First, it is important to understand the three different tax structures. Every person should plan their taxes and finances around these for the most advantageous tax strategy and to keep more money to themselves rather than to pay off a hefty tax bill.

Pre-Tax Structure
This structure allows you to invest monies pre-tax or before tax basis, giving you the tax deduction in the year of contribution. Earnings, dividends and interest grow tax free until you withdraw funds at a future date. Upon withdrawal, the income is taxable at the tax rate of your retirement, while the contributions are tax deductible at the rate in the year of contribution. Most of employer sponsored retirement plans such as 401(k) and 403(b) and also Traditional IRA, SEP IRA and Simple IRA are usually pre-tax. Although each plan has different contribution limit and plan rules, the tax structure is the same. The advantage of pre-tax structure is to save taxes in the year of contribution and get taxed in retirement when tax rates are usually lower. However, it is important to understand the various types of income you would receive in your retirement including social security and how this income would place you in a higher tax bracket in retirement, sometimes making your Social Security benefits taxable.

After-Tax Structure
This tax structure allows your after tax monies to be invested to earn more income in the form of interest, dividends or capital gains. Usually these are investments in Stocks, Bonds, Mutual Funds, ETFs, Money Market, CDs and Real Estate. Investment is considered as non-qualified and does not have any holding period such as pre-tax structure where you have to wait until you are 59 ½ years to withdraw your monies without any penalties. Tax is assessed in the form of regular ordinary tax for interest or capital gain taxes for stocks, bonds and real estate. There is no deduction for making this investment; however taxes are assessed in the year when the gains are realized by selling of those investments. Generally investment is done in this structure for shorter or medium term. This is also a person’s emergency fund when needed in times of need as they cannot tap in to pre-tax investments due to 10% additional penalties. There are no penalties associated to sell After-Tax investment at any point of time. The only thing to look out for is if the investment will be assessed short-term (lesser than a year) or long-term (one year o more) capital gain taxes. Long Term Capital gain taxes are generally lower than the short-term. Most of employer sponsored retirement plans such as 401(k) and 403(b) and also Traditional IRA, SEP IRA and Simple IRA are usually pre-tax. Tax-Free Structure
This structure is probably the most underutilized and overlooked savings and investment option. Here you deposit after tax dollars and the assets grow income tax free and can possibly be withdrawn tax free as long as you follow rules associated with this asset class. This structure can provide dollar to dollar of the amount you may need. For example, if you need $50,000 every year on your withdrawal, then $50,000 from tax free structure translates to $50,000 of available monies, where as the Pre-tax bucket can possibly take out 20% of taxes or whatever your tax rate would be during retirement leaving you with only $40,000 (as 20% of $50,000 would go in paying taxes). Roth and Cash Value Life Insurance are some types of investment products that offer this benefit. Also 529 Plans do similar towards college education. To understand the benefit of this bucket, it is important to translate this in to real numbers.For example, if you are generate an 8% annual return, then a tax-free structure would double your monies in 9 years, where as if those investment returns are subject to 25% income tax than your monies will double in 12 years. This is the kind of impact taxes can have on your savings. Strategizing a tax efficient retirement is usually done by utilizing the correct mix from all three structures.Life Insurance can also be used as a Tax-Free Retirement Tool similar to Roth IRAs or Roth 401Ks. Remember that Roth and Loans from Cash Value Life Insurance Products are only two things that do not get included in your tax return when distributed upon Retirement and can be used as a Tax Free structure. Cash Value Life Insurance is a rich man’s Roth since the Roth has an Adjusted Gross Income limit of $203,000 in 2019, which means any married couple making over $203,000 and any Single Person making over $137,000 in 2019 cannot contribute to Roth, but they can consider investing in Cash Value Life Insurance Products.

* This tax structure is potentially tax free and may lose its tax favored status under certain circumstances. Please consult your Tax Consultant or Financial Professional on how to take advantage of the items under this structure. ** Cash Value generally grow tax free and can be accessed via Loans and withdrawals up to the basis. Please consult your Financial Professional to ensure they do not convert in to a Modified Endowment Contract (MEC). The tax advantage status may be lost if the policy is surrendered and the gains and distributions may be accessed income tax and potential 10% penalty.

Life Insurance as a Retirement Planning tool
We always think that life insurance is for the financial benefit for our relatives when we die, but we do not realize that we can often use it to our advantage sooner. We can structure our life insurance so that we can use it as an additional stream of income, especially during our retirement. Here is how a permanent insurance product can be used as an additional income source.

Cash Value with Whole Life
Whole life insurance covers you for a lifetime. They are generally more expensive than term life (which has a fixed duration of 10, 15, 20 or 30 years). In the whole life insurance policy you accumulate cash value, which also earns interest or dividends on tax deferred basis. You can borrow against the policy up to the amount of cash value you have accrued without paying taxes. If you receive dividends you will not owe any taxes on them unless you exceed the total amount of premiums you have paid. Based on how much you can borrow, you can use a whole life policy as a steady source of income in retirement. You do not have to repay loans against cash value. Outstanding loan balance reduces any death benefit payable to your beneficiaries when you die.

Universal Life an Investing Tool
Universal Life Insurance is another type of permanent coverage; however, it works little differently than whole life. You can still earn cash value based on the amount of interest earned as you pay your premiums. One key difference is that Universal Life gives you the flexibility of premium in which the premium amount can be adjusted based on your financial situation. You also can change your death benefit amount as needed. You can also use the accrued earnings in Universal Life to cover your premiums making this an attractive product for retirees. In addition to building cash value, there is also an investment component. A portion of your monthly contributions goes towards paying your premium costs and the remaining amount is invested in the investment vehicle of your choice. The investment performance determines your individual returns. You can borrow against the cash value tax-free. One has to be aware that the returns in universal life are not guaranteed. Work with your financial professional to select the best investment strategy for you.

Can I convert Permanent Policy to an Annuity to create a Lifetime Income stream?
If you have built up amount of cash value in a permanent policy then you may be able to convert that to an annuity, creating a regular source of income. An annuity is a product that you can purchase from a life insurance company. You typically fund an annuity with a lump sum and the insurer pays you a fixed amount for the duration of its lifetime. A lifetime annuity allows you to receive payments until you die. If you cash out a permanent life policy, you would have to pay tax on the earnings, however a 1035 exchange allows you to switch to an annuity tax-free. In an annuity you may not have a death benefit component similar as a life insurance product. If you have other assets for your heirs than you may want to consider this switch to pay for your retirement years.

Bottom Line
Developing a retirement strategy begins with knowing what your savings and investment options are. If you have not thought about Roth and Cash Value Life Insurance as tools to grow your assets tax free then you may be overlooking a potentially valuable source of income and savings. We can help you explore all of your options and determine which retirement strategy is right for you. We offer a free Financial Assessment for all our clients to help them make the right financial decisions for now and for retirement.

About the Author

Umang Thakkar is a Sr. Partner with IncorpTaxAct LLC (www.incorptaxact.com). He is a Tax Expert with Planning Expertise and a Financial Advisor. For any tax or financial advice, please send an email to umang@incorptaxact.com.

Payal Agarwal is a Financial Professional Associate and a Registered Rep with Pruco Securities and Prudential. For any Life Insurance, Health Insurance, Annuities or Retirement Planning needs, please send an email to payal.agarwal@prudential.com

Views and opinions expressed are that of the author in this article are not that of Prudential and Pruco Securities or any other Brokerage, Financial Services Provider or any other entity. Please consult your Tax Professional or Financial Advisor for any personal advice. No opinion expressed in this article should be considered as a professional tax or financial investment
advice.

Posted on: 1-1-2019 by: Deshvidesh

Tax time is here! What changed, and how will it impact your tax return?

Don’t you feel Income Taxes are the hardest subject in the world to understand? That is exactly what Albert Einstein said way back when: “The hardest thing in the world to understand is income taxes.” Taxes have gotten more complicated since then – most are dazed and confused when it comes to their tax returns. insight on 2015 IRS Tax code and provide a quick reference guide for tax preparation.

General Tax Updates

Tax Bracket Adjustment: The 2015 tax bracket has been updated to reflect 1.6% increase factoring inflation. The top 1% of high income earners including individuals with over $413K in Taxable income will be paying out 39.6% income tax on their Gross Taxable Income.

Changes to Standard Deduction – The standard deduction amount has increased from prior year:

$6,300 for Single/Married Filing Separate

$12,600 for Married Filing Jointly

$9,250 for Head of Household

Alternative Minimum Tax – The alternative minimum tax was set to limit tax breaks for Americans looking to reduce their overall tax bill. As of 2015, the AMT income exemption for taking this tax break is set for individuals who earn over $53,600 and married filing jointly couples at $83,400 in taxable income.

Healthcare Tax Updates

Affordable Care Act (ACA) Penalty – The ACA penalty has increased in 2015. The fee for not having health coverage in 2015 is the greater of:

• 2 percent of your yearly household income. (Only the amount of income above the tax filing threshold, about $10,150 for an individual, is used to calculate the penalty.) Or,
• $325 per person, ($162.50 per child under 18). The maximum penalty per family using this method is $975.

Health Expense Account (HSAs & FSAs) – Individuals who have a Health Savings Account (HSA) in 2015, the contribution limit has been raised to $3,350 for the single plan and $6,650 for the family plan.

In addition, the Health Savings Account (HSA) has three major tax savings:

• Contributions are tax deductible
• Growth of the HSA (outside of contributions) are tax-free
• Withdrawals are tax-free if used to pay for medical expenses

On the other side, for those individuals who opted to use a Flexible Spending Account (FSA), you will also receive an increase in the total contributions limit to equate to $2,550, up $50 from 2014 that is required to be spent in the 2015 plan year.

Retirement Plan Updates

401(K) Contribution Limits – In 2015, employees can now contribute up to $18,000, which is up from the $17,500 limit imposed in 2014. In addition to the increase in 401(k) contributions, there is also the increase in catch-up contributions for individuals who are age 50 or over at the end of the calendar year. For 2015, the total catch-up contributions equate to $6,000 per person and are allowed under a 401(k), 403(b), SARSEP, and governmental 457(b) plans.

Limitation on IRA rollovers – As of 2015, you are limited to one indirect rollover from your IRA account to another IRA account per year. With an indirect rollover, a plan participant is allowed to withdraw (through a distribution) all of their retirement balance without taking on a penalty if they decide to enroll the balance into a new IRA account. Due to the 2015 change, indirect rollovers are now only allowed to be performed once a year.

However, if you want to transfer your IRA balances through a direct rollover, i.e., trustee to trustee, then there are no limitations on how many times this can occur. As long as your retirement balance stays out of your hands during the transfer (i.e., direct rollover), you can perform this process as many times as you like.

The Saver’s Credit (Retirement Savings Contributions Credit) – Low and moderate income workers are provided an additional tax credit to help them save for retirement. According to the IRS, the saver’s credit helps offset part of the first $2,000 workers voluntarily contribute to IRAs and 401(k) plans and similar workplace retirement programs.

In 2015, the saver’s credit increased by $1,000 for married-filing-jointly couples who make less than $61,000. The credit was also increased by $500 for individual taxpayers with incomes less than $30,500.

Other 2015 Tax Changes

Foreign Bank Account Reporting (FBAR)

FBAR was created as part of a US initiative to uncover hidden monies in offshore accounts. The IRS is forcing those with money in overseas bank accounts to disclose those accounts if balances exceed the threshold. Keep in mind that those filing FBAR aren’t taxed on the balance of the accounts or anything of the sort—it’s truly just a reporting requirement so the IRS knows what money lies overseas.

Any US person with a foreign account balance of $10,000 or more at any point during the tax year will need to file. The threshold is also an aggregate amount—meaning, if you have multiple accounts, it’s the total balance of all of your accounts that trigger a filing requirement. So, if you are thinking that keeping $3,500 in one account and $7,500 in another will enable you to avoid filing, you are incorrect. This also applies to those who simply have signing authority over an overseas account. That’s an important thing to remember, as the account doesn’t have to be YOUR account. To explain further, signature or authority means the authority of an individual to control the disposition of money, funds or other assets held in a financial account by direct communication to the person with whom the financial account is maintained.

Along with your bank account balances you also need to report Foreign stock or securities held in a financial account at a foreign financial institution. The account itself must be reported but the contents of the account do not need to be reported separately, Financial account held at a foreign branch of a US bank, Foreign mutual funds and Foreign-issued life insurance or annuity contract with a cash-value.

FBAR is filed separately to the Department of the Treasury. You have to submit it electronically through the BSA e-filing site. This form is also necessary if you hold joint accounts. Your spouse would sign this form to allow you to file on their behalf. Keep in mind that if your spouse has other accounts you are not on that he/she needs to file (i.e. individual accounts), they must file their FBAR separately (including the FBAR for your joint account). The filing deadline is June 30th each year and unlike your Federal Tax Return, no extensions are available.

For those whose lack of filing was non-willful (meaning you truly didn’t know about your reporting obligation), the fine can be $10,000 per violation. If it is determined that you purposely avoided filing, the fine can be $100,000 or 50% of the balance of the account at the time of the violation (whichever is greater).

The IRS has created two amnesty programs to help you get caught up. The program most helpful to expats is the Streamlined Filing Procedures. This program is available to US citizens living in both the US and abroad and all who have failed to file due to lack of knowledge are eligible. To file under this program, you will file the last 3 years of Federal Tax Returns (if you haven’t already done so) as well as the last 6 years of FBARs. The FBAR filings will be done electronically, just as they would if you filed on time. It is extremely important that you get caught up if you are behind in your filings.

About the Author

Umang Thakkar is the founder and owner of IncorpTaxAct. An Enrolled Agent with over 15 years, his expertise includes Taxation, Accounting & Payroll. Contact Umang Thakkar for more information. Visit www.incorptaxact.com, call (770) 682-3119, or email at umang@incorptaxact.com with your questions and comments.