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.”

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 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.

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.

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.”

According to the IRS, during 2008, those in the top tax bracket earned around $1.2 trillion. The Federal deficit for 2009 and 2010 were $1.4 trillion and $1.3 trillion, respectively, and fiscal 2011 deficit is set to be $1.5 trillion. So, the recent deficits are all greater than all the taxable income earned by the rich. How about charging a 100% tax rate on the wealthy? It would not cover any of the three year’s deficit. That is, take 100% of their income. You may get away with it for 1 year. But, by next year, they will all move away and there will not be any taxes collected from the rich!! Most of the richest people in the U.S. are the one’s creating the jobs. So, if they move, there will be no jobs for everyone else. Thus, no jobs, no income, so, no taxes. Put out the sign on the U.S. borders…”Closed, out of business”.

I hate when people say about government handouts…”Oh, the government will pay for it”. The government is not a person. The government does not pay for anything. It takes from one person to give to another. Let’s change the statement to…”Oh, my neighbors, family and friends will pay for all my benefits.” Change the statement, and it will wake people up to what is really happening.

We are all at crossroads in the U.S.…it is approaching a point where 50% of the people are paying taxes, so, the other 50% of people, who do not pay taxes, are getting the benefits.

Here’s an idea…Why not tax everyone, yes, I mean everyone, even those on Welfare. It can be a very small percentage rate on the very poor. If everyone is paying some tax, they will be contributing and feeling like part of the “American Family”. They also may vote differently, since they are not getting a free ride. Hmmm…the fair tax or a consumption tax.

“Patience is the ability to keep your motor running when you feel like stripping your gears.”

Individuals preparing their documents for tax reporting on stocks sold during the year always hit a wall. That wall is trying to find out when they bought the stock and how much they paid for those shares. The amount paid is known as their cost basis. On top of that, to determine their total cost basis, they must add in all dividends earned and capital gains to the cost basis (also known as tax basis). They add these items in as they have already paid tax when the dividends and gains were earned. The cost basis calculations have been a nightmare for some, but, it has been a benefit for others. You see, to date, the IRS had no way of knowing how much you paid to buy a stock or mutual fund. Only recently, brokers have reported only selling prices. So, an individual was left to tell the IRS their cost basis. Technically, one could create a gain or a loss without anyone knowing the truth. (I am not advocating anyone should do anything illegal). Hmm! What is the difference between tax avoidance and tax evasion ?…. about 20 years in the “big house”!

Well, a new federal law requires brokerage firms and mutual fund companies report their customer’s cost basis, gains/losses and holding period to the IRS when certain securities are sold.

There is a 3 year phase, in that this information must be sent to the IRS:

1) On January 1, 2011 – Equities only (excludes Regulated Investment Company stocks (RIC) and those Dividend Reinvestments Plans (DRIP).

2) On January 1, 2012 – Mutual funds, RIC stocks and equities enrolled in DRIP.

3) On January 1, 2013 – Fixed income, options, warranties, rights, derivatives and commodities.

So, read between the lines…You may want to make some purchases or changes to your portfolio to take advantage of an open window here – while it still lasts in 2010.

Discipline or regret!

Democrats have made it evident that if they lose control of Congress, then, during the “lame duck” session, they will pass at least 20 bills that will not be beneficial to most Americans. (I guess they are going to take their football and go home).

The plan by the present administration is to eventually have 48-49% of taxpaying Americans pay taxes to support the other 51-52%.

This formula does not work and will doom the U.S. economy. Look at these statistics from the IRS:

1. Americans filed 140 million tax returns for calendar year 2008 income. Through the use of deductions, exemptions and credits, 52 million tax returns of the 140 million total returns (or 37% of all returns filed) paid zero federal income tax.

2. Based upon 2008 tax data, it took an adjusted gross income of $380,000 to rank in the top 1% of US taxpayers, a group that paid 38% of all federal income tax for the year. In 1980, the top 1% of taxpayers paid 19% of all federal income tax. So, the “rich” continue to pay a higher amount of taxes even though the media tells you differently.

3. Based upon 2008 tax data, it took an adjusted gross income of $160,000 to rank in the top 5% of US taxpayers, a group that paid 59% of all federal income tax for the year. In 1980, the top 5% of taxpayers paid 37% of all federal income tax.

You know, a simpler solution is to have everyone, and I mean everyone, pay some tax on any income that they receive. It would give every taxpayer ownership in their country and they might watch what Congress really spends. If it does not come out of your pocket, then, you do not really care what is being spent.

Here is my proposal to Congress which will never be accepted. Every legal citizen, in this great country, is currently allowed one vote. Then, each person will also be given one additional vote for each dollar in taxes you pay.
Hmm! I think Congress would begin to cater to a different group.

Better plan for future tax rate hikes for everyone. How else can a small percentage of taxpayers pay for a larger percentage of non taxpayers?

Make your plans now…otherwise…”Discipline or Regret!”

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…