Finance Questions

Archive for the ‘US Federal Finance’ Category

How are Non-Qualified Tax-Deferred Equity Participation Plan (TDEPP) benefits taxed?

An account is established for each employee participating in the plan. In general, the employee does not become vested in the plan for a few years and the units do not convert to the company stock for a longer period of time such as five years, at which point the stock is delivered to the employee.
An employee is not taxed on the portion of the bonus deferred into the plan at the time the deferral is made. Taxes are due when the account balance is vested and when the account balance is converted. When the account balance becomes vested, the employee must pay social security taxes (if he or she has not yet surpassed the Social Security wage base in earnings, which for 2005 is $90,000 and $87,900 for 2004), Medicare taxes and federal unemployment taxes on the then current fair market value of his or her account balance.
Employees will be notified when their account balance is vested, and the taxes will be deducted from their paychecks following vesting. Later, when the account is converted to stock, the employee is taxed on the then current fair market value of the shares he or she receives as ordinary income, not as capital gains.
The employee can choose to either

(1) satisfy the withholding obligation by submitting a check, in which case all shares will be delivered, or
(2) the employee can choose to have the company withhold an equivalent number of shares and receive net shares. The employee’s tax basis in the shares received is the fair market value of the shares as of the time of conversion
For contributions to plan accounts prior to 1998, account balances are vested after the earlier of an employee’s completion of two years of service following the contribution or the employee’s death, disability or termination due to downsizing or retirement. An employee’s account balance loses its vesting if the employee is terminated from employment for cause.
This is a general overview of the plan. Only the plan document, summary description booklet and award certificate provide a full explanation of the plan’s terms and conditions. The plan differs from company to company.

How do mutual fund shareholders determine the amount of income that is from state tax-exempt government securities?

The exempt portion of the income distribution is equal to the percentage of mutual fund assets invested in qualifying securities (See Question 1 above for a listing of securities). 
In New York, California and Connecticut, a tax exemption for government income earned from a mutual fund is only available to shareholders if at least 50% of the assets of the fund at the end of each quarter of the fund’s fiscal year were invested in government securities that are considered tax exempt under state law. 

What is the state income tax treatment for interest accrual on “stripped” government securities?

Interest from “stripped” bonds does not necessarily have the same tax character for state income tax purposes, as would be the case if the bonds were held directly. 
CA, NY, and NJ allow interest from “stripped securities” to be state income tax-exempt, but not all states follow that rule. 
Interest accrual is taxable on a yearly basis at the federal level.

What government securities interest is usually exempt from state taxes?

Government securities interest or Interest income from “direct obligations” of the Federal Government and certain agency obligations is exempt from income taxation in all states (but, it is taxable at the federal level).
The government securities interest on the following popular obligations is generally exempt from state income tax:

• U.S. Treasury Bills, Notes, Bonds
• U.S. Savings Bonds – Series EE and HH
• Federal Home Loan Banks (FHLBS)
• Financing Corporation (FICO)
• General Services Administration
• Tennessee Valley Authority
• U.S. Postal Service
• Production Credit Association
• Federal Land Banks
• Federal Intermediate Credit Bank
• Banks for Cooperatives
• Federal Farm Credit Banks
• Student Loan Marketing Association
• General Insurance Fund
• Commodity Credit Corporation
• Federal Deposit Insurance Corp

The government securities interest on the following bonds is generally subject to state income tax:

• Government National Mortgage Association (GNMA – Ginnie Mae)
• Federal National Mortgage Association (FNMA – Fannie Mae)
• Federal Home Loan Mortgage Corporation (FHLMC – Freddie Mac)

What are the basics of Archer Medical Savings Account (MSA)

Self-employed individuals covered under a high-deductible health plan and employees of “small employers” (on average no more than 50 employees during either of the two preceding calendar years) can:
a) deduct contributions
b) exclude from income employer contributions,
c) accumulate tax-deferred income and
d) receive tax-free distributions from the MSA to pay medical expenses.
Annual deductions are generally limited to 65% of the annual deductible for individual coverage, (the deductible amount under a “high deductible health plan” must be at least $1,700 and no more than $2,600) and 75% of the annual deductible for family coverage (deductible amount must be at least $3,450 and no more than $5,150).
The maximum out-of-pocket expenses for covered expenses cannot exceed $3,450 for individual coverage and $6,300 for family coverage.
Like IRAs, contributions can be made until the due date of the return without regard to extensions. As indicated, distributions from MSAs for the payment of medical expenses generally are excludable from gross income.
Distributions that are not for medical expenses are not only includable in income, but also subject to a 15% penalty tax. This penalty does not apply to distributions after age 65 or distributions made on account of disability or death. But such distributions are still subject to income tax.
Any balance remaining in a Medical Savings Account (MSA) upon an individual’s death is includible in his or her gross estate. But if the account holder’s surviving spouse is named beneficiary of the MSA, the MSA becomes the MSA of the surviving spouse and the MSA balance can be deducted from the decedent’s gross estate as a marital deduction. If the MSA passes to any other beneficiary, it ceases to be an MSA and the beneficiary is required to include the fair market value of the MSA assets as of the date of death in gross income for that year. The amount includible in gross income is reduced by medical expenses incurred prior to death.