Month: February 2019

Maybe there’s some favorable news for insurance agents and brokers, but don’t jump too high!

Recall that the Tax Cuts and Jobs Act of 2017 (TCJA) lowered the highest tax rate on C-corporations to 21%. To afford at least a partially similar benefit to pass-through businesses (S-corporations, partnerships, and sole proprietorships, or any LLC taxed as one of those three), a business deduction was possible that could be applied to the owner’s individual taxable income.

This “Section 199A Deduction” could be up to 20% of a business’s qualified business income

(QBI – the definition is unimportant for purposes of this article).  The deduction was subject to a phase-out or reduction, and TCJA divided all pass-through businesses into two categories for purposes of determining the amount of this “deduction reduction.”

The first was Specified Service Businesses. An owner of a Specified Service Business is eligible for a full 20% deduction if his or her personal taxable income is below $157,500 ($315,000 if filing jointly).  As taxable income increases the size of the deduction is reduced until the owner’s taxable income reaches $207,500 ($415,000 if filing jointly).  After that there is no deduction available.

The same taxable income level breakpoints are applied to businesses in the second category, Non-service Businesses, but their owners have an advantage in that the deduction phases out less or not at all if (in a nutshell) the company has a sizeable multi-employee wage base, or the owner has significant basis in the business.

The brou-ha-ha within the insurance industry when TCJA was passed was whether or not insurance agents and insurance brokers fell into the more advantageous second category (Non-service Businesses).

The legislation was unclear.

But now the U.S. Treasury has issued final regulations for TCJA that would include in the second (again, the more favorable) category of Non-service Businesses all insurance agents, agencies and brokerages taxed as a pass-through.  But the circumspect insurance advisor has reason to pause.

One group that the TCJA definitely specifies as a Specified Service Business are companies involved in “financial services”

These services are defined (in part) as the provision of financial services including “managing wealth, advising clients with respect to finances, developing retirement plans, developing wealth transitions plans . . .”, etc. (emphasis added).

It is hard to imagine comprehensive insurance planning that does not wander over into these regions.  Consult with your tax advisor for a final conclusion.

The good news for small insurance enterprises is that, business category notwithstanding; taxpayers with taxable income under $157,500 ($315,000 if filing jointly) are still eligible for the full 20% reduction and eligible for some relief at higher taxable income levels.

An excellent discussion from Principal Financial of the Section 199A Deduction under TCJA and the Regulations is available HERE.

Nobody gets help with college costs nowadays unless they first fill out a lengthy and bothersome form known as the FAFSA (the acronym stands for Free Application for Federal Student Aid, just in case it ever pops up when you choose the Governmental Financial Assistance category on Double Jeopardy).

The information entered therein drives all consideration for aid under all Federal and many State educational programs.

Now here’s the rub

FAFSA has certain eligibility criteria that determines – based on your income and net worth – how much you should be contributing to your child’s higher education.

If the amount they determine you can pay is too high it renders you ineligible for assistance.

And therein lies the additional rub

If you are poor and haven’t paid much of the tax that supports the assistance programs, then you’ll probably get financial support.  If you are rich and paid a great deal of the tax to fund the programs, then you probably won’t get any aid – but no big deal because you’ve got enough to pay the piper anyway.

The people that get hammered are those in the middle who have paid their fair share of the tax and, in addition, have been responsible enough to save, invest, and accumulate against the day of their anticipated retirement – only to find that the net worth that their sound economic behavior has created disqualifies them for assistance.

Here is where you can help your clients

Especially those with liquid net worth considerable enough that is proscribes or prohibits assistance.

The instructions for completion of the FAFSA form direct that in reporting financial information, “Net worth means current value [of includible assets] minus debt.”  For example, a commercial building worth $300,000 with a $100,000 mortgage would add $200,000 to the net worth calculation.

But more important – when adding the value of investments the instructions state that “Investments do not include . . . the value of life insurance . . . [or] annuities . . .”

How many clients do you have with considerable amounts of net worth in low-performing assets like CDs?  And now the value of those assets are creating a roadblock to financial add.

One simple solution to recommend is the transfer of funds to an annuity contract or an overfunded life insurance policy (they may not have adequate coverage anyway).

The timing of a purchase doesn’t appear to be an issue

In researching this strategy, calls to the FAFSA information line drew the response that an annuity or life policy was exempt so long as it was in force at the time of the completion of the FAFSA application.  Needless to say, a client should do his or her own spadework in this regard before making a decision.

Once the child is graduated or no longer in need of assistance, funds can be transferred back into the investment opportunities of choice.  From the time that inquiries into possible financial aid begin until the event of a child’s graduation is usually long enough to purchase an annuity with an acceptably short surrender charge period – especially if the 10 o’clock scholar involved is one inclined to pack four years of higher education into six.

Contact us for the best product opportunities available for clients who are prospects for this FAFSA Net Worth Minimization Strategy.