finance blog

2013 Tax Bill: Who *Really* Gets Hit

Drum roll please:

3. Anyone (the 53%) who pays federal income taxes.
2. Single No kids (SNOKs).
1. DINKs:  Dual-Income No Kids.

The 2013 tax compromise hits everyone who files because of the change in Social Security tax.  From the very first dollar rates go from 4.2% to 6.2% for Social Security.  Compared to 2012, virtually everyone pays more taxes in 2013.

Having no kids really hits taxpayers.  Don’t miss my message… children are expensive to raise, and having children will not save you money!  But having children will reduce your tax bill due to myriad credits from the child tax credit, to extra exemptions, to 529 college savings plans.

Having no children hits single taxpayers some, but DINKs get hit harder for total incomes above the 15% tax bracket (approx $71,000).  Married couples making $248,000 per year — not quite Obama-rich — will pay $4548 more in Social Security taxes alone than they did in 2013 if the partners make similar incomes.  If, however, another couple with a single wage earners (SINK: single income no kids), SocSec tax would be half, $2274 due to the $113,700 Social Security cap, which is assessed per person, not per couple.

The marriage penalty, which never fully went away, is back with a vengeance in 2013.  The higher the income, the greater the marriage penalty.  The more equal the incomes, the greater the penalty.  It is almost like the tax code is telling married women to stay home and get pregnant.  It is hard to believe it is 2013, because it feels like the tax code is still written with a 1950’s mentality.


decisions, editorial, finance blog, financial

Financial Opinion on Marijuana Legalization

Marijuana Plant
Marijuana Plant in Pot

As a non-user of marijuana, I find it interesting and unfortunate that many other non-users are opposed to marijuana legalization.  My  argument starts fiscally.  Illegal marijuana is a net cost to society.  It finances crime syndicates both in the US and particularly Mexico.  Illegal marijuana also poses several direct fiscal burdens:

  1. Law enforcement costs to arrest and pursue marijuana use and sale cases.
  2. Expenses to incarcerate marijuana transporters, sellers, buyers and users.
  3. Cost of taking employed users away from their jobs and family.

Conversely, legalized marijuana provides fiscal benefits:

  1. Decreased law endorsement expenses.  Law enforcement can focus on under-age (under 21) marijuana crimes.
  2. Decreased incarceration expenses.   Freeing non-violent users (and sellers) from prisons will save tremendous sums of money.  Further not incarcerating such people in the future saves money.
  3. Otherwise law-abiding individuals will retain jobs.
  4. Tax revenue can be collected on legal marijuana.

That is just the beginning of my supporting argument.   Think of the other “Freakonomic” effects of marijuana criminalization:

  1. Drug violence in the form of turf wars and transportation route protection (esp. at border crossings).
  2. Financial support of other illegal enterprises, such as human smuggling and weapon smuggling.
  3. Lack of quality controls (regulations) leading to contaminated (with pesticides) and laced marijuana leading to sickness, disease and occasional death of consumers.

Please note that I am NOT advocating the use of marijuana, in the same way (as a non-smoker) that I do NOT advocate the use of tobacco!  I avoid both because of their negative health effects.

However, I do use alcohol.  I like microbrew beers, fine Scotch, and assorted other libations.  I have done some research and have learned that 1-2 alcoholic drinks per day is an overall  health-enhancing activity.

I liken marijuana prohibition with alcohol prohibition in a few ways.  For example, both have lead to increases in organized crime and related violence.  And both reduced sales tax revenues.   Further, both moratoriums have lead to poor quality products… such as blindness induced by the lacing of ethanol with methanol during Prohibition.

Now I switch gears to the ethical arguments.  I have seen a loved one die of cancer and cancer-induced starvation.  Cancer and chemotherapy frequently leads to nausea and vomiting.  These are miserable symptoms and lead to weakness and premature death.  The 70-something person I refer to was a vital, strong and healthy person before cancer struck.  He could do manual labor in his 70s that 30-year-olds would struggle to do.  And his mental faculties were also razor sharp.   Nonetheless his cancer deprived him of the ability to eat and retain food.  This reduced his weight from a trim 165 pound pre-cancer 6’1″ frame to a sad 110 pounds.  I personally believe, based on my research, that marijuana would have helped his appetite and nausea, which would have greatly improved his *quality* of life.

There you have it.  Financial and ethical arguments for the legalization of marijuana.  Note, I don’t couch the arguments in terms of medical marijuana… I speak in general terms.  I have had friends and dare I say colleagues who have used marijuana.  Some of whom have retained great talents and intellects.  On close inspection I have seen their short-term memory impaired in a manner similar to that produced by overindulgence in alcohol.   In my college years I have “babysat” many an alcohol overdose “patient” including one time we had to call 911.  Conversely, I never had to “babysit” a marijuana OD person.  My research confirms that anecdotal evidence.  Cliff Notes version: “Alcohol OD bad, marijuana OD… virtually impossible.”

It makes no sense to make marijuana illegal.  Tobacco and alcohol are arguably more dangerous… but society has wisely seen clear to regulate rather than prohibit their sale and use.  Marijuana should be no exception.

finance blog, gold, Investing, money

Millionaire by 40? Inflation says Big Deal!

40 years old is still several years off for me, but I it is very likely I will be a millionaire by the time I reach 40.  In fact, if you count my contributions to Social Security (including my employer’s half), the current value invested in my personal “Social Security Trust Fund” puts me there already.  But I’m certainly not counting on Social Security.

So, I’ll be rich right?  Wrong!   First there’s inflation.   Many economists say US inflation has been about 4% per year over the last century.  There’s a handy rule of 72 that says, for example, 72/4 = 18.  That means 4% inflation means that a million dollars today is only worth $500,000 in 18 years and $250,000 in 36 years.

Second, there’s taxes.  Over $300,000 of my holdings are in tax-deferred accounts such as 401k accounts and IRA accounts.  Sure this money is part of my net worth, but when it comes out at retirement I’ll likely be paying something like 30% tax on it.  That’s about $90,000 to Uncle Sam.  Poof!  Gone!

Back to inflation.  Inflation works like a stealth tax.  According to government CPI figures, US inflation increased just 1.5% in 2010.  That simply doesn’t jive with my experience.  My HOA fees increased 7%, my electric and water bill increased 8%.  Car insurance, home insurance, satellite TV, health-insurance premiums, internet, rooms at my favorite hotel, and meals at my favorite restaurant went up, by 4-10% last year.  Even the local sales tax increased almost 1%, making everything that much more expensive on top of everything else.  In Balhiser World 2010 inflation was about 4-5%, rather than the 1.5% according to the CPI.   Thus I have some new ideas about what CPI stands for…

  • Cagey Price Index  (Price? What price?  Prices are relative.)
  • Calming Price Index  (Nothing to see here. Relax. Inflation is under control.)
  • Clairvoyant Price Index  (Far away someone is substituting chuck steak for Filet Mignon.  Meat is meat.  And prices are low.)
  • Creative Price Index (2+2=3 for sufficiently small values of 2)
  • Cowardly Price Index (Please don’t be mad, prices aren’t that bad… see?)

Of course CPI officially stands for Consumer Price Index.  Let just say that for the next 72 years the official CPI is 4%, but actually inflation is 5%.  That handy rule of 72 says that at 4%, one million dollars today will be worth $62,500 of buying power.  At 5% buying power is cut in half to $31, 250.  Of a long enough time a 1 percent difference in inflation is a big deal.

So what?  Well, the CPI is used for a lot of things such as government cost of living adjustments, tax bracket adjustments, Social Security benefit increases, and money paid on Treasury Inflation-Protected Securities, to name a few.

It’s bed time so I’ll cut to the chase.

  1. One million dollars is not what it used to be, and is certain to be worth much less in the future.
  2. To try to remain solvent (and avoid unpopular austerity measures) the US Government has a powerful incentive to under-report inflation.
  3. Many investors and economists are beginning to believe that the CPI significantly under-reports inflation. Examples: “CPI Controversy”“Bill Gross says so”, “Forbes, pastries, and gold say so too”.
finance blog

GE and We: A Tale of Income Tax

By most accounts I paid more federal income tax than GE for 2010.  Personally, I paid more in regular federal income tax than I did for my brand new car.   When you factor in social security tax, medicare tax, state tax, and property tax that is an additional $16,700 or so.  I probably paid about another $4200 in sales tax, gas tax, liquor tax, fees, tariffs,  assessments, regional assessments, urban renewal, licensing, and other government fees.  I’d bet I paid more (federal income) tax than GE, and I’d bet almost everyone reading this blog did too, but I’m even more sure that GE paid it’s accountants more than I did.  I wonder how many millions GE spent on accounting, preparing, and filling its 2010 return?

I don’t blame GE for taking advantage of the system… minimizing tax is one of the key responsibilities to its shareholders.  But I am troubled by the corporate tax system.  Why should GE pay 0.0% and IBM pay 24.8%?  Shouldn’t large U.S. corporations play by the same rules?  Shouldn’t the rules be more even across companies?  Who wrote these crazy rules?  Well, that last question is rhetorical, obviously!

I think a 35% base corporate income tax rate is way too high, but 0% (for GE) is way too low.  My opinion is that a 15-25% corporate tax is much more internationally competitive.  But even at 15%, GE’s 14.2 Billion USD profit should be taxed at a little bit more my than my way-way-way less than a million, barely-6-figure, USD income.

bonds, finance blog, money

Year-End Portfolio Tax Planning

With only a few weeks remaining in 2010, now is a great time to make any tax-planning adjustments.

Step 1 is determining your general current capital gains and gross income situation.   Do you have carry-forward tax losses?  What are your current 2010 realized net short-term and long-term capital gains?   What are your unrealized capital gains?  What is your 2010 “ordinary income” situation looking like?

Answering these questions gives you a starting point for year-end tax planning.

For example, if you have big long-term capital gains because you sold a bunch of company stock to make a down-payment on a vacation property, you make ask yourself, “is paying 15% tax on these gains a good deal, or do I want to try to offset them with a few capital losses?”

Or, you may ask the inverse question…  “I have a bunch of unrealized long-term capital gains;  Should I sell now and realize them for the ‘bargain price’ of 15% tax?”

Some of these financial questions are tough to answer.  That is why I pay my CPA $80/hour to help me answer them. [This is a bargain price; my previous CPA was $150/hour.  Finding a good one for $80/hour was a godsend!]  If your struggling to answer them, I’d encourage you to set up an appointment with your CPA, or if you don’t have one a local CPA.   Bring your best answers or guesses, and you might be surprised how much they can enlighten you in one short hour.

A little year-end tax planning could save you $500, $1000, possibly several thousand dollars.  If you have to pay $80, $100, or even $250, for this I’d say its money well spent.

finance blog

What Election 2010 Means for Your Finances

Simply put, the House will go to a Republican majority.  The Senate is likely to maintain in Democratic hands, though by a small margin (say 51/49, with independents caucusing Democratic).

Meanwhile, there will be a lame-duck House and Senate sessions.  The biggest item this Congress will face is expiring tax cuts.  There are two ways this can go.   1)  A compromise is reached before year-end where cuts under a certain number (say $400,000) are retained.  2) No compromised is reached and the tax cuts sunset.  Forced to bet, I’d predict option #2 happens.  If this occurs, this sets up an interesting 2011 where the President’s veto pen and the Senate are the checks against a strong Republican push to retain the Bush tax cuts.

In 2011 the status of income taxes, inheritance taxes, dividend taxes, and capital gains taxes is up for vote.  The strong Republican shift in the House will put more attention on these issues in 2011.  The minority status of Republicans in the Senate will make it challenging for Republicans to put significant changes on President Obama’s desk.  The biggest wildcard will be how President Obama will deal with this dramatically changed legislature.

In summary, I predict that the next 2 years will be marked by gridlock on many fronts.  I predict that the Bush personal income taxes will be retained for those with incomes $200-250K or less… I’ll hazard that even up to cuts for this with incomes up to $500K will be retained.  The fate of dividend tax cuts it less certain.  I suspect that the 15% rate will be retained for those with incomes up to $500K.  I suspect that capital gain rates will lapse to the higher pre-Bush levels.  These are my best guesses.

Investing, money

Taxes and Tension

I got up this morning and went straight away to finalizing my taxes.  Hey, I’m 3 days early!  I use Turbo Tax  Home&Business.  After almost five hours I am done.

I’ve been working on my taxes since February.   I’ve probably invested a total of 15 hours on this year’s taxes.  This includes reading several IRS online documents… skimming about 50 pages and reading about 10 pages in depth… sometimes re-reading many times.  And this includes doing other online research.  I find, however, that the IRS documents are more helpful than much of the drek I come across online.  They are also really boring!

This year (2008 tax year) I have the full straight of schedules: A, B, C, and D.   The filed forms for federal amount to 11 pages.  There are 8 additional pages of worksheets.

By getting done a bit before April 15, I had time to calculate my allowable 2008 Roth IRA contribution.  Unfortunately, I only get a portion of the $5000 2008 limit (for folks under 50).   Once calculated I simply made the Roth IRA investment online.  [Its not too late, you can still make contributions for 2008 up through April 15th! ]

I’m also carrying forward a capital loss.  It’s a bummer that loss offsets against income are still maxed at $3000/year.  Congress, how about some inflation adjustment on this number?  It should be upped to at least $5000 in my opinion.

I don’t hate doing taxes, but they sure are a big pain and hassle.  Hey, at least they are done for this year.  Best wishes to those of you who are rushing to file.  And to all taxpayers, my sympathy.


Mr. Tax Man

It’s December and a good time to start tax planning.  For example now is a pretty good time to realize investment losses by selling some stocks or mutual funds that have lost money (which haven’t).  Last I checked the amount of tax loss deductible from ordinary income was $3000.  Just be careful of the wash sale rule which effectively prohibits buying back a stock/etc for 30 days: wash sale.

Another thing to consider is mutual fund capital gain distributions.  There’s nothing fun about paying taxes on a distribution from a fund that has lost money.  It is often helpful to consider funds that have good tax management (index funds are often excellent at keeping capital gains distributions to a minimum.)  If a fund is about to dump an unwanted distribution on you consider selling it before the distribution date.

Finally 401(k), IRA, 403b, and similar accounts.  If you are not maxed out, consider upping your 2009 401(k) contribution.  You might also consider making a 2008 IRA contribution if your are not subject to income limits.