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How progressive is too progressive?? January 6, 2015

Posted by forwardfinancialplanning1 in Federal Income Taxes, Income Taxes.
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Some interesting stats from the IRS have to raise the question, “When does our progressive system of income taxation go too far?” Many people would agree that there is a benefit to society if those of greater means absorb a somewhat larger share of the costs of maintaining that orderly society. But, what do we mean by “somewhat larger?”

In 2012 (latest stats available–cited by The Kiplinger Tax Letter), the top 1% of all income tax filers paid a whopping 38.1% of all income taxes levied. The highest 5% paid 58.9% of total federal income tax and the top 10% bore 70.2% of the total tax burden.

At the other end of the income spectrum, the bottom 50% of filers paid 2.8% of the total federal tax. So, over half of the members of the tax paying public have little, or no skin in the game.

No wonder we have difficulties controlling entitlements!!! About half of the beneficiaries are getting everyone else to pay for it…………….


Are the voters more clueless than the politicians? August 10, 2014

Posted by forwardfinancialplanning1 in Income Taxes, State Income Taxes.
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It’s usually pretty difficult to defend anything that takes place in Springfield, Illinois but we just came across one that suggests that the politicos are merely manifesting the ignorance of their electorate. According to a survey by Capitol Fax, barely one third of Illinois residents 65 and older know that their pensions, Social Security payments and retirement plan distributions are not taxed by the state of Illinois. Just over 50% believed their retirement income was being taxed and of that half, 83% said their state income taxes were “too high.”

With the state’s “temporary” tax increase (to 5%) on everyone else’s income slated to sunset on December 31, 2014, it looks like the Springfield gang will have a hard time attracting support for an extension from the senior crowd. If 0% is judged too high, it’s going to be impossible to torture the math enough to create something acceptable to this voting bloc.

Save taxes and benefit charities May 26, 2014

Posted by forwardfinancialplanning1 in Federal Income Taxes, Income Taxes, State Income Taxes.
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Many people tells us that they are unable to itemize federal income tax deductions as their eligible combined deductions do not exceed the standard deduction. While this situation certainly occurs for many, some taxpayers may successfully itemize by “bunching” their deductions into one particular calendar year. Business owners can often control the timing of income and expense realization in order to group deductible expenses into a particular year. But, what if you’re not a business owner?

Donor advised funds might be the solution for those who are charitably inclined. The tax payer creates the donor-advised fund with an initial contribution which might possibly represent multiple years of planed giving. However, the IRS permits a tax deduction for the entire amount in the tax year that the contribution is made to the donor advised fund. The donor subsequently directs grants from the donor advised fund to their desired charitable recipient. In this way, the donor may have a total of itemized deductions which exceeds the standard deduction for the specific tax year. Contributing highly appreciated securities is a very tax efficient strategy for placing money in the donor advised fund, as the contributor avoids capital gains taxes on the securities’ appreciation. And, they can deduct the entire value of the contributed amount.

Where will see the fallout? February 11, 2014

Posted by forwardfinancialplanning1 in Economic Conditions, Federal Income Taxes, Income Taxes.
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Read a very interesting article in the Winter edition of The T Rowe Price Report entitled, “Is the Financial System Healed”? The material discusses our collective national experience since the September 12, 2008 Lehman Brothers meltdown through year-end 2013. A reader certainly has to conclude that by many measures, the US has weathered the storm since peering over the edge of a financial abyss in late 2008.

But at what price? Clearly we have an economic system that’s struggling to digest Dodd-Frank, the Affordable Care Act among other governmental efforts to “save us from ourselves.” And of course, to the long term unemployed and under-employed, it feels like the recovery never came. But a table of comparative data included in the article may foreshadow some additional long term issues to be reconciled.

On September 12, 2008, Total Public Debt (federal) was $9,620 billion while at year-end 2013, the comparable figure was $17,179 billion. The US Federal Reserve’s balance sheet has ballooned from $1,007 billion to $4,033 billion. If excessive private sector debt (both corporate and individual) can be blamed for the financial crisis, what will be the future impact of such huge increases in public debt and the money supply? Savers have been victimized by the Fed’s Zero Interest Rate Policy for several years, now. but it has definitely helped improve the solvency of our financial system. But, at some point, some new victims will come forth. Who will they be?

If the outcome is a burst of inflation, the same savers who have watched their interest yields vanish will be asked to “fall on a sword” a second time. Somehow, that just doesn’t seem fair.

“And the winner is……………….” November 25, 2013

Posted by forwardfinancialplanning1 in Federal Income Taxes, Health Insurance, Income Taxes.
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As we watch the debacle known as ObamaCare attempt to get launched, one can only hope that they’ll soon “get it right.” It’s particularly discouraging to contemplate that the government will essentially throw unlimited amounts of money at the problematic web site in an attempt to fix its problems. (Imagine how many heads would roll if Microsoft, Apple, Oracle, et al had they spent such enormous amounts to get one of their new products to work?). Several of our recent posts (October 13, October 23) have commented on the federal government’s poor stewardship of our tax dollars. A recent report on the Pentagon’s lack of fiscal accountability appears to set a new standard for governmental ineptitude.

A Reuters investigation by Scot Paltrow found that the Defense Department cannot account for a mere $8.5 TRillION in taxpayer funds since 1996. The report notes that 1996 was the first year that the Pentagon should have been audited under a law requiring audits of all government departments. It further notes that the Department of Defense makes a regular practice of inserting billions of dollars of “plugs” which are the accounting equivalent of stating, “we don’t know where it went.”

This makes the current fiasco in Health & Human Services look like the minor leagues!!

The tip of the iceburg…………. October 23, 2013

Posted by forwardfinancialplanning1 in Education Planning, Health Insurance, Income Taxes.
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As the negative press reports pile up regarding the roll-out of the Affordable Care Act (“ObamaCare”) insurance exchanges, the appearance of two seemingly unrelated articles cause me to ask the philosophical question, “Can the government get anything right?”. Detractors of the ACA are already asking, “Do you think a private sector company could get away with the roll-out a new product with as many problems as this one?”

The first article by the Associated Press quoted a US Treasury Department report which found that the IRS paid out more than $110 billion (yes, billions!!) in tax credits over the last decade to people who didn’t qualify for them. IRS Inspector General J. Russell George said more than one-fifth of all credits paid under the Earned Income Tax Credit went to people to were not eligible to receive them. This situation is particularly troubling in that the Earned Income Credit is a “refundable” tax credit. This means that people who have no federal tax liability still get sent a check for the amount of the credit. One can call this situation “welfare” or “a negative” effective tax rate—-either way it’s blatantly unfair to those who dutifully pay their taxes.

The second article in The Wall Street Journal cites Department of Education figures that show that the default rate on student loans has increased for six straight years and currently, one in ten students defaults within two years of starting repayment. Outstanding student loans in the US now exceed $1 trillion with the vast majority being originated by the federal student loan programs. It’s noteworthy that anyone can get a federal student loan with no credit check whatsoever and the taxpayer gets stuck holding the bill when default takes place.

Getting back to the ACA roll-out, one has to wonder that if the federal government is such a poor steward of taxpayer dollars with regard to refundable tax credits and student loans, how can we expect any better with the ACA? Many ACA applicants are counting on federal subsidies to reduce the cost of their newly acquired insurance policies. These subsidies will be administered via the IRS.

Retiree Tax Planning June 19, 2013

Posted by forwardfinancialplanning1 in Retirement Spending, State Income Taxes.
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Retirees may have some control over their tax burden if they are geographically flexible. Often, they flock to one of the states that does not have a state income tax, such as Florida or Texas. However, income taxes aren’t the only taxes we pay. Sales, property and inheritance/estate taxes also constitute potential tax bills for seniors and should be considered. Kiplinger’s web site offers a very convenient summarization map that provides many of the useful details needed. Check it out at Kiplinger.com/tools/retiree_map

What’s wrong with this picture????? January 19, 2013

Posted by forwardfinancialplanning1 in Federal Income Taxes, Income Taxes.
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It’s likely that the only thing in the USA that’s currently less popular than Congress is the US Internal Revenue Code (It’s no coincidence that this same Congress creates the tax code via its legislation, but that’s a topic for a different time).  A recent news release by the IRS caught my eye as a great indicator of how “broken” and dysfunctional this system has become.  While 100% of our population believes that the tax system is incomprehensible and a vast majority feels it’s unfair, this latest statistic blows my mind.

The IRS is crowing about their success in detecting fraud in the system.  They claim to have detected more than 173,000 fraudulent tax returns which would seem to be a major accomplisment.  The “mind-blowing” portion of the claim however, is that this incidence of fraud was “detected” from  tax returns filed by prison inmates!!! 

Just think about this—we have a system which is taking a victory lap for rooting out fraud and corruption from a population that is already incarcerated!!  Excuse me for being a bit cynical, but the law enforcement community would have a difficult time earning accolades for preventing bank robberies committed by the current inmates of federal prisons.  Yet, this can be hailed as a major success by the enforcers of the US Tax Code!!

There’s gotta be a better way………………………………

Still more accolades for our “leaders” in Springfield….. November 30, 2012

Posted by forwardfinancialplanning1 in Pensions, State Income Taxes.
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Many of our readers are “fortunate” (as we are) to reside in the state of Illinois.  Doing so gives us a front row view of the procession of our former governors heading off to federal prisons.  And while we voters and taxpayers receive some small satisfaction from seeing the scoundrels punished for their misdeeds, we’re still left holding the IOU’s emanating from their dysfunctional governance. 

A huge future liability for Illinois taxpayers is going to be the unfunded state pension obligations incurred over the past twenty years of fiscal imprudence. Many of our long-term state legislators in addition to the past felon-governors can “take credit” for this disaster.  How bad is it?  Check out this state pension fund rating analysis conducted by Morningstar:    


The most amazing fact is that in the November 2012 elections, Illinois voters just gave a “super-majority” to the party that engineered this train wreck!

What do we know for sure? November 6, 2012

Posted by forwardfinancialplanning1 in Bond Mutual Funds, Federal Income Taxes, Income Taxes.
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On the eve of a closely contested presidential election, uncertainties abound regarding our future income taxes.  We don’t know about future (2013 and beyond) marginal tax rates, nor do we know for sure what tax liabities will be incurred by realizing capital gains.   What’s an investor to do?

Besides keeping a level head, investors should reflect on their current circumstances and act based on the few tax certainties that we do have.  We do know that for 2012, long term capital gains are taxed at 15 % for most investors, and 0% for taxpayers falling into the 10% and 15% brackets.  We also know that interest rates are as low as they’ve been in at least 50 years.  With interest rates this low, it’s highly likely that any investor owning taxable bond mutual funds is probably sitting on some capital gains.

Putting these two circumstances together suggests that it might be “tax-wise” to sell those bond funds in 2012 to “lock in” the long term capital gains at the preferential rates of 0% or 15%.  It’s highly unlikely that future long term capital gains rates will be lower than 15% and obviously can’t be any lower than the 0% that will apply to some fortunate taxpayers.  Further, investors can re-purchase the identical fund shares on the following business day which should effectively “step up” their cost basis.   Worried about the IRS “wash sale rule?”   It doesn’t apply to realized long term capital gains as it would,  had the security sale resulted in a capital loss.