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Deferred compensation plans and offshore accounts

Many U.S. citizens, including Michigan residents, put their offshore savings into deferred compensation plans. Taxpayers may do this in an attempt to defer otherwise taxable income to avoid paying at current tax rates. In fact, many individuals with offshore accounts have been doing this since the 1990s.

As with about every method of deferring taxes on offshore accounts to a more convenient time, the IRS has attempted to put in place a method for regulating such practices. In fact, changes to the tax code to address such issues came about in 2008 as part of the Emergency Economic Stabilization Act.

The Emergency Economic Stabilization Act includes Code Section 457A. This section requires income recognition for purposes of tax filing by 2017 on certain pre-2009 offshore-deferred compensation arrangements. It does not matter whether account holders actually received the income so long as the plan is not subject to significant risk of forfeiture.

It is now 2017, and the tax balances regarding such arrangements likely are enormous. The proceeds will receive ordinary income tax treatment. And such treatment will prove particularly significant for residents in states with an already high income tax. According to one attorney, the tax on $100 million in such states may be close to $50 million.

While holders of such accounts should show concern, there may still be a number of strategies in place that can reduce the impact of Code Section 457A. This could include the structuring of a charitable lead annuity trust (CLAT). There may be other avenues to explore as well.

Such strategies are complex, however. It is important to not put in place a strategy that could result in legal consequences.

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