All Things Financial Planning Blog


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Health Care Reform and You


Your Personal Declaration of IndependenceThe Patient Protection and Affordable Care Act, or PPACA, has many facets to it and its implementation will be done over several years. Provisions of the Act have ramifications for businesses and individuals so we will focus on the Health Care Reform Act and its impact on you as an individual. Since we are at about mid-year 2013 I wanted to focus on the Act for this year and next. To summarize 2013 and 2014, I offer the following …

In 2013,

  • Medicare Part A tax rate on wages goes up from 1.45% to 2.35% for certain individuals making more than $200,000 and couples making more than $250,000.
  • ‘Investment Income’ will have an additional 3.8% tax imposed if you make more than the $200,000 or $250,000.
  • Your employer must provide employees with info on employer plans, health exchanges and subsidies.
  • Your flexible spending account ‘set-aside’ will be limited to $2,500 per individual.
  • Medical expense deductions will not be deductible until they exceed 10% of AGI rather than the current 7.5%.

Beginning in 2014,

  • Waiting periods before you can enroll in an employer sponsored plan cannot be more than 90 days.
  • Insurance carriers will be required to cover everyone, even those with preexisting medical conditions.
  • If you are not covered through an employer health plan and do not purchase minimum essential health coverage on your own, you will have to pay a yearly fine of $95 per person ($695 in 2016) or 1% of taxable income (2.5% in 2016), whichever is greater. Individuals who do not have affordable minimum essential coverage from their employer will be eligible for tax credit subsidies for their health insurance purchase on a state exchange if their income is below 400 percent of federal poverty level – about $46,000. Minimum essential coverage includes Medicare, Medicaid, CHIP, TRICARE, individual insurance, grandfathered plans, and eligible employer-sponsored plans. Workers compensation and limited-scope dental or vision benefits are not considered minimum essential health coverage.
  • Group health plans, including grandfathered plans, may not impose cost-sharing amounts (i.e., copays or deductibles) that are more than the maximum allowed for high-deductible health plans (currently these limits are $5,000 for an individual and $10,000 for a family coverage). After 2014, these amounts will be adjusted for health insurance premium inflation. Group health plans, including grandfathered plans, may no longer include more than restricted annual or any lifetime dollar limits on essential health benefits for participants. Limits may exist in and after 2014 for non-essential benefits.
  • Each State must establish health insurance exchanges for individuals and small businesses defined, federally, as employers with less than 100 employees

What will the health insurance exchanges and pricing look like?

Obviously, each State is different. Some States run their own exchanges others have opted to let the Federal government run their State programs. There has been a lot said and predicted about policy pricing given the mandates of coverage and benefits provided for in the Act.

In California, we got our first look at our health care plans to be offered on California’s exchange. Our State will have 19 rating regions which will have 13 health carriers offering four plan types to Californians – Platinum, Gold, Silver and Bronze. California’s Silver Plan will have region costs that will vary for a 40-year-old from the low $200’s per month to the low $400’s per month depending on the region you live in. This is similar to our ‘zip-code-pricing’ currently used by companies in our State. The silver plan, which is expected to cover 70% of an individual’s health care expenses, has a $2,000 deductible, $45 copay for primary care visits, a $250 emergency room co-pay and a maximum annual out-of-pocket expense of $6,350.

According to Chad Terhune of the LA Times, for our 40-year old purchasing a Silver Plan and living in the Los Angeles County region they will be paying somewhere between $242 and $325 a month whereas a similarly designed plan today would cost $321 albeit with more comprehensive benefits. Statewide, considering all counties, the average premium in the State is $177. So the results thus far seem pleasing given the chatter about price increases.

In Ohio they have opted for the Federal government administered program to run the Ohio exchange. Fourteen carriers have submitted 214 different plans to the federal administered exchange. The price ranges for minimum essential health benefits through the federal administered exchanges range from $282 and $577. According to Ohio officials that will be an 88% increase in individual health policy costs for its citizens. . Other preliminary pricing for the 40-year old purchasing a Silver Plan has come in at a low of $205 in one region of Oregon to a high of $413 in a region in Vermont. The Congressional Budget Office had projected nationwide average monthly costs for the second lowest Silver Plan to average about $433. Results are still coming in so stay tuned.

One of the other provisions of PPACA is that health insurance companies must issue rebates to individuals and small businesses if the health insurance company does not spend at least 80% of their annual premiums on medical care. In recent filings with regulators, Blue Shield of California said it owed $24.5 million in rebates to thousands of small firms and similarly Blue Cross of California will be rebating $12 million.

Comments and Planning Implications.

So there is a lot to be played out yet with respect to the law and its implementation and pricing. Businesses have a lot of hoops to jump through with larger companies, publicly traded for example, probably less (a relative term, obviously) impacted than the smaller businesses especially those with more than 50 employees and less than 200. How the pricing and number of carriers willing to provide policies in your state will pan out between now and the end of the year is still a work in progress. For those who do not have insurance currently, or those who have policies that do not provide minimum essential coverage, consult with your advisor to see how the blend of tax subsidies, tax penalties and other issues of PPACA impact you, your family and your financial plans. To your healthy and successful financial future!

David Bergmann, CFP®, EA, CLU, ChFC
Managing Principal
The David Bergmann Group
Marina Del Ray, CA


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Year End Tax Planning – Part Two – Business


Year-end tax considerations for businesses are not quite as up in the air as is the individual tax situation so let’s take a look at a few of them.

Will the 3.8% Net Investment Income Tax Come Into Play?
With respect to that 3.8% net investment income tax coming in 2013, don’t worry, the tax doesn’t apply to income from trades or businesses conducted by a sole proprietor, partnership, or S corporation. But income, gain, or loss on working capital isn’t treated as derived from a trade or business and thus is subject to the tax.  Additionally, gain or loss from a disposition of an interest in a partnership or S corporation is taken into account by the partner or shareholder as net investment income and, therefore, could cause the 3.8% tax to apply.

Considering Buying Equipment?
Current law allows you to ‘write-off’ (expense), up to $139,000 of qualifying property placed in service in the tax year. If you have already placed in service $560,000 of qualifying property this strategy will not work because for every dollar of qualifying assets that you place in service above this level you lose a dollar of ‘expensing’ benefit. If you haven’t exceeded the maximum yet, and you need the machine but do not have the cash, put the purchase on your credit card that will qualify it as having been purchased this year. You can also get substantial write-offs in 2012 from a purchase of a more than 6,000 pound vehicle that may be used in a trade or business.

Do you need to ‘shelter’ income or want to save for the future?
Setting up a retirement plan is fairly easy. The costs of a plan can be very minimal or they can get very expensive if you want ‘tailored or targeted’ plan design or a, so-called defined benefit plan, which has annual actuarial costs and other expense factors. Without going into details regarding selection or design factors let’s look at some of the basic choices for retirement plans other than an individual retirement account …

Plan Type:   Simple
Establish Date:  October 1st  
Fund By Date:  Due date return + Extension
Max. if <50 yrs. old:  $11,500 + 3% or 2%

Plan Type: 401 (K)
Establish Date:  December 31st
Fund By Date:  Due date return + Extension
Max. if <50 yrs. old:  $16,500 + 25%*

Plan Type: Defined Benefit
Establish Date: December 31st
Fund By Date: Due date return + Extension
Max. if <50 yrs. old:  Actuarially Determined

Plan Type: SEP
Establish Date:  Due date of return + Extension
Fund By Date: Due date of return + Extension
Max. if <50 yrs. old: $49,000 (25%* of comp)

[*Note that 25% is actually 20% because it is 25% of income ‘in respect of’ (after) the deduction so $100,000 of income minus $20,000 =’s $80,000.   $20/$80 is 25%]

Need Employees?
If you are thinking of hiring, consider hiring a veteran before year-end to qualify for a work opportunity credit. The credit, a dollar for dollar reduction in tax liability, can range from $2,400 to $9,600 depending on a variety of factors.

Are you a Corporation?
If you are incorporated, you may want to consider a stock redemption (buy-back) which may, depending on a multitude of factors, create a long-term capital gain or a dividend which will receive the favorable 15% tax rate if done this year. Remember, unless Congress acts, capital gains rates will be going up and that 3.8% net investment income tax could apply if you make more than $250,000 married, $125,000 married filing separately and $200,000 individually.

Are you a Partnerships or a S-Corporation?
When our ‘amount at risk’ in an activity is not sufficient to allow us to, possibly, take a loss from an activity, our loss will be ‘suspended’ until such time as we have sufficient amounts ‘at-risk’. If you might not be able to utilize a loss currently because you didn’t have sufficient amounts ‘at-risk’, consider adding capital, or, alternatively, if possible, add debt that you are ‘personally responsible for’ to the activity which, by definition, will increase your at-risk. That will allow you, then, to take the loss currently. Remember, though, if this is a passive activity, there are other hurdles to overcome in order to take a ‘passive loss’ currently.

Closing Thoughts
These are but a few of the year end considerations. For 2013 ‘larger’ small businesses who offer health care to their employees, or even those that do not offer health care to employees currently, will need to review provisions of the Patient Protection and Affordable Care Act to determine the tax impact of the Act on their benefit plans and what course of action might be most prudent to pursue with respect to benefit plan(s) design for the business.

I hope that your 2012 tax year was a good one for you, your family and your employees, and I hope that 2013 is even better for ALL!

David Bergmann, CFP®, EA, CLU, ChFC
Managing Principal
The David Bergmann Group
Marina Del Ray, CA


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Financial Issues for Your Children


We all spend time dealing with our personal financial and tax issues and these can be overwhelming at times that we sometimes forget about these same issues for our children. We start a savings account (an UGMA perhaps where we are the custodian for our child) when they are born and we put all their gift money in it. Or maybe we set up an educational savings account for them in the expectation that they will go to college when they graduate from high school. And then we sort of put it on cruise control for a number of years.

This blog will deal with some of the things we should be aware of that may get in the way of good financial management of our fiduciary responsibility to our children.

Notice, I said fiduciary responsibility. That means we are supposed to be the custodian of this money for our children until they reach adult age of 18 in most states. At that time, the child is legally entitled to take over the use and management of this money that we thought was for college. This may not be what your child wants to do, so this is where it becomes important to have done our homework on instilling good financial skills earlier.

One of the important financial skills that every child needs is to understand how our income tax system works. In the early years, the accounts we have established for them will be earning interest or dividends each year which helps the accounts grow. This income, by itself, may not be significant enough to warrant a tax return to be filed; then suddenly she gets this super job at age 16, has a W-2 with taxes withheld and wants to get the refund of these taxes.

What are some of the issues that this raises?

What you first want to do is help her to understand that she had some choices when she was hired and filled out the Form W-4 withholding request. If her income was not going to be high enough to require taxes to be paid when she filed her return, she could have checked Box 7 that indicates income taxes are not to be withheld because she expects to have no tax liability. This may eliminate the need to even file a federal or state (similar form W-4 for the state) tax return.

If a federal return needs to be filed to get the refund, she needs to be sure to add the interest income and dividends from those saving accounts and mutual funds that you established many years ago. Those 1099s are coming to the house, right? Oh, and don’t forget about the grandparents who may have established an account for the grandchildren with the grandchild’s social security number on the account. Even you may not be aware of these, but the IRS has a record of the income under that number and will adjust the return accordingly if the income is not reported with the return. So check with your parents about this issue.

There are times when the child’s income and related taxes are impacted by your tax situation and vice versa, so you need to be aware of those issues as well. One of those issues is called the “Kiddie Tax”. This occurs when the child has investment income greater than $1,800. The amount above $1,800 will be taxed at the parents’ tax rate unless the child’s tax rate is higher. For the amount below $1,800, the first $950 is not taxed and the next $900 is taxed at the child’s tax rate. Investment income above $950 for the child will require a tax return to be filed. This does not mean that the child has to pay taxes; just that a return has to be filed.

In addition, if the child had earned income of more than $5,700, the child must file a tax return. For earned income, the child will be taxed at her tax rate using the Single filer tax rate schedule.

If the child is filing her own return, then Form 8615, Tax for Certain Children Who Have Investment Income of More Than $1,800, must be completed and attached to the Form 1040.

If you have more than one child with investment income subject to the Kiddie Tax, investment income of all such children must be combined with the income of the parents to determine the tax rate to be used. This requires the parents to have completed their return before completing the child’s return to determine what tax rate to use.

For most taxpayers, including children, earned income is what is reported to us on a W-2 form. However, a child could be earning income by being self-employed (cutting the grass in the neighborhood or babysitting), in which case they would be reporting this income on Schedule C. This would entitle them to claim expenses of generating this income, perhaps subject them to Self-Employment taxes, and maybe qualify them for contributing to tax-deferred retirement plans that would reduce their taxable income subject to income taxes.

If the parents have a business and they hire the child to work for them, the parents can reduce their business income by the payments made to the child for actual work performed thus lowering their tax liability. In addition the child may pay tax at a lower rate or have no tax liability, can contribute to a retirement program, and may be able to claim the Hope or Lifetime Learning Credit that the parents may lose because their income is too high.

As can be seen from these examples, the child does have income tax reporting requirements if she is creating income from earnings or investments but may not have income tax liabilities.  In the process the child may be able to get other tax advantages through savings or reducing the tax liability of the parents. So be sure to check with your tax adviser before the end of the tax year if any of the above items may impact you or your children. By doing so now, you can do the effective tax planning needed and fulfill your fiduciary responsibilities to your child.

FrancisStOnge

Francis St. Onge, CFP®
President
Total Financial Planning, LLC
Brighton, MI