Insurance

Tax Implications of Disability Income
Tax Implications of Disability Income 850 500 smolinlupinco

If you are one of the many Americans who rely on disability benefits, you might be wondering how that income is taxed. The short answer is it depends on the type of disability income you receive and your overall earnings.

Taxable Disability Income

The key factor is who paid for the benefit. When the income is paid to you directly from your employer, it’s taxable like your ordinary salary and subject to federal income tax withholding. Depending on your employer’s disability plan, Social Security taxes may not apply. 

Often, disability income isn’t paid by your employer but rather from an insurance policy that provides the disability coverage. Depending on whether the insurance is paid for by you or by your employer, the tax treatment varies. If your employer paid, the income is taxed the same as if it was paid directly to you by the employer as above. But if you paid for the policy, payments received are usually tax-free.

Even if the insurance is offered through your employer, as long as you pay the premiums instead of them, the benefits are not taxed. However, if your employer pays the premiums and includes that amount as part of your taxable income, your benefits may also be taxable. Ultimately, tax treatment of benefits received depends on tax treatment of paid premiums.

Illustrative example

Scenario 1: 

If your salary is $1,050 a week ($54,600 a year) and your employer pays $15 a week ($780 annually) for disability insurance premiums, your annual taxable income would be $55,380. This total includes your salary of $54,600 plus $780 in disability insurance premiums. 

The insurance premiums are considered paid by you so any disability benefits received under that policy are tax-free.

Scenario 2:

If the disability insurance premiums are paid for by your employer and not included in your annual wages of $54,600, the amount paid is excludable under the rules for employer-provided health and accident plans.

The insurance premiums are considered paid for by your employer and any benefits you receive under the policy, are taxable income as ordinary income.

If there is permanent loss of a body part or function, special tax rules apply. In such cases, employer-paid disability might be tax-free, as long as they aren’t based on time lost from work.

Social Security disability benefits 

Social Security Disability Insurance (SSDI) benefits have their own tax rules. Payments are generally not subject to tax as long as your annual income falls under a certain threshold. 

For individuals if your annual income exceeds $25,000, a portion of your SSDI benefits are taxable. The threshold for married couples is $32,000. 

State Tax Implications

Though federal law treats disability payments as taxable income as outlined above, state tax laws vary. It’s wise to seek out professional support to determine if disability payments are taxed or exempt in your state. 

As you determine your disability coverage needs, remember to consider the tax implications. If you purchase a private policy yourself, the benefits are generally tax free since you are using your after-tax dollars to pay the premium. 

On the other hand, if your employer pays for the benefit, you will lose a portion of the benefits to taxes. Plan ahead and look at all your options. If you think your current coverage will be insufficient to support you should the unthinkable happen, you might consider supplementing any employer benefits with an individual.

Reach out to your Smolin advisor to discuss your disability coverage and how drawing benefits might impact your personal tax situation.

Stressed About Long-Term Care Expenses Here’s What You Should Consider.

Stressed About Long-Term Care Expenses? Here’s What You Should Consider
Stressed About Long-Term Care Expenses? Here’s What You Should Consider 850 500 smolinlupinco

Most people will need some form of long-term care (LTC) at some point in their lives, whether it’s a nursing home or assisted living facility stay.  But the cost of unanticipated long-term care is steep.

LTC expenses generally aren’t covered by traditional health insurance policies like Social Security or Medicare. A preemptive funding plan can help ensure your LTC doesn’t deplete your savings or assets.

Here are some of your options.

Self-funding

If your nest egg is large enough, paying for LTC expenses out-of-pocket may be possible. This approach avoids the high cost of LTC insurance premiums. In addition, if you’re fortunate enough to avoid the need for LTC, you’ll enjoy a savings windfall that you can use for yourself or your family. 

The risk here is that your LTC expenses will be significantly larger than what you anticipated, and it completely erodes your savings.

Any type of asset or investment can be used to self-fund LTC expenses, including:

  • Savings accounts
  • Pension or other retirement funds
  • Stocks
  • Bonds
  • Mutual funds
  • Annuities

Another option is to tap your home equity by selling your house, taking out a home equity loan or line of credit, or obtaining a reverse mortgage.

Both Roth IRAs and Health Savings Accounts (HSAs) are particularly effective for funding LTC expenses. Roth IRAs aren’t subject to minimum distribution requirements, so you can let the funds grow tax-free until they’re needed. 

HSAs, coupled with a high-deductible health insurance plan, allow you to invest pre-tax dollars that you can later use to pay for qualified unreimbursed medical expenses, including LTC. Unused funds may be carried over from year to year, which makes an HSA a powerful savings vehicle.

LTC insurance

LTC insurance policies—which are expensive—cover LTC services that traditional health insurance policies typically don’t cover. 

It can be a challenge to determine if LTC insurance is the best option for you. The right time for you to buy coverage depends on your health, family medical history, and other factors. 

The younger you are, the lower the premiums, but you’ll be paying for insurance coverage when you’re not likely to need it. Many people purchase these policies in their early to mid-60s. Keep in mind that once you reach your mid-70s, LTC coverage may no longer be available to you, or it may become prohibitively expensive.

Hybrid insurance

Hybrid policies combine LTC coverage with traditional life insurance. Often, these policies take the form of a permanent life insurance policy with an LTC rider that provides tax-free accelerated death benefits in the event of certain diagnoses or medical conditions.

Compared to stand-alone LTC policies, hybrid insurance provides less stringent underwriting requirements and guaranteed premiums that won’t increase over time. The downside, of course, is that the more you use LTC benefits, the fewer death benefits available to your heirs.

Potential tax breaks

If you buy LTC insurance, you may be able to deduct a portion of the premiums on your tax return.

If you have questions regarding LTC funding or the tax implications, please don’t hesitate to contact us.

Questions? Smolin can help. 

If you’re concerned about planning for long-term care, don’t put it off any longer. We’re here to help! Contact your Smolin accountant to learn more about your options for LTC expenses so you can rest easy.

Adjustments Social Security Wage Base

Adjustments to Social Security Wage Base Ahead
Adjustments to Social Security Wage Base Ahead 850 500 smolinlupinco

In 2024, the Social Security wage base for employees and self-employed people will increase.

Employees and employers can expect the wage base for computing Social Security tax to rise to $168,600 next year—a significant jump from the wage base of $160,200 in 2023. 

Self-employment income and wages above this amount won’t be subject to Social Security tax.

The basics on the Social Security wage base increase

Employers pay two taxes under the Federal Insurance Contributions Act (FICA): Social Security tax (for Old Age, Survivors, and Disability Insurance) and Medicare tax (for Hospital Insurance).

The amount of compensation subject to the Social Security tax is capped at a maximum, but there is no maximum amount for the Medicare tax. 

In 2024, employers should expect a FICA tax rate of 7.65%. This includes 6.2% for Social Security, with the remaining 1.45% going to Medicare. 

What is changing in 2024

In 2024, employees will pay a total of:

  • 6.2% Social Security tax on the first $168,600 of wages (6.2% x $168,600 makes the maximum tax $10,453.20)
  • 1.45% Medicare tax on the first $200,000 of wages ($250,000 for joint returns, $125,000 for married taxpayers filing separate returns)
  • 2.35% Medicare tax (regular 1.45% Medicare tax plus 0.9% additional Medicare tax) on all wages in excess of $200,000 ($250,000 for joint returns, $125,000 for married taxpayers filing separate returns)

In 2024, self-employed people pay the following rates in self-employment tax:

  • 12.4% Social Security tax on the first $168,600 of self-employment income, for a maximum tax of $20,906.40 (12.4% x $168,600)
  • 2.90% Medicare tax on the first $200,000 of self-employment income ($250,000 of combined self-employment income on a joint return, $125,000 on a return of a married individual filing separately)
  • 3.8% (2.90% regular Medicare tax plus 0.9% additional Medicare tax) on all self-employment income in excess of $200,000 ($250,000 of combined self-employment income on a joint return, $125,000 for married taxpayers filing separate returns)

What to know if you have more than one employer

Many people worked more than one job to make ends meet in 2023. If your employees are among them, you might have questions. 

Employees with a second job will have taxes withheld from two different employers. They may not ask you to stop withholding Social Security tax once they reach the wage base threshold. Even when an individual’s combined withholding exceeds the maximum amount of Social Security taxes that can be imposed for the year, each employer must withhold Social Security taxes. 

For any excess withheld, the employee should see a credit on their tax return.

Questions? Smolin can help.

If you have questions about payroll tax filing or payments, contact the helpful team at Smolin. We’ll help ensure you stay in compliance while achieving the most favorable tax rate possible.

could you benefit health savings account

Could You Benefit from a Health Savings Account?
Could You Benefit from a Health Savings Account? 850 500 smolinlupinco

The cost of healthcare is rising. As a result, many people are on the hunt for a more cost-effective way to pay for their medical bills. 

If you’re eligible, a Health Savings Account (HSA) may offer a way to set aside funds for a future medical “rainy day” while also enjoying tax benefits, like: 

  • Withdrawals from the HSA to cover qualified medical expenses aren’t taxed
  • Earnings on the funds in the HSA aren’t taxed
  • Contributions made by your employer aren’t taxed to you
  • Contributions made by you are deductible within certain limits 

Who is eligible for an HSA? 

HSAs may be established by, or on behalf of, any eligible individual.

If you’re covered by a “high deductible health plan,” you may be eligible for an HSA. In 2023, a health plan with an annual deductible of at least $1,500 for self-only coverage or at least $3,000 for family coverage may be considered a high-deductible plan.

In 2024, these numbers will increase to $1,600 for self-only coverage and $3,200 for family coverage.

Deductible contributions are limited to $3,850 for self-only coverage in 2023 and $7,750 for family coverage. (Again, these numbers are set to increase in 2024 to $4,150 for self-only coverage and $8,300 for family coverage.)

Other than for premiums, annual out-of-pocket expenses required to be paid can’t exceed $7,500 for self-only coverage or $15,000 for family coverage in 2023. In 2024, these numbers will climb to $8,050 and $16,100, respectively. 

If an individual (or their covered spouse) is an eligible HSA contributor and turns 55 before the end of the year, they may make additional “catch-up” contributions for 2023 and 2024 up to $1,000 per year.  

Limits on deductions

Deductible contributions aren’t governed by the annual deductible of the high deductible health plan. You can deduct contributions to an HSA for the year up to the total of your monthly limitation for the months you were eligible. 

The monthly limitation on deductible contributions for someone with self-only coverage is 1/12 of $3,850 (or just over $320) in 2023. For an individual with family coverage, the monthly limitation on deductible contributions is 1/12 of $7,750 (or just under $646). 

At tax time, anyone eligible on the first day of the last month of the tax year will be treated as eligible for the entire year. This is relevant to computing the annual HSA contribution.

That said, if the individual is enrolled in Medicare, they’ll no longer be eligible per the HSA rules and can no longer make HSA contributions. 

Taxpayers may withdraw funds from an IRA and transfer them tax-free to an HSA—but only once. The amount allowed varies, depending on the maximum deductible HSA contribution for the type of coverage that is in effect at the time of transfer. 

The amount moved between the accounts will be excluded from gross income and thus won’t be subject to the early withdrawal penalty of 10%. 

HSA Distributions

Distributions from your HSA account that you use to pay for qualified medical expenses of those covered aren’t taxed. Typically, the qualified medical expenses in question would qualify for the medical expense itemized deduction.

However, funds withdrawn from your HSA for other reasons are taxed. Unless the person covered by the HSA is over 65, disabled, or dies, they will also be subject to an extra 20% tax. 

Questions? Smolin can help.

HSAs offer a very flexible option for providing health care coverage. However, as you can see, the rules can be quite complicated. 

If you have questions about tax rules regarding your HSA or the most favorable way to manage the funds within it, please reach out. The friendly accountants at Smolin are always happy to walk you through your options and help you determine the most tax favorable way to manage your money. 

Refinance or Purchase up to 97% with No Mortgage Insurance
Refinance or Purchase up to 97% with No Mortgage Insurance 150 150 smolinlupinco

 

Home-Funding-Corp

“I will prepare, and someday my change will come.” – Abraham Lincoln, 16th President of the United States

If you currently have an FHA Loan or Conventional Loan with mortgage insurance or are looking to buy a home with less than a 20% down payment (which normally requires mortgage insurance), please call me to discuss our no mortgage insurance programs for loan to value’s up to 97%.

If you would like to learn more, please email or call me at your earliest convenience.

As a Mortgage and Reverse Mortgage expert with almost 11 years in the industry, I pride myself on being a true consultant to guide and educate homeowners accordingly. I prove straight-forward and easy to understand information to help my clients make an informed decision on the best option for them.

Please contact me if you have any questions about a reverse mortgage or mortgages in general. I am licensed in NJ, NY, CT, PA and FL and would be happy to assist you or anyone you know.

Thank you!

Marc C. Demetriou, CLU, ChFC
Branch Manager/Mortgage Consultant
Residential Home Funding Corp.
Phone: 973-492-0117 | Fax: 973-492-1108 | Cell: 201-286-3386

What Every CPA Needs to Know About Captives
What Every CPA Needs to Know About Captives 150 150 smolinlupinco

captive insurance

Written by Michael A. DiMayo, CFP, CLU, ChFC & Kevin E. Myers, CPA, M.S. Taxation

Principals of Oxford Risk Management Group, Michael A. DiMayo, CFP, CLU, ChFC and Kevin E. Myers, CPA, MS, explain the key industry considerations for CPAs

Anyone interested in captives is probably aware by now that captive insurance companies made the IRS “Dirty Dozen” list posted last year for the 2015 filing season. The IRS noted that captives are “a legitimate tax structure involving certain small or micro captive insurance companies”. It is important to understand and to become familiar with the reasons why captives made this list in order to partner with a reputable and compliant captive manager who can help you to form a legitimate, bonafide insurance company, avoiding “Dirty Dozen” status. Such a captive manager will help you to form and manage a captive insurance company to fit within the guidelines to qualify as a legitimate tax structure, rather than to find yourself within an abusive structure and under IRS scrutiny.

When IRC § 831(b) was enacted, it was intended to allow small- to mid-sized companies to quickly and effectively build up a sizeable amount of capital to help pay claims. Section 831(b) allows a company to pay income tax only on the captive investment income, provided gross annual premiums are $1.2m or less. The IRS has become suspicious that some 831(b) captives are currently being formed predominantly for non-insurance reasons (i.e., solely to save money on taxes), hence their place on the “Dirty Dozen” list. This has resulted in the IRS conducting “promoter” audits, which target potentially abusive arrangements that pay little attention to the insurance aspects behind the transaction.

Forming a captive insurance company does not guarantee you an audit by the IRS. The IRS is currently targeting promoters who are abusing the legitimate structure of captives by promoting the tax benefits of captives and ignoring the risk management function. These abusive structures typically lack business purpose, contain poorly and carelessly drafted policies, with little to no underwriting, feasibility study or independent third-party risk management review, are often written for improbable risks (such as hurricane insurance in Nebraska) and contain pooling arrangements designed to generate few, if any, claims. By engaging with a compliant captive manager, a captive can be properly structured with the necessary documentation of business purpose and managed as a true insurance company to support your case in the event a random IRS audit does occur.

Insurance Risk

Areas which the IRS seems to consistently address during its examinations include insurance risk and the common notions of insurance, risk shifting, risk distribution and business purpose. IRC § 816(a) defines an insurance company as a company in which more than half of the business is through the issuance of insurance contracts or the reinsuring of risks underwritten by insurance companies. “Insurance” is not specifically defined in the Internal Revenue Code so case law typically sets the precedent to define the common notion of insurance. Two factors required to be present to be considered insurance in the commonly accepted sense are risk shifting and risk distribution. In addition, the company must look and act like a true insurance company. This is typically determined by ensuring the company is organized and regulated by a state regulatory authority, contains valid policies with reasonably priced premiums, payment of claims and is adequately capitalized.

Business Purpose

An initial feasibility analysis should be performed to ensure a captive insurance program is appropriate for the operating company and an adequate underwriting process should be in place to identify the appropriate risks for the company. Through the underwriting process, the operating company should thoroughly identify and evaluate the risks that it faces within its industry and should make a management decision whether it wants to transfer or retain those risks. This decision should be made by managers who are knowledgeable about the organization’s operations and risk profile.

Risk Management Objective

Every effort should be made to conduct the undertaking as part of an overall risk management program for the insured enterprise. This process should include a thorough review of all existing policies in the client’s property and casualty portfolio and, whenever possible, consultation with the incumbent property and casualty insurance broker familiar with the client’s program. It is also helpful to seek review from an independent risk management consultant to obtain further validation of the various coverages to be potentially included in a policy issued by the captive.

Premium Pricing

Insurable risks should be reasonably priced, using an appropriate actuarial method. It is vital to obtain accurate pricing through independent, third-party, credentialed actuaries who use pricing methodologies that are accepted within their industry, with results confirmed via objective, peer-reviewed scrutiny. It is critically important to work with a reputable captive provider who can provide adequate underwriting and actuarial substantiation to support the pricing and coverages offered under the captive insurance policy. The captive manager should also maintain adequate documentation and notes that support the pricing of the captive and should have this documentation readily available in the event of an audit.

Captives for Estate Planning

The IRS is currently concerned with captives formed for estate planning purposes. The IRS alleges abuse in two areas in connection with 831(b) captives and estate planning. One area is purchasing life insurance with captive assets, allowing a business owner to indirectly purchase life insurance with pre-tax dollars. The second area is owning the captive via an irrevocable trust outside of the estate of the insured business owner, allowing a business owner to transfer wealth through the insurance company surplus to avoid estate tax. The captive industry is expecting further guidance from the IRS in the near future regarding these two areas.

Recent Tax Court Cases

During 2015, the Tax Court ruled in favor of the taxpayer, RVI Guaranty, and held that certain residual value insurance contracts, which insured against a market drop in the value of certain leased property, were insurance for federal income tax purposes. The Tax Court found the policies satisfied all major tax requirements to be considered insurance: risk shifting, risk distribution, and the common notion of insurance. The court concluded that while the residual value insurance policies are not the typical insurance policies, they do constitute insurance contracts for tax purposes. This case is notable to the captive insurance industry since Tax Court cases that clarify what is insurance for income tax purposes are uncommon. This case provides significant precedential value to the captive insurance industry.

Current Pending Legislation

During early 2015, the Senate Finance Committee introduced a bill to amend the Internal Revenue Code Section 831(b) to increase the tax-exempt premium limitation from $1.2m to $2.2m, with inflation adjustments for future years. An earlier version of the bill limited the percentage of premium from a single policyholder to 20%, but this version of the bill was dismissed. The current bill requires the Department of the Treasury to submit to the Senate Finance Committee a report on the abuse of captive insurance companies for estate planning purposes and to include legislative recommendations for addressing such abuses. This report is due on February 11, 2016. The current speculation within the captive industry suggests changes may be in the pipeline with regards to trust ownership of captives and disallowing life insurance to be held inside a captive.

Observations

In light of recent Tax Court guidance, clients are well advised to seek input from independent advisors throughout the risk management review process. Selecting an appropriate domicile for the captive is also of paramount importance as taxing authorities will tend to favor an arrangement which has been scrutinized and been subject to oversight by reputable insurance regulators. It is also crucial for the independent auditors’ report to reflect consensus in the opinion that the structure is indeed believed to operate as a legitimate insurance entity in all respects. In conclusion, it is imperative to partner with a reputable, compliant captive manager to help form and maintain a legitimate captive, as well as to provide ongoing documentation retention in the event of an IRS audit.

Michael A. DiMayo is co-founder of Oxford Risk Management Group and Affiliates, with management responsibilities including marketing, strategic relationship development and best practice initiatives. Mike has extensive experience in all aspects of the captive insurance industry with emphasis on design, implementation, ongoing management and regulatory oversight for Oxford’s captive clients.

Kevin E. Myers is co-founder of Oxford Risk Management Group and Affiliates, and is the internal Certified Public Accountant and Tax Advisor for Oxford Risk Management Group and Affiliates. Kevin has extensive experience in structuring captive insurance companies with respect to Internal Revenue Code Section 831(b) and related tax compliance and research for corporate, individual and non-profit clients.

 

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