U.S. Treasuries, Bonds, and More!!

By Alexander Tecle

Why is it important to keep track of U.S. Treasury interest rate levels? How do they impact interest rates globally?

It is important because the U.S. Treasury yield curve is the first mover of all domestic interest rates and the most influential factor in setting global interest rates. Interest rates on all domestic bond categories rise and fall based on the yield activity within the U.S. Treasury market. In general, investors view the US. Treasury security as the risk-free rate, or least risky security in the global markets. Investors use the Treasury yield-curve (yields for treasuries at all maturities) as an acceptable yield-for-risk benchmark for all bond investments at higher risk levels.

 

How does the Federal Reserve influence the direction and activity of the yield curve?

The Federal Reserve directly affects the short-term side of the yield curve by setting the Federal Funds Rate. The Fed Funds rate is the rate at which banks charge each to lend capital to each other during the overnight cycle. The Federal Reserve also controls the prices of treasuries and other bonds in the market by their open market operations that purchase and sell of bonds by increasing the supply of bonds or reducing the supply of bonds in the market place. This process is called quantitative easing or tightening. At this moment, the Federal Reserve is in the process of tightening monetary policy, which is encouraging the U.S. treasury yield curve to rise and push up U.S. bond yields. This action is quite common in the later part of the economic-cycle after an extended period of economic growth and expansion. Please select the link below to review the current treasury yield environment and U.S. credit yield environment.

U.S. Rates

 

How is the Federal Reserve rate policy different then other central bank around the globe?

 

In developing nations, such as the European Union, Japan, and Australia, the central banks are working cohesively to loosen monetary policy and encourage a relatively low interest rate environment. The European Central Bank, Central Bank of Japan, and others have been engaged in hyper quantitative easing operations to bring the key overnight lending rate into negative territories with the intent to discourage investing into their government bonds and encourage the market to invest into higher risk assets. (Such as stocks, corporate bond, private equity, etc.) The primary motive is that the developed market economies have struggled to produce substantial and prolonged periods of economic growth and expansion. The difference between the progress of the U.S. and Developed-International economic cycles has been a thematic concern for monetary policy makers. This concern has resulted in a divergence of global rate policies amongst global central banks and substantial difference in the price of bonds yields around the world that can be observed rather easily. Select the link below to view developed-international market interest rates globally.

U.K. Rates, Germany Rates, Japan Rates, and Australia Rates.

IRS tax penalty

IRS Tax Penalty

The Internal Revenue Service IRS imposes an IRS tax penalty for different reasons. Some of the most common irs tax penalties are:

Notably, the IRS imposes interest by law. The IRS is powerless to remove interest unless calculated incorrectly. Conversely, the IRS will pay interest to you if they owe you money.

Can penalties be removed?

Importantly, the IRS removes penalties upon the taxpayer can demonstrating reasonable cause. Otherwise, the taxpayer may request a first time penalty abatement, if they have had a good history for the past three years.

If you receive an IRS notice, you should request that the IRS remove the penalties for reasonable cause and for first time penalty abatement. We usually do this while paying the undisputed amount of income tax and interest.

Penalties during an audit

I would not agree to penalties during an audit, especially if the taxpayer had a good history. Do not agree to an audit report that includes penalties. If you have already agreed to penalties, you could re-open the audit.

If you have any questions, please contact us.

Opko

UPDATE: OPKO scheduled to resume trading Friday at 1:15 p.m. EDT.

Opko

Opko Health Inc.’s stock closed down 18% on September 7, 2018. Importantly, Nasdaq halted trading in Opko Health, NASDAQ symbol OPK ($OPK) on September 7, 2018 at 14:34:38 Eastern Time at a last sale price of $4.5835. Meanwhile, nasdaq suspended trading since that time. While this has transpired, hurricane florence bears down on the United States.

Equity Options in OPK

Importantly, September 14, 2018 options are set to expire. The Options Clearing Corporation handles options clearing. The OCC issued a notice #43635 regarding equity option expiration on September 11, 2018. Furthermore, the memo indicates that so long as trading is suspended, equity options in $OPK will not automatically exercise even if they are in the money. Importantly, the holder must provide positive exercise instructions to OCC. If trading resumes, then the options will exercise, as normal.

In the money Options

There are several in the money options relating to OPK. The Sept 14 $5.00 put says it appreciated by 650%. See OPK180914P00005000 and OPK180914P00005500.

The Message from OCC

Hello,

Thank you for using our services. There are a few OCC memos which will help. Hence, the general guidelines memo when a stock halts:

https://www.theocc.com/webapps/infomemos?number=30049&date=201201&lastModifiedDate=09%2F13%2F2014+09%3A48%3A49

Secondly, a specific reference to OPK options in memo #43635:

https://www.theocc.com/webapps/infomemos?number=43635&date=201809&lastModifiedDate=09%2F11%2F2018+10%3A29%3A21

Likewise, please keep in mind, these memos concern Exercise by Exception procedures.

In conclusion, thanks again and I hope this helps.

Conclusion

Finally, make sure you monitor this situation like a hawk to ensure yo do not miss an opportunity.

 

IRS Offer in Compromise (OIC)

IRS Offer in Compromise (OIC)

The IRS Offer in Compromise (OIC). It is an important tax savings vehicle that can result in you paying pennies on the dollar. You’ve seen the commercials. If you owe $10,000 in back taxes, give us a call. The IRS Fresh Start Program. And the commercials go on and on.

How do OICs really work?

An IRS Offer in Compromise (OIC) is not a series of forms such as the Form 656, Form 433 A OIC, or Form 433 B OIC. It’s not an IRS Offer in Compromise Pre Qualifier tool. The IRS Offer in Compromise (OIC) is not a negotiating tool, that allows you to “negotiate” with the IRS, despite what you saw on TV. In fact, an offer in compromise is acceptable to the government when it can collect more by accepting the offer than it would by collecting against the taxpayer.

The government, like other creditors, encounters situations where its tax accounts receivable cannot be collected in full. Also, the taxpayer may present a legitimate dispute as to the amount owed. Therefore, it is an accepted business practice to resolve these issues through negotiation and compromise.

What Offers in Compromise does the IRS actually accept?

The IRS may accept an offer in compromise when it is unlikely that the tax liability can be collected in full. Also, the amount offered reasonably reflects the collection potential or exceeds it. An IRS Offer in Compromise (OIC) is a legitimate alternative to declaring a case currently not collectible or a protracted installment agreement. The goal is to achieve collection of what is potentially collectible at the earliest possible time and at the least cost to the Government.

IRS Collections

Generally, the IRS has 10 years to collect a tax debt from the date of assessment. For example, a 2018 tax return is due on April 17, 2018. Therefore, the assessment occurs on the day of filing the tax return filed, or April 17, 2018 (tax day). The debt would therefore expire on April 17, 2028. This is called the collection statute expiration date, or CSED. The IRS generally actively collects during the first 7 years, although the debt remains in force for 10. Federal tax liens show the CSED date.

 Installment Agreement

The IRS usually will offer an installment agreement for 72 months. That’s 6 years. If you pay using an IRS installment agreement, bear in mind a 0.5% penalty added to the balance monthly, plus interest, which I estimate at 0.5%. Interest rates are rising, so its simply an estimate.

OIC Payment plan

The OIC generally has two payment options. One is in less than 24 months. The second is up to 60 months.

Currently Not Collectible

Currently not collectible means that the IRS cannot collect. In essence, the taxpayer is unable to pay back taxes. There can be many reasons. For example, under IRS Collection Financial Standards, the taxpayer does not have income to service the debt. This might include corporations, limited liability partnerships (LLP), exempt organizations, or LLCs, deemed inactive and defunct with no assets. The collection of the liability would create a hardship for taxpayers by leaving them unable to meet necessary living expenses.

Accepted OICs

Therefore, if your IRS Offer in Compromise (OIC) offers more than can be collected, it has a strong chance of being accepted. If the debt can be paid in full for 72 months, the length of the installment agreement, then the OIC has a low chance of acceptance.

The Secret to OIC Acceptance

Our firm has had success in accepted OIC for persons and businesses. This is because we have presented a strong case that the taxpayer is offering more than is otherwise collectible. We do not accept the IRS’s standardized quick sale values, or QSV. Rather, we estimate a reasonable discount upon quick sale value and discount that pursuant to the taxpayer’s marginal tax rate, which in some cases is higher than the standardized IRS values.

In conclusion, to induce the IRS to accept an OIC, you should present that case that the government will receive more than it would otherwise in the collections process.

Contact us if you need some help.

Net Unrealized Appreciation – NUA – 2018

Net Unrealized Appreciation – NUA – 2018

Net Unrealized Appreciation – NUA – 2018 occurs when an individual has invested in company stock within a retirement plan, such as a 401(k). NUA also refers to as a lump-sum distribution involving company stock. The NUA rules are different for 2018 because the tax rates changed.

Why is it Important?

An eligible taxpayer can save a significant amount of taxes by distributing appreciated stock to a taxable account.

Who is Eligible?

A person who separates from service by way of disability, or retirement if older than 59.5.

Please explain further in depth.

Under the typical NUA scenario, a person retiring from their company will have a 401(k) that holds their company’s stock. For example, you worked at FPL or HEICO Corporation for many year. During that time, you or the company acquired company stock in the retirement plan and its appreciated quite a bit. You will have to consider doing an NUA transaction within 1 tax year following the year you retire. For example, if you retire on November 30, 2018, you have until the close of 2019 to do an NUA.

You have three options.

  • (1) You can do nothing and keep your money at the 401(k) as long as they will do business with you.
  • (2) Take a lump-sum distribution from the 401(k) and roll the entire balance into a Rollover IRA, not taking advantage of the NUA.
  • (3) Make a lump-sum distribution from your 401(k). Distribute the shares of the company stock into a taxable brokerage account, and roll over the rest into a Rollover IRA.

Tax Consequences

If you take advantage of the NUA, you will immediately owe ordinary income tax on the original cost basis of the shares. The cost basis is what you paid for it, presumably long ago. Tax is due on the appreciated aspect of the stock when you sell it. The NUA constitutes the difference between the cost basis and the fair market value. the FMV is the exchange traded price, in many cases. If you later sell the company stock, any gain will be taxed as a long term capital gain.

NUA TIP: If there is any after-tax money  accumulated in the 401k, then a portion of these monies could be used to reduce the amount of the cost basis, which will lower the tax bill.

What happens to the stock after the NUA Transfer is complete?

The stock carries its cost basis from the 401k. However, when the taxpayer sells, he or she realizes a gain on the appreciation of the stock above the cost basis. Upon sale or liquidation of the stock, long-term capital gains apply to the sale proceeds at long-term capital gains rates.

NUANCE: The gain on the stock on the date of transfer is treated as long-term capital gain. The law deems it long-term. However, any subsequent appreciation of the stock above its fair market value on the date of transfer is treated as a short-term capital gain until 1 year passes from the date of the lump-sum distribution.

EXAMPLE: Assume a taxpayer distributes NUA stock on April 17, 2019. The stock had a cost basis of $10 and a fair market value of $22. Assume a tax rate of 37%. In 2019, the taxpayer owes ordinary income tax on the stock basis. The tax due is $3.70. The difference between the cost basis and the FMV is $12. This is the NUA. Assume the stock later appreciated to $23. Assume the Taxpayer sold it on April 23, 2019. In such a case, the taxpayer would also owe long-term capital gains taxes on the $12 appreciation, and short-term capital gains taxes on the difference between the $22 FMV on the date of distribution and the $23 sale price. The gain is not subject to the Additional Medicare tax. The custodians report the NUA on Form 1099-R and the subsequent sale on Form 1099-B.

When is an NUA ideal?

The NUA becomes attractive when you hold highly appreciated company stock in your 401k.

There are many IRS rules that govern a former 401k participants eligibility to use of the NUA transfer. It is important to consider these rules before making the decision to take advantage of the NUA transfer election.

Net Unrealized Appreciation – NUA – 2018

Net unrealized appreciation rules

Frank Duke Method

Net unrealized appreciation 401k

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