Yesterday, I talked about the Savings and Loan Crisis of the early 80’s and observed that we are now in the midst of another crisis, having learned little in the 25+ years passed. Another “what have we (not) learned” thought:
In the early 80’s we had the first video recorders, it’s really amazing to think how recent their introduction was. I bought my first machine for $600 which with inflation, is equal to $1415 today. But with Moore’s Law, one can buy a combination DVD/VHS player for around $100 today, remarkable. But back then, VHS wasn’t the only format, Beta was a competing format, one that many people felt was actually superior in quality. So we had the Beta/VHS War and in the end, who lost? Indeed, the consumer. VHS won, and any user of Beta found their selection of movies to rent dwindled to nothing over time. This took years to play out, of course, but today the result is obvious. Ask anyone under 30 if they remember Beta and see their response.
Now, in line with my title, we have a repeat of history, the current HD-DVD vs Blu-Ray. I am not in a position to debate the relative merits of either. I just can’t help my ask myself and you, my reader (how did you find this blog, anyway?) have we not learned anything? I like technology, but I’m not an early adopter, I will likely wait to buy a High Definition player until after I know which format has won, because I don’t believe that two formats will both survive. If I’ve missed something, if there’s some stupid thing we did back in the 80’s that you see happening now, I’m happy to add a third ‘History’ article, but until then.
JOE
This is from the “random thoughts before I fall asleep department.”
As a society, will we ever learn? Two unrelated issues, similar timeframes. First, in the early 80’s we enjoyed the Savings and Loan Crisis. The origins and result of that crisis are beyond my ability to analyze on my blog, it’s easy enough to Google to read up on the history, but it’s safe to say that it wasn’t so long ago that we don’t remember that there were some painful times back then. It’s safe to say that one component of that crisis was rising interest rates, and the fact that banks were paying more on CDs than on the interest on their outstanding loans.
Today, we have the flip side of this. Rates dropping so low that the teaser rate on an ARM was 1-2% and had nowhere to go but up. And that ‘up’ somehow caught everyone by surprise. There’s enough blame to go around, aggressive mortgage salesfolk, an industry that wasn’t abiding by the rules all the time, ratings companies that misrated the resulting mortgage packages, and consumers who were, well, let’s just say they didn’t quite understand what they were buying. That’s enough for one day’s (or night in my case) thought. Tomorrow, history repeats, again. Groundhog Day, or 50 First Dates, depending on your age.
JOE
I began writing a post regarding strategies for those who might die with more than the $2M current estate exemption, and saw a question come up on the misc.taxes.moderated newsgroup (huh? well, before the web, there was still an internet, text based, and newsgroups were a big thing).
Here’s the full question:
Let’s say that one’s estate consists entirely of a tax-deferred account (IRA or 401k) containing $2.5 million. That exceeds the current $2 million estate tax credit, so is $500K subject to estate tax? Or, because there is a deferred tax liability on the $2.5 million, does the law allow adjustment of the account value to recognize that income tax liability before determining the size of the estate? Could an heir withdraw the full account value, pay income tax on the withdrawl, and then determine the estate value, or is the estate tax due on the full amount of the account pre-tax, in addition to the deferred income tax?
Now, I realize this is not a question at the top of everyone’s mind, but it can have quite an impact on the children of someone passing whose money is in tax-deffered accounts. As I posted on the newsgroup, the issue is addressed by the “income in respect of a decedent” (IRD) rules as described in great details at The CPA Journal in an article that explains that the estate tax paid is available as a credit when the IRA withdrawals commence. If this were not the case, an IRA or 401(k) could be subject to both estate and income tax as high as 80% combined. I’ve found that the IRD rules are not well known, but perhaps they should be. For further reading see Ed Slott’s ‘Parlay Your IRA into a Family Fortune‘.
JOE
Today I caught a bit of CNBC, in which there was a brief discussion of the AMT. The AMT (Alternative Minimum Tax) was put in place to be sure that the wealthy were not able to gather so many deductions and tax loopholes that they could avoid paying taxes on all their income. Good idea in theory, but in practice the AMT amount was never adjusted for inflation and is now hitting people it was never intended to. People who live in a state with high taxes are now finding that their Real Estate taxes and/or State Income Tax are no longer deductible, but wiped out by the AMT.
I wrote about The Law of Unintended Consequences in a post last week, and remarked, “I’d think the guys at Freakonomics would appreciate some of the times this becomes obvious.” Well, it’s either coincidence or someone there reading my blog and agreeing this is a law worth considering and observing its occurrence. A couple days back, Freakonomics published an article titled, “Is the Law of Unintended Consequences the Strongest Law Around?” about how the disability act actually resulted in higher unemployment rates for the disabled. As I stated last week, keep looking, examples of this are everywhere.
JOE