Top Links:
General IRS site gateway
Move from IRS to a state tax site
Tax professional site we can share with our clients
IRS personal forms website

Download IRS publications, forms and links

2010 Bean Counter Tax Ideas:

• Home Office Deduction
• Earned Income Tax Credit
• Making Work Pay Credit
• American Opportunity Tax Credit
• Borrowing on your 401(k) Plan
• Types of Life Insurance
• Guaranteed Issue and Simplified Issue Life Insurance
• Health Insurance
• Disability Insurance
• Long Term Care
• Annuities
• Older Bean Counter Tax Tips
  

Home Office Tax Deduction

If you use a portion of your home exclusively for business purposes, you may be able to deduct home costs related to that portion, such as a percentage of your real estate taxes, mortgage interest, insurance, utilities, repair costs including painting, your mortgage or rent, and depreciation. Also, sole proprietors regularly meeting clients in a home office can deduct part of the costs of landscaping the property.  The deductible portion is based on the percentage of the home that is used for business, according to the Tax Court.  The Court also allows a deduction for part of the costs of lawn care and driveway repairs. In order to claim a deduction for that part of a home used for business, taxpayers must use that part of the home:

• Exclusively and regularly as their principal place of business, as a place to meet or deal with patients, clients or customers in the normal course of their business, or in connection with their trade or business where there is a separate structure not attached to the home; or
• On a regular basis for certain storage use such as inventory or product samples, as rental property, or as a home daycare facility.

In addition, taxpayers working as employees can claim this deduction only if the regular and exclusive business use of the home is for the convenience of their employer and the portion of the home is not rented by the employer. “Exclusive use” means a specific area of the home is used only for trade or business. “Regular use” means the area is used regularly for trade or business. Incidental or occasional business use is not regular use. If you claim the home office tax deduction and want to use the standard mileage rate for a vehicle, you must use it in the very first year you place it in service for your business.

If you use the standard mileage rate method (set by the IRS and is adjusted annually), you calculate the fixed and operating costs of your vehicle by multiplying the number of business miles traveled during the year by the business standard mileage rate.  The rate is set at 50 cents per mile for 2010.

Using the standard mileage rate takes the place of deducting almost all the operating and fixed business costs of your vehicle, such as maintenance and repairs, tires, gas, oil, insurance, and license and registration fees. However, you can still deduct parking fees and tolls that are directly related to business (i.e., not commuting) in addition to the standard mileage rate. For business owners, interest on loans for vehicles and taxes attributable to the operation of these vehicles are also deductible in addition to the standard mileage rate.

When you use the standard mileage rate method, the mileage rate includes a specific amount for depreciation. This means that you cannot claim an additional deduction for depreciation when you use the standard mileage rate.

back to top

Earned Income Tax Credit

The earned income credit is a special credit which lower income workers can deduct on their tax return. The earned income credit can be claimed on a tax return not only by workers with qualifying children, but also by workers with no children under certain circumstances. The earned income credit reduces the amount of tax you owe (if any) on your tax return and is intended to offset some of the increases in living expenses and social security tax. The earned income credit is not a tax deduction; it is subtracted directly from the amount of tax you owe on your tax return, so you end up paying less tax and you may get some money back from the government. Even if you had no tax withheld or do not owe any tax to the IRS on your tax return, you might still get some money back because the earned income credit is a "refundable credit".

In 2008, 24 million taxpayers used the EITC program to claim more than $48 billion, or an average of $2,000.  The Internal Revenue Service estimates 25% of taxpayers who are eligible for the earned income credit failed to claim it (numbering in the millions).  Some people miss out on the EITC because the rules are complicated, while others are not aware that they even qualify. The EITC is a refundable tax credit ranging up to $5,028. The credit is designed to supplement wages for low-to-moderate income workers. But the credit does not just apply to lower income people. Tens of millions of individuals and families previously classified as "middle class" are now considered "low income" because they lost a job, took a pay cut, or worked fewer hours last year. The exact refund you receive depends on your income, marital status and family size. To get a refund from the EITC you must file a tax refund, even if you do not owe any taxes. Moreover, if you were eligible to claim the earned income tax credit in the past but did not, you can file any time during the year to claim an EITC refund for up to three previous tax years. Another feature is that you can get the credit sooner rather than later. If you expect to qualify for the credit in 2009 and you have at least one dependent child, you can request part of that credit immediately under the "Advance EITC Program" by filling out a Form W-5.

Internal Revenue Service - Earned Income Tax Credit (EITC) Questions and Answers

Q1. What is the Earned Income Tax Credit (EITC)?
A1. The earned income credit (EITC) is a tax credit for certain people who work and have low wages. A tax credit usually means more money in your pocket. It reduces the amount of tax you owe. The EITC may also give you a refund.

Q2. Who can claim the credit?
A2. To claim the EITC on your tax return, you must meet all of the following rules:

• Must have a valid Social Security Number
• You must have earned income from employment or from self-employment.
• Your filing status cannot be married, filing separately.
• You must be a U.S. citizen or resident alien all year, or a nonresident alien married to a U.S. citizen or resident alien and filing a joint return.
• You cannot be a qualifying child of another person.
• If you do not have a qualifying child, you must:
• be age 25 but under 65 at the end of the year,
• live in the United States for more than half the year, and
• not qualify as a dependent of another person
• Cannot file Form 2555 or 2555-EZ (related to foreign earn income)
• You must meet these EITC Thresholds and Limitations

Q3. What if I was denied the EITC last year?
A3. If your EITC for any year after 1996 was denied or reduced for any reason other than a math or clerical error, you must attach a completed Form 8862, Information to Claim Earned Income Credit After Disallowance, to your next tax return to claim the EITC. You must also qualify to claim the EIC by meeting all the rules described in Publication 596.
However, do not file Form 8862 if either (1) or (2) below is true.
1. After your EITC was reduced or disallowed in the earlier year:

• You filed Form 8862 (or other documents) and your EITC was then allowed, and
• Your EITC has not been reduced or disallowed again for any reason other than a math or clerical error.

2. You are taking the EITC without a qualifying child and the only reason your EITC was reduced or disallowed in the earlier year was because the IRS determined that a child listed on Schedule EITC was not your qualifying child.
Also, do not file Form 8862 or take the EITC for:

• 2 years after there was a final determination that your EITC was reduced or disallowed due to reckless or intentional disregard of the EITC rules, or
• 10 years after there was a final determination that your EITC was reduced or disallowed due to fraud.

Q4. Who is a qualifying child?
A4. Your child is a qualifying child if your child meets three tests. The three tests are:

1. Relationship
2. Age
3. Residency

Relationship
To be your qualifying child, a child must be your:

• Son, daughter, stepchild, eligible foster child, or a descendant (for example, your grandchild) of any of them, or
• Brother, sister, half brother, half sister, stepbrother, stepsister, or a descendant of any of them (for example, your niece or nephew).

Definitions to clarify the relationship test.

Adopted child. An adopted child is always treated as your own child. The term "adopted child" includes a child who was lawfully placed with you for legal adoption.

Eligible Foster Child. A person is your eligible foster child if the child is placed with you by an authorized placement agency or by judgment, decree, or other order of any court of competent jurisdiction.

Age
Your child must be:

1. Under age 19 at the end of the year,
2. A full-time student under age 24 at the end of the year, or
3. Permanently and totally disabled at any time during the year, regardless of age.

Residency Test
Your child must have lived with you in the United States for more than half of the year.
See Publications 596 and 501 for more details

Q5. Who is an eligible foster child?
A5. An eligible foster child is an individual who is placed with you by an authorized placement agency or by judgment, decree, or other order of any court of competent jurisdiction.

Q6. What is Earned Income?
A6. Earned income includes all the taxable income and wages you get from working.
There are two ways to get earned income:

1. You work for someone who pays you, or;
2. You work in a business you own.

Taxable earned income includes:

• Wages, salaries, and tips;
• Union strike benefits;
• Long-term disability benefits received prior to minimum retirement age;
• Net earnings from self-employment.

Combat Pay
Nontaxable combat pay election. You can elect to have your nontaxable combat pay included in earned income for the earned income credit. The amount of your nontaxable combat pay should be shown on your Form W-2, in box 12, with code Q.

Q7. How do I figure my credit?
A7. Once you know that you qualify for the EITC, you need to know how to figure the amount of the credit. You have two choices of how to figure the credit:

1. Have the IRS figure the credit for you. If you would like the IRS to do this, see Publication 596, or
2. Figure the credit yourself. To do this you must use the Earned Income Credit Worksheet (EIC Worksheet) in the instruction booklet for Form 1040, Form 1040A, or Form 1040EZ, and the Earned Income Credit (EIC) Table in the instruction booklet, or use the EITC Assistant Tool online.

For more information, see Chapter 4, Figuring and Claiming the EITC, in   Publication 596.

Q8.  How can I get EITC in my paycheck?
A8.  You may prefer to get some of next year’s EITC throughout the year, rather than wait and get EITC after you file your tax return. To get EITC, complete Form W-5 and give the lower part of the form to your employer. Keep the top part for your records. 

Q9.  What if I am prohibited from claiming the EITC for a period of years?
A9.  If your EITC for any year after 1996 was denied and it was determined that your error was due to reckless or intentional disregard of the EITC rules, then you cannot claim the EITC for the next 2 years. If your error was due to fraud, then you cannot claim the EITC for the next 10 years. The date on which your EITC was denied and the date on which you file your tax return affects the years for which you are prohibited from claiming the EITC. 

here is the link to the IRS Q&A:  http://www.irs.gov/individuals/article/0,,id=96466,00.html

back to top

Making Work Pay Credit (NEW)
 
The Stimulus Bill has created a refundable income tax credit which is available in both 2009 and 2010 to eligible individuals. The amount of the credit is the lesser of: (i) 6.2% of an individual’s earned income or (ii) $400 ($800 for joint returns).

This credit uses the same definition of “earned income” as the Earned Income Credit, except that the Making Work Pay Credit’s definition of earned income does not include net earnings from self-employment which are not taken into account in computing taxable income, but does include combat pay excluded from gross income.
 
The credit will be received by taxpayers in increments over the year through the adjustment of the withholding tables. The credit is phased-out for higher income taxpayers by reducing the amount of the credit by an amount equal to 2% of the amount by which the taxpayer’s gross income exceeds $75,000 (or $150,000 for joint filers). As a result of this phase-out, the credit is not available to individuals whose gross income exceeds $95,000 ($190,000 for joint filers).

Internal Revenue Service - Making Work Pay Questions and Answers: General Issues

Q1. What is the Making Work Pay Credit?
A. In tax years 2009 and 2010, the Making Work Pay provision will provide a refundable tax credit of up to $400 for individuals and up to $800 for married taxpayers filing joint returns.

Q2. How will taxpayers get this credit?
A. For people who receive a paycheck and are subject to withholding, the credit will typically be handled by their employers through automated withholding changes to be made in early spring 2009. These changes may result in an increase in the amount of take-home pay. The amount of the credit will be reported on the 2009 income tax return. Taxpayers who do not have taxes withheld by an employer during the year can also claim the credit on their 2009 tax return filed in 2010.

Q3. How will the self-employed (those who do not receive Social Security, Veterans Affairs or Railroad Retirement Board income) claim this credit?
A. Self-employed taxpayers can claim the Making Work Pay credit on their 2009 return filed in 2010. Self-employed individuals should evaluate their expected income tax liability and determine whether they want to make any adjustments in their estimated tax payments.

Q4. Can private pensioners (those who do not receive Social Security, Veterans Affairs or Railroad Retirement Board income) claim this credit?
A. Private pension recipients are not eligible for the Making Work Pay credit unless they have earned income. However, because the new withholding tables reduce the taxes withheld from all taxpayers, pension recipients may not have enough tax withheld from their pension benefits to cover their tax liability on those payments. The IRS recommends that pension recipients evaluate their expected tax liability for the year and consider whether they need to make estimated tax payments or adjust their withholding on Form W-4P, Withholding Certificate for Pension or Annuity Payments.

Q5. Are employees required to have a valid Social Security number (SSN) to be eligible for the Making Work Pay tax credit?
A. Yes, eligibility for this credit is conditioned upon providing a valid SSN.

Q6.  If a taxpayer is eligible for more of a credit, how can it be claimed?  
A. The modified tables take the anticipated credit into account through reduced withholding. However, the Making Work Pay credit will be reported on all filed 2009 income tax returns, along with the taxpayer’s withheld income tax. Taxpayers receiving less than the full amount of the anticipated credit through reduced withholding will still be entitled to the full credit on their return.

here is the link to the IRS Q&A:  http://www.irs.gov/newsroom/article/0,,id=205922,00.html

back to top

American Opportunity Tax Credit (Improvement of Hope Scholarship Credit) (NEW)

The Hope Scholarship Credit is available to taxpayers as a method of offsetting the costs of post-secondary education; however it cannot be used by a child unless the child provides greater than 50% of their own support. It is available for up to 4 years of post-secondary study per student. In 2008, the maximum Hope Scholarship Credit available was $1,800.

The Stimulus Bill created the American Opportunity Tax Credit (“AOTC”) which effectively replaces the Hope Scholarship Credit for any taxable year beginning in 2009 or 2010. Under the AOTC, the benefit of the Hope Scholarship Credit is expanded by increasing its maximum benefit to $2,500 – calculated as 100% of eligible expenses up to $2,000 plus 25% of up to the next $2,000 of eligible expenses. The AOTC also expands the definition of “eligible expenses” by allowing “course materials” to be included.
 
The phase out limits applicable to the AOTC are also higher than those for the Hope Scholarship Credit - the AOTC phases out for taxpayers with modified adjusted gross income between $80,000 and $90,000 for single filers, or $160,000 and $180,000 for those filing jointly. Finally, the AOTC is 40% refundable; meaning that this portion may be applied against a taxpayer’s alternative minimum tax liability.

Internal Revenue Service - American Opportunity Credit: Questions and Answers

Q1. Are there any changes to the tax credits for college expenses?
A. The American opportunity tax credit, which expanded and renamed the already-existing Hope credit, can be claimed for tuition and certain fees you pay for higher education in 2009 and 2010.

Q2. The Hope credit originally applied only to the first two years of college. Has that changed?
A. Yes. The American opportunity tax credit can be claimed for expenses for the first four years of post-secondary education.

Q3. How much is the American opportunity tax credit worth?
A. It is a tax credit of up to $2,500 of the cost of qualified tuition and related expenses paid during the taxable year. That is a $700 increase from the previous Hope credit.

Q4. What education expenses qualify for the American opportunity tax credit?
A. The term "qualified tuition and related expenses" has been expanded to include expenditures for "course materials." For this purpose, the term "course materials" means books, supplies and equipment needed for a course of study whether or not the materials are purchased from the educational institution as a condition of enrollment or attendance.

Q5. Does an expenditure for a computer qualify for the American opprtunity tax credit?
A. Whether an expenditure for a computer qualifies for the credit depends on the facts. An expenditure for a computer would qualify for the credit if the computer is needed for enrollment or attendance at the educational institution.

Q6. How is the American opportunity tax credit calculated?
A. Taxpayers will receive a tax credit based on 100 percent of the first $2,000 of tuition, fees and course materials paid during the taxable year, plus 25 percent of the next $2,000 of tuition, fees and course materials paid during the taxable year.

Q7. How will the American opportunity tax credit affect my income tax return?
A. You will be able to reduce your tax liability one dollar for each dollar of credit for which you're eligible. If the amount of the American opportunity tax credit for which you're eligible is more than your tax liability, the amount of the credit that is more than your tax liability is refundable to you, up to a maximum refund of 40 percent of the amount of the credit for which you’re eligible.

Q8. Who is eligible for the American opportunity tax credit?
A. A taxpayer who pays qualified tuition and related expenses and whose federal income tax return has a modified adjusted gross income of $80,000 or less ($160,000 or less for joint filers) is eligible for the credit. The credit is reduced ratably if a taxpayer’s modified adjusted gross income exceeds those amounts. A taxpayer whose modified adjusted gross income is greater than $90,000 ($180,000 for joint filers) cannot benefit from this credit.

Q9. What is "modified adjusted gross income" for the purposes of the American opportunity tax credit?
A. It is the taxpayer's adjusted gross income increased by foreign income that was excluded, and by income excluded from sources in Puerto Rico or certain U.S. possessions.

Q10. How is the credit claimed?
A. The credit is claimed using Form 8863, attached to Form 1040 or 1040A.

Q11. I'm just beginning college this year. Can I claim the American opportunity tax credit for all four years I pay tuition?
A. The American opportunity tax credit is for amounts paid in 2009 and 2010 only. You may be eligible for the lifetime learning credit for any tuition and fees required for enrollment you pay after 2010.

Q12. Can I also claim the tuition and fees tax deduction in addition to claiming the American opportunity tax credit?
A. No. You cannot claim the tuition and fees tax deduction in the same year that you claim the American opportunity tax credit or the lifetime learning credit. You must choose among them. You also cannot claim the tuition and fees tax deduction if anyone else claims the American opportunity tax credit or the lifetime learning credit for you in the same year. A tax deduction of up to $4,000 can be claimed for qualified tuition and fees paid. Though the credit will usually result in greater tax savings, taxpayers should calculate the effect of both on the tax return to see which is most beneficial — the tax credit or the deduction. Often tax software will automatically compare the two for you.

Q13. Is there a new benefit that applies to college savings plans (commonly known as 529 Plans)?
A. Yes. A qualified, nontaxable distribution from a Section 529 plan during 2009 or 2010 now includes the cost of the purchase of any computer technology or equipment or Internet access and related services, if such technology, equipment or services are to be used by the beneficiary of the plan and the beneficiary's family during any of the years the beneficiary is enrolled at an eligible educational institution.

back to top

Borrowing on your 401(k) Plan:

Individuals who participate in a 401(k) plan sometimes borrow from their plan. While you may justifiably feel squeamish about taking out a 401(k) plan loan, it can actually make good sense in appropriate circumstances-assuming it is paid back on time. For instance, in today's tough economy, plan loans can be a source of much-needed cash when bank loans are unavailable or prohibitively expensive.

401(k) plan loans are generally economical and easy to obtain. In particular, a 401(k) plan participant with less-than-stellar credit or tapped out credit lines may find it much easier and cheaper to borrow from their 401(k) plan than from a commercial lender.

401(k) plan loans provide participants with access (within limits) to their 401(k) plan dollars without incurring income tax liabilities and the 10% premature withdrawal penalty tax. The 10% penalty tax generally applies to withdrawals before age 59, however, exceptions are available. In essence, the participant (borrower) pays interest to himself or herself when taking out a plan loan.

401(k) plan loans are only permitted if the plan document allows them, and many plans do. The maximum amount that can be borrowed is generally the lesser of $50,000 or 50% of the participant's (borrower's) vested account balance. Most 401(k) plan loans are secured exclusively by the participant's vested account balance (although other forms of security, such as a lien against the participant's home, are sometimes seen).

At least two major potential pitfalls are associated with 401(k) plan loans. First, the participant's account balance is irreversibly diminished if the loan is not paid back. Second, the federal income tax consequences are harsh for failure to pay back a plan loan according to its terms, and the loan will usually have to be repaid in full soon after the employee leaves the job for any reason. Such failure to repay the loan can result in a deemed distribution of the unpaid loan balance that triggers a federal income tax hit (possibly a state income tax hit, too). In addition, the dreaded 10% premature withdrawal penalty will generally apply unless the participant is age 59 or older.

Interest paid on a loan secured by the participant's (borrower's) 401(k) plan account balance is Nondeductible if any of the account balance used to secure the loan is attributable to elective deferrals (i.e., elective salary reduction contributions the employee signed up for). This is true regardless of how the loan proceeds are used and regardless of the existence of other security for the loan, such as the participant's home. Since 401(k) account balances will almost always include at least some elective deferral dollars, interest on loans from such plans will usually be nondeductible. In most cases, borrowing from your 401(k) plan should only be done when funds are not available elsewhere. But, during this difficult economic time, it may be prudent to do so.

back to top

Types of Life Insurance

Term Life Insurance

Term life insurance is perhaps the simplest form of life insurance.  It was developed to provide temporary life insurance protection on a limited budget. The word term means that the coverage is purchased for a specific “term” of years, after which it “terminates.”  Since term insurance can be purchased in large amounts for relatively small initial premium payments, it is well suited for short-range goals; such as, life insurance coverage to pay off a loan, or providing extra life insurance protection during the child-raising years.

The most common type of term insurance is Guaranteed Level Premium Term Life Insurance. Typically, the premium is guaranteed to be the same for a given period of years. The most common terms are 10, 15, 20 and 30 years.

Term life insurance is like automobile or homeowners’ insurance in that it only pays a benefit in the event of a catastrophe (death).  At the end of the policy period, the insurance is cancelled and the insured individual must prove insurability in order to continue the coverage for another term of years. For an aging population wanting to provide for children and family, this must be considered. Certainly, a term policy is important for providing for children’s needs in the event of a parent’s untimely death. In cases where either a parent or spouse wants life insurance protection to provide for a spouse or child, term insurance may not be appropriate since it does not provide long-term protection.

Whole Life Insurance

By its definition, this type of life insurance covers a person for his/her “whole” (entire) life. The premium payment for whole life insurance is larger than term coverage because the coverage stays in existence until the insured dies. Whole life insurance typically requires that the owner pays premiums for the life of the policy.  There are some arrangements that let the policy be “paid up.” This means that no further payments are ever required, in as few as five years, or even with a single large premium. 

Whole Life insurance costs more than term insurance because the premium payment is guaranteed for life. The excess money collected by the insurance company establishes a reserve account within the insurance policy which is known as the cash value. This cash value is returned to the policy owner if he/she wishes to surrender (or “cash in” on) the policy, and is also available to the policy owner through loans against the policy cash value. Many people use whole life insurance as a form of forced savings.

Cash value access through loans or surrender, is tax free up to the point of total premiums paid. If the insured individual dies, the death benefit is reduced by the amount of any outstanding loan balance. An insurance company normally pays an annual dividend on the cash value.

Universal Life Insurance

Universal Life insurance is a type of permanent life insurance based on a cash value. That is, the policy is established with the insurer so that premium payments above the cost of insurance are credited to the cash value. The cash value is credited each month with interest, and the policy is debited each month by a cost of insurance (COI) charge, which is drawn from the cash value if no premium payment is made that month. The interest credited to the account is determined by the insurer; often it is pegged to a financial index. Due to the fact that only the amount of interest credited and not the cash value itself varies, universal life policies offer a stable investment option.

Universal Life is similar in some ways to, and was developed from, whole life insurance. The potential advantage of the universal life policy is in its flexibility and the potential for greater cash value growth if the interest rates offered outperform the insurer’s general account.

Universal life is more flexible than whole life in two primary ways: the death benefit and usually the premium payment are flexible. The death benefit can be increased (subject to insurability) and decreased without surrendering the policy. Also, a range of premium payments can be made to the policy from a minimum amount to cover the various guarantees, to a maximum amount the insurance company will accept (based on IRS rules set up by Congress). The primary difference is that the universal life policy shifts some of the risk for maintaining the death benefit to the insured. In a universal life policy, the policy will lapse (the death benefit will no longer be in force) if the cash value or premium payments are not enough to cover the cost of insurance. To make their policies more attractive, insurers often add guarantees. If specific premium payments are made for a given period, the policy will remain in force even if the cash value drops to zero.

Variable Universal Life

Variable Universal Life is a type of life insurance that builds cash value. In a variable universal life policy, the cash value can be invested in a wide variety of separate accounts, similar to mutual funds. The contract owner decides which of the available separate accounts to use. The “variable” component in the name refers to this ability to invest in multiple accounts similar to mutual funds. The “universal” refers to the flexibility the owner has in making premium payments. The premiums can vary from zero in a given month up to maximums defined by the IRS rules for life insurance. Variable Universal Life is also considered to be a type of permanent
life insurance because the death benefit will be paid if the insured dies any time up until the endowment age (typically 100) as long as there is sufficient cash value to pay the costs of insurance in the policy.

Variable Universal Life insurance, as with other cash value policies, receives special tax advantages in that the cash value earns interest or investment returns without incurring current income tax unless the policy is surrendered. The investment returns are used to pay for the costs of insurance inside the policy.

Second-To-Die Life Insurance

This is a type of policy that covers two individuals (usually husband and wife). The policy pays a death benefit on the second death. It does not pay a benefit on the first death. From the perspective of the life insurance company, only one of the insured persons needs to be healthy in order to qualify for this coverage. Therefore, an individual who has previously been denied life insurance can qualify for this type of coverage.

It is important to note that qualifications for life insurance are very subjective except for certain obvious health conditions such as HIV, etc. which are never covered. It is generally accepted that deafness or blindness are disabilities and individuals are usually accepted for life insurance coverage at standard rates. A person with one of these conditions can usually get coverage unless some other serious health issue is the cause of the condition or is caused by the condition.

Case Study

back to top

Guaranteed Issue and Simplified Issue Life Insurance

Life insurance underwriting (evaluating a risk for an insurance company) is an ever-changing field and selecting the right company to underwrite your policy is very important. In 1990 there were more than 2500 life insurance companies. Today, due to mergers, acquisitions, and failures, that number has shrunk to less than 1100.

Due to the fact that many specialty carriers have exited the business, there are few clear-cut specialty companies that take applicants with challenging qualifications. A common condition such as high blood pressure or cholesterol can cause a rating increase.

Another key distinction today is the ability to distinguish between mortality and morbidity when looking at insurance products. Mortality involves determining the number of people in a given health class (category) that will live to age 100. Morbidity looks at the possibility of an individual’s needs to utilize either health care or long-term care type facilities. Today, insurance companies consider all aspects of one’s life as well as the details and management of a health condition in determining a rating class.

Thanks to medical developments and increased underwriting flexibility, conditions once thought of as uninsurable are now being approved, and as a result, much needed protection is being provided for families. Two examples of conditions that are more favorably rated today include blindness and deafness; which in the past, may have been considered very high risk for life insurance carriers. Today, either of these conditions can warrant a standard rating. Similar improvements have been made in underwriting involving multiple sclerosis, paraplegia, and Parkinson’s disease as well as many other diseases and conditions.

Underwriters today are utilizing the following guidelines when assessing ratings and approving coverage:
• Identifying the actual cause of the condition and underlying illness or accidental circumstance
• Age and onset as well as current treatment
• Associated conditions such as anxiety or depression
• Treatment details such as medication type and dosage
• Details such as occupation, personal care needs, and functional capacity
• Condition’s management, treatment, and prognosis

Three additional alternatives for coverage include: Group or Association Plans, Guaranteed Issue Life Insurance, and Accidental Death and Dismemberment Coverage. Generally these plans will provide much needed coverage; however, they come with limitations, but do offer competitive premiums.

Group or Association plans are generally offered as part of a business or organization’s benefit plan. They provide limited coverage for a specified period of time, usually age 65. Conversion at age 65 to a permanent policy for life may be an option, but it represents a potentially expensive alternative. Typically, these plans combine the risks of their members and healthy participants may end up paying higher premiums to balance the cost to all members. Group and association plans offer positive alternatives to permanent insurance.

Highly Simplified Issue plans offer limited face amounts, usually up to $50,000 and can generally provide coverage as long as the applicant can perform general activities of daily living and not recently hospitalized more than once. These plans are built on a whole life platform and provide limited coverage for the first two years. They pay the entire death benefit if death occurs after year three. Despite the additional premium expense, they do provide peace of mind with little or no underwriting and offer lifetime guaranteed coverage.

The final option, Accidental Death insurance is gaining popularity as plans have inexpensive premiums. These plans offer family benefits, college education expense, and mortgage liquidation. According to the National Safety Council, accidents are the fifth leading cause of death behind heart disease, cancer, stroke, and respiratory disease. However, for people ages 1 to 44, accidents are the top killer. These plans are significantly less expensive than a traditional life insurance plan; however, they will only pay out if death occurs due to an accident.

Today almost everyone can have life insurance. People with disabilities have more options than ever before, especially through 54Freedom. 54Freedom has a specific focus on the financial needs of the 54 million Americans with disabilities and their families. 54Freedom’s team is staffed by insurance professionals who have relationships with the top insurance companies. This affords them the ability to search for the best coverage and premium to fit one’s needs. Take the time to protect yourself and your family and get proper coverage today!

Case Study
Tom and Mary, both age 40, have a ten- year-old son, Seth. Mary has a spinal cord injury from an accident when she was at the age of 30. Tom and Mary were advised by their attorney to increase their life insurance. They proceeded to search for $100,000 of coverage on each of them. Tom was able to increase his company Group Life Insurance by $100,000 for a small monthly cost that was taken out of his paycheck. Mary, on the other hand, was offered $100,000 of coverage by a national carrier for a premium of $5,000 per year. Even though the price seemed very high, Mary and Tom were seriously considering purchasing the policy.

Mary read an email newsletter from the National Spinal Cord Injury Association discussing the benefits of becoming a subscriber at 54Freedom. After looking at their offerings, Mary and Tom decided to get a Family Membership at 54Freedom so that they could avail themselves of the $100,000 Accidental Death insurance policy in the amount of $100,000 for an annual payment of $125 per insured. The statistics showed them that the probability of death from an accident was really the biggest risk that Mary faced. The decision to purchase these financial products allowed Tom and Mary to use the $5,000 a year they were planning to pay for the other life insurance policy to fund their Roth IRA’s and get a good start on their retirement planning. The savings resulted from choosing an accidental death policy rather than one which covers illness and accident.

In addition, their $54 a year purchase gave them the family plan at 54Freedom which offered each another $10,000 of coverage and $10,000 on their son along with a Pharmacy discount card and the 54Freedom financial primer book.

Tom and Mary said, “We feel very comfortable where the 54Freedom team has led us . . . as we have affordable life coverage, a discount pharmacy card and our first start at a significant retirement program. The primer has given us ideas on a will for our son and some other tax saving and funding ideas. We also plan on purchasing the disability plan to cover our incomes.”

back to top

Health Insurance

The term health insurance is generally used to describe a form of insurance that pays for medical expenses. It may be provided through a government-sponsored social insurance program, or from private insurance companies. It may be purchased on a group basis (e.g., by a firm to cover its employees) or purchased by individual consumers. In each case, the covered groups or individuals pay premiums or taxes to help protect themselves from high or unexpected health care expenses. Similar benefits paying for medical expenses may also be provided through social welfare programs funded by the government.

Health insurance works by estimating the overall risk of health care expenses and developing a routine finance structure (such as a monthly premium or annual tax) that will ensure that money is available to pay for the health care benefits specified in the insurance agreement. The benefit is administered by a central organization, most often either a government agency or a private or not-for-profit entity operating a health plan.

A health insurance policy is a contract between an insurance company and an individual. The contract can be renewable annually or monthly. The type and amount of health care costs that will be covered by the health plan are specified in advance, which is stated in the member contract or Evidence of Coverage booklet. The individual policyholder’s payment obligations may take several forms:

PREMIUM: The amount the policyholder pays to the health plan each month to purchase health coverage.

DEDUCTIBLE: The amount that the policyholder must pay out-of-pocket before the health plan pays its share. For example, a policyholder might have to pay a $500 deductible per year, before any of their health care is covered by the health plan. It may take several doctor’s visits or prescription refills before the policyholder reaches the deductible and the health plan starts to pay for care.

CO-PAYMENT: The amount that the policyholder must pay out of pocket before the health plan pays for a particular visit or service. For example, a policyholder might pay a $45 co-payment for a doctor’s visit, or to obtain a prescription. A co-payment must be paid each time a particular service is obtained.

CO INSURANCE: Instead of paying a fixed amount up front (a co-payment), the policyholder must pay a percentage of the total cost. For example, the member might have to pay 20%of the cost of a surgery, while the health plan pays the other 80%. Because there is no upper limit on co-insurance, the policyholder can end up owing very little, or a significant amount, depending on the actual costs of the services they obtain.

EXCLUSIONS: Not all services are covered. The policyholder is generally expected to pay the full cost of non-covered services out of his/her own pocket. In some plans pre-existing conditions may be excluded for coverage.

COVERAGE LIMITS: Some health plans only pay for health care up to a certain dollar amount. The policyholder may be expected to pay any charges in excess of the health plan’s maximum payment for a specific service. In addition, some plans have annual or lifetime coverage maximums. In these cases, the health plan will stop payment when they reach the benefit maximum and the policyholder must pay all remaining costs.

OUT-OF-POCKETMAXIMUMS: Similar to coverage limits, except that in this case, the member’s payment obligation ends when he/she reaches the out-of-pocket maximum, and the health plan pays all further covered costs. Out-of-pocket maximums can be limited to a specific benefit category (such as prescription drugs) or can apply to all coverage provided during a specific benefit year.

CAPITATION: An amount paid by an insurer to a health care provider, for which the provider agrees to treat all members of the insurer.

IN-NETWORK PROVIDER: A health care insurer has a list of preferred or “in network” doctors and hospitals. The insurer will offer discounted co insurance or co payments, or additional benefits, to a plan member to see an in-network provider. Generally, providers in network are providers who have a contract with the insurer to accept rates further discounted from the “usual and customary” charges the insurer pays to out-of-network providers.

Health Savings Accounts

1. Health Savings Accounts (HSA’s) were created by the Medicare bill signed by President Bush on December 8, 2003, and are designed to help individuals save for future qualified medical and retiree health expenses on a tax-free basis.
2. HSA’s can be set up by employers or by individuals and any money contributed to the HSA is income tax deductible. The annual limit for contributions to an HSA is $3,000 for an individual and $5,950 for a married couple. (This is the 2009 limit and it is indexed for future years.)
3. Participation in an HSA requires that the individual be covered by a High Deductible Health Plan (HDHP) with a minimum deductible of $1,150 for an individual and $2,300 for a family (2009 limit—indexed for future years.)
4. Withdrawals from an HSA are income tax free if they are used to pay for non-reimbursed medical expenses.
5. Funds are invested with HSA Custodian Accounts at Banks, Credit Unions, Insurance Companies and other entities approved by the IRS as HSA Custodian or Trustee.

 Case Study

Tom and Gerry are 30-year-old twin brothers. Tom is married to Beth and they have two children. Gerry is single and has no plans to get married. They work together in a business that was started by their father. There are no other employees and as a result they do not have a group medical plan. Tom participates in a Health Maintenance Organization (HMO) plan offered by Blue Cross and Blue Shield through the local Chamber of Commerce. He and his family are all in good health and this plan covers their doctor visits, medications, emergency room, and hospitalization. The plan costs $1200 per month and has been increasing steadily.

Gerry, on the other hand, does not feel an overwhelming need for comprehensive health insurance. He made the decision to participate in a High Deductible Health Plan and to contribute the maximum allowable to a Health Savings Account. With his High Deductible Health Plan, he pays premiums of $100 per month and he contributes an additional $240 per month to his Health Savings Account. He pays 100% of the cost of doctor visits, and medications out of his pocket. He could use the money in his Health Savings Account to offset these expenses, but he prefers to let that money grow to a time in the future when his health situation may change for the worse.

Gerry acquired his HSA account and High Deductable health plan from 54Freedom. Tom is now considering the same plan as it will accumulate additional retirement monies.

Disability Insurance

What it is

Disability Insurance is coverage against the risk of losing one’s ability to work and earn an income resulting from an accident or an illness. The individual must have generally lost the ability to perform normal duties at work. The key factor insurance company’s use in determining a person’s eligibility for disability insurance is the person’s income. Disability insurance replaces income.

What it is not

Disability Insurance is not a plan of insurance that pays benefits simply because a person has become disabled due to an accident or illness. The individual must have a loss of his/her earnings resulting from the disability in order to receive benefits from a disability policy.

There are, however, insurance policies that will pay benefits when a person acquires a disability, without regard to what affect that disability has on the person’s earnings. That coverage is called Long-term Care insurance and is explained in another chapter.

There are three forms of disability insurance:

1. Group Disability Insurance provided as an employee benefit or as part of an affinity group
2. Social Security Disability Insurance which is provided via the US government through the Social Security Administration
3. Private Individual Disability Insurance policies provided by companies.

Group Disability Coverage

The most common form of disability coverage is group disability insurance and is typically provided for by employers. This coverage is either long-term disability insurance (LTD) or short term disability insurance (STD).

Long term disability insurance usually replaces about 60% of an employee’s wages and typically begins to pay benefits six months after a person acquires a disability. Disability payments will continue until the insured person dies recovers from the disability and returns to work or reaches age 65. This coverage is designed to cover catastrophic injuries and illnesses that prevent people from returning to work after the disability.

Short term disability insurance is similar to long-term disability insurance in that it also usually replaces 60% of an employee’s wages. However, it typically begins to pay benefits either from the onset of the disability or seven days after the person is injured or becomes ill. Short term disability benefits are paid until the individual with a disability either returns to work or for a total of six months.

Social Security Disability

Social Security Disability benefits are considered Long-Term Disability benefits.  Eligibility for Social Security Disability benefits is based on several factors. Individuals who may be eligible include a family’s primary wage earner, a worker’s dependent widow, widower, or a child under age 18 with disabilities.

When you are seeking Social Security Disability benefits, your disease or condition, first of all, must meet the Social Security Administration’s (SSA) definition of disability.

If your health problem meets SSA requirements, it must also be one that has lasted or is expected to last 12 months, or until death, and is severe enough to prevent you from performing your former job or any other type of gainful employment.

Additionally, you must be insured under the Social Security Administration (SSA) FICA insurance program. When you pay FICA taxes, you are, in essence paying your FICA disability insurance premium. As you pay into the system you accumulate credits (one credit for each quarter of the year). Generally, you are covered for disability benefits, after you have paid FICA taxes for ten years, and have earned 40 credits (4 credits per year.) However, age is another eligibility factor that comes into play; the number of work credits needed to qualify for SSDI depends on the age at disability onset. Disabled individuals who have not worked long enough to accumulate 40 credits may qualify, based on a lesser amount of credits.

Once you have stopped working, you have a five-year grace period, in which you are still eligible for monthly disability payments. If the onset of your disability occurs more than five years after your last insured day, you will not qualify for disability benefits.

Private Individual Disability Insurance

Individual disability insurance policies are available from most life insurance companies. Private insurance is a good idea for people who are not covered by an employer group or where the employer group coverage is limited.

The cost of this type of coverage is similar to life insurance costs and the price depends on several factors.

• The amount of the coverage applied for (Typically, insurance companies will allow a person to purchase a total of 65% to 70% of their earnings in coverage).
  
  
• The length of the benefit period. How long a person receives benefits is determined by the benefit period selected in the policy. Benefit periods can be one year, two years, five years or to age 65. Obviously the longer the benefit period, the more expensive the policy. Most individual disability policies are written with either five year or age 65 benefit periods.
  
  
• The length of the waiting period. The waiting period is the number of days between the date an insured person becomes disabled and the date that the insurance company begins to pay benefits. Typical waiting periods are 90 days or 6 months. Insurance carriers generally only offer 60 days, 90 days and 6 months as options for waiting periods.
  
  
• The applicant’s insurability. Insurance carriers offer coverage to people who are generally in good health. In addition to the individual’s health status, his or her occupation and avocations play a large part in determining how much a person pays for disability insurance coverage. Obviously, a banker or an office worker would pay less than a construction worker because the probability of a work related injury is less. Likewise, a person who drives race cars as a hobby would pay more for this type of coverage than someone who does not.

Accidental Disability Insurance

This is a form of disability insurance (available at 54Freedom) that pays a benefit to a covered person if that person’s disability results from an accident. This coverage is much easier to qualify for since the covered person’s health at the time of the application for the policy is not considered a major factor in determining eligibility for the coverage. Many people (but not all) with disabilities can purchase this type of coverage.

The coverage typically provides a monthly income benefit after a 90 day waiting period and the benefit is payable for a period of two years. If the covered person is still disabled at the end of the two-year period, the policy would pay an additional lump sum benefit equal to 100 times the monthly amount paid out during the initial 24-month phase. This policy was created by the 54Freedom team.

Case Study
Bill works for Jameson Tool Company as an inside salesman. Bill’s wife has paraplegia after a high school diving accident. She cares for their three young children at home and does not work. Bill spends most of his time on the phone talking with customers about buying equipment. Jameson Tool Company offers a short term disability plan as part of their employee benefit package. The policy will pay benefits from the seventh day of a disability caused by a sickness and the first day of a disability caused by an accident and continues to pay the benefits until the employee returns to work or for six months (whichever is shorter). Bill earns $1,000 per week, so the plan would pay him 65% of his pay or $650 per week in the event of his disability. Since Bill is paying for this coverage by way of payroll deduction, the $650 benefit is income tax free and is only about $100 less per week than his normal take home pay after taxes.

back to top

Taxation of Long-term Care Insurance Proceeds

A qualified long term care insurance contract is generally treated as an accident and health insurance contract for income tax purposes. Amounts received under a qualified long-term care insurance contract(other than policyholder dividends or premium refunds) may be excludable from income as amounts received for personal injury and sickness. The premiums on long-term care insurance contracts and the expenses of qualified long-term care are treated as medical expenses.
Joe is confined to a nursing home for 30 days in 2010. The nursing home charges $210 per day, for a total of $6,300. Joe's long-term care insurance contract pays 80% of the amount charged by the home after a 10-day waiting period, so the insurance company sends him a check for $3,360 {[$6,300 - (10 x $210)] x 80%}. The $3,360 is excluded from Joe's 2010 taxable income. Furthermore, Joe can deduct the $2,940 unreimbursed difference ($6,300 - $3,360) as a medical expense, subject to the adjusted gross income limitation.

Some long term care insurance contracts pay a certain amount per day, regardless of the actual long-term care costs. However, the exclusion from taxable income is limited. For 2010, the excludable amounts are $290 per day or $105,850 ($290 x 365) for the year. However, long-term care insurance proceeds received on a per diem basis can be excluded from income (even if they exceed the limits) if the taxpayer has long-term care expenses in excess of the cap. For example, there would be no income to the taxpayer if the policy paid $300 per day and the cost of the long-term care was that amount or more. Otherwise, amounts received in excess of the dollar cap are fully taxable, However, the per diem limitation does not apply if the taxpayer is terminally ill when the insurance payments are received.

There are several levels of long-term care as follows: home care, adult day care, skilled nursing home care and assisted living facilities.

Long term care is expensive. One year of care at home, assuming one needs periodic personal care help from a home health aide (the average is about three times a week) is very costly. The annual national average expense for Home Health Care is $28,435.
 
Long-term care is a contingency that Americans should make plans for in their routine financial planning.

There are only three ways of paying for long-term care.

• Personal assets and income
• Government programs like Medicaid
• Long-term care insurance.

Long-term care insurance has evolved over the past three decades as a meaningful way of offsetting the costs of long-term care.

People who are disabled can qualify for long-term care insurance! Obviously, this makes the consideration of this type of coverage for spouses and caregivers of people with disabilities very important. Understanding of the qualifications for availability is extremely important!

Long-term care insurance is developed specifically to cover the costs of long-term care services; many of which are not covered by traditional health insurance or Medicare. These include services in one’s home such as assistance with activities of daily living as well as care and a variety of facility and community settings.

There is a great deal of choice and flexibility in long-term care insurance policies. You can select a range of care options and benefits that allows one to get the services one needs in the settings that suit him/her best. The cost of one’s long-term care insurance policy is based on the type and amount of services one chooses to have covered, how old a person is when he or she buys the policy, and any optional benefits one chooses such as inflation protection. If one is in poor health or already receiving long term care services, he or she may not qualify for long-term care insurance.

Long-term care insurance policies have a benefit period or a lifetime benefit maximum, which is the total amount of time or total amount of dollars up to which benefits will be paid. Common benefit periods for long-term care policies are two, three, four, five years, as well as, lifetime or unlimited coverage. Other options between five years and lifetime/unlimited coverage are also available from many companies. Most policies translate these time periods into dollar amounts and do not actually limit the number of days for which they will pay for care, but rather, just the overall dollar amount that the policy will pay.

With long-term care insurance, one pays premiums in amounts he/she knows in advance and can budget for the expense. While the policy pays up to its coverage limit for the long-term care one needs when one needs it. Typically, premium payments are waived during the time one is receiving benefits.

Underwriting Long-Term Care Insurance for Persons with Disabilities

Long-term care insurance coverage is available to many people with disabilities! There are certain disabilities such as blindness and deafness that many insurance carriers treat as normal health, and therefore, make long-term care coverage available to these people. On the other hand, it can be very difficult for other people with disabilities to get this coverage. THE INSURANCE CARRIER UNDERWRITING FOR THIS COVERAGE IS SUBJECTIVE AND TAKEN ON A CASE BY CASE BASIS. Coverage will generally not be available to people who need assistance with activities of daily living such as dressing, eating and mobility.

There are, however, a myriad of other disabilities that can qualify for some form of coverage. Many times, in the household of a person with a disability, it may be much more important for the CAREGIVER to be covered with long-term care insurance.

Case Study

back to top

Annuities

Annuities are classified as either Immediate Annuities or Deferred Annuities.

Immediate Annuities

In the case of immediate annuities an individual transfers a sum of money to an insurance company in return for a series of payments (either for a certain number of years or for life). The payment that the insurance company makes to the annuitant (person who receives the income) enjoys special income tax treatment and generally only a portion of that income is subject to income tax. Payments can be arranged to be paid to a single person for life or to two people and, in this case, payments will continue until both annuitants have passed away. There is flexibility in choosing a payout option for two people. The annuity payment can be joint and full (meaning that when either of the annuitants dies, the income to the survivor remains the same) or joint and 2/3 (meaning that when either of the annuitants dies, the income to the survivor will become 2/3 of the income both were receiving). Other percentage and distribution options are available.

Immediate Annuities for persons with disabilities: There is a concept known as “Age Rated Annuities.” What this term means is a person with a health issue is given an older age in the financial calculation to account for a shortened life expectancy. Often, persons with disabilities are viewed by insurers to have a shorter life expectancy as people without disabilities and insurance companies will take this fact into account when determining the amount of payout on an immediate annuity. This could result in a much larger income payment for a person with a disability. Please refer to the two case studies below to see an example of how this works.

Deferred Annuities

In the case of deferred annuities, individuals transfer funds to an insurance company as a medium to long-term investment. Deferred annuities enjoy income tax deferral of earnings and may offer guarantees of earnings.

Bonus Annuities

Bonus Annuities are deferred annuities that offer an immediate bonus (thus a return) on an initial premium or premiums in the first three to five years.

These guaranteed annuities reward the buyer by offering a bonus: the insurance company adds an average of 5%to 10%to each of your premium payments, which can make for an excellent head start. For example, if you invest $10,000 in a bonus annuity, the insurance company will add $500 to $1000.

Bonus annuities allow you to withdraw 10% to 15% of your premium payments per year without a penalty, and some allow you to take the greater of all earnings or 10%to 15%of premiums (although any withdrawal from an annuity may be subject to taxes and a 10%federal penalty if taken prior to 59½ years of age). Most bonus annuities have a surrender charge—a penalty for making an early withdrawal above the free withdrawal amount. Typically this surrender charge decreases over an eight or nine year period.

Equity Index Annuities

Equity index annuities offer the opportunity to earn stock market returns (to an annual maximum) with the possibility in some policies of principal protection.
 
Equity index annuities earn annual interest based on the performance of a stock market index. Most use the S&P 500 average as the index; however, other indexes are available.

An Example

An individual invests $100,000 in an Equity Index Annuity. The annuity has a first year bonus of 5% and a minimum guarantee of 2%. The initial value of the annuity becomes $105,000. On the date of the initial deposit, the value of the S&P 500 is 1200. On the first anniversary of the annuity, the S&P 500 index is 1272, an increase of 6%. This 6% is then applied to the annuity value and the new annuity value at the beginning of the second year is $111,300. ($105,000 x 6% = $6,300). On the following anniversary, the S&P 500 has dropped to 1100. The annuity value does not reduce but will increase to $113,560 based on the minimum guarantee of 2%.

Equity index annuities can offer:

• Upside index growth potential
• No downside market risk due to index losses
• Locked-in gains every year

Multi Portfolio Annuity

A multi portfolio annuity is also known as a variable annuity. This annuity is made up of separate sub accounts which are similar to mutual funds that are managed by several different investment managers. Some variable annuities offer as many as forty different sub accounts. The sub accounts are completely separate from the general assets of the insurance company offering another layer of protection of funds in the event the insurance company enters into bankruptcy protection.

Individuals who invest in Variable Annuities make the choices of the sub accounts that his/her money is put in, and he/she generally has the option to move money between separate accounts.

Variable annuities offer the following automatic features:

Dollar Cost Averaging—purchasing shares of the investment over a 6 month or 12 month period with the objective of reducing the overall cost of the investment.

Portfolio Re-Balancing—periodically (every three months, six months or yearly) automatically selling shares that have increased in value and buying shares that have decreased in value—a short term way to buy low and sell high.

In addition, variable annuities offer asset allocation strategies based on the risk tolerance of the individual investor (investment strategies for individuals that consider themselves conservative investors, moderate investors, or aggressive investors).

Like all annuities, the earnings of variable annuities are not subject to current income taxation and are deferred until the funds are withdrawn (also subject to a penalty tax if withdrawn before age 59½).

Case Study: Immediate Annuity

Stanley is age 68 and a widower. His wife was killed in a car accident that also resulted in loss of hearing for Stanley. His living expenses total about $3,000 per month, including $500 for healthcare, which also covers the cost of his hearing aid and batteries and other health care needs. Stanley has three sources of income. He receives a small pension of $800 per month from his former employer, $1,400 from Social Security, and interest income of $830 per month on a savings account of $250,000. His interest income from his savings account has been diminishing. He has to pay income tax on the interest his savings account earns and is therefore depleting principal to pay his income taxes. His current rate of interest on the savings account is 4%, which earns $10,000 annually or about $830 per month. The total monthly income of $3,030 from all three sources allows Stanley to pay basic expenses.

Stanley read about immediate annuities at the 54Freedom.com web site and called to speak to a 54Freedom team member. The team member provided Stanley with an immediate annuity which provided Stanley with a guaranteed monthly annuity income for life of $1,400 (an increase of almost $600 per month). In addition, due to the special income tax treatment of annuities, only $530 per month of this $1,400 is subject to income tax. Stanley purchased this annuity for $200,000 and kept $50,000 in savings as a reserve fund. After making this purchase, he has a total monthly income of $3,766, allowing him to travel and meet unexpected expenses. This scenario is especially appropriate for Stanley since he has no heirs or other responsibilities that will expect to inherit his $200,000 savings account.

Case Study: Immediate Annuity 2

Stanley has a cousin Marvin, who is the same age as Stanley and his assets and pension are virtually the same as Stanley’s. Marvin, however, is living with diabetes and has had his legs amputated below the knee. He struggles with maintaining his health every day and his need for income is greater than Stanley’s. Stanley told Marvin about his experience buying the immediate annuity. Marvin called the 54Freedom team member and discussed his situation. The 54Freedom team member told Marvin that because of his health situation he may be able to get more income from an immediate annuity than Stanley. Marvin was very pleased when the 54Freedom team member told him that because of his health situation the insurance company rated his age to be 76 instead of 68 and this resulted in a guaranteed lifetime annuity income of $1,900 per month, instead of the $1,400 that Stanley is receiving even though this immediate annuity was the same deposit as Stanley’s ($200,000). One of the considerations that Marvin needs to take into account before making his decision to purchase the annuity is whether or not leaving an inheritance is important to him.

Marvin is very happy with this outcome and hopes the reduction in stress and increase in resources will allow him to maximize his health.

Case Study: Deferred Annuity

Marge is age 45. She was born with cerebral palsy. She wears leg braces and uses a scooter for all but short distances. She is healthy, and has never had any health issues beyond the occasional cold or sore throat. She has a retirement plan at work and she contributes the maximum amount to her Individual Retirement Account (IRA). She recently received $40,000 as an inheritance from her uncle and she has been researching places to invest this money. She does not want to invest it in the stock market because she believes that she already deposits enough into the market in her IRA and pension at work. Likewise she is not very interested in bank savings accounts because the interest rates are not that attractive. She has read about deferred annuities on the 54Freedom web site. She contacted 54Freedom and a member of their team discussed different types of deferred annuities with her. Marge decided to purchase an “Equity Index Bonus Annuity.” She contributed $40,000 as the initial premium deposit to the annuity. The insurance company credits this deposit with an immediate 5% bonus of $2,000. On the first day of her annuity contract, her account is worth $42,000. Marge decided to put the money in the S&P 500 Equity Index account with an annual cap on the return and a principal guarantee. Under current volatile conditions, Marge is pleased with her guarantee of principal and expects to see positive returns in the future. These returns will grow tax deferred.

back to top

   IRA Charitable Contributions:
An individual is allowed an exclusion from gross income for qualified charitable distributions of up to $100,000 from a traditional individual retirement account (IRA) or a Roth IRA, which would otherwise be included in income. Married individuals filing jointly may exclude distributions up to $200,000 from income, $100,000 per individual IRA owner. The exclusion is applicable to distributions made in tax years beginning after December 31, 2005, and before January 1, 2010. To qualify, the charitable distribution must be made directly to a charity to which deductible contributions are made on or after the taxpayer attains 70 ½ years of age. Such distributions are not taken into account for charitable deduction purposes; that is, the taxpayer cannot claim the contribution as an itemized deduction. The distribution is required to be made by the IRA trustee directly to a charitable organization as described in Code Sec. 170(b)(1)(A).

back to top

Child Tax Credit:
Taxpayers with at least one qualifying child under the age of 17 are allowed a child tax credit of $1,000 per child. The credit will phase out when the parent(s) income exceed certain limitations. If your  “modified adjusted gross income”  (MAGI) income level is below the following limitations, take a look at this credit.

       $75.000 for single or head of household
       $55,000 for married filing separately
       $110,000 for married joint filers

The 2009 credit will phase out at the rate of $50 per $1,000 above the stated limitations for MAGI. Therefore, the child credit will not be available to taxpayers with a MAGI exceeding the following:
       
       $114,000 for single or head of household
       $94,000 for married filing separately
       $149,000 for married joint filers

back to top

Review Your Estate Planning Documentation:
The 2009 Federal Estate Tax Exclusion for the current year is now $3.5 million dollars per individual. If your estate includes a “bypass trust” a review needs to be completed.

With proper planning, a couple can now leave $7 million dollars to their heirs without paying federal estate tax. The additional exemption amount will provide protection for most taxpayers. However, if the estate contains a “bypass trust”, look for the words in the documentation language that include the phrase “the maximum statutory exclusion”.

The trust grantor may have intended a different distribution mix for his estate .But the trust language will now instruct the executor to move up to 3.5 million estate value to the remaining spouse. It now becomes prudent to review your estate plan!

back to top

IRS Reminds Taxpayers of Tax Relief Available for COD Income Realized in Mortgage Workouts:
The IRS has released a summertime tax tip addressing the exclusion from income of cancellation of indebtedness income (COD) income realized in mortgage workouts (IRS Summertime Tax Tip 2009-09). Taxpayers whose mortgage debt is completely or partially forgiven at any time during 2007 through 2012 may be eligible for special tax relief, it points out. The Mortgage Forgiveness Debt Relief Act of 2007 (P.L. 110-142) (2007 Mortgage Act) allows taxpayers to exclude from tax up to $2 million ($1 million for a married person filing a separate return) of cancellation of debt income realized in a mortgage workout on their principal residence. This exclusion also applies to mortgage debt forgiven in connection with a foreclosure.

To be eligible for relief, the debt must have been used to buy, build or substantially improve the taxpayer’s principal residence and must be secured by a mortgage on that residence. Mortgage refinancing are also eligible for the exclusion, up to the amount of the original mortgage.

Debt incurred for second homes, rental property, business property, credit cards or car loans does not qualify for the relief under the 2007 Mortgage Act. Other kinds of tax relief may be available, however. The exclusion provided for in the 2007 Mortgage Act may be claimed by filing Form 982, Reduction of Tax Attributes Due to Discharge of Indebtedness, with the taxpayer’s federal income tax return for the year the debt was eliminated or cancelled. Lenders are required to send borrowers whose debt is reduced or eliminated a Form 1099-C, Cancellation of Debt. This form must show the amount of debt forgiven and the fair market value of any property  given up through foreclosure.

back to top

Home Office Deductions for Self-Employed
If you are self-employed and work out of your home, there are selected rules you need to follow. The advantage of following the rules, you are able to deduct certain expenses related to your residence.

Expenditures related to the home office, include both direct and indirect cost. Direct expenses are for example cost of painting the office space, furniture and equipment added to the office space, paper supplies plus communication costs. Indirect costs include the cost to maintain the home office, home insurance and utilities costs. These costs would be allocated to the home office expense based upon square footage assigned to the office as compared to the total home square footage. The resultant percentage, multiplied by the total indirect expenses will increase your home office deduction. See IRS tax form 8829 Business Use of Your Home to implement this deduction.

Travel cost between your home office and the client’s location is fully deductable as transportation expense. Cost of computers and any other equipment used in your business becomes a deductable expense. 

If inventory is part of your business, the space used to store the goods should be included in your space allocation calculation. That is, be sure to add the storage space attributable to the business. With proper planning, you will be able to benefit from the maximum deductions available to the business owner.

back to top

Health Savings Accounts (HSA):
The Health Saving Account was established as part of the health care benefit program created by Congress. HSA accounts were created for the self-employed, small business owners and other employees who may not have access to a health insurance plan.

The current inflation adjustment plan for a high deductable plan limitation in the current year is $3,000. The 2010 annual amount will increase by $50.00 or $3,050 for the single individual. The Family plan rate for 2009 currently is $5,950. The new rate for 2010 will jump to $6,150.

The definition of a high deductible plan for the self-employed is one that has an annual deductable amount of $1,200 or more for a single individual. The family plan deductible requirement is $2,400. The out of pocket expenses (including deductibles and copayments, but not premiums) do not exceed $5950 for the individual or $11,900 for the family plan.

Any amount distributed out of a HSA account should be used to pay for qualified medical expenses. Such payments are not subject to income tax. Therefore, payments for non qualified medical expenses are includable as income and subject to taxation plus a 10%penalty. Finally, one must be covered by a high deductible medical plan at the start of each month.

back to top

Tax Incentives for Businesses
The American Recovery and Reinvestment Act of 2009 (ARRA) provides a number of tax incentives for businesses. Most of the tax incentives for businesses are found in Subtitle C of Division B, Title I of ARRA. In addition, some of the energy incentives, contained in Subtitle B, [and a subsidy for premiums for COBRA health continuation coverage in Title III of Division B,] provide tax relief for businesses.

Here is a summary of the key ARRA provisions, in numerical order, which may impact businesses, large and small:

TAX INCENTIVES FOR BUSINESS (SUBTITLE C)

50-Percent Special Depreciation Allowance/Bonus Depreciation (Section 1201) - The new law extends the 50-percent special depreciation allowance that was available for 2008 acquisitions to acquisitions of qualifying property in 2009. This provision enables businesses to deduct half the adjusted basis of qualifying property in the year it is placed in service. The extension applies to qualifying property placed in service in 2009 (2010 for long production period property and certain transportation property).

Acceleration of Certain Business Credits (Section 1201): Corporations that acquire eligible business property have an additional year to accelerate certain tax credits in lieu of a bonus depreciation deduction. The extension applies to eligible business property placed in service in 2009 (2010 for long production period property and certain transportation property).

Section 179 Expensing (Section 1202): During 2009, small businesses can elect to expense up to $250,000 of the cost of qualifying property under section 179. Without the new law, the limit would have dropped to $133,000. The existing $25,000 limit still applies to sports utility vehicles. The $250,000 amount provided under the new law is reduced if the cost of all section 179 property placed in service by the taxpayer during the tax year exceeds $800,000.

Expanded Net Operating Loss Carryback (Section 1211): Many small businesses that had expenses exceeding their income for 2008 can choose to carry the loss back for up to five years, instead of the usual two years. For small businesses that were profitable in the past but lost money in 2008, this could mean a special tax refund. The option is available for a small business that has no more than an average of $15 million in gross receipts over a three-year period. This option is available for most eligible taxpayers for a limited time. A corporation that operates on a calendar-year basis, for example, must file a claim by Sept. 15, 2009. For eligible individuals, the deadline is Oct. 15, 2009.

Estimated Tax Requirement Modified (Section 1212): Many individual small business taxpayers may be able to defer until the end of the year paying a larger part of their 2009 tax obligation. For 2009, eligible individuals can make quarterly estimated tax payments equal to 90 percent of their 2009 tax or 90 percent of their 2008 tax, whichever is less. Individuals qualify if they received more than half of their gross income from their small business in 2008 and meet other requirements. For details, see Publication 505.

Discharge of Business Indebtedness (Section 1231): The act allows certain businesses that repurchase specific types of debt in 2009 and 2010 to pay taxes on cancellation of debt income over a five year period, starting with tax year 2014.

Exclusion of Gain on the Sale of Certain Small Business Stock (Section 1241): ARRA provides an extra incentive for investment in small businesses. The new law provides an increase in the Section 1202 exclusion from 50 percent (60 percent for enterprise zone qualified business entity stock) to 75 percent for any gain from the sale or exchange of qualified small business stock acquired after Feb. 17, 2009 and before Jan. 1, 2011, and held for more than five years. This provision is limited to individual investors and not available to corporations.
 
S-Corporation Built-in Gains Holding Period (Section 1251):  For tax years beginning in either 2009 or 2010, the new law eliminates the corporate level tax on the built-in gains of an S-Corporation that converted from C-corporation status at least seven tax years before the current tax year.

COBRA PREMIUM ASSISTANCE (TITLE III)
COBRA: Health Insurance Continuation Subsidy (Section 3001): Under the new law, employees who were involuntarily terminated after Aug. 31, 2008 and before Jan. 1, 2010, and who elect COBRA health continuation coverage, are entitled to receive a 65 percent subsidy on their COBRA premiums. For periods of COBRA coverage beginning after Feb. 16, 2009, the involuntarily terminated employee must be treated as having paid the required COBRA premium if the individual pays 35 percent of the premium amount. The employer (or, in some cases, multiemployer health plan or insurer) may recover the other 65 percent by taking the subsidy amount as a credit on their quarterly employment tax return.

ENERGY INCENTIVES (SUBTITLE B)
Extension of Renewable Energy Production Tax Credit (Section 1101): The new law generally extends the “eligibility dates” of a tax credit for business facilities producing electricity from wind, closed-loop biomass, open-loop biomass, geothermal energy, municipal solid waste, qualified hydropower and marine and hydrokinetic renewable energy. The new law extends the "placed in service date” for wind facilities to Dec. 31, 2012.  For the other facilities, the placed-in-service date was extended from Dec. 31, 2010 (Dec. 31, 2011 in the case of marine and hydrokinetic renewable energy facilities) to Dec. 31, 2013.

Election of Investment Credit in Lieu of Production Credit (Section 1102): Businesses that place in service facilities that produce electricity from wind and some other renewable resources after Dec. 31, 2008 can choose either the energy investment tax credit, which generally provides a 30 percent tax credit for investments in energy projects or the production tax credit, which can provide a credit of up to 2.1 cents per kilowatt-hour for electricity produced from renewable sources.  A business may not claim both credits for the same facility.

Repeal of Certain Limits on Business Credits for Renewable Energy Property (Section 1103): The new law repeals the $4,000 limit on the 30 percent tax credit for small wind energy property and the limitation on property financed by subsidized energy financing. The repeal applies to property placed in service after Dec. 31, 2008.

Coordination with Renewable Energy Grants (Section 1104): Business taxpayers also can apply for a grant instead of claiming either the energy investment tax credit or the renewable energy production tax credit for property placed in service in 2009 or 2010. In some cases, if construction begins in 2009 or 2010, the grant can be claimed for energy investment credit property placed in service through 2016, and for qualified renewable energy facilities, the grant is 30 percent of the investment in the facility and the property must be placed in service before 2014 (2013 for wind facilities). 

New Clean Renewable Energy Bonds (Section 1111): Certain State utilities, governmental entities and cooperatives that initiate projects to generate electricity from renewable sources (for example wind and solar) can finance those projects through qualified tax credit bonds. The new law increases the amount of funds available to issue new clean renewable energy bonds from the one-time national limit of $800 million to $2.4 billion.

Temporary Increase in Credit for Alternative Fuel Vehicle Refueling Property (Section 1123): The new law modifies the credit rate and limit amounts for property placed in service in 2009 and 2010. Qualified property (other than property relating to hydrogen) is now eligible for a 50 percent credit, and the per-location limit increases to $50,000 for business property (increases to $2,000 for other/residential locations). Property relating to hydrogen keeps the 30 percent rate as before, but the per-business location limit rises to $200,000.

back to top

Identity Theft Scams
WASHINGTON — The Internal Revenue Service reminds consumers to avoid identity theft scams that use the IRS name, logo or Web site in an attempt to convince taxpayers that the scam is a genuine communication from the IRS. Scammers may use other federal agency names, such as the U.S. Department of the Treasury.

In an identity theft scam, a fraudster, often posing as a trusted government, financial or business institution or official, tries to trick a victim into revealing personal and financial information, such as credit card numbers and passwords, bank account numbers and passwords, Social Security numbers and more. Generally, identity thieves use someone’s personal data to steal his or her financial accounts, run up charges on the victim’s existing credit cards, apply for new loans, credit cards, services or benefits in the victim’s name and even file fraudulent tax returns.

The scams may take place through e-mail, fax or phone. When they take place via e-mail, they are called “phishing” scams.

The IRS does not discuss tax account matters with taxpayers by e-mail.

The IRS urges consumers to avoid falling for the following recent schemes:

Making Work Pay Refund
This phishing e-mail, which claims to come from the IRS, references the president and the Making Work Pay provision of the 2009 economic recovery law. It says that there is a refundable credit available to workers, consumers and retirees that can be paid into the recipient’s bank account if the recipient registers their account information with the IRS. The e-mail contains links to register the account and to claim the tax refund.

In reality, most taxpayers receive their Making Work Pay tax credit, which was designed for wage earners, in their paychecks as a result of decreased tax withholding, not as a lump sum distribution from a federal fund. Additionally, consumers and retirees who are not wage earners are not eligible for this tax credit.

Inherited Funds / Lottery Winnings / Cash Consignment
In this phishing scheme, recipients receive an e-mail claiming to come from the U.S. Department of the Treasury notifying them that they will receive millions of dollars in recovered funds or lottery winnings or cash consignment if they provide certain personal information, including phone numbers, via return e-mail. The e-mail may be just the first step in a multi-step scheme, in which the victim is later contacted by telephone or further e-mail and instructed to deposit taxes on the funds or winnings before they can receive any of it. Alternatively, they may be sent a phony check of the funds or winnings and told to deposit it but pay 10 percent in taxes or fees. Thinking that the check must have cleared the bank and is genuine, some people comply. However, the scammers, not the Treasury Department, will get the taxes or fees.

Form W-8BEN
In this scam, fraudsters modify a genuine IRS form, the W-8BEN, Certificate of Foreign Status of Beneficial Owner for United States Tax Withholding, to request detailed personal and financial information. This could include nationality, passport number, bank account and PIN numbers, spouse’s name and mother’s maiden name, or other personal or financial information or security measures for financial accounts. The scammers may use the genuine form number and name or may make up a new form number, such as W-4100B2.

They either e-mail or fax the form or letter. If only a letter, the letter itself contains the request for the personal and financial information. The letter, which claims to come from the IRS, states that the recipient will face additional taxes unless he or she quickly faxes the required information to the number provided by the scammer.

In reality, taxpayers file the genuine Form W-8BEN with their financial institutions, not with the IRS. Additionally, the genuine W-8BEN does not request the taxpayer’s passport number, bank account number, security or similar information.

Refund Scam
The bogus e-mail, which claims to come from the IRS, tells the recipient that he or she is eligible to receive a tax refund for a given amount. It instructs the recipient to click on a link contained in the e-mail to access and complete a form for the tax refund. The form requires the entry of personal and financial information. The refund scam is the most common one seen by the IRS. Several recent variations on this scam have claimed to come from the Exempt Organizations area of the IRS. Some others have included the name and purported signature of a genuine or a made-up IRS executive. Taxpayers do not have to complete a special form to obtain a refund. Taxpayer refunds are based on the tax return they submit to the IRS.    

How to Spot a Scam
Many e-mail scams are fairly sophisticated and hard to detect. However, there are signs to watch for, such as an e-mail that:

• Requests detailed or an unusual amount of personal and/or financial information, such as name, SSN, bank or credit card account numbers or security-related information, such as mother’s maiden name, either in the e-mail itself or on another site to which a link in the e-mail sends the recipient.
• Dangles bait to get the recipient to respond to the e-mail, such as mentioning a tax refund or offering to pay the recipient to participate in an IRS survey.
• Threatens a consequence for not responding to the e-mail, such as additional taxes or blocking access to the recipient’s funds.
• Gets the Internal Revenue Service or other federal agency names wrong.
• Uses incorrect grammar or odd phrasing (many of the e-mail scams originate overseas and are written by non-native English speakers).
• Uses a really long address in any link contained in the e-mail message or one that does not start with the actual IRS Web site address (www.irs.gov). To see the actual link address, or url, move the mouse over the link included in the text of the e-mail.

What to Do
The IRS does not initiate taxpayer contact via unsolicited e-mail or ask for personal identifying or financial information via e-mail. If you receive a suspicious e-mail claiming to come from the IRS, take the following steps:

• Do not open any attachments to the e-mail, in case they contain malicious code that will infect your computer.
• Do not click on any links, for the same reason. Also, be aware that the links often connect to a phony IRS Web site that appears authentic and then prompts the victim for personal identifiers, bank or credit card account numbers or PINs. The phony Web sites appear legitimate because the appearance and much of the content are directly copied from an actual page on the IRS Web site and then modified by the scammers for their own purposes.
• Contact the IRS at 1-800-829-1040 to determine whether the IRS is trying to contact you.
• Forward the suspicious e-mail or url address to the IRS mailbox phishing@irs.gov, then delete the e-mail from your inbox.

Genuine IRS Web site

back to top

IRS PUBLICATIONS, FORMS & LINKS

IRS 2009 tax forms in PDF format, please click on the link below to download form or use IRS urls listed below to go directly to IRS.gov website for further information.

IRS Form 1040
IRS Form 1040 Instructions
IRS Form 1040 Schedule A
IRS Form 1040 Schedule A Instructions
IRS Form 1040 Schedule C
IRS Form 1040 Schedule C Instructions
IRS Form 1040 Schedule M
IRS Form 1040 Schedule M Instructions
IRS Form 5405 & Instructions
IRS Form 5695 & Instructions
IRS Form 8829
IRS Form 8829 Instructions
IRS Form 8863 & Instructions
IRS Form 8867 - EIC Preparer Checklist
IRS Form 8880 & Instructions
IRS Form 8917 & Instructions
IRS Form W-5 EIC
IRS Publication 596
IRS Publication 962
IRS Publication 1235
IRS Publication 3211 Q&A
IRS Schedule EIC

back to top

John Wolle, CPA
54Freedom Bean Counter
phone: 1-877-341-3342 (toll-free)
fax: 1-315-655-4784
john@54freedom.com