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.

If you bought an airline ticket before July 23, 2011, you may be entitled to a refund. You need only to have bought and paid for the ticket before July 23rd and traveled July 23rd or after that date.

The airlines stopped collecting taxes on Friday, July 22, 2011 at midnight. You can contact your air carrier for the refund. They may have you contact the IRS for the refund since the IRS has the money.

Two Left Jabs and a Right Hook

Many boxers have been hit with two jabs, a right hook and find themselves on the matt looking up. You need to prepare for two jabs coming at you: Increasing inflation and more stock market volatility. The right hook to you will be increasing taxes. You need to prepare for all three. There are ways to protect yourself. One way is not by burying your head in the sand. Yes, I have written many times how most Americans are procrastinators (that is why 97% fail financially). They are also very naïve and unaware of what is taking place around them.

My point is that taxes will need to go up dramatically to fund the massive deficits and debt our country now faces. The Bush tax cut extensions expire in about 18 months. The majority of Americans will wait until 30 days before the expiration date and then try to do some planning. You need to act now. See your advisor for help. I have attached a link to an article from the Heritage Foundation.

http://www.heritage.org/Research/Reports/2011/04/Tax-Day-2011-Deficit-Spending-Hides-Future-Tax-Hikes?query=Tax+Day+2011:+Deficit+Spending+Hides+Future+Tax+Hikes

This organization has a fantastic reputation in all the research they do. I suggest you read it carefully and then make your plans. Even if Congress tries to cut back expenses in order to “save our ship”, it will be massive cutbacks and it will affect you and your families. Americans claim they want austere cuts, but, they want the other person’s programs cut; not there’s. So, even if they put cuts in place, expect higher taxes, since cuts alone cannot solve the problems.

Like the person that eats a quart of ice cream each night, puts on 50 pounds and expects to lose it all in days without pain, well, that person has another thing coming. We, as Americans, let the politicians add government programs since the 1930’s (ice cream). We have never stopped the politicians from adding more programs (eating more ice cream). We have allowed them to tax us to death to pay for the programs. So, to get back in shape, we need severe cuts (stop eating ice cream) and tough exercise (more taxes).

“Contentment isn’t getting what we want but being satisfied with what we have.”