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  Client Advisor
Winter 2011-2012 Issue
Make disability insurance
less taxing
In this issue:

Disability insurance can be a valuable part of your risk management plan. If you cannot work because of an illness or injury, you might lose income. Disability insurance benefits can make up the difference.

Few insurers will offer to replace 100% of your income. As a rule, disability policies will replace no more than 60% or 70% of your income.

Example 1: Kevin Connors earns $60,000 per year ($5,000 per month). He has disability coverage that will pay up to 60% of his income: $3,000 per month. If Kevin should suffer a stroke, for example, and lose the ability to work, he’d receive a maximum of $3,000 per month. If Kevin were able spend the full $3,000 each month, he might be able to maintain a comparable lifestyle. However, if Kevin owes, say, 20% in federal and state income tax, he would only have $2,400 per month ($28,800 per year) and face more financial challenges.

Tax Treatment
A basic rule governs the taxation of disability benefits. If you pay for disability insurance with your own after-tax dollars, your benefits will be tax free. However, if your employer pays the premiums, you will owe income tax on any disability benefits that you receive. That’s the federal income tax treatment, which typically is followed by states, as well.

Many people have some form of disability coverage at work. If you have group coverage there, and you pay for it, you’ll receive tax-free benefits in case you’re disabled. Even if you pay for your coverage through payroll withholding, as long as you pay income tax on the money that’s withheld, you’ll qualify for tax-free disability benefits.

Some employers have a cost-sharing arrangement. If so, employees will receive partially tax-free income pro rata.

Example 2: Michael Dobbs has group disability that costs $40 per month. His employer pays $20 per month, and Michael has $20 withheld from his paycheck each month. Because Michael pays for half the cost of the insurance, any disability benefits that he receives from the policy will be 50% taxable and 50% tax free.

If Michael’s employer pays half or even all of the disability insurance premiums, and Michael wants totally tax-free benefits, he can see if his company will enter into an arrangement with him. Michael can ask his employer to treat the disability premiums that it pays as additional taxable compensation.

Example 3: As in example 2, Michael pays $20 per month for disability insurance, and his company pays the other $20 per month. In this scenario, Michael’s company adds $20 to his taxable compensation, even though the money goes to the insurance company. Michael might pay an additional $5–$7 per month in tax, depending on his bracket, but any disability benefits will be tax free.

Going Solo
You might not be able to convince your employer to treat its disability insurance premiums as taxable compensation. Even if you can arrive at such an arrangement, you might feel that your group coverage is inadequate. In either situation, you may want to purchase individual disability insurance in addition to your group coverage.

As long as you pay for individual disability insurance with your own after-tax dollars, which typically will be the case, you’ll owe no tax on any benefits that you’ll receive. Individual policies can have other advantages: they might offer additional benefit amounts and longer payout periods than group policies. Also, you can take your individual insurance with you if you change jobs. Individual disability policies may be expensive, though, so shop carefully and work with a well-recommended agent.

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 Disability Insurance
 ERP software & IT needs
 Special Alert
 Medicare Advantage
 Disaster Recovery
 IRS inflation figures
 New reporting requirements

Shannon & Associates
1851 Central Place S
Suite 225
Kent, WA 98030-7507
Phone: 253.852.8500
Fax: 253.852.0512



ERP software and IT needs    

Let us help with your ERP software and IT needs!

Accounting software needs analysis, selection, implementation, training and support

Manufacturing and distribution solutions

Third-party software integration

Creating meaningful management reports using Crystal Reports or FrX

Assessing your IT controls and practices

Reviewing your internal processes and controls for efficiency as well as fraud prevention practices

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Special alert    

House and Senate Approve Bill Temporarily Extending the Payroll Tax Cut

Late on December 22, House and Senate leaders agreed to end their stalemate over extending the payroll tax break. Under the agreement, for the first two months of 2012, a 4.2% Social Security tax would continue to apply to workers’ pay (10.4% OASDI tax for self-employment income).

However, the agreement calls for new language to be inserted into the tax relief bill to prevent a potential payroll tax problem for employers. According to information provided by the House Ways & Means Committee, the revision would allow employers to withhold employee payroll taxes at 4.2% (instead of 6.2%) on all wages paid during the two-month extension period, subject only to the full 2012 wage base ($110,100) and without regard to the $18,350 cap (two-twelfths of the wage base of $110,100) on wages earned through the end of February, 2012. If an employee’s wages during the first two months of 2012 exceed $18,350 and the payroll tax reduction is not extended for the remainder of 2012, an amount equal to 2% of those excess wages would ultimately be recaptured on the worker’s individual tax return for 2012.

Both the Senate and House approved the bill on the morning of December 23. It will now be sent to the President for his expected signature.

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Weighing the benefits of medicare advantage    

At age 65, workers and their spouses generally become eligible for Medicare, the federal health insurance program for seniors. You may find that Medicare offers better coverage at a lower cost than the coverage you had previously. However, the standard (original) Medicare program has several shortcomings.

As an enrollee in original Medicare, you’ll typically be responsible for 20% of the Medicare-approved amount for expenses such as doctors’ charges and outpatient procedures. You’ll also be responsible for the costs of prescription drugs. Such costs might run into thousands of dollars.

Covering The Gaps
To reduce your exposure to steep outlays, you can buy insurance. Medicare supplement (Medigap) policies can help pay your medical bills, and Medicare Part D plans can cover your drug outlays. Both types of coverage are available from private companies, which must follow guidelines set by federal legislation. Such coverage can be costly, though. Charges for Medigap policies and Part D plans vary widely, depending on the benefits they offer; but the combined cost can be thousands of dollars per year. Married couples with both spouses on Medicare might face extremely high premium payments.

Taking Advantage

About 12 million seniors (approximately one-fourth of all Medicare enrollees) choose another way to obtain Medicare coverage. They opt out of original Medicare and enroll in a Medicare Advantage plan. Such plans, which are offered by private companies, may be attractive, but you should know the details before signing up.

Most Medicare Advantage plans have networks of doctors and labs and hospitals, so they resemble health maintenance organizations (HMOs) and preferred provider organizations (PPOs). As long as members stay in the network, they usually have modest costs. You might owe a $30 copay for a visit to a doctor, for instance, instead of the 20% coinsurance patients owe with original Medicare. If members go outside the network for care, though, they probably face higher costs. Many Medicare Advantage plans offer prescription drugs to enrollees at discount prices. Therefore, seniors who sign up for a Medicare Advantage plan don’t need a Medigap policy and, often, don’t need to buy a Part D plan, either. What’s more, some Medicare Advantage plans offer health benefits not offered by Medicare; these might include dental care, vision care, and even health club memberships.

Paying The Price
What costs will you incur if you choose a Medicare Advantage plan? They vary from plan to plan. You will continue to pay your Medicare Part B premium, which might be as low as $99.90 per month or much more, depending on your income. You may pay an additional monthly charge to your Medicare Advantage plan, but that’s not always the case; some plans charge nothing at all to members except the copays for the care they receive. In general, as long as you stay within the network, Medicare Advantage plans typically cost less than original Medicare plus a Medigap policy plus a Part D drug plan. That may be a good choice, if you are willing to give up the freedom to choose from a broader universe of health care providers. If you think that this would be a worthwhile strategy, check to see whether a plan includes your preferred physicians in its network. At, a Medicare Plan Finder provides costs, lists of covered drugs, and a quality rating system that goes up to five stars. If you do choose a Medicare Advantage plan and are not pleased with your choice, don’t fret. You can leave a Medicare Advantage plan and move to original Medicare until February 14, 2012; you can switch into a five-star Medicare Advantage plan at any time. Also, from October 15 to December 7, 2012, you can join, switch, or drop a Medicare Advantage plan for 2013.

A New Advantage
Beginning in 2012, top-ranked Medicare Advantage and Medicare Part D prescription plans can engage in marketing and enroll beneficiaries throughout the year.

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Disaster recovery: Is your data backed up?    

by John Mitchell

You might be saying to yourself “I backup my data everyday.” This may be true, but do you know for sure that the data is actually there?

It’s always a good practice, and well worth the time, to review your backup process at least a couple times a year. This will give you the confidence that your data is actually where you think it’s supposed to be if it’s ever required.

Backing up your data can be as simple as using a portable USB drive to tape drives, to dedicated hard drives, to having a full scale off-site backup solution in place.

No matter the device or method beng used, you should be regularly testing the backups to see if the data is even getting to your device. Restoring data is basically the reverse of how you backed it up. If you used a backup program, it will have a way to restore it. If you copy the data from its original location to the device manually, do the reverse to test it, but always restore it to a different location on your computer. This way, you don’t disrupt your current backups and data! You can now check to see if you actually have data. If you do, great!

Another thing to consider is where is this backup data/media stored? Of course if it’s a tape or HD setup, it’s going to be onsite and in the same room/building as your live data. Do you have any copies of these backups offsite? What happens if you lose the entire building in a disaster? If all of your backup data is in the building, well, there goes your data, too.

While you might not be able to keep ‘up-to-the-minute’ data backups offsite, if you have the prior night’s backup, that’s a whole lot better than nothing at all. This can be done by simply taking the backup media from the prior night’s backup home with you and bringing it back with you the next day and you keep rotating the media so that you will always have something offsite.

Is your backup data encrypted? Does it need to be? It’s great that you are backing up your data and taking it off site, but what happens if the offsite data is lost or stolen? This can make a difference if your data has any sensitive client or employee information in it - for example, contact information and other personal data like social security numbers and birthdates.

Ideally, you should be backing up your data on a daily basis. Especially if you process a lot of transactions or update individual files daily. You should also have past backups offsite and maybe even monthly archived backups in another offsite location to be even that much more prepared.

Every backup solution has its advantages and disadvantages. You need to determine what your data is worth to your business and determine what is or is not an acceptable loss you can incur.

There is not enough space to go over each of these here, but if you have concerns on this, or you don’t know what your current backup situation is, call John Mitchell or Julia Atwood at Shannon & Associates 253-852-8500 and we can help answer your specific questions and advise on a possible course of action that fits your needs.

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IRS announces 2012 inflation adjusted figures    

Many federal tax law dollar limits are subject to periodic inflation adjustments. However, due to low “official” inflation rates, many limitations remained unchanged for three years — an unprecedented stretch of no inflation adjustments. For 2012, however, several cost-of-living adjustments will go into effect. Here is a list of some important tax law limitations/adjustments for 2012, reflecting changes from 2011:

  • Personal exemption — $3,800 per eligible person, up from $3,700.
  • Basic standard deduction — $11,900 (married filing jointly), up from $11,600; $8,700 (head of household), up from $8,500; $5,950 (single and married separate), up from $5,800.
  • Social Security taxable wage base — $110,100, up from $106,800.
  • Roth IRA contribution allowability — phaseout range $173,000 to $183,000 of annual adjusted gross income for married couples filing jointly, up from $169,000 to $179,000; $110,000 to $125,000 for single taxpayers and heads of household, up from $107,000 to $122,000.
  • Defined contribution retirement plan dollar limit on annual additions — $50,000, up from $49,000.
  • Phaseout range for those who make deductible contributions to a traditional IRA and are covered by a workplace retirement plan:
  • Singles and heads of household — $58,000 to $68,000 of modified adjusted income, up from $56,000 to $66,000;
  • Married couples filing jointly — in which the spouse who makes the IRA contribution is covered by a workplace retirement plan — is $92,000 to $112,000, up from $90,000 to $110,000.
For IRA contributors who are not covered by a workplace retirement plan but are married to someone who is covered, the phaseout range is $173,000 to $183,000, up from $169,000 to $179,000.
  • Defined benefit plan limit on annual benefits - $200,000, up from $195,000.
  • Maximum annual compensation used to determine benefits or contributions - $250,000, up from $245,000.
  • Dollar limit used to define highly compensated employee - $115,000, up from $110,000.
  • Compensation limitation defining key employee/officer to “top heavy” plan purposes - $165,000, up from $160,000.
  • “Nanny” tax threshold - annual payment of $1,800, up from $1,700.
  • The gift-tax, generation-skipping-transfer (GST) tax, and estate-tax exemption amount - $5,120,000, up from $5,000,000.
  • Dollar limitation on property eligible for Section 179 expensing election used in a trade or business - $139,000, up from a previously scheduled $125,000. Limit is reduced dollar for dollar as the cost of eligible property placed in service exceeds $560,000, up from $500,000.
Also, tax bracket thresholds increase for each income-tax filing status and rate. For example, for a married couple filing a joint return, the taxable income threshold separating the 15% bracket from the 25% bracket is $70,700 in 2012, up from $69,000 in 2011.

We Can Help
Please contact us if you have any questions regarding these, or any other, tax law limits for 2012. We can also assist with all of your 2011 tax return preparation needs.

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New annual reporting requirement regarding specified foreign financial assets    

We want to make sure you are aware of some new rules that may impact your federal income tax filings for 2011 and future years. Form 8938, Statement of Specified Foreign Financial Assets, is a new reporting requirement that will be effective for 2011 and future tax years and is required as part of the implementation of the Hiring Incentives to Restore Employment Act (HIRE Act) that Congress has enacted. These provisions are part of a broad initiative by the federal government to increase tax compliance, particularly by those with foreign accounts or foreign assets.

It is possible that the provisions will affect you, even though you may not believe you own “anything foreign.” There are significant civil and criminal penalties for failure to file the Form 8938 when required or to complete the form as required.

Some of the financial assets that must be reported on the new Form 8938 include:

  • Financial accounts maintained at foreign financial institutions;
  • Foreign retirement accounts;
  • Direct ownership of stock in a foreign corporation (outside of a financial institution);
  • Foreign life insurance products;
  • Foreign partnership interests, such as foreign hedge funds and foreign private equity funds;
  • Foreign deferred compensation arrangements; and,
  • Beneficial interests in foreign trusts or estates.
There are various thresholds above which the Form 8938 reporting requirement kicks in. Some taxpayers will be required to report if they have foreign assets and foreign accounts with an aggregate value of $50,000. Filing thresholds for business entities, trusts and estates have not been announced. At this time, we do not have full guidance from the Internal Revenue Service detailing the rules associated with this required filing.

On September 28, the IRS released draft instructions for Form 8938, which will be used to report foreign assets and accounts. The form will typically be attached to your annual federal income tax return, if you have a filing requirement. Form 8938 reporting is in addition to other filing requirements with respect to foreign assets and accounts you may have an interest in or authority over.

Accordingly, tax practitioners, including us, are going to need to ask you more questions to prepare your 2011 tax return. If you are subject to Form 8938 reporting, we will likely need to perform more work to prepare the Form 8938. We will continue to closely monitor developments in this area. We would be happy to discuss these rules with you and how they apply to your situation.

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  Call 253.852.8500 or email to find out more.