INCOME & CAPITAL GAINS TAX
Income Tax & Capital Gains Tax
Income tax rates and capital gains tax rates have increased.
In addition, clients must also pay the 3.8% Affordable Care Tax. This substantial increase in income tax rates has made income and capital gains tax planning more compelling and relevant than ever before.
Wilson + Miller is a team of tax lawyers based in Little Rock, Arkansas
However, we are aware that tax planning opportunities are not limited by state or national borders. Some of the most effective tax planning solutions are found in other states or in the U.S. territories.
We provide our clients with a unique set of solutions that can, in the right situations, significantly reduce the impact of the Income Tax and the Capital Gains Tax.
- Tennessee & Alaska Community Property Trusts
- Puerto Rico and U. S. Virgin Islands Tax Benefit Programs
- DING/NING Trusts
- Private Placement Life Insurance
Captive Casualty Insurance
A captive insurance company, typically referred to as a “captive,” is an insurance company that you own. It’s a risk management insurance structure that, when set up and operated in compliance with state regulations and IRS guidelines, can provide substantial risk mitigation, economic, tax, and estate planning benefits.
A captive insurance company issues policies that protect you against business risks for which coverage from commercial insurance carriers may be unavailable or unaffordable. Instead of paying premiums to a commercial insurance carrier, you pay premiums for coverage to your captive company. Any unused premiums your business pays accrue to your benefit as equity in the captive instead of going out the door to a carrier. The premiums paid to the captive may qualify as deductible for the business or professional practice.
The IRS Is Examining Captives Closely Now
The IRS is taking a hard look at captive insurance companies and the managers of captive insurance companies.
We Can Help
While the captive solution can provide compelling benefits, the increased level of scrutiny does underscore the need to be certain your captive is properly established and properly operated. We can help you develop your captive insurance strategy that will comply with IRS requirements.
The Virgin Islands & Puerto Rico Tax Benefit Programs
The government of the United States Virgin Islands and the government of Puerto Rico provide generous tax benefits for qualified business activities that are accepted into those programs. Businesses interested in relocating to the USVI or Puerto Rico can achieve up to a 90% reduction in their income tax burden for qualified business activities. These programs are ideal for businesses that are not location-dependent. There are several requirements including a residency requirement.
Puerto Rico also has a program that totally eliminates the capital gains tax on all gains that accrue after the individual relocates to Puerto Rico.
Our staff will guide you through the application process and then help you manage the complex rules that govern the businesses that participate in these programs. Our professional staff understands the policy behind the laws that permit significant tax credits designed to support economic growth in our nation’s territories. As government employees, we regulated these programs. As private attorneys, we have drafted many of the laws that enhance these tax advantaged programs.
Alaska & Tennessee Community Property Trusts
This is a very interesting solution for our clients who are married and who own appreciated assets. Couples who live in a “Community Property” jurisdiction enjoy a distinct advantage over couples who live in so-called “Common Law” jurisdictions. The Community Property jurisdictions include Louisiana, Texas, New Mexico, Arizona, Nevada, California, Idaho, Washington, and Wisconsin. The other 41 states are Common Law jurisdictions.
The benefit to the Community Property jurisdictions is that when one spouse dies, the entire value of the couple’s community property receives a “step-up” in cost basis — thus allowing the asset to be sold without incurring any state or federal capital gains tax on the pre-death appreciation. In a Common Law jurisdiction, only one-half of the couple’s assets would receive this step-up in basis.
In 1998, Alaska adopted a unique community property statute that allows non-Alaska residents in separate property states to take advantage of federal income tax laws that favor community property. Effective July 1, 2010, the Tennessee legislature cloned the Alaska legislation. Trusts created to take advantage of these laws can translate into substantial capital gains tax savings, with few downside risks.
Here is generally how it works. IRC §1014(b)(6) allows an adjustment (usually a step-up) to basis on property which represents the surviving spouse’s one-half share of community property held by the decedent and the surviving spouse under the community property laws of any state, or possession of the United States or any foreign country, if at least one-half of the whole of the community interest in such property was includable in the value of the decedent’s gross estate.
Alaska (and now Tennessee) law allows married residents of separate property states (such as Arkansas) to elect community property treatment for some or all of their property by establishing an Alaska Revocable Community Property Trust or a Tennessee Revocable Community Property Trust. Typically, the trust is structured to split and “pour back” into the clients’ revocable trust when the first spouse dies. Because trust assets are classified as community property under Alaska or Tennessee law, IRC § 1014(b)(6) provides a “full adjustment” in basis to date of death values at the death of the first spouse.
This technique can be very powerful for our clients who have a substantial amount of appreciated property (including stocks, real estate, and closely held business interests) because the 100% basis step-up at the first death will allow the asset to be sold after the first death — regardless of which spouse dies first. There are a few requirements that must be met in order to establish these trusts, but these requirements are easily satisfied. The team at Wilson + Miller can help you determine if this option is right for your situation.