Paul Ferraresi

When the Alternative Minimum Tax (AMT) was instituted, it was designed to make sure the top American income earners paid their “fair share” of taxes. The tax rate was a flat 28% with very few deductions allowed. Over the years, Congress has made very few attempts to adjust the level at which Americans will be taxed at the AMT level. Consequently, as inflation has raised individual incomes over the years, many now cross the threshold level to pay AMT. Well, over one-third (33%) of Americans now pay the AMT due to increases in their pay. You see…you calculate the regular tax and the AMT – whichever is greater, you pay.

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…

Every workshop I conduct often leads me to ask the participants: “In the future, do you think tax rates will be going lower, staying the same, or going higher?” Without question, 99% of the people vote higher.

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.

The Recovery and Reinvestment Act of 2009 has a variety of tax savings that may benefit you.

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.

The fables told to gullible voters and the uninformed by President Obama that the rich got a tax holiday under George W. Bush is bunk.
Let’s take a look at the numbers. The share of the tax burden paid by the top 20% of households by income distribution actually increased. Those with average pretax incomes of $248, 400 increased significantly between 2000, Bill Clinton’s last year as President, and 2006 the last year in which data is available.
The Obama administration is set to increase taxes on the upper income people even more. He is trying to sell it as a retribution for the big breaks they allegedly got from Bush at the expense of the poorer folks. (Poor folks do not pay taxes)
The top 20% of households paid a record 86.3% of all taxes in 2006 versus 81.2% under Clinton. Hmmm to be “fair” the top 20% should only pay 20% and so forth…not almost 90%.
If the Democrats raise the tax burden they kill the golden goose. The bottom 20% of income earners saw their share of income taxes drop from minus 1.6% to minus 2.8% in 2006 (these numbers are negative because many in the lower quintile pay no income taxes, but, get money from child and other tax credits.)
If people claim the 5.1% increase in taxes for high earners was due to an increase in their incomes…well, that is wrong. The top 20% saw pretax income rise from 54.8% of the total in 2000 to 55.7% in 2006. A 0.9 percentage point increase. The top 10% share of income increased from 40.6% to 41.6% mainly due to a large number of low income tax payers being removed from the tax rolls.
For over one hundred years every time tax rates increase the tax revenue into Washington decreases. Every time tax rates decrease tax revenue increases. If you want less of something then simply tax it more. Duh!
Like the guy who went into the doctor and said…when I raise my arm it hurts..what should I do? Don’t do that! If they want more tax money in don’t raise taxes! Don’t do that.

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  ?)