Paul Ferraresi

In less than 11 months from now a new Congress will be elected. In addition, you may have the same or a new administration in the White House.

What will the economy be like? What will be the “mood” of Americans? Monetary policy has been used up, and only fiscal policy tools remain. A major fiscal tool is tax policy.

The present tax law is set to expire on December 31, 2012. Will politicians kick the can down the road again? Everyone knows that there are a few major changes that need to be done to have the U.S. economy thrust forward with dynamic vigor. One aspect that must be noted: Any tax policy change must be cemented in place for at least five years. Any prudent individual or business cannot do any worthwhile planning or changing behavior with any shorter time period.

Here are a few changes that will transpire when the extended “Bush tax cuts” expire. Remember, it was the largest tax cut in history when first implemented and got us out of the 911-tech stock implosion of 2000-2003. Consequently, if it is not extended…it will be the largest tax increase in history. Here are just a “FEW” of the changes:

• All tax rates basically go up around 5%. The 10% bracket is eliminated and will be at 15%.
• Dividend rates will go from the present 15% rate to your ordinary tax rates.
• Capital gains rates go from the present 15% rates to rates of 25%. (Gee, I wonder what this will do to your stock market investments? DUH!)
• Elimination of the tax credit for having children. (This will hurt the unwed parents and illegal immigrant parents.)
• The marriage penalty tax will go back into effect. (This will encourage married people to not stay married.)

Since it is obvious that you will be taxed more in every area of your life, doesn’t it make sense to develop a plan to place your monies into programs that will never be taxed? We are here to help at any time.

Come November 2012 it may be beneficial to heed the words of the former Mayor Daly of Chicago, “Vote early and vote often.”

YOUR STATE TAXES

The Tax Foundation does an annual survey of all 50 states and ranks them according to the degree of tax burdens placed on people within that state.

The northeastern states have the highest burdens. According to the 2009 reports, Connecticut has the worst burden per capita; then New Jersey, New York, Massachusetts, Maryland, and California.

States with the least burden in 2010 were South Dakota, then Alaska, Wyoming, Nevada and Florida.

The “facts and figures” guidebook is available online at www.taxfoundation.org\publications\show\2181.html.

Remember, these taxes are over and above the Federal fees and taxes.

The Fed stopped the QE2 program on June 30, 2011. The whole purpose was to provide liquidity to the Treasury market and to appease the Chinese who hold the greatest amount of Treasury debt. The Chinese were concerned that no one would buy their holdings.

The Treasury wants to widen the pool of potential purchasers of Treasury debt. This will include impossible mandates (where they can do such things) and huge offering incentives (where they cannot get what they want). The rumblings do NOT look good for common folks like you and me.

One proposal is to require 401(k)s to hold a certain percentage of their assets in Treasuries at a risk of losing their tax free status. Another is encouraging pension plans to increase their portfolios with more Treasuries. Here is another… allowing companies with overseas cash to bring it home under a “tax holiday” as long as the majority goes into Treasury debt.

Under such plans (1) your 401(k) returns would be less over the long term, and (2) pension plans would need to increase their holdings from the present 6% to 16%, which would force companies to contribute more, costing companies more and forcing them to cut other costs (jobs).

Thus, Uncle Sam is trying to create demand for Treasury debt via the carrot and the stick. The good part… (hmmm) the U.S. is borrowing money from its citizens to stimulate the economy, so these same citizens will pay themselves back with higher taxes. This becomes an Abbott and Costello routine or a chicken and egg game.

As stated in this blog countless times, get out of your 401(k)s, or, stop contributing at least. Get into a non-qualified program that will grow tax free (not deferred); you take it out tax free and, when you die, it transfers income tax free.

New Cost Basis Reporting Laws

Individuals preparing their documents for tax reporting on stocks sold during the year always hit a wall. That wall is trying to find out when they bought the stock and how much they paid for those shares. The amount paid is known as their cost basis. On top of that, to determine their total cost basis, they must add in all dividends earned and capital gains to the cost basis (also known as tax basis). They add these items in as they have already paid tax when the dividends and gains were earned. The cost basis calculations have been a nightmare for some, but, it has been a benefit for others. You see, to date, the IRS had no way of knowing how much you paid to buy a stock or mutual fund. Only recently, brokers have reported only selling prices. So, an individual was left to tell the IRS their cost basis. Technically, one could create a gain or a loss without anyone knowing the truth. (I am not advocating anyone should do anything illegal). Hmm! What is the difference between tax avoidance and tax evasion ?…. about 20 years in the “big house”!

Well, a new federal law requires brokerage firms and mutual fund companies report their customer’s cost basis, gains/losses and holding period to the IRS when certain securities are sold.

There is a 3 year phase, in that this information must be sent to the IRS:

1) On January 1, 2011 – Equities only (excludes Regulated Investment Company stocks (RIC) and those Dividend Reinvestments Plans (DRIP).

2) On January 1, 2012 – Mutual funds, RIC stocks and equities enrolled in DRIP.

3) On January 1, 2013 – Fixed income, options, warranties, rights, derivatives and commodities.

So, read between the lines…You may want to make some purchases or changes to your portfolio to take advantage of an open window here – while it still lasts in 2010.

Discipline or regret!

The only money you will ever have to spend, lose or invest is what the government allows you to keep. Many taxpayers do not understand that they do have a choice as to whether they will pay a small or large amount of income tax. Why pay the IRS investable funds you are allowed to keep?

Tax-advantaged investments are not “loopholes” in the Tax Law that the IRS is out to plug up. They are not immoral, as some would have you believe. A common fallacy is to confuse tax evasion with tax avoidance. Tax evasion is illegal and punishable. Tax avoidance, on the other hand, is legal and is encouraged by the lawmakers. The United States Congress promotes the shifting of funds from the taxable sectors of the economy to areas of public need or good by passing laws which create tax-deferred, tax-sheltered and even tax-free investments.

Many, ignorant of the nature of the tax-advantaged investments, would have you believe that you are “robbing” the economy of tax dollars by not giving your taxes to the government to spend in their great wisdom. Such advocates are ignorant of the fact that tax-advantaged investments are put into housing, energy, food, strategic metals, research and development, medical needs and transportation.

Rather than being filtered through bureaucratic mazes to the economy, these otherwise diverted tax dollars are being applied directly to where the need lies – creating new jobs, expanding industry and adding to the growth of the country.

Understanding that tax-advantaged investments can be risky should be a prerequisite to becoming involved in them. Although there is the possibility of “hitting it rich” with such endeavors, many have and many will continue to chance the loss of their investment. Yet when compared with the alternative, a 100% chance of loss when paying taxes, such investments can look quite attractive. After all, which investment will offer the greater possibility of providing you income in your golden years or at any other time?

The taxpayer also needs to remember that Congress has passed tax incentives because such investments are risky. Tax advantages are provided to encourage investing in high-risk areas that provide for the social good of the country.

Being involved with a taxadvantaged investment requires a proper frame of mind. It is your sleep that will be lost if you are uncomfortable with such an investment. Such investments are complex – particularly with the ever-changing tax laws. Working with a knowledgeable financial planner will help you avoid many of the pitfalls and help you keep more of your hard-earned dollars from taking a one-way trip to the IRS.