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New Social Security Figures
The Social Security Administration recently announced changes for 2011, including:
Beneficiaries will not receive a cost-of-living adjustment (COLA) for 2011 because there was no increase in the Consumer Price Index (CPI-W) from the third quarter of 2008 to the third quarter of 2010. This is the second year in a row that no COLA has been payable.
The maximum annual earnings subject to Social Security taxes will remain at $106,800 (by statute, this amount remains the same when there is no COLA).
Earnings required for a quarter of coverage will remain at $1,120 (by law, because there was a decrease in the national average wage index for 2009).
The retirement earnings test exempt amounts for beneficiaries will remain unchanged (by statute, these amounts remain the same when there is no COLA).
For beneficiaries under full retirement age, the annual limit remains at $14,160 ($1,180 per month). In the year an individual reaches full retirement age, the annual limit remains at $37,680 ($3,140 per month).
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Clients and Friends:
Below is a discussion by Nick Murray, sorting out the knowns and unknowns of the current economic downturn. Surprisingly enough, he proves true the old saying, "What you don't know won't hurt you." If you have any questions or concerns about your investments, finance, or retirement planning, get in touch with me, or Kristy, and we'd be happy to set up a time to meet with you and discuss your personal financial situation.
I have also included an article which outlines a question which has recently been brought to my attention by several different individuals. The article deals with whether or not the proceeds from the sale of your home can be taxed under the new healthcare laws.
Additionally, President Obama just recently signed a bill which intends to enhance the transparency of many government documents. "The Plain Writing Act of 2010" seeks to clear up government communication with the public. The bill covers a wide variety of government agencies, the IRS included.
As always, please contact us if you have any questions about these issues, or any concerns you have about taxes or finances.
Sincerely,
Bob Rounsfull |
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Why Won't the Market Go Down Like It's Supposed to?
Just eleven years ago at this time-in the waning weeks of 1999-the world was working itself up into an apocalyptic frenzy over the imminence of the new millenium.
Specifically, it had become clear to everyone that the world's computers had never been programmed to roll into the year 2000; all the years in all the computer programs on the planet started with 19. So at midnight on December 31, 1999, they would either roll into the year 1900 at best, fouling up everything, or they would freeze up and melt down-if such a simultaneous catastrophe is possible, as it was widely believed to be. This inevitable disaster even had a catchy name that was on everyone's lips: Y2K.
In the hysterical narrative which had seized the popular imagination, your checking and savings account balances, your investment positions, and everything else of value that was stored in a computer would vanish in a moment, and you would not get them back for months...if ever. People sold everything they owned, converted all their assets to cash or certified checks, and deposited them safely between the mattress and the box spring.
In the event, as you'll recall, all the computers clicked silently over without a glitch as the ball came down in Times Square, and the world went merrily on.
Why did Y2K turn out to be the non-event of the millennium? Because it was the essence of a known unknown. Everybody understood the exact nature of the problem, as well as (to the second) when the problem would strike. And it is an iron law of human behavior-and especially of market events-that nothing which the consensus has identified as the problem ever turns out to be the real problem.
In the case of Y2K, everyone was so focused on the problem for so long that all the computer users in the world-governments, banks, stock exchanges, all the ships at sea and you and I at home-had more than ample time to re-program their computers, or to install brand new software, or even to buy new computers that had been manufactured with the well-documented problem already fixed.
It's never the known unknowns that get you. Everybody knew what the nature of the Y2K problem was. Everybody knew, a couple of years ago, that a new strain of swine flu virus threatened a pandemic on the scale of the 1918 event, in which half a million Americans and 22 million people worldwide died. Everybody knew Saddam had weapons of mass destruction. "It's not what you don't know that hurts you," as Satchel Paige so memorably said. "It's what you know that just ain't so."
Which brings us straight to the heart of the current market conundrum.
It is abundantly clear that the United States government and many or most of the other governments in the developed world have, over the past three years, enlarged their indebtedness by orders of magnitude never seen in peacetime. Nor is this a one-time phenomenon: we are continuing to run quite astonishing budget deficits, such that the debt can, on its current path, only increase for as far into the future as we can see. In addition, there is the long-term structural problem of entitlements: Social Security and Medicare must-again on their current trajectories-eventually become insolvent. Finally, there is the issue of what the new health-care entitlement is going to cost, and where the money is going to come from.
There are really only three ways to address these staggering issues, and all are more or less unthinkable. The first two are major tax increases (which are always growth-killers, and always do more long-term harm than good) and significant reductions in benefit formulae (indexing Social Security benefits to inflation rather than to wages, for example, and raising the retirement age). And the third is attempting, as all governments soon or late have done throughout history, to inflate one's way out of the problem: to pay off the obligations incurred today with tomorrow's debased currency.
(It is in contemplation of this third possibility that gold has risen to $1300 an ounce. Gold is an absolutely dreadful long-term investment-even at $1300, it is down well over 40% adjusted for inflation in the last 30 years, while the real price of the S&P 500 is up three and a half times-but it always gets a significant pop when everyone is worried about inflation. The key phrase in the foregoing sentence is, of course, "everyone is worried.")
And yet-against all reason and logic, and especially all consensus-the equity market in the United States refuses to crater. Indeed, in recent weeks, it has demonstrated a stubbornly and even maddeningly counterintuitive tendency to want to rise. In this, as the portfolio manager Martin Zweig has said that it always does, the market seems to have figured out a way to disappoint the largest possible number of people.
There are only two ways for an investor-hiding out in bonds if not in money markets, like everyone else-to process this experience. One is to hold that the market is wrong (or that, at the very least, it has somehow failed to take note of the firestorm that is bearing down upon it). And the other is to at least consider the possibility that it is he, and the huge consensus that shares his apocalyptic viewpoint-that knows, in other words, the entire package of known unknowns-who is even now in the process of being proven wrong.
Please note that none of this is a political statement, much less an economic or market forecast. I don't in any way minimize the terrible levels of our national debt, nor the hideous rate at which we continue to run up additional deficits. I'm keenly aware of the structural unsustainability of Social Security and Medicare in their present forms. And I can't even imagine what the new health care entitlement will cost, any more than anyone else can. None of this is the point, which is simply that (1) these are the known unknowns, and (2) it is never the known unknowns that get you.
This may very well be a conversation (as distinctly opposed to an argument) that you will wish to have with your financial advisor. That is, after all, what he or she is there for: to provide counsel, and a perspective that may differ from the consensus in thought-provoking ways.
What you don't want to do is to get so dug into your own foxhole of fear that you render yourself incapable of seeing that the market has taken full cognizance of your concerns, has examined them closely, and has evidently found them wanting.
It is axiomatic that one is always wrong to bet the ranch on Armageddon in the long run. (If the last three years taught us nothing else, at least let us have learned that.) But to remain committed to any consensus when the market has had more than enough time to consider it and has clearly rejected it is both a terribly expensive and an ultimately heartbreaking experience.
© 2010 Nick Murray. All rights reserved. Used with permission. |
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A 3.8 Percent "Sales Tax" on Your Home?
Q: Does the new health care law impose a 3.8 percent tax on profits from selling your home?
A: No, with very few exceptions. The first $250,000 in profit from the sale of a personal residence won't be taxed, or the first $500,000 in the case of a married couple. The tax falls on relatively few - those with high incomes from other sources.
FULL ANSWER: We've been flooded with queries about this one ever since the health care bill became law. At the last minute, Democratic lawmakers decided on a new 3.8 percent tax on the net investment income of high-income persons. But the claim that this would amount to a $15,200 tax on the sale of a typical $400,000 home is utterly false.
The truth is that only a tiny percentage of home sellers will pay the tax. First of all, only those with incomes over $200,000 a year ($250,000 for married couples filing jointly) will be subject to it. And even for those who have such high incomes, the tax still won't apply to the first $250,000 on profits from the sale of a personal residence - or to the first $500,000 in the case of a married couple selling their home.
We can understand how this misconception got started. The law itself is couched in highly technical language that only a qualified tax expert can fully grasp. (This provision begins on page 33 of the reconciliation bill that was passed and signed into law.) And it does say the tax falls on "net gain ... attributable to the disposition of property." That would include the sale of a home. But the bill also says the tax falls only on that portion of any gain that is "taken into account in computing taxable income" under the existing tax code. And the fact is, the first $250,000 in profit on the sale of a primary residence (or $500,000 in the case of a married couple) is excluded from taxable income already. (That exclusion doesn't apply to vacation homes or rental properties.)
The Joint Committee on Taxation, the group of nonpartisan tax experts that Congress relies on to analyze tax proposals, underscores this in a footnote on page 135 of its report on the bill. The note states: "Gross income does not include ... excluded gain from the sale of a principal residence."
And just to be sure, we checked with William Ahern, director of policy and communications for the nonprofit, pro-business Tax Foundation. "Some home sales would see a tax increase under this bill," Ahern told us, "but it would have to be a second home or a principal residence generating [a gain of] more than $250,000 ($500,000 for a couple)."
So there you have it. The sort of people who would have to pay the tax might include, for example:
- A single executive making $210,000 a year who sells his $300,000 ski condo for a $50,000 profit. His tax on the sale of that vacation home would amount to $1,900, in addition to the capital gains tax he would have paid anyway.
- An "empty nester" couple with combined income of over $250,000 a year who sell their $1 million primary residence to move to smaller quarters. If they cleared $600,000 on the sale, they would be taxed on $100,000 of the profit (the amount over the half-million-dollar exclusion). Their health care tax on the sale would amount to $3,800 over and above the usual capital gains levy.
However, a typical home sale would not incur any tax. In March, for example, half of all existing homes sold for $170,700 or less, according to the National Association of Realtors. Obviously, none of those sales could possibly generate a $250,000 profit, and so none would be subject to the tax.
Thus, for the vast majority, the 3.8 percent tax won't apply. The Tax Foundation, in a report released April 15, said the new tax on investment income (including real estate) "will hit approximately the top-earning two percent of families" when it takes effect in 2013.
Footnote: Some of the chain e-mails that claim ordinary home sales will be taxed include a copy of an article written by Paul Guppy, a policy analyst with the conservative Washington Policy Institute (that's Washington state, not Washington, D.C.). The article appeared March 28 as an op-ed in the Spokane, Wash., Spokesman-Review, and Guppy claimed that "[m]iddle-income people must pay the full tax even if they are 'rich' for only one day." That brought a quick rebuttal from Sara Orrange, the government affairs director of the local Realtors association. She wrote a letter to the newspaper calling Guppy's article "inaccurate" and saying, "Most people who sell their homes will not be impacted by these new regulations. This is not a new tax on every seller, and that correction needs to be made." In a news article the next day, business reporter Bert Caldwell confirmed that only "a very few" home sellers would pay the 3.8 percent tax.
The Internal Revenue Service says that to qualify for the $250,000/$500,000 exclusion, a seller must have owned the home and lived there as the seller's "main home" for at least two years out of the five years prior to the sale.
- Brooks Jackson
If you have any questions about the points raised in this piece, please do not hesitate to call or email! |
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"Plain Writing Act of 2010'' signed into law.
On October 13, the President signed into law H.R. 946, the "Plain Writing Act of 2010." This first-of-its-kind measure requires federal agencies, including IRS, beginning not later than Oct. 13, 2011 (one year after the enactment date) to use "plain writing" in any covered document, which is any document other than a regulation that is:
· ... necessary for obtaining any federal government benefit or service or filing taxes;
· ... provides information about any Federal Government benefit or service; or explains to the public how to comply with a requirement the federal government administers or enforces; and
· ... includes (whether in paper or electronic form) a letter, publication, form, notice, or instruction.
"Plain writing'' is defined as writing that is clear, concise, well-organized, and follows other best practices appropriate to the subject or field and intended audience.
The bill seeks to improve effectiveness and accountability of federal agencies to the public by promoting clear government communication that the public can understand and use.
© 2010 Thomson Reuters/RIA Tax Watch. All rights reserved. |
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