How Retirees Can Keep Insurance

QUESTION: I am thinking about the possibility of taking early retirement but I don’t want my employer to know yet. One thing that could stop me from pursuing this plan is health insurance. I have always worked. So, I haven’t had to buy it on my own. But I have heard that it is very expensive. Do you know if there is any way to keep your employer-offered health insurance after you retire and reimburse your former employer?--Y. P.

ANSWER: If you work for a company with at least 20 employees, your employer can continue to provide you with health insurance after you retire, and a growing number of companies are doing so. For this service, the company is permitted to charge you no more than 3% over the group insurance rate it must pay to insure company employees.

Under terms of the Consolidated Omnibus Reconciliation Act, enacted in 1986, companies also may offer continued coverage for up to three years to the beneficiaries of employees who die, become disabled or divorce.

Q: Can you tell me how much federal gift tax I would have to pay on a $10,000 gift?--L. F.

A: Not a cent. By law, you can give as much as $10,000 per person per year--or $20,000 if you file a joint tax return with your spouse--without being charged gift tax. It is the donor who is charged gift tax, because such gifts are usually a mechanism to reduce the size of one’s estate.

Were you to give more than $10,000, the excess would be taxable. But you wouldn’t have to pay it. Rather, the tax would be subtracted from the amount of money and other assets you may leave your heirs upon your death without inflicting them with a big tax bill.

Let’s say you are single and give someone a gift of $50,000 this year. The first $10,000 would be free from taxation. The other $40,000 would be subtracted from your lifetime gift and estate tax exemption, which is currently $600,000.

So if you were to die next year, after the $40,000 tax was subtracted from your exemption, your heirs could receive $560,000 tax free. If the amount of your estate were to exceed that amount, your heirs would be stuck with a tax bill equal to 50% of the excess.

Married taxpayers, however, may leave any amount to their surviving spouse without triggering a federal gift or estate tax.

Q: I just heard an outrageous story. The Internal Revenue Service got angry and slapped a tax on a guy who didn’t owe any taxes but filed a return anyway so he could write a note on the return saying he wished he would have owed money so he could refuse to pay the tax. I forget what he was protesting. Could it possibly be legal for the IRS to do such an outrageous thing?--F. D.

A: The IRS has a history of severe punishment for taxpayers who try to make political statements through the tax system. So the incident you heard about is neither out of line for the agency nor illegal--although it was probably a fine they assessed, rather than a tax.

Your story sounds similar to one involving a California soup kitchen owner. He earned only $3,300 in 1983, so he wasn’t required to file a federal income tax return or to pay any tax.

But, to protest the U.S. government’s intervention in Central America, he did file a return. On it, he wrote a protest note to the government.

The IRS fined him $500 for filing a frivolous return, an action backed by both a U.S. district court and a U.S. court of appeals.

Q: Several times in the past, your column has been helpful to me because it explained the meaning of various acronyms I had heard used but didn’t understand. Now I have another for you. PIGS. All I can tell you is that I have heard it used in the context of making money.--V. E.

A: You have the tax reform act to blame for this new acronym. PIGS is short for passive income generators and is the result of some rather frantic searches for so-called passive income to offset passive gains, as mandated by tax reform.

Although the applicable section of the new tax law is extremely complex, it generally forbids taxpayers from writing off losses from such “passive” activities as owning rental properties unless they have at least as much income from those activities.

This new requirement, designed to stop tax shelter abuses, has triggered sharp interest in businesses that generate passive income. Rental real estate seems to be the most popular, because it generates passive income as well as tax deductions for such things as the mortgage interest and property taxes.

Real estate consultants say this search for PIGS also is sparking a flood of improvements to rental properties. That is because rental property owners often can charge higher rents by making even minor improvements. And the higher the rents, the more “passive” income they generate and the more “passive” losses from tax shelters they can write off.

Debra Whitefield cannot answer mail individually but will respond in this column to financial questions of general interest. Do not telephone. Write to Money Talk, Los Angeles Times, 780 Third Ave., Suite 3801, New York, N.Y. 10017.