Life insurance policy loans can generally be taken without income tax consequences, but there are circumstances where a “loan” is immediately taxable. We’ve covered situations where a policy is surrendered with a loan outstanding, resulting in taxable income. This article discusses another case where a policy “loan” will be treated as taxable income.

In Frederick D. Todd II et ux. v. Commissioner (T.C. Memo. 2011-123), the Tax Court considered whether a distribution from a welfare benefit fund to a fund participant was a policy loan or a taxable distribution.

For previous coverage of life insurance policies held by welfare benefit funds in Advisor’s Journal, see Deductions for Life Insurance Premium Payments to Welfare Benefit Plan Denied (CC 10-29).

Read this complete analysis of the impact at AdvisorFX (sign up for a free trial subscription with full access to all of the planning libraries and client presentations if you are not already a subscriber).

For in-depth analysis of welfare benefit funds, see Advisor’s Main Library: B—Welfare Benefit Funds.

Why is this Topic Important to Wealth Managers? This blogticle provides discussion and analysis on the alternative minimum tax and how it’s calculated in 2011. For wealth managers who are closely integrated with client planning, knowledge of the AMT and how it affects clients is integral to overall wealth management.

Present law imposes an alternative minimum tax (‘‘AMT’’) on individuals. The AMT is the amount by which the tentative minimum tax exceeds the regular income tax.[1] An individual’s tentative minimum tax is the sum of (1) 26 percent of so much of the taxable excess as does not exceed $175,000 ($87,500 in the case of a married individual filing a separate return) and (2) 28 percent of the remaining taxable excess.[2]

The taxable excess is so much of the alternative minimum taxable income (‘‘AMTI’’) as exceeds the exemption amount.[3] The maximum tax rates on net capital gain and dividends used in computing the regular tax are used in computing the tentative minimum tax. AMTI is the individual’s taxable income adjusted to account for specified preferences and adjustments.[4]

The AMT exemption amount for taxable years beginning in 2011 is (1) $74,450, in the case of married individuals filing a joint return and surviving spouses; (2) $48,450 in the case of other unmarried individuals; and (3) $37,225 in the case of married individuals filing separate returns.[5]

Generally, present law provides for certain nonrefundable personal tax credits (i.e., the dependent care credit, the credit for the elderly and disabled, the child credit, the credit for interest on certain home mortgages, the Hope Scholarship and Lifetime Learning credits, the credit for savers, the credit for certain nonbusiness energy property, the credit for residential energy efficient property, the credit for certain plug-in electric vehicles, the credit for alternative motor vehicles, the credit for new qualified plug-in electric drive motor vehicles, and the D.C. first-time homebuyer credit).

Under Sec. 202 of the Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010 [6] for taxable years including 2011, the nonrefundable personal credits are allowed to the extent of the full amount of the individual’s regular tax and alternative minimum tax.[7]

This extension of the use of nonrefundable credits replaces what would have been a much different tax treatment. In other words, the nonrefundable personal credits (other than the child credit, the credit for savers, the credit for residential energy efficient property, the credit for certain plug-in electric drive motor vehicles, the credit for alternative motor vehicles, and credit for new qualified plug-in electric drive motor vehicles) would have been allowed only to the extent that the individual’s regular income tax liability exceeds the individual’s tentative minimum tax, determined without regard to the minimum tax foreign tax credit. The remaining nonrefundable personal credits would have been allowed to the full extent of the individual’s regular tax and alternative minimum tax.

For more information on the AMT see generally AMAFX Tax Facts How is the Alternative Minimum Tax calculated?

Next week’s blogticles will present interesting planning concepts for wealth managers.

We invite your questions and comments by posting them below, or by calling the Panel of Experts.

[2] IRC Sec. 55(b).

[3] IRC Sec. 55(b)(1)(A)(i)(II).

[4] See IRC Sec. 55(b)(2).

[5] IRC Sec. 55(d).

[6] Public Law 111–312.

[7] See IRC 26(a).

A recent IRS Revenue Ruling provides an important reminder for us of the rules for deducting interest that’s paid or accrued on a business life insurance policy loans. Knowing how and when policy loan interest is properly deductible can mean the difference between closing the sale in the first instance and an IRS audit down line if these rules are ignored.

In general, interest paid on a life insurance policy loan is not deductible for income tax purposes; but there are some exceptions for life insurance purchased for business purposes. The deductibility of policy loan interest has been eroded significantly over the past 20 years, so details are critical when selling or transacting on a policy that’s issued to a business.  Read this complete analysis of the impact at AdvisorFX (sign up for a free trial subscription with full access to all of the planning libraries and client presentations if you are not already a subscriber).

For previous Advisor’s Journal coverage of the exception to the pro rata limitation on interest deduction, see Obama Budget Would Undercut Utility of Life Insurance in Small Business Planning (CC-11-41).

For in-depth analysis of corporate-owned life insurance, see Advisor’s Main Library: D—Deductibility Of Business Insurance Premiums, E—Premiums As Taxable Income To The Insured & F—Taxability Of Corporate Owned Life Insurance Proceeds At Death.

As reported earlier this month in Advisor’s Journal [Qualified Charitable Distributions from an IRA (CC 11-03))], a qualified charitable distribution (QCD) of up to $100,000 made from an IRA will not be included in the taxpayer’s gross income, as long as the contribution is made directly from the trustee to a public charity or conduit private foundation when the account owner is at least 70½ years old.

One benefit of taking a QCD is that it can qualify as a required minimum distribution (RMD). For the taxpayer who does not have a financial need for the distribution, making a QCD is an opportunity to take the RMD—avoiding the severe tax penalties for not taking the distribution—while excluding the distribution from taxable income.

But because the QCD provision lapsed during 2010, taxpayers who took an RMD during 2010 are out-of-luck.  

Read this complete analysis of the impact at AdvisorFX (sign up for a free trial subscription with full access to all of the planning libraries and client presentations if you are not already a subscriber).

Why is this Topic Important to Wealth Managers? Discusses 2011 applicable tax rates, credit allowances and deductions for clients of wealth managers. 

Child Tax Credit—for taxable years beginning in 2011, the value used in 24(d)(1)(B)(i) to determine the amount of credit under § 24 that may be refundable is $3,000.

Hope Scholarship, American Opportunity, and Lifetime Learning Credits—for taxable years beginning in 2011, the Hope Scholarship Credit under § 25A(b)(1), as increased under § 25A(i) (the American Opportunity Tax Credit), is an amount equal to 100 percent of qualified tuition and related expenses not in excess of $2,000 plus 25 percent of those expenses in excess of $2,000, but not in excess of $4,000. Accordingly, the maximum Hope Scholarship Credit allowable under § 25A(b)(1) for taxable years beginning in 2011 is $2,500.

In addition, for taxable years beginning in 2011, a taxpayer’s modified adjusted gross income in excess of $80,000 ($160,000 for a joint return) is used to determine the reduction under § 25A(d)(2) in the amount of the Hope Scholarship Credit otherwise allowable under § 25A(a)(1). For taxable years beginning in 2011, a taxpayer’s modified adjusted gross income in excess of $51,000 ($102,000 for a joint return) is used to determine the reduction under § 25A(d)(2) in the amount of the Lifetime Learning Credit otherwise allowable under § 25A(a)(2).

Standard Deduction—In general, for taxable years beginning in 2011, the standard deduction amounts under § 63(c)(2) are as follows:

Personal Exemption—for taxable years beginning in 2011, the personal exemption amount under § 151(d) is $3,700.

Interest on Education Loans—for taxable years beginning in 2011, the $2,500 maximum deduction for interest paid on qualified education loans under § 221 begins to phase out under § 221(b)(2)(B) for taxpayers with modified adjusted gross income in excess of $60,000 ($120,000 for joint returns), and is completely phased out for taxpayers with modified adjusted gross income of $75,000 or more ($150,000 or more for joint returns).

Excessive Investment Income to Disqualify Earned Income Credit— taxable years beginning in 2011, the earned income tax credit is not allowed under § 32(i) if the aggregate amount of certain investment income exceeds $3,150.

2011 tax tables—for taxable years beginning in 2011, the tax rate tables under § 1 are as follows: 

This week’s blogticle will be discussing wealth management and creation ideas for 2011.

We invite your questions and comments by posting them below, or by calling the Panel of Experts.

Why is this Topic Important to Wealth Managers?  Discusses new tax rate brackets beginning next colander year (2011).  Also, briefly discusses tax rate tables generally.

In 2001, the Economic Growth and Tax Relief Reconciliation Act first created a new 10-percent regular income tax bracket for a portion of taxable income that was previously taxed at 15 percent.  That law also reduced the other regular income tax rates. The otherwise applicable regular income tax rates of 28 percent, 31 percent, 36 percent and 39.6 percent were reduced to 25 percent, 28 percent, 33 percent, and 35 percent, respectively.

Under Section 101 of the new Tax Relief, Unemployment Insurance Reauthorization, And Job Creation Act of 2010, the law creates an extension of the taxable income brackets created almost a decade ago.

Generally, a taxpayer determines his or her tax liability by applying the tax rate schedules (or the tax tables) to his or her taxable income. The rate schedules are broken into several ranges of income, known as income brackets, and the marginal tax rate increases as a taxpayer’s income increases. Separate rate schedules apply based on an individual’s filing status.

Below are the new tax rate tables for those filing as single taxpayers, married filing jointly, as well as head of household.

For those filing as single taxpayers the new income tax rates, effective after 2010 are:

For married individuals filing jointly, the new income tax rates are:

For those filing as head of household, the new income tax rates are:

Tomorrow’s blog will continue to discuss pertinent provisions of the new Tax Cuts and how they relate to wealth managers.

We invite your questions and comments by posting them below, or by calling the Panel of Experts.