Non-Qualified Deferred Compensation Allows Corporate Executives to Manage Their Liability

Friday, October 1, 2010

A quote from Supreme Court Justice George Sutherland, US Supreme Court 1922-1938: "The legal right of a taxpayer to decrease the amount of what otherwise would be his taxes, or altogether avoid them, by means which the law permits, cannot be avoided."

American Benefit Corporation's James W. Herlihy has published a new article on non-qualified deferred compensation. Executives may limit their tax liability if their corporation offers a non-qualified deferred compensation plan.

Sheltering income from the scheduled tax increases that will take effect January 1, 2011 is nearly impossible unless you are a corporate executive and your company sponsors a non-qualified deferred compensation plan. By deferring pre-tax base and bonus compensation corporate executives can target their optimal tax bracket. The tax increases primarily affecting the highly compensated are coming in three phases and together they constitute the largest tax increase in American history.

Phase #1

Personal income taxes will rise.

  • The top income tax rate will rise from 35% to 39.6%. Coupled with state and city taxes many earners will be in the 50% tax bracket.
  • The "marriage penalty" will return from first dollar of income.
  • Te estate tax will reappear.
Phase #2

Higher tax rates on savers and investors

  • The capital gains tax will rise from 15% to 20% in 2011.
  • The dividends tax will rise from 15% this year to 39.6% in 2011.
  • These rates will rise another 3.8% in 2013.
Phase #3

Beginning in 2013 there is a new 3.8% Medicare tax on the net investment income of high-income taxpayers (individuals with adjusted gross income (AGI) exceeding $200,000, and married couples filing joint returns with AGI exceeding $250,000). Net investment income will include gain on the sale of a home. However, the tax will not apply to any gain from the sale of a principal residence that is excluded from income (individuals, if they qualify, can generally exclude the first $250,000 in gain from the sale of a principal residence; married couples filing joint returns can generally exclude up to $500,000).

It has never been more critical to manage your tax liability and non-qualified deferred compensation provides the corporate executive with that tool.

About Us - At American Benefit Corporation, we design, fund and manage executive non-qualified benefit plans for highly compensated corporate executives who wish to reduce current income taxes and form personal capital on a tax efficient basis. Established more than 30 years ago, we serve the unique needs of executives in numerous corporations with their personal capital formation objectives.

This material is intended for informational purposes only and is not intended to replace the advice of a qualified tax advisor.

Investments in securities involve risks, including the possible loss of principal. When redeemed, shares may be worth more or less than their original value.