Archive for October, 2006
Charitable Remainder Trust Taxation
An annuity is both a contract with an insurance company and an investment. Your contributions (often called premium payments) to it are invested to produce earnings. This article explains when and what is taxed as income under annuitization, withdrawals, and gifts of your annuity.
An annuity has two phases: accumulation and annuitization. During accumulation – called a deferred annuity – both your contributions (i.e. premium payments) and their earnings accumulate within the contract. During annuitization (i.e. payout stage) you receive monthly payments while money remaining in the contract creates more earnings.
Most annuities are nonqualified. You can make unlimited after-tax contributions to them and their earnings grow tax-deferred. Only the tax-deferred earnings are eventually subject to income tax; your contributions come out tax-free as a return of your basis in the contract.
A qualified annuity is one regulated under government rules as a retirement plan. All contributions to them are deductible from income but, of course, must come from working income.
Annual contributions are limited like IRA contributions. Since they have no after-tax contributions, your tax basis in the contract is zero; so all withdrawals will be subjected to income tax.
Like all qualified plans, any withdrawal you make before reaching age 591/2, will have a 10% penalty tax imposed on it in addition to income tax. After reaching 701/2, you’re required to make minimum required distributions – just like IRAs.
Income taxation is imposed on:
* Accumulation withdrawals
* Gifts of an annuity, and
* Beneficiary’s withdrawals
Let’s see how nonqualified annuities are taxed:
Taxation on annuitization payments:
Your monthly payouts are considered as made up of a contribution part and an earnings part. Only the earnings part is taxed as income. It’s a specific fraction of your payment equal to total earnings divided by the contracts total value – i.e. earnings plus contributions. After you’ve received all your contributions back in payouts, all future payouts are fully taxed as income.
Taxation on withdrawal from your deferred annuity accumulation:
Taking money out of your deferred annuity is a withdrawal. But earnings are considered to come out first. So anything you withdraw is taxed as income until all the earnings are out. Any withdrawal beyond earnings is a tax free return of basis.
Until you’ve turned 59 years old, the IRS imposes a 10% penalty tax on what you take out of your nonqualified annuity too.
This withdrawals taxation also includes cashing out your deferred annuity altogether. An early cash out may trigger an additional fee from the annuity company.
Taxation on a gift of your deferred annuity:
Gifting your deferred annuity to a person, charity or a charitable remainder trust, triggers income tax on the annuity’s earnings; that includes any 10% penalty tax too.
For gifting to a government-approved charity, your deduction is limited to your basis in the contract – i.e. the sum of your contributions.
Qualified annuities are taxed as above accept they have no basis – i.e. basis equals zero.
Taxation on beneficiaries and survivors:
Annuities that go to beneficiaries and survivors are considered as ‘income in respect of a decedent’ – and not as an investment. So an annuity – unlike an investment – doesn’t get a stepped-up basis.
So, any annuity payout to survivors and beneficiaries is subject to income tax – but only to the extent that money paid out to them exceeds the annuity’s basis -i.e. the original owner’s annuity contributions. So a portion of each payout will be attributed to the deferred tax on the earnings of those contributions and a portion will be return of basis.
As it was for the original owner, when the basis has been completely recovered through payments to the beneficiary, all further payments will be fully taxed as income.
About the Author:
Shane Flait writes and consults on financial, legal, tax, and retirement issues. He gives you workable strategies to accomplish your goals.
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You can contact him at email@example.com
Estate Planning in Special Situations: A Discussion of Intergenerational Problems and Practical …
Tax Planning Strategies 2009
Have you thought about upgrading your equipment to the newest industry standards but were afraid of the cost? Or perhaps you want to improve your office to make it more comfortable for your patients? Do you need to upgrade your reception area to make it more efficient for your administrative staff or look nicer for your patients?
If you have been thinking about any of these improvements for your practice, consider that if you do it in 2008, the Government will help pay for them. That’s right, Uncle Sam is ready to pay for a significant part of your cost of improvements, but only if you make your purchases and do your improvements in 2008. How? The good old American way – through major tax deductions.
In February 2008, President Bush signed into law the Economic Stimulus Law of 2008. Most people think of this as the bill that gave millions of Americans a tax rebate check of $600-$1,200. You may not have been eligible for this benefit because your income was too high, but other parts of this legislation could be worth far more to a dentist than a small rebate check.
There are two parts of this legislation that could be particularly lucrative to you in 2008. First, there is the change to the Section 179 rules. Most of you know that if you buy new equipment then you can elect to deduct the full cost of this equipment up to certain limits. What you may not know is that these limits were increased substantially for equipment purchased and placed into service in 2008.
There are two limits that increased as part of the 2008 Tax Act. The first is the total amount of equipment that can be deducted in a single year. The rule is $125,000 for years before and after 2008. But, for 2008 only, the limit has been increased to $250,000.
And the deduction is not limited to equipment. It also applies to computer software and to certain leasehold improvements.
The second limit that was increased is the maximum amount of equipment you can buy and still get the Section 179 deduction at all. Before and after 2008, you only get the deduction if you buy less than $400,000 of equipment during the year. For 2008, this has been doubled to $800,000. What does this mean to you? If you are setting up a new office or multiple offices, you may have been disallowed ANY Section 179 deduction if you purchased more than $400,000 of equipment. With this limit doubled, most dentists will be able to deduct all of the equipment they buy in 2008 up to the increased $250,000 limit.
In addition to the changes to the Section 179 deduction, there is more good news for those of you expanding or renovating your offices. As you may know, Section 179 only applies to tangible personal property (i.e., equipment and furnishings). So what about all of those improvements to the office itself? Any benefit there? Absolutely!!!
The 2008 Tax Act allows a bonus deduction for depreciation on certain property equal to 50% of the cost. And you still get to depreciate the other 50% of the cost of the property over the normal depreciation period. Let me give you an example.
Suppose you decide to renovate your office in 2008. You buy new equipment for $150,000, new furniture for $30,000 and make leasehold improvements to the office of $40,000. If you get this all done in 2008, your current tax deduction will be in excess of $200,000. If you wait until 2009, you will only get a deduction in 2009 of about $138,000. The different of $62,000 would have to be depreciated over future years.
One more benefit from this new law should not be overlooked, and that’s the additional depreciation you can take on business vehicles placed in service in 2008. Because of the “luxury auto” limitations, depreciation deductions for automobiles are severely limited. But in 2008, the limits are increased by $3,600. Nothing like the increases in Section 179 or bonus depreciation, but still a nice additional benefit for 2008.
Now for the really important part of this story. What should you do? Should you spend the money? ONLY IF IT MAKES SENSE FOR YOUR BUSINESS!!! I never recommend spending money just for a tax benefit. After all, the maximum tax rate is on 35% and even with a state rate of as much as 11%, you still lose money if all you are getting is a tax deduction.
On the other hand, if you are planning to make improvements to your office and/or equipment in the next year or two, it might make sense to do it in 2008 so the Government can underwrite a substantial portion (35-50%) of the cost.
I strongly recommend you meet with your tax advisor before undertaking any tax planning. I especially recommend to our dentist clients that they work with their tax advisor to formulate a COMPREHENSIVE, LONG-TERM TAX STRATEGY.
About the Author:
Tom Wheelwright is not only the founder and CEO of Provision, but he is the creative force behind Provision Wealth Strategists. In addition to his management responsibilities, Tom likes to coach clients on wealth, business, and tax strategies. Along with his frequent seminars on these strategies, Tom is an adjunct professor in the Masters of Tax program at Arizona State University. For more information please visit http://www.provisionwealth.com
7 Tax Saving Strategies Before 2010 Part 1 of 4
Fundraising Ideas For Charity Christmas
Question: fundraising event (christmas fete) ideas?
At school im organising a christmas fete for a local childrens charity
but im stuck for ideas.. i have the traditional stalls such as tombola, bring and buy, cakes and food, santas grotto, and a craft themed one
i just need about 4/5 more
thanks in advance xx
ok so ive decided now ill set up a little nail bar
and ill look into candyfloss and the prices of that x
Answer: Candy floss stall,
thats all i can think of right now, hope it helps
Fundraising Ideas College
Question: What are some fundraising ideas for guys at a college looking to fund an inline hockey team?
All suggestions will be helpful, but please don’t mention carwash. It’s a pretty obvious one. Only serious responses will be considered.
Answer: Having played for a rugby team before a neck injury re-introduced me to hockey, a few things we did (all of which work):
1) Calendars work. I can't tell you how many rugby teams have put out calendars (often times showing a little cheesecake/beefcake). The upfront cost is minimal. Market the calendar wisely and you can do well. Have fun with it.
2) If you're of legal drinking age...celebrity bartending nights at your local bar/pub. You guys work, and you keep a portion of revenues.
3) Program/scorecard sales at games. If you have an NHL team nearby, contact them about doing this. You volunteer your time, and keep a portion of what you sell.
4) Volunteer to scorekeep and help out youth hockey. Youth teams always need scorekeepers, referees, etc. Get on good terms with the hockey community, and it helps. Plus, the local rink(s) might then be inclined to help you with costs.
5) If you can, sell sponsorships (not sure the legality of this with a college). Your team has to have a website, and put links to their site on yours. Offer to promote their company (my rugby team's sponsor (a local pub) bought us a full playing kit and put their logo on our shirts)
6) Amazon and NHL.com have free marketing programs. People go their sites through your website, and if they buy stuff, you get a percentage of what they buy. Complete no-brainer (I volunteer with a greyhound adoption group in the GTA, and we do this with Amazon.ca; last year we earned just over $1,000 from this).
As a bigger picture...befriend your local community. Volunteer your time. Be visible. A group of polite young men in hockey sweaters donating their time to a charitable cause buys you a lot of goodwill. If the only time people see you is when you have your hat in hand...not so good. Scratch someone else's back and they'll help you.
Fundraising Ideas for Animal Causes
Tax Planning India 2009
Question: How can my father in India transfer money to me and my sister in the U.S. without incurring gift taxes?
My father (an Indian citizen living in India) is planning to wire-transfer about US$300K from his bank account in India to my bank account in the US, with the intent that this money is to be split between me and my sister (who are both US permanent residents (green card holders)). 1) Am I right in understanding that I owe no tax due to the wire transfer from my father to myself, but that I must file (just) IRS Form 3520 by April 15, 2009? 2) If I write my sister a check for $150K, will she or I incur any gift taxes? 3) If yes to question 2, what if my sister and I instead open a joint account to which I transfer the money?
Answer: PLEASE ignore the clown talking about the 13 corporations! That MUST be a joke; it certainly doesn't have anything to do with US tax law!
Gift taxes are levied on the donor of the gift, not the recipient. However as your father is not a US citizen or resident he is not subject to US tax laws and cannot be compelled to pay the US Gift Tax.
However there are some issues to watch out for with the single payment to be divided between you and your sister. Make sure that you have solid documentation of the intent of the gift BEFORE you split it!
Better yet, have your sister set up her OWN bank account and have your father make TWO payments, one to each of you. That will clearly show his intent to make separate gifts to each of you and avoid any chance of the IRS attempting to require you to file a Gift Tax return on the half you give to your sister, with the resulting loss of your lifetime exclusion amount.
Don't use a joint account to split the gift. The IRS frequently assumes that a joint account is being used to try to shield gifts from Gift Tax laws. Have her set up her own account and ask your father to make two separate gifts.
You are correct on the Form 3520 filing requirement. Regardless of how the gift is transferred to the US and split once it arrives, you AND your sister are BOTH required to file the Form 3520. This will also help in establishing that separate gifts were made by your father.
tax guru weekly program 22-03-2009