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January 4, 2013 / nestbuilderfinancial

American Taxpayer Relief Act 2012

(Or Fiscal Cliff avoidance, Part I)

Rather than a Grand Bargain with tax, spending and entitlement reform, law makers had to settle for addressing just the tax picture.  The debt ceiling – when the government hits its credit card limit again – will be back in the forefront this month and next, as will the automatic across-the-board spending cuts known as the sequester. More arguments are sure to surface over these issues.   

The new tax law is anything but simplified.  This summary is not intended to be all-inclusive, but to touch on items that directly affect many of the people I work with.   

The temporary payroll tax reduction was allowed to expire increasing everyone’s payroll (Social Security) tax by 2%.  You’ll probably see the effects of this in your next check.  In Illinois, when the reduction kicked in two years ago, the state also increased its income tax rate to 5% and the effect of that increase was muted because of the payroll reduction.  In other words you didn’t get the benefit of the payroll tax deduction then but now you get the pain of the increase.

Taxpayers in the 10%, 15%, 25% and 28% brackets will retain their Bush-era income, capital gain and dividend tax rates. 

Municipal bond interest remains free of federal income taxes.

The Alternative Minimum Tax was permanently fixed and is (finally!) adjusted for inflation.

A new, higher tax rate of 39.6% was added for singles making $400,000 or more and married couples making $450,000.  This group will see their dividend and long-term capital gains tax rates increase to 20% and a new 3.8% surtax for Obamacare.  This is about a 60% increase over their previous 15% rate for capital gains and dividend taxes.

Singles earning $250k and couples making $300k join their higher earning peers in new limitations on exemptions and itemized deductions such as mortgage interest and state income tax deductions.  The people in this income category retain the 15% tax rate on cap gains and dividends but are now subject to about a 25% increase due to the additional 3.8% surtax for the new health care act. 

The estate tax is now set to 40% and has a $5M exclusion.  There is a “portability” clause that allows the surviving spouse to use up the deceased’s exclusion in addition to their own.

Tax credits for lower-income workers remain in place with the Earned Income Tax Credit increasing to up to $5,891.  Workers who qualify for this credit may owe nothing in taxes after exemptions and deductions and can receive a refund of up to $5,891.

There are more details to these items that can be found at

There is also information on changes to business taxes.  The tax rates remain the same, among the highest in the developed world, but there are some breaks for favored industries.

“When you tax something you get less of it, and when you reward something you get more of it.”  Jack Kemp

December 9, 2012 / nestbuilderfinancial

The Fiscal Cliff

Even though the election is over, we still have a decidedly divided government and it’s not clear what will happen with scheduled tax increases and spending cuts at the end of the year.  Will we go over the so-called fiscal cliff or will our elected leaders come to agreement and avert the cliff?  Let’s go back and review how we got here.  In the summer of 2011 the U.S. reached its debt ceiling limit.  The lack of agreement and bitter partisanship surrounding the issue led to a downgrade to the U. S. credit rating. The divided government went to the brink and punted by creating a committee to find ways to cut government spending by $1.2 trillion – yes, with a T – and ultimately coming up with a plan called “sequestration” that includes drastic spending cuts and tax increases to be instituted on January 1, 2013 if they did not come to a compromise that both could live with. 

So here we are, staring down tax increases for virtually everyone and the highest income tax rate climbing up to 39.6%.  Long-term capital gains tax goes up from 15% to 20%, with an extra 3.8% health care tax tacked on for high earners.  Dividends will jump from 15% to the ordinary income tax rate, as high as 39.6% plus 3.8% for high earners.  Interest will increase from 35% for high earners to 39.6% plus 3.8%.  Low-income earners will be sorely disappointed to see their rates increase and favorite tax credits such as the Earned Income Credit affected. Spending cuts include whopping cuts to the military – and military-related jobs will be cut too. Some economists predict that if agreement can’t be reached we’ll slide into another recession next year.

Many see that there needs to be both increased tax revenue and spending cuts to deal with this and there is a bipartisan model to use: the “Simpson-Bowles” committee was commissioned by President Obama in 2010 and they were able to come to agreement on these issues.  Unfortunately it was tabled and other than passing reference, it’s been collecting dust.

Our assessment is that taxpayers currently in the 33% and 35% marginal rates will see tax increases next year – either higher rates or reduced loopholes like the mortgage interest deduction or both.   We also anticipate that middle-income earners will, in time, see their taxes increase in coming years perhaps by a possible new Value-Added Tax would affect virtually everyone.  That’s where the real money is.

September 20, 2012 / nestbuilderfinancial

3.8% Surtax included in the Affordable Care Act

Regardless of whether the “Bush tax cuts” expire or get extended in 2013, some taxpayers will pay a 3.8% surtax on their investments and in limited cases, on the sale of their home starting next year. 

This 3.8% surtax is included the Affordable Care Act (aka Obamacare) and it affects higher-income households: over $200,000 for singles or $250,000 for married couples.  Interest, except for municipal bonds, dividends and capital gains will have a 3.8% surtax for these higher earners and the long-term capital gains tax goes up from 15% to 18.3% if the Bush tax cuts are extended or from 15% to 23.8% if the cuts expire for people with higher incomes. 

Homeowners are allowed to exclude up to $250,000 for singles or $500,000 for married couples in capital gains from the sale of their house (that is over and above what they paid for it) without any tax consequence.  However,  homeowners with incomes over the $200k/$250k threshold AND gains of over $250,000 for singles or $500,000 for married couples will be subject to the 3.8% surtax on the gains above the exclusion.

For a simplified example, a married couple with income of $300,000 sell their house.  They bought the house decades ago for $100,000 and sold it for $1,000,000.  Their “gain” is $900,000, but the first $500,000 of the gain is excluded from taxation; the long-term capital gains tax and the surtax will be owed on the remaining $400,000 gain bringing the tax on this sale to over $95,000 assuming the capital gains rate climbs to 20% plus the 3.8% surtax.

Got it?

July 20, 2012 / nestbuilderfinancial

Housing’s newest bathtub

You may have heard of a V-shape recovery – that’s when the market tanks and recovers in a relatively short period of time (it never seems short at the moment, only in hindsight!).  You might even have heard of a U-shaped recovery – that’s when the market hovers around the bottom for a while before taking off.

I heard a new recovery metaphor and it’s related not to the stock market, but the housing market – a bathtub-shaped recovery.  That’s when the housing market hovers around the bottom for an extended period.  The Wall Street Journal says that  prices have stabilized and in recent days we’ve had some good mixed in with a not-so-good housing reports.  But the real estate market is not like the stock market and recoveries are usually slow, even in hindsight, hence the bathtub-shaped recovery.  There are an estimated 2 million homes in foreclosure that have yet to enter the market.

If you want to sell and are waiting for prices to get back to highs in 2006 or 2007 you might have a long wait.  Think about the cost of holding on for another 5-10 years…or more: is it worth it?  If you’re not planning to move and can afford to stay where you are be happy with a fixed rate mortgage because rents are rising along with demand.

June 18, 2012 / nestbuilderfinancial

On the lighter side…

Do you like to cook?  Did you ever buy a special ingredient for a new dish and then leave what’s left of the new item in the fridge until it went bad?  That’s happened to me a few times in the past, but not any more thanks to the internet.  I just google “recipe” with the ingredient I have and a bunch of recipes pop up that use it.  It’s a great way to try some new dishes or combinations you might not have thought of.   I think those Google guys are worth every last penny of their millions.

June 11, 2012 / nestbuilderfinancial

Ed Slott has another PBS program

Right now I’m watching Ed Slott’s Retirement Rescue – Mr. Slott is a CPA and has written books, done PBS specials and is often quoted in national and financial publications.  Over all, I like much of what he says, but buyer beware.  Some of what’s said comes across as fact when – in fact – it is unknowable at this time, such as taxes will be higher, perhaps much higher in – the future.  And he is not mentioning inflation which can be a big drag on your retirement savings.  All-in all I think it’s good that he puts these programs together because it makes people more aware of the issues and presents possible solutions.  He doesn’t sell insurance or investments, but he sells books and programs highlighting the benefits of Roth IRAs, life insurance, annuities and trusts.  If you haven’t seen any of his programs before, it’s worth watching one for the educational value and he makes it somewhat entertaining.  Let me know how you like his shows.

May 1, 2012 / nestbuilderfinancial

Social Security…grab & run or wait for the gold?

Generally you can start collecting Social Security benefits between the ages of 62 and 70 with 66-67 being the “full retirement age” (FRA).  Most people start collecting at age 62 even though that provides the smallest payout.  Many have no alternative – they’re unemployed with little hope of finding work, or have health issues preventing them from working.  And others don’t see any reason to wait, may doubt benefits will actually be bigger later and hey, may not live that long anyway.

No one knows when their time is up, but we do know that collectively we’re living longer and longer.   Virtually every serious proposal to “fix Social Security” says that there won’t be changes for people 55 and better (not older, better!), however those younger than 55 may see some changes, possibly increasing the full retirement age from 66-67 to 68 or 70 and/or a change to the cost-of-living-adjustment (COLA) formula.

More affluent investors can often afford to retire and delay drawing on their Social Security benefits until at least FRA and even until age 70 providing them with the largest possible payout AND the larger COLA increase every year thereafter.  Even those not so affluent might want to think about part-time work to delay benefits and get the biggest bang for the buck.

If you think you’re going to live past your mid-70s you’ll most likely come out ahead if you can delay SS benefits; if you don’t think you’ll make it that long, you might come out ahead if you start collecting early.  And if you’re married you have more options for making the most of your benefits, but I’ll save that for another post.

Bottom line: the best time to make this decision is just before you retire and/or reach age 62 and again at your full retirement age.  Then evaluate your health and financial picture and make an educated decision.