President Obama Signs the JOBS Act

President Barack Obama, surrounded by lawmakers and business leaders, signs the JOBS Act last week in the Rose Garden.

On Thursday, April 5^th, 2012, President Barack Obama signed the JOBS Act with overwhelming bipartisan support. The bill makes it easier for startups to raise money, to stay private when they need to and to go public when the time is right.

The bill’s “crowdfunding” provision is getting the most attention. It allows entrepreneurs to raise small amounts of capital from large pools of individual investors. The Internet provides a tool for private citizens to form new marketplaces as social networks evolve to become more than just networks of friends.

Further, the JOBS Act allows companies to stay private longer, which gives entrepreneurs the flexibility to decide how and when it’s best to go public. Previously, companies with more than 500 investors were mandated to file with the Securities and Exchange Commission. The JOBS Act raises this number to 2,000 investors and excludes employees as shareholders in that number. This enables private companies to build revenue and develop sophistication before entering the capital markets.

When the time is right, the JOBS Act makes it easier for a new class of “emerging growth companies” to go public. For businesses with less than $1 billion in revenue, the number of audited financial statements required is reduced. Young, high-growth firms are allowed up to five years to comply with certain Sarbanes-Oxley Act disclosures.

To protect investors, the JOBS Act includes an amendment that mandates companies to provide basic financial information to investors before seeking crowdfunding. It also requires third-party intermediaries, in the form of websites managing crowdfunding shares, to register with the SEC. The amendment also sets limits on the amount of money an individual can invest to prevent investors from taking too much risk. Individuals with an annual income or net worth of less than $100,000, for example, would be limited to investing 5% of their income in crowdfunding.

Sources:  White House Video      Read the Transcript     CNN

Eight Tips to Determine if Your Gift is Taxable

If you gave money or property to someone as a gift, you may owe federal gift tax. Many gifts are not subject to the gift tax, but the IRS offers the following eight tips about gifts and the gift tax.

1. Most gifts are not subject to the gift tax. For example, there is usually no tax if you make a gift to your spouse or to a charity. If you make a gift to someone else, the gift tax usually does not apply until the value of the gifts you give that person exceeds the annual exclusion for the year. For 2011 and 2012, the annual exclusion is $13,000.

2. Gift tax returns do not need to be filed unless you give someone, other than your spouse, money or property worth more than the annual exclusion for that year.

3. Generally, the person who receives your gift will not have to pay any federal gift tax because of it. Also, that person will not have to pay income tax on the value of the gift received.

4. Making a gift does not ordinarily affect your federal income tax. You cannot deduct the value of gifts you make (other than deductible charitable contributions).

5. The general rule is that any gift is a taxable gift. However, there are many exceptions to this rule. The following gifts are not taxable gifts:
• Gifts that are do not exceed the annual exclusion for the calendar year,
• Tuition or medical expenses you pay directly to a medical or educational institution for someone,
• Gifts to your spouse,
• Gifts to a political organization for its use, and
• Gifts to charities.

6. You and your spouse can make a gift up to $26,000 to a third party without making a taxable gift. The gift can be considered as made one-half by you and one-half by your spouse. If you split a gift you made, you must file a gift tax return to show that you and your spouse agree to use gift splitting. You must file a Form 709, United States Gift (and Generation-Skipping Transfer) Tax Return, even if half of the split gift is less than the annual exclusion.

7. You must file a gift tax return on Form 709, if any of the following apply:
• You gave gifts to at least one person (other than your spouse) that are more than the annual exclusion for the year.
• You and your spouse are splitting a gift.
• You gave someone (other than your spouse) a gift of a future interest that he or she cannot actually possess, enjoy, or receive income from until some time in the future.
• You gave your spouse an interest in property that will terminate due to a future event.

8. You do not have to file a gift tax return to report gifts to political organizations and gifts made by paying someone’s tuition or medical expenses.

For more information see Publication 950, Introduction to Estate and Gift Taxes. Both Form 709 and Publication 950   are available at www.IRS.gov or by calling 800-TAX-FORM (800-829-3676).

Source:  IRS Tax Tip 2012-62

This is not intended as tax or legal advice.  Please contact your tax and legal professionals regarding your individual situation.

Do You Need a High I.Q. to Invest Well?

You don’t have to be a genius to pick good investments, But does having a high I.Q. score help? The answer is a qualified yes, according to new research.

The authors concluded that people with relatively high I.Q.’s typically diversify their investment portfolios more than those with lower scores and invest more heavily in the stock market.

Certainly, caution is needed here. I.Q. tests are controversial as to what they measure, and factors like income, quality of education, and family background may not be completely controlled for. But the study’s results are worth pondering for their possible implications.

Knowing whom to trust, and relying on those who are trustworthy, is itself an aspect of intelligence. Mr. Guiso and his co-authors cited research that suggested that investment decisions relied significantly on a part of the brain called the Brodmann area 10. This region of the frontal cortex is believed to be associated with our ability to make inferences about others’ preferences and beliefs based on their actions. Such social intelligence seems to reward some people more than others with an ability to put standard investment advice into practice.

The paper, titled “Trusting the Stock Market,” was published in The Journal of Finance.

Source:  What High-I.Q. Investors Do Differently  By Robert J. Shiller

Senate Passes Crowdfunding Bill With Added Protections for Nonaccredited Investors

The U.S. Senate approved, 73-26, an amended version of legislation that will legalize “crowdfunding,” or equity investments in start-ups by the general public.

The CROWDFUND Act (or Capital Raising Online While Deterring Fraud and Unethical Non-Disclosure Act) adds requirements to the House of Representatives’ JOBS (Jumpstart Our Business Startups) Act that companies use SEC-approved crowdfunding platforms that provide investor protections.

Though both bills have had bipartisan support, they are controversial in the business world, as many people worry that lowering the barriers to investing will encourage fraud. The Senate amendments were focused on creating protections for nonaccredited investors.

Under the Senate bill, entrepreneurs will be allowed to raise up to $1 million per year through approved crowdfunding portals. The amount investors will be able to spend will be capped based on their income.

Though the House and Senate bills will have to be reconciled and signed, excitement about legalized crowdfunding has people waiting in the wings. For instance, a site called Crowdfunder says it already has $13.35 million committed to 913 companies, by 974 would-be investors.

SEC Chairman Mary L. Schapiro has added her voice to the criticism of the JOBS Act, saying that it removes too many investor protections, and opens up the more vulnerable to “fraudulent schemes disguised as investment opportunities.”

Sources:  Wall Street Journal – All Things D    TechCrunch

CalSTRS Nonspouse Option Beneficiary

If you name someone other than your spouse or a former spouse to be your option beneficiary, CalSTRS is required by federal law to impose age restrictions in certain scenarios. Under federal tax law, a registered domestic partner is not considered a spouse. As a result, the age restriction applies to registered domestic partners.

If you name someone other than your spouse or a former spouse to be your option beneficiary, CalSTRS is required by federal law to impose the following age restrictions:

• Under the 75% Beneficiary Option, your nonspouse option beneficiary cannot be more than exactly 19 years younger than yourself.
• Under the Compound Option, your nonspouse option beneficiary or beneficiaries cannot be either more than exactly 19 years younger than yourself under the 75% Beneficiary Option, or more than exactly 10 years younger than yourself under the 100% Beneficiary Option.

When you choose a new option or a new option beneficiary or beneficiaries, an adjustment to your monthly benefit will be made. Before changing your option or choosing a new option beneficiary, meet with your CalSTRS benefits counselor to obtain an estimate of your benefit based on the new choice.

Source: CalSTRS

Summary of Governor Brown’s Twelve Point Pension Proposal and Its Impact on CalSTRS Members

CalSTRS has published  a summary of Governor Brown’s twelve point pension proposal and its impact on CalSTRS members.

The following reforms are judged to have significant or moderate impact on CalSTRS members according to CalSTRS.  Click the link source link below if you want to view the complete list.

Reform Title	Intent of Proposal	Impact on CalSTRS Members	Applies To:
Mandatory Hybrid Risk Sharing Plan	Provides pension benefits based on a combination of a Defined Benefit/Defined Contribution plan replacing 75% of salary at age 67 after 35 years of service. The Defined Benefit component represents 2/3 of the benefit. Allows option of an undefined alternative plan in place of Defined Contribution. Targets a benefit cap at 120% of Social Security wage base.	Significant. Current benefit for CalSTRS members is 2% of final salary per year of service at age 60. This would reduce the Defined Benefit component to 1.43% of pay per year of service at age 67. CalSTRS members do not receive Social Security credits for their CalSTRS-covered employment.	New members
Increase Retirement Age	Increases the full retirement age for new members to age 67.	Significant. Current normal retirement age is 60 and the actual average retirement age is about 62.	New members
Require Three-Year Final Compensation	Reduces spiking by extending final compensation period to three years.	Moderate. Current members who retire with 25 years of service have their final compensation based on the highest 12 consecutive months of average annual compensation. Approximately 55% of members qualify for the 1-year calculation.	New members
Prohibit Purchases of Nonqualified Service	Prohibits the purchase of nonqualified service, or airtime.	Moderate. Current members may purchase up to five years of nonqualified service (as allowed by the IRS) and pay the entire cost based on the actuarial assumptions. About 800 members purchase this type of service each year.	Current actives and new members

Source:  Fact Sheet: Gov. Brown’s 12-Point Pension Proposal and its Impact on CalSTRS Members

Education Tax Credits Help Pay Higher Education Costs

Two federal tax credits may help you offset the costs of higher education for yourself or your dependents.  These are the American Opportunity Credit and the Lifetime Learning Credit.

To qualify for either credit, you must pay postsecondary tuition and fees for yourself, your spouse or your dependent. The credit may be claimed by either the parent or the student, but not both. If the student was claimed as a dependent, the student cannot file for the credit.

For each student, you may claim only one of the credits in a single tax year. You cannot claim the American Opportunity Credit to pay for part of your daughter’s tuition charges and then claim the Lifetime Learning Credit for $2,000 more of her school costs.

However, if you pay college expenses for two or more students in the same year, you can choose to take credits on a per-student, per-year basis. You can claim the American Opportunity Credit for your sophomore daughter and the Lifetime Learning Credit for your spouse’s graduate school tuition.

Here are some key facts the IRS wants you to know about these valuable education credits:

1. The American Opportunity Credit

• The credit can be up to $2,500 per eligible student.
• It is available for the first four years of postsecondary education.
• Forty percent of the credit is refundable, which means that you may be able to receive up to $1,000, even if you owe no taxes.
• The student must be pursuing an undergraduate degree or other recognized educational credential.
• The student must be enrolled at least half time for at least one academic period.
• Qualified expenses include tuition and fees, coursed related books supplies and equipment.
• The full credit is generally available to eligible taxpayers whose modified adjusted gross income is less than $80,000 or $160,000 for married couples filing a joint return.

2. Lifetime Learning Credit

• The credit can be up to $2,000 per eligible student.
• It is available for all years of postsecondary education and for courses to acquire or improve job skills.
• The maximum credited is limited to the amount of tax you must pay on your return.
• The student does not need to be pursuing a degree or other recognized education credential.
• Qualified expenses include tuition and fees, course related books, supplies and equipment.
• The full credit is generally available to eligible taxpayers whose modified adjusted gross income is less than $60,000 or $120,000 for married couples filing a joint return.

If you don’t qualify for these education credits, you may qualify for the tuition and fees deduction, which can reduce the amount of your income subject to tax by up to $4,000. However, you cannot claim the tuition and fees tax deduction in the same year that you claim the American Opportunity Tax Credit or the Lifetime Learning Credit. You must choose to either take the credit or the deduction and should consider which is more beneficial for you.

For more information about these tax benefits, see IRS Publication 970, Tax Benefits for Education available at www.irs.gov or by calling the IRS forms and publications order line at 800-TAX-FORM (800-829-3676).
Links:

• The American Recovery and Reinvestment Act of 2009: Information Center
• American Opportunity Credit
• Form 8863, Education Credits

Source:  IRS Tax Tip 2012-37

Early Distribution from Retirement Plans May Have a Tax Impact

Taxpayers may sometimes find themselves in situations when they need to withdraw money from their retirement plan early. What they may not realize is that that transaction may mean a tax impact when they file their return.

Here are 10 facts from the IRS about the tax implications of an early distribution from your retirement plan.

1. Payments you receive from your Individual Retirement Arrangement before you reach age 59 ½ are generally considered early or premature distributions.

2. Early distributions are usually subject to an additional 10 percent tax.

3. Early distributions must also be reported to the IRS.

4. Distributions you roll over to another IRA or qualified retirement plan are not subject to the additional 10 percent tax. You must complete the rollover within 60 days after the day you received the distribution.

5. The amount you roll over is generally taxed when the new plan makes a distribution to you or your beneficiary.

6. If you made nondeductible contributions to an IRA and later take early distributions from your IRA, the portion of the distribution attributable to those nondeductible contributions is not taxed.

7. If you received an early distribution from a Roth IRA, the distribution attributable to your prior contributions is not taxed.

8. If you received a distribution from any other qualified retirement plan, generally the entire distribution is taxable unless you made after-tax employee contributions to the plan.

9. There are several exceptions to the additional 10 percent early distribution tax, such as when the distributions are used for the purchase of a first home (up to $10,000), for certain medical or educational expenses, or if you are totally and permanently disabled.

10. For more information about early distributions from retirement plans, the additional 10 percent tax and all the exceptions, see IRS Publication 575, Pension and Annuity Income and Publication 590, Individual Retirement Arrangements (IRAs). Both publications are available at www.irs.gov or by calling 800-TAX-FORM (800-829-3676).
Links:

• Publication 575, Pensions and Annuities (PDF 227K)
• Publication 590, Individual Retirement Arrangements (IRAs) (PDF 449K)
• Form 5329, Additional Taxes on Qualified Plans (including IRAs) and Other Tax Favored Accounts   (PDF 72K)
• Form 5329 Instructions (PDF 40K)

Source:  IRS Tax Tip 2012-34

Investing

“Investing is often described as the process of laying out money now in the expectation of receiving more money in the future. At Berkshire we take a more demanding approach, defining investing as the transfer to others of purchasing power now with the reasoned expectation of receiving more purchasing power – after taxes have been paid on nominal gains – in the future. More succinctly, investing is forgoing consumption now in order to have the ability to consume more at a later date.”

Source:  Warren Buffett, Berkshire Hathaway Shareholder Letter, February, 25, 2012, page 17

IRS issues proposed regulations on purchase of longevity annuity contracts by plans

The IRS has issued proposed regulations relating to the purchase of longevity annuity contracts under defined contribution plans, 403(b) plans, IRAs, and eligible governmental section 457 plans. The proposed regulations are designed to open up the 401(k) and IRA market to longevity annuities by providing special relief from the minimum distribution requirements.

CCH Note: A longevity annuity (sometimes referred to as “longevity insurance” or a “deeply deferred annuity”) is an income stream that begins at an advanced age, such as age 85, and continues as long as the individual lives. Purchasing such annuities can help participants hedge the risk of drawing down their benefits too quickly and thereby outliving their retirement savings. However, the required minimum distribution (RMD) rules can be an impediment to the utilization of such annuities. Under current rules, prior to annuitization, the value of the annuity must be included in the account balance that is used to determine RMDs. If the remainder of the account has been depleted, the participant might have to begin distributions from the annuity earlier than anticipated in order to satisfy RMD requirements.

Qualifying longevity annuity contracts

The proposed regulations would modify the RMD rules in order to facilitate the purchase of deferred annuities that begin at an advanced age. Prior to annuitization, the value of these contracts, referred to as “qualifying longevity annuity contracts” (QLAC) would be excluded from the account balance used to determine RMDs.

The proposed regulations would apply to contracts that met certain requirements, including the requirement that distributions begin not later than age 85. In addition, the premiums paid for the QLAC could not exceed the lesser of $100,000 or 25% of the participant’s account balance on the date of the payment. The only permissible benefit payable after the participant’s death would be a life annuity, payable to a designated beneficiary. Thus, a contract that provided for distribution for a certain period, or that provided for a refund of premiums after the participant’s death, would not qualify as a QLAC. The proposed regulations provide that if the sole beneficiary of an employee under the contract is the employee’s surviving spouse, the only benefit permitted to be paid after the employee’s death is a life annuity payable to the spouse that does not exceed 100% of the annuity payable to the employee. If the employee’s surviving spouse is not the sole beneficiary, the only benefit permitted to be paid after the employee’s death is a life annuity payable to a designated beneficiary, the amount of which is not to exceed certain limits.

The definition of QLAC would also exclude certain other types of arrangements, such as a variable contract under Code Sec. 817, an equity-indexed contract, or a similar contract. The contract would not be allowed to provide any commutation benefit, cash surrender value, or other similar feature.

Specific rules would apply to QLACs purchased under IRAs, 403(b) plans, and 457(b) plans. Disclosure and annual reporting requirements would also apply to all QLACs.

Proposed effective date

The proposed regulations regarding reporting and disclosure requirements would be effective when the regulations are finalized. Otherwise, the regulations are proposed to be effective for contracts purchase on or after the date that final regulations are adopted and for determining RMDs for distribution calendar years beginning on or after January 1, 2013. The IRS advises that, until final rules are issued, taxpayers may rely on the proposed regulations and the existing rules under Code Sec. 401(a)(9) continue to apply.

Comments and hearings

Written or electronic comments on the proposed regulations are due by May 3, 2012. A public hearing has been scheduled for June 1, 2012.

For more information on this and related topics, consult the CCH Pension Plan Guide, CCH Employee Benefits Management, and Spencer’s Benefits Reports.

Source:  CCH® PENSION — 02/16/12