jump to navigation

How progressive is too progressive?? January 6, 2015

Posted by forwardfinancialplanning1 in Federal Income Taxes, Income Taxes.
add a comment

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…………….


Save taxes and benefit charities May 26, 2014

Posted by forwardfinancialplanning1 in Federal Income Taxes, Income Taxes, State Income Taxes.
add a comment

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.
add a comment

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.
add a comment

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!!

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

Posted by forwardfinancialplanning1 in Federal Income Taxes, Income Taxes.
add a comment

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………………………………

What do we know for sure? November 6, 2012

Posted by forwardfinancialplanning1 in Bond Mutual Funds, Federal Income Taxes, Income Taxes.
1 comment so far

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.

Guess it makes sense to the IRS………….. September 4, 2012

Posted by forwardfinancialplanning1 in Exchange Traded Funds (ETF), Federal Income Taxes, Income Taxes.
add a comment

As Wall Street “manufactures” more and more exotic investment products, it behooves the investor to not only understand the investment, but also to understand its tax treatment.  IRA holders can often get themselves in hot water by holding problematic investments within these tax protected accounts, but we recently came across one that often fares worse in a taxable account. 

Gold prices have seen an enormous run-up in the past decade and while they’ve retreated lately, they still attract a lot of attention from investors losing confidence in paper currencies.   Exchange traded funds (ETF’s) such as SPDR Gold Shares (GLD) have been promoted as a hassle free way to gain exposure to the shiny metal.  However, ETF’s that hold bullion as their primary asset are treated differently in each type of account.  In a traditional IRA, selling shares of GLD is treated the same as if the account holder had sold a share of stock. Thus, the eventual distribution of the funds will most likely be treated as ordinary income in the year of distribution (The possibility of “basis” in the IRA is being ignored in this example).  However, this same transaction is treated diffently in a taxable account.  Regardless of the length of the holding period of the ETF in a taxable account, the sale of shares of the ETF are treated as if the ETF had sold actual gold bullion.  Therefore, even if the holding period is longer than a year, any gain is taxed at the 28% “collectibles” tax rate and not at the preferential long term capital gains rates of either 0% or 15% depending on your tax bracket. 

This is probably not something an investor would want to learn after the sales transaction took place………………………….


You can’t believe everything you read in the paper… December 9, 2011

Posted by forwardfinancialplanning1 in Bond Mutual Funds, Equity Mutual Funds, Federal Income Taxes, Income Taxes, State Income Taxes.
add a comment

Many of our readers reside in the Bloomington-Normal, Illinois area and subsequently subscribe to the local newspaper, The Pantagraph.   An article in the December 8, 2011 “Money & Markets” column of the Money section is entitled “December is tax time”——not surprising given the time of year.  However, the authors, AP writers Mark Jewel, and Jenni Sohn might want to double-check their sources as the article contains several inaccurate statements. 

Their article is based on the annual mutual fund practice (required by law) of distributing to shareholders the pro-rata share of realized capital gains that have resulted within the mutual fund portfolio.  The authors suggest that due to poor 2011 equity market returns, “many stock funds won’t have capital gains to pass on.”  They continue with, “Some may even have losses that investors can use to offset gains on other investments.”  While their first statement may eventually prove to be true, there’s no doubt about the second statement—it is incorrect.   Mutual funds do not pass through the pro-rata share of net realized portfolio losses to shareholders.  Rather, residual realized portfolio losses must be “carried forward” by the fund into future years.

The authors later state that capital gains are not a concern for a tax-free municipal bond fund.   This supposition is also incorrect since only municipal bond interest payments (and not capital gains) escape the reach of the tax man.

The moral of the story???  It’s prudent to obtain guidance from a professional in the field.  Jewel and Sohn do provide some good advice in that regard as they suggest that the complexity of the tax laws makes it wise to, “Consider consulting an accountant or other tax advisor about your strategy.”  Perhaps they should heed some of their own advice……………!!!


Honor system no more July 9, 2011

Posted by forwardfinancialplanning1 in Federal Income Taxes, Income Taxes, Investing-General, State Income Taxes.
add a comment

The United States has one of the highest income tax compliance rates in the world.  Despite this fact, the IRS is taking measures to increase compliance even more.  The reporting of “cost basis” on the sale of financial securities has traditionally operated as a de facto honor system because there was no reporting  on cost basis required of financial services firms such as broker-dealers and mutual fund companies.  The IRS did require the reporting of the gross proceeds from a security sale, but as mentioned above, had no way of matching this against the unreported acquisition cost.  So, the taxpayer basically provided the cost basis and the subsequent profit/loss and holding period with the IRS having no way, other than an audit, in which to verify the information.

However, this situation is changing.  Starting this year, financial services firms must also report the cost basis of certain securities sales.  In addition, they must also report the security holding period (short or long term) for the capital gain or loss.

This new  reporting requirement applies to individual stock sales in 2011, mutual funds, most ETF’s and dividend reinvestment plans in 2012 and other securities such as bonds and options in 2013.  Thus, investors will need to start doing some tax planning in advance prior to initiating a security sale.   Since investors frequently accumulate securities positions in multiple acquisition lots, the financial service firm handling the transaction will ask which lot is being sold.  So, dig out your records……………………

More on the magnitude of the federal deficit May 11, 2011

Posted by forwardfinancialplanning1 in Economic Conditions, Federal Income Taxes, Income Taxes.
add a comment

Several previous postings on this site have commented on our federal government’s propensity to spend more than it receives in tax revenue.  Some in Washington would like you to believe that the deficit is merely a case of revenue shortfalls that can be remedied by asking the wealthy to pay taxes at a higher marginal rate.  While it is correct that federal income tax rates are currently lower than they have been for much of the past 50 years, proponents of tax increases are not being truthful when they claim that we merely need to “soak the rich”  and end tax breaks for “big oil” in order to close the deficit.

Recent House testimony by Rep. David Schweikert of the 5th Congressional district in Arizona clarifies this circumstance.  Schweikert notes that the federal government currently borrows $4.7 billion a day to fund its operations.  By eliminating all depreciation, oil depletion allowances and incentives for fossil fuel exploration, we can fund 2 minutes  of government operations on a typical day.  Likewise, had the so-called Bush tax cuts been allowed to expire at the end of 2010 (rather than being extended for two more years), that “massive” injection of additional revenue would have paid for an additional 28 minutes on the typical day in Washington.  Unfortunately, all days (even in D.C) have 24 hours………….most of which can only be paid for by major decreases in entitlements and other federal spending.