Jan 11

Not quite, but close to it for many taxpayers.

As part of the American Taxpayer Relief Act (ATRA) of 2012, a benefit you may appreciate has been slipped in, a ‘permanent’ fix to the estate tax issue. First, here ‘permanent’ simply means a provision that has no sunset date, no automatic falling off the tax forms. That said, let’s look at the estate tax, before and after, and why you should be concerned about this even if you are not a ‘one percenter.’

In 1998, the year our daughter was born, we bought life insurance. Since we both worked, and had similar incomes, we each bought a million dollar policy. This may sound like a lot of money, but we had a house with a mortgage, and college tuition 18 years hence, both of which would whittle this windfall down pretty fast. But. As I learned in 1999, estate tax would kick in for an estate over $650,000. So even if we had no other assets, our insurance of $2M would see $700K taxed as high as 50% if my wife and I should perish together. It gets worse from there. If I passed first, I could leave an unlimited inheritance to my wife, but then if she would die soon after, $1.35 (everything over $650K) is subject to estate tax. Off to see an estate attorney. Time to set up trusts. With a bit of financial smoke and mirrors, the insurance is purchased from small gifts given to my daughter through the trust. In other words, the insurance itself is not part of our estate. Back then, I’d have casual conversations on death and dying (I know, real ‘life of the party’ discussions) and I realized most people had no idea that if you own the insurance policy, it’s part of your estate when you die. So even a couple with a $500K policy each could be heading for an estate tax issue. Maybe not when the first person passes, but when the surviving spouse also passes and still owned all the assets from when they were both alive.

Enough history. ATRA (Bonus points – what does this acronym stand for?) provides some excellent estate tax details:

  • A $5 million per person exemption (indexed so 2013 should be $5.25M)
  • A top rate of 40% (kicking in on amounts over $1M taxable)
  • ‘Permanent’ portability. i.e. the surviving spouse adds on the exemption to her own estate, so a couple truly has a $10.5M exemption
  • The annual gift exclusion is $14K per person for the year, but the full estate tax exclusion may be tapped for lifetime giving as well.

If you are blessed with wealth over $10.5M, the $14K annual gift may not seem like much, but keep in mind it’s per giver/recipient combination. So, you and your spouse can give $56K per year to your child and spouse. You can also gift each of the grandchildren $28K. With a large enough family, the total can easily exceed $250K if you are looking to be that generous.

On a final note, you can see how, in 1998, with no clear understanding that the estate tax would take such a generous turn, it seemed the right thing to do a bit of extra planning. Today, we’d save the expense of a trust, and only have a will in place.

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Jul 17

Is it National Ice Cream Day already? I’m still burning off the calories I ate last year at this time. Whether you’re a big fan or treating this like any other day, let’s get on with the roundup.

I rediscovered a classic post from Jim at Bargaineering, 50 Financial Skills Every Person Needs To Know. An excellent list of skills one should have. And a welcome addition to my Joe’s List of Lists, which I edit every so often.

At Wealth Pilgrim, my friend Neal gives advice on IRA Restrictions – A Guide To Your Best IRA. I find it remarkable that the rules are so complex for retirement accounts that most people are clueless to how IRAs work. Let Neal get you up to speed on the basics, and maybe save you from a costly mistake.

Posting at MoneyWatch, I read an interesting article by Farnoosh Torabi, Extreme Coupons: TV Show Draws Extreme Backlash. A coupon backlash? Well, when people see that with some (ok, a lot) effort, they might be able to save hundreds of dollars on a grocery or drug store visit, I can understand the stores getting nervous. Check out her article, and let me know if you found your local stores starting to change their policy regarding coupon use.

North of the (US) border, Robb Engen guest posted at Canadian Finance Blog, Freedom 55 Is Just A Dream. Perhaps, but it all starts with education, a decent income, and living sufficiently beneath your means to start saving aggressively at a young age. For me, I may be able to retire at 55, but will likely work a bit longer, depending what else is going on in my life.

Emily Guy Birken Guest posted at Moolanomy on Estate Taxes: Planning Now to Avoid Taxes Later. If you thought retirement account rules were complex, the Estate Tax is bound to confuse you. Emily does a great job explaining your options to keep more money in your beneficiaries hands and out of Uncle Sam’s.

Money Guy debunks POTUS’ looking to tax jet owners and others at Jet Owners, Ogres, and Other Millionaire Myths. Tax jets and the workers who build jets will be out of work. I don’t have the answers, but the path we’re on isn’t the right one. I agree with Money Guy.

And to wrap up the week, Kay Lynn at Bucksome Boomer tell us what she’d do “If I had a Million Dollars.” I believe I deserve the award for most boring answer in her comments, I’d put it away towards retirement, 100%, every last dollar. I’d still work for the next 6-10 years, and pay the mortgage over the next 6 as well. No big spending spree, no unplanned trips. Boring, sorry.

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Dec 08

It appears that President Obama and the GOP agreed on Monday to extend the Bush tax cuts for the next two years.

Included in the deal is the extension of the 15% rate on dividends and capital gains, an additional 13 months of jobless benefits, and a 2% employee payroll tax cut. (Payroll tax is another word for the FICA/Social Security withholding.) For a family earning $50,000, the savings is $1000, someone earning the maximum income subject to withholding, $106,800 in 2011, the savings is $2,136, double that for a high earning dual income couple. I don’t know how this slipped in, never caught that it was part of any discussion. I suppose I shouldn’t look a gift horse in the mouth, but it’s money the social security system will be in worse shape for the lacking it.

Also in the mix is another adjustment to AMT, the alternative minimum tax that was meant as a safeguard against the high earners not paying any tax, but now ensnares us commoners.

Last, the estate tax will return with a $5M exemption and 35% rate after that. Wow, that’s not bad, but let’s hope it’s made more lasting than an annual negotiation. The larger issue with the estate tax is less about the numbers, per se, and more about the moving target. If it’s kept at $5M (or even the $3.5M we had in 2009) with a provision for increasing with inflation,  it would be easier to plan one’s affairs long term.

What do you think? Are you glad this is behind us, or do you feel these concessions will only worsen the financial crisis?


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Aug 01

This past week, one bit of news seemed to be more popular on the finance front than others, the news of the death of George Steinbrenner and the impact of the 2010 estate tax laws.

Bible Money Matters discussed this in his No Estate Tax In 2010 Means George Steinbrenner’s Family And Others Will Save Millions In Taxes.

At Aggressive Progress, The Steinbrenner Way offered a partisan view of the topic. I’m not judging, just offering a variety of takes on this matter.

Kelly Phillips Erb (AKA TaxGirl) wrote Steinbrenner’s final win — over estate taxes. Kelly is a pro who understands this complex topic better than most, she does a great job in this article covering the issue regarding step up in basis, which does not occur in 2010 (not beyond a token amount).

Kay Bell mentioned this as well, but her post was titled The Boss’ estate tax bonanza and for a moment, I was expecting to find out how Bruce Springsteen was handling his estate planning.

The Oblivious Investor answers, Student IRA: Can a Student Open a Roth IRA? — Ok, I’ll ruin the surprise, yes they can, and Mike tells you why they should.

At Money Help For Christians, I enjoyed Expensive Shopping is Good | How To Shop For Value, Not Price, a post that help address the age old frugal vs cheap debate.

At Green Panda Treehouse, Mike gives us a glimpse of his Financial Timeline. A mini financial autobiography, and an interesting read. We all have a story of how we got where we are today, and I enjoy when others share their experience.

Financially Poor discussed Why Won’t Money Buy Happiness? This is another recurring theme, the discussion will continue. I suppose it depends on more factors than just money. There are happy poor people, and miserable rich people, so the correlation of money and happiness certainly isn’t 100%.

Last, this week (after all, my roundup posts are intended to be a “best of” not enough reading for the whole afternoon) is Johnathan Chevreau’s article
The case for managed money: DC and 401(k) pensions roared back in 2009, Vanguard finds. I like John’s writing, he’s one of my regular reads, but in this case, I’m not sure I agree with his conclusion. Vanguard stated “at the end of 2009, the average account balance was US$69,000, up 23% from 2008.” That’s an increase from a starting point of about $56,000. Given, the 2009 deposit limit was $16,500 ($22,000 if 50 or older) and there were still companies matching deposits, it’s tough to parse out the growth from deposits vs growth from market return. John referenced a Vanguard report that ran 84 pages. I’ll be studying it for a future article of my own.

Have a great week.

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Jul 30

Sometimes, a reader’s comment will be so insightful that it’s a shame to let it get buried in a comment section many may not see.  This is such a comment, by my longtime reader Elle. She also shares her knowledge at the Usenet group misc.taxes.moderated where I am one of the mods.

This ‘guest post’ by Elle is in response to my recent The State of the Estate Tax.

“The years immediately following the repeal of the
inheritance tax [in 1902] were witness to an unprecedented
number of mergers in the manufacturing sector of
the economy, fueled by the development of a new
form of corporate ownership, the holding company.
This resulted in the concentration of wealth in a
relatively small number of powerful companies and
in the hands of the businessmen who headed them.
Along with such wealth came great political power,
fueling fears over the rise of an American plutocracy
and sparking the growth of the progressive movement.
Progressives, including President Theodore
Roosevelt, advocated both an inheritance tax and a
graduated income tax as tools to address inequalities
in wealth.”

— From the IRS article The Estate Tax: Ninety Years and Counting.

Tax laws do not come about in a vacuum. Voters put people in Congress who make these laws. Presumably those in Congress consider arguments like the one above, along with what their constituents say. Many Christians (among others concerned about poverty) reject Dave Ramsey’s argument. Many would call his stance on this issue the immoral one.

All is far from perfect in our economy and the way government is addressing economic problems. I see a lot of resentment from the lower classes that is justified. I also see the lower income classes denying, at a stunning rate, they have any self-responsibility. These are the people at the bottom without whom economies cannot function. Capitalists do not quite get that you have to watch out for the little guy/gal or businesses will implode.

People are mad. I think things will get worse before they get better. When they do get better, it will be because people seek reason behind actions instead of resorting to “Gimme this; gimme that!” Eventually, people will come back to the realization that they get more of what they want–better stock dividends, better economic growth, more for you and for me–when we work together. It can be done in a capitalist society. It has been done in the past.

(Thanks, again, Elle. A great take on this issue)

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