What Is a 1035 Exchange?

 

Tip: Long-Term Coverage. 1035 exchanges can be used to exchange a life insurance policy, modified endowment contract, or an annuity contract for a long-term care policy. That means that an old life insurance policy may provide coverage for long-term care. Consult a tax professional before considering an exchange.
Source: American Association for Long-Term Care Insurance, 2015

According to the most recent information available, Americans had individual life insurance with a total face value of $11.8 trillion.1

Due to a variety of factors, these individuals may find themselves in circumstances where the specific life insurance policy or annuity contract they own does not suit their needs.2 They may want to exchange products without incurring a taxable event.

That’s where Section 1035 of the Internal Revenue Code comes in. A 1035 exchange provides a means for exchanging an annuity contract or life insurance policy without being treated as if it had been surrendered or sold. Keep in mind that a 1035 exchange can be used only when it involves the same contract or policyholder and the same type of product.

Trading In an Older Policy

A 1035 exchange, provided certain requirements are met, gives policy or contract holders the flexibility to “trade-in” an older contract or policy for a newer contract or policy. A newer policy or contract may have lower costs, a higher death benefit, or more investment choices.

1035 exchanges involve a complex set of tax rules and regulations. Before moving forward with a 1035 exchange, consider working with a tax professional who is familiar with the rules and regulations.

Partial Exchanges

Fast Fact: Surrender Charge Caution. If you own an annuity contract that is still in the surrender charge period, you may be required to pay the surrender charge when undertaking a 1035 exchange. And your new annuity contract may be subject to its own surrender charge period—which may be longer than the remaining period on the old contract.
Source: Securities and Exchange Commission, 2016

Also, individuals can do a partial 1035 exchange for a portion of the total contract. A tax professional should be consulted for a partial exchange because any gain may be subject to ordinary income tax when withdrawn.

Several factors will affect the cost and availability of life insurance, including age, health and the type and amount of insurance purchased. Life insurance policies have expenses, including mortality and other charges. If a policy is surrendered prematurely, the policyholder also may pay surrender charges and have income tax implications. You should consider determining whether you are insurable before implementing a strategy involving life insurance. Any guarantees associated with a policy are dependent on the ability of the issuing insurance company to continue making claim payments.

Annuities have contract limitations, fees, and charges, including account and administrative fees, underlying investment management fees, mortality and expense fees, and charges for optional benefits. Most annuities have surrender fees that are usually highest if you take out the money in the initial years of the annuity contact. Withdrawals and income payments are taxed as ordinary income. If a withdrawal is made prior to age 59½, a 10% federal income tax penalty may apply (unless an exception applies). The guarantees of an annuity contract depend on the issuing company’s claims-paying ability. Annuities are not guaranteed by the FDIC or any other government agency. The earnings component of an annuity withdrawal is taxed as ordinary income and, if taken before age 59½, may be subject to a 10% federal income tax penalty. Annuities have fees and charges associated with the contract, and a surrender charge also may apply if the contract owner elects to give up the annuity before certain time-period conditions are satisfied.

Variable annuities are sold by prospectus, which contains detailed information about investment objectives and risks, as well as charges and expenses. You are encouraged to read the prospectus carefully before you invest or send money to buy a variable annuity contract. The prospectus is available from the insurance company or from your financial professional. Variable annuity subaccounts will fluctuate in value based on market conditions, and may be worth more or less than the original amount invested if the annuity is surrendered.

  1. American Council of Life Insurers, 2015
  2. Endowment contracts and qualified long-term care contracts also may be eligible for a 1035 exchange. A tax professional should be consulted before considering an exchange.

The content is developed from sources believed to be providing accurate information. The information in this material is not intended as tax or legal advice. It may not be used for the purpose of avoiding any federal tax penalties. Please consult legal or tax professionals for specific information regarding your individual situation. This material was developed and produced by FMG Suite to provide information on a topic that may be of interest. FMG Suite is not affiliated with the named broker-dealer, state- or SEC-registered investment advisory firm. The opinions expressed and material provided are for general information, and should not be considered a solicitation for the purchase or sale of any security. Copyright 2016 FMG Suite.

Beware of Ransomware

Ransomware is malicious software that’s designed to encrypt data in order to block access to it, or even access to the computer system itself, until a payment of money is made.

Get Paid for Going Green

Tip: DSIRE is a comprehensive source of information on local, state, federal, and utility incentives and policies that support renewable energy and energy efficiency.
Source: DSIREusa.org, 2015

Americans spent an annualized $142.7 billion on home improvements in the first quarter of 2015—which represents a 6.5% increase over the first quarter of 2014.¹ Those looking into environmentally minded home modifications may get a boost from Uncle Sam’s tax incentives. Here’s how:²

The Energy Property Tax Credit

Tax credits for energy efficient home additions have been extended to 2016. This means these types of improvements may be eligible for a 10% tax credit up to $500, excluding installation costs. This is a lifetime limit however, so if you have taken the credit in the past, your savings may be reduced.³

As for what qualifies, improvements must be to your primary residence and they must be found on the “Federal Tax Credits for Consumer Energy Efficiency” list. The list includes additions under the categories of biomass stoves, heat pumps, air conditioning, boilers, furnaces and fans, insulation, roofs, water heaters, windows, and doors.

Alternative Energy Improvements

But what if you want to be even more environmentally friendly? If you install an alternative energy source for your home, such as a geothermal heat pump, a small wind turbine, or a solar-powered energy system, you may be eligible for a rebate of up to 30% on the price. That means you potentially can get a third of your money back. And unlike other tax incentives, this one applies to both principal residences and second homes.⁴ However, depending on the improvement, it may have to be completed by December 31, 2016 to receive the credit.

Gadget Giveaway

Installations aren’t the only way to make tax-friendly improvements to your home. What about the tax benefits of clearing some techno-clutter?

When you donate your used electronics, you potentially can deduct the fair market value of each piece, which you determine. (To get an idea of fair market value, you can consider looking at what similar items are selling for at various online auctioneers.) Donating old electronics can help you save space, not to mention helping someone in need.

More and more homeowners are looking into the benefits of energy-saving home improvements. If you opt to “go green” this year, don’t forget to consider what tax breaks may be available. Tax laws are constantly changing, so before committing to an improvement project, consult legal or tax professionals for specific information regarding your individual situation. Also, the information in this material is not intended as tax or legal advice. It may not be used for the purpose of avoiding any federal tax penalties.

  • 1. Joint Center for Housing Studies, 2015
  • 2. The information in this material is not intended as tax or legal advice. It may not be used for the purpose of avoiding any federal tax penalties. Please consult legal or tax professionals for specific information regarding your individual situation.
  • 3, 4. Energystar.gov, 2015

The content is developed from sources believed to be providing accurate information. The information in this material is not intended as tax or legal advice. It may not be used for the purpose of avoiding any federal tax penalties. Please consult legal or tax professionals for specific information regarding your individual situation. This material was developed and produced by FMG Suite to provide information on a topic that may be of interest. FMG Suite is not affiliated with the named broker-dealer, state- or SEC-registered investment advisory firm. The opinions expressed and material provided are for general information, and should not be considered a solicitation for the purchase or sale of any security. Copyright 2016 FMG Suite.

How to Make the Tax Code Work for You

By April 15, 2016, 125 million taxpayers had dutifully filed their federal income tax returns.¹ And all of them made decisions about deductions and credits—whether they knew it or not.

When you take the time to learn more about how it works, you may be able to put the tax code to work for you. A good place to start is with two important tax concepts: credits and deductions.²

Credits

As tax credits are usually subtracted dollar for dollar from the actual tax liability, they potentially have greater leverage in reducing your tax burden than deductions. Tax credits typically have phase-out limits, so consider consulting a legal or tax professional for specific information regarding your individual situation.

Here are a few tax credits that you may be eligible for:

  • The Child Tax Credit is a federal tax credit for families with dependent children under age 17. The maximum credit is $1,000 per qualifying child.³
  • The American Opportunity Credit provides a tax credit of up to $2,500 per eligible student for tuition costs for four years of post-high-school education.⁴
  • Those who have to pay someone to care for a child (under 13) or other dependent may be able to claim a tax credit for those qualifying expenses. The Child and Dependent Care Credit provides up to $3,000 for one qualifying individual, or up to $6,000 for two or more qualifying individuals.⁵

Fast Fact: The mortgage interest deduction is not the biggest deduction in terms of its cost to federal coffers. At $77 billion in 2016, it stands behind the exclusion for work-based health insurance, the reduced tax rate on capital gains and dividends, and deductions for retirement plan contributions and earnings.
Source: PewResearch.org, 2016

Deductions

Deductions are subtracted from your income before your taxes are calculated, and thus may reduce the amount of money on which you are taxed and, by extension, your eventual tax liability. Like tax credits, deductions typically have phase-out limits, so consider consulting a legal or tax professionals for specific information regarding your individual situation.

Here are a few examples of deductions.

  • Under certain limitations, contributions made to qualifying charitable organizations are deductible. In addition to cash contributions, you potentially can deduct the fair market value of any property you donate. And you may be able to write off out-of-pocket costs incurred while doing work for a charity.⁶
  • If certain qualifications are met, you may be able to deduct the mortgage interest you pay on a loan secured for your primary residence. This deduction can include interest on a mortgage, a second mortgage, a home equity line of credit, or a home equity loan.⁷
  • Amounts set aside for retirement through a qualified retirement plan, such as an Individual Retirement Account, may be deducted. The contribution limit is $5,500, and if you are age 50 or older, the limit is $6,500.⁸
  • You may be able to deduct the amount of your medical and dental expenses that exceeds 10 percent of your adjusted gross income, or 7.5 percent if either you or your spouse is age 65 or older.⁹

Understanding credits and deductions is a critical building block to making the tax code work for you. But remember, the information in this article is not intended as tax or legal advice. And it may not be used for the purpose of avoiding any federal tax penalties.

  1. Internal Revenue Statistics, 2016.
  2. The information in this material is not intended as tax or legal advice. It may not be used for the purpose of avoiding any federal tax penalties. Please consult legal or tax professionals for specific information regarding your individual situation.
  3. Internal Revenue Service, 2016
  4. Internal Revenue Service, 2016
  5. Internal Revenue Service, 2016
  6. Internal Revenue Service, 2016
  7. Internal Revenue Service, 2016
  8. Withdrawals from traditional IRAs are taxed as ordinary income and, if taken before age 59½, may be subject to a 10% federal income tax penalty. Generally, once you reach age 70½, you must begin taking required minimum distributions.
  9. Internal Revenue Service, 2016

The content is developed from sources believed to be providing accurate information. The information in this material is not intended as tax or legal advice. It may not be used for the purpose of avoiding any federal tax penalties. Please consult legal or tax professionals for specific information regarding your individual situation. This material was developed and produced by FMG Suite to provide information on a topic that may be of interest. FMG Suite is not affiliated with the named broker-dealer, state- or SEC-registered investment advisory firm. The opinions expressed and material provided are for general information, and should not be considered a solicitation for the purchase or sale of any security. Copyright 2016 FMG Suite.

Tax Deductions You Won’t Believe

While Americans are entitled to take every legitimate deduction to manage their taxes, the Internal Revenue Service (IRS) places limits on your creativity. Here are some examples of deductions from the IRS that were permitted and some that were, well, too creative.¹

Creative Deductions that Passed Muster

Usually a child’s school-related costs are not deductible. However, one taxpayer was allowed to deduct the cost of travel, room and board as a medical expense for sending their child with respiratory problems to a school in Arizona.

Pet food typically doesn’t qualify as a write-off, except in the case where a business owner successfully argued that it was a legitimate expense to feed a cat protecting their inventory from vermin.

Does your child have an overbite? If so, you may find that the IRS is okay with a medical deduction for the cost of a clarinet (and lessons) to correct it.

A deduction for a swimming pool won’t float with the IRS, except if you have emphysema and are under doctor’s orders to improve breathing capacity through exercise. The deduction, however, was limited to the cost that exceeded the increase in property value. And yes, ongoing maintenance costs are deductible as medical expenses.

Deductions that Were Too Creative

The cost of a mink coat that a business owner bought for his wife to wear to dinner for entertaining clients was denied even though he claimed it was an integral part of dinner conversation and provided entertainment value.

Despite having dry skin, one taxpayer was denied a deduction for bath oil as a medical expense.

Losses associated with theft may be deductible, but one taxpayer went too far in deducting the loss of memories when her photos and other life souvenirs were discarded by her landlord.

One business owner reported an insurance payment as income, but then deducted the cost of the arsonist as a “consulting fee.”

Don’t expect taxpayers to pay for enhancements to self-image. Just ask the ballerina who tried to deduct a tummy tuck or the woman who tried to write off her Botox expenses.

Creativity is not something that the IRS typically rewards, so you should be careful testing the limits of its understanding. Seek the counsel of an experienced tax or legal professional for specific information regarding your situation.

  1. The information in this material is not intended as tax or legal advice. It may not be used for the purpose of avoiding any federal tax penalties. Please consult legal or tax professionals for specific information regarding your individual situation.

The content is developed from sources believed to be providing accurate information. The information in this material is not intended as tax or legal advice. It may not be used for the purpose of avoiding any federal tax penalties. Please consult legal or tax professionals for specific information regarding your individual situation. This material was developed and produced by FMG Suite to provide information on a topic that may be of interest. FMG Suite is not affiliated with the named broker-dealer, state- or SEC-registered investment advisory firm. The opinions expressed and material provided are for general information, and should not be considered a solicitation for the purchase or sale of any security. Copyright 2016 FMG Suite.

Lather, Rinse, Repeat: IRS Reporting in 2017

This webinar will provide an overview of the reporting process, what we learned from the first round of reporting, and how employers should be tracking employees.

The Right Stop Loss Solution = Savings + Security

Learn about the key concepts of stop loss coverage, specific policy points to be aware of, and what to look for in a stop loss partner.

Insurance Needs Assessment: When You’re Newly Married

Marriage changes everything, including insurance needs. Newly married couples should consider a comprehensive review of their current individual insurance coverage to determine if any changes are in order, as well as consider new insurance coverage appropriate to this new life stage.

Auto

The good news is that married drivers may be eligible for lower rates than single drivers. Since most couples come into their marriage with two separate auto policies, you should review your existing policies and contact your respective insurance companies to obtain competitive quotes on a new, combined policy.

Home

Newly married couples may start out as renters, but they often look to own a home or condo as a first step in building a life together. The purchase of homeowners insurance or condo insurance is required by the lender. While these policies have important differences, they do share the same purpose — to protect your home, your personal property and against any personal liability.

You should take special care of what is covered under the policy, the types of covered perils, and the limits on the amount of covered losses. Pay particular attention to whether the policy insures for replacement costs (preferable) or actual cash value.

Health

Like auto insurance, couples often bring together two separate individual health insurance plans. Newly married couples should review their health insurance plans’ costs and benefits and determine whether placing one spouse under the other spouse’s plan makes sense.

Disability

Married couples typically combine their financial resources and live accordingly. This means that your mortgage or car loan may be tied to the combined earnings of you and your spouse. The loss of one income, even for a short period of time, may make it difficult to continue making payments designed for two incomes. Disability insurance replaces lost income so that you can continue to meet your living expenses.¹

Life

Central to any marriage is a concern about the other’s future well-being. In the event of a spouse’s death, a lifestyle based on two incomes may mean that the debt and cash flow obligations can’t be met by the surviving spouse’s single income. Saddling the surviving spouse with a financial burden can be avoided through the purchase of life insurance in an amount that pays off debts and/or replaces the deceased spouse’s income.²

Liability

Personal liability risks can have a significant impact on the wealth you are beginning to build for your future together. Consider purchasing umbrella insurance under your homeowners policy to protect against the financial risk of personal liability.

Extended Care

Extended care insurance may be a low priority given other financial demands, such as saving for retirement. Nevertheless, you may want to have a conversation with your parents about how long-term care insurance may protect their financial security in retirement.

  1. The information in this material is not intended as tax or legal advice. It may not be used for the purpose of avoiding any federal tax penalties. Please consult legal or tax professionals for specific information regarding your individual situation.
  2. Several factors will affect the cost and availability of life insurance, including age, health, and the type and amount of insurance purchased. Life insurance policies have expenses, including mortality and other charges. If a policy is surrendered prematurely, the policyholder also may pay surrender charges and have income tax implications. You should consider determining whether you are insurable before implementing a strategy involving life insurance. Any guarantees associated with a policy are dependent on the ability of the issuing insurance company to continue making claim payments.

The content is developed from sources believed to be providing accurate information. The information in this material is not intended as tax or legal advice. It may not be used for the purpose of avoiding any federal tax penalties. Please consult legal or tax professionals for specific information regarding your individual situation. This material was developed and produced by FMG Suite to provide information on a topic that may be of interest. FMG Suite is not affiliated with the named broker-dealer, state- or SEC-registered investment advisory firm. The opinions expressed and material provided are for general information, and should not be considered a solicitation for the purchase or sale of any security. Copyright 2016 FMG Suite.

Use It Or (Don’t) Lose It

When it comes to paid time off (PTO), it’s usually “use-it-or-lose-it,” but that practice may be ending with some employers.

Insurance Needs Assessment: When You’re Young and Single

The transition to adulthood is an exciting new stage that marks true independence. You may have graduated college, taken your first job, and even rented your first apartment. With this new freedom come real responsibilities, including protecting yourself from the financial risks life presents.

Auto

Once you are no longer covered on your parent(s) policy, you will need to find insurance coverage in your name. It can be expensive for a young driver, so consider shopping around for the best rates and learn the myriad of ways to reduce this cost, such as coverage and deductible elections, the type of car you own, and available discounts.

Renter’s

If you are moving into an apartment, you should consider renter’s insurance. You may not think you’ve accumulated much in value, but when you calculate the cost of replacing your computer, electronic equipment, HDTV, clothes, etc., it can run into thousands of dollars. Renter’s insurance can be inexpensive. When shopping for a policy, ask about whether it includes liability coverage, which can protect you in the event you are sued by someone who is injured in your apartment.

Health

Federal law requires that all individuals (with limited exceptions) have health insurance. Failure to obtain coverage can result in a financial penalty. Healthcare coverage is frequently obtained through your employer. However, if your employer does not offer a health insurance program, you have two choices for obtaining coverage.

The first is to maintain coverage through your parent’s health insurance plan. Federal law permits parents to keep adult children on their plan up to age 26. This choice may be relatively inexpensive, so you may want to ask your parents to inquire what the monthly premium is to add you to their plan.

The second option is to purchase a policy directly, either through a private insurer, the federal health insurance exchange (HealthCare.gov), or through a state exchange, if available in your state of residence.

Disability

Your single most valuable asset is your future earning power. Your ability to work and earn an income is essential when it comes to your financial survival. Incurring a disability, even for a short period of time, can have substantial economic consequences, making disability insurance one of the most important insurance needs at this stage of life.

Life

Since a young, single adult typically does not have other people depending upon his or her ability to earn a living (e.g., children, dependent parents), some believe the need for life insurance is minimal.

However, due to a long life expectancy at this young age, life insurance coverage can be very inexpensive. You may want to consider obtaining some coverage to take advantage of low rates and good health in advance of a time when you will have dependents.

Extended Care

Given limited financial resources, extended care insurance may be a low priority. Nevertheless, you may want to have a conversation with your parents about how extended-care insurance may protect their financial security in retirement.

The information in this material is not intended as tax or legal advice. It may not be used for the purpose of avoiding any federal tax penalties. Please consult legal or tax professionals for specific information regarding your individual situation.

Several factors will affect the cost and availability of life insurance, including age, health, and the type and amount of insurance purchased. Life insurance policies have expenses, including mortality and other charges. If a policy is surrendered prematurely, the policyholder also may pay surrender charges and have income tax implications. You should consider determining whether you are insurable before implementing a strategy involving life insurance. Any guarantees associated with a policy are dependent on the ability of the issuing insurance company to continue making claim payments.

The content is developed from sources believed to be providing accurate information. The information in this material is not intended as tax or legal advice. It may not be used for the purpose of avoiding any federal tax penalties. Please consult legal or tax professionals for specific information regarding your individual situation. This material was developed and produced by FMG Suite to provide information on a topic that may be of interest. FMG Suite is not affiliated with the named broker-dealer, state- or SEC-registered investment advisory firm. The opinions expressed and material provided are for general information, and should not be considered a solicitation for the purchase or sale of any security. Copyright 2016 FMG Suite.

Home Is Where The Office Is

I don’t mind working, but this eight hour wait to go home is killing me. If that sounds like you, then have you considered working from home?

Insurance Needs Assessment:When You’re Married With Children

A growing family, by definition, means growing financial obligations — both present and in the future. Raising children can increase your insurance needs and heightens the urgency for being properly prepared.

Auto

When a child becomes a new driver, one option is to add the teenager to the parents’ policy. You may want to discuss with your auto insurer ways to reduce the additional premium that accompanies a new driver.

Home

You should periodically review your homeowners policy for three primary reasons.

A growing family generally accumulates increasing amounts of personal belongings. Think of each child’s toys, clothes, electronic equipment, etc. Moreover, household income tends to rise during this time, which means that jewelry, art, and other valuables may be among your growing personal assets.

The second reason is that the costs of rebuilding — and debris removal — may have risen over time, necessitating an increase in insurance coverage.

Lastly, with growing wealth, you may want to raise liability coverage, or if you do not have an umbrella policy, consider adding it now. Umbrella insurance is designed to help protect against the financial risk of personal liability.

Health

With your first child, be sure to change your health care coverage to a family plan. If you and your spouse have retained separate plans, you may want to evaluate which plan has a better cost-benefit profile. Think about whether now is the appropriate time to consolidate coverage into one plan.

Disability

If your family is likely to suffer economically because of the loss of one spouse’s income, then disability insurance serves an important role in replacing income that may allow you to meet living expenses without depleting savings.¹

If you already have disability insurance, consider increasing the income replacement benefit since your income and standard of living may now be higher than when you bought the policy.

Life

With children, the amount of future financial obligations increases. The cost of raising children and funding their college education can be expensive. Should one of the spouses die, the loss of income might severely limit the future quality of life for your surviving children and spouse. Not only does death eliminate the future income of one spouse permanently, but the future earning power of the surviving spouse might be diminished as single parenthood may necessitate fewer working hours and turning down promotions.

The amount of life insurance coverage needed to fund this potential financial loss is predicated on, among other factors, lifestyle, debts, age and number of children, and anticipated future college expenses.²

Some couples decide to have one parent stay at home to care for the children full time. The economic value of the stay-at-home parent is frequently overlooked. Should the stay-at-home parent die, the surviving parent would likely need to pay for a range of household and child-care services and potentially suffer the loss of future income due to the demands of single parenthood.

Extended Care

The earlier you consider extended-care choices the better. However, the financial demands of more immediate priorities, like saving for your children’s college education or your retirement, will take precedence if resources are limited.

  1. The information in this material is not intended as tax or legal advice. It may not be used for the purpose of avoiding any federal tax penalties. Please consult legal or tax professionals for specific information regarding your individual situation.
  2. Several factors will affect the cost and availability of life insurance, including age, health and the type and amount of insurance purchased. Life insurance policies have expenses, including mortality and other charges. If a policy is surrendered prematurely, the policyholder also may pay surrender charges and have income tax implications. You should consider determining whether you are insurable before implementing a strategy involving life insurance. Any guarantees associated with a policy are dependent on the ability of the issuing insurance company to continue making claim payments.

The content is developed from sources believed to be providing accurate information. The information in this material is not intended as tax or legal advice. It may not be used for the purpose of avoiding any federal tax penalties. Please consult legal or tax professionals for specific information regarding your individual situation. This material was developed and produced by FMG Suite to provide information on a topic that may be of interest. FMG Suite is not affiliated with the named broker-dealer, state- or SEC-registered investment advisory firm. The opinions expressed and material provided are for general information, and should not be considered a solicitation for the purchase or sale of any security. Copyright 2016 FMG Suite.