Health Care Reform

Landmark Health Care Reform
On March 23, 2010, President Obama signed the Patient Protection and Affordable Care Act (Patient Act) into law. The House of Representatives also passed a reconciliation bill, the Health Care and Education Affordability Reconciliation Act of 2010, which makes changes to the Patient Act and is currently before the Senate for approval. Together, both pieces of legislation make sweeping reforms to health care in the United States.

U.S. citizens and legal residents will be required to have qualifying health insurance (exceptions apply) by 2014, or pay a fine. It is estimated that more than 32 million uninsured Americans will gain coverage through government subsidies to offset premiums, and through Medicaid coverage. The Congressional Budget Office projects that the final legislation will cut the national deficit. Nevertheless, the bill is projected to cost about $940 billion. Some of that cost will be paid by:

Imposing a tax of up to 2.5% of household income on individuals who lack qualifying health care coverage, to be phased in beginning in 2014

Increasing the medical expense income tax deduction threshold to 10% of adjusted gross income, up from the current 7.5%

Increasing the Medicare Part A tax rate by 0.9% on wages for individuals with earnings over $200,000 and for married couples with earnings exceeding $250,000, and assessing a new 3.8% tax on unearned income for these higher-income individuals

An excise tax on so-called "Cadillac Plans"

Imposing taxes or fees on health insurance providers and drug companies, while doctors and hospitals will receive less compensation from government sources

Key provisions effective within six months following enactment include:
A provision that children covered by insurance can no longer be denied coverage because of pre-existing conditions

Payment of $250 rebate to Medicare Part D beneficiaries subject to the coverage gap (beginning January 1, 2010) and gradually reducing the beneficiary coinsurance rate in the coverage gap from 100% to 25% by 2020

Insurers will not be able to impose lifetime caps on insurance coverage

All plans offering dependent coverage will be required to allow children to remain under their parents' plan until age 26

Insurers cannot cancel or deny coverage if you are sick except in cases of fraud

Adults with pre-existing conditions will be able to buy coverage from temporary high-risk pools until 2014, when coverage cannot otherwise be denied for pre-existing conditions

The creation of a long-term care insurance program to be financed by voluntary payroll deductions (effective January 1, 2011)

Key provisions effective on or before January 1, 2014, include:
All Americans must carry health insurance or face a fine, with exceptions for economic hardship, religious beliefs, and other situations (e.g., a couple has income of less than $19,000)

Extends Medicaid coverage to non-disabled adults with incomes at or below 133% of the Federal Poverty Level

Adults with pre-existing conditions cannot be denied coverage or have their insurance cancelled due to pre-existing conditions

Requirement that states establish an American Health Benefit Exchange that facilitates the purchase of qualified health plans and includes an Exchange for small businesses; also requires employers that contribute toward the cost of employee health insurance to provide free choice vouchers to qualified employees for the purchase of qualified health plans through Exchanges

Tax credits will be available to qualifying families to offset the cost of health insurance premiums
Employers with more than 50 employees must offer health insurance for their employees or be fined per employee

Part of the Reconciliation Act passed by the House and presently before the Senate adds student loan provisions including:

An end to the bank-based system of distributing federal student loans—private lenders would no longer receive government subsidies to make federal student loans and all such loans would now be made directly from the federal government to borrowers

Annual inflation-adjusted increases would apply to the Pell Grant beginning in 2013

$2 billion would be paid over four years to community colleges to improve educational and career-training programs

$1.5 billion would be available over ten years to increase income-based repayment benefits for student loan borrowers—mandatory monthly payments would be limited to 10% of discretionary income (down from the current 15%), and outstanding loan balances would be forgiven after 20 years (down from the current 25 years)

$750 million over five years would be available for College Access Challenge grants to support state efforts to help more low-income students graduate from college

$255 million a year would be allocated to historically black colleges and minority-serving institutions

This article was provided by Forefield and distributed by Lawrence Sprung

Hiring Incentives to Restore Employment (HIRE) Act

Legislation signed into law by the President on March 18, 2010 includes the Hiring Incentives to Restore Employment (HIRE) Act. Provisions contained in the Act include:

Payroll tax exemption for hiring unemployed workers
For wages paid after March 18, 2010 and before January 1, 2011, qualified employers (generally, any employer other than the federal, state, or local governments) are exempt from the Social Security (Old Age, Survivors and Disability Insurance, or "OASDI") portion of the FICA employment tax with respect to qualified individuals. Qualified employers can elect to forego this payroll tax suspension.

A qualified individual is an individual who:

1. Begins employment after February 3, 2010, and before January 1, 2011.
2. Certifies that he or she has not been employed for more than 40 hours during the 60-day period ending on his or her date of hire.
3. Is not hired to replace another employee, unless the other employee separated voluntarily, or was terminated for cause.
4. Is not related to the employer.

A special rule applies to wages paid prior to April 1, 2010 that would otherwise qualify for the payroll tax exemption. Such wages are subject to regular employment tax rules (employers must pay the regular amount of Social Security tax). However, the amount by which an employer's payroll tax would have been reduced under this provision will be treated as a payment against tax in the second quarter of 2010.

Tax credit for retaining new hires
For tax years ending after March 18, 2010, a business tax credit will be allowed for each qualified "retained worker." A retained worker is a qualified individual (i.e., an individual hired after February 3, 2010, and before January 1, 2011, and who otherwise meets the requirements for the payroll tax provision described above) who:

1. Was employed on any date during the year,
2. Was employed for a period of not less than 52 consecutive weeks, and
3. Has wages during the last 26 weeks of the 52-week period that equal at least 80 percent of his or her wages during the first 26 weeks of the 52-week period.

The credit is allowed for each employee in the taxable year in which the second requirement above (i.e., that the individual be employed for a period of no less than 52 consecutive weeks) is first satisfied.

The amount of the credit for each retained worker equals the lesser of:

1. $1,000, or
2. 6.2 percent of wages paid to the retained worker during the 52 consecutive weeks of employment

IRC Section 179 expensing
The 2009 limits relating to I.R.C. Section 179 expensing are extended for one year, to taxable years beginning in 2010. As in 2009, the maximum amount that a taxpayer may expense is $250,000 of the cost of qualifying property placed in service for the taxable year. This amount is reduced by the amount by which the cost of qualifying property placed in service during the taxable year exceeds $800,000.

Navigating Estate Plans Through Uncharted Waters

Uncertainty caused by the temporary federal estate tax repeal
The failure of Congress to preserve the federal estate and generation-skipping transfer (GSTT) taxes has created a challenging estate planning environment. The Economic Growth and Tax Relief Reconciliation Act of 2001 (EGTRRA) brought about the repeal of these transfer taxes for 2010, but the federal gift tax remains intact with a $1 million lifetime exemption and a top tax rate of 35 percent. Further, a modified carryover basis system replaces the long-standing step-up in basis rule promoting the income taxation of appreciated assets when these assets are sold by the estate's heirs. And, these changes are only temporary--in 2011, the estate and GST taxes are scheduled to return to their 2001 status (i.e., $1 million exemption and top rate of 55 pecent). On top of that, Congress could reinstate these taxes (retroactive to January 1 or otherwise) or enact an entirely new transfer tax regime, adding to the uncertainty currently surrounding estate planning. How should an estate planning professional proceed under these circumstances?

Estate tax planning vs. capital gains tax planning
As of January 1, 2010, federal estate and GST taxes are repealed, meaning that estates, in general, may transfer assets of any value without being subject to these taxes (although state death taxes may still be imposed, see below for further discussion). While dying in 2010 could mean the avoidance of transfer taxes, there is instead the potential imposition of federal capital gains tax on the sale of appreciated assets when they are sold by estate beneficiaries. Thus, for individuals who are very old, very ill, or terminally ill, immediate attention may be needed to steer an estate plan away from minimizing estate taxes and towards minimizing capital gains taxes.

Prior to 2010, in general, the basis of estate property was its fair market value on the date of the decedent's death. In 2010, the basis of estate property is the lesser of the asset's fair market value on the date of death or the decedent's (carryover) basis. For example, assume the decedent's basis in property is $2 million with a date-of-death fair market value of $4 million. Beneficiaries inheriting the property will receive it with the lower $2 million carryover basis. If the property is subsequently sold for $4 million, the beneficiary may realize a capital gain on the difference between the selling price ($4 million) and the carryover basis ($2 million).

However, two special basis adjustments may apply. The first adjustment allows estates to exempt up to $1.3 million of appreciation or gain on property that is passed to any beneficiary. The second adjustment allows estates to exempt up to $3 million of property that passes to a surviving spouse, or as "qualified terminable interest property" (QTIP). These exemptions are separate, so an exemption of $4.3 million can be applied towards property going to a surviving spouse (with nothing left over for property passing to other beneficiaries).

Example(s): Assume an unmarried decedent's estate consists of a farm worth $1.5 million with a basis of $500,000 ($1 million gain), and stock worth $1 million with a basis of $500,000 ($500,000 gain). The estate administrator may exempt up to $1.3 million of the total gain ($1.5 million). The exemption can be allocated to assets at the discretion of the executor, unless the decedent specifically directs otherwise in the will or trust. Thus, the entire $1 million gain from the farm can be exempted with the remaining exemption ($300,000) applied to the stock (leaving $200,000 of taxable gain). Or the entire gain from the stock can be exempted, with the exemption balance applied to the farm (leaving a capital gain of $200,000).

Tip: Determining a decedent's basis can be very important. Special attention must be paid to determining and documenting how and when assets are acquired or received, the acquisition cost, and any additional increases in basis.

Caution: There are other rules that may also affect the basis of property. For example, the decedent's basis in property can be increased by unused capital loss carryovers, net operating loss carryovers, and by Internal Revenue Code (IRC) Section 165 claims for theft losses and worthless securities, among other things. You may need to consult with a tax professional to understand all these issues.

How these exemptions are allocated among various estate assets will take careful consideration. Some questions to consider include:

  • What type of asset is it?
  • What is the basis of the property?
  • Do other adjustments need to be applied to the asset's basis?
  • Who is the intended beneficiary of the asset, and what is his or her tax bracket?
  • What is the intended use of the inherited asset, (i.e., is it expected to be sold or held)?
  • If the asset is a principal residence, is the federal income tax home sale exclusion ($250,000) available to reduce the gain from the sale?

Review plans for formula clauses
Many wills and trusts were drafted in contemplation of transfer taxes, so they contain provisions that allocate or direct the distribution of assets based on formulas or other directions in order to minimize these taxes. In particular, wills and trusts created for married couples frequently employ a formula to minimize potential federal estate tax by utilizing the federal estate tax exclusion amount of the first spouse to die. This is usually accomplished by dividing the estate of the deceased spouse into a marital trust for the benefit of the surviving spouse and a family trust (also referred to as a credit shelter trust or bypass trust) for the benefit of children. The family trust is funded up to the decedent's unused estate tax exclusion amount and the marital trust receives the balance of the estate. But if there is no estate tax in the year of death, how is such a provision to be interpreted? For example, if the document references funding of the family trust with an amount equal to the maximum that will pass free of estate tax (i.e., up to the applicable exclusion amount), if there is no estate tax, could this language be construed to mean that the entire estate passes to the family trust? If the surviving spouse is the beneficiary of both trusts, there may be no problem, but if the spouse has no right or access to assets in the family trust, then the surviving spouse could theoretically be left with nothing.

Similarly, for donors who are charitably inclined, estate planning documents may leave a percentage of the estate or a dollar amount to a charity out of that portion of the estate exceeding the applicable estate tax exclusion amount. Again, if there is no estate tax, it's conceivable that no gift will be made to the charity.

In light of these and other potential issues, it is best to review estate planning documents and make necessary revisions to accomplish the intent of the owner. Wills and trusts should be drafted to clearly reference what should happen if the owner dies when there is no estate tax, or if the exclusion amount is greater or less than the 2009 amount ($3.5 million). Thus, documents will need to provide flexibility in their distribution provisions to accommodate the possibility of many varied scenarios.

Gifting opportunities and issues caused by the repeal of the GST tax
The temporary repeal of the GSTT provides an opportunity to make gifts to skip beneficiaries free from the GSTT. In 2010, large gifts to grandchildren, subject to both the gift tax and the GSTT in prior years, now are subject only to the gift tax (at a 35 percent tax rate).

Creating and funding a dynasty trust for skip beneficiaries (i.e., grandchildren and younger generations) also may be a viable planning option that takes advantage of the temporary GSTT repeal. In addition, if the trust proceeds are used to provide for the beneficiary's education or health care, even if the GSTT is reintroduced, those distributions are not subject to the tax.

For those who have begun gifting through the use of dynasty or similar trusts, 2010 may be the time to accelerate trust distributions or terminate the trust altogether. The trust may allow the trustee discretion to make distributions to or for any of the trust beneficiaries. In general, the GSTT applies to taxable distributions to skip persons, and on taxable terminations resulting in a shift from one generation to the next. If the trust corpus exceeds the applicable GSTT exclusion amount ($3.5 million in 2009, $1 million in 2011), trust distributions or terminations may be subject to the GSTT. In 2010, unless the law changes, there is no GSTT to infringe on these transactions.

However, if the GSTT is imposed retroactively, gifts thought to have escaped the GSTT may be captured by it after all. This possibility must be weighed against the potential tax savings of gifting without the GSTT to determine the best course of action.

Testamentary gifts to skip beneficiaries may be based on the applicable GSTT exemption (gifts to skip beneficiaries up to the applicable GSTT exclusion amount, the remainder to children or other beneficiaries). For deaths in 2010, the repeal of the GSTT could result in the entire gift being made to skip beneficiaries with nothing to remainder beneficiaries. Documents may need to be amended to include a different formula to account for the possibility that there is no GSTT exemption when allocating gifts to grandchildren.

Addressing the impact of state death taxes
Prior to 2001, many states tied their death tax (sometimes called a credit estate tax, sponge tax, or pickup tax) to the federal state death tax credit. The passage of EGTRRA eventually replaced the state death tax credit with a deduction. Thus, states that coupled their death tax to the federal credit saw its elimination. Some states responded by simply linking their death tax to the federal credit that was in effect prior to 2001 ($675,000) or some other amount. Other states decoupled from the federal system altogether and enacted a separate inheritance or estate tax. And, those states that did nothing anticipate the potential reinstitution of their death tax in 2011 when the federal credit is scheduled to return. Planning for both federal and state transfer taxes (some states also have a gift tax and/or GSTT) has become extremely difficult and complex. Creative planning will be required.

This article was provided by Forefield and distributed by Lawrence Sprung.

Item’s Worth Noting

Special rules apply to charitable donations for Haiti relief efforts
If you make a qualified charitable contribution after January 11, 2010, and before March 1, 2010, for relief efforts associated with the January 12, 2010, earthquake in Haiti, you can treat the contribution as if it were made on December 31, 2009. As a result, if you itemize deductions on Form 1040, Schedule A, you can elect to claim the deduction for the Haitian relief contribution on your 2009 federal income tax return. To qualify, the contribution must be made in cash. To facilitate charitable donations made via text messages, a telephone bill showing the name of the organization, and the date and amount of the contribution, will satisfy charitable deduction recordkeeping requirements.

Time running out for first-time homebuyer's tax credit
If you're in the market for a new home and hope to take advantage of the first-time homebuyer tax credit, you'll need to purchase a principal residence before May 1, 2010 (or before July 1, 2010 if you enter into a written binding contract prior to May 1, 2010). If you--and your spouse, if you're married--did not own any other principal residence during the three-year period ending on the date of purchase, the credit is worth up to $8,000 ($4,000 if you're married and file separate returns). If you--and your spouse, if you're married--have maintained the same principal residence for at least five consecutive years in the eight-year period ending at the time you purchase a new principal residence, the credit is worth up to $6,500 ($3,250 if you're married and file separate returns).

The credit is reduced if your modified adjusted gross income (MAGI) exceeds $125,000 ($225,000 if married filing a joint return) and is completely eliminated if your MAGI reaches $145,000 ($245,000 if married filing a joint return). You can't claim the first-time homebuyer tax credit if the purchase price of your principal residence exceeds $800,000. Other limitations and provisions also apply.

President's proposed 2011 budget offers Congress multiple initiatives
The proposed 2011 budget submitted by President Obama offers multiple new initiatives, including several small business tax incentives, provisions intended to promote college affordability, and tax benefits targeting the middle class. The budget that ultimately emerges from Congress will likely differ significantly from that proposed by the President, but the proposed budget is valuable in that it provides a framework for discussion over the next few months. The proposed budget includes:

For businesses-- A new tax credit of $5,000 for each new hire made by an employer, a one-year extension of 2009 bonus depreciation and Section 179 expensing limits, and requirements for employers who do not offer retirement plans to implement automatic IRAs for employees
For students-- Expanded Pell Grant limits, a permanent American Opportunity tax credit, and a proposal to strengthen income-based repayment plans for student loans (overburdened borrowers would pay only 10% of discretionary income in loan payments and remaining debt would be forgiven after 20 years)
For individual taxpayers-- A return of the top two marginal tax rates to 39.6% and 36% in 2011, and an expanded 28% tax bracket; a permanent extension of the current 0% and 15% rates on long-term capital gain, with a new 20% rate for higher-income individuals; permanent extension of the federal estate tax and the alternative minimum tax (AMT) rules and exemption amounts, at 2009 levels

New credit card provisions now in effect
The Credit Card Accountability Responsibility and Disclosure (CARD) Act of 2009 included several provisions that became effective on February 22, 2010. Some of these changes could affect you:

Credit card companies are prohibited from increasing annual percentage rates (APRs) that apply to existing balances unless (1) the index on which the rate is based changes, (2) the APR was a promotional rate that has expired, (3) you failed to comply with a hardship workout plan, or (4) you're more than 60 days past due on the account; if an increase in APR is the result of you falling 60 days past due on the account, the rate will be restored to what it was before the increase if you make timely minimum payments for six months
If different APRs apply to separate portions of an outstanding balance, the amount of any payment beyond the minimum payment due must be applied to the portion of the balance with the highest APR
If you're under age 21, you won't be able to get credit unless you have a cosigner over age 21 or can demonstrate an ability to repay the debt
You can't be charged an over-the-limit fee unless you authorize the credit card company to complete the transaction that causes the balance to exceed your credit limit

The Great Turnaround

What the 1980 U.S.Men’s Olympic Hockey Team can teach us about late-stage retirement planning.

It was February of 1980, at Madison Square Gardens during the height of the Cold War. It was there, that the U.S. Men’s Olympic Hockey team took on what experts considered the world’s best hockey team at the time: The U.S.S.R. It was an exhibition match meant to be a preview of the upcoming Olympics and the U.S. was trounced, 10-3.

Fast forward ten days later and after being given no chance by critics and fans alike, the United States men’s team pulled one of the biggest sporting upsets of all time by defeating the U.S.S.R., 4-2. That team would then go on to win the Olympic Gold Medal and their story would become known as the “Miracle on Ice.” So how did they do it? How did they go from being given no chance to pulling off the inconceivable? Some say it was one of those perfect moments when miracles happen. Others point to something more solid: the preparation. The Russians spent their practice days before the medal round sitting around, studying plays, and generally relaxing. In general, they didn’t really prepare. The U.S. team practiced as hard as they ever had before. The coach looked for weaknesses and planned a winning strategy.

Their dramatic turnaround in such a short time is a solid example of two things: 1) It’s never too late to reach your goals, and 2) with the proper planning and strategy, you’re more likely to accomplish great things. This couldn’t be a better vision to have in your head if you’re nearing retirement and haven’t spent much time planning and saving for life after work. While not all investment stories end successfully, with just the right combination of perseverance, planning, and sacrifice, you may still be able to retire in relative comfort even if you got a late start in the game.

Your strategy and frame of mind are the keys when beginning to save for retirement later in the game. You can sit around like the U.S.S.R., resting and doing basic review, or you can prepare yourself mentally for the challenging, (but potentially rewarding) road ahead. When faced with the reality of catching up, you must also accept the fact that you may have to be more aggressive in your savings habits and your investments than some of your friends or co-workers who started saving long-ago. You no longer have the luxury of being as conservative later in life as you may like. You may also have to consider the possibility of working past age 65.

Most Americans who work today breeze past age 65. There’s a growing trend of people who love their jobs or just love to work. Realizing that you may have to work a bit longer is something you might have to consider at this stage. Now that you’ve sharpened your skates, and prepared mentally, it’s time to go out and play.

First things first. If you’re starting late in the game it’s extremely important to take advantage of the catch-up provision offered by 401(k)’s and IRAs. In order to catch up and still have a comfortable retirement, you’ll want to contribute the maximum amount to each, plus the extra amount you can add by law. This is known as the “catch-up provision.” If you’re 50 and older, the catch-up provision for 401(k)s in 2010 is $5500. IRAs allow you to contribute $1000 this year to catch-up. While it may seem difficult to contribute the maximum amount plus a catch-up, you have to ask yourself if you’d rather sacrifice now or worry a lot later. This helps you stay focused on your goal and every day needs of retirement. One of the biggest pieces of advice available today has to do with planning a budget and trying to play catch-up. You should list your retirement fund expenses first, as the most critical, before anything else and budget up from there.

Just playing catch-up isn’t the only way to save this late in the game for a successful retirement. One way to help (be more comfortable) later on in life is to reduce some of your heaviest debt right away. By reducing the amount you owe in credit card bills, car loans, or even your children’s extra college expenses, you ensure that when the time comes for you to retire, you do so knowing that your largest debts are behind you. This keeps you focused on the every day needs of retirement.

Finally, if you’re entering the retirement planning phase this late and you enjoy working, you might consider doing so a while longer. Besides the added financial benefit, you’re also contributing to your personal well-being both mentally and physically. You may even consider starting your own small business and making a bit of extra income while setting your own hours. After all, you’ve earned this freedom; shouldn’t you be taking advantage of it?

There is always something you can do to save for retirement, even if you think it’s too late. While the 1980 U.S. Men’s Olympic Hockey team may have been called the “Miracle on Ice,” planning for retirement this late in your life doesn’t take a miracle. But it does take a certain amount of self-sacrifice, some elbow grease, and some trusted planning from a financial professional. These are just a few of the basic ways to be prepared for retirement this late in the game. It won’t always be an easy path to retirement savings but with the right combination of hard work and trusted planning, you may find yourself with more time to enjoy life after work.

Written by: Securities America, Inc. Distributed by: Lawrence D. Sprung.

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