Archive for the 'General Financial Information' Category

Fiscal Cliff 2012


Now that the Presidential race is over and we know who will be leading our country for the next 4 years, all attention has turned to the serious financial challenges that face our nation if Washington fails to take action by this December 31st, 2012 the date which marks The Fiscal Cliff.

 

The consequences of going off The Fiscal Cliff is a combination of two major government actions that were set in place during 2011 and 2012; Automatic government spending cuts (commonly referred to as Sequestration) and significant Tax Increases, all of which equates to somewhere between $500 to $817 Billion in deficit reduction, which is also referred to as Taxmaggedon. While both the tax increases and the spending cuts will have a significant impact on the US and global economies, they will have the most drastic impact on American families and business owners.

 

So whether you are an investor, a small business owner, a home owner or unemployed, inaction by Congress will affect you. So it is important for families and business owners to know what is included in these tax increases so that they understand the impact on their financial future and can make the necessary changes going forward. The following highlights, at a high level, the various topics currently being discussed in Washington that will have the most significant impact on the majority of Americans.

 

These are the major issues the President and Congress must act on:

 

  • The Payroll Tax Holiday
  • The Affordable Care Act (ACA)
  • Debt Ceiling and the Budget Control Act
  • Alternative Minimum Tax (AMT)
  • Bush Tax Cuts
  • Unemployment Benefits
  • The “doc fix”

 

The Payroll Tax Holiday expires

For 2011 and 2012 the employee portion of FICA was reduced by 2%. This reduction will end on December 31st which means starting in January the FICA amount withheld from your Paycheck will increase by 2%.

 

The Affordable Care Act (ACA) or Obamacare

The Affordable Care Act included two new taxes to help cover the cost of the increased Healthcare benefits. These taxes are;

  • Unearned Income Medicare Tax (UIMC) – 3.8% on unearned income.
  • Increased Hospital Insurance (HI) tax – 0.9% on earned income for individuals with more than $200,000 in income and married couples filing jointly with more than $250,000 in income.

Additionally, the ACA raises the threshold to claim medical expenses as an itemized deduction from 7.5% to 10% of adjusted gross income for individuals under age 65.

 

Debt Ceiling and the Budget Control Act (Sequestration)

The current debt ceiling is $16.394 Trillion and at the time of writing this article the US Public Debt subject to limit is $16.166 Trillion and is increasing at an average of $3.87 Billion /day.

The Budget Control Act or Sequestration will kick in at the beginning of 2013 which will dramatically cut funding to many government departments as described below:

  • 9.4% reduction in Non-exempt defense discretionary funding (keeping military bases open, paying salaries and research and development)
  • 10% reduction in Non-exempt mandatory defense spending
  • 8.2% reduction in Non-exempt, non-defense discretionary funding (Congress authorized programs such as Head Start and AIDS assistance)
  • 7.6% reduction in non-exempt, non-defense mandatory programs (Not much left here to cut. Most are exempt)
  • 2% reduction in Medicare budget

 

Alternative Minimum Tax

The Alternative Minimum Tax (AMT) patch which has historically been renewed at the end of each year, ended last year. So currently the AMT will affect 30 million more Americans this year unless congress patches it again.

 

Bush Tax Cuts

What is referred to as the Bush Tax Cuts will expire on December 31st, 2012. The Bush Tax cuts are the changes that were made by the 2001 EGTRRA and the 2003 JGTRRA acts.

In 2001 EGTRRA was passed which:

  • Lowered income tax rates

The expiration of the Bush Tax cuts will revert the income tax rates back to rates prior to 2001

10% bracket – gets rolled back into the 15% bracket

25% bracket – returns to 28%

28% bracket – returns to 31%

33% bracket – returns to 36%

35% bracket – returns to 39.6%

 

  • Changed deductions and credits(Marriage penalty returns)

EGTRAA increased the standard deduction for joint filers by allowing tax payers who file as married filing jointly who do not itemize, to claim the standard deduction for both spouses (i.e. 200% of the deduction). This will revert back to only 167% of the deduction.

The 2012 standard deduction is set at $11,900 which will be reduced to $9,900 in 2013.

Dependent Care Credits will go from $3,000 to $2,400 for a single dependent and from $6,000 to $4,800 for two or more dependents.

 

Child-care credit maximum will be reduced from $1,000 per child to $500 per child.

 

Student Loan debt will now have a cut-off date for interest payments of 60 months.

 

The Employer paid job training or continuing education exclusion of $5,250 will end in 2013 which means this benefit will now be taxed as regular income for the employee.

 

  • Simplified retirement savings

The Bush Tax Cuts introduced sweeping changes to retirement plans in general.

An in depth coverage of these changes is outside the scope of this document, the following are the high level changes.

Raised the pre-tax contribution limits for defined contribution plans and IRAs

Increased defined benefit compensation limits

Made non-qualified retirement plans more flexible

Created “catch-up” provisions for older workers

Created the ROTH 401(k)/403(b)

 

  • Estate and Gift Tax rules

EGTRRA made sweeping changes to the Wealth Transfer Taxes; the estate tax, generation skipping transfer (GST) tax, and gift tax. With the expiration of the Bush Tax cuts the unified credit exclusion reverts from $5,120,000 back to $1,000,000

The Maximum estate tax, gift tax and generation-skipping tax rate will rise from 45% back up to 55%.

The state estate tax credit will revert back to a deduction for state estate taxes

The gift tax rate was further reduced to 35% in 2010 this will revert back to 55%

 

In 2003 JGTRRA was passed which:

  • accelerated the cuts passed with EGTRRA
  • increased the exemption amount for AMT
  • lowered the tax rates for dividends and capital gains

People in the 15% tax bracket had their Capital gains tax rate reduced from 10% to 8% on qualified gains of property or stock. This will revert back to 10%.

 

Unemployment Benefits

The standard unemployment benefit lasts for 26 weeks. Over the last 4 years this has been extended through two programs: the Emergency Unemployment Compensation Program (EUC) and the Extended Benefits program. The EUC provided upto a total of 53 weeks of extended benefits and the Extended Benefits provided 13 to 20 weeks of additional unemployment compensation. When all is totaled, an individual could receive up to 99 weeks of unemployment compensation. At the end of this year the bulk of these extensions will end which will revert the unemployment benefit back down to the standard 26 weeks.

Doc Fix on Medicare

Each year congress votes to delay the Medicare Sustainable Growth Rate Formula (the “doc fix”) from going into effect. If this is not continued this year it will result in an immediate 27% cut to Medicare physician payments.

 

The above highlights should help you understand the issues being discussed in Washington and the potential impact they might have on your financial future. For more specific information regarding your unique financial situation I strongly recommend that you sit down with your Tax and Financial advisor to discuss any concerns you may have.

 


Archive for the 'General Financial Information' Category

Raise the Taxes on the Ultra Rich


When the current administration took office it was focused on increasing the taxes on corporations and closing the tax loop-holes that multi-national corporations used to avoid paying taxes here in the United States. One of the unfortunate side affects of this change was that some of the largest multi-national corporations decided to move their headquarters outside of the United States. Another side affect of all the tax talks surrounding the corporate tax code is that corporations decided to increase the amount of cash on hand so that when the tax changes were made they would have the necessary funds to cover their new tax liability.

Now the talk is really heating up about increasing the taxes on the Ultra Rich (the Millionaires and Billionaires) in the US. The majority of the Ultra Rich make their money through investments. These investments provide large sums of capital to businesses which in turn use the capital for research and development, expansion, increased production, etc… So will we begin to see some of the same changes that we saw with corporations over the last two years begin to happen with the Ultra Rich? Will the Ultra Rich begin to increase the amount of money they hold in cash and other low risk alternatives? Will the Ultra Rich decide that it is time to retire and or move out of the United States? Either of these alternatives would reduce the amount of capital available for corporate America to invest in growth.

So if the Ultra Rich do decide to reduce the amount of money they invest in corporate America that will have a harmful affect on our economy. Whether you like the idea of increasing the taxes on the Ultra Rich or not, the impact of what the Ultra Rich do with their wealth could have a significant impact on all US citizens. How will their decisions impact you?


Archive for the 'General Financial Information' Category

Black Belt of Personal Finance


For the past couple of years I have been working towards achieving a black belt in Tae Kwon Do and during the same period I have also been working through the process of achieving my CFP® designation. Last year as I was gearing up to sit for the CFP exam I had an epiphany. The process to obtain a black belt in Tae Kwon Do (and many other martial arts forms) and the process to receive a CFP designation are strikingly similar. Below is a high level look at the requirements for each program.

The black belt curriculum requires each student to accomplish the following:

  • Semi-Monthly testing to advance to the next rank
  • 2-3 years of practice
  • A 16 week testing cycle to demonstrate mastery of all program material
  • A community service project
  • On going practice for life

The CFP certification process requires each applicant to accomplish the following:

  • An undergraduate degree
  • 7 to 8 courses in financial planning each with exams
  • 3 years of industry experience
  • A 10 hour Comprehensive exam to demonstrate mastery of all course material
  • A criminal background check
  • On going continuing education for life

In the martial arts community obtaining your black belt means you are now ready to begin your real training. Likewise in the financial planning industry, receiving your CFP designation means you are now prepared to begin the real journey in financial planning. This is why I feel that the CFP designation is the Black Belt of Financial Planning. An individual who achieves either of these accomplishments has demonstrated their focus and dedication to mastering the skills necessary to become an expert and their commitment to ongoing improvement. A black belt in martial arts provides you with the strength to help others, while a black belt in financial planning provides you with the knowledge to help others.


Archive for the 'General Financial Information' Category

The Stimulus Bill and You!!


The Stimulus Bill, or The American Recovery and Reinvestment Act of 2009, passed by the Senate and House earlier this year will have a significant impact on US households for several years to come. So how will it affect the average US household?

The first thing we must understand is what data the New Administration is using to make its decisions. The findings in the report “Income, Poverty, and Health Insurance Coverage in the United States: 2007” which is the most recent data published, we find the following key bits of information:

  • The Real Median household income in 2007 was $50,233
  • The number of people living at or below the poverty rate in 2007 was 37.3 million people
  • The number of people without health insurance in 2007 was 45.7 million people

These numbers are staggering which is why the Legislative Branch passed the Stimulus bill and the New Administration has proposed a $3.6 Trillion budget for FY2010.

So to determine if you will be affected by the Stimulus Bill and the New Administration’s proposed tax-and-spending plans compare your financial situation with the data above.

In short, as listed in the Wall Street Journal, the winners in the upcoming years:

  • Middle-class Families (<$250,000 household income)
  • Low-wage workers
  • Lower-income retirees
  • Veterans
  • Preschoolers
  • College Students
  • Homeless

The big losers:

  • High-wage earners (>$250,000 household income)
  • Wall Street hedge-fund managers
  • Oil and Gas investors
  • Corporate executives
  • Well-to-do seniors
  • Washington lobbyists

So what should you do?

Be proactive!! Don’t sit back and let life happen, you need to sit down with your Financial Advisor and build a sound financial plan based on your current financial situation, career goals, family goals and retirement goals. Once you have defined your plan put it into action, do NOT try to time the market. If you have defined your goals realistically then you should be able to implement your strategy effectively to reach your goals in the shortest amount of time. Remember, your strategy is the long range plan you will still have to adjust your plan on a regular basis to take into account changes in your career and family lives as well as all the changes to the tax and investment regulations.