Little did he know ...
It's easy to get caught up in our plans for the 4th of July - backyard barbeques, a mini-vacation, time with family and friends ... but let's not forget what we're celebrating.
On July 4th, 1776, a mixed bunch of mostly soft-spoken, hard-working men signed the Declaration of Independence. It was bold, it was rebellious, and it was treason. At the time, those 56 men were subjects of King George, and they knew that signing that Declaration could cost them their lives. But they felt so strongly that their America should be free, they took that risk.
"We hold these truths to be self-evident,
that all men are created equal,
that they are endowed by their Creator
with certain unalienable Rights,
that among these are Life, Liberty and the pursuit of Happiness."
- John Adams, 1776
Let's not forget this beautifully-crafted document, the bold courage it took to sign it and the freedoms we now enjoy because of it.
Happy Independence Day!
Tuesday, June 29, 2010
Friday, June 25, 2010
2010 Tax Laws: A Mid-Year Update
2010 has been one strange year for the U.S. tax code.
We have a huge tax issue that is still not fully resolved, the usual annual array of tweaks and changes to the Internal Revenue Code ... and a chance that some tax breaks from 2009 could yet be extended for 2010, if an abbreviated version of the American Jobs and Closing Tax Loopholes Act (H.R. 4213) becomes law. This bill was passed by the House of Representatives in late May, with a June vote expected in the Senate. 1 Many analysts think it will be signed by President Obama this summer.
It's the middle of the year, so let's take a look at where things stand for TY 2010 in terms of changes, amendments, additions and question marks. If you see an asterisk, you are seeing an expired 2009 tax break that might come back for 2010. At the end of this document, you'll see a summary of the tax breaks that could be extended into 2010 if H.R. 4213 passes.
And by the way, if you are a contractor, a real estate developer or a partner in an investment or venture capital firm, be sure to take a look at the very last item.
Here we go ...
1 The estate tax and GSTT have been repealed for 2010, and they probably won't be enforced retroactively.
Even though the Obama administration preferred having an estate tax in 2010, Congress was preoccupied with other matters as 2009 drew to a close. So no action was taken, and as EGGTRA stipulated in 2001, the estate tax is 0% in 2010. 2
So far, anyway. The longer we go with no action taken, the harder it gets for Congress to take action and put a retroactive estate tax in place. (You could easily argue that a retroactive estate tax would be unconstitutional.)
Of course, the estate tax and the generation-skipping transfer tax (GSTT) are scheduled to return in 2011. Most estate planners think that Congress will restore things to 2009 levels ($3.5 million exemption for estate tax and GSTT with 45% estate, GSTT, and gift tax rates). Alternately, estate taxes would reset to pre-EGGTRA levels in 2011 (the exemption level at just $1 million with 55% estate, GSTT, and gift tax rates). 2
2 With no estate tax in place for 2010, the step-up basis rules have been replaced by carryover basis rules.
This year, assets in an estate are subject to capital gains taxes when sold based on the original price paid for the asset. This could mean some big problems for heirs if an asset was bought by Mom or Dad 20 or 30 years ago. Let's say the asset is a stock. If Mom or Dad purchased shares off and on through the years, you'll have quite an assignment to find that paper trail, and you may end up paying capital gains tax on the appreciation if the estate is really large. Fortunately, each estate can exempt $1.3 million of gains from the carryover basis rule, and another $3 million exemption applies to assets inherited from a spouse - so as much as $4.3 million of an estate can retain the step-up in 2010. 3
3 The federal gift tax rate is 35% for 2010, not 45%.
Yes, there is still a gift tax in 2010 on gifts above the lifetime exemption amount of $1 million. However, the tax bite is just 35% for 2010. Of course, if you end up gifting less than $1 million during your lifetime, you won't have to worry about the gift tax at all. 4
For the record, IRS Publication 950 (issued 12/09) states: "In 2010, any transfer of money or property in trust is a taxable gift unless the trust is treated as wholly owned by the donor or the donor's spouse." 5
4 No income limits on Roth IRA conversions.
To recap, anyone can convert a traditional IRA to a Roth IRA in 2010 - the old income limits that were in the way have been repealed. Anyone who does this also has the option of paying the taxes resulting from the conversion over two tax years - 2011 and 2012. 6
There are still income limits preventing certain taxpayers from actively contributing to a Roth IRA, but there is no stopping those taxpayers from contributing to their traditional IRAs one more time in 2010 and then converting them to Roth IRAs. 7
5 You can no longer opt to deduct state and local sales taxes on your federal return (for the moment).*
Prior to 2010, you could choose to deduct state sales tax payments instead of state and local income taxes. Congress let this option expire at the start of this year. However, Sen. Maria Cantwell (D-WA) has been spearheading a provision to extend the state and local sales tax deduction - so we have a chance that this option may return for tax year 2010. 7,8
6 Tax brackets have been (barely) adjusted for (minimal) inflation.
The adjustments are very minor (for single filers, for example, they are as little as $50 for the 25% bracket and $700 for the 35% bracket). Here are the ordinary taxable income brackets in TY 2010:
· Single Taxpayers:
o 10% bracket has a ceiling of $8,375
o 15% bracket starts @ $8,376
o 25% bracket starts @ $34,001
o 28% bracket starts @ $82,401
o 33% bracket starts @ $171,851
o 35% bracket starts @ $373,651
· Married Filing Jointly or Qualifying Widow/Widower:
o 10% bracket has a ceiling of $16,750
o 15% bracket starts @ $16,751
o 25% bracket starts @ $68,001
o 28% bracket starts @ $137,301
o 33% bracket starts @ $209,251
o 35% bracket starts @ $373,651
· Married Filing Separately:
o 10% bracket has a ceiling of $8,375
o 15% bracket starts @ $8,376
o 25% bracket starts @ $34,001
o 28% bracket starts @ $68,651
o 33% bracket starts @ $104,626
o 35% bracket starts @ $186,826
· Head of Household:
o 10% bracket has a ceiling of $11,950
o 15% bracket starts @ $11,951
o 25% bracket starts @ $45,551
o 28% bracket starts @ $117,651
o 33% bracket starts @ $190,551
o 35% bracket starts @ $373,651 9
This isn't a change, but it is worth noting: for the first year in who knows when, there is no COLA adjustment to the personal exemption ($3,650) and the standard deduction for most taxpayers ($5,700/$11,400, except for a $50 increase for heads of household). 10
7 AMT exemption amounts drop way below 2009 levels.
Last year's levels were adjusted for the economic stimulus arranged by the Obama administration. In all probability, Congress will patch the tax before the end of 2010 and set AMT exemption amounts much higher. Currently, AMT amounts are set as follows for tax year 2010:
· Single/Head of Household: $33,750
· Married Filing Separately: $22,500
· Married Filing Jointly: $45,000 6
8 Business mileage deduction rates have gone down.
If you are using a personal vehicle for business, the business mileage deduction is 50¢ a mile in 2010. That's about 9% below the 2009 deduction of 55¢ per mile. You can chalk it up to reduced transportation costs. If you use a personal vehicle for medical reasons or to move in 2010, well that deduction is also reduced - it was 24¢ per mile in 2009, and it is just 16.5¢ a mile this year. If you use a personal vehicle for charitable purposes (driving it for the purpose of working for a charity), the deduction is 14¢ a mile - same as in 2009. 11
9 The foreign earned income exclusion rises by $100.
The exclusion was $91,400 in 2009, now it is $91,500 for 2010. 6
10 The domestic production activities deduction is now 9%.
That's a notable leap from 6% in 2009, though it comes with one asterisk. What types of businesses can take advantage of this? Construction and architectural firms, film production companies, engineering firms, or businesses that rent, lease or sell equipment they build. The asterisk? The deduction is still 6% this year for oil and gas companies. 6
11 The IRA distribution to charity option expired after December 31, 2009.*
Will it come back? Some tax analysts think it might. It was great while it lasted, and it was a real boon to universities and assorted non-profits. Yet Congress did not extend the provision allowing IRA distributions to charity into 2010. Here's hoping they restore it. 6
12 No additional standard deduction for property taxes.*
In 2010, you can't boost a standard federal deduction by up to $1,000 of state or local property taxes you have paid. There is the possibility that Congress will get around to reinstating this perk designed to encourage home sales. But so far in 2010, you can't increase your standard deduction in this way. 6
13 No more excluding jobless benefits from your taxable income.
In 2009, you could exclude up to $2,400 of unemployment benefits. The way it is now, you get no such break for 2010. 7
14 Changes to the Earned Income Credit (EIC).
This tax break is primarily designed for low- and middle-income families. In 2010, the maximum EIC for working families with three or more children was set at $5,666, subject to phase-outs when AGI surpasses $43,352 ($48,362 if married filing jointly). Total advance EIC payments for 2010 are limited to $1,880. By the way, you can earn $3,100 in investment income during 2010 and still claim the credit in 2010. 12
15 Non-taxable combat pay can't be used to figure earned income for the Earned Income Credit.
That was the case in 2009, but combat pay can't be used in the calculation for 2010. 6
16 A cap on farm losses used to offset non-farm income.
In 2010, the limit on farm losses you can take is either a) $300,000 or b) your net farm income over the past five years, whichever is greater. And yes, this limit goes for S corporation owners and partners as well. However, it will only apply if you get federal farm payments or Commodity Credit Corporation (CCC) loans. You may take suspended losses in subsequent tax years. 6
17 No sales tax breaks if you buy a new car.
You could deduct sales tax on a new car purchase from your 2009 federal return. You can't get such a tax benefit in 2010, unless Congress gives you back the chance to deduct sales taxes instead of state income taxes (see #5 above). 7
18 No higher education tuition deduction for 2010.*
In 2009, some qualifying taxpayers could take an above-the-line deduction for college tuition and expenses. If your AGI was $65,000 or less ($130,000 for joint filers), the limit of the deduction was $4,000. Taxpayers with AGI up to $80,000 ($160,000 for joint filers) could take a reduced deduction of as much as $2,000. But not in 2010 ... not so far, anyway. 13
19 No classroom supplies deduction for teachers.*
In 2009, K-12 teachers, principals, guidance counselors and other education professionals could take a $250 above-the-line deduction to offset out-of-pocket classroom expenses. That deduction expired at the end of 2009, but it may return if H.R. 4213 is made law. 13
*Now, if H.R. 4213 becomes law:
5a The state and local sales tax deduction option would be restored for 2010.
This would help you if you live in a state that doesn't levy state income tax. Taxpayers would have the option of taking an itemized deduction for either state and local income taxes, or state and local general sales taxes. 13
11a The IRA distribution to charity option would come back.
If it does, individuals age 70½ or older could once again distribute as much as $100,000 from their IRAs to charitable organizations through the end of 2010, and the money would not be characterized as income or be subject to itemization rules. (By the way, you would not be able to do this with an inherited IRA if you, the beneficiary, turn age 70 1/2 before such a charitable rollover. That was also true before 2010.) 13,14
12a The additional standard deduction for property taxes would be extended through 2010.
The limit would be $500 for single filers and $1,000 for joint filers. This deduction would not lower your AGI; you would add it to the standard deduction. 13
18a The higher education tuition deduction would return for 2010.
A reminder: this is for higher education tuition and expenses only, not elementary or secondary school costs. If your AGI is $65,000 or less ($130,000 for joint filers), the limit of the deduction would be $4,000. If it is between $65,000-80,000 ($135,000-160,000 for joint filers) you could be eligible for a deduction of as much as $2,000. 13
19a The classroom expenses deduction would be restored.
The $250 above-the-line deduction to help K-12 teachers/educators would return for 2010. 13
Additionally, if H.R. 4213 passes in its current form:
· Tax breaks for land donations would be extended.
That is, the special rules and provisions under the "4-H Act" (the Heartland, Habitat, Harvest, and Horticulture Act of 2008) would be extended through 2010 to help qualifying farmers and ranchers donate land to organizations such as the Nature Conservancy. The 2010 tax break could be as large as 100% of the excess of the taxpayer's contribution base over the total of all other allowable charitable contributions. 13,14
· All hybrid vehicle tax credits would be in place until the end of 2010.
Some of these credits expired in 2009, and others sunset this year and in 2014 (there are different credits for different classes of hybrids). H.R. 4213 would forward the expiration dates on all three classes of credits ahead by one year. 13,14
· The provisions of the National Disaster Relief Act of 2008 would be extended.
Prior to this law, Congress and the IRS pretty much issued tax breaks for taxpayers affected by disasters on a case-by-case basis. H.R. 4213 would extend the Act through the end of 2010, allowing higher loss limits on personal casualty losses from natural disasters, a special depreciation allowance for property that rehabilitates or replaces qualified business property, and current deductions for disaster repair and clean-up expenses. 13
· Tax credits for alternative fuels and energy-efficient windows would remain in place.
In 2009, the IRS offered a biodiesel credit, a biodiesel small producer credit and a biodiesel excise credit. H.R. 4213 would restore them for 2010. It would also revise the language concerning tax credits for energy-efficient windows to recognize different climate patterns in different regions of the country. 13,14
· We would see a "carried interest" tax hike.
Real estate investors know the concept of "carried interest" well. Let's say a real estate partnership buys a forlorn shopping center and hires a contractor to pretty it up. Those real estate investors may offer the contractor a 15% or 20% cut of their future net when they sell the center. That's called "carried interest", and this income is usually taxed as a capital gain.
But on January 1, 2011, that could change. In a phase-in provision included in the House version of H.R. 4213, 50% of the amounts paid on the carried interests of individual partners would initially be taxed as ordinary income. So would the gain on the sale or exchange of a carried interest.
So instead of carried interest being taxed as capital gains at rates up to 15% or 20%, carried interest would be taxed at ordinary income rates up to 35% or even 39.6% in 2011. (And if you are a real estate developer, venture capitalist or entrepreneur, you may find yourself in one of the two highest tax brackets.)
CCH, the tax research firm, projects this as the biggest revenue generator from H.R. 4213 over the next decade if the bill becomes law. Congress hopes that hiking taxes on carried interest would raise $1.7 billion for the federal government annually. 13,15
Citations.
1 investmentadvisor.com/News/2010/6/Pages/Tax-Extenders-Bill-Passes-House-Heads-for-Senate.aspx [6/1/10]
2 moneywatch.bnet.com/retirement-planning/article/estate-tax-what-you-need-to-know-for-2010/378294/ [1/5/10]
3 articles.moneycentral.msn.com/RetirementandWills/PlanYourEstate/5bigMythsAboutTheEstateTax.aspx [4/14/10]
4 moneywatch.bnet.com/retirement-planning/blog/financial-independence/why-is-everyone-afraid-of-the-gift-tax/843/ [4/14/10]
5 irs.gov/pub/irs-pdf/p950.pdf [12/09]
6 turbotax.intuit.com/tax-tools/tax-tips/irs-tax-return/5519.html#2010 [4/19/10]
7 boston.com/business/personalfinance/managingyourmoney/archives/2009/12/summary_of_tax.html [12/4/09]
8 cantwell.senate.gov/issues/sales_tax.cfm [4/19/09]
9 bankrate.com/finance/taxes/2010-tax-bracket-rates.aspx [1/5/10]
10 online.wsj.com/article/SB125322006352820593.html [9/17/09]
11 bloomberg.com/apps/news?pid=20603037&sid=aHY2qdL6oTsM [12/3/09]
12 irs.gov/formspubs/article/0,,id=180803,00.html [12/4/09]
13 tax.cchgroup.com/legislation/Tax-extenders-bill.pdf [6/1/10]
14 usnews.com/money/blogs/the-best-life/2010/05/24/10-tax-breaks-likely-to-be-extended [5/24/10]
15 lvrj.com/opinion/-carried-interest--95678939.html [6/5/10]
We have a huge tax issue that is still not fully resolved, the usual annual array of tweaks and changes to the Internal Revenue Code ... and a chance that some tax breaks from 2009 could yet be extended for 2010, if an abbreviated version of the American Jobs and Closing Tax Loopholes Act (H.R. 4213) becomes law. This bill was passed by the House of Representatives in late May, with a June vote expected in the Senate. 1 Many analysts think it will be signed by President Obama this summer.
It's the middle of the year, so let's take a look at where things stand for TY 2010 in terms of changes, amendments, additions and question marks. If you see an asterisk, you are seeing an expired 2009 tax break that might come back for 2010. At the end of this document, you'll see a summary of the tax breaks that could be extended into 2010 if H.R. 4213 passes.
And by the way, if you are a contractor, a real estate developer or a partner in an investment or venture capital firm, be sure to take a look at the very last item.
Here we go ...
1 The estate tax and GSTT have been repealed for 2010, and they probably won't be enforced retroactively.
Even though the Obama administration preferred having an estate tax in 2010, Congress was preoccupied with other matters as 2009 drew to a close. So no action was taken, and as EGGTRA stipulated in 2001, the estate tax is 0% in 2010. 2
So far, anyway. The longer we go with no action taken, the harder it gets for Congress to take action and put a retroactive estate tax in place. (You could easily argue that a retroactive estate tax would be unconstitutional.)
Of course, the estate tax and the generation-skipping transfer tax (GSTT) are scheduled to return in 2011. Most estate planners think that Congress will restore things to 2009 levels ($3.5 million exemption for estate tax and GSTT with 45% estate, GSTT, and gift tax rates). Alternately, estate taxes would reset to pre-EGGTRA levels in 2011 (the exemption level at just $1 million with 55% estate, GSTT, and gift tax rates). 2
2 With no estate tax in place for 2010, the step-up basis rules have been replaced by carryover basis rules.
This year, assets in an estate are subject to capital gains taxes when sold based on the original price paid for the asset. This could mean some big problems for heirs if an asset was bought by Mom or Dad 20 or 30 years ago. Let's say the asset is a stock. If Mom or Dad purchased shares off and on through the years, you'll have quite an assignment to find that paper trail, and you may end up paying capital gains tax on the appreciation if the estate is really large. Fortunately, each estate can exempt $1.3 million of gains from the carryover basis rule, and another $3 million exemption applies to assets inherited from a spouse - so as much as $4.3 million of an estate can retain the step-up in 2010. 3
3 The federal gift tax rate is 35% for 2010, not 45%.
Yes, there is still a gift tax in 2010 on gifts above the lifetime exemption amount of $1 million. However, the tax bite is just 35% for 2010. Of course, if you end up gifting less than $1 million during your lifetime, you won't have to worry about the gift tax at all. 4
For the record, IRS Publication 950 (issued 12/09) states: "In 2010, any transfer of money or property in trust is a taxable gift unless the trust is treated as wholly owned by the donor or the donor's spouse." 5
4 No income limits on Roth IRA conversions.
To recap, anyone can convert a traditional IRA to a Roth IRA in 2010 - the old income limits that were in the way have been repealed. Anyone who does this also has the option of paying the taxes resulting from the conversion over two tax years - 2011 and 2012. 6
There are still income limits preventing certain taxpayers from actively contributing to a Roth IRA, but there is no stopping those taxpayers from contributing to their traditional IRAs one more time in 2010 and then converting them to Roth IRAs. 7
5 You can no longer opt to deduct state and local sales taxes on your federal return (for the moment).*
Prior to 2010, you could choose to deduct state sales tax payments instead of state and local income taxes. Congress let this option expire at the start of this year. However, Sen. Maria Cantwell (D-WA) has been spearheading a provision to extend the state and local sales tax deduction - so we have a chance that this option may return for tax year 2010. 7,8
6 Tax brackets have been (barely) adjusted for (minimal) inflation.
The adjustments are very minor (for single filers, for example, they are as little as $50 for the 25% bracket and $700 for the 35% bracket). Here are the ordinary taxable income brackets in TY 2010:
· Single Taxpayers:
o 10% bracket has a ceiling of $8,375
o 15% bracket starts @ $8,376
o 25% bracket starts @ $34,001
o 28% bracket starts @ $82,401
o 33% bracket starts @ $171,851
o 35% bracket starts @ $373,651
· Married Filing Jointly or Qualifying Widow/Widower:
o 10% bracket has a ceiling of $16,750
o 15% bracket starts @ $16,751
o 25% bracket starts @ $68,001
o 28% bracket starts @ $137,301
o 33% bracket starts @ $209,251
o 35% bracket starts @ $373,651
· Married Filing Separately:
o 10% bracket has a ceiling of $8,375
o 15% bracket starts @ $8,376
o 25% bracket starts @ $34,001
o 28% bracket starts @ $68,651
o 33% bracket starts @ $104,626
o 35% bracket starts @ $186,826
· Head of Household:
o 10% bracket has a ceiling of $11,950
o 15% bracket starts @ $11,951
o 25% bracket starts @ $45,551
o 28% bracket starts @ $117,651
o 33% bracket starts @ $190,551
o 35% bracket starts @ $373,651 9
This isn't a change, but it is worth noting: for the first year in who knows when, there is no COLA adjustment to the personal exemption ($3,650) and the standard deduction for most taxpayers ($5,700/$11,400, except for a $50 increase for heads of household). 10
7 AMT exemption amounts drop way below 2009 levels.
Last year's levels were adjusted for the economic stimulus arranged by the Obama administration. In all probability, Congress will patch the tax before the end of 2010 and set AMT exemption amounts much higher. Currently, AMT amounts are set as follows for tax year 2010:
· Single/Head of Household: $33,750
· Married Filing Separately: $22,500
· Married Filing Jointly: $45,000 6
8 Business mileage deduction rates have gone down.
If you are using a personal vehicle for business, the business mileage deduction is 50¢ a mile in 2010. That's about 9% below the 2009 deduction of 55¢ per mile. You can chalk it up to reduced transportation costs. If you use a personal vehicle for medical reasons or to move in 2010, well that deduction is also reduced - it was 24¢ per mile in 2009, and it is just 16.5¢ a mile this year. If you use a personal vehicle for charitable purposes (driving it for the purpose of working for a charity), the deduction is 14¢ a mile - same as in 2009. 11
9 The foreign earned income exclusion rises by $100.
The exclusion was $91,400 in 2009, now it is $91,500 for 2010. 6
10 The domestic production activities deduction is now 9%.
That's a notable leap from 6% in 2009, though it comes with one asterisk. What types of businesses can take advantage of this? Construction and architectural firms, film production companies, engineering firms, or businesses that rent, lease or sell equipment they build. The asterisk? The deduction is still 6% this year for oil and gas companies. 6
11 The IRA distribution to charity option expired after December 31, 2009.*
Will it come back? Some tax analysts think it might. It was great while it lasted, and it was a real boon to universities and assorted non-profits. Yet Congress did not extend the provision allowing IRA distributions to charity into 2010. Here's hoping they restore it. 6
12 No additional standard deduction for property taxes.*
In 2010, you can't boost a standard federal deduction by up to $1,000 of state or local property taxes you have paid. There is the possibility that Congress will get around to reinstating this perk designed to encourage home sales. But so far in 2010, you can't increase your standard deduction in this way. 6
13 No more excluding jobless benefits from your taxable income.
In 2009, you could exclude up to $2,400 of unemployment benefits. The way it is now, you get no such break for 2010. 7
14 Changes to the Earned Income Credit (EIC).
This tax break is primarily designed for low- and middle-income families. In 2010, the maximum EIC for working families with three or more children was set at $5,666, subject to phase-outs when AGI surpasses $43,352 ($48,362 if married filing jointly). Total advance EIC payments for 2010 are limited to $1,880. By the way, you can earn $3,100 in investment income during 2010 and still claim the credit in 2010. 12
15 Non-taxable combat pay can't be used to figure earned income for the Earned Income Credit.
That was the case in 2009, but combat pay can't be used in the calculation for 2010. 6
16 A cap on farm losses used to offset non-farm income.
In 2010, the limit on farm losses you can take is either a) $300,000 or b) your net farm income over the past five years, whichever is greater. And yes, this limit goes for S corporation owners and partners as well. However, it will only apply if you get federal farm payments or Commodity Credit Corporation (CCC) loans. You may take suspended losses in subsequent tax years. 6
17 No sales tax breaks if you buy a new car.
You could deduct sales tax on a new car purchase from your 2009 federal return. You can't get such a tax benefit in 2010, unless Congress gives you back the chance to deduct sales taxes instead of state income taxes (see #5 above). 7
18 No higher education tuition deduction for 2010.*
In 2009, some qualifying taxpayers could take an above-the-line deduction for college tuition and expenses. If your AGI was $65,000 or less ($130,000 for joint filers), the limit of the deduction was $4,000. Taxpayers with AGI up to $80,000 ($160,000 for joint filers) could take a reduced deduction of as much as $2,000. But not in 2010 ... not so far, anyway. 13
19 No classroom supplies deduction for teachers.*
In 2009, K-12 teachers, principals, guidance counselors and other education professionals could take a $250 above-the-line deduction to offset out-of-pocket classroom expenses. That deduction expired at the end of 2009, but it may return if H.R. 4213 is made law. 13
*Now, if H.R. 4213 becomes law:
5a The state and local sales tax deduction option would be restored for 2010.
This would help you if you live in a state that doesn't levy state income tax. Taxpayers would have the option of taking an itemized deduction for either state and local income taxes, or state and local general sales taxes. 13
11a The IRA distribution to charity option would come back.
If it does, individuals age 70½ or older could once again distribute as much as $100,000 from their IRAs to charitable organizations through the end of 2010, and the money would not be characterized as income or be subject to itemization rules. (By the way, you would not be able to do this with an inherited IRA if you, the beneficiary, turn age 70 1/2 before such a charitable rollover. That was also true before 2010.) 13,14
12a The additional standard deduction for property taxes would be extended through 2010.
The limit would be $500 for single filers and $1,000 for joint filers. This deduction would not lower your AGI; you would add it to the standard deduction. 13
18a The higher education tuition deduction would return for 2010.
A reminder: this is for higher education tuition and expenses only, not elementary or secondary school costs. If your AGI is $65,000 or less ($130,000 for joint filers), the limit of the deduction would be $4,000. If it is between $65,000-80,000 ($135,000-160,000 for joint filers) you could be eligible for a deduction of as much as $2,000. 13
19a The classroom expenses deduction would be restored.
The $250 above-the-line deduction to help K-12 teachers/educators would return for 2010. 13
Additionally, if H.R. 4213 passes in its current form:
· Tax breaks for land donations would be extended.
That is, the special rules and provisions under the "4-H Act" (the Heartland, Habitat, Harvest, and Horticulture Act of 2008) would be extended through 2010 to help qualifying farmers and ranchers donate land to organizations such as the Nature Conservancy. The 2010 tax break could be as large as 100% of the excess of the taxpayer's contribution base over the total of all other allowable charitable contributions. 13,14
· All hybrid vehicle tax credits would be in place until the end of 2010.
Some of these credits expired in 2009, and others sunset this year and in 2014 (there are different credits for different classes of hybrids). H.R. 4213 would forward the expiration dates on all three classes of credits ahead by one year. 13,14
· The provisions of the National Disaster Relief Act of 2008 would be extended.
Prior to this law, Congress and the IRS pretty much issued tax breaks for taxpayers affected by disasters on a case-by-case basis. H.R. 4213 would extend the Act through the end of 2010, allowing higher loss limits on personal casualty losses from natural disasters, a special depreciation allowance for property that rehabilitates or replaces qualified business property, and current deductions for disaster repair and clean-up expenses. 13
· Tax credits for alternative fuels and energy-efficient windows would remain in place.
In 2009, the IRS offered a biodiesel credit, a biodiesel small producer credit and a biodiesel excise credit. H.R. 4213 would restore them for 2010. It would also revise the language concerning tax credits for energy-efficient windows to recognize different climate patterns in different regions of the country. 13,14
· We would see a "carried interest" tax hike.
Real estate investors know the concept of "carried interest" well. Let's say a real estate partnership buys a forlorn shopping center and hires a contractor to pretty it up. Those real estate investors may offer the contractor a 15% or 20% cut of their future net when they sell the center. That's called "carried interest", and this income is usually taxed as a capital gain.
But on January 1, 2011, that could change. In a phase-in provision included in the House version of H.R. 4213, 50% of the amounts paid on the carried interests of individual partners would initially be taxed as ordinary income. So would the gain on the sale or exchange of a carried interest.
So instead of carried interest being taxed as capital gains at rates up to 15% or 20%, carried interest would be taxed at ordinary income rates up to 35% or even 39.6% in 2011. (And if you are a real estate developer, venture capitalist or entrepreneur, you may find yourself in one of the two highest tax brackets.)
CCH, the tax research firm, projects this as the biggest revenue generator from H.R. 4213 over the next decade if the bill becomes law. Congress hopes that hiking taxes on carried interest would raise $1.7 billion for the federal government annually. 13,15
Citations.
1 investmentadvisor.com/News/2010/6/Pages/Tax-Extenders-Bill-Passes-House-Heads-for-Senate.aspx [6/1/10]
2 moneywatch.bnet.com/retirement-planning/article/estate-tax-what-you-need-to-know-for-2010/378294/ [1/5/10]
3 articles.moneycentral.msn.com/RetirementandWills/PlanYourEstate/5bigMythsAboutTheEstateTax.aspx [4/14/10]
4 moneywatch.bnet.com/retirement-planning/blog/financial-independence/why-is-everyone-afraid-of-the-gift-tax/843/ [4/14/10]
5 irs.gov/pub/irs-pdf/p950.pdf [12/09]
6 turbotax.intuit.com/tax-tools/tax-tips/irs-tax-return/5519.html#2010 [4/19/10]
7 boston.com/business/personalfinance/managingyourmoney/archives/2009/12/summary_of_tax.html [12/4/09]
8 cantwell.senate.gov/issues/sales_tax.cfm [4/19/09]
9 bankrate.com/finance/taxes/2010-tax-bracket-rates.aspx [1/5/10]
10 online.wsj.com/article/SB125322006352820593.html [9/17/09]
11 bloomberg.com/apps/news?pid=20603037&sid=aHY2qdL6oTsM [12/3/09]
12 irs.gov/formspubs/article/0,,id=180803,00.html [12/4/09]
13 tax.cchgroup.com/legislation/Tax-extenders-bill.pdf [6/1/10]
14 usnews.com/money/blogs/the-best-life/2010/05/24/10-tax-breaks-likely-to-be-extended [5/24/10]
15 lvrj.com/opinion/-carried-interest--95678939.html [6/5/10]
Tuesday, June 15, 2010
The Hidden Source of Returns
The biggest problem with investment returns is that they're posted daily--or, in the case of the recent "flash crash," every hour or so.
Why is this a problem? Because it implies that what happened yesterday or the day before is meaningful to your financial life, and is important information for future investment decisions. People all over the world struggle with figuring out the relevance of last week's or last month's or last quarter's investment returns, and the cable investing channels and newspapers feed the confusion by trying to explain yesterday's downturn in terms of housing or unemployment data, and project tomorrow's returns based on interest rates and earnings reports.
If you're one of those people who checks the market regularly and can't quite find the meaning of all this short-term information, then this is a good time to relax. Because there IS no meaning to be found there.
At all times, there are three forces guiding the markets. The first is long-term economic growth. Global businesses are gradually expanding their operations, opening up new markets, learning to manufacture and service their customers more efficiently, creating new products. With billions of new customers emerging in India, China, Indonesia and elsewhere, and new technology improving the efficiency of building, tracking, servicing, managing and everything else, this trend has been generally upward since people first squatted in caves around a wonderful new invention called the campfire.
The industrial revolution, the information revolution, and whatever new revolution the Internet and iPhone are a part of are accelerating this long-term business trend, which is invisibly making you money in your portfolio every day you stay invested.
The second force is the economic cycle, which moves from robust growth back to recession back to robust growth in a round-trip gyration which can last anywhere from months to years. Economists have felled whole forests trying to explain the hows and whys of these fluctuations, but most of us instinctively understand what it means to become overextended, pulling back, tightening our belts and then moving forward again. No human activity can be graphed as a flat line.
The only important thing to realize about economic cycles is that they are generally subservient to the longer-term cycle. Throughout all the ups and downs and sidewayses, the world economy has experienced net long-term growth ever since those first campfires.
The third force is investor emotions, which are by far the most volatile element of investment returns, and can change hourly, daily, weekly, monthly. You know these on a personal level; it's what you feel when you see the market go into the "flash crash" freefall, or a year and a half ago when the markets suddenly realized that the demise of Lehman Brothers--a company which helped finance the Civil War--was a scary event. That urge you feel to sell everything and make the anxiety go away is shared by roughly a billion other investors around the globe, who conspire, unconsciously but powerfully, to rock the markets like the ocean waves in a storm. Even on good days, these waves are rolling around powerfully enough to make TV analysts think they can find meaning in them.
But that's the point: studying the waves, studying what happened yesterday or last quarter, tells you nothing at all about the long-term viability, health or growth of the companies in your investment portfolio--despite what Jim Cramer happens to be screaming today. You might get equally-valid information looking at the patterns of tea leaves or the markings on the back of tortoise shells.
That doesn't mean the waves have no impact on investments, however. The great investors, like Warren Buffett, look for those times when a billion investors are pushing the panic button, and take advantage of stocks selling at bargain prices. Thousands, perhaps millions of investors had to sell during a lot of panics to make Warren Buffett a billionaire, and in his annual shareholder meetings, he acknowledges this. The waves go in the opposite direction as well, taking prices well out of the bargain zone.
Through it all, the long-term trend is quietly making you money, moving us toward a future day when people will look back at us the way we look back at people who lived at the dawn of the Industrial Revolution. They will wonder how we could get so excited about (or scream on TV about) all these little ups and downs while the economy was steadily, visibly, reliably carrying us to a better place
Why is this a problem? Because it implies that what happened yesterday or the day before is meaningful to your financial life, and is important information for future investment decisions. People all over the world struggle with figuring out the relevance of last week's or last month's or last quarter's investment returns, and the cable investing channels and newspapers feed the confusion by trying to explain yesterday's downturn in terms of housing or unemployment data, and project tomorrow's returns based on interest rates and earnings reports.
If you're one of those people who checks the market regularly and can't quite find the meaning of all this short-term information, then this is a good time to relax. Because there IS no meaning to be found there.
At all times, there are three forces guiding the markets. The first is long-term economic growth. Global businesses are gradually expanding their operations, opening up new markets, learning to manufacture and service their customers more efficiently, creating new products. With billions of new customers emerging in India, China, Indonesia and elsewhere, and new technology improving the efficiency of building, tracking, servicing, managing and everything else, this trend has been generally upward since people first squatted in caves around a wonderful new invention called the campfire.
The industrial revolution, the information revolution, and whatever new revolution the Internet and iPhone are a part of are accelerating this long-term business trend, which is invisibly making you money in your portfolio every day you stay invested.
The second force is the economic cycle, which moves from robust growth back to recession back to robust growth in a round-trip gyration which can last anywhere from months to years. Economists have felled whole forests trying to explain the hows and whys of these fluctuations, but most of us instinctively understand what it means to become overextended, pulling back, tightening our belts and then moving forward again. No human activity can be graphed as a flat line.
The only important thing to realize about economic cycles is that they are generally subservient to the longer-term cycle. Throughout all the ups and downs and sidewayses, the world economy has experienced net long-term growth ever since those first campfires.
The third force is investor emotions, which are by far the most volatile element of investment returns, and can change hourly, daily, weekly, monthly. You know these on a personal level; it's what you feel when you see the market go into the "flash crash" freefall, or a year and a half ago when the markets suddenly realized that the demise of Lehman Brothers--a company which helped finance the Civil War--was a scary event. That urge you feel to sell everything and make the anxiety go away is shared by roughly a billion other investors around the globe, who conspire, unconsciously but powerfully, to rock the markets like the ocean waves in a storm. Even on good days, these waves are rolling around powerfully enough to make TV analysts think they can find meaning in them.
But that's the point: studying the waves, studying what happened yesterday or last quarter, tells you nothing at all about the long-term viability, health or growth of the companies in your investment portfolio--despite what Jim Cramer happens to be screaming today. You might get equally-valid information looking at the patterns of tea leaves or the markings on the back of tortoise shells.
That doesn't mean the waves have no impact on investments, however. The great investors, like Warren Buffett, look for those times when a billion investors are pushing the panic button, and take advantage of stocks selling at bargain prices. Thousands, perhaps millions of investors had to sell during a lot of panics to make Warren Buffett a billionaire, and in his annual shareholder meetings, he acknowledges this. The waves go in the opposite direction as well, taking prices well out of the bargain zone.
Through it all, the long-term trend is quietly making you money, moving us toward a future day when people will look back at us the way we look back at people who lived at the dawn of the Industrial Revolution. They will wonder how we could get so excited about (or scream on TV about) all these little ups and downs while the economy was steadily, visibly, reliably carrying us to a better place
Monday, June 7, 2010
EUROPE'S TURMOIL HAS A SILVER LINING
A rally in Treasuries has helped push down mortgage rates.
Rates on fixed mortgages are under 5%. The 2010 European debt crisis has been bad for the euro and bad for stocks, but there is a positive consequence emerging here in the U.S. - conventional mortgage rates are back below 5% again.
On June 3, Freddie Mac's Weekly Primary Mortgage Market Survey found average rates on 30-year home loans at 4.79%. That's .3% lower than in the January 7 survey. Now let's look at the 15-year FRM. In Freddie Mac's estimate, average interest rates on those home loans decreased from 4.50% to 4.20% over the same period.1
Why are rates staying so low? Well, the lack of inflation is one reason. The other is that investors are buying plenty of Treasuries. So their rate of return has decreased and mortgage rates have decreased as a side effect. Qualifying homeowners can now access plenty of money at very low interest rates.
Contributing factors may keep rates low for a while. In addition to the current tepid inflation, prominent analysts such as MoodysEconomy.com's Mark Zandi see the euro losing more value in the near term, and the European Central Bank keeping interest rates low (which would influence our Federal Reserve).2
What if this "silver lining" leads to another one? There is that possibility. If stock market investors really sour on what they're seeing, then more of them might decide to put money into real estate. Home prices aren't exactly a barrier right now, so if rates remain low, there is the possibility that the housing market could get an unexpected shot in the arm - at least in the short term.
As the crumpling of the housing market was the major factor leading to the stock market downturn, it would be wild if a slump in the stock market indirectly promoted a comeback in the housing market and ultimately buoyed the economy. Does that sound far-fetched? Stranger things have happened.
What if you could save thousands?
On June 2, the Mortgage Bankers Association noted that U.S. refinancing activity had hit its highest level in seven months, accounting for about three-quarters of all mortgage applications.3 If your credit score is good, you may want to look into a refi before things change too much.
Citations
1 freddiemac.com/pmms/index.html?year=2010 [6/4/10]
2philly.com/inquirer/opinion/20100530_Silver_lining_in_Europe_s_debt_crisis.html[5/30/10]
3 - totalmortgage.com/blog/page/2 [6/2/10]
A rally in Treasuries has helped push down mortgage rates.
Rates on fixed mortgages are under 5%. The 2010 European debt crisis has been bad for the euro and bad for stocks, but there is a positive consequence emerging here in the U.S. - conventional mortgage rates are back below 5% again.
On June 3, Freddie Mac's Weekly Primary Mortgage Market Survey found average rates on 30-year home loans at 4.79%. That's .3% lower than in the January 7 survey. Now let's look at the 15-year FRM. In Freddie Mac's estimate, average interest rates on those home loans decreased from 4.50% to 4.20% over the same period.1
Why are rates staying so low? Well, the lack of inflation is one reason. The other is that investors are buying plenty of Treasuries. So their rate of return has decreased and mortgage rates have decreased as a side effect. Qualifying homeowners can now access plenty of money at very low interest rates.
Contributing factors may keep rates low for a while. In addition to the current tepid inflation, prominent analysts such as MoodysEconomy.com's Mark Zandi see the euro losing more value in the near term, and the European Central Bank keeping interest rates low (which would influence our Federal Reserve).2
What if this "silver lining" leads to another one? There is that possibility. If stock market investors really sour on what they're seeing, then more of them might decide to put money into real estate. Home prices aren't exactly a barrier right now, so if rates remain low, there is the possibility that the housing market could get an unexpected shot in the arm - at least in the short term.
As the crumpling of the housing market was the major factor leading to the stock market downturn, it would be wild if a slump in the stock market indirectly promoted a comeback in the housing market and ultimately buoyed the economy. Does that sound far-fetched? Stranger things have happened.
What if you could save thousands?
On June 2, the Mortgage Bankers Association noted that U.S. refinancing activity had hit its highest level in seven months, accounting for about three-quarters of all mortgage applications.3 If your credit score is good, you may want to look into a refi before things change too much.
Citations
1 freddiemac.com/pmms/index.html?year=2010 [6/4/10]
2philly.com/inquirer/opinion/20100530_Silver_lining_in_Europe_s_debt_crisis.html[5/30/10]
3 - totalmortgage.com/blog/page/2 [6/2/10]
Thursday, June 3, 2010
THE 2 BIGGEST RETIREMENT MISCONCEPTIONS
While the idea of retirement has changed, certain financial assumptions haven't.
We've all heard about the "new retirement", the mix of work and play that many of us assume we will have in our lives one day. We do not expect "retirement" to be all leisure. While this is becoming a cultural assumption among baby boomers, it is interesting to see that certain financial assumptions haven't really changed with the times.
In particular, there are two financial misconceptions that baby boomers can fall prey to - assumptions that could prove financially harmful for their future.
#1) Assuming retirement will last 10-15 years. Historically, retirement has lasted about 10-15 years for most Americans. The key word here is "historically". When Social Security was created in 1933, the average American could anticipate living to age 61. By 2005, life expectancy for the average American had increased to 78.1
However, some of us may live much longer. The population of centenarians in the U.S. is growing rapidly - the Census Bureau estimated 71,000 of them in 2005 and projects 114,000 for 2010 and 241,000 in 2020. It also believes that 7.3 million Americans will be 85 or older in 2020, up from 5.1 million 15 years earlier.2
If you're reading this article, chances are you might be wealthy or at least "affluent". And if you are, you likely have good health insurance and access to excellent health care. You may be poised to live longer because of these two factors. Given the landmark health care reforms of the Obama administration, we could see another boost in overall American longevity in the generation ahead.
Here's the bottom line: every year, the possibility is increasing that your retirement could last 20 or 30 years ... or longer. So assuming you'll only need 10 or 15 years worth of retirement money could be a big mistake.
In 2010, the American Academy of Actuaries says that the average 65-year-old American male can expect to live to 84½, with a 30% chance of living past 90. The average 65-year-old American female has an average life expectancy of 87, with a 40% chance of living past 90.3
Most people don't realize how much retirement money they may need. There is a relationship between Misconception #1 and Misconception #2 ...
#2) Assuming too little risk. Our appetite for risk declines as we get older, and rightfully so. Yet there may be a danger in becoming too risk-averse.
Holding onto your retirement money is certainly important; so is your retirement income and quality of life. There are three financial issues that can affect your quality of life and/or income over time: taxes, health care costs and inflation.
Will the minimal inflation we've seen at the start of the 2010s continue for years to come? Don't count on it. Over the last few decades, we have had moderate inflation (and sometimes worse, think 1980). What happens is that over time, even 3-4% inflation gradually saps your purchasing power. Your dollar buys less and less.
Here's a hypothetical challenge for you: for the rest of this year, you have to live on the income you earned in 1999. Could you manage that?
This is an extreme example, but that's what can happen if your income doesn't keep up with inflation - essentially, you end up living on yesterday's money.
Taxes will likely be higher in the coming decade. So tax reduction and tax-advantaged investing have taken on even more importance whether you are 20, 40 or 60. Health care costs are climbing - we need to be prepared financially for the cost of acute, chronic and long-term care.
As you retire, you may assume that an extremely conservative approach to investing is mandatory. But given how long we may live - and how long retirement may last - growth investing is extremely important.
No one wants the "Rip Van Winkle" experience in retirement. No one should "wake up" 20 years from now only to find that the comfort of yesterday is gone. Retirees who retreat from growth investing may risk having this experience.
How are you envisioning retirement right now? Has your vision of retirement changed? Is retiring becoming more and more of a priority? Are you retired and looking to improve your finances? Regardless of where you're at, it is vital to avoid the common misconceptions and proceed with clarity.
Citations
1 - nytimes.com/2008/04/27/weekinreview/27sack.html?pagewanted=print [4/27/08]
2 - usatoday.com/tech/science/2005-10-23-aging-centenarians_x.htm [10/23/05]
3 - usatoday.com/money/perfi/retirement/2010-04-30-401k28_CV_N.htm [5/3/10]
While the idea of retirement has changed, certain financial assumptions haven't.
We've all heard about the "new retirement", the mix of work and play that many of us assume we will have in our lives one day. We do not expect "retirement" to be all leisure. While this is becoming a cultural assumption among baby boomers, it is interesting to see that certain financial assumptions haven't really changed with the times.
In particular, there are two financial misconceptions that baby boomers can fall prey to - assumptions that could prove financially harmful for their future.
#1) Assuming retirement will last 10-15 years. Historically, retirement has lasted about 10-15 years for most Americans. The key word here is "historically". When Social Security was created in 1933, the average American could anticipate living to age 61. By 2005, life expectancy for the average American had increased to 78.1
However, some of us may live much longer. The population of centenarians in the U.S. is growing rapidly - the Census Bureau estimated 71,000 of them in 2005 and projects 114,000 for 2010 and 241,000 in 2020. It also believes that 7.3 million Americans will be 85 or older in 2020, up from 5.1 million 15 years earlier.2
If you're reading this article, chances are you might be wealthy or at least "affluent". And if you are, you likely have good health insurance and access to excellent health care. You may be poised to live longer because of these two factors. Given the landmark health care reforms of the Obama administration, we could see another boost in overall American longevity in the generation ahead.
Here's the bottom line: every year, the possibility is increasing that your retirement could last 20 or 30 years ... or longer. So assuming you'll only need 10 or 15 years worth of retirement money could be a big mistake.
In 2010, the American Academy of Actuaries says that the average 65-year-old American male can expect to live to 84½, with a 30% chance of living past 90. The average 65-year-old American female has an average life expectancy of 87, with a 40% chance of living past 90.3
Most people don't realize how much retirement money they may need. There is a relationship between Misconception #1 and Misconception #2 ...
#2) Assuming too little risk. Our appetite for risk declines as we get older, and rightfully so. Yet there may be a danger in becoming too risk-averse.
Holding onto your retirement money is certainly important; so is your retirement income and quality of life. There are three financial issues that can affect your quality of life and/or income over time: taxes, health care costs and inflation.
Will the minimal inflation we've seen at the start of the 2010s continue for years to come? Don't count on it. Over the last few decades, we have had moderate inflation (and sometimes worse, think 1980). What happens is that over time, even 3-4% inflation gradually saps your purchasing power. Your dollar buys less and less.
Here's a hypothetical challenge for you: for the rest of this year, you have to live on the income you earned in 1999. Could you manage that?
This is an extreme example, but that's what can happen if your income doesn't keep up with inflation - essentially, you end up living on yesterday's money.
Taxes will likely be higher in the coming decade. So tax reduction and tax-advantaged investing have taken on even more importance whether you are 20, 40 or 60. Health care costs are climbing - we need to be prepared financially for the cost of acute, chronic and long-term care.
As you retire, you may assume that an extremely conservative approach to investing is mandatory. But given how long we may live - and how long retirement may last - growth investing is extremely important.
No one wants the "Rip Van Winkle" experience in retirement. No one should "wake up" 20 years from now only to find that the comfort of yesterday is gone. Retirees who retreat from growth investing may risk having this experience.
How are you envisioning retirement right now? Has your vision of retirement changed? Is retiring becoming more and more of a priority? Are you retired and looking to improve your finances? Regardless of where you're at, it is vital to avoid the common misconceptions and proceed with clarity.
Citations
1 - nytimes.com/2008/04/27/weekinreview/27sack.html?pagewanted=print [4/27/08]
2 - usatoday.com/tech/science/2005-10-23-aging-centenarians_x.htm [10/23/05]
3 - usatoday.com/money/perfi/retirement/2010-04-30-401k28_CV_N.htm [5/3/10]
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