’s earnings if the subsidiary is predominantly engaged in such business and conducts substantial activity with respect to such business. To qualify, the subsidiary must pass an entity level income test to demonstrate that the income is active, not passive, income.

V.

The Act permanently applies a 20% withholding tax to gains on the disposition of U.S. real property interests by partnerships, trusts, or estates that are passed through to partners or beneficiaries that are foreign persons under the Foreign Investment in Real Property Tax Act.

VI.

The Act extends and modifies the production tax credit (PTC) and reenacts bonus depreciation for property placed in service before January 1, 2014. The production tax credit expired for wind projects that were not placed in service before January 1, 2013, and was scheduled to expire for biomass, geothermal, landfill gas, trash, hydropower, and marine and hydrokinetic facilities that were not placed in service before January 1, 2014. The Act extends PTC for such facilities if construction begins before January 1, 2014. The actual date the project is placed in service is not relevant; the key is whether construction begins during 2013.

Although the Act does not define what it means to begin construction, it is anticipated that the rules will be substantially similar to analogous rules under the now-expired 1603 cash grant program. In general, under these rules, a taxpayer can establish that it has begun construction of a project either by satisfying a physical work test or a 5 percent safe harbor.

Under the physical work test, the taxpayer must have begun physical work of a significant nature on specified energy property. The work must be reasonably continuous—it will not be sufficient to begin work during 2013 and then take a long hiatus and complete the project at a later date.

Under the 5 percent safe harbor, the taxpayer must pay (in the case of a cash method taxpayer) or incur (in the case of an accrual method taxpayer) 5 percent or more of the total cost of the specified energy property. A cost is generally incurred when: (i) the fact of the liability is fixed, (ii) the amount of the liability is determinable with reasonable accuracy, and (iii) the economic performance test of Treas. Reg. § 1.461-4 has been satisfied with respect to such cost.

VII.

The bonus depreciation rules, which generally expired at the end of 2011, are reenacted for property placed in service during 2013. The amount of bonus depreciation allowed will equal 50 percent of the cost basis of the qualifying property.  The determination of when property is placed in service is based on the totality of facts and circumstances. In general, property is considered to be placed in service when it is in a condition or state of readiness and is available for a specifically assigned function. Equipment that is operational but undergoing testing to eliminate defects is considered to be in a condition or state of readiness and availability for a specifically assigned function.  The Internal Revenue Service has stated that the following factors are to be considered in determining placed-in-service dates for power plants: approval of required licenses and permits; passage of control of the facility to the taxpayer; completion of critical tests; commencement of daily or regular operation; and synchronization into a power grid for generating electricity to produce income.

CONCLUSION:

There are significant concessions yet to be considered by the Senate, Congress and the President as the next four years proceed during the Presidency of Obama and beyond:

A. Provisions Expiring in 2013  Provision (Code section)           Expiration Date

1. Credit for certain non-business energy property (sec. 25C(g))                  12/31/13

2. Alternative fuel vehicle refueling property

(non-hydrogen refueling property)(sec. 30C(g)(2)) 12/31/133

3. Credit for two- or three-wheeled plug-in electric vehicles

(sec. 30D(g)) 12/31/13

4. Credit for health insurance costs of eligible individuals (sec. 35(a)) 12/31/13

5. Second generation biofuel producer credit (formerly cellulosic biofuel producer credit)

(sec. 40(b)(6)(H)) 12/31/13

6. Incentives for biodiesel and renewable diesel:

a. Income tax credits for biodiesel fuel, biodiesel used to produce a qualified mixture, and small agri-biodiesel producers (sec. 40A) 12/31/13

b. Income tax credits for renewable diesel fuel and renewable diesel used to produce a qualified mixture (sec. 40A) 12/31/13

c. Excise tax credits and outlay payments for biodiesel fuel mixtures (secs. 6426(c)(6) and 6427(e)(6)(B)) 12/31/13

d. Excise tax credits and outlay payments for renewable diesel fuel mixtures(secs. 6426(c)(6) and 6427(e)(6)(B)) 12/31/13

7. Tax credit for research and experimentation expenses (sec. 41(h)(1)(B)) 12/31/13

8. Determination of low-income housing credit rate for credit allocations with respect to non-federally subsidized buildings (sec. 42(b)(2)) 12/31/13

9. Beginning-of-construction date for renewable power facilities

eligible to claim the electricity production credit or investment credit in lieu of the production credit (secs. 45(d) and 48(a)(5))

12/31/13

10. Credit for production of Indian coal sec. 45(e)(10)(A)(i)) 12/31/13

11. Indian employment tax credit (sec. 45A(f))                                             12/31/13

12. New markets tax credit (sec. 45D(f)(1))                                                   12/31/13

13. Credit for certain expenditures for maintaining railroad tracks (sec. 45G(f)) 12/31/13

14. Credit for construction of new energy homes (sec. 45L(g)) 12/31/13

15. Credit for energy efficient appliances (sec. 45M(b)) 12/31/13

16. Mine rescue team training credit (sec. 45N)                                             12/31/13

17. Employer wage credit for activated military reservists (sec. 45P) 12/31/13

18. Work opportunity tax credit (sec. 51(c)(4))                                             12/31/13

19. Qualified zone academy bonds: allocation of bond limitation (sec. 54E(c)(1)) 12/31/13

20. Deduction for certain expenses of elementary and secondary school teachers (sec. 62(a)(2)(D)) 12/31/13

21. Discharge of indebtedness on principal residence excluded from gross income of individuals (sec. 108(a)(1)(E)) 12/31/13

22. Parity for exclusion from income for employer-provided mass transit and parking benefits (sec. 132(f)) 12/31/13

23. Treatment of military basic housing allowances under low-income housing credit (sec. 142(d)) 12/31/13

24. Premiums for mortgage insurance deductible as interest that is qualified residence interest (sec. 163(h)(3)) 12/31/13

25. Deduction for State and local general sales taxes (sec. 164(b)(5)) 12/31/13

26. Three-year depreciation for race horses two years old or younger (sec. 168(e)(3)(A)) 12/31/13

27. 15-year straight-line cost recovery for qualified leasehold improvements, qualified restaurant buildings and improvements, and qualified retail improvements (secs. 168(e)(3)(E)(iv), (v),(ix), 168(e)(7)(A)(i) and (e)(8)) 12/31/13

28. Seven-year recovery period for motorsports entertainment complexes (secs. 168(i)(15)and 168(e)(3)(C)(ii)) 12/31/13

29. Accelerated depreciation for business property on an Indian reservation (sec. 168(j)(8)) 12/31/13

30. Additional first-year depreciation for 50 percent of basis of qualified property (secs. 168(k)(1) and (2) and 460(c)(6)(B)) 12/31/13

31. Election to accelerate AMT credits in lieu of additional first-year depreciation (sec. 168(k)(4)) 12/31/13

32. Special depreciation allowance for second-generation biofuel plant property(sec. 168(l)) 12/31/13

33. Special rules for contributions of capital gain real property made for conservation purposes (secs. 170(b)(1)(E) and

170(b)(2)(B)) 12/31/13

34. Enhanced charitable deduction for contributions of food inventory (sec. 170(e)(3)(C)) 12/31/13

35. Increase in expensing to $500,000/$2,000,000 and expansion of definition of section 179 property (secs. 179(b)(1) and

(2) and 179(f)) 12/31/13

36. Placed-in-service date for partial expensing of certain refinery property (sec. 179C(c)(1)) 12/31/13

37. Energy efficient commercial buildings deduction (sec. 179D(h)) 12/31/13

38. Election to expense advanced mine safety equipment (sec. 179E(a)) 12/31/13

39. Special expensing rules for certain film and television productions (sec. 181(f)) 12/31/13

40. Deduction allowable with respect to income attributable to domestic production activities in Puerto Rico

(sec. 199(d)(8)) 12/31/13

41. Deduction for qualified tuition and related expenses (sec. 222(e)) 12/31/13

42. Tax-free distributions from individual retirement plans for charitable purposes(sec. 408(d)(8)) 12/31/13

43. Special rule for sales or dispositions to implement Federal Energy Regulatory Commission (“FERC”) or State electric

restructuring policy (sec. 451(i)) 12/31/13

44. Modification of tax treatment of certain payments to controlling exempt organizations (sec. 512(b)(13)(E)) 12/31/13

45. Treatment of certain dividends of regulated investment companies (“RICs”) (secs. 871(k)(1)(C) and (2)(C), and881(e)(1)(A) and (2)) 12/31/13

46. RIC qualified investment entity treatment under the Foreign Investment in Real Property Tax Act (“FIRPTA”) (sec. 897(h)(4)) 12/31/13

47. Exceptions under subpart F for active financing income (secs. 953(e)(10) and 954(h)(9)) 12/31/13

48. Look-through treatment of payments between related controlled foreign corporations under the foreign personal holding company rules (sec. 954(c)(6)) 12/31/13

49. Special rules for qualified small business stock (sec. 1202(a)(4)) 12/31/13

50. Basis adjustment to stock of S corporations making charitable contributions of property (sec. 1367(a)(2)) 12/31/13

51. Reduction in S corporation recognition period for built-in gains tax (sec. 1374(d)(7)) 12/31/13

52. Empowerment zone tax incentives:

Designation of an empowerment zone and of additional empowerment zones (secs. 1391(d)(1)(A)(i) and (h)(2)) 12/31/13

b. Increased exclusion of gain (attributable to periods through 12/31/18) on the sale of qualified business stock of an

empowerment zone business secs. 1202(a)(2) and 1391(d)(1)(A)(i)) 12/31/13

c. Empowerment zone tax-exempt bonds (secs. 1394 and 1391(d)(1)(A)(i) 12/31/13

d. Empowerment zone employment credit (secs. 1396 and 1391(d)(1)(A)(i)) 12/31/13

e. Increased expensing under sec. 179 (secs. 1397A and 1391(d)(1)(A)(i)) 12/31/13

f. Non-recognition of gain on rollover of empowerment zone investments (secs. 1397B and 1391(d)(1)(A)(i)) 12/31/13

Note:  The empowerment zone tax incentives may expire earlier than December 31, 2013 if a State or local government provided for an expiration date in the nomination of an empowerment zone, or the appropriate Secretary revokes an empowerment zone’s designation. The State or local government may, however, amend the nomination to provide for a new termination date.

53. Incentives for alternative fuel and alternative fuel mixtures (other than liquefied hydrogen):

Excise tax credits and outlay payments for alternative fuel (secs. 6426(d)(5) and 6427(e)(6)(C)) 12/31/13

Excise tax credits for alternative fuel mixtures (sec. 6426(e)(3)) 12/31/13

54. Temporary increase in limit on cover over of rum excise tax revenues

(from $10.50 to $13.25 per proof gallon) to Puerto Rico and the Virgin Islands (sec. 7652(f)) 12/31/13

55. American Samoa economic development credit (sec. 119 of Pub. L. No. 109-432 as amended by sec. 756 of Pub. L. No. 111-312) 12/31/13

At the date of this writing, there are tax concession provisions expiring in 2014, 2015, 2016, 2017 and 2018, 2019, 2020, 2021, 2022 and 2023.  You can clearly see that the year 2013 will be a busy year indeed for the Senate, Congress, the President and Lobbyists.  The revenue measures will be anything but predictable or reliable and the costs to run governments within the United States control, its states, territories, possessions will all take additional revenue or cost cutting.  You really need to stay on top of these concessions and/or check very often with your trusted tax advisor.

Michael Nelson,Esq.

 

 

 

Imagine your car is hit in the mall parking lot by a busy shopper, who wasn’t paying attention when she filled the back seat of her car with large packages blocking the visibility out of the rearview window, and backed out of the parking space directly into your side door.  You both get out of your respective cars to assess the damage, and agree that there was only minor damage to both cars.  She says to you, “I’m so sorry.  I wasn’t paying attention.  This is my fault.”  You reply, “I’m calling my lawyer.”  She says, “Instead of filing a lawsuit, which will cost you money and take several months or maybe even years to litigate, would you accept $3,000.00 from me today?”  She stated her case.  She admitted liability.  And anticipating the dispute, she offered a solution.  Do you take the offer?

Now, imagine yourself applying this same strategy in your divorce case.

You’ve been thinking about asking for a divorce, but have feared how your spouse will react.  You know that you haven’t paid attention to your relationship, and have emotionally and/or physically strayed from the marriage.  You have both assessed the damage to the relationship, and perhaps have even tried counseling to repair it.  Unfortunately, you feel that full extent of the damage is simply too great to repair.  You are ready to say, “I’m so sorry.  I wasn’t paying attention.  This is my fault.”  Your spouse will likely react and declare, “I’m calling my lawyer.”

But, what if, like the driver who backed into the car in the shopping mall parking lot, you are prepared with a solution?  How do you think your spouse will react if you instead present your case like this:  “I’m so sorry.  I wasn’t paying attention.  This is my fault.  I was thinking that instead of ‘lawyering-up,’ we could work this out together.  I’ve drafted up a few ideas about how we could co-parent our kids, and worked out a few different calendars that could work for both of our schedules.  I recognize that it will be impossible for either one of us to financially support our marital home, and thought that we could sell it, split the proceeds, and each look for smaller places to live.  Though we haven’t been married very long, spousal support (alimony) will probably be needed, so here’s what I was thinking.  And child support can be calculated using the guidelines provided by the court.  I know this is a lot to consider, but what do you think?”  You stated your case.  You admitted liability.  And anticipating the dispute, you offered a solution.  Does your spouse take the offer?

If the offer is accepted, the next steps could be as simple as meeting with an attorney or certified family law mediator, who would work with you to prepare the necessary documents such as a Marital Settlement Agreement, Petition for Dissolution of Marriage, etc. etc.  to effectuate your divorce.

Whether it’s a slip and fall, automobile or medical malpractice case, one constant element of almost every lawsuit is the “prayer for relief” clause … the request for damages.  Whether required by the court system or simply good attorney practice, many lawsuits are avoided when the parties participate in pre-litigation settlement negotiations, where the parties communicate their prayer for relief in an effort to avoid the high costs associated with protracted lawsuits.  The strategy is to present and discuss multiple solutions at the earliest possible time, to avoid conflict.  Here are a few steps to follow:

1.     Prepare and draft multiple solutions to each dispute before raising the issue.  For example, instead of declaring that you want 50/50 timesharing/custody of the children, construct different calendars presenting a variety of possible schedules for you and your spouse.

2.     Admit your own fault in the demise of the marriage.  Take responsibility for the failure of your relationship, and don’t connect it to anything your spouse did or didn’t do.  Putting your spouse on the defensive will not help you achieve your goal.

3.     Prepare and present a reasonable offer of settlement.  When thinking about your offer, consider whether you would accept the same offer if presented to you.  Try to avoid game-playing, that is, “haggling” with the numbers or possessions.  Let your spouse know that you are serious by making a serious offer.

While an attorney or certified family law mediator can certainly help you and your spouse prepare a Marital Settlement Agreement, you may also want to consider first consulting with a divorce coach, who can help you in the “prelitigation” phase.  A divorce coach will educate you about the process of divorce, and can help you assess your specific situation, offering suggestions or guidance in how to best approach the initial discussion with your spouse.

Diane Danois, Esq.

Obamacare seemed to have all the solutions to all of our healthcare problems … It’s solution for the growing cost of long-term care was a program called the CLASS Act which meant to provide a government-backed universal long-term care insurance plan.  The reason most people have to rely on Medicaid planning is because they either cannot afford long-term care insurance or they do not qualify for it because of pre-existing health conditions.  The CLASS Act sought to fix that by widening the pool and automatically enrolling anyone who chose to participate.

If there was any question about whether the CLASS Act was a goner, when the new bill got passed on January 2nd Congress made it official. As part of the budget compromise to avoid the Fiscal Cliff, the CLASS Act was formally repealed and replaced with a Long-Term Care Commission.

The CLASS Act was Obamacare’s  attempt to create a national insurance pool for long-term care.  Part of the plan included a cost review by the Department of Health and Human Services.  After the review was done, Secretary Kathleen Sebelius came to the conclusion that the CLASS Act was untenable financially.  To support  the system, the premiums would need to be beyond what she thought most people would be willing to voluntarily pay.  Congress officially agreed and wrote the program’s obituary last week.

For those who can get and afford long-term care insurance, it helps give them the peace of mind of not having to worry about how they’re going to protect their assets if they suffer from a debilitating health condition.  But for the rest of the folks, the standard problems are pervasive: the insurance is either too expensive or they don’t qualify for it because of pre-existing health conditions.

Without the benefit of a guaranteed-issue government insurance, seniors face their own Fiscal Cliff.  The only way for the uninsured to protect themselves is to seek refuge under Medicaid, but many don’t know how to minimize the sting of the Medicaid spend down. Most don’t realize they can take advantage of government incentives that allow them to protect a limited number of assets and preserve precious resources in case their health later improves or for the benefit of a healthy spouse.  With the absence of the CLASS Act, Medicaid Planning becomes all the more essential.

Long-term care Medicaid is not a free ride.  Through a complex system of rules, there is a cost-sharing element that factors in the applicant’s income and family needs.  Sure, they let applicants shift assets like IRAs into income-only annuities without a penalty, but primarily to help support a healthy spouse.  In many cases, the shift of assets to income excludes an asset but increases the monthly cost-sharing.

With that said, there are still ample opportunities to deal with the problem.  Medicaid Planning is the last hope of many before total impoverishment from the costs of nursing homes.  Through creative planning, you can stay at home or in low-cost assisted living facilities with Medicaid’s assistance through the expansion of the Home and Community Based Services (HCBS) program.

If you can’t get or afford long-term care insurance and are worried about how you are going to keep from going over your own personal Fiscal Cliff when a loved one’s health deteriorates, you should learn and understand how to protect your family’s financial future through Medicaid Planning.

If you need help with a strategy to protect your assets or perhaps you may have a family member in need, please contact our Medicaid Planning support center to assist you in providing the best advice for you, your family, or a your friends. Go to www.medicaidanswers.net to learn more.

 

For advisors, our Certified Medicaid Planner (CMP™) course can give you whole new perspective on ways to help your clients and tools to expand your practice.

Many businesses establish insurance companies to primarily insure some of the business risks of the parent company or its operating subsidiaries. These insurance companies are commonly referred to as captive insurance companies since their insurance activities are focused upon, or “captive” to the insurance needs of the parent business or its operating subsidiaries.There are some unique tax items that should be considered with foreign captive insurance companies. Internal Revenue Code section 4371 imposes a federal excise tax (the “FET”) on premiums paid by a U.S. person (or a non-U.S. person engaged in a U.S. trade or business) for insurance policies, indemnity bonds, annuity contracts, and reinsurance contracts with respect to risks located in the United States. The FET rate is four percent on casualty insurance and indemnity bonds; one percent on life, health, and annuity contracts; and one percent on reinsurance.

The Internal Revenue Service has taken the position that section 4371 applies the FET to each policy of insurance or reinsurance covering U.S. risks and that the FET can be applicable to multiple transactions in which the same underlying U.S. risks are insured and reinsured. This is known as the cascading theory. Under the cascading theory, if a foreign insurance company insures or reinsures a U.S. risk that would be subject to the FET, and then obtains reinsurance for that risk from a second foreign insurance company, the FET applies to the reinsurance contract between the two foreign parties, unless a treaty exemption applies. Several income tax treaties provide an exemption from the FET for eligible foreign insurers and reinsurers. However, these exemptions generally do not apply if the foreign insurer or reinsurer, in turn, reinsures the risk with another foreign reinsurer that is not eligible for an exemption from the FET under an applicable treaty.

In recent years, the IRS has significantly increased its audit activity with respect to foreign captive insurance companies and the accurate reporting of the FET. Accordingly, it is important to review FET compliance for any internationally domiciled captive insurance company. Certain penalty mitigation procedures and favorable interest rules may be available for taxpayer’s liable for previously unreported FET if the taxpayer reaches out to the IRS before it reaches out to the taxpayer.