Advanced Underwriting Consultants

Question of the Day – March 6

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The professionals at Advanced Underwriting Consultants (AUC) answer the tax questions posed by producers.  Here’s the question of the day.

Question:  Can my client deduct the investment fees charged inside her variable annuity from her income taxes?

Answer:  No.

If investment fees are paid in cash or otherwise taken from an already-taxed source, they are potentially deductible—if the taxpayer itemizes, and to the extent all deductible miscellaneous expenses exceed 2% of AGI.

If the fees are deducted from an untaxed source—inside an IRA or nonqualified deferred annuity (NQDA) contract, for example—they are NOT tax deductible.  See Revenue Code Section 212.

Even though the internal amounts charged in an IRA or NQDA (including VAs) are not tax deductible, the IRS allows such amounts to be deducted from the pre-tax account without being included in the client’s taxable income.

Have a question for the professionals at AUC?  Feel welcome to submit it by email.  We may post your question and the answer as the question of the day. 

Question of the Day – December 21

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Here’s the question of the day.

Question:  My 45 year old client purchased her only Roth IRA three years ago with a $100,000 Roth conversion.  The Roth IRA is now worth $90,000.  If she surrenders the Roth, is she entitled to an income tax deduction?

Answer:   Perhaps, but under these circumstances it may not provide any net benefit.

Treasury Regulations Sec. 1.408A-6 says that all Roth IRAs must be aggregated for the purpose of calculating the tax treatment of distributions.  The IRS holds generally that for a loss position to be recognized, the asset must be fully surrendered.  That means that for a Roth IRA tax loss to be potentially available, all the taxpayer’s Roth IRAs must be surrendered, with a net loss being the aggregate result.

In this example, the facts are that the converted Roth is the taxpayer’s only Roth.

When the taxpayer surrenders the Roth IRA, there is a $10,000 loss.  The IRS’s position that the loss is deductible, but only if the taxpayer itemizes on the tax return.  Further, the loss is considered a miscellaneous expense, so it is only deductible to the extent the taxpayer’s total miscellaneous expenses exceed 2% of AGI.

Finally, the taxpayer must consider the tax implications of surrendering amounts associated with a conversion within five years of the conversion.  The rules say that a taxpayer younger than 59 ½ who withdraws converted amounts from a Roth IRA within five years of the conversion must pay the 10% penalty tax on the amounts withdrawn.  In this example, it would mean a $9,000 penalty tax on the $90,000 distribution.

Have a question for the professionals at AUC?  Feel welcome to submit it by email.  We may post your question and the answer as the question of the day. 

Question of the Day – January 26

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The professionals at Advanced Underwriting Consultants (AUC) answer the tax and technical questions posed by producers.  Here’s the question of the day.

Question: What are the tax advantages to an individual in purchasing a qualified long term care contract?

Answer: There are two main potential advantages of LTCi for the insured policyowner:

  1. The long term care benefit is income tax free when paid.
  2. The premium paid for LTCi is potentially income tax deductible.

The maximum tax-free benefit payable under a tax-qualified LTC policy in 2012 is the greater of

  • $310 per day, or
  • actual amounts paid for qualified long term care services.

Qualified long term care services are the necessary diagnostic, preventive, therapeutic, curing, treating, mitigating, rehabilitative services, and maintenance and personal care services that are:

1. Required by a chronically ill individual, and

2. Provided pursuant to a plan of care prescribed by a licensed health care practitioner.

Not every taxpayer will be able to deduct the premiums for LTCi.  The premiums are considered to be a medical expense, and are only currently deductible by those taxpayers who itemize.  Further, the medical expense deduction is only available to the extent that total medical expenses exceed 7.5% of the taxpayer’s adjusted gross income (AGI) in 2012.

To make deductibility even more problematic, the amount of premium that is potentially deductible is limited to the lesser of the actual amount paid, or the LTCi age-based table amount, shown on the following chart:

Attained Age Before the Close of the Taxable Year 2012
40 or younger $350
Older than 40 but not more than 50 $660
Older than 50 but not more than 60 $1,310
Older than 60 but not more than 70 $3,500
Older than 70 $4,370

Here’s an example with regard to premium deductibility.  Say that Martha, age 64, is a single taxpayer who has $80,000 of adjusted gross income in 2009.  She is paying $4,200 annually for her LTCi policy.  Martha has $4,500 of other medical expenses, and she itemizes on her tax return.

Martha must first calculate the AGI threshold for her medical expense deduction.  Multiplying $80,000 by 7.5% equals $6,000.  Only those medical expenses in excess of $6,000 are deductible.

Martha is paying $4,200 a year for LTCi, but the chart amount for her age is only $3,500.  She must use the smaller chart number.  Adding her other medical expenses of $4,500 to her chart number of $3,500 yields a sum of $8,000.  That exceeds the AGI threshold by $2,000—which is the amount of her medical expense deduction for 2012.

Thinking of it another way from Martha’s perspective—only $2,000 of her $4,200 LTCi premium is deductible.

Have a question for the professionals at AUC?  Feel welcome to submit it by email.  We may post your question and the answer as the question of the day.