2013 Tax Guide for Insurance Professionals

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It’s tax time again.

This brief Tax Guide addresses several key tax issues/changes that may affect your business, your clients, and the products you sell. Hopefully this guide saves you time trying to figure out what you need to know during this critical planning month.

2013 Tax Law Issues On the Table

Many tax issues are still in flux – as of March 1, here is a summary of some key issues that may impact your business and your clients’ situations.

Mortgage Interest Deduction

Although it is probable that this deduction will continue, it could be severely changed. It might be changed to only cover primary residences, excluding secondary ones. The cap on deductable mortgage debt could be reduced from $1 million to $500,000. Congress might even do away entirely with the deduction for high-income earners.

Any of these could result in a major setback for the recovering housing market. Currently, the first year deduction on a $350,000, 30-year mortgage with a 3.75% fixed rate is $13,045. This is a major selling point for would-be homeowners.

Employer Health Insurance Tax

More than 150 million Americans receive tax-free health insurance benefits from their employer. That could change, however. 2012 W-2’s will include the total amount paid for each employee’s plan. Observers say that this could point to a new tax on those benefits.

A tax on health insurance benefits would eliminate the country’s biggest tax break. This tax would raise $150 billion in revenue. But it could force many into plans with higher co-payments and deductibles.

Charitable Deductions

Instituting a threshold before charitable contributions can be deducted has been suggested. Or alternatively, putting a cap on the overall amount of deductions allowed.

Municipal Bond Interest

Municipal bonds are exempt from federal and most state and local taxes. This makes them especially popular with wealthy investors. President Obama has proposed a limit on the exemption at the 28% tax bracket. Individuals in higher brackets would face a 7% tax on formerly tax free investments. This could drive up costs for cities and towns as investors demand higher rates.

Corporate Tax Breaks

President Obama has suggested closing some of the many tax loopholes large corporations utilize. Hotly debated is the $1.7 trillion U.S. multinational companies have designated as foreign investments.

Taxing that $1.7 trillion would hurt many U.S. companies and the U.S. economy. There are many markets outside the U.S. that have high growth potential. This tax would prevent companies from investing in those markets. Also, much of this money is actually invested in U.S. government securities and banks. Taxation might cause the money to be repurposed and not invested in those securities.

*As of 2.27.13, All Data Subject to Change.

Social Security Taxation

New Data from SSA.Gov on Taxation of Benefits (as of 2.28.13):

2013 Social Security/SSI/Medicare Information




















How Should I Address Taxation on Social Security Benefits with Prospects?

In 1938, Congress changed Social Security law and allowed up to 50% of benefits to be taxable. In 1993, the law was changed again. Now up to 85% of benefits are subject to taxation, and this creates a powerful opening to prospect with new potential clients.

“Threshold Income” causes Social Security to be taxed. One’s threshold income includes half of Social Security, pensions, IRA Distributions, CDs, money markets, US treasuries, mortgage certificates, capital gains, dividends, tax-free bonds and corporate bonds.

According to IRS Publication 1304, 62% of those who are receiving Social Security benefits are paying taxes on those benefits. Imagine working your whole career to finally receive Social Security and then your benefits get taxed.

Key Strategy

Tell your clients they can make a simple move with their money that can reduce or even eliminate those taxes. Your client’s total income, including any interest and investment income, determines the portion of your client’s Social Security benefits that are treated as taxable. Amazingly, even tax-free interest on municipal bonds can cause a larger portion of your client’s Social Security benefits to be taxable. 

The strategy to reduce taxation on Social Security benefits is to redirect a portion of your client’s assets into a tax-deferred product, such as an annuity, so the interest your client earns on that savings does not count against them when the taxes on Social Security benefits are being computed. Therefore, income credited inside an annuity will not create a tax on Social Security.

Produced by Insurance Insight Group (IIG) as compiled by Robert Billingham, Marketing Director, IIG.

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