Janell A. Israel & Associates

1585 Kapiolani Blvd., Suite 1604, Honolulu, Hawaii 96814 Phone: 808-942-8817

March 2012 Tax Newsletter

What's New in Taxes:

Payroll Tax Cut Extended Through 2012

Congress passed an extension of the 2% payroll tax cut that had been scheduled to expire at the end of February. The extension means 160 million working Americans will continue to pay social security tax on their wages at a 4.2% rate for the rest of 2012, rather than at a 6.2% rate.

Because Republicans and Democrats were unable to agree on how to pay for the extended tax cut, the law included no spending cuts to offset the estimated $93 billion cost of this provision.

The law also provides for long-term federal unemployment benefits, setting the maximum at 73 weeks in states with the worst unemployment and 63 weeks for other states.

Another provision in the law includes the so-called "doc fix" that prevents a scheduled 27% reduction in Medicare payments to doctors.

The unemployment benefits and doctor payments will be paid for by the government sales of broadband spectrum, requiring federal workers hired after this year to contribute more to their pensions, and cuts in certain health programs.

What is a Charitable Organization?

Money or property that you donate to "qualified" charitable organizations can be included in your itemized deductions as a charitable contribution. But what is a "qualified" charity? IRS Publication 78 lists all qualified organizations.

• Churches, synagogues, temples, mosques, and other religious organizations.
• Federal, state, and local governments, if your contribution is solely for public purposes. This generally includes local government, public schools, Indian tribal government, and governments of U.S. Possessions.
• Nonprofit schools and hospitals.
• Nonprofit volunteer fire companies, public parks and recreation facilities, and civil defense organizations.
• Organizations organized and operated for charitable purposes, such as the Salvation Army, Red Cross, Goodwill Industries, United Way, Boy Scouts, Girl Scouts, March of Dimes, etc.
• Certain organizations that foster national or international amateur sports competition.
• War veterans' organizations, including posts, auxiliaries, trusts, or foundations organized in the United States or any of its possessions.
• Domestic fraternal societies, orders, and associations operating under the lodge system.
• Certain Canadian and Mexican charities allowed by treaty - however, generally to deduct your contribution you must have income from sources within the country.

If you have questions regarding a specific charity or charitable contribution, please feel free to inquire with this office.

New Business:

More Small Business Audits

The IRS plans to conduct random audits of 2,500 returns from 2010 filed by corporations with less than $250,000 in assets. The results will be used to update the IRS formulas for selecting returns for audit.

The IRS is also trying to improve tax compliance among sole proprietors. According to a Treasury report, sole proprietors accounted for 20% of the $345 billion tax gap calculated for 2001 and about the same percent of the $450 billion tax gap for 2006.

What's New in Finances:

IRS Reopens Program

To encourage taxpayers with offshore accounts to get current with their tax obligations, the IRS has reopened its "offshore voluntary disclosure program (OVDP)." Similar programs in 2009 and 2011 resulted in the collection of more than $4.4 billion of taxes owed.

The 2012 program will be similar to the 2011 program; however, one difference is that there is currently no deadline by which taxpayers must apply.

The Short Answer: How to Handle Beneficiary Designations

By Christine Benz, Morningstar

The decision about how to designate beneficiaries for your company retirement plan, life insurance policies, and other assets might seem like a no-brainer. Chances are you would like those near and dear to you to inherit any money you've accumulated during your lifetime, so making sure that happens should be as simple as writing their names on the appropriate forms, right?

Not so fast. Naming beneficiaries is a more nuanced decision-making process than you might think, and it's one that may have significant repercussions for your loved ones.

In this week's column, I'll provide some pointers to bear in mind as you review your beneficiary designations.

1. Know the basics.

You can typically name beneficiaries for a broad range of assets, including retirement plans, annuities, and life insurance policies. And you can name almost anyone--or anything--as your beneficiary, including individuals, charities, and trusts. (Children under the age of majority--age 18 or 21, depending on the state in which you live--cannot be named as beneficiaries of life insurance policies, retirement plans, or annuities, however.)

When you name a beneficiary, those assets can pass directly to whomever you designate; they won't have to go through probate, which can be a lengthy and costly process. In addition, bear in mind that your beneficiary designations will override bequests you've made in your will. For example, even though your will might state that you want your spouse to inherit all of your assets, your brother will get a piece of the pie if you named him as the beneficiary of your company retirement plan and didn't bother to change it after you got married.

2. Keep your designations up to date.

That brings me to my next point: Plan to review your beneficiary designations on a regular schedule, ideally as part of an annual review of your finances. Major life events, such as a marriage, a divorce, the birth of a child, or the death of a loved one may require that you make changes to your designations. By the same token, you'll also want to review your beneficiary designations if you or your employer has recently switched retirement-plan or insurance providers, as the beneficiaries you specified with your previous provider may not automatically carry over to the new one.

3. Bear in mind the tax consequences.

Before you make your beneficiary designations, be aware that inheriting assets is apt to have tax ramifications for your loved ones. (That's not the case if you name a charity as your beneficiary, however. Not only will the charity receive the assets tax-free, but your estate will also be eligible for a charitable deduction.) If you're making someone other than your spouse the beneficiary of your company retirement-plan assets, he or she may have to take mandatory distributions from that plan and, in turn, pay taxes on the money. Your spouse, on the other hand, will be able to roll over your retirement-plan assets into his or her own IRA and won't have to pay taxes until distributions begin.

Also keep estate taxes in mind: If you designate someone other than your spouse as your beneficiary, that amount will be included in the value of your estate, and, in turn, could increase your estate-tax liability. And if your beneficiary already has a large amount of assets, you could end up creating an estate-planning headache for him or her, or compounding an existing one. That's because any inherited assets will be included in that person's estate, and if the taxable estate is above a certain threshold at the time of his or her death ($5 million in 2011), his or her heirs will owe estate tax. Again, these issues don't pertain to husbands and wives, as a spouse won't owe estate tax on assets inherited from another spouse. The surviving spouse's heirs may well owe estate tax at the time of his or her death, however.

For all of these reasons, it pays to discuss these considerations with your loved ones before you name them as your beneficiaries.

4. Be specific.

If you have a particularly trusted friend or relative, it may be tempting to name him or her as your beneficiary with the assumption that that person would "know" how to distribute your assets in accordance with your wishes. For example, you might want to name your financially savvy brother as your beneficiary of your retirement plan; he, in turn, could distribute your assets to each of your siblings.

I'd advise against this tack, however. For one thing, there's the possibility that that person won't know precisely how you'd want those assets distributed or could decide to keep it all for himself. Perhaps more importantly, you could create or compound estate-planning issues for that person. Even if that individual ends up distributing the inherited assets to others, those assets will still be considered part of that person's estate when he or she passes away.

For all of these reasons, it pays to be as specific as possible when designating beneficiaries. Most beneficiary designation forms allow you to name multiple primary and contingent beneficiaries and to specify what percentage of assets you'd like distributed to each person upon your death.

5. Give special consideration to special-needs loved ones.

I have many clients with special-needs persons in their life, so I can relate to the desire to make sure that any physically or mentally disabled loved ones are well provided for. Remember, however, that you could affect the disabled individual's eligibility for government-provided benefits by transferring assets directly to him or her. In addition, if the person is mentally disabled, he or she may not be able to manage the assets.

If you're in a position to transfer a large amount of assets to a loved one with special needs, consult with an attorney who specializes in estate planning first. He or she may recommend that you set up a Special Needs Trust.

6. Familiarize yourself with other aspects of estate planning.

Although you might associate the need for "estate planning" with the mega-rich, designating beneficiaries is actually one of the first steps in creating an estate plan; creating a will is another. Moreover, you don't have to consider yourself extremely wealthy to contemplate setting up a trust. Set up a meeting with an attorney to discuss.

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All information is believed to be from reliable sources, however we make no representation as to its completeness or accuracy. The information contained in this newsletter is provided by Mostad & Christensen, Inc. The information is of a general nature and should not be acted upon in your specific situation without further details and/or professional assistance. For more information on anything in this newsletter, or for assistance with any of your tax, business, or financial strategy concerns, contact our office.

Securities and advisory services offered through National Planning Corporation (NPC), Member FINRA/SIPC, a Registered Investment Adviser. Mosted & Christensen, Janell Israel & Associates, Morningstar and NPC are separate and unrelated companies.

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Rep is not an attorney. Rep can help review the documents and recommend a local attorney that specializes in Estate Planning. Estate planning can involve a complex web of tax rules and regulations. You should consider the counsel of an experienced estate planning professional before implementing any strategy.