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.

In trying to fund the new healthcare plan (that only 30% of Americans wanted), Congress set up another trap for everyone…not just the “rich.” Better plan now for future tax increases coming your way as your income rises in the future. The new program is a Medicare surtax.

Strategies for the tax involve creating effective tax deductions under new investment income rules, choosing the right investments, insurance products and business structures, and picking the right time to set up trusts. The idea is two-pronged but basic: Reduce overall taxable income, and reduce investment income.

The surtax adds a 0.9% Medicare Hospital Insurance Tax on earned income over $200,000 for single taxpayers and $250,000 for married couples, and an Unearned Income Medicare Contribution of 3.8% on investment income for taxpayers with adjusted gross incomes over $200,000 for single filers and $250,000 for married filers.

The 3.8% is assessed on the lesser of net investment income or the amount of modified adjusted gross income over the threshold. Net investment income is investment income minus certain expenses and includes interest, dividends, capital gains, annuities, rents, royalties and passive activity income. It does not include active trade or business income, distributions from IRAs or other qualified retirement plans, or income considered for self-employment taxes.

Keeping income below the threshold will be a key line of attack. Ways to do that include stashing money in tax-exempt investments, including municipal bonds. Non-qualified deferred compensation, life insurance policies, and oil and gas investments are other ideas.
Begin now, today, to take an aggressive move in shifting your investments to avoid these future taxes. Do not wait until the “crowd” starts to move their monies. Talk with your advisor now and systematically move your monies. The “crowd” will wait until after they pay the tax to think about making changes.

Ah, discipline or regret…

One does not need to be a tax attorney to know what is ahead for all Americans. Here is why rates are going higher:

• Congress moves rates from high to low and back to high. You have been in a “low” period.

• Effective 12/31/2010, the Bush tax cuts will expire, so rates go back up to pre-Bush. This means an average of 3-5% higher for every bracket.

• The war on terrorism will continue for another generation and will require increasing amounts of money.

• Social Security and Medicare are broke. The Baby Boomers are just starting to lean on these programs, so both programs will need increasing amounts of money.

• We have a financial crisis not seen in two generations – a stimulus and mortgage bailout program were failures and thus, will require more monies to pay back these borrowed funds.

• The present administration is designing programs so that 45% of American taxpayers (the payers) will provide for 55% of American non-taxpayers (the takers). Thus, the payers (producers) will be required to ante up more for the takers (non-producers).

Now, all the hype has been…”tax the rich.” Be careful what you wish for…you will become part of the rich very soon, according to the present administration’s plan.

• A report from the IRS for the 2008 tax returns filed, only 256,000 returns out of 142 million returns filed, which is the top 2%, had an adjusted gross of over $250,000 (what some may think is rich). This top 2% paid 45% of all federal taxes collected even though they only earned 25% of all income. Hmmm…. I thought the system was to be fair…you know, top 10% pays 10%, top 50% pays 50%, and so forth. Right now, 50% of all those that earn income pays NO TAX!!

• Even if they confiscated 100% of the income of the top 2%, it would not touch the deficit. Do the math yourself.

• They asked Willy Sutton…“why do you rob banks?” He said…“cuz that is where the money is.” Look for Congressional Revenuers to come looking for more money… “where is the money” – the middle class.

To make my point, let’s look at a few new taxes that have come into effect due to the new health care law:

1) Medicare taxes will increase by 0.9% on joint household wages above $250,000 (on 1/1/2013). Thus, if a couple had $400,000 in wages, they would have a new tax of $1,350 ($150,000 x 0.9%). This amount is not indexed for inflation. So, in the future more people will creep into this area. Also, as with every tax they place on high income earners, it eventually goes down to the middle class.

2) The same upper-income couple above will be subject to a 3.8% new tax on unearned income (interest, dividends, royalties, rents, and capital gains). Say our couple earns $50,000 in interest from their bank accounts. This would produce a new $1,900 tax bill for them (sources: House of Representatives and CBO). This will have a dramatic negative effect on savings and the stock market. In all cases, see your tax advisor for details.

3) As you sell your home in the future, there will be a 4% tax on the gross sales proceeds for everyone. (Hmmm…I thought no new taxes on those earning less than $250,000 – then, they said only on those above $200,000, then they said on those above $150,000.)

You know Congress does all its tax planning based on the “static” approach. That is, they assume everything will stay static and no one will do anything to avoid taxes. In our example above, our couple will incur over $3,000 in taxes and they will do whatever it takes to lower or reduce the taxes. This avoidance will lead to less economic growth, fewer jobs, less tax revenue coming in, then they will have to raise taxes somewhere else and…well, you connect the dots. Just cut spending. Stop this madness!!

Now, I have just covered a few of the new taxes. Rather than waiting for the sword to cut you, I am demanding you take action now…or forever hold your peace.

I have been advocating for years to get your money into programs that will allow your money to grow tax-free. You can have access to the money tax-free at any time and when you die, it transfers income tax-free. This strategy is a layup with a ladder, or a stolen base on a wild pitch.

Please contact us at (713) 871-5919 or at conswella@fgmci.com to take action now. If you wait until the rates go up, it will be too late.

Ah yes….discipline or regret.

Most people spend and concentrate mainly on their homes and autos. Here are a few tax incentives in each area that may save you tax dollars.

If you have a house or a car, going green will be easier.

• Green Homes - Clients who install solar panels or make other energy efficiency improvements to their homes will receive substantial write-offs for their efforts. A credit of up to 30% is available for expenses incurred in 2009 and 2010. You could even install solar panels to heat your pool and it will count. In the past, the benefit was only a 10% credit.

The maximum credit has been raised from $500 to $1,500, combined over two years, with specific limits for different types of improvements. For example, furnaces are limited to $150. A previous limit of $200 for windows has been lifted, but the specifications for windows to qualify have become stricter.

For certain green home improvements, there are no longer any dollar caps. For example, that $1500 cap does not apply to geothermal heat pumps, solar water heaters and solar panels. Wind energy systems and certain fuel cells are also exempt from the cap. You can claim the full 30% of the purchase price for these, and they can be expensed. To see exactly which home improvements qualify, go to:
www.energystar.gov/index.cfm?c=products.pr_tax_credits.

• Green Cars - The government hopes more people will start driving clean, plug-in cars. Hybrid electric cars now qualify for a tax credit that starts at $2500 and phases out after the manufacturers sell 200,000 vehicles. The credit is calculated according to the power of the vehicle. If the car has a battery with at least five kilowatt-hours of capacity, your credit is increased by $417. For every kilowatt-hour thereafter, up to 16, you add an additional $417. It could be worth as much as $7500.

Recent surveys show that tax rates will rise dramatically. Here is why: Democrats are likely to maintain their majority in both Houses of Congress. In addition, the Dems will probably pick up seats in the Senate. Even if the GOP wins the White House, a Republican President will probably be dealing with a Democratic Congress. On the other hand the more likely scenario is an all-Democratic government (look out for what you pray for … here it comes).

Under current law the dividend and cap gains tax rate would return from the present 15% tax rate to the old 39.6%. All the Democratic candidates have said they would repeal the Bush tax cuts immediately. In addition, Rep. Charles Rangel (D-N.Y.) chairman of the tax-writing Ways and Means Committee is vowing to repeal the AMT. He is proposing a surtax on high income individuals plus moving the top rate (including dividends and cap gains) from the present 35% to 44.2%.

[Side Bar: I have written countless times in this blog that taxes will be going up in the future. You should have restructured your contributions to the time-bombs, (i.e. 401K and IRA) and even been pulling money out of your qualified plans at the present low rates.]

Even if the GOP and Dems settle on a dividend and cap gains rate of “only” 28% that is a doubling of the present tax rate.

Conversely, a Republican President will probably be faced with a majority Democratic Congress and be forced to make major concessions to get tax legislation passed. Yup – higher taxes!

What does this mean for you?

• Investors in the stock market are always looking ahead – Have the markets been dropping lately as investors, prepare for more taxes?
• Future stock market returns will be moderate at best.
• Investment into start up businesses will halt curbing job creation due to higher cap gain taxes.
• Businesses will have to lay off people as corporate tax rates also go up in order to maintain their basic profits.
• Jobs will move overseas to a more friendly tax environment.
• Investors will place monies overseas further weakening the U.S. economy and the U.S. dollar.
• Less take home money for you with increased taxes and rising inflation.

Presently Congress is working on a stimulus package to “give back” to us some of our own money (And also give some of our tax money back to people that have NOT paid taxes – Hmmm!)

Don’t they get it? The Dems want to raise taxes, but, they are full throttle to give back money via stimulus package. Isn’t the return of our tax money the same as a tax cut? Let the people keep more of their money. Most people know how to spend their own money better than Congress does!!!

And you said you wanted change? WATCH OUT … for Happy Days are NOT here again (Where are Richie, Ralph and Fonzi  ?)

Recent surveys show that tax rates will rise dramatically. Here is why: Democrats are likely to maintain their majority in both Houses of Congress. In addition, the Dems will probably pick up seats in the Senate. Even if the GOP wins the White House, a Republican President will probably be dealing with a Democratic Congress. On the other hand the more likely scenario is an all-Democratic government (look out for what you pray for … here it comes).

Under current law the dividend and cap gains tax rate would return from the present 15% tax rate to the old 39.6%. All the Democratic candidates have said they would repeal the Bush tax cuts immediately. In addition, Rep. Charles Rangel (D-N.Y.) chairman of the tax-writing Ways and Means Committee is vowing to repeal the AMT. He is proposing a surtax on high income individuals plus moving the top rate (including dividends and cap gains) from the present 35% to 44.2%.

[Side Bar: I have written countless times in this blog that taxes will be going up in the future. You should have restructured your contributions to the time-bombs, (i.e. 401K and IRA) and even been pulling money out of your qualified plans at the present low rates.]

Even if the GOP and Dems settle on a dividend and cap gains rate of “only” 28% that is a doubling of the present tax rate.

Conversely, a Republican President will probably be faced with a majority Democratic Congress and be forced to make major concessions to get tax legislation passed. Yup – higher taxes!

What does this mean for you?

• Investors in the stock market are always looking ahead – Have the markets been dropping lately as investors, prepare for more taxes?
• Future stock market returns will be moderate at best.
• Investment into start up businesses will halt curbing job creation due to higher cap gain taxes.
• Businesses will have to lay off people as corporate tax rates also go up in order to maintain their basic profits.
• Jobs will move overseas to a more friendly tax environment.
• Investors will place monies overseas further weakening the U.S. economy and the U.S. dollar.
• Less take home money for you with increased taxes and rising inflation.

Presently Congress is working on a stimulus package to “give back” to us some of our own money (And also give some of our tax money back to people that have NOT paid taxes – Hmmm!)

Don’t they get it? The Dems want to raise taxes, but, they are full throttle to give back money via stimulus package. Isn’t the return of our tax money the same as a tax cut? Let the people keep more of their money. Most people know how to spend their own money better than Congress does!!!

And you said you wanted change? WATCH OUT … for Happy Days are NOT here again (Where are Richie, Ralph and Fonzi ? )

The most efficient route for paying premiums and receiving tax free benefits is if you have your own private company. Under this scenario the premiums are tax deductible and the benefits to the recipient are tax free. You can put all the “bells and whistles” on the policy and not worry about skimping. Ah, you say … I do not have my own company. For decades I have begged my client to set up some type of business. No, you don’t need a huge business just a basic home based type. It does not matter what you do … a hobby, consulting, etc, just so long as it generates income. There are thousands of home businesses, cheap to start up, and, provide good money. In addition to buying Long-Term Care insurance through this business, you can take deductions that a “working stiff” cannot, set up a method to fund your child’s college education on a tax deductible basis and more!

I hear you … “Paul, I am more concerned about my parents and their needs for LTCi”. Well, if they have an annuity, or are considering buying one, either qualified or non qualified, then, there is relief on the way (please contact us for questions on the best annuities).

Here is some great news for annuity holders, those considering buying an annuity that will take place in less than 2 years.

A tremendous opportunity

On August 17, 2006, President Bush signed the Pension Act of 2006 into law. Specific provisions of the Act will help usher in new and exciting opportunities for annuities and long-term care planning. These provisions provide tax advantages for annuities used to fund LTC and LTC insurance costs. With many in the marketplace, many annuities are uniquely positioned to help you benefit from the Pension Protection Act.

Pension Protection Act points of Interest:

• Cash value withdrawals from non-qualified annuities used to pay for LTC expenses, of HIPAA tax-qualified LTC insurance, will no longer be considered taxable income, regardless of cost basis. (Note: the above provision takes effect January 1, 2010 and does not affect claims or withdrawals prior to December 31, 2009.)
• Qualified LTC insurance, under section 7702B of HIPAA, can now be added to annuity contracts. The law even allows for qualified LTCi to be offered to annuities issued in the past.

What this means for Annuity Holders:

• All existing and new annuity holders will benefit. An amendment will need to be filed for and offered to existing contracts, making them tax-qualified by January 1, 2010.

Benefits to Annuity policy holders:

• Any LTC claims paid from the base policy will not be taxable.

The Pension Protection Act’s focus on tax benefits for asset-based LTC solutions verifies their stature in the financial services community, and offers a tremendous opportunity for you to make a difference in your financial future.

Those tax changes propelled the economy to unpredicted GDP growth, doubled the stock market over 5 years, brought huge tax income into the U.S. Treasury and gave relief to overtaxed U.S. citizens at every level. The number of tax code changes from those cuts are too numerous to cite in this article. My favorites are the across the board reduction in tax rates; a drop in dividend tax rates from 39.5% to 15% which have benefited everyone especially our senior citizens that depend on fixed income; a drop in capital formation taxes from 28% to 15% that have helped create jobs and increase everyone’s wealth, and, a drop in the deficit below any one’s wildest expectations even as Congress spends more.

I have seen all my clients … “happy” and not under stress due to the lowering of taxes. Every American with more in their pockets have been spending the excess dollars (God Bless the American consumer … they know how to spend) which lead to the growth in GDP and jobs. Those that did not spend, saved and invested the excess money which led to a lowering of interest rates to record levels.

A funny provision of the tax cut was that Democrats in Congress insisted on a “sunset” provision. That is, all these cuts and happiness must end by 12/31/10. Funny how they NEVER put a “sunset” provision on any tax increases – hmmm.

The sad part of your fortunes is as I write this EVERY Democratic Presidential candidate has said they will increase taxes immediately after 12/31/10. “She” has said that if “she” is elected her first order of business the day “she” is inaugurated – is to “roll back” all of Bush’s tax cuts to pre 2001 levels … Hmmm! In addition, Charles Rangel, head of Ways and Means Committee Tax Writing, who has been Ms. Clinton’s puppeteer, is in full agreement with her plan. If “she” is not elected and any other Democrat is elected President he will push for her Inauguration Day plan. The bill would raise all tax brackets by as much as 10%. So if you are now paying 35% it is set to go to 44%. That is a 25% increase in their tax take and a 25% drop in your “keep” rate.

I have advocated in this column countless times that everyone knows taxes will go up. This is not just in the next few years but continually in the future. Why? To simply fund the generation long war on terror, to prop up the underfunded/bankrupt Social Security/Medicaid bill for the coming Baby Boomers, and to pay for Congress’ insatiable appetite to spend for votes.

What can you do?

• Meet with your advisor immediately to take action on strategies in 2007 with lower rates and do similar planning to take action in 2008.
• If you buy stock or capital assets now you will have your 1 year holding take place before the end of 2008.
• Begin now to do strategic rollouts of your IRA/401K plans. You do not have to be retired to do this. If taxes are going to be higher later then why wait (see all past articles on Missed Fortune).

If the Republicans win the White House and the Democrats do not have a majority in Congress then we will get a reprieve. The above strategies still make sense for the long term, but hold onto your wallets.

Ah, Discipline now — or Regret later!

The original purpose of the “kiddie tax” was to stop people from transferring investments to a child that may be in a lower tax bracket (hiding income from taxation). This tax is made up of rules that determine the tax on a child’s investment income. In 2007 the first $850 of a child’s investment income is tax free, then, the next $850 is taxed at the child’s own tax rate. Any unearned income over $1,700, in 2007, is taxed at the parent’s higher rate (adjusted for inflation).

Why the concern over this? Many people were holding off shifting assets and having their kids sell them, from 2007 until 2008. Why? In 2008 a 0% capital gains tax rate would apply to those in the two lowest income tax brackets.

If you have kids from 18-23 by the end of 2007 there is still time to act. Until 12/31/2007 those in the two-lowest tax brackets can enjoy a 5% capital gains tax rate versus their parent’s 15% capital gains tax rate in 2008.

Do you have …

1. Appreciated securities?
2. Over concentrated position in one security?
3. Planned a major purchase (i.e. car) in the next year?
4. Children in the 18-23 year old range?

You might consider transferring these funding assets to the kids and sell before year end 2007. The tax would be 5% in 2007 versus 15% in 2008. Then, use the proceeds to reposition assets or make that large purchase.

Also, this new wrinkle in tax planning will make saving money for college in a child’s name not tax effective.

You know people do things for their own self interest. I do not mean being selfish. Rather, if you look at how this original legislation came about it is obvious people did the transfer to the kids because they felt taxes were too high on their unearned income. Congress does not get it … every time Congress zigs … people zag.

It is not that the taxes you pay are not high enough … no … Congress spends too much. A single solution is to reduce tax rates. Ever since John Kennedy did the first major tax cut, and all other tax cuts done since then, the revenue has increased into Washington. Every time tax rates go up – taxes into Washington decrease.

An interesting side note … In 2004 George W. Bush stood by his guns to keep tax rates low. The opposition claimed that the American people were not hurting enough and taxes should be raised. Bush estimated that by 2010 the then $480 billion deficit would be cut in half. In the fall of 2007, today, the deficit is already below one-half at $160 billion. The deficit continues to drop like a rock as tax money is flowing into Washington. (Oh, and this deficit decrease was done financing a war, a major shock to our economy at 9/11, a business recession, Katrina, Rita and countless other tragedies – Does anyone get it??) Would you like an extra tax refund??? Demand that everything in the Washington budget be cut by 10%, including salaries. You would see a bonus refund immediately!