Let it Snow, Let it Snow, Let it Snow!
If you are a contractor who also plows snow for public or private entities, there are a few things you should know before you start plowing this winter.
Your automobile insurance policy will provide you with liability coverage — bodily injury and damage to the property of others — while you are actually plowing. And hopefully (keep reading), your general liability policy covers you once you have finished the work. That is, it provides coverage for suits regarding slips and falls resulting from any alleged poor plowing claims that might come.
Massachusetts courts used to have a high bar for proof of negligence before these types of slip-and-fall claims could proceed. “As a pedestrian in New England, you should know it snows and the ground is slippery, plowed or not!” Recently the bar has been lowered, however, allowing these types of claims to proceed at a lower threshold of negligence. Not good for the snow plow operator.
Plowing for a private entity is riskier than plowing for a governmental entity because it is harder to sue a public entity and those working for them. However, the shopping mall operator and his contractors are fair game.
Don’t assume your general liability policy covers you for these slip-and-fall claims. Many contractors’ general liability policies exclude, by endorsement, snow-plowing operations. In this case, you would need to purchase this coverage separately. Always check with your broker to see if you are covered!
At Cleary, we will evaluate your business exposures and work with you to develop a comprehensive plan to safeguard your business. Give us a call today at 617-723-0700.
Seeking Tax Nirvana in 2013
Presented by John B. Steiger, ChFC, AEP Certified Financial Planner ™
If we had to give 2012 a name, we could probably call it the Year of Uncertainty. The upcoming U.S. presidential elections, the pending fiscal cliff, and the ongoing economic issues in the eurozone have combined to make investors more concerned about their future financial plans than perhaps ever before. And one of their biggest worries is taxes.
Although we are currently enjoying the lowest income tax rates in 20 years and the lowest capital gains rates since World War II, this is about to change. Working with your financial and tax advisors to develop a tax-diversified approach to your portfolio may be the best way to navigate the current environment. Let’s take a closer look at the upcoming changes and potential solutions for addressing them.
Recent developments
Starting in 2013, the 2010 Patient Protection and Affordable Care Act will increase taxes for high-income taxpayers, including estates and trusts. The increases will come in the form of two new taxes:
- Medicare Hospital Insurance (HI) payroll tax increase of 0.9 percent
- New 3.8-percent surtax on most investment income
With the Supreme Court upholding of the health care act, it is very likely that these two taxes will indeed go into effect.
In addition, federal income, capital gain, gift, and estate tax rates are scheduled to increase for all taxpayers in the upcoming tax year, unless Congress acts to extend the Bush-era tax cuts. Dividends will return to ordinary income rates as high as 43.4 percent, and long-term capital gains may be taxed as high as 23.8 percent.
There are some taxes that are not scheduled to change, though. Taxpayers exposed to the Alternative Minimum Tax (AMT) will continue to find it hard to take advantage of tax planning strategies. Most tax deductions allowed under the regular tax calculation are ignored under AMT, and income normally excluded from taxes may be added back into AMT income.
What is this new investment income surtax?
The new investment income surtax (aka health care surtax) affects taxpayers with wages and net earnings above $200,000 (single), $250,000 (married filing jointly), or $125,000 (married filing separately). For trusts and estates, the threshold is based on the dollar amount at which the 39.6-percent marginal tax bracket begins for these entities (approximately $12,000).
The following types of investment income will be affected:
• Taxable interest
• Capital gains
• Dividends
• Nonqualified annuity distributions
• Royalties
• Rental income
The following income is exempt from the new surtax:
• Distributions from retirement accounts (e.g., pensions, 401(k)s, and IRAs)
• Income generated from municipal bonds
• Social security
• Income from a trade or business
• Income subject to the passive activity rules
• Self-employment income
The sale of a home could trigger the tax, but only the proceeds in excess of the personal residence exclusion would be taxed. For qualified individuals, the exclusion protects the seller from taxes up to $250,000 of gain; for married couples filing jointly, the exclusion applies to a gain of up to $500,000.
Calculating the tax
For individuals, the 3.8-percent health care surtax is applied to the lesser of net investment income or the excess of modified adjusted gross income (MAGI) over the applicable threshold.
For example, Mark and Sue Taxpayer have earnings from wages of $175,000 and investment earnings of $100,000, for a total MAGI of $275,000. According to the rule, the 3.8-percent surtax is applied to the lesser of $100,000 (net investment income) or $25,000 (excess MAGI over the $250,000 threshold for married filing jointly). In Mark and Sue’s case, only $25,000 of their investment income is subject to the health care surtax. The entire $100,000 of net investment income is subject to either capital gains or ordinary income tax, depending on the nature of the income.
Invest in tax-exempt municipal bonds
These investments may become more attractive because the interest they generate is not subject to the 3.8-percent health care surtax; it is also generally exempt from federal tax and from state tax for residents living in the issuing state. Keep in mind that although private activity municipal bonds are tax-exempt for regular federal taxes, they are subject to AMT; an individual who otherwise pays little or no tax has a tax liability under AMT.
When working with an advisor to determine whether tax-exempt bonds have a place in your portfolio, don’t let the desire to avoid taxes lead you to an asset allocation that’s inappropriate for your financial situation and objectives.
If liquidity prior to maturity is a concern, be aware that rising interest rates typically cause bond prices to fall.
Even if interest rates remain low, investors reacting to financial headlines can engage in indiscriminate selling and cause bond prices to plummet.
Consider converting to a Roth IRA
Distributions from retirement accounts and IRAs are not subject to the 3.8-percent health care surtax. Assets in traditional IRAs and employer-sponsored retirement plans generally grow tax-deferred until they are withdrawn; in the case of Roth IRAs, however, qualified distributions are tax-free.
Should you invest in a traditional IRA or a Roth IRA? Although distributions from retirement plans are exempt from the surtax, they may increase ordinary income above the high-income thresholds. This would result in other investment or earned income becoming subject to the tax. Therefore, you should consider converting traditional IRAs to Roth IRAs in 2012. Paying taxes on the conversion sooner may allow future distributions to escape the scheduled tax increases later. This only makes sense if you can pay the tax with money from outside the IRA.
Roth conversion. If you decide that a Roth conversion makes sense, keep in mind that you have until October 15, 2013, to recharacterize an IRA converted in 2012. If you have several Roth accounts and the value of one goes down, you can recharacterize that account and avoid paying unnecessary taxes.
Purchase life insurance or annuities
These types of tax-deferred investments can still make sense, even though their distributions may be subject to the new investment surtax. Although distributions from life insurance and annuities are taxed at higher ordinary income tax rates, the benefit of long-term tax deferral can offset the higher rates. The taxpayer’s holding period will be critical to this decision. For example, if you defer $100,000 today and expect your tax rate to increase from 35 percent to 43 percent, assuming a growth rate of 6 percent, it will take almost six years to break even; the higher the assumed growth rate, the earlier the break-even year.
Cash value life insurance. This may be particularly attractive to individuals age 40 and younger, mainly because they may have time to maximize the benefits of tax deferral. It has the additional advantage of providing a death benefit that is substantially higher than the account value. Life insurance distributions taken as loans and withdrawals of basis are potentially tax-free if managed properly. Remember that loans and withdrawals generally reduce the death benefit for the family, may decrease guarantees, and can increase the risk of a policy lapse.
Analyze existing stocks and mutual funds
Portfolios of stocks and mutual funds can also be managed to take advantage of tax-deferral opportunities.
Consider making your portfolio more tax-efficient by taking a long-term perspective, investing in funds with low turnovers, and harvesting tax losses.
Holding bonds in retirement vehicles and keeping stocks in taxable accounts are additional ways to take advantage of these investments’ tax profiles.
Oil and gas investments can also make sense for some (Keep in mind that specific suitability requirements may apply.); the right deal may enable large write-offs of intangible drilling costs in early years and benefit from depletion allowances in later years.
Achieving tax diversification
Just as a portfolio can be overly concentrated in a single stock position, it can also be overly weighted in assets with the same tax characteristics. Retirees are better positioned if they enter retirement with portfolios that are tax-diversified; diversification can help middle-income retirees stay under the investment surtax threshold and reduce how much of their social security benefits are taxed. With an optimum mix of investments—taxable, tax-deferred, and tax-free—you may end up with the highest after-tax yield.
Commonwealth Financial Network® does not provide legal or tax advice.
Diversification does not assure a profit or protect against loss in declining markets, and diversification cannot guarantee that any objective or goal will be achieved.
For Registered Representatives: John B. Steiger is a financial consultant located at 460 Totten Pond Road Suite 600 Waltham, MA 02451. He offers securities and advisory services as a Registered Representative and Investment Adviser Representative of Commonwealth Financial Network®, Member FINRA/SIPC. John can be reached at 781.547.5621 or at john@financialconnector.com.
© 2012 Commonwealth Financial Network®
At Cleary, we are committed to a holistic approach of protecting and preserving our clients’ financial assets. Give us a call today at 617-723-0700 and let us know how we can help you.
Lessons from Superstorm Sandy
Superstorm Sandy was a catastrophic event by any measure. The damage inflicted on New York City and the surrounding coastal communities was unprecedented. Insured losses are estimated to total between $20 billion and $25 billion. The impact of the storm was tragic but also serves as a reminder for both insurance coverage issues and emergency preparedness.
Flooding was a significant source of damage from Sandy. Unfortunately, it is estimated that 70 percent of individuals and businesses located within the flood zones did not carry flood coverage. Loss due to flooding is not automatically covered under commercial property insurance, but most policies have the ability to add flood as a covered peril. For properties located in or adjacent to a flood zone, coverage is available through the National Flood Insurance Program (NFIP) through a separate policy. The following link provides additional information on the NFIP and includes a Flood Risk Profile you can use to assess your location: http://www.floodsmart.gov/floodsmart/.
Business Interruption claims comprise much of the insurance loss sustained due to Sandy. A 13-foot storm surge struck lower Manhattan, causing widespread damage to infrastructure and office buildings. Many firms were unable to access their office locations and some continue to be displaced months later.
Business Interruption coverage indemnifies the policyholder for the loss of earnings resulting from a covered property loss. Business Interruption insurance should provide coverage for lost profit and continuing expenses a business incurs due to the temporary closure of the business as a result of the event. Flood needs to be a covered peril in order for your insurance to respond to a business interruption directly caused by a storm surge. Extra Expense is commonly included with Business Interruption coverage and would respond to reasonable additional costs a business incurs to keep operating. An example of an extra expense would be the additional cost to rent a temporary office in order to continue operations.
Property policies will typically include a number of additional coverages that could also respond to an event such as Sandy. These coverages generally have specific limits assigned to them, but you often have the flexibility to increase the coverage.
Civil Authority coverage applies when a location’s access is restricted due to an evacuation order from the government. This coverage can apply if your location is within the restricted area even if you do not sustain a direct physical loss. The coverage will frequently have a specific time period or limit that will apply.
Utility Services coverage can provide for direct damage or business interruption due to loss of electrical, water, or communications services. There are limitations based on how and where the utility services are interrupted. Coverage almost always has a specific limit assigned to it and may include restrictions such as excluding loss due to “overhead transmission lines.”
Property Insurance may include coverage for Ingress or Egress. After Sandy, many workers were unable to return to their offices due to damage to surrounding streets as well as reduction of access to commuting options. Ingress/Egress can provide some coverage for this type of exposure but may include limitations on location and source of the restriction. The restriction would have to be triggered by a covered peril.
Dependent Business Interruption can provide coverage due to a loss suffered by a key customer or supplier. The loss needs to be triggered by a covered peril, and the coverage will have a specific limit. Businesses that rely on a key supplier or customer should evaluate this coverage carefully.
Disaster planning is an important component of a risk-management plan for any business. Many businesses are able to continue operations by working remotely, but it takes advance planning and attention to infrastructure in order to be successful. There are many sources to assist you with developing a disaster plan for your business. FEMA’s link for businesses is http://www.ready.gov/business. Many insurance carriers can also provide guidance and tools to assist with the process.
Superstorm Sandy proved that a large storm can have far-ranging impact beyond properties located on the waterfront. Even businesses located in high-rise buildings are not immune to losses sustained due to flooding. The storm had many tragic consequences, but it also provided valuable lessons for evaluating both your insurance and business continuity plans.
At Cleary, we will evaluate your business exposures and work with you to develop a comprehensive plan to safeguard your business. Give us a call today at 617-723-0700.