Orlando Harmon
The Technical and Miscellaneous Revenue Act of 1988 (TAMRA) was passed to discourage investors from using life insurance to avoid federal income taxes. TAMRA places limits on life insurance policies, reducing the number of people looking to buy life insurance to shelter their money. TAMRA also introduced the Modified Endowment Contract (MEC), which means that policies entered into on or after June 21, 1988, that fail the 7-pay test are considered by the Internal Revenue Service (IRS) to be MECs.
| Characteristics | Values |
|---|---|
| Full form | Technical And Miscellaneous Revenue Act |
| Year | 1988 |
| Purpose | To discourage investors from using life insurance to avoid federal income taxes |
| Effect | Limits how much you can pay into a life insurance policy over a set period |
| Instituted Modified Endowment Contracts (MECs) |
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What You'll Learn
The Technical And Miscellaneous Revenue Act of 1988 (TAMRA)
Before the advent of MECs, investing a large sum of money in a small permanent life insurance policy was possible, effectively creating a potentially high-growth tax shelter. As a result, Congress passed TAMRA, which instituted MECs. If the policy is determined to be a MEC, it may be subject to income taxes as well as penalty taxes.
TAMRA also introduced the "7-pay test", which states that policies entered into on or after June 21, 1988, that fail the 7-pay test (aggregate premiums paid at any time during the first 7 years of the contract exceed the annual net level premium of a 7-pay policy multiplied by the number of years the policy has been in force) are considered by the Internal Revenue Service (IRS) to be MECs.
The TEFRA DEFRA and TAMRA rules place limits on life insurance policies that reduce the number of people looking to buy life insurance to shelter funds.
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TAMRA's 7-pay test
The Technical And Miscellaneous Revenue Act of 1988 (TAMRA) is a piece of legislation that relates to the income taxation of cash value life insurance. TAMRA was implemented to discourage investors from using life insurance to avoid federal income taxes. As part of the TAMRA implementation, the legislation limits how much you can pay into a life insurance policy over a set period. These limits are called the "7-pay test".
The 7-pay test determines that policies entered into on or after 21 June 1988 that fail the test (where aggregate premiums paid at any time during the first seven years of the contract exceed the annual net level premium of a 7-pay policy multiplied by the number of years the policy has been in force) are considered by the Internal Revenue Service (IRS) to be modified endowment contracts (MECs). If the policy is determined to be a MEC, it may be subject to income taxes as well as penalty taxes.
Before the advent of MECs, investing a large sum of money in a small permanent life insurance policy was possible, effectively creating a potentially high-growth tax shelter. As a result, Congress passed TAMRA, which instituted MECs. The TEFRA DEFRA and TAMRA rules place limits on life insurance policies that reduce the number of people looking to buy life insurance to shelter funds.
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Modified Endowment Contracts (MECs)
The Technical And Miscellaneous Revenue Act of 1988 (TAMRA) was implemented to discourage investors from using life insurance to avoid federal income taxes. As part of the TAMRA implementation, the legislation limits how much you can pay into a life insurance policy over a set period.
If you exceed the limits set by the Internal Revenue Service (IRS), the policy becomes a Modified Endowment Contract (MEC). These limits are called the "7-pay test". The 7-pay test determines that policies entered into on or after 21 June 1988 that fail the test (aggregate premiums paid at any time during the first seven years of the contract exceed the annual net level premium of a 7-pay policy multiplied by the number of years the policy has been in force) are considered by the IRS to be MECs. If the policy is determined to be a MEC, it may be subject to income taxes as well as penalty taxes.
Before the advent of MECs, investing a large sum of money in a small permanent life insurance policy was possible, effectively creating a potentially high-growth tax shelter.
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TAMRA's limits on life insurance policies
The Technical and Miscellaneous Revenue Act of 1988 (TAMRA) was implemented to discourage investors from using life insurance to avoid federal income taxes. TAMRA places limits on life insurance policies, reducing the number of people looking to buy life insurance as a tax shelter.
TAMRA introduced Modified Endowment Contracts (MECs). If a policy is determined to be a MEC, it may be subject to income taxes as well as penalty taxes. A policy is considered a MEC if it fails the 7-pay test, meaning the aggregate premiums paid at any time during the first 7 years of the contract exceed the annual net level premium of a 7-pay policy multiplied by the number of years the policy has been in force.
TAMRA limits how much you can pay into a life insurance policy over a set period. Exceeding the limits set by the IRS will result in the policy becoming an MEC.
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The Internal Revenue Service (IRS)
The Technical and Miscellaneous Revenue Act of 1988 (TAMRA) was passed by Congress to discourage investors from using life insurance to avoid federal income taxes. TAMRA instituted modified endowment contracts (MECs), which are policies that fail the 7-pay test. The 7-pay test is when the aggregate premiums paid at any time during the first seven years of the contract exceed the annual net level premium of a 7-pay policy multiplied by the number of years the policy has been in force. If a policy is determined to be an MEC by the Internal Revenue Service (IRS), it may be subject to income taxes and penalty taxes.
The IRS is responsible for enforcing the provisions of TAMRA related to life insurance. The IRS will determine if a policy is an MEC by applying the 7-pay test. If the policy fails the test, it is considered an MEC and may be subject to additional taxes. The IRS will also collect any income taxes and penalty taxes due on MECs.
The IRS has published guidance on TAMRA and life insurance in the form of regulations, revenue rulings, and other publications. This guidance provides detailed information on how TAMRA applies to life insurance policies and how the 7-pay test is calculated. The IRS also provides information on how to report and pay any taxes due on MECs.
In addition to enforcing TAMRA, the IRS also has a broader role in regulating and overseeing the life insurance industry. The IRS works with state insurance regulators to ensure that life insurance companies are complying with federal tax laws and regulations. The IRS also investigates and takes enforcement action against life insurance companies and individuals who violate federal tax laws, including those related to TAMRA.
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Frequently asked questions
TAMRA stands for the Technical And Miscellaneous Revenue Act of 1988.
TAMRA is a piece of legislation that was passed to discourage investors from using life insurance to avoid federal income taxes.
TAMRA limits how much you can pay into a life insurance policy over a set period. If you exceed the limits set by the IRS, the policy becomes a Modified Endowment Contract (MEC) and may be subject to income taxes and penalty taxes.
