The Fiscal Cliff is way overblown as far as the American Economy is concerned. The people that run businesses in America know what they are doing in most cases. Although, the Fiscal Cliff presents an interesting challenge, you can bet your bottom dollar that these business leaders will adjust to the ultimate outcome.
Think about it. Despite four years of President Obama's leadership or lack thereof, a do nothing Senate and a we cannot do anything House of Representatives, the American Economy continues to purr along. Business leaders adjust to the current environment. Sadly, a lot of this adjustment has been downsizing their companies, running lean inventories and reducing investments in research and development. These strategic business moves, however, have contributed to a great year in the stock market. This despite no tranquility at all.
What does the next 10 days hold? Who knows? However, I know one thing. The American Economy will continue to do well, because business leaders will adjust to the new reality, whatever becomes of that reality.
In talking to family, friends, clients and others, I think we all agree that this Fiscal Cliff thing needs to get resolved one way or the other. It is simply unfathomable that these fools in Washington D.C. do not give a hoot about the American people. They are only in it for a power grab and their own selfish re-election needs. You always hear about the fact that elections have consequences. The American people have let these fools in Washington, D.C. control us. This is a big mistake. We are smarter than this.
The Preamble of the United States Constitution starts out with "We the People of the United States, in Order to form a more perfect Union, establish Justice, insure domestic Tranquility, provide for the common defence, promote the general Welfare, and secure the Blessings of Liberty to ourselves and our Posterity, do ordain and establish this Constitution for the United States of America."
I do not read anything in the Preamble that says we the government, or I the President, or we the Senators, or we the House of Representatives. It says "We the People..." We the people are in control of this country, if we believe a word of the Constitution. I am curious however as to why we allow these idiots in Washington, D.C. to treat us this way. We have no one to blame but ourselves.
I think we need to take these elections in the future a lot more serious and exercise our right to vote in a manner that favors "We the People" of these United States of America, instead of a political party. Further, the Preamble also says..."insure domestic Tranquility." We need some domestic tranquility today, don't we?
Showing posts with label fiscal cliff. Show all posts
Showing posts with label fiscal cliff. Show all posts
Friday, December 21, 2012
Thursday, December 6, 2012
How the rich will avoid taxes
Suppose the worst happens. Congress and the President go over the Fiscal Cliff. You are one of the fortunate 2% people whose income is over $250,000. Someone like, Mr. Buffet for example. How do you think he might deal with the new tax scenario?
Let's take a pool of money, say $500,000 and invest it in a stock portfolio. Qualified dividends are taxed at the rate of 15% right now, until January 1st, when they will go up to ordinary income rates. So, if you are in the highest tax bracket of 39.6%, plus the additional taxes added because of Obama Care, then you are going to 44.7%. Do you really believe that wealthy investors are just going to sit there and not shift their income around?
The capital gains tax rate will go from 15% to a modest increase of 20%. This is significantly lower than 44.7%. Quit a bit lower in fact. Instead of taking dividend income, these investors will simply sell something and pay the 20% capital gains rate, if they have a profit. Most often, they will simply sell their losers and not pay any taxes. Either way, 20% or 0% is a whole lot better than 44.7%.
In a little different tax reduction strategy, people like Mr. Buffet will simply reduce their portfolio of dividend paying stocks to companies who pay little or no dividends.
Let's continue with my example portfolio of $500,000. Keep in mind, that for my example purposes, my investor is in the top tax bracket of 44.7% after January 1st. Suppose my investor's collection of dividend paying stocks paid an overall yield of 3%. This investor's $15,000 of income would owe taxes of $6,705 in the 44.7% tax bracket. Now, consider if they reduce their dividend paying stocks down so that their yield is 1.5% instead of 3%. The taxes owed would drop to $3,352.50. This represents a 50% tax savings.
Further still, what if the investor shifted some of their funds to tax free and AMT tax free municipal bonds? They might be able to eliminate their taxes on dividends altogether. If they are able to limit or eliminate their taxes altogether, then they may be able to do this so that they drop down into even a lower tax bracket.
Another strategy that is tailored for those who need high income with low taxes on that income is to use a Multi-Split Annuity strategy. Instead of investing the $500,000 in dividend paying stocks, you purchase three annuities. One has a 5 year certain payout and the other has a 5 year deferral, then a 5 year certain payout. The other is a deferred annuity that grows for 10 years back to the original principal amount.
The first immediate annuity pays $2,300 a month for 5 years and 87% of it is tax free. You only pay taxes on $299 a month which is 13% of the $2,300.
The second immediate annuity pays $2,600 a month for 5 years beginning after the 5 years of deferral and is 65% tax free. You only pay taxes on $910 a month which is 35% of the $2,600.
The third deferred annuity which is deferred for 10 years starts out at $279,200, but grows back to the original $500,000 that you started with at the beginning of this strategy. The growth of this annuity is tax deferred so there are no taxes due over the 10 year period.
Crunching the numbers we find that for the first five years we had to pay taxes on $17,940 of taxable income. This is on $500,000 of principal, keep in mind. Even in the 44.7% bracket, this is only $8,019.18, but we received $138.000 ($2,300 per month) during this first 5 years. This is a 5.52% yield by the way.
Then, on the next five years, years six through ten, we pay taxes on $54,600. At the 44.7% bracket, this is $24,406.20 in taxes due. However, we received $156,000 in income and our yield has grown to 6.24%.
The total tax rate paid during this 10 year period was 6.49%. This is a whole lot better than 44.7%, wouldn't you agree? It is also better than a 20% capital gains tax rate, too.
Note: This is an example of a Multi-Split Annuity strategy. The actual numbers vary according to interest rates, payout rates, age and tax brackets. A Multi-Split Annuity strategy works better in higher interest rate environments. This is not meant to be tax, insurance or financial advice on a Multi-Split Annuity strategy, but rather simply an example of how sophisticated investors might avoid income taxes.
These are some limited examples of what the rich will do to reduce their income taxes. Like I said, Congress and the President are not going to get the money they think they are from the rich. Oh by the way, they are well aware of this, too. This is just all an issue of fairness. The President believes that the rich need to pay their fair share. He campaigned on it, got elected on it and now he is demanding it from the House of Representatives.
Neither Congress or the President truly care about getting extra revenue from the rich, because they know the rich will rearrange their portfolios to reduce their taxable income. This is all about politics and who ends up getting the blame. Sadly, the American people are the pawns of this chess game. Let's hope somebody in Washington D.C. will come to their senses and do something for the American people, instead of their own political agenda.
Let's take a pool of money, say $500,000 and invest it in a stock portfolio. Qualified dividends are taxed at the rate of 15% right now, until January 1st, when they will go up to ordinary income rates. So, if you are in the highest tax bracket of 39.6%, plus the additional taxes added because of Obama Care, then you are going to 44.7%. Do you really believe that wealthy investors are just going to sit there and not shift their income around?
The capital gains tax rate will go from 15% to a modest increase of 20%. This is significantly lower than 44.7%. Quit a bit lower in fact. Instead of taking dividend income, these investors will simply sell something and pay the 20% capital gains rate, if they have a profit. Most often, they will simply sell their losers and not pay any taxes. Either way, 20% or 0% is a whole lot better than 44.7%.
In a little different tax reduction strategy, people like Mr. Buffet will simply reduce their portfolio of dividend paying stocks to companies who pay little or no dividends.
Let's continue with my example portfolio of $500,000. Keep in mind, that for my example purposes, my investor is in the top tax bracket of 44.7% after January 1st. Suppose my investor's collection of dividend paying stocks paid an overall yield of 3%. This investor's $15,000 of income would owe taxes of $6,705 in the 44.7% tax bracket. Now, consider if they reduce their dividend paying stocks down so that their yield is 1.5% instead of 3%. The taxes owed would drop to $3,352.50. This represents a 50% tax savings.
Further still, what if the investor shifted some of their funds to tax free and AMT tax free municipal bonds? They might be able to eliminate their taxes on dividends altogether. If they are able to limit or eliminate their taxes altogether, then they may be able to do this so that they drop down into even a lower tax bracket.
Another strategy that is tailored for those who need high income with low taxes on that income is to use a Multi-Split Annuity strategy. Instead of investing the $500,000 in dividend paying stocks, you purchase three annuities. One has a 5 year certain payout and the other has a 5 year deferral, then a 5 year certain payout. The other is a deferred annuity that grows for 10 years back to the original principal amount.
The first immediate annuity pays $2,300 a month for 5 years and 87% of it is tax free. You only pay taxes on $299 a month which is 13% of the $2,300.
The second immediate annuity pays $2,600 a month for 5 years beginning after the 5 years of deferral and is 65% tax free. You only pay taxes on $910 a month which is 35% of the $2,600.
The third deferred annuity which is deferred for 10 years starts out at $279,200, but grows back to the original $500,000 that you started with at the beginning of this strategy. The growth of this annuity is tax deferred so there are no taxes due over the 10 year period.
Crunching the numbers we find that for the first five years we had to pay taxes on $17,940 of taxable income. This is on $500,000 of principal, keep in mind. Even in the 44.7% bracket, this is only $8,019.18, but we received $138.000 ($2,300 per month) during this first 5 years. This is a 5.52% yield by the way.
Then, on the next five years, years six through ten, we pay taxes on $54,600. At the 44.7% bracket, this is $24,406.20 in taxes due. However, we received $156,000 in income and our yield has grown to 6.24%.
The total tax rate paid during this 10 year period was 6.49%. This is a whole lot better than 44.7%, wouldn't you agree? It is also better than a 20% capital gains tax rate, too.
Note: This is an example of a Multi-Split Annuity strategy. The actual numbers vary according to interest rates, payout rates, age and tax brackets. A Multi-Split Annuity strategy works better in higher interest rate environments. This is not meant to be tax, insurance or financial advice on a Multi-Split Annuity strategy, but rather simply an example of how sophisticated investors might avoid income taxes.
These are some limited examples of what the rich will do to reduce their income taxes. Like I said, Congress and the President are not going to get the money they think they are from the rich. Oh by the way, they are well aware of this, too. This is just all an issue of fairness. The President believes that the rich need to pay their fair share. He campaigned on it, got elected on it and now he is demanding it from the House of Representatives.
Neither Congress or the President truly care about getting extra revenue from the rich, because they know the rich will rearrange their portfolios to reduce their taxable income. This is all about politics and who ends up getting the blame. Sadly, the American people are the pawns of this chess game. Let's hope somebody in Washington D.C. will come to their senses and do something for the American people, instead of their own political agenda.
Wednesday, November 28, 2012
What the Mortgage Deduction Means to Taxpayers
Can you believe these people in Washington D.C.? They are in absolutely no hurry to solve the fiscal cliff crisis. Imagine running a business the way these people do. They would be out of business in a New York minute.
As part of the fiscal cliff talk, we are hearing some mild talk about getting rid of deductions and credits. One of those is the mortgage deduction that affects everyone with a mortgage. A large part of the Great Recession is the problems associated with the housing market. This shows that these people in Washington D.C. are totally lacking in any financial knowledge. They have no clue about basic finance.
Right now, if you are in the 28% tax bracket and own a mortgage, you can file Schedule A and put down the interest you paid for the year and get a tax deduction. In order to simplify things, this means that you receive a 28% savings on your tax return for the interest that you paid. If you take away this deduction, then this would mean that the prices of houses are now more than 28% over priced when you factor in the interest costs. Therefore, the housing market would be immediately impacted. This means further that if your house was worth $200,000 with the mortgage interest deduction, then it will immediately drop down to roughly $129,000 without the mortgage interest deduction and factoring in the interest costs.
Everyone who owns a mortgage would be affected. This would crush the housing market and tank the economy like we have never seen before. You think things are bad now. Wait until you see what happens if they take away the mortgage deduction.
Think about it. If you are going to buy a house and you know that you will not have a mortgage deduction, then this means that the net amount that you can afford for housing has to and will go down. Normally, on a $200,000 mortgage with 10% down, a 30 year term with a 4% interest rate, the payment is $859 per month. With the mortgage deduction, the net payment with a 28% tax deduction is only $618 per month. The net effect is that you can buy a bigger house with the mortgage deduction.
If you take the mortgage deduction away and factor in the interest costs of what $618 per month will buy on a 30 year mortgage, then the affordability of what you can buy is now about $129,000. Do you see the potential impact on the housing market? Suppose you are trying to sell a house for $200,000 before they remove the mortgage deduction. If they remove this deduction, then the people who can now afford your home becomes a much smaller group. Someone who previously could have easily bought your $200,000 house with the mortgage deduction can now only afford a $129,000 home without the deduction. I see said the blind man.
Removal of the mortgage deduction will cause a housing market meltdown of nuclear proportions.
Let's hope these people in Washington D.C. come to their senses.
Support your local real estate agent. These folks are our first line of defense.
As part of the fiscal cliff talk, we are hearing some mild talk about getting rid of deductions and credits. One of those is the mortgage deduction that affects everyone with a mortgage. A large part of the Great Recession is the problems associated with the housing market. This shows that these people in Washington D.C. are totally lacking in any financial knowledge. They have no clue about basic finance.
Right now, if you are in the 28% tax bracket and own a mortgage, you can file Schedule A and put down the interest you paid for the year and get a tax deduction. In order to simplify things, this means that you receive a 28% savings on your tax return for the interest that you paid. If you take away this deduction, then this would mean that the prices of houses are now more than 28% over priced when you factor in the interest costs. Therefore, the housing market would be immediately impacted. This means further that if your house was worth $200,000 with the mortgage interest deduction, then it will immediately drop down to roughly $129,000 without the mortgage interest deduction and factoring in the interest costs.
Everyone who owns a mortgage would be affected. This would crush the housing market and tank the economy like we have never seen before. You think things are bad now. Wait until you see what happens if they take away the mortgage deduction.
Think about it. If you are going to buy a house and you know that you will not have a mortgage deduction, then this means that the net amount that you can afford for housing has to and will go down. Normally, on a $200,000 mortgage with 10% down, a 30 year term with a 4% interest rate, the payment is $859 per month. With the mortgage deduction, the net payment with a 28% tax deduction is only $618 per month. The net effect is that you can buy a bigger house with the mortgage deduction.
If you take the mortgage deduction away and factor in the interest costs of what $618 per month will buy on a 30 year mortgage, then the affordability of what you can buy is now about $129,000. Do you see the potential impact on the housing market? Suppose you are trying to sell a house for $200,000 before they remove the mortgage deduction. If they remove this deduction, then the people who can now afford your home becomes a much smaller group. Someone who previously could have easily bought your $200,000 house with the mortgage deduction can now only afford a $129,000 home without the deduction. I see said the blind man.
Removal of the mortgage deduction will cause a housing market meltdown of nuclear proportions.
Let's hope these people in Washington D.C. come to their senses.
Support your local real estate agent. These folks are our first line of defense.
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