Rutland, VT (Vocus) July 13, 2010
American Benefit Corporation’s James W. Herlihy has published a new article on alternative means of reducing income taxes for the highly compensated.
With the submission of President Obama's 2011 budget to Congress are a number of proposed income tax increases for the highly compensated. These proposed tax increases include:
1) The previous top income tax rates of 36% and 39.6% will be restored effective January 2011.
2) Capital gains rates will increase from 15% to 20% in 2011 and 23.8% in 2013 for joint filers with income over $250,000.
3) There is a new 3.8% tax effective in 2013 for joint filers with income over $250,000.
4) In addition, many state income taxes, tied to the federal tax rate, will increase automatically. While other states, feeling considerable fiscal pressure, have already increased their tax rate or are currently giving it consideration. All of these tax increases, depending on the state of residence, will put many high earners in a marginal tax bracket in excess of 50%.
For those higher earners who are corporate executives Non-qualified Deferred Compensation, regulated by IRC 409(A), offers an opportunity for current income tax reduction. It also offers the opportunity to avoid capital gains taxes on investment changes and possible state tax exemption when the funds are distributed.
IRC 409(A) provides detailed guidance concerning the structure of a Non-qualified Deferred Compensation Plan. Some of the more important provisions are as follows:
1) Plans may permit the pre-tax deferral of up to 100% of base and bonus compensation.
2) The election to defer base compensation must be made before the compensation is earned.
3) The election to defer bonus compensation must be made 6 months before the end of the bonus performance period, i.e., June 30th for calendar year bonus plans.
4) Plans may include investment options similar to those offered by 401(k) plans.
5) Investment gains, if any, are tax deferred.
6) Investment reallocations do not generate income tax or capital gains tax to the executive.
7) All distributions from the plan are taxed as ordinary income.
8) A federal tax statute permits deferred compensation payments of 10 years or greater to be taxed in the state of residence at the time they are paid.
9) The executive is a general creditor of the sponsoring corporation.
Residence in a state with no income tax (i.e., Florida) would avoid a state tax on deferred compensation payments.
About Us -
At American Benefit Corporation, we design, fund and manage executive non-qualified benefit plans for highly compensated corporate executives who wish to reduce current income taxes and form personal capital on a tax efficient basis. Established more than 30 years ago, we serve the unique needs of executives in numerous corporations with their personal capital formation objectives.
This material is intended for informational purposes only and is not intended to replace the advice of a qualified tax advisor.
Securities offered through M Holdings Securities, Inc., a Registered Broker/Dealer, Member FINRA/SIPC. American Benefit Corporation is independently owned and operated.