Paul Ferraresi

Many in Washington and around the country believe that the solution to the deficit problem is to add more taxes to upper income Americans. I completely disagree. I remember, as a child, when top tax rates were at 91%. It took a lot of fun out of earning money. Consequently, many people, back then, invested in stupid “tax shelters” or moved overseas to reduce taxes. Remember, anything you tax…you will get less of…The more you tax the rich…the more they will move away and you will have less tax income going to Washington.

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.”

New Cost Basis Reporting Laws

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!

It is obvious that the present administration and Congress have no intention of addressing the January 1st, 2011 increase in tax rates before the November 2nd elections.

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!”

The only money you will ever have to spend, lose or invest is what the government allows you to keep. Many taxpayers do not understand that they do have a choice as to whether they will pay a small or large amount of income tax. Why pay the IRS investable funds you are allowed to keep?

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.

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…