The Insurance Doctor

Category: taxes

  • Secret Codes 1031 and 1035 (exchange)

    Secret Codes 1031 and 1035 (exchange)

    Last week we talked about 4 ways to tap into the cash of your life insurance policy.  This week, we are taking it to the next level and will outline ways to exchange (or rollover) an existing annuity, life insurance or endowment policy for a better policy whilst deferring tax on the transaction.

    Since President Biden has proposed increasing capital gains from the current 20% to 39.6% (let’s call it 40%) for those in the top income bracket, tax loopholes like the 1035 and 1031 exchange become even more valuable.

    A 1035 exchange is defined as is a provision in the IRS tax code (1035) allowing for a tax-free transfer (or rollover) of an existing annuity contract, life insurance policy or endowment for another one of like kind.

    It is easier to understand the power of 1035 exchanges by using examples of when it is in a client’s best interest to take advantage of this tax loophole.  Scenarios when we used the 1035 exchange to improve client positions over the past 3 years include:

    1. Client has a 20-year old traditional whole-life insurance policy with a $100,000 cash value (earning zero interest) and is interested in a new policy with the long-term-care rider(chronic illness rider): RESULT: We rolled over the cash into a new policy so Mary can now access a portion of her death benefit for long-term care needs (by exercising the new chronic-illness rider while living) should she become ill without having to buy an expensive long-term care policy.  Mary paid NO TAX on her 1035 exchange!
    2. Client’s wife died of Covid-19, so we reviewed his 5 annuities, one of which was only paying 1.2%: RESULT: John had a 10-year-old annuity that had a 7-year rate guarantee of 3.5%.  Unbeknownst to him (John never read his annual statements) his annuity renewal rate dropped to 1.2% in 2018, so he did a 1035 exchange to a new annuity with a different company locking in his rate of 2.75% for 7 years.  John paid NO TAX on his 1035 exchange!
    3. Mark’s 2nd wife (15 years younger than him) just died from Covid-19 and he has a large life insurance policy on himself he feels he no longer needs or wants to pay for.  RESULT: Mark did a 1035 exchange (rolled over his cash value) from his life insurance policy to a fixed annuity paying 3% in New Jersey (where he has a summer home).  Now, he no longer has to pay his life insurance premium and all of his money (cash value) is earning 3% guaranteed (no fees in a fixed annuity) for 10 years instead of the 0% he was earning on his whole-life policy.  Mark paid NO TAX on his 1035 exchange!

    DISCLAIMER: The 1035 exchange check must go directly from one insurance company to another.  The policyholder cannot ever receive (called constructive receipt) the check!

    The 1035 exchange is a powerful tool for insurance and financial advisors that is under-utilized mostly due to ignorance or a lack of creativity.  There is a similar tool called a 1031 exchange available for real estate. 

    DISCLAIMER: Please consult with your realtor, financial advisor, and real estate attorney before deciding if a 1031 exchange is right for you. 

    I reached out to interview George Russo over the weekend as I know he has extensive 1031 exchange experience, for an explanation and some tips.

    In real estate, a 1031 exchange is a swap of one investment (or business) property for another (considered like-kind) that allows capital gains to be deferred, not eliminated.  It can work if you are looking to sell an investment property, you do not need the money and do not want to pay the capital gains taxes.  Savvy investors use 1031’s to defer capital gains and build wealth!

    George said, “it is critical to know the rules and work with experienced advisors when handling these sophisticated transactions.”  Steps he mentioned include:

    1. Sign a contract of sale of your property.
    2. Within 45 days you must “identify” 3 similar properties based on value.
    3. Choose an “intermediary” (remember, like the 1035 exchange you CANNOT ever receive the cash, so the intermediary holds it).
    4. Sell your property.  You now have 180 days to close on the new property.
    5. Close on the new property within 6 months and your basis gets transferred from the old to the new property with no taxation.

    Although Covid-19 has its challenges, there are also opportunities to improve your financial position and quality of life for the LONG-HAUL!  

    If you are interested in a life insurance or annuity policy review, feel free to reach out to me at Rob@InsuranceDoctor.us. 

    It has been a joy writing my “Financial Wave” column for The Wave as we approach our 1-year anniversary on May 1st, 2021!

  • Covid Briefing #21

    Covid Briefing #21

    There is an old saying, “Ignorance is Bliss!”  My new saying during this Covid-19 era is “Ignorance is Super-Expensive!”  In my 30-year career, I have never seen more advisor ignorance and malpractice.  Keep this in consideration if this is the first you are hearing about this.

    There have been MAJOR CHANGES in tax deadlines and proposed changes in tax, gifting, and estate planning rules, proposed on March 29th by Bernie Sanders, which I will review below.  My “Elite 8” list of changes to be concerned about are:

    1. The Federal CARES Act One Year Hiatus on Required Withdrawals from IRA’s and Most 401k’s is Over in 2021:  This means the RMD (required minimum distribution) must be taken in 2021.  The amount is based on the age of the account holder.  For example, a 72-year-old with an $100,000 IRA must withdraw $3,906 this year.  A 75-year-old is required to withdraw $4,367 this year. 
    2. Obamacare Health Insurance Exchange Enrollment Date Extended Again: This means the health insurance open-enrollment period now is extended to Sunday, August 15th for those individuals who want to enroll.
    3. The Federal and New York State Income Tax Return Deadline was Extended: These 2 deadlines were extended from April 15th to Monday, May 17th. 
    4. Stimulus Payments Were Deemed Not Taxable: This is major news for Americans who have received one or more stimulus payments.  They are technically considered an advance on a tax credit known as The Recovery Rebate Credit.
    5. What Happens if You Missed a Stimulus Payment? You can recover it through the Recovery Rebate Credit when filing your 2020 tax return.  It can be found on line 30 of Form 1040 or 1040-SR.  Consult with your CPA or tax advisor on this.
    6. The PPP (Paycheck Protection Program) Application Deadline Extended: Eligible business owners may apply for needed funds through Memorial Day, Monday, May 31st.  For questions regarding the PPP, email me at Rob@InsuranceDoctor.us.  We can assist and connect you to banks who want to help at no cost for my Wave readers!
    7. The CDC (Centers for Disease Control) Extended the Eviction Moratorium Date: The nationwide ban on certain residential evictions was extended to at least Wednesday, June 30th!
    8. On March 25th, 2021, Senator Bernie Sanders Introduced the “For the 99.5 Percent Act”: These sweeping changes, if enacted into law, would change the way families pass money down to their children, and dramatically increase the taxes children must pay within 9 months from their parents’ death!  Proposed changes include but are not limited to: A. Reducing the current $15,000/ per person unlimited gift tax exclusion to a maximum of $20,000 per year in total.  B. Reducing the current $11,700,000 per person estate tax exclusion to $3,500,000 per person. C. Limiting lifetime gifts to $1,000,000 per person in total.

    Are you confused yet?  There has never been a more important time to rely on your advisors.  Reach out now to your CPA, Attorneys, Insurance Broker, Investment Advisor and Financial Planner to review these monumental changes.  This is what you pay them for, and your money-moves now will have an impact on your family for many years to come!  Feel free to reach out to me for guidance at Rob@InsuranceDoctor.us.

    Be Positive, Test Negative and Keep the Faith!

  • The American Rescue Plan

    The American Rescue Plan

    On Thursday, March 11th, President Joe Biden signed The American Rescue Plan into law almost a year to the day when it was acknowledged that Covid-19 had hit the USA, and it was deadly!

    This is the 3rd stimulus program since the pandemic has begun, and the question on most people’s minds is “Where is My $1,400 Check?” This third round of economic stimulus will be based on the taxpayer’s last processed tax return, from either 2020 or 2019.  That includes anyone that used the IRS’s non-filers tool last year or submitted a special simplified tax return.  The $1,400 is per adult.  The boost to the child tax credit will give eligible parents a total of $3,600 for each child under age 6 and $3,000 for each child under age 18 for 2021.  Until now, the credit was up to only $2,000 per child under age 17.  For large families who qualify, this can be a windfall!

    The US Treasury claims that almost 85% of Americans will qualify, based on income:

    1. $1,400 for a Single Filer: Individuals earning up to $75,000 AGI (adjusted gross income) would receive $1,400, which would be reduced by 20% for every $1,000 earned between $75,000-$80,000.  In other words, someone who earned $76,000 receives $1,120 ($1400-20% or $280) and one earning $77,000 receives $840 etc.
    2. $2,800 for a Married Couple Filing Jointly: Couples earning up to $150,000 would receive $1400 each but would lose 10% for every $1,000 up to $160,000.  Couples (filing jointly) would be ineligible if earning over $160,000. 
    3. $1,400 for Heads of Household: A head of household earning up to $112,500 would qualify for the full amount.

    There are different opinions on the new $1.9 Trillion American Rescue Plan as no Republicans voted “yes” in either The Senate or House of Representatives.  To give you a frame of reference, our current national debt is roughly $22 Trillion, meaning we are printing up to 9% of our national debt in new paper.  In 2020, we increased the money supply by 24% with the two 2020 stimulus payment packages. 

    This recovery package is designed for our country to bounce back with money set aside for the child tax credit, small businesses, restaurants, closed venues, extended unemployment, and state and local governments, to name a few. Only 9% of the $1.9T is going directly to Covid-19 relief. 

    HERE ARE MY 4 TIPS ON HOW TO MONITOR RECEIVING YOUR PAYMENT AND IN WHAT FASHION IT WILL BE RECEIVED:

    1. Complete Your 2020 Tax Return As SOON As Possible: If you earned more money in 2019 than 2020, the $1,400 check qualification is based on your 2019 return unless you get your 2020 tax return processed as soon as possible.
    2. Consult Your CPA or Enrolled Agent: If you did not receive the last stimulus check and should have qualified, you can pick it up as a discount on your 2020 tax return.
    3. Get Familiar with the IRS Website www.IRS.gov:  The IRS has updated their website with their “GET MY PAYMENT TOOL.”  You can go to www.IRS.gov/coronavirus/get-my-payment.  The “get my payment” button requires you to input your full social security number/tax ID, date of birth, street address and zip code.  This tool will be updated only once/day, usually overnight.
    4. Be Patient and on the Lookout: For those that received the first 2 stimulus checks and did NOT receive the checks by direct deposit, The Treasury will be mailing you a check or debit card.  Both Chase Bank and Wells Fargo are already having delays.  These types of payments are sent out in groups called “Tranches.”  If your address has changed, the easiest way to update it is to file your 2020 tax return with your new address.  Stimulus payments will be sent out through the mail as a check, debit card or via direct deposit, if you are already set up.

    In the coming weeks, more “Tranches” (batches) of payments will be sent via direct deposit, or through the mail as a check or debit card.  Some people have cut their stimulus debit cards thinking it was a sales promotion.

    Stay Positive, Test Negative and Keep the Faith!

  • 5 Last Minute Year-End Tax Tips

    5 Last Minute Year-End Tax Tips

    Whether you are an individual and/or business owner, the following 5 tips can save you money in 2019!

    1. Maximize 401K deductions for 2019: Unlike IRA’s and SEP’s, 401K contributions can only be deducted in the tax year they are deposited.  Taxpayers should check their pay stubs to make sure they are maximizing their 401k limit which is $19,000 for 2019. (higher if they are over age 50).
    2. Prepayment of State Taxes: Individuals can deduct taxes paid to state and local agencies on their Schedule A.  By paying before year-end they can claim the deduction for 2019 instead of waiting for next year.
    3. Donation to Charity: Any donations to charity must be made by December 31st, 2019 to be considered a completed gift for the 2019 tax year.
    4. Deferral of Income until 2020: Individuals can request bonuses be deferred until January.  Cash basis service businesses may consider delaying their November and/or December billings until January to minimize 4th quarter income and defer taxes on that income until 2020.
    5. Prepayment of personal/business expenses: Individuals and business owners may look to prepay expenses for supplies, materials and/or services to accelerate deductions for 2019 instead of 2020.

  • 6 Facts Nobody Knows About The 2018 Trump Tax Reform

    The Trump Tax bill has affected individuals and businesses both in the USA and abroad.  It’s still being dissected.  Check out these facts:

    1. Eliminates health ins tax penalty in 2019: The 12/22/2017 tax bill signed into law eliminates the tax penalty for individuals who fail to maintain (MEC) minimum essential coverages as of 1/1/2019.
    2. The Employer Mandate still applies: Applicable large employers (ALE) will continue to face penalties for failure to offer affordable coverage providing minimum value to their full-time employees.
    3. Individual Mandate Penalties are still in force in 2018: Individuals who go without health coverage for 3-month or longer in 2018 will still have to pay a penalty (unless they qualify for an exception)!
    4. More options are available for 529 monies: Families can withdraw up to $10,000/year tax-free to use for public, private or religious elementary or secondary school expenses
    5. Home Equity Loans (HELOC’s) may no longer be deductible: HELOCs (home equity lines of credit) and 2nd mortgages are ONLY deductible if used for “substantial improvements” to the home and the combination of the 1st mortgage and HELOC or 2nd mortgage doesn’t exceed the new cap of $750,000. (previously $1.1m)
    6. Pro athletes can no longer deduct agent fees in 2018: The NFL explains it by saying since players pay agents directly and agent fees are not deducted from game checks, they will no longer be deductible under the Trump Tax Reform.
  • Tips on what to do with your Tax Refund

    Tips on what to do with your Tax Refund

    Other than folks who receive an annual bonus this is the only time of year when some people will receive a lump sum of money. Instead of squandering your money consider the following options:

    • Add to your IRA: you can contribute up to $5,500/year to a traditional and/or Roth IRA or $6,500 if you are 50 or older by the end of 2014taxrefund
    • Pay off debt: If you are carrying more debt than you are comfortable with, consider paying it down. It’s like investing at the same interest rate being charged on the loan. Try to pay off your credit cards with the highest interest rate first.
    • Top off your emergency fund: You should have 6 months salary liquid in case of an emergency. Keep the money in an interest earning account.
    • Boost retirement savings: If you aren’t contributing enough to a company retirement plan to capture 100% of the company match, you are walking away from free money! Use the extra cash to increase your contribution.
    • Keep the money in a side fund for college: Putting the money in a 529 plan decreases what your student can qualify for in endowment “Free money”.
    • Prepay your summer vacation: Use some of the cash to pay off your vacation in advance so you don’t have to take it from your income in the summer.

    Do yourself a favor by choosing one of these options instead of wondering where all the money went at this time next year! Contact Rob today for a free consultation on this and other concerns you have here. 

  • 5 Last Minute Year End Tax Tips

    5 Last Minute Year End Tax Tips

    Following these 5 tips can save you money in 2016!

    Whether you are an individual and/or business owner, the following 5 tips can save you money in 2016!tax savings year end strategies

    1. Maximize 401K deductions for 2016: Unlike IRA’s and SEP’s, 401K contributions can only be deducted in the tax year they are deposited. Taxpayers should check their pay stubs to make sure they are maximizing their 401k limit which is $18,000 for 2016. (higher if they are over age 50).
    2. Prepayment of State Taxes: Individuals can deduct taxes paid to state and local agencies on their schedule A. By paying before year end they can claim the deduction for 2016 instead of waiting to next year.
    3. Donation to Charity: Any donations to charity must be made by December 31st, 2016 to be considered a completed gift for the 2016 tax year.
    4. Deferral of Income until 2017: Individuals can request bonuses be deferred until January. Cash basis service businesses may consider delaying their November and/or December billings until January to minimize 4th quarter income and defer taxes on that income until 2017.
    5. Prepayment of personal/business expenses: Individuals and business owners may look to prepay expenses for supplies, materials and/or services to accelerate deductions for 2016 instead of 2017.Get your 2017 plan off to a good start by getting your FREE ‘financial check-up’ with Robert here today.