Under prior law, a declaration of homestead protected up to $500,000 of equity in your primary residence.  This protection was available only if the homeowner actually filed a declaration of homestead at the registry of deeds.  Prior law contained several confusing provisions that sometimes disadvantaged homeowners.

The new Homestead Legislation goes into effect on March 16th, 2011.  Under the new law every Massachusetts homeowner will automatically receive $125,000 of creditor protection for the equity in their home, regardless of whether a homestead declaration is filed.  Homeowners who file a declaration of homestead will continue to receive $500,000 of creditor protection.  Moreover, the new rules for filing a homestead declaration clear up some confusing and ambiguous provisions of the prior law.  The new law makes clear the following:

There are many benefits to owning your home in trust (i.e. avoidance of probate on your death or disability, avoidance of the Medicaid recovery lien in the event you require assistance for the payment of nursing home expenses, etc.).  Under prior law, it was unclear whether one could hold title to his or her principal residence and still be able to claim homestead protection for the house.  The new law makes it clear that a beneficiary of a trust can secure homestead protection.  Married couples with equity in their home in excess of $500,000 may still want to hold title to their principal residence as tenants by the entirety, so please contact us before transferring title of your home to a trust.

Under prior law, you had to be very careful when refinancing your home.  Many homeowners unwittingly revoked their homestead upon the refinancing.  The new law makes clear that a mortgage refinancing will not terminate a previously filed homestead.  Further, transfers between spouses and co-owners do not rescind a previously filed homestead.

Perhaps one of the more important questions that is resolved by the new law concerns the proceeds from the sale or taking of a home or the insurance proceeds paid to the homeowner from a covered loss.  Under prior law there was a question as to whether homestead protection extended to the proceeds from a sale or insurance claim.  The new law makes clear that homestead protection applies to the proceeds for a period of time following the sale, taking or casualty.  In the case of where the home is sold or taken, whether voluntarily or involuntarily, the proceeds received on account of any such sale shall be entitled to protection for a period ending on the date on which the person benefited by the homestead either acquires another home that the person intends to occupy as a principal residence or 1 year after the date on which the sale or taking occurred, whichever first occurs.  In the event of a fire or other casualty, the proceeds received on account of any such casualty shall be entitled to protection for a period ending on the date upon which the reconstruction or repair to the home is completed or the date on which the person benefited by the homestead acquires another home that he or she intends to occupy as a principal residence; or 2 years after the date of the fire or other casualty, whichever first occurs.

Every client should file a declaration of  homestead. 

If you have any questions or need any assistance please call us.

This update is designed for general information only. The information presented should not be construed to be formal legal advice nor the formation of a lawyer/client relationship. For further information please contact one of our attorneys. Information contained herein has been abridged from laws, court decisions and administrative rulings, and should not be construed as legal advice or legal opinions on specific facts.  The enclosed material is provided for education and information purposes by MacLean Holloway Doherty Ardiff & Morse, P.C. to clients and others who may be interested in the subject matter.

Re: 2010 Tax Relief Act: General Information

After weeks of intense negotiations between the White House and Congressional leaders, Congress passed, and President Obama signed into law, a two-year extension of soon-to-have-expired Bush-era tax cuts, including extension of current individual tax rates and capital gains/dividend tax rates. Called the most sweeping tax law in a decade, the Tax Relief, Unemployment Insurance Reauthorization and Job Creation Act of 2010 ( H.R. 4853), was approved by the Senate on December 15, 2010 and by the House on December 16, 2010. The new law is, however, much more than just an extension of existing tax rates. The new law also provides a temporary across-the-board payroll tax cut for wage earners, a retroactive AMT “patch,” estate tax relief, education and energy incentives and many valuable incentives for businesses, including 100 percent bonus depreciation and extension of many temporary tax breaks. This letter highlights many of the key incentives in the new law. As always, please call or email our office for more details.

Individuals

Tax rates. Among the most valuable tax breaks for individuals in the new law are a two-year extension of individual income tax rate reductions and a payroll tax cut. Both will deliver immediate tax savings starting in January 2011. The new law keeps in place the current 10, 15, 25, 28, 33, and 35 percent individual tax rates for two years, through December 31, 2012. If Congress had not passed this extension, the individual tax rates would have jumped significantly for all income levels. The new law also extends full repeal of the limitation on itemized deductions and the personal exemption phaseout for two years. Married couples filing jointly will also benefit from extended provisions designed to ameliorate the so-called marriage penalty.

Payroll tax cut. The payroll tax cut is designed to get more money into workers’ paychecks and to encourage consumer spending. Effective for calendar year 2011, the employee share of the OASDI portion of Social Security taxes is reduced from 6.2 percent to 4.2 percent on wages, up to the taxable wage base of $106,800. Self-employed individuals also benefit. Self-employed individuals will pay 10.4 percent on self-employment income up to the wage base (reduced from the normal 12.4 percent rate). The payroll cut replaces the Making Work Pay credit, which reduced income tax withholding for wage earners in 2009 and 2010. The payroll tax cut, unlike the credit, does not exclude some individuals based on their earnings and has the potential of significantly higher benefits (with a maximum payroll tax reduction of $2,136 on wages at or above the $106,800 level as compared to a maximum available $800 Making Work Pay credit for married couples filing jointly ($400 for single individuals)).

Capital gains/dividends. The new law also extends reduced capital gains and dividend tax rates. Like the individual rate cuts, the extended capital gains and dividend tax rates are temporary and will expire after 2012 unless Congress intervenes. In the meantime, however, for two years (2011 and 2012), individuals in the 10 and 15 percent rate brackets can take advantage of a zero percent capital gains and dividend tax rate. Individuals in higher rate brackets will enjoy a maximum tax rate of 15 percent on capital gains, as opposed to a 20 percent rate that had been scheduled to replace it and with dividends taxed at income tax rates. Only net capital gains and qualified dividends are eligible for this special tax treatment. If you have any questions about your capital gain/dividend income, please contact our office.

AMT patch. More and more individuals are finding themselves falling under the alternative minimum tax (AMT) because of the way the AMT is structured. To prevent the AMT from encroaching on middle income taxpayers, Congress has routinely enacted so-called “AMT patches.” The new law continues this trend by providing higher exemption amounts and other targeted relief.

More incentives. Along with all these incentives, the new law extends many popular but temporary tax breaks. Extended for 2011 and 2012 are:

• $1,000 child tax credit
• Enhanced earned income tax credit
• Adoption credit with modifications
• Dependent care credit
• Deduction for certain mortgage insurance premiums

The new law also retroactively extends some other valuable tax incentives for individuals that expired at the end of 2009. These incentives are extended for 2010 and 2011 and include:

• State and local sales tax deduction
• Teacher’s classroom expense deduction
• Charitable contributions of IRA proceeds
• Charitable contributions of appreciated property for conservation purposes

Businesses

Bonus depreciation. Bonus depreciation is intended to help businesses depreciate purchases faster against their taxable income, thereby encouraging businesses to invest in more equipment. Bonus depreciation allows businesses to recover the costs of certain capital expenditures more quickly than under ordinary tax depreciation schedules.  Businesses can use bonus depreciation to immediately write off a percentage of the cost of depreciable property.  The new law makes 100 percent bonus depreciation available for qualified investments made after September 8, 2010 and before January 1, 2012. It also continues bonus depreciation, albeit at 50 percent, on property placed in service after December 31, 2011 and before January 1, 2013. There are special rules for certain longer-lived and transportation property. Additionally, certain taxpayers may claim refundable credits in lieu of bonus depreciation. 100 percent bonus depreciation is a valuable tax break and businesses have only a short window to take advantage of it. Please contact our office so we can help you plan for 100 bonus depreciation.

Code Sec. 179 expensing. Along with bonus depreciation, the new law also provides for enhanced Code Sec. 179 expensing for 2012. Under current law, the Code Sec. 179 dollar and investment limits are $500,000 and $2 million, respectively, for tax years beginning in 2010 and 2011. The new law provides for a $125,000 dollar limit (indexed for inflation) and a $500,000 investment limit (indexed for inflation) for tax years beginning in 2012 (but not after).

Research credit. Many businesses urged Congress to make the research credit permanent after the credit expired at the end of 2009. While this proposal enjoyed significant support in Congress, its cost was deemed prohibitive. Instead, Congress extended the research tax credit for two years, for 2010 and 2011.

More incentives. Other valuable business incentives in the new law include extensions of:

• 100 percent exclusion of gain from qualified small business stock
• Transit benefits parity
• Work Opportunity Tax Credit (with modifications)
• New Markets Tax Credit (with modifications)
• Differential wage credit
• Brownfields remediation
• Active financing exception/look-through treatment for CFCs
• Tax incentives for empowerment zones
• Special rules for charitable deductions by corporations and other businesses
• And more

Energy

In 2010, Congress had been expected to pass comprehensive energy legislation including new and enhanced tax incentives. For a number of reasons, an energy bill did not pass. However, the new law extends some energy tax breaks for businesses. The new law also extends, but modifies, a popular energy tax break for individuals.

Businesses. For businesses, one of the most valuable energy incentives is the Code Sec. 1603 cash grant in lieu of a tax credit program. This incentive encourages the development of alternative energy sources, such as wind energy. Other business energy incentives extended by the new law include excise tax and other credits for alternative fuels, percentage depletion for oil and gas from marginal wells, and other targeted incentives.

Individuals. Individuals who made energy efficiency improvements to their homes in 2009 or 2010 are likely familiar with the Code Sec. 25C energy tax credit. This credit rewards individuals who install energy efficient furnaces or add insulation, or make other improvements to reduce energy usage. The new law extends the credit through 2011 but reduces some of its benefits. Although 2010 is soon over, there may still be time to take advantage of the more generous credit. Please contact our office.

Education

The Tax Code includes a number of incentives to encourage individuals to save for education expenses. In 2009, Congress enhanced the Hope education credit and renamed it the American Opportunity Tax Credit (AOTC). Like many other incentives, the AOTC was temporary. The new law extends it for two years, through 2012. Along with the AOTC, the new law also extends:

• Higher education tuition deduction
• Student loan interest deduction
• Exclusion for employer-provided educational assistance
• Enhanced Coverdell education savings accounts
• Special rules for certain scholarships

Estate and gift taxes

The federal estate tax, along with federal gift and generation skipping transfer (GST) taxes, was significantly overhauled in 2001. At that time, Congress set in motion a gradual reduction of the estate tax until abolishing it for 2010. Under budget rules, however, those changes could extend for only 10 years; starting in 2011, the estate tax had been scheduled to revert to its pre-2001 levels of 55 percent and a $1 million exclusion.

Estate tax. The new law revives the estate tax, but with a maximum estate tax rate of 35 percent with a $5 million exclusion. The revived estate tax is in place for decedents dying in 2011 and 2012. The new law gives estates the option to elect to apply the estate tax at the 35 percent/$5 million levels for 2010 or to apply carryover basis for 2010. The new law also allows “portability” between spouses of the maximum exclusion and extends some other taxpayer-friendly provisions originally enacted in 2001.

This far-reaching multi-billion dollar tax package affects almost every taxpayer. Keep in mind that many of its provisions are temporary. It is important to plan early to maximize your tax savings. Please contact our office if you have any questions.

Pre-Foreclosure Notice Requirements.

The new bill, S 2407, (Chapter 258 of the Acts of 2010) temporarily revises G.L. c. 244, §35A (the revisions expire on December 31, 2015).  The law now requires that lenders send a 150-day right-to-cure notice rather than a 90-day notice in any case where the property sought to be foreclosed is the borrower’s principal residence and is collateral for a residential loan.  The notice requirement also only applies to one to four family properties where the property is occupied, or to be occupied, in whole or in part by the borrower.

Pursuant to the new law, a lender can opt to send a 90-day notice instead of a 150-day notice if it can certify that it has engaged in a good faith effort to negotiate a commercially reasonable alternative to foreclosure.  In order to demonstrate “good faith” within the meaning of the statute, the lender must show that it considered the borrowers current circumstances by reviewing a number of factors, including the borrower’s income, debts and expenses; a comparison of the net present value of payments under a modified loan versus the anticipated net recovery from a foreclosure; and other interests of the lender.  Documentation of the “good faith” analysis must be provided to the borrower at least 10 days before a meeting, either by telephone or in person, between the lender’s representatives and the borrower or the borrower’s representatives.

If the parties fail to reach a mutually acceptable alternative to foreclosure, the lender may then proceed with a 90-day notice.  The lender must file an affidavit with the Land Court, with a copy to the borrower, evidencing in detail its compliance with the statutory good faith requirements.

If the borrower fails to respond within 30 days to a written offer to negotiate loss mitigation options, the lender may use a 90-day notice instead of a 150-day notice.

The 150-day right-to-cure notice is required to be given to the borrower once during any three-year period, so that if a borrower reinstates and then defaults on the mortgage again, the notice requirements for a subsequent breach within the three year period would be governed by the terms of the mortgage contract rather than the statute.

In addition to the change in timing, the new statute also creates additional disclosure requirements within the body of the notice.  Most notably, the letter must now include the following declaration:  “This is an important notice concerning your right to live in your home. Have it translated at once.” The statute requires that the lender include the declaration in the language the lender has regularly used in communications with the borrower.

The statute now also requires that the notice be sent by regular and certified mail to the borrower’s mailing address. The previous version of the statute did not specify mailing requirements.

Tenant Protections in Foreclosed Properties.

In addition to the changes to the statute regarding pre-foreclosure notices, S 2407 also created G.L.c. 186A, “Tenant Protections in Foreclosed Properties.” The new chapter places significant new limitations and obligations on lenders that purchase properties at their own foreclosure auctions.

The new law restricts lender-owners from evicting tenants occupying property pursuant to a bona fide lease or tenancy at will without having just cause or a binding purchase and sale agreement to sell the property to a third party. Within 30 days after a foreclosure sale, the lender-owner must post a notice giving contact information for the lender-owner, building manager or other representative as well as the address to which rent or use and occupancy must be sent.

After the notice is posted, the lender-owner can evict a tenant for the following just cause reasons: committing a nuisance, causing damage, interfering with the quiet enjoyment of other tenants, using or allowing the unit to be used for illegal purposes or refusing reasonable access to the lender-owner. The lender-owner must wait 30 days after the notice is posted before evicting a tenant for the following just cause reasons: failure to pay rent or use and occupancy, materially violating an obligation of the tenancy and failing to cure the violation after 30 days’ written notice or refusal to renew a written lease after expiration.

The law also prevents eviction, even where just cause exists, if the lender-owner fails to deliver to each tenant a written disclosure of the tenant’s right to a court hearing before eviction. This notice must be delivered at the same time as the contact information is posted. The notice must also be mailed by first-class mail to each unit and slid under the door of each unit.

In the event that the lender-owner believes the amount of rent or use and occupancy being paid by the tenant is unreasonable, the lender-owner must bring a claim in District, Superior or Housing Court seeking to establish a new, reasonable use and occupancy rate. The statute provides a presumption of reasonableness for any rental amount set forth in a bona fide lease.

Violation of the provisions of G.L.c. 186A is punishable by a fine of not less than $5,000.

The provisions pertaining to the 150-day right-to-cure notices and post-foreclosure tenants’ rights took effect immediately took effect on August 7, 2010 and continue in effect until December 15, 2015.

The Massachusetts Division of Banks interprets the new law as applying only to those loan defaults where a right to cure notice was sent after the governor signed the bill.  Thus, if a lender sent a 90-day notice on August, 2010 in compliance with the statute as it then existed, that lender would be entitled to initiate foreclosure after the 90-day period expired.

In addition to the many non-tax provisions related to small business lending and access to capital, tax provisions in the legislation include a retroactive extension of bonus depreciation, a doubling of the Code Sec. 179 expense limit, a five-year general business credit carry-back, a 100 percent exclusion for qualified investments in small business, an increase in start-up business expensing, and a five-year holding period for built-in gains of S Corporations. Other provisions address the tax treatment of business-provided cell phones, the penalty for failure to report a listed transaction, Roth accounts in 401(k), 403(b) and 457(b) plans, and the treatment of nonqualified annuities.  Revenue offsets included in the legislation remove crude tall oil from eligibility for the cellulosic bio-fuels credit, increase the penalties for failure to file information returns, expanded 1099 reporting of real estate rental payments, allow earlier IRS levies on federal contractor payments, and address the sourcing rules for guarantee fees.

Bonus Depreciation

The new law extends, through December 31, 2010, 50-percent first-year bonus depreciation, which had expired at the end of 2009. The extension is retroactive to January 1, 2010. The new law also extends, through 2011, the additional year of bonus depreciation allowed for property with a recovery period of 10 years or longer, and for transportation property (tangible personal property used to transport people or property).

IMPACT. Bonus depreciation is not limited by the size of the business, unlike practical access to Code Sec. 179 “small business” expensing. The bonus depreciation provision is by far the most expensive single tax break in the bill, weighing in at $5.4 billion over 10 years, but carrying an initial cost of $29.5 billion in its first two years because of accelerated depreciation that would otherwise be deducted in later years. Bonus depreciation under the new law carries a very short window of opportunity — qualifying equipment must be purchased and placed into service on or before December 31, 2010.

Long-term contracts. The new law also decouples bonus depreciation from allocation of contract costs under the percentage of completion accounting method rules for assets with a depreciable life of seven years or less.

IMPACT. This change permits contractors to benefit from bonus depreciation even if they do not complete their contracts within the same year.

Code Sec. 280F. The limitation under Code Sec. 280F on the amount of depreciation deductions allowed with respect to certain passenger automobiles is increased in the first year by $8,000 for automobiles that qualify and for which the taxpayer does not elect out of the additional first-year deduction. For 2010, therefore, maximum first year depreciation for passenger automobiles is $11,060 ($11,160 for light trucks).

Code Sec. 179 Expensing

Eligible taxpayers may elect to claim a Code Sec. 179 expense deduction on the purchase price of qualified Code Sec. 179 property. Under current law, the maximum deduction for tax years beginning in 2010 is $250,000. The dollar limit is reduced by the amount by which the cost of qualifying property placed in service during the tax year exceeds $800,000. For 2011, the expensing limit had been scheduled to revert to prior levels of $25,000 and $200,000, respectively, both not indexed for inflation. The new law increases the maximum deduction to $500,000 and the investment limit to $2 million for tax years beginning in 2010 and 2011.

IMPACT. The new law increases in the qualifying property cap from $800,000 to $2 million effectively increases the availability of Code Sec. 179 expensing to many more businesses. Under the new law, the Code Sec. 179 expensing deduction does not phase out completely until the cost of eligible property exceeds $2.5 million. Perhaps even more important, however, the nontax provisions in H.R. 5297 will serve to open up the credit markets needed by small businesses to find the capital to buy equipment that qualifies for either enhanced Code Sec. 179 expensing or bonus depreciation under the bill.

Qualified real property. The new law also temporarily expands the definition of qualified Code Sec. 179 property to include qualified real property, which is defined as qualified leasehold improvement property, qualified restaurant property and qualified retail improvement property. However, taxpayers are limited to expensing up to $250,000 of the total cost of these properties. The new law provides that the dollar cap will apply to the aggregate cost of qualified real property. Further, the bill provides for limitations on the carryover of qualified real property deductions.

COMMENT. A taxpayer may elect to exclude real property from the definition of Code Sec. 179 property. That election might prove useful to certain taxpayers if the regular $2 million eligible property cap is otherwise close to being reached.

COMMENT. The new law continues to treat computer software as qualified Code Sec. 179 property that is subject to full Code Sec. 179 expensing otherwise reserved for tangible personal property.

COMMENT. President Obama had proposed to end what has become the frequent extensions of increased Code Sec. 179 expensing by permanently raising the expensing amount to $125,000 and the phase-out threshold to $500,000 for tax years beginning after 2010 (both amounts indexed for inflation). Now that Code Sec. 179 expensing has been raised for 2011 as well as 2010, it is unlikely that Congress will act on a permanent extension of increased Code Sec. 179 expensing before next year.

S Corp Built-In Gain Period

A C corporation that converts to an S corporation generally must hold any appreciated assets for 10 years following the conversion or, if disposed of earlier, pay tax on the appreciation at the highest corporate level rate (currently 35 percent). The American Recovery and Reinvestment Act of 2009 (2009 Recovery Act) temporarily shortened the usual 10-year holding period to seven years for dispositions in tax years beginning in 2009 and 2010. The new law further shortens the holding period to five years in the case of dispositions in any tax year beginning in 2011, if the fifth year in the recognition period precedes the tax year beginning in 2011.

IMPACT. The built-in gains tax prevents C corporations from avoiding corporate level tax on the disposition of appreciated assets it acquired while a C corporation by first converting to S corporation status. The new law offers S corporations more flexibility in shedding historic C corporation assets that either no longer suit business needs or can provide additional capital through their sale to better assure the S corporation’s survival during the economic downturn.

COMMENT. The five-year period in the new law refers to five calendar years from the first day of the first tax year for which the corporation was an S corporation.

Cell Phones

The new law removes cell phones and similar personal communication devices from their current classification as listed property under Code Sec. 280F, thereby lifting the strict substantiation requirements of use and the additional limits placed on depreciation deductions. In addition, the provision enables the fair market value of personal use of a cell phone or other similar device provided to an employee predominantly for business purposes to be excluded from gross income.

IMPACT. This “listed property” designation was imposed on cell phones when they were novel, expensive, and not widely owned. Today, not only are cell phones widely available and used, but also necessary for doing business. IRS Commissioner Douglas Shulman announced in January 2010 that the IRS would call a temporary halt to enforcing strict substantiation on cell phone use until Congress made good on its leadership’s promise to pass remedial legislation. The new law’s relief applies to tax years beginning after December 31, 2009.

SMALL BUSINESS PROVISIONS

The new law targets a variety of tax incentives exclusively to small businesses, including extended carryback for the general business credit, enhanced AMT offset, and relief from Code Sec. 6707A penalties.

Extended Carryback Of General Business Credit

The new law extends the carryback period for eligible small business credits to five years. Eligible small business credits are the sum of the general business credits determined for the tax year with respect to an eligible small business. The extended carryback provision is effective for credits determined in the taxpayer’s first tax year beginning after December 31, 2009.

IMPACT. An eligible small business for purposes of the enhanced general business credit is a corporation whose stock is not publicly traded, a partnership or a sole proprietorship. Additionally, the average annual gross receipts of the corporation, partnership, or sole proprietorship for the prior three tax year periods cannot exceed $50 million.

AMT offset. Under the new law, an eligible small business credit may offset both regular and AMT liability.

Qualified Small Business Stock

The 2009 Recovery Act temporarily increased the Code Sec. 1202 percentage exclusion for qualified small business stock sold by an individual from 50 percent to 75 percent for stock acquired after February 17, 2009 and before January 1, 2011, and held for more than five years. The new law raises the exclusion to 100 percent for gain on stock acquired after the date of enactment of the bill and before January 1, 2011. Under the new law, the excluded gain will not count as an AMT preference item but the five-year holding period continues to apply.

IMPACT. With both the income tax and capital gains rates anticipated to rise in the future, the benefits of an investment in Section 1202 stock become even more substantial as acquired shares are sold in 2015 or later under the five-year holding period rule. Since stock is the key to this benefit, the corporate form of doing business may have a leg up on unincorporated entities in this regard.

PLANNING NOTE. To be eligible for the exclusion both prior to and under the bill, the individual must generally acquire the small business stock at its original issue (directly or through an underwriter) for money, for property other than stock, or as compensation for services. When the stock is issued, the aggregate gross assets of the issuing corporation may not exceed $50 million. In addition, the corporation also must use at least 80 percent of the value of its assets in the active conduct of one or more qualified trades or businesses. The stock or eligible replacement must be held for at least five years.

COMMENT. Under Code Sec. 1202 limitations already in place, the amount of gain eligible for the 100 percent exclusion by an individual with respect to any corporation is capped at the greater of (1) 10 times the taxpayer’s basis in the stock or (2) $10 million.

Code Sec. 6707A Penalty Relief

Taxpayers failing to disclose participation in certain tax shelters are liable for penalties under Code Sec. 6707A. For certain violations, those penalties had netted minimum dollar amounts that, in practice, were draconian to certain small businesses as compared to any claimed tax benefits. The new law provides a general rule that a participant in a reportable transaction that fails to disclose the transaction is subject to a penalty equal to 75 percent of the decrease in tax shown on the return as a result of the transaction or which would have resulted if the transaction was respected for federal tax purposes. Regardless of the amount determined under the general rule, the new law specifies that the penalty may not exceed certain maximum amounts ($10,000 for an individual taxpayer failing to disclose a reportable transaction; $50,000 for all other taxpayers, $100,000 for an individual taxpayer failing to disclose a listed transaction; and $200,000 for all other taxpayers). The new law also provides a minimum penalty of $5,000 for an individual taxpayer failing to disclose a reportable transaction or a listed transaction. The minimum penalty for all other taxpayers would be $10,000. The relief in the new law applies to Code Sec. 6707A penalties assessed after December 31, 2006.

IMPACT. The change is intended to ameliorate the impact of the penalty on small businesses. At Congressional hearings, small business owners told lawmakers of penalty assessments that vastly exceeded the tax benefits of the transactions, many of which, the small business owners testified, they did not know were tax shelters.

IMPACT. The retroactive effective date opens up refund opportunities on penalties that the IRS has not otherwise held in abeyance pending this much-anticipated law change. The IRS temporarily stopped collecting Code Sec. 6707A penalties for undisclosed tax shelter transactions starting in June 2009 and extended its forbearance several times. Its latest collections moratorium had officially ended on June 1, 2010.

COMMENT. A reportable transaction is one that the IRS has determined requires disclosure because it has a potential for tax evasion. A listed transaction is a reportable transaction specifically identified by the IRS as an improper tax avoidance transaction.

Start-Up Expense Deduction

Taxpayers have generally been able to deduct up to $5,000 in qualified trade or business start-up expenses. The $5,000 deduction is reduced (but not below zero) by the amount of the taxpayer’s total startup costs that exceed $50,000. The new law raises the deduction limit to $10,000 and increases the phase-out threshold to $60,000 for one year, 2010.

IMPACT. Start-up expenses are costs related to creating an active trade or business, or investigating the creation or acquisition of an active trade or business. They are costs not directly related to capital or equipment and have been generally relegated to amortization above the current $5,000 deductible amount. The increase in the deduction amount is intended to allow entrepreneurs to recover more small business start-up expenses up-front, increasing cash flow and the ability to hire more workers.

Self-Employment Income

A self-employed individual can take a deduction for health insurance costs paid for the individual and his or her immediate family for income tax purposes. However, in determining the self-employment income subject to self-employment taxes, the self-employed individual cannot deduct any health insurance costs. Under the new law, the deduction for income tax purposes for the cost of health insurance is allowed in calculating net earnings from self-employment for purposes of self-employment taxes. The provision only applies to the self-employed taxpayer’s first tax year beginning after December 31, 2009.

COMMENT. The health insurance business deduction for self-employed individuals was implemented in 1987 and subsequently made permanent. This equalized the treatment of health insurance costs that an employer pays for employees and for self-employed individuals. However, health insurance costs did not reduce wages subject to self-employment taxes. Employees must take health insurance costs as an itemized deduction, but get the benefit of having pre-tax premium contributions reduce the amount of wages subject to FICA. The new law reduces the burden on self-employed individuals.

COMMENT. The Joint Committee on Taxation noted that it is intended that earned income within the meaning of Code Sec. 401(c)(2) be computed without regards to the deduction for health insurance. Thus, earned income for purposes of the limitation applicable to the health insurance deduction is computed without regard to this deduction.

PROMOTING RETIREMENT SAVINGS

The new law gives taxpayers a greater number of options for their retirement plan dollars. Two provisions facilitate contributions to designated Roth accounts. A third provision expands the options for nonqualified annuity contracts.

IMPACT. Although these are taxpayer friendly provisions, they are treated as revenue raisers because they encourage up-front distributions that are taxable.

457(b) Plan Deferrals

Beginning in 2011, the new law authorizes eligible state and local government 457(b) plans (but not plans of nonprofit organizations) to allow participants to contribute deferred amounts to designated Roth accounts. A similar provision already applies to 401(k) and 403(b) plans and will take effect in 2011 for the federal Thrift Savings Plan.

IMPACT. Contributions to Roth accounts are after-tax, but earnings accumulate tax-free and can be distributed tax-free if contributions are held for five years and certain other requirements are met.

401(k) Rollovers To Roth Accounts

The new law authorizes 401(k), 403(b) and 457(b) governmental plans to allow participants to roll over qualified distributions, including in-service distributions, into a designated Roth account within their plans. The rollover will be taxable, except for any after-tax contributions. The provision is effective for distributions after September 27, 2010. If an amount is rolled over in 2010, the amount is included ratably in income in equal amounts over 2011 and 2012, unless the taxpayer elects otherwise.

IMPACT. The ability to report income from the 2010 rollover in 2011 and 2012 echoes existing rules for converting a traditional IRA to a Roth IRA in 2010. Plans and taxpayer may need to move quickly. First, the plan must be amended to permit these rollovers. Then, participants must act before year-end on any qualifying distribution if they want to take advantage of either the two-year deferral into 2011 or 2012 or lower tax rates in 2010 if Congress does not extend the 2001 individual marginal income tax rate reductions.

IMPACT. Especially with 401(k) balances still reeling from stock market declines, distribution rollovers to Roth accounts now — while the income to be recognized on those balances upon distribution is still low — will make immediate rollovers highly popular. One drawback, for many taxpayers, however, will be finding the cash to pay the income tax. If taken from the otherwise qualifying distribution, that amount would be taxed immediately and permanently lose the benefit of deferral.

COMMENT. The JCT explained that it is intended that the IRS will provide employers with a remedial amendment period to allow employers to offer this option for distributions during 2010 and then have adequate time to amend their plans.

Annuitization

The bill allows an owner of a nonqualified annuity contract to split up the contract, by taking a portion of the benefits as a separate stream of annuity payments while leaving the balance of the contract untouched. The annuitization period must be for 10 years or more, or for the lives of one or more individuals. Amounts remaining with the contract will continue to accumulate earnings on a tax-deferred basis. The provision applies to amounts received in tax years beginning after December 31, 2010.

COMMENT. A nonqualified annuity contract is an annuity contract held outside of a qualified retirement plan or an individual retirement account.

REVENUE RAISERS

In addition to the $6.6 billion raised by the retirement-friendly provisions (discussed above), the Small Business Jobs Act offsets the price tag for its $12 billion in tax relief with some not-so-friendly changes in the name of reducing the tax gap and closing unintended “loopholes.”

Information Reporting On Rental Property Expense Payments

The new law requires qualified individuals receiving rental income from real property to file information returns with the IRS and to service providers reporting payments of $600 or more during the year for rental property expenses. The new information reporting requirement applies to payments made after December 31, 2010.

IMPACT. Expanded information reporting is a popular revenue raiser in Congress and predictions are that reporting obligations, and their related compliance costs, will more than quadruple for taxpayers if Congress continues on its present course. Reliance by Congress on increased information reporting to provide “quick and easy” revenue offsets worries many tax practitioners and the National Taxpayer Advocate. However, the IRS has promised to remove duplicative reporting where possible.

Exceptions. The new law includes exceptions to the rental property expense reporting requirement, such as exceptions for individuals who can show that the reporting requirement creates a hardship and any individual who receives rental income of not more than a minimal amount (both as will be determined by the IRS). The new law also provides for an exception for members of the military or employees of the intelligence community who rent their principal residence on a temporary basis.

Higher Failure-To-File Penalties On Information Returns

The new law substantially increases the penalties for failing to timely file information returns with the IRS: First-tier penalties (filing an information return after the filing deadline but not more than 30 days after the due date) increase from $15 to $30. The calendar year maximum will increase from $75,000 to $250,000. Second-tier penalties (filing an information return more than 30 days after it is due but before August 1) will increase from $30 to $60, and the calendar year maximum will increase from $150,000 to $500,000.  Third-tier penalties (for failing to file before August 1) will increase from $50 to $100, and the calendar year maximum will increase from $250,000 to $1.5 million.

PENDING TAX LEGISLATION

INDIVIDUAL TAX RATE REDUCTIONS

After December 31, 2010, reduced individual income tax rates are scheduled to revert to their pre-2001 levels, with the top rate rising to 39.6 percent. President Obama wants to permanently extend all of the individual rate cuts except for the top two rates. A growing number of lawmakers are calling for a temporary extension, for one or two years, of all the sunsetting tax cuts.

TAX EXTENDERS

A package of tax extenders (H.R. 4213), which passed the House earlier this year, has languished in the Senate. Sen. Max Baucus, D-Montana, recently introduced a new tax extenders bill. Baucus’ bill would extend a host of popular but temporary tax incentives, such as the state and local sales tax deduction, the teachers’ classroom expense deduction, and the higher education tuition deduction, through the end of 2010. Baucus’ bill excludes a controversial revenue raiser: the imposition of self-employment taxes on certain shareholders in S corps. The individual tax rate reductions and tax extenders are not the only tax items on Congress’ Fall agenda. The federal estate tax; Reduced capital gains/dividends tax rates; An AMT “patch;” Worker classification reform; More international tax reforms; Energy tax incentives; and National disaster relief.

WHITE HOUSE BUSINESS TAX PROPOSALS

President Obama has proposed allowing qualified businesses to immediately writeoff 100 percent of new investments in equipment made through the end of 2011. Generally, current rules provide for a longer period, three to 20 years. The president has also proposed to make permanent the research tax credit, which expired at the end of 2009. Under the president’s proposal, the simplified research credit would increase to 17 percent.

IMPACT. Under the president’s proposal, qualified taxpayers would be able to immediately write-off business expenses in the first year, enabling taxpayers to lower their taxable income by the full amount of qualified investments.

COMMENT. President Obama proposed to offset the estimated $180 billion cost of his proposals by unspecified closings of tax loopholes. The $180 billion cost means the proposals are unlikely to gain much traction in Congress

INFORMATION REPORTING

The House and Senate have considered but rejected legislation to repeal expanded business information reporting under the Patient Protection and Affordable Care Act (PPACA). Under the PPACA, businesses, charities and state and local governments will file an information return for all payments aggregating $600 or more in a calendar year to a single provider of goods or services (with some exceptions for tax-exempt payees), for payments made after 2011. The PPACA also repeals the long-standing reporting exception for payments to a corporation, also effective for payments made after 2011.

COMMENT. Stand-alone legislation (S. 3783) to exempt very small businesses and raise the filing threshold to $5,000 has been introduced in the Senate but is unlikely to be taken up before the November elections.

© CCH INCORPORATED, a Wolters Kluwer Business . All Rights Reserved. Reprinted with permission from CCH Tax Briefing, September 27, 2010.

This update is designed for general information only. The information presented should not be construed to be formal legal advice nor the formation of a lawyer/client relationship. For further information please contact one of our attorneys. Information contained herein has been abridged from laws, court decisions and administrative rulings, and should not be construed as legal advice or legal opinions on specific facts.  The enclosed material is provided for education and information purposes by MacLean Holloway Doherty Ardiff & Morse, P.C. to clients and others who may be interested in the subject matter.

Initial Written Employment Applications

Currently, under the Massachusetts Fair Employment Practices Law (See M.G.L. Chapter 151B, §4(9)), employers may ask job applicants, including in a written employment application, about felony convictions, but are prohibited from asking job applicants questions about (i) arrests that do not result in convictions, (ii) a first conviction for certain specified misdemeanors, and (iii) a conviction of a misdemeanor where the date of conviction or date of incarceration (whichever is later) is five or more years from the date of the request for the information.  However, effective as of November 4, 2010, employers will be prohibited from asking applicants questions about any criminal offender record information on an “initial written application form” subject to two very limited exceptions: (i) where a federal or state law or regulation requires that the applicant be disqualified from a particular position on the basis of a conviction of a criminal offense, and (ii) where under a federal or state law or regulation an employer is required not to employ an individual on the basis of a conviction of a criminal offense.  While further guidance is required, it seems apparent that after November 4, 2010 employers will be permitted to ask job applicants questions about felony convictions and misdemeanor convictions which are not protected from disclosure (as described in the first sentence above) in subsequent phases of the hiring process, such as during an interview.

In light of these changes, employers must discontinue any practice of asking applicants questions about any criminal offender record information on an initial written application form on or before November 4, 2010.

Required Disclosure

Under the amended CORI laws, employers in possession of an applicant’s criminal offender record information will be required to provide the applicant with a copy of this criminal offender record information before questioning the applicant about his or her criminal history.  Moreover, if the employer makes a hiring decision adverse to the applicant based upon the applicant’s criminal history, the employer must provide the applicant with a copy of the criminal offender record information in the employer’s possession, unless such information was previously provided to the applicant.

Employers should be aware that applicants and employees will no longer be blind to requests to review their CORI records.  The CORI amendments create a new department under the executive office known as the Department of Criminal Justice Information Services to which all CORI requests must be made.  This department is required to maintain a log of all CORI requests including the name of the requestor, the name of the subject, the date of the request, and the purpose of the request.  All applicants and employees will be entitled to receive from the department a copy of the log listing the names of all persons requesting a copy of their CORI record, the date of the request, and the purpose of the request.

Requirement to Maintain a CORI Policy

Employers that annually request five or more criminal background investigations, whether criminal offender record information is obtained from Department of Criminal Justice Information Services or any other source, must maintain a written CORI policy providing that, in addition to any obligations required under applicable state regulations, the employer will (i) notify the applicant of the potential for an adverse decision based upon CORI records; (ii) provide a copy of the CORI record and policy to the applicant; and (iii) provide information to the applicant concerning the process of correcting a criminal record.

Access to CORI Records

All CORI records will need to be accessed through the Department of Criminal Justice Information Services.  To request CORI records, employers will first need to verify the individual’s identity by reviewing a government issued identification and then provide the Department with the individual’s name, date of birth and the last four digits of their social security number.  In addition, the employer will be required to certify to the Department that the CORI request is for a purpose permitted under the statute (such as an employment decision), that the individual authorized the employer in writing to access their CORI records, and that the employer verified the individual’s identity by reviewing a government issued identification.  Employers will be required to maintain all written CORI authorizations for a period of one year following the date of the CORI request.  Employers may not maintain CORI records of former employees for more than seven years after their termination, and may not maintain CORI records for unsuccessful applicants for more than seven years following the date of the hiring decision.

Content of CORI Records

Employers will have access to (i) felony convictions that occurred within the past ten years or, if the conviction resulted in incarceration, for the ten year period following the applicant’s or the employee’s release from incarceration; (ii) misdemeanor convictions that occurred within the past five years or, if the conviction resulted in incarceration, for the five year period following the applicant’s or the employee’s release from incarceration; (iii) pending criminal charges; and (iv) unsealed convictions for certain crimes, such as murder and sex offenses.

If you have any questions about how this new law may affect you or how you can comply with it, please contact us.

This update is designed for general information only. The information presented should not be construed to be formal legal advice nor the formation of a lawyer/client relationship. For further information please contact one of our attorneys. Information contained herein has been abridged from laws, court decisions and administrative rulings, and should not be construed as legal advice or legal opinions on specific facts.  The enclosed material is provided for education and information purposes by MacLean Holloway Doherty Ardiff & Morse, P.C. to clients and others who may be interested in the subject matter.

The Department of Education published on its website General Guidance for Parents.  Below is a copy of that publication.

FERPA General Guidance for Parents

FERPA is a Federal law that applies to educational agencies and institutions that receive funding under a program administered by the U. S. Department of Education. Parochial and private schools at the elementary school levels do not generally receive such funding and, therefore, are not subject to FERPA. The statute is found at 20 U.S.C. § 1232g and the Department’s regulations are found at 34 CFR Part 99.

Under FERPA, schools must generally afford parents: -access to their children’s education records -an opportunity to seek to have the records amended -some control over the disclosure of information from the records.

Parents may access, seek to amend, or consent to disclosures of their children’s education records, unless there is a court order or other legal document specifically stating otherwise. When a student turns 18 years of age or attends a postsecondary institution, the student, and not the parent, may access, seek to amend, and consent to disclosures of his or her education records.

Access to Education Records

Schools are required by FERPA to:

       Provide a parent with an opportunity to inspect and review his or her child’s education records within 45 days of the receipt of a request

       Provide a parent with copies of education records or otherwise make the records available to the parent if the parent, for instance, lives outside of commuting distance of the school

       Redact the names and other personally identifiable information about other students that may be included in the child’s education records.

Schools are not required by FERPA to:

       Create or maintain education records;

       Provide parents with calendars, notices, or other information which does not generally contain information directly related to the student;

       Respond to questions about the student.

Amendment of Education Records

Under FERPA, a school must:

       Consider a request from a parent to amend inaccurate or misleading information in the child’s education records;

       Offer the parent a hearing on the matter if it decides not to amend the records in accordance with the request;

       Offer the parent a right to place a statement to be kept and disclosed with the record if as a result of the hearing the school still decides not to amend the record.

A school is not required to consider requests for amendment under FERPA that:

       Seek to change a grade or disciplinary decision;

       Seek to change the opinions or reflections of a school official or other person reflected in an education record;

       Seek to change a determination with respect to a child’s status under special education programs.

Disclosure of Education Records:

A school must:

       Have a parent’s consent prior to the disclosure of education records;

       Ensure that the consent is signed and dated and states the purpose of the disclosure.

A school MAY disclose education records without consent when:

       The disclosure is to school officials who have been determined to have legitimate educational interests as set forth in the school district’s annual notification of rights to parents;

       The student is seeking or intending to enroll in another school;

       The disclosure is to state or local educational authorities auditing or evaluating Federal or State supported education programs or enforcing Federal laws which relate to those programs;

       The disclosure is pursuant to a lawfully issued court order or subpoena; and

       The information disclosed has been appropriately designated as directory information by the school.

Annual Notification

A school must annually notify parents of students in attendance that they must allow parents to:

       Inspect and review their children’s education records;

       Seek amendment of inaccurate or misleading information in their children’s education records;

       Consent to most disclosures of personally identifiable information from education records.

The annual notice must also include:

       Information for a parent to file a complaint of an alleged violation with the FPCO;

       A description of who is considered to be a school official and what is considered to be a legitimate educational interest so that information may be shared with that person;

       Information about who to contact to seek access or amendment of education records.

Means of notification:

       Can include local or student newspaper; calendar; student programs guide; rules handbook, or other means reasonable likely to inform parents;

       Notification does not have to be made individually to parents.

Complaints of Alleged Violations:

Complaints of alleged violations may be addressed to:

Family Policy Compliance Office
US Department of Education
400 Maryland Avenue, SW
Washington, DC 20202-5901
Phone: (202) 260-3887

Complaints must:

       Be timely submitted, not later than 180 days from the date you learned of the circumstances of the alleged violation

       Contain specific allegations of fact giving reasonable cause to believe that a violation has occurred, including:

             Relevant dates, such as the date of a request or a disclosure and the date the parent learned of the alleged violation;

             Names and titles of those school officials and other third parties involved;

             A specific description of the education record around which the alleged violation occurred;

             A description of any contact with school officials regarding the matter, including dates and estimated times of telephone calls and/or copies of any correspondence exchanged between the parent and the school regarding the matter;

             The name and address of the school, school district, and superintendent of the district;

             Any additional evidence that would be helpful in the consideration of the complaint.

For more information visit http://www2.ed.gov

This newsletter is designed for general information only. The information presented should not be construed to be formal legal advice nor the formation of a lawyer/client relationship. For further information please contact one of our attorneys. Information contained herein has been abridged from laws, court decisions and administrative rulings, and should not be construed as legal advice or legal opinions on specific facts.  The enclosed material is provided for education and information purposes by MacLean Holloway Doherty Ardiff & Morse, P.C. to clients and others who may be interested in the subject matter.  

Although you can leave everything you own to your spouse free of estate tax, doing so can actually increase estate tax costs at your spouse’s death. The reason for this is that each person can leave up to an estate tax “exclusion amount” to children or other non-spouse beneficiaries without any federal estate tax liability. This “exclusion amount” was $3.5 million in 2009 and, according to the latest discussions on Capitol Hill, will be made the permanent at that level for 2010 and later years. By leaving everything to your spouse, however, you will waste this exclusion amount. Coordinating the tax breaks and both spouses’ estates is a cornerstone of successful estate planning.

As an example, say the husband has $4 million and the wife has $250,000. The husband could leave everything to the wife without owing any estate tax. However, the wife’s estate would owe tax on $750,000 of the $4.25 million (ignoring any growth in value for simplicity). She could leave $3.5 million to the children (or anyone else) free of estate tax, but the husband’s $3.5 million exemption would be lost forever. That could cost the family over $500,000.

This tax could be avoided by leaving $3.5 million to the children and the rest to the wife. The first estate would still owe little if no tax. And the wife’s estate also would owe little if no estate tax on her remaining share.

If the concern is that a total of $750,000 would not be enough for the wife, it’s possible to also leave the income from the other funds to her for her life, using what is called a credit shelter trust. The husband’s estate would be able to shelter the $3.5 million that ultimately will go to the children, and that amount won’t be subject to tax in the wife’s estate.

Of course, if the spouse owning few assets dies first, he or she could lose the opportunity to transfer $3.5 million to the children free of tax. This may be dealt with relatively easily by having the wealthier spouse transfer funds tax-free during life to the other spouse. Such transfers are tax free, with neither gift tax nor estate tax consequences.

There also are situations in which the marital deduction can be used to save tax and at the same time address non-tax concerns. For example, there are circumstances in which leaving all the funds outright to a spouse may not be desirable. Typically, one or both spouses may be concerned about the management of the property, or may want to make sure that particular beneficiaries ultimately get the property. That last concern probably arises most often when there are children of a prior marriage.

In any of these situations, individuals often use what is technically called a QTIP trust. While various requirements must be met to qualify as a QTIP, the most important thing is that your estate can qualify for the marital deduction without your leaving the property outright to your spouse. You only need give the income from the property for the spouse’s life.

As you can see, the marital deduction is a powerful and flexible tool that can yield great benefits when properly coordinated. However, careful planning, including taking into account income tax considerations and practical considerations is necessary.

If you have any questions, please do not hesitate to call.

This newsletter is designed for general information only. The information presented should not be construed to be formal legal advice nor the formation of a lawyer/client relationship. For further information please contact one of our attorneys. Information contained herein has been abridged from laws, court decisions and administrative rulings, and should not be construed as legal advice or legal opinions on specific facts.  The enclosed material is provided for education and information purposes by MacLean Holloway Doherty Ardiff & Morse, P.C. to clients and others who may be interested in the subject matter.  

Life insurance proceeds are subject to estate tax if the insured owned the policy at death, or transferred it within three years of death. Even if the policy was transferred to another, an insured is considered to still own the policy if, for example, the insured possesses any of the following: the right to change the beneficiary, the right to borrow against the policy, the right to surrender the policy for its cash value, or the right to pledge the policy for a loan. In other words, all of these “incidents of ownership” in the policy must be transferred more than three years before death for the proceeds to escape being included in the insured’s estate.

If these obstacles are overcome, substantial estate tax savings can be realized by transferring a life insurance policy. But if you give a policy to your spouse who predeceases you, the policy’s value will be taxed in your spouse’s estate. You probably do not want to give the policy to your children either, unless they are mature and financially secure in their own right.

It is for these reasons that life insurance trusts have become such popular devices. If a life insurance policy and all policy rights are transferred to an irrevocable trust, and the ex-owner survives for the next three years, the policy proceeds can escape estate tax in the surviving spouse’s estate as well as the insured’s. A trust also provides flexible settlement options. You can have the funds managed professionally, protecting beneficiaries from financial inexperience. The trustee can be given discretion to pay income in varying amounts to beneficiaries depending upon their needs and their tax situations.

If you want to set up a life insurance trust, you also have to decide whether it should be funded or unfunded. If the trust is to be funded, you will have to transfer cash or other property to it to pay the premiums on the policy. If it is unfunded, you or someone else will have to make periodic contributions to it so that the premiums can be paid. As with any trust, there are income tax and gift tax consequences that have to be planned for.

The tax-saving opportunities of life insurance trusts are so substantial that some lawmakers have called for their elimination. Nevertheless, insurance trusts have survived the current round of budget balancing and deficit reduction, and if there are any future changes in this area, in all likelihood, they would not apply retroactively. If you are interested in setting up a trust or learning more about this technique, please don’t hesitate to call us.

This newsletter is designed for general information only. The information presented should not be construed to be formal legal advice nor the formation of a lawyer/client relationship. For further information please contact one of our attorneys. Information contained herein has been abridged from laws, court decisions and administrative rulings, and should not be construed as legal advice or legal opinions on specific facts.  The enclosed material is provided for education and information purposes by MacLean Holloway Doherty Ardiff & Morse, P.C. to clients and others who may be interested in the subject matter. 

However, for tax years beginning after December 31, 2009, a conversion from a traditional to a Roth IRA can be made without regard to your income or filing status. Therefore, if you are a married individual filing separately, or have adjusted gross income greater than $100,000, you are no longer precluded from making a Roth IRA conversion. The elimination of the rules related to IRA conversions may provide you with a unique tax planning opportunity.

Although the income limitation on Roth IRA conversions is permanently repealed, there is a special tax treatment available for 2010 conversions only. Conversion income in 2010 is recognized ratably in 2011 and 2012, unless you make an election to recognize all of the income in 2010.

There are several valid reasons why you may want to take advantage of the opportunity to convert to a Roth IRA, other than the obvious tax-free withdrawals and not being subject to required minimum distributions during your lifetime. These include the recent devaluation of your IRA investments, hedging against future tax rate increases, offsetting any current year net operating losses, or estate planning.

The following key factors generally need to be identified and addressed in order to best analyze a Roth IRA conversion:

• Asset mix (i.e., qualified versus nonqualified, liquid versus illiquid)
• Traditional IRA fair market value
• Time horizon
• Current and future cash flow needs
• Current marginal tax rate versus projected future marginal tax rate
• The ability to pay the income tax on a conversion with nonqualified funds
• Estate planning objectives

As you can see, whether a traditional IRA should be converted to a Roth IRA is a complex issue. Please call our office at your earliest convenience to discuss the conversion strategies available to maximize your tax benefits.

This newsletter is designed for general information only. The information presented should not be construed to be formal legal advice nor the formation of a lawyer/client relationship. For further information please contact one of our attorneys. Information contained herein has been abridged from laws, court decisions and administrative rulings, and should not be construed as legal advice or legal opinions on specific facts.  The enclosed material is provided for education and information purposes by MacLean Holloway Doherty Ardiff & Morse, P.C. to clients and others who may be interested in the subject matter.

Section 1035 of the U.S. tax code allows holders of annuity or life insurance contracts to move to another annuity or life insurance contract without being taxed on the move. The new law extends the benefits of section 1035 to individuals who want to exchange an old annuity or life insurance policy for a long-term care insurance policy or a hybrid policy. The law applies only to “non-qualified” annuities, which means annuities that were purchased with after-tax dollars.

If you have an old annuity or life insurance policy and want long-term care insurance, you have several options. You can either partially or fully exchange the old policy and use the proceeds to purchase a stand-alone long-term care insurance policy. Or you can fully exchange the old policy for a new hybrid insurance or annuity contract that also includes a long-term care insurance policy. You will then be able to withdraw money from the annuity or life insurance contract tax-free as long as it is being used to pay for long-term care.

Exchanges may not be beneficial for everyone. Before exchanging any policies, you should make sure your current policy doesn’t have a death benefit or another benefit that you don’t want to give up. Also, there may be surrender charges for exchanging an old annuity. Talk with your elder law attorney to determine if an exchange is the right move for you.

Reprinted with permission of ElderLaw Answers.