American Taxpayer Relief Act of 2012

I put together a presentation today about the American Taxpayer Relief Act of 2012. I wanted to share some highlights of the changes that occurred with this new regulation. The Act was signed into law by President Obama on Jan. 2, 2013. It prevented many of the tax hikes that were scheduled to go into effect this year and retain many favorable tax breaks that were scheduled to expire. It will also increase income taxes for some high-income individuals. Further, it extends a bunch of expired and expiring tax breaks for businesses and individuals.

Top tax rate increased to 39.6% from 35% for taxpayers making:
• $450,000 for joint filers and surviving spouses
• $425,000 for heads of household
• $400,000 for single filers
• $225,000 for married taxpayers filing separately

Raised the top rate for capital gains and dividends to 20% (up from 15%) for taxpayers making:
• $450,000 for joint filers and surviving spouses
• $425,000 for heads of household
• $400,000 for single filers
• $225,000 for married taxpayers filing separately

Also note that the 2010 Health Care Reconciliation Act includes an additional 3.8% tax on net investment income for joint filers and surviving spouses making $250,000 and single filers making $200,000.

Reinstated personal exemption phaseouts for higher income taxpayers. Under the Personal Exemption Phaseout, the total amount of exemptions that can be claimed by a taxpayer subject to the limitation is reduced by 2% for each $2,500 (or portion thereof) by which the taxpayer’s AGI exceeds the applicable threshold (Inflation adjusted)
• Applicable thresholds (Inflation adjusted for tax years after 2013)
• $300,000 for joint filers and a surviving spouse
• $275,000 for heads of household
• $250,000 for single filers
• $150,000 for married taxpayers filing separately

Extended for five years the following items that were originally enacted as part of the American Recovery and Investment Tax Act of 2009
• American Opportunity tax credit
– Permits eligible taxpayers to claim a credit equal to 100% of the first $2,000 of qualified tuition and related expenses, and 25% of the next $2,000 of qualified tuition and related expenses (for a maximum tax credit of $2,500 for the first four years of post-secondary education)
• Refundable child credit
– Eased rules for qualification
• Earned income tax credit
– Various changes related to higher EITC amounts for eligible taxpayers with three or more children
– Increased in threshold phaseout amounts for singles, surviving spouses, & heads of households

Retained $5 million exemption amount for estate and gift taxes with slight rate increases
• Prevented steep increases in estate, gift and generation-skipping transfer tax that were slated to occur for individuals dying and gifts made after 2012 by permanently keeping the exemption level at $5,000,000 (as indexed for inflation)

Permanently increased in the top estate & gift tax rate
• Rate increased from 35% to 40%

Extended and modified depreciation provisions
• Extended and modified the 50% bonus depreciation provisions for one year for qualified property placed in service before 2014

These are some of the more relevant items from the American Taxpayer Relief Act of 2012 which I wanted to highlight. If you have any additional comments or questions, please feel free to post a comment or contact me.

Trickle down economics

I was browsing some comments on a CNN article about the fiscal cliff and came across these comments. In my opinion they are some good common sense arguments for the existence of “trickle down” economics.

Commenter #1
“it’s been proven that trickle down theory doesn’t work.”

Commenter #2
“Proven by whom? Do you have the actual proof? BTW, when’s the last time a poor person gave you a job?”

Commenter #3
“When the rich get richer all they do is send their money overseas. They don’t open business or hire anyone new.”

Commenter #4
“If trickle down economics does not work then why did we bail out banks and the auto industry. We bailed them out because we were afraid that if they went out of business, then they would not be able to pay employees who in turn give their money to the service industry. It is because the top leaders understand that trickle down economics is the core of our economy that we bailed out those industries.”

The Debt Problem

We are all aware of the debt problem that we have in the United States. The debt is currently over 16.2 trillion dollars and increasing. This represents a debt of approximately $51,600 per citizen and $141,700 per taxpayer. The debt represents a major problem with no easy solutions.

The debt and deficit can be compared to a leak in a boat. The faster the water comes in (deficit) the more total water (debt) the ship holds. At some point that ship will not be able to take on any more water and will sink. Hopefully if we bail fast enough (increase taxes and/or reduce spending), it won’t sink. But at this point, it may be inevitable without taking drastic measures. When the ship we call the United States sinks, all of the other ships will feel the waves like never before.

I believe it is probable that our government will “print” money to alleviate the problem. I also beleive that at some point, our government will have to balance the budget. If we were to balance the budget today we would remove 1.1 trillion in spending from the world economy in which the bulk of this spending occurs in the United States. I don’t believe our economy could take such a hit without going into another recession. If our government balances the budget slowly, we will end up with even greater debt to GDP ratios and will be faced with even greater deficit reduction down the road.

This leaves the inflation option.

The Fisher Hypothesis tells us that all things being equal, a rise in a country’s expected inflation rate will eventually cause an equal rise in the interest rate.

Current lenders now face the risk of rising inflation. If inflation does rise and increased interest rates follow, this represents a significant risk of loss to lenders represented by discounts in debt securities. This, in turn, produces the risk of decreased asset values and recession.

Any way I spin the issue; it always ends up in recession. Any arguement to the contrary would be appreciated so I could sleep a little more easy tonight.

Debt timebomb

Diversifying your portfolio

I was reading a story about someone interested in changing investment portfolios. They were thinking about going from using a broker and holding mutual funds to dropping the broker and purchasing blue chip stocks for their portfolio to reduce fees. The advice given was to look at ETFs for lower cost.

Now that sounds like pretty sound advice, but the advisor missed the bigger picture. This person was contemplating changing from a portfoltio that may have some diversification into a portfolio that held one asset class only and no diversification. The danger is that Blue Chips, while generally more sound than other investment types, still hold risk.

As I learned in marketing, all companies have a life cycle.  1. Start up  2. Growth  3. Maturity  4. Death.  I’ll bet you can guess where many or most Blue Chip stocks fall. Thats right, somewhere closer to death.

I think this person should have been also warned about this risk associated with the decision they were contemplating. The bright side is atleast they weren’t considering un-diversifying into something more risky like third world start-ups.