Paul Ferraresi

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!

Congress is on the hunt for revenue raisers. Watch your wallet. Call your lobbyist

Comments by Paul Ferraresi:

In all my teaching seminars I ask the class if they think tax rates in the future will be higher, lower, or the same. An overwhelming majority always say higher why? They answer… the war on terror will continue for 25-30 years, present budget deficits, baby boomers beginning to extract from Social Security and Medicare and so forth. In addition, the cycle of taxes goes from high (Carter years) to low (Reagan years) to high (Clinton years) to low (Bush Jr. Years). What’s the next cycle?

Here is an excerpt from a recent Forbes article. See the slight of hand starting. I expect over 200 more moves like this will come in the next year. Hold on to your wallets. Remember, you asked for it last November with your vote (or not voting). Read the rest of this entry »

It’s no joke: Cutting taxes for the rich actually raised them

What’s the best way to raise taxes on the rich? Cut their tax rates. It sounds like a joke, but it’s the most sensible way to read the results of the past six years of U.S. tax policy. After the Bush administration and Congress reduced the top marginal rates, the people with the highest incomes shouldered a larger share of the tax burden.

It’s quite a burden, by the way: Fiscal 2006, which ended on Sept. 30, was the first year that the individual income tax took in more that a trillion dollars-$1,043,908,000, according to the latest report of the U.S. Treasury’s Financial Management Service. Read the rest of this entry »

Here are some tax ideas that can save you a bundle. The laws are always changing.

Junk Isn’t Deductible

Think twice before trying to deduct that rusty old bike or the tattered clothes you gave to charity. Under the new rules, any household items or clothing you gave away after August 16, 2006, must be in good condition to be deductible.

The rule does not defined good condition. “To be safe, when you give to a charity have them identify on your receipt that the stuff was in good condition,” says Lisa Osofsky, an accountant at Weiser in New York. Read the rest of this entry »