Category Archives: Tax Planning

5 QLAC Questions and Answers

My Comments: QLAC? What the heck is a QLAC?

By Jeffrey Levine / July 18, 2014

On July 1, 2014 the Treasury Department released the long-awaited final regulations for Qualifying Longevity Annuity Contracts (QLACs). These new annuities will offer advisors a unique tool to help clients avoid outliving their money.

The QLAC rules, however, are a complicated mash-up of IRA and annuity rules, and clients may need substantial help in understanding their key provisions. To help advisors break down the most important aspects of QLACs, below are 5 critical QLAC questions and their answers.

1) Question: What are QLACs?
Answer: QLACs, or qualifying longevity annuity contracts, are a new type of fixed longevity annuity that is held in a retirement account and has special tax attributes. Although the value of a QLAC is excluded from a client’s RMD calculation, distributions from QLAC don’t have to begin until a client reaches age 85, well beyond the age at which RMDs normally begin.

2) Question: Why did the Treasury Department create QLACs?

Answer: Prior to the establishment of QLACs, there were significant challenges to purchasing longevity annuities with IRA money. The rules required that unless an annuity held within an IRA had been annuitized, its fair market value needed to be included in the prior year’s year-end balance when calculating a client’s IRA RMD. This left clients with non-annuitized IRA annuities with an inconvenient choice to make after reaching the age at which RMDs begin. At that time, they needed to either:
1) Begin taking distributions from their non-annuitized IRA annuities, reducing their potential future benefit, or
2) Annuitize their annuities, which would obviously produce a lower income stream than if they were annuitized at a more advanced age, or
3) “Make-up” the non-annuitized annuity’s RMD from other IRA assets, drawing down those assets at an accelerated rate.

None of these options was particularly attractive and now, thanks to QLACs, clients will no longer be forced to make such decisions.

3) Question: How much money can a client invest in a QLAC?

Answer: The final regulations limit the amount of money a client can invest in a QLAC in two ways: a percentage limit; and an overall limit. First, a client may not invest more than 25 percent of retirement account funds in a QLAC.

For IRAs, the 25 percent limit is based on the total fair market of all non-Roth IRAs, including SEP and SIMPLE IRAs, as of December 31st of the year prior to the year the QLAC is purchased. The fair market value of a QLAC held in an IRA will also be included in that total, even though it won’t be for RMD purposes.

The 25 percent limit is applied in a slightly different manner to 401(k)s and similar plans. For starters, the 25 percent limit is applied separately to each plan balance. In addition, instead of applying the 25 percent limit to the prior year-end balance of the plan, the 25 percent limit is applied to the balance on the last valuation date.

In addition, that balance is further adjusted by adding in contributions made between the last valuation and the time the QLAC premium is made, and by subtracting from that balance distributions made during the same time frame.

In addition to the 25 percent limits described above, there is also a $125,000 limit on total QLAC purchases by a client. When looked at in concert with the 25 percent limit, the $125,000 limit becomes a “lesser of” rule. In other words, a client can invest no more than the lesser of 25 percent of retirement funds or $125,000 in QLACs.

4) Question: What death benefit options can a QLAC offer?
Answer: A QLAC may offer a return of premium death benefit option, whether or not a client has begun to receive distributions. Any QLAC offering a return of premium death benefit must pay that amount in a single, lump-sum, to the QLAC beneficiary by December 31st of the year following the year of death.

Such a feature is available for both spouse and non-spouse beneficiaries. In addition, the final regulations allow this feature to be added regardless of whether the QLAC is payable over the life of the QLAC owner only, or whether the QLAC will be payable over the joint lives of the QLAC owner and their spouse.

QLACs may also offer life annuity death benefit options. In general, a spousal QLAC beneficiary can receive a life annuity with payments equal to or less than what a deceased spouse was receiving or would have received if the latter died prior to receiving benefits under the contract. An exception to this rule is available, however, to satisfy ERISA preretirement survivor annuity rules.

If the QLAC beneficiary is a non-spouse, the rules are more complicated. First, clients must choose between two options, one in which there is no guarantee a non-spouse beneficiary will receive anything; but if payments are received, they will generally be higher than the second option.

The second option is a choice that will guarantee payments to a non-spouse beneficiary, but those payments will be comparatively smaller than if payments were received by a non-spouse beneficiary under the first option. Put in simplest terms, a non-spouse beneficiary receiving a life annuity death benefit will generally fare better with the first option if the QLAC owner dies after beginning to receive benefits whereas, if the QLAC owner dies before beginning to receive benefits, they will generally fare better with the second method.

5) Question: Are QLACs available now
Answer: Yes…and no. Quite simply, the QLAC regulations are in effect already, but that doesn’t mean that insurance carriers already have products that conform to the new IRS specifications.

To the best of my knowledge, and as of this writing, QLACs exist in theory only.
It’s likely, however, that in the not too distant future, QLACs will go from tax code theory to client reality. Exactly which carriers will offer them and exactly which features those carriers will choose to incorporate into their products remains to be seen.

But make no mistake: QLACs are coming (or here, depending on your point of view). If such products may make sense for clients, it probably makes sense to reach out to them now and begin the discussion.

Why the IRS Wants You to Watch Your IRA Rollovers

IRS logoMy Comments: Can you say esoteric? Can you say huh? Can you say obscure?

The IRS recently issued a ruling, or perhaps more accurately a tax court decision made it for them that limits a persons ability to make an IRA rollover more than once in any calendar year. Used to be if you had 10 different IRA accounts, it didn’t matter. Now you are limited to ONE.

Mind you this doesn’t necessarily apply to transfers, which are technically different from rollovers. This article, assuming you give a damn, will tell you why.

By Mark Miller / April 24, 2014

CHICAGO (Reuters) – Memo from the Internal Revenue Service to retirement investors: Be careful with those individual retirement account rollovers.

That’s the gist of a recent IRS ruling that puts new restrictions on the number of “indirect rollovers” from one IRA to another you can do annually. The ruling comes on the heels of a federal court decision in January in which a complex strategy involving multiple rollovers executed by a New York City tax attorney, Alvan Bobrow, and his wife, Elisa, was disallowed. They were hit with a $51,298 income tax bill and a penalty of $10,260.

The new IRS rule only affects indirect rollovers, in which money isn’t sent direct from one financial trustee to another. Until now, such rollovers were permitted once every 12 months from each IRA account that a taxpayer owns. Starting January 1, 2015, the 12-month rule applies to all IRAs a taxpayer owns collectively. (Rollovers completed in 2014 won’t be affected.)

An indirect rollover allows an investor to withdraw funds from an IRA and then take up to 60 days to reinvest the proceeds in a different IRA without incurring income tax liability or the 10 percent withdrawal penalty for investors younger than 59 1/2. The court case, Bobrow v. Commissioner, involved several large indirect rollovers (just over $65,000 apiece) in 2008.
At issue is a sophisticated strategy, allowable under the old rules, aimed at drawing what amounts to an interest-free loan through a series of indirect rollovers. It’s usually executed by financial advisers or other financial experts because the penalties for mistakes are severe.

“We’ve executed it with a handful of clients over the past decade,” says Michael Kitces, partner at Maryland-based Pinnacle Advisory Group, “although I usually caution strongly against it, because if you botch it for any reason, you can’t fix it.”

In this case, Bobrow took an indirect distribution of $65,064 from his IRA in April 2008. In June he took a distribution of the same amount from a second IRA and four days later used those funds to repay the first IRA. In July he took a third distribution of that amount from an IRA owned by his wife, repaying that money into his second IRA days later. In September he made a final deposit to repay his wife’s IRA.

The IRS held that the timing of some of the transactions didn’t comply with the 60-day rule, and other aspects of the maneuver violated its rules. Bobrow sued the IRS, but the court wound up not only backing the IRS on the issue of the Bobrows’ timing but also ruling more broadly that all indirect rollovers are subject to an aggregate once-per-year rule.

That set the stage for the IRS rule that takes effect next year, which aims to clamp down on this maneuver. It applies to transfers from one IRA to another, or from a Roth IRA to another Roth account. It also covers SEP (simplified employee pension) plans and Simple (savings incentive match plan for employees) IRAs. It doesn’t apply to rollovers from a workplace account to an IRA, or to Roth conversions.

The rule has caused a stir among financial advisers because it contradicts language in IRS Publication 590, which spells out the IRA rules. (The IRS will amend the publication.) Nonetheless, the shift should not pose problems for most taxpayers, who typically execute rollovers directly between financial institutions.

“People really shouldn’t do indirect rollovers,” says Ed Slott, an IRA educator and author. “The only advantage is to get temporary use of the money, and that’s not really the spirit of the law.” Slott says some financial institutions do make it tough to execute direct rollovers, which could lead some taxpayers to the indirect route.

“I’ve heard of cases where the investor goes into a bank or brokerage and the staff person doesn’t know how to do a trustee-to-trustee transfer – or they try to talk the customer out of moving the money to another institution,” he says. “So, the investor will say, ‘Just give me a check, I haven’t decided what to do with it yet.’ “

Slott thinks the safest way to handle rollovers is direct trustee-to-trustee – with the receiving institution doing the paperwork. “If you are moving from bank A to broker B, broker B is getting the money, so let him do the paperwork. He’ll do it the right way, because he has an incentive to do so.”

But I’ll wave a caution flag: Don’t use an adviser simply because she offers to streamline your paperwork. Brokers and other financial advisers may be able to help you do the rollover paperwork, but you still need to do due diligence on the quality of investments offered and the fees charged. The U.S. Labor Department is gearing up to propose broad new rules later this year that would require brokers to act as fiduciaries, including when they advise clients on rollovers.

(The opinions expressed here are those of the author, a columnist for Reuters.)

Top 10 Benefits and Risks of Forming a Captive

retirement_roadMy Comments: I recently published an eBook with the title CAPTIVE WEALTH!

It explains how to use an 831(b) Captive Insurance Company to create, to grow, and to preserve wealth.

While not a simple idea, it does have the blessing of the IRS if you do it the right way, under the right circumstances. That alone makes it valuable and something to know about.

From the perspective of a successful small business owner, it allows him or her to turn a current expense item into an asset at a later date. Think about it; money spent now comes back later as an asset, which can be used many different ways. This article outlines some of the caveats you should be aware of.

By Donald Riggin, from Guide to Captives and Alternative Risk Financing | November 11, 2013
Top-10-issues

9 Tax Breaks Expiring at Year’s End

IRS-formsI’m sure you agree that we live in a world of political correctness. Sometimes that’s a good thing and many times it just gets in the way of common sense. Right now, I have to tell you I am NOT licensed or qualified to dispense tax advice. But as a financial planner, for which I am licensed and qualified, I can tell you there are tax issues you should perhaps be aware of. Some of them qualify as simple common sense.

Another year has nearly passed, and it’s time to make sure your have your tax ducks in a row.
It’s important to make sure you know about the key changes made to the tax code before you make your end-of-year moves.

The slogan for this month might just be “use it or lose it.” That’s because there are several tax breaks that are set to expire as 2014 dawns. Whoever your clients are — teachers, students, small-business owners and big spenders to name a few — make sure they take advantage before it’s too late.

“The days of relying on Congress to automatically renew expiring tax provisions … might finally be coming to a close as the strain on the federal budget becomes more evident with each new round of budget negotiations,” wrote William H. Byrnes and Robert Bloink on ThinkAdvisor.

(Not all tax news is bad. The IRS recently gave high-income taxpayers a break with the release of the final regulations governing the new 3.8% tax on net investment income.)

Read about all NINE of them HERE:

A Long Walk Off a Short Cliff

Social Security 3My Comments: An area of expertise that I claim, involves a topic known as “captive insurance companies.” This concept applies to successful small business owners and the companies they own. These folks are in the news a lot lately because they get talked about in the context of the Affordable Care Act and what some pundits say will ruin them.

But since 99% of small businesses have less than 50 employees, which means the PPACA is not in play, there is a more important reason to pay attention, and that’s the government shutdown and the effect a potential default will have on them going forward.

For those of you who are small business owners and don’t know about captives, you can find out much more elsewhere on this web site. (or click on the attached image…) For now, know that it represents a way for you to improve cash flow, minimize risk exposure, and set aside funds for the future with favorable tax consequences.

Sitanta O’ Mahony October 10, 2013

By the time you read this, the fiscal crisis afflicting the US may appear to be over. Indeed despite the markets being roiled by talk of a possible US default, reaching the debt ceiling – as the government is forecast to do on October 17th – does not mean the government will default.

In fact the American constitution prevents such an eventuality; the 14th Amendment states that “the validity of the public debt of the United States, authorized by law” is sacrosanct and “shall not be questioned.” Despite this, perhaps because of remarks by the US press secretary appearing to dismiss the 14th amendment as a solution, the markets continue to be spooked.

Captive insurers are also being affected by the legislative deadlock, and unfortunately this will continue whether or not the impasse is resolved.

Lawrence Prudhomme, vice president at management and consultancy firm GPW and Associates, Inc. says the shutdown of the Internal Revenue Service (IRS), which is closed for business until the impasse is resolved, is one of the most immediate and visible ways the government shutdown is affecting captives.

It is also a short-term issue, he says. “For captive insurance companies domiciled outside the United States, obtaining an employer identification number requires direct contact with the IRS and cannot be done electronically.

So, as a result, until the IRS is reopened, nothing can be done in this area. It’s inconvenient, but not critical to the overall process of forming a new captive. We are anticipating that things will be resolved shortly and any backlogs will be overcome in a reasonable amount of time” says Prudhomme.

The biggest fiscal cliff development which Gary Osborne, President of USA Risk Group, Inc., the largest independent captive management firm in the US, has seen is an increase in firms utilising their captive, or starting a captive, to fulfil obligations under The Patient Protection and Affordable Care Act (PPACA), aka Obamacare.

“We’re seeing a big increase in smaller companies looking at utilising captives to self-insure. Self-insurance can be used to meet the requirements of PPACA and it gives companies much greater flexibility and choice in terms of the coverage they provide compared to remaining in one of the health insurance exchanges”.

Osborne cites the case of Vermont which mandates the provision of unlimited fertility treatments in its exchanges. However if a firm self-insures, a cap of one or two such treatments can be implemented.

“The coverage provided under a self insured plan can be tweaked as long as it meets the minimum federal standard which is generally much lower than many states are imposing under the health insurance exchanges.”

Although states can’t stop firms self-insuring under the federal law, in a bid to maximise higher standards of health care for all employees, they are limiting the ability to buy stop loss insurance and Osborne says this is forcing companies with fewer than 100 employees back onto the exchanges.

The other area in which the impasse is impacting captives is in relation to the renewal of the Terrorism Risk Insurance Program Reauthorization Act (TRIPRA), commonly known as TRIA, which is set to expire on December 31, 2014.

“TRIA is one of the areas the government are considering cutting, people are beginning to question why the government is getting involved and whether or not it’s really needed”, says Osborne. With trenchant cuts in public spending on the table TRIA seems an easy target.

Yet notwithstanding the tag of ‘corporate welfare’ being lobbed at it by the Cato Institute and others, in fact TRIA doesn’t cost a lot of money, says Osborne. “It’s a pooling mechanism, an advance from the government, which insurance companies (including domestic captives) contribute to by paying up to 3% of their premium. Unfortunately it’s one of those symbolic issues that has been caught up in the fight.”

Despite this, Osborne thinks TRIA’s future is assured. “There are enough vested interests fighting for it”. Let’s hope the same can be said for affordable healthcare.

The Legality of Offshore Planning: an Introduction

imagesMy Comments: This blog post by Hale Stewart, derives in part from his expertise with captive insurance companies, and the fact that they are often set up in an offshore jurisdiction to provide a layer of asset protection for those using the concept. There are now approximately 17 states that allow and encourage the creation of domestic captives, as opposed to offshore captives.

Mr. Stewart and I are acquainted as a result of my involvement with captive insurance companies and privately owned medical practices. Physicians are troubled these days by the financial pressures resulting from the PPACA or what many folks think of as “Obamacare”. Introducing a captive insurance company allows the practice owners to keep more of their money and minimize those financial pressures.

A captive insurance company, by definition and design, sells insurance policies to no one other than the company that owns it. It is a valid and economically viable tool that can significantly benefit the owners of a successful small business, if done correctly and appropriately.

by Hale Stewart, Esq. on June 26, 2013

Apple’s tax plan — and subsequent appearance before Congress defending their plan — has again drawn attention to the idea of offshore planning. The overall debate has fallen into the fairly predictable pattern of the political right saying Apple is 100 percent allowed to do whatever they can to lower their taxes, while the political left has decried the practice as a deliberate evasion of taxes.

What both sides have failed to do is place the idea of offshore planning in the context of U.S. anti-avoidance law in order to determine if the structure would indeed stand-up to scrutiny in the event it was challenged in court. While the analysis that follows will hardly be an in-depth treatment, it should serve to highlight some of the legal issues involved with complex international tax planning of this nature.

By way of introduction, there are two core concepts of U.S. anti-avoidance law, both of which are derived from the same case, Gregory v. Helvering. The concept which is by far most cited is that taxpayers are allowed to structure their affairs to minimize taxation. However, just as important — but not cited with nearly the same frequency — is that all transactions must have substance; merely complying with the technical requirements of the code is insufficient.

In Gregory, the taxpayer performed a corporate formation and liquidation over a three-day period. The court ruled this short duration indicated the corporation was not meant to be used for a legitimate business purpose, but was instead a technical shell game used to minimize taxes. In ruling against the taxpayer, the court forever added an additional layer to tax planning — the need to demonstrate transactional “substance.”

Further complicating our analysis are two issues. The first is that “legal substance” is an ephemeral and ill-defined concept. Little to no scholarship has been performed on the idea. The vast majority of courts dealing with this issue gloss over it, usually stating the act of formation is sufficient in and of itself to demonstrate a legitimate enterprise.

However, this is exactly what the taxpayer did in Gregory only to have the court rule against her. Perhaps the best list of factors for practitioners to use to demonstrate substance (or at lease corporate separateness) comes from veil piercing law, where many courts have a list of factors to determine if a company is in fact an “alter ego” of the person incorporating the company.

A strong argument could also be made that the material participation standards of 26 U.S.C. 469 could provide some much needed parameters for comparison. However, no court decision that I’m aware of has formally applied these commonly used and understood concepts to the area of corporate substance.

The best explanation I have found for “substance” is from a law review article titled “Business Purpose, Economic Substance and Corporate Tax Shelters” by Peter C. Canellos (54 SMU L. Rev. 47) where he notes that the vast majority of legitimate business transactions (which would therefore survive a substance over form challenge) have at their core, one of three purposes: increasing profit, lowering expenses or acquiring/raising financing. However, it should be noted that only lowering a tax expense is insufficient.

Unfortunately from a practicing perspective, whether or not a transaction falls into one of the three categories usually falls under the, “I know it when I see it” column.

The second problem complicating an analysis of the transaction is that substance over form law is itself a conceptual briar patch. Despite it’s importance to tax law, no case law book has ever been written on this topic.

Shepherdizing the Gregory case returns over 1,000 cases, law review articles, CLE materials and practitioner’s guides. Courts routinely use various substance over form terms interchangeably and incorrectly, and return conflicting decisions on the same or similar facts. While five actual anti-avoidance law concepts have been cited and developed in the case law (substance over form, the sham transaction, business purpose, the economic substance doctrine and the step transaction doctrine), legitimate scholarly debate could support the contention that there is only one, or three, four and five doctrines.

Going forward, I’m going to look at offshore from three perspectives: substance over form, economic substance and business purpose. Substance over form will use the concepts outlined above (“material participation” and the factors in “alter ego” analysis will be used. There will also be an explanation of legislative intent). I will make the assumption that the economic substance doctrine is a latter day version of the sham transaction doctrine (“sham transaction” language was used primarily in the 1950s-1970s, while “economic substance” language was used from the late 1980s/early 1990s onward; both contain an objective and subjective component). The business purpose doctrine will use the factors outlined in the Frank Lyon case. As the step transaction doctrine is most often used in corporate reorganizations or shorter duration transactions, it will not be used.

Goodbye Capital Gains Tax Breaks

USA EconomyMomentum is building for a tax code overhaul, and lower taxes on stock transactions could be doomed.
By Joy Taylor, May 6, 2013

Tax breaks for capital gains and dividends are likely to end by 2015, as lawmakers look for ways to broaden the tax base, allowing income tax rates on individuals to be cut. There is precedent for this — the tax break for long-term capital gains was axed in 1986, the last time that lawmakers significantly reformed the tax code.

Tax overhaul won’t happen swiftly. Lawmakers won’t have time to complete tax reform until 2014, and when they do finish it, the effective date probably will be prospective, so changes aren’t likely to occur until 2015. There will be plenty of time to mull the impact on your investment portfolio and contemplate actions to minimize the tax wallop.

But discussions will intensify in the coming months. One reason: Senator Max Baucus (D-MT), who heads the Senate committee responsible for writing tax laws, has announced that he’ll leave the Senate when his term ends at the end of 2014. Look for him to push hard for tax reform before he leaves, making a revamped tax code his policymaking legacy.

In the end, we expect long-term capital gains and dividends to be taxed as ordinary income — a big change from the 20% maximum rate they now incur. If President Obama succeeds in winning a top income tax rate on individuals of more than 28%, however, it’s possible that the maximum rate on long-term capital gains and dividends will be limited to 28%.

Consider taking gains before 2015 to lock in the lower rate currently in place. But be careful not to let the tax tail wag the investment dog. Tax savings aren’t the only consideration when culling your portfolio; your moves should also make financial sense. Note that we expect taxwriters to keep the stepped-up basis rule for inherited assets, so 100% of pre-death appreciation on those assets will escape income tax when the heirs sell, regardless of the capital gains rate.

Take care in engaging in installment sales before then. The 1986 law provided that installments received after the capital gains rate rose weren’t protected, even though the sale occurred before the rate change. We expect that a similar rule will be passed this time, too.

Weigh the impact on succession plans for family firms. Corporate redemptions of shareholders’ stock will be hit. Family firms hoping to redeem stock of senior owners to shift control to the next generation will need to take that into account.

Keep in mind that the relative advantages and disadvantages of components in your portfolio may need reevaluating. Dividend paying stocks will lose their tax-favored status if dividends are taxed at ordinary income rates. And there will be no tax disadvantage for having growth stock in retirement plans. Without a capital gains preference, it won’t matter that appreciation on the stock will be taxed as ordinary income when distributed to the owner of the retirement plan or IRA.

And it’s worth noting one other tax reform proposal that affects investors: Stock sellers could lose the right to direct that the highest-basis stock be sold first. They may be forced to use the average basis of their shares to compute the gain or loss recognized on a sale, rather than use the specific identification method. The tax reform plan drafted in the House includes such a provision, and we think it has a good chance of making it into law.

Trim Down Your Tax Obligations in 2013 Without Having to Convince the IRS

My Comments: From time to time, I get requests from various individuals who want to contribute an article for me to use as a blog post, giving them credit. This one is the result of such an effort. The writer has made several attempts to create an easy to read and understandable blog post. He deserves credit for his efforts, so, with some final editing, here is what he has to say.

The apparent motivation is to drive traffic to a web site, in this case one that promotes debt counseling and help in repairing one’s credit scores. I make no claims at all that these folks know what they are doing, or are legitimate in any way.

What I can say is that the suggestions Andy talks about below are not unreasonable, and might indeed have a positive impact on your tax liabilities going forward. But the devil is in the details, and how you go about it will have a lot to do with the outcome you are looking for.

By Andy Raybuck

Are you looking for ways to minimize your 2012 tax bills without having to convince the IRS? If you answered “yes”, you’re pretty much out of luck. But if you want to avoid being in the same position next year, you can still take steps to reduce your 2013 taxes. As the clock strikes midnight on 31st December this year, most opportunities to reduce your 2013 taxes will vanish like bubbles in champagne.

By the time your 1099s or W2 roll in, there’s not enough time to argue about the year you received your income, interest rates or the gains. While everyone is taking steps to reduce their debts and taxes in order to lead a debt free life, you can read through the concerns of this article in order to get some fresh ideas for minimizing your stress.

Bump up your contribution to your 401(k): The money you sock away in your workplace 401(k) account reduces your taxable income and therefore your taxes will also be reduced. You’d be surprised to see how contributing 1% more to your 401(k) affects your monthly income and your budget. Assume you make $80,000 annually and you get paid weekly. If you contribute 5% of your salary to a 401(k), that puts you in the 25% tax bracket. While your pre-tax contribution is $77, this will reduce your pay by $58. You can just bump up your contribution to 6%, you can easily add $92 a week and pre-tax $15 more.
Consider moving to municipal bonds: Apart from a retirement account, if you own a bond fund, you may consider shifting to municipal bonds. The interest you earn from the munis is free from federal income taxes. And if they’re issued by the same state where you reside, they’re even free of state taxes. Presently, a 10 year, high quality muni bond yields 1.7% as compared with a 10 year Treasury bond note that yields around 1.83%. However, it is possible to keep more after taxes by investing in the munis.
Switch to dividends: Dividend-paying stocks will yield more than a Certificate of Deposit or a CD offered by the banks and they’re also taxed at a lower rate. The tax rate on the dividends is 15% for most people and 20% for most single filers who earn less than $400,000 of taxable income. In case of married couples, the limit is $450,000. The interest income from CDs will be taxed at ordinary income tax rates. Only use CDs if you’re not comfortable with the risk factor involved with stocks.
Sell the losers: Did you purchase an Apple stock due to a moment of enthusiasm? If this is in your taxable account, you can sell off the stock. However, if you have enough faith on the future performance of the Apple stocks, you may even buy back the stock after 30 days.
Leverage the tax credits to minimize taxes: A tax credit reduces the amount of tax that you have to pay. The Earned Income Tax Credit is a refundable credit for all those people who work hard but aren’t able to earn a huge amount of money. The Child and Dependent Care Credit is for the expenses you paid for the care of your qualifying children under 13. The Child Tax Credit may apply to you when you have a qualifying child under the age of 17. The American Opportunity Tax credit helps you offset certain costs that you have to pay for higher education.

No one likes to pay higher taxes. With the fiscal cliff hanging over the heads of Americans, it is most likely that consumers will be more worried about reducing their tax liabilities. Start reducing your taxes now by following the above mentioned tips so you can avoid forging birth certificates for your quadruplets next year.

The U.S. Tax System: How Did We Get Here? Pt. 1, the Early Years

IRS-formsMy Thoughts on This: I was taught long ago that no one has a responsibility to pay more in taxes than is required. It’s up to you and I to figure out what is required. So we push the envelope and either through good fortune or because we really know what we are doing, we get it right. At least until a tax audit shows up and says you pushed too hard and got it wrong. But that doesn’t mean you stop pushing.

By Mike Patton | March 4, 2013

Income taxes, payroll taxes, property taxes, sales taxes, import taxes, and estate and gift taxes are just a few of the taxes that we, as Americans, are required to pay. Moreover, we are taxed at the federal level, the state level, the county or parish (in my state of Louisiana) level and even at the city level. Finally, we are taxed while we are alive and some unfortunate souls (although they’re really fortunate) are taxed from the grave. Yes, taxes are as much a way of life as baseball, hotdogs, apple pie and Chevrolet (I’m dating myself). How did we ever get to the point where our government is leveraging our future to the extent it is today? For perspective, I’d like to journey back to the beginning of our tax system and learn how our forefathers addressed this situation.

In the beginning was man and man had a need for governance. To facilitate this, we established a central governing authority to protect citizens from egregious acts from forces within or outside of our borders. Hence, government is a necessary institution which requires proper funding.

When America was founded, we spent little in the way of public purposes. In 1643, the colonists adopted what would be the forerunner to the income tax and called a “faculty tax.” It was assessed on people according to their “faculties” or their “property and ability to earn income.” During the American Revolution (1775-1783) most of the 13 states levied this tax.

Americans have always possessed an independent spirit. Following “oppressive” taxation imposed by England such as the 1765 Stamp Act (imposed specifically on “the British colonies and plantations in America” because of the massive debt incurred by England following the Seven Years war) American colonists began to cry “No taxation without representation.” Their collective emotions reached a boiling point in 1773 with the Boston Tea Party, which eventually led to the revolution.

After independence, another instance of taxpayer revolt began in 1791. At that time, whiskey cost less than 50 cents per gallon and because our government needed to pay down the national debt, levied a 30 cent per gallon tax, the Whiskey Rebellion resulted (which ended in 1794 when George Washington himself led an army into western Pennsylvania and the armed resisters melted away). These are just two examples of Americans rising up in protest of aggressive taxation.

The first national tax system did not emerge until well after the American Revolution. In fact, the Constitution of 1789 gave taxation powers to the federal government to “pay debts and provide for the common welfare of the United States.” Obviously, the federal government’s role is greatly expanded from its earlier days.

In my next post, we’ll look at the period from 1800 to the early twentieth century up to the advent of the modern tax system in 1913. History provides great perspective on the ebb and flow of the tax system. Moreover, if we fail to heed the lessons of history, we may well be destined to repeat its follies.

Legacy, Estate Planning as Important as Retirement

will with clockMy Comments: I expected to be retired now. But I’m one of millions who find it better to keep working and use the daily mental challenge to stay healthy, and because the income is welcome.

But the topic here is not an easy one to resolve. I can attest to the difficulty of talking with folks about their mortality. Funerals are not generally fun events. But they are inevitable and to the extent you can make life better for those you leave behind, I think you have an obligation to at least make an attempt.

By Paula Aven Gladych

People always talk about their plans for retirement, and they spend a good portion of their lives saving money in retirement accounts so they can maintain their lifestyles in their later years. But planning for the future isn’t just about retirement accounts or what you want to do with all of your free time.

According to financial experts, people also need to plan for what comes after their retirement—end-of-life planning.

That means legacy and estate planning, life insurance, long-term care and burial preparations.

Many people don’t want to talk about their own mortality, so they avoid planning for it.

The single biggest gap in legacy and estate planning is education, said David Richmond, president of Richmond Brothers, a registered investment advisory firm in Michigan.

“Do parents talk to their kids as they age about their money and how it is going to come to them? Do we teach, as an American culture, how to give money away or how to manage money? It is not taught in high school or college. It is not taught anywhere,” he said.

Wealthier families have always taught these things because they have more money to pass down, but conversations about money should take place in all families, regardless of income.
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