Feeds:
Posts
Comments

Archive for the ‘Economics’ Category

The Wall Street Journal reports that efforts to pass an extension of the Bush-era tax cuts have failed in the Senate.

If these politicians are serious about getting rid of “tax uncertainty” and reducing tax liabilities on the vast majority of Americans, then they should be dealing with a relatively simple and uncontroversial thing – patching the AMT tax exemption. Otherwise, more than 21 million families will see their tax bills go up next year. But like the estate tax, these are for the most part great stealth taxes. No one has to go on the record about voting for higher taxes because it just will happen.

As a nation we cannot even afford to extend the Bush-era cuts temporarily much less permanently if we are serious about tackling the deficit. And the tax cuts are far from being stimulative in this economic environment.

More stimulative options would include payroll tax holidays and extensions to unemployment benefits.

Instead we will be left with the “tax uncertainty” of the AMT and the estate tax. And every other thing that is the serious province of government will be held hostage.

On second thought, there really is no tax uncertainty. The Congress has had nearly nine years to come up with solutions for the estate and Bush tax cuts. We know that the rates on both will be going up on January 1. And we know that AMT will, too.

So now that we have certainty, can we please move forward and do some other stuff that really needs doing?

Advertisements

Read Full Post »

On Wednesday night as I drove Spencer to visit his grandparents, I was listening to an NPR program. The segment included an interview with members of the President’s commission on the budget deficit and the debate over tax policy.

I think that we all can agree that saving money, not spending foolishly and living within our means are good starting points for long-term financial success whether for governments, businesses and individuals. These are values that I hope to instill in my toddler and teach my clients.

I applaud the effort to put on the table controversial ideas to at least begin an adult conversation.  As I noted in a different post on the topic, if we do nothing to get our financial house in order, we risk economic growth, prosperity and national security for ourselves and our posterity.

Reality is a whole lot different than made-for-radio or -TV soundbites.   During the interview, Senator Judd Gregg (R-NH) noted that it’s not a good time to raise taxes.  In the context of the debate over the extension of the Bush-era tax cuts, Gregg was pretty clear about his stand: raising taxes during this fragile recovery while lots of folks are out of work will not help the economy.

OK.  I’ll buy that even though I still believe that only through shared sacrifice making tough and sometimes unpopular policy or tax changes will we as a nation get our financial house in order on our time frame as opposed to being forced during some crisis like the folks in Greece to make drastic cuts in a short time frame.

But if that is what the Senator believes than why is that he and members of his party have no regard for the “tax uncertainty” of their inaction on the estate tax?  After December 1, the exemption level drops from the $3.5 million level in 2009 (right now there is no estate tax for 2010) to $1 million.  And the tax rate will go up from 0% in 2010 to 55%.  This was what existed before these cuts were put into place in 2001.

And what about the Alternative Minimum Tax?  The average American will likely see his tax bill go up between $3,000 to $5,000 next year by Congress doing nothing. This parallel and stealth tax system will ensnare more than 21 million households of average income Americans if the AMT exemption amount drops as is scheduled after December 31 if there is no action by Congress.  This means that households filing jointly with income as low as $45,000 will lose out on many deductions and exemptions and end up paying a higher flat rate tax instead of the graduated income tax rates that everyone is now fighting over.

I guess that such moves regarding the estate tax will help gain someone political points.  And by ignoring the AMT, no one and everyone can take the blame without singling out anyone for a particular vote.

Maybe it’s OK when living and working inside the Beltway of Washington to do this.  Saying one thing and doing another or simply ignoring reality are probably good skills for politicians of every stripe and party.  But for the rest of us, this kind of rhetoric on the one hand coupled with hypocritical actions (or inactions as the case may be) on the other just makes no sense in the real world.

During WWII there was a saying:  Loose lips sink ships.  In Washington these days, loose lips cause more than hot air. The rest of us simply catch a cold and end up paying more.

Now how is that going to help consumers stimulate the economy?

Read Full Post »

AMT.  At first glance you might think that some letters have been transposed. But unlike the machine that spits out money to you, the AMT is the stealth tax system that threatens the financial health of millions of Americans each year.

The Alternative Minimum Tax, created decades ago to make sure the super-rich paid their fair share of taxes, has become a sure-fire way for the federal government to scoop up more tax revenues out of the pockets of average taxpayers without really raising taxes while playing  lip service to reducing taxes.

The AMT applies a flat tax rate to income above a certain exemption amount.

Each year more and more working class Americans are caught in the net of the AMT unless Congress approves patches to minimize the impact.  If patches aren’t made to the AMT, it means that more than 21 million additional households will face an average tax increase between $3,000 to $5,000.

No one in Congress really wants to fix the problem because the AMT provides so much revenue to the Treasury’s coffers. Sure, each year patches are usually passed.  But it takes longer and longer for them to do it.  And any real effort to reform the tax code and scrap the AMT system is unlikely.

The AMT is a parallel tax system requiring taxpayers to essentially complete two tax returns each year and pay the higher of the two if certain conditions prevail.  And when you fall under the grip of the AMT, you lose out on lots of your typical deductions and exemptions.  Accordingly, your tax liability goes up (or refund goes down) leaving more in the hands of the government.

Tea Party or not, Congress is fiddling and you may be left with less in your pocket or your ATM because of the AMT.

Going into this past election season, there was much made about the Tea Party activists and Republicans opposing tax increases especially during the fragile economic times we are in now.  There has also been lots of talks about the need for “certainty” in the tax code so that business owners could plan better, invest more and eventually create more jobs.

All are laudable.  But the reality that confronts us now is we have tax uncertainty going into another year.

Like a teenager completing a term paper at the last-minute even though it had been assigned weeks before, Congress has had several years to address lots of issues like the Estate Tax and the Bush-era tax cuts set to expire on December 31.

But because of political posturing, nothing has been done to address these issues.  In fact, if you want to talk about tax uncertainty ask an estate planning attorney since the Congress has left everyone hanging about what rates will apply going forward.

So despite the fact that AMT patches are generally non-controversial, no effort has been made to deal with them as Congress postures and blusters about extending tax cuts that will primarily help multi-millionaires who on average earn more than $1 million each year.

And even though the party about to control power in the House seeks to provide “tax certainty” and not create a drag on the economy, there is a real chance that inaction on the part of Congress will dampen economic activity in 2011.

Why? Think of it this way.  The IRS needs to know what the law is to prepare the forms needed by your tax preparer and the company that makes the software used by your preparer.

Right now the AMT exemptions for 2009 are:

  • $46,700 for single and head of household filers,
  • $70,950 for married people filing jointly and for qualifying widows or widowers, and
  • $35,475 for married people filing separately.

Unless Congress takes action, the AMT exemption amounts for 2010 are scheduled to be lower than the 2009 figures:

  • $33,750 for single and head of household filers,
  • $45,000 for married people filing jointly and for qualifying widows or widowers, and
  • $22,500 for married people filing separately.

Proposals in Congress would set the 2010 exemptions for those who are married filing jointly at $72,450 and $47,450 for singles.

And even if the Congress gets its act together, it may not be enough time for the IRS and tax preparers to set up their systems properly.  This will delay the processing of returns and in turn delay the receipt of billions of dollars in tax refunds.

What do you think that $300 billion more in the hands of taxpayers sooner rather than later will do for an economy needing stimulus?

So while Congress fights over extending cuts to folks who may not even qualify for them in the first place since they may already be subjected to the AMT, it may possibly force millions of others to at best wait for refunds or at worst pay more in taxes despite lip service to the folks who elected them.

Regardless of how this plays out, you really need to keep an eye on how tax policy risks can impact your own personal bottom line.

Read Full Post »

« Newer Posts

%d bloggers like this: