June 25, 2019

Your Money: Amid Fiscal Stalemate, How to Handle Tax Rate Uncertainty

So we’re left with no idea how much we’ll be paying in federal income taxes in 2013, and a wide range of possibilities for taxes on investments and estates and tax deductions for mortgage interest and charitable contributions. Plenty of people will spend the next several days feeling helpless, with one eye on the stock market and the other on Washington.

For all the uncertainty, though, we do know a bit about how things will change next year. For example, new taxes, some of which will help pay for Medicare, will affect a few million affluent households.

We also know that in all likelihood, whatever happens in Washington in the coming days or weeks won’t come close to solving the problem that tends to clear the room when you say it aloud: We are not collecting enough money to pay for the promises we’ve made to one another. It isn’t just Medicare, either. Many states have steadfastly refused to set aside the trillions of dollars they will need to cover benefits for public workers once they retire.

As for what you should do about all of this, the answer, for now, is probably nothing. In the short term, stock prices may decline and the economy may get the hiccups, but it’s foolish for amateurs to try to alter their investment portfolios to take advantage of the situation. Leave that to the hedge funds, and watch how many of them get it wrong.

In the long term, however, prepare to make the kind of attitude adjustment that can take awhile to embrace. A decade or two from now, most of us will probably be paying more in taxes or getting fewer services from the government than we do now. Once that happens, you’ll need to earn more, save more, live on less or take better advantage of legal tax avoidance strategies.

In fact, you may want to try to do all of these things in the next couple of years, just to see which ones you can accomplish with the least amount of pain.

Here is what we do know will happen in 2013. First, there is a new tax of 0.9 percent on wages, other compensation and self-employment income above $200,000, if you’re single, or $250,000, if you’re married and filing your taxes jointly. This is on top of the existing Medicare tax.

Second, there is a new tax of 3.8 percent on investment earnings, including interest, dividends and capital gains, in addition to whatever the capital gains tax ends up being. It applies to single people with modified adjusted gross income of $200,000, or $250,000 for married couples filing jointly.

There is still some time to maneuver around the second tax. If you have winning investments you were planning to sell soon anyway, say for a down payment on a house, you might as well do it by Monday. That way, you can avoid the new tax if you’re certain you’ll be in the qualifying income category next year.

A few other changes: For now, you can generally take a tax deduction only for unreimbursed medical expenses that exceed 7.5 percent of your adjusted gross income. That floor will rise to 10 percent next year, except for people 65 and over, who won’t be subject to it until 2017.

Also, if you save money in a flexible spending account for health care expenses, 2013 will bring a $2,500 cap on what you can set aside each year while avoiding income taxes. Many people routinely saved $5,000 in the past.

In the next few weeks, we’ll presumably learn more about the new tax rates on income, capital gains, dividends and estates. A solution may come in stages, with a temporary patch now and the promise of a longer-term deal later.

But this is only the beginning, and if you want to read the Stephen King version of our collective fiscal story, there are a few sources to consult. You could start with the radical centrists at Third Way, a research group, who are the best splashers of cold water that I’ve read on the topic of the federal budget. They present some truly scary data while trying to persuade Democrats to accept cuts to Medicare and other programs.

In 2010, for instance, 11,712 people turned 25 each day, while just 6,670 turned 65. By 2030, 12,499 people will be turning 25 each day, but the number turning 65 will jump to 10,948. The 65-year-olds in 2030 will probably live longer than the people who turned 65 in 2010, and keeping them alive could cost a lot more.

The Pew Center on the States, using the states’ own actuarial data, estimates that there is a $1.38 trillion dollar gap between what governments have set aside to pay for public employees’ pensions and retiree health care costs and their actual obligations. Robert Novy-Marx, an assistant professor at the University of Rochester’s Simon Graduate School of Business, and Joshua D. Rauh, a professor at the Stanford Graduate School of Business, believe the shortfall in pension financing alone is actually $3 trillion to $4 trillion.

If states were to try to fill the gap solely by raising taxes, Mr. Novy-Marx and Mr. Rauh estimate that the cost per household in 2011 would have been $2,250 in New York, $2,000 in New Jersey and $1,994 in California — and we’d need to pay that amount every year for 30 years, with adjustments for inflation. Happy New Year!

These numbers boggle the mind, which is why you’re not seeing them in the newsletters that state legislators send to your home. Instead, lawmakers are trying to change the benefits promised to public employees. But even minor changes have led to lawsuits that could take a decade to resolve. By then, the obligations will probably have grown much larger.

Read enough of these reality checks, and a hazy sort of reckoning starts to take shape. It’s not clear how high taxes will go or how many services — from retiree health care to garbage removal — we may someday need to pay more for, or cover ourselves. But it’s going to cost you more money one way or the other, unless you’re in a truly low tax bracket.

That brings us to those legal tax avoidance maneuvers, which often benefit people who can save. Flexible spending accounts for medical costs will still save you hundreds of dollars in taxes each year, even with a $2,500 cap. A health savings account, the kind that pairs up with a high-deductible health insurance policy, can grow into a sizable pile if you save the money and use it in retirement instead of to pay out-of-pocket medical expenses now. And the fact that the affluent can still avoid capital gains taxes, and get an income tax break in many states, on hundreds of thousands of dollars of college savings via 529 plans is a minor miracle.

There is also the Roth individual retirement account, where even the low-six-figure set can put away money on which they’ve already paid income taxes, leave it there for decades in stocks and bonds, and pull it out without paying a dime of capital gains or other taxes.

That’s the story — for now, at least. In 30 or 40 years, if things are really grim, might the federal government try to tax withdrawals from Roth accounts with enormous balances? As we’re learning now, most great tax deals, like the mortgage interest deduction for beach houses and the tax-free health insurance benefits that many of us get from our employers, may not last forever.

We don’t have much control over what will happen in Washington or our state capitals next year, or 10 years from now. But most of us can probably find ways to earn a little more, save a little extra or spend a little less. Pick just one of those options, make it your New Year’s resolution and see if it helps you feel more in control of your financial destiny by this time next year.

Article source: http://www.nytimes.com/2012/12/29/your-money/how-to-handle-tax-rate-uncertainty.html?partner=rss&emc=rss

Amid Fiscal Stalemate, How to Handle Tax Rate Uncertainty

So we’re left with no idea how much we’ll be paying in federal income taxes in 2013, and a wide range of possibilities for taxes on investments and estates and tax deductions for mortgage interest and charitable contributions. Plenty of people will spend the next several days feeling helpless, with one eye on the stock market and the other on Washington.

For all the uncertainty, though, we do know a bit about how things will change next year. For example, new taxes, some of which will help pay for Medicare, will affect a few million affluent households.

We also know that in all likelihood, whatever happens in Washington in the coming days or weeks won’t come close to solving the problem that tends to clear the room when you say it aloud: We are not collecting enough money to pay for the promises we’ve made to one another. It isn’t just Medicare, either. Many states have steadfastly refused to set aside the trillions of dollars they will need to cover benefits for public workers once they retire.

As for what you should do about all of this, the answer, for now, is probably nothing. In the short term, stock prices may decline and the economy may get the hiccups, but it’s foolish for amateurs to try to alter their investment portfolios to take advantage of the situation. Leave that to the hedge funds, and watch how many of them get it wrong.

In the long term, however, prepare to make the kind of attitude adjustment that can take a while to embrace. A decade or two from now, most of us will probably be paying more in taxes or getting fewer services from the government than we do now. Once that happens, you’ll need to earn more, save more, live on less or take better advantage of legal tax avoidance strategies.

In fact, you may want to try to do all of these things in the next couple of years, just to see which ones you can accomplish with the least amount of pain.

Here is what we do know will happen in 2013. First, there is a new tax of 0.9 percent on wages, other compensation and self-employment income above $200,000, if you’re single, or $250,000, if you’re married and filing your taxes jointly. This is on top of the existing Medicare tax.

Second, there is a new tax of 3.8 percent on investment earnings, including interest, dividends and capital gains, in addition to whatever the capital gains tax ends up being. It applies to single people with modified adjusted gross income of $200,000, or $250,000 for married couples filing jointly.

There is still some time to maneuver around the second tax. If you have winning investments you were planning to sell soon anyway, say for a down payment on a house, you might as well do it by Monday. That way, you can avoid the new tax if you’re certain you’ll be in the qualifying income category next year.

A few other changes: For now, you can generally take a tax deduction only for unreimbursed medical expenses that exceed 7.5 percent of your adjusted gross income. That floor will rise to 10 percent next year, except for people 65 and over, who won’t be subject to it until 2017.

Also, if you save money in a flexible spending account for health care expenses, 2013 will bring a $2,500 cap on what you can set aside each year while avoiding income taxes. Many people routinely saved $5,000 in the past.

In the next few weeks, we’ll presumably learn more about the new tax rates on income, capital gains, dividends and estates. A solution may come in stages, with a temporary patch now and the promise of a longer-term deal later.

But this is only the beginning, and if you want to read the Stephen King version of our collective fiscal story, there are a few sources to consult. You could start with the radical centrists at Third Way, a research group, who are the best splashers of cold water that I’ve read on the topic of the federal budget. They present some truly scary data while trying to persuade Democrats to accept cuts to Medicare and other programs.

In 2010, for instance, 11,712 people turned 25 each day, while just 6,670 turned 65. By 2030, 12,499 people will be turning 25 each day, but the number turning 65 will jump to 10,948. The 65-year-olds in 2030 will probably live longer than the people who turned 65 in 2010, and keeping them alive could cost a lot more.

The Pew Center on the States, using the states’ own actuarial data, estimates that there is a $1.38 trillion dollar gap between what governments have set aside to pay for public employees’ pensions and retiree health care costs and their actual obligations. Robert Novy-Marx, an assistant professor at the University of Rochester’s Simon Graduate School of Business, and Joshua D. Rauh, a professor at the Stanford Graduate School of Business, believe the shortfall in pension financing alone is actually $3 trillion to $4 trillion.

If states were to try to fill the gap solely by raising taxes, Mr. Novy-Marx and Mr. Rauh estimate that the cost per household in 2011 would have been $2,250 in New York, $2,000 in New Jersey and $1,994 in California — and we’d need to pay that amount every year for 30 years, with adjustments for inflation. Happy New Year!

These numbers boggle the mind, which is why you’re not seeing them in the newsletters that state legislators send to your home. Instead, lawmakers are trying to change the benefits promised to public employees. But even minor changes have led to lawsuits that could take a decade to resolve. By then, the obligations will probably have grown much larger.

Read enough of these reality checks, and a hazy sort of reckoning starts to take shape. It’s not clear how high taxes will go or how many services — from retiree health care to garbage removal — we may someday need to pay more for, or cover ourselves. But it’s going to cost you more money one way or the other, unless you’re in a truly low tax bracket.

That brings us to those legal tax avoidance maneuvers, which often benefit people who can save. Flexible spending accounts for medical costs will still save you hundreds of dollars in taxes each year, even with a $2,500 cap. A health savings account, the kind that pairs up with a high-deductible health insurance policy, can grow into a sizable pile if you save the money and use it in retirement instead of to pay out-of-pocket medical expenses now. And the fact that the affluent can still avoid capital gains taxes, and get an income tax break in many states, on hundreds of thousands of dollars of college savings via 529 plans is a minor miracle.

There is also the Roth individual retirement account, where even the low-six-figure set can put away money on which they’ve already paid income taxes, leave it there for decades in stocks and bonds, and pull it out without paying a dime of capital gains or other taxes.

That’s the story — for now, at least. In 30 or 40 years, if things are really grim, might the federal government try to tax withdrawals from Roth accounts with enormous balances? As we’re learning now, most great tax deals, like the mortgage interest deduction for beach houses and the tax-free health insurance benefits that many of us get from our employers, may not last forever.

We don’t have much control over what will happen in Washington or our state capitals next year, or 10 years from now. But most of us can probably find ways to earn a little more, save a little extra or spend a little less. Pick just one of those options, make it your New Year’s resolution and see if it helps you feel more in control of your financial destiny by this time next year.

Article source: http://www.nytimes.com/2012/12/29/your-money/how-to-handle-tax-rate-uncertainty.html?partner=rss&emc=rss

Starbucks Offers to Pay More British Tax Than Required

“Having listened to customers and to the British public, Starbucks in the U.K. will be making changes which will result in the company paying higher corporation tax in the U.K. — above what is currently required by law,” the company said in a statement.

Starbucks said that in 2013 and 2014 it would refrain from claiming certain tax deductions that helped reduce its tax bill in Britain to nothing over the past three years. The company said it would pay taxes over the next two years even if it does not post a profit in Britain, where it has more than 700 shops.

The tax practices of Starbucks, along with those of other U.S. multinational companies, including Google and Amazon, have come under intense scrutiny in Britain in recent weeks, even as the government has announced plans to extend its fiscal discipline for another year.

The chairman of the Public Accounts Committee of Parliament, Margaret Hodge, has accused the companies of “immoral” behavior and protesters have called for a boycott of Starbucks.

U.K. Uncut, a group that is campaigning against the government’s fiscal policies, has called for protests outside Starbucks stores on Saturday. The group dismissed the latest announcement from the company as a ploy.

“Offering to pay some tax if and when it suits you doesn’t stop you being a tax dodger,” Hannah Pearce, a spokeswoman for U.K. Uncut, said in a statement. “Starbucks have been avoiding tax for over a decade and continue to deny that it paid too little tax in the past. Today’s announcement is just a desperate attempt to deflect public pressure.”

In its 14 years of doing business in Britain, Starbucks has paid a total of £8.6 million, or $13.8 million, in corporate taxes there. The company has reduced its tax bill in Britain by channeling revenue through other company subsidiaries in jurisdictions where tax rates are lower. One unit in the Netherlands, for example, receives royalty payments from Britain.

Similar tax-reduction strategies are employed by many multinational companies. But Starbucks said that it would not make such transfers over the next two years.

“Specifically, in 2013 and 2014 Starbucks will not claim tax deductions for royalties or payments related to our intercompany charges,” the company said.


Article source: http://www.nytimes.com/2012/12/07/business/global/07iht-uktax07.html?partner=rss&emc=rss

Wealth Matters: Get a Grip on Taxes Before the Storm Hits

This year, tax advisers agree, was benign in terms of changes to the Internal Revenue Code. But that comes after two tumultuous years. In 2009, tax preparers waited nervously for action on the expiring estate tax that never came. Then, in late 2010 came a jumble of unexpected tax actions: from reinstating the estate tax for this year and next, with a higher exemption level than most tax advisers expected, to extending the Bush-era tax cuts for two more years.

So how to handle these last few weeks of the tax year? As is true every year, taxpayers should run a checklist for everything from selling securities that have lost money to taking advantage of annual gift allowances.

But even then, seemingly straightforward deductions are not always so. The $500 energy tax credit, for example, limits the amount you can deduct for new windows to 10 percent of the value up to $200. In other words, you had to spend $2,000 on windows to get the full window credit.

And charitable deductions can be more broadly defined to include costs incurred while volunteering, said Mark Steber, chief tax officer at Jackson Hewitt, a tax preparation company. “You can’t deduct the value of your time, but you can deduct your out-of-pocket expenses,” he said.

But beyond the usual recommendations, the tax advisers I spoke to stressed that you should use this year to get your affairs in order for what promises to be an uncertain two years of tax policy.

“For high-net-worth individuals, chances are the next year or so is going to be a challenging time,” said Chris Johnson, head of United States wealth advisory at Barclays Wealth. “There is going to be a lot of attention focused on ways to extract additional tax dollars.”

If Congress does not act to extend a series of smaller tax deductions, next year could be costly for middle-income taxpayers as well. Here are some of the more pressing issues to consider.

WHAT MAY EXPIRE AFTER 2011 Every year Congress passes a series of so-called patches, renewing some 70 tax breaks for another year or two. In the past, this has been a formality, much as raising the debt ceiling used to be. This year, it remains to be seen what Congress will do.

Mark Luscombe, principal federal tax analyst at CCH, a publisher of research and software for tax lawyers and accountants, noted that when these patches expired in 2009 and were re-enacted retroactively at the end of 2010, the delay wreaked havoc with tax planning.

The deductions vary. Teachers, for example, can deduct $250 toward classroom expenses.

Other patches affect broader swaths of the population. One allows residents to choose between deducting state income and sales tax against their federal tax. This is a favorite of people in states like Florida and Texas that have no state income tax.

In high-tax states, the big worry is what happens to the alternative minimum tax, a parallel system of taxation that cancels out many deductions. The A.M.T. was originally meant to keep wealthy people from paying too little in taxes. Because it was not indexed for inflation, however, Congress has had to approve periodic fixes to keep it from affecting many more people than intended.

Without a fix next year, Stephen A. Baxley, director of tax and financial planning at Bessemer Trust, said, the A.M.T. “will hit an additional 20 million people, and most of them are middle-income taxpayers.” It normally claims around four million taxpayers.

Two of the big triggers for the A.M.T. are high state taxes on property and income, which hits residents of New York, New Jersey, Connecticut and California disproportionately, said Alfred Peguero, partner in PricewaterhouseCoopers’s private company services practice.

For older people, there is again a chance that the provision allowing them to directly donate the required minimum withdrawal from their retirement account to charity may be delayed or not renewed. Currently, people over 70 1/2 can donate up to $100,000 to charity. If this patch were to disappear, the federal income tax on the withdrawal and the charitable deduction would cancel each other out. But some states do not allow charitable deductions above a certain income, or at all.

“Higher taxpayers have their itemized deductions reduced in New York,” Mr. Baxley said. “In Connecticut and New Jersey, you don’t get any benefit from itemized deductions.”

WHAT CHANGES IN 2012 There are several provisions that take effect or lapse regardless of Congressional action.

One set to start in 2012 is a requirement that brokers report the purchase price on mutual funds and exchange-traded funds to the Internal Revenue Service for capital gains purposes. (They began doing this for stocks this year.)

Article source: http://feeds.nytimes.com/click.phdo?i=93bf35d26430b2e05f43b128d48d2b38