Paul Ferraresi

What do investors expect the dividend tax rate to be in 2011? This will be the year after the Bush tax cuts expire.

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  ?)

What do investors expect the dividend tax rate to be in 2011? This will be the year after the Bush tax cuts expire.

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 ? )

I continue to write about the need for Long-Term Care Insurance. Here are some tidbits on the tax deductibility of the premiums and tax status of benefits.

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.

The tax cuts of 2001 and 2003 that George Bush enacted are set to expire on 12/31/10. These fantastic tax cuts supercharged the economy from the devastating solar-plex blow of 9/11.

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!

We all know that children can be taxing especially if they are teenagers. Unfortunately, beginning in 2008 they will be even more so, when the “kiddie tax” will be expanded. The expanded definition will include children up to 19 (presently 18) as well as dependent, full time students up to age 24.

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!