Apr 19

For as long as I could remember, a cancelled debt came with a tax bill. If you defaulted on a loan, the discharged debt amount was treated as income and taxed at your marginal rate, i.e. simply added on top of your income and taxed. Soon after the housing crisis of 2004-5, congress passed a waiver so those who lost their homes didn’t find insult after injury, and were not taxed on their discharged debt.

The new proposed code will extend this rule until the end of 2017, presumably long enough for those in difficult economic times to get back on track.

In theory, I think this forgiveness is admirable. In reality, it creates the ongoing risk of moral hazard. Banks should use proper criteria to qualify mortgages conservatively, and borrowers should bear some responsibility to not get in over their heads, walking away scot-free is getting off a bit too easy, in my opinion.

That’s it, the last of my Government Budget 2015 series. I hope you found a few bits of code that were of interest, or better still, might benefit you.

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Apr 18

The American Opportunity Tax Credit is a College Tuition benefit. Specifically, Taxpayers may claim an AOTC for 100 percent of the first $2,000 plus 25 percent of the next $2,000 of qualified tuition and related expenses (for a maximum credit of $2,500) per student.

This is not a deduction, but a credit, in effect, you are being handed $2500 towards the first $4000 in college expenses. As with many such benefits, this one is phased out for singles with AGI from $80K to $90K and for joint filers with AGI from $160K to $180K.

The AOTC overlapped with the Hope credit and Lifetime Learning Credit, each of which comes with its own set of rules.

This proposal eliminates the sunset rule, making the AOTC ‘permanent.’

A good change, if it passes. Come back tomorrow, time to put a close to this series.

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Apr 17

There are times that you can deduct the cost of operating your car, and more specifically, write off the mileage you’ve driven for particular reasons.

mileagerates14

From the IRS site, above is a brief summary. You can see the disparity between what you can deduct for miles driven for business vs medical, moving, and charity. Strangely, the deduction for charity is not currently indexed to inflation, and requires a specific change authorized by congress. It’s been stuck at 14 cents per mile for a very long time.  The budget proposal would change the rate for charitable driving to the same rate as medical and moving. That’s over a 50% increase, but still barely enough to cover gas. I’m disappointed the business miles rate wasn’t chosen. If you volunteer at a charity, your time is not a deduction, only the mileage and actual cost you incur if you have any unreimbursed purchases for the charity. Given the high cost of gas and car maintenance, this change is an improvement, but not enough of an increase, in my opinion.

We’re nearing the end of this series, two more budget proposals to look at, and that’s it.

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Apr 16

This proposed change to the tax code is a simplification, but at what cost? One bit of the proposal offers to eliminate RMDs on retirement account that are worth less than $100K. A good thing, I suppose, although those with a low IRA balance are also likely to be in such a low tax bracket that the withdrawal wont be a burden. The next part of this change is add RMD requirements to the Roth IRA. I have mixed feelings about this. One view is that retirement accounts are meant for just that, retirement. These accounts have morphed into estate planning tools, especially for those of modest means. The IRA offers a great way to pass your assets on to a loved one, bypassing probate, and in the case of the Roth IRA, doing so with no tax bill on withdrawal.

I’m neutral on this proposal. Of course the government sees it as way to raise money.

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Apr 15

We continue our look at the proposed 2015 Government Budget, and today it’s one that is bound to impact people by surprise.

The proposal itself may seem well intended, at face value, it puts a limit on what one can accumulate in their retirement accounts. In light of the Mitt Romney $400M IRA, such proposals have gotten public approval. To be clear, it’s not the spirit of the proposal that I object to, but the math behind its implementation. Let me first offer the limits and how they will be calculated. First, an annual benefit of $210,000 has been deemed enough. For a single person with no deductions, he would clear about $160,000. This is top 10% or so, but not quite wealthy. The next step is to see that $3.2M at age 62 will buy an annuity which will return the $210K each year. That makes sense, but not everyone wants an annuity. $3.2M will provide $128,000 per year if we use the 4% withdrawal rule, and after tax, just under $100,000.

We are talking about age 62, and the proposed budget doesn’t go into detail, but a rate of return must be assumed to determine a present value. If we use 6%, a 32 year old will have a cap on his account of about $560K. Still a reasonable number, although you should keep in mind, the market isn’t consistent year after year. Million dollar 401(k) accounts dropped by half in the dotcom bubble in early 2000, and again in the bust of 2008. So, the employee of a high tech firm with a volatile stock can see years when he can’t contribute, and therefore cannot collect his company match, only to find a drop in value the next year that puts him below the limit. The limit is different for each person depending on their age, and will force a cumbersome set of calculations as multiple providers will need to report their year end balances for each participant.

Last, I see nothing in the proposal to distinguish between the calculations for a couple vs individual. This may be addressed in the final version of the budget or just left as individual limits, but either way, as it stands, the calculations are just this side of incomprehensible. And this doesn’t address the accounts that are already in the tens of millions, only the ability to deposit more money.

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