USA Rich and poor tax payers, 2010

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Middle income and families

Middle income and couples contributed more in taxes compared to other income groups. Free education, housing support, child care support, health care access and other family-centered and middle-income centered benefits should be given more to this income group.

From these income groups, more than half of the monthly income goes to housing expense.

2010 Tax Statistics in the USA

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More women between the ages of  55 under 60 yrs of age worked in 2010 compared to the number of men in the same age group.

In both men and women, the top earning age group is between the ages of 46 under 55 yrs of age. Disparity in income between men and women is almost double in favor of men.

738k men are still working past age 76 yrs of age and contributed to about $7M in taxes.

 

 

 

Bay area seniors are not selling their homes for fear of capital gains tax

Your Bay area House

The single biggest asset many people have is their home, and depending on the real estate market, a homeowner might realize a huge capital gain on a sale. The good news is that the tax code allows you to exclude some or all of such a gain from capital gains tax, as long as you meet three conditions:

You owned the home for a total of at least two years in the five-year period before the sale.

You used the home as your primary residence for a total of at least two years in that same five-year period.

You haven’t excluded the gain from another home sale in the two-year period before the sale.

If you meet these conditions, you can exclude up to $250,000 of your gain if you’re single, $500,000 if you’re married filing jointly.

Length of ownership matters

If you sell an asset after owning it for more than a year, any gain you have is a “long-term” capital gain. If you sell an asset you’ve owned for a year or less, though, it’s a “short-term” capital gain. And the tax bite from short-term gains is significantly larger than that from long-term gains.

“You pay a higher capital gains tax rate on investments you’ve held for less than a year, often 10 to 20 percent more, and sometimes even higher,” says Matt Becker, a financial planner and founder of Mom and Dad Money, LLC. That difference in tax treatment, Becker says, is one of the advantages a “buy-and-hold” investment strategy has over a strategy that involves frequent buying and selling, as in day trading.

Also, Becker notes that people in the lowest tax brackets usually don’t have to pay any tax on long-term capital gains. The difference between short and long term, then, can literally be the difference between taxes and no taxes.

Capital losses can offset capital gains

As anyone with much investment experience can tell you, things don’t always go up in value. They go down, too. If you sell something for less than its basis, you have a capital loss. Capital losses from investments — but not from the sale of personal property — can be used to offset capital gains. So if you have $50,000 in long-term gains from the sale of one stock, for example, but $20,000 in long-term losses from the sale of another, then you may only be taxed on $30,000 worth of long-term capital gains.

If capital losses exceed capital gains, you may be able to use the loss to offset up to $3,000 of other income. If you have more than $3,000 in capital losses, the excess can be carried forward to future years to offset income in those years.

Business Income is not capital gain

If you operate a business that buys and sells items, your gains from such sales will be considered — and taxed as — business income rather than capital gains. For example, many people buy items at antique stores and garage sales and then resell them in online auctions. Do this in a businesslike manner and with the intention of making a profit, and the IRS will view it as a business.

The money you pay out for items is a business expense, the money you receive is business revenue and the difference between them is treated as income, subject to the same taxes as income from employment.

THE LOSS HARVEST

Sell your losers and stay out for 31 days, then get back in. Harvest the deduction. What’s this strategy worth? A lot, but not nearly as much as some proponents claim.

Forbes can be counted as a booster of loss harvesting; these pages have promoted the strategy for at least 35 years. It works best when you can get in and out at no cost (with no-load funds) or at low cost (with stock trades at a discount broker). It pays, but not as well, when you run up management fees to have the work done for you.

Aperio and Parametric have been helping wealthy investors harvest losses for years. In 2011 Fidelity took semiautomated harvesting to the masses (fee: an incremental 0.3% a year for customers already paying for other investment management). More recently the robotic money managers Wealthfront and Betterment (both on the Forbes Fintech 50 list) have joined the ranks of harvest hustlers.

The robo-advisors offer bargain rates for portfolio management (0.15% to 0.35% a year). But be wary of the hyperbole.

A Betterment chart highlights a 1.9% potential annual benefit from the strategy over the period 2000-13. Wealthfront cites a possible 2% annual payout. Both vendors duly caveat their claims with discussions of why your results may differ.

The problem: To justify the big expectations you have to assume, rashly, that you can use any resulting short-term capital losses to offset high-taxed income.

You get that high-bracket offset against up to $3,000 a year of ordinary income. Nice, but that’s a meager sum for a wealthy investor. You also get to use harvested short-term losses in unlimited amounts against short-term gains popping up in other accounts. But why would you have those? Tax-wise investors don’t sell, impulsively, for a short-term gain.

Consider this possibility: Losses harvested from your securities will be put to use primarily to offset low-taxed long-term gains. If that’s the case, their boost to your net worth will be on the modest end of the advertised ranges.

Rational investors do often have long-term gains thrust upon them. These gains may arise from a mutual fund, from a home sale that is not fully protected by the $500,000 (per couple) exclusion or from a winning stock position swept away in an all-cash takeover.

Conclusion: You should harvest losses if you can do that with low transaction costs. You can expect to use most of them because they can be carried forward indefinitely. But you shouldn’t count on getting anything like two points of incremental return.

 

8.69% return to break even upon home purchase

to break even upon home purchase

1. Home Maintenance Costs
Home maintenance expenditures include cash outlays for services such as appliance repair, pest control, house cleaning, chimney cleaning, gutter and downspout cleaning, landscaping, lawn maintenance and home security. (To save money on home expenses, see Fifteen Insurance Policies You Don’t Need, Extended Warranties: Should You Take The Bait? and Five Money-Saving Shopping Tips.)

Tip: Although these costs can be minimized by purchasing a new home, many experts recommend budgeting 1% of the home purchase price every year in order to cover the costs of these expenditures.

2. Property Insurance
Insurance premiums for coverage against certain natural disasters such as fire, flood, tornadoes, earthquakes, or hurricanes may cost 0.55% of the home purchase price. Therefore, the home would need to appreciate in value by this amount each year in order to offset this expenditure. Now, clearly the costs for natural disaster insurance will vary significantly based on the geographic area in which the home is located. However, regardless of the locale, the mechanics of this concept can be tailored by the reader in order to determine his or her break-even rate. (Read more on this subject in Insurance Tips For Homeowners.)

3. Private Mortgage Insurance
Private mortgage insurance (PMI) is charged to homeowners that fail to put down at least 20% of their home purchase price as collateral for a loan. Homeowners are charged this amount each year to help protect the lender against default. In Figure 1, we have assumed that the homeowner will make a 5% down payment and that PMI insurance will cost 0.5% of the home purchase price. As such, PMI expense will directly increase the required annual home appreciation rate by this amount. (To learn more about PMI, see Six Reasons To Avoid Private Mortgage Insurance.)

4. Brokerage Costs
Brokerage costs are typically paid by the homeowner to a real estate agent for help with selling the home. In this analysis, we assumed that the homeowners will pay the real estate agent a 6% commission. However, because transaction costs are a one-time expenditure and we are trying to determine how much the home will need to appreciate each year in order to offset this cost, we need to spread the brokerage commission over the estimated length of time the home is expected to be owned. For this analysis, we use an industry accepted standard of seven years. By spreading the brokerage cost over this period of time, we determined that a home must appreciate in value each year by 0.86% in order to offset the cost of this expenditure.

5. Closing Costs
Closing costs are another expenditure that needs to be factored into our model. However, closing costs are more difficult to equate with the home purchase price, because these costs tend to be more closely tied to other factors. For this illustration, we assumed that the homeowner will pay a fee of $3,000 at the time the home is purchased. Therefore, assuming that the purchase price of the home is $225,000, closing costs would translate into an expenditure of 1.3%.

Closing costs are a one-time expenditure, but they should be allocated over the length of time the home is owned for the purposes of this exercise. As previously explained, we are making this adjustment because we are trying to determine how much the home will need to appreciate each year in order to cover this one-time cost. Following the seven-year home ownership assumption used in this analysis, closing costs would increase the annual break-even rate by 0.19%. We realize that closing costs depend on the institution that provides the loan. Therefore, the impact of this expenditure must be tailored by the homeowner in order to accurately determine its impact on his or her own break-even rate.

6. Property Taxes
In 2007, the median property tax rate in the U.S. was approximately 0.93% of the home purchase price. Therefore, a home would need to appreciate by 0.93% in order to offset this expenditure. However, the current provisions set forth in the U.S. income tax code allow property tax payments to be deductible for the purpose of calculating taxable income. Therefore, assuming that the homeowner is in the 28% federal income tax bracket, and that the purchase price of the home is $225,000, the tax deduction benefit associated with property tax payments would reduce the required home appreciation rate by 0.26%.

This property tax deduction factor is determined by multiplying the property tax rate and the amount paid for the home by the homeowner’s federal income tax rate, and then dividing the result by the purchase price of the home. Again, to apply this methodology, the impact of the property tax factor will have to be adjusted in order to reflect the individual homeowner’s federal income tax rate. (To learn more about property taxes, see Five Tricks For Lowering Your Property Tax.)

7. Interest Expense
We are assuming a fixed rate on a mortgage loan is 6.25% and that 95% of the home will be purchased with debt capital (with a 5% down payment). As a result, the impact of the equity made through the down payment will reduce the interest expense from 6.25% to 5.94%; as only 95% of the $225,000 home is being charged the 6.25% interest.

Like property taxes, mortgage loan interest is also a qualified tax deduction. The homeowner should pay around $13,359 in interest in the first year and, assuming the homeowner is in a 28% income-tax bracket, the interest tax shield would be $3,741. This amount is calculated by multiplying the amount of interest expense the homeowner will pay in the first year by the homeowner’s income tax rate.

However, because non-homeowners are entitled to a standard deduction when completing federal income taxes, the benefit of owning a home should only include the portion of the income tax shield that is above the eligible federal deduction amounts granted to non-homeowners. For this illustration, we have assumed that the homeowner is single, and therefore is eligible for a $5,150 standard tax deduction. In comparison, if the homeowner were married, he or she would be entitled to a $10,300 deduction. By factoring the standard deduction into our equation, the interest tax expense would be reduced from $13,359 to $8,209. This amount is simply determined by subtracting the standard deduction amount from the amount of interest expense paid by the homeowner in the first year. Again, assuming that the homeowner is in the 28% income tax bracket, we determined that the interest tax shield would reduce the break-even rate by 1.02% ($8209 x 28%/$225,000).

Total Impact of Home Ownership Costs
Based on the methodology outlined in this article, the assumptions made about the homeowner and the estimated cost expenditures used in this analysis, we determined that a home will need to appreciate 8.69% during the first year after it is purchased in order for it to offset the costs associated with owning the home.

Asset Protection Iron Triangle by Charles Lamm

Asset protection is not just for the wealthy any longer. When a middle class home can easily run a half million dollars in Florida or another state, and over a million in California or other state, anyone can become a target of lawsuits, divorce courts, and the IRS.  You have to dig a well before you are thirsty, or in this case, build a legal fortress before invading barbarians reach your gate.

Your tools to protect your assets are:

  • “no asset” C corporation
  • Limited liability company (LLC)
  • Beneficiary controlled trust

C Corporation

  • A “no asset” C corporation will be the management company for your LLC. The two work together to protect your property from those who would take it from you.
  • You are employed by the C Corp, not the LLC. You can also be the sole shareholder and hold all of the officer positions. Your corporation owns nothing but a checkbook.

Your corporation can pay for:

  • medical insurance for the officers
  • life insurance ($50 thousand limit)
  • retirement plan

As an officer, you can be reimbursed for out-of-pocket medical expenses through a medical expense reinbursement plan (MERP).

Entertainment expenses directly related to the business can include:

  • training expenses
  • travel
  • meals
  • computer expenses
  • phone expenses
  • business gifts up to $25 per recipient
  • Never let your corporation pay for personal items. Commingling of funds could pierce the corporate veil and make you personally liable for corporate debts in the event of a judgment against the corporation.
  • Consult your CPA or tax advisor for the latest changes in allowable deductions.

LLC

  • Your limited liability company is where you earn your income. Your LLC should also own any vehicles, equipment, computers, copiers, printers, and real property.
  • You want your Operating Agreement to make your corporation the Manager of your LLC.
  • Your LLC should also pay the bulk of your operating expenses for your office, supplies, travel, fuel, utilities, phone, computers, and more.
  • Your interest in the LLC will be as a 99% member will be owned by the trust.

Beneficiary Controlled Trust

  • A beneficiary controlled trust is the crown jewel of asset protection.
  • While I will not go into detail here, a BCT works like this:
  • Someone other than yourself establishes an irrevocable trust with you as the beneficiary and as the Investment Trustee. A second entity or person is required as the Distribution Trustee.

Seek Advise

Charles Lamm’s company, _________Services, Inc., can act as your Distribution Trustee if you want to keep your affairs private from your friends and relatives.  __________ to take advantage of Florida’s excellent trust laws, as well as no state income tax.

  • The Grantor can put up to $12,000 per year into the trust without gift tax considerations, and you have an immediate right to withdraw the money as it is a Crummey defective grantor trust.
  • It’s complicated, but the idea is to leave the assets in the trust and use the trust to own the LLC and to take care of your needs.
  • The trust can purchase property, pay for your education and medical expenses, and take care of your physical well-being. You have full control over the trust assets without actually owning anything.
  • As the Investment Trustee, you control how the assets are used, and you can replace the Distribution Trustee at any time.

Summary:

  •  You are now isolated from lawsuits, creditors, judgments, ex-spouses, and the IRS.
  • Location within Broward and the state of Florida
  • Location within Broward and the state of Florida (Photo credit: Wikipedia)
  • Charles Lamm is a retired attorney who owns Trustee and RA Services, Inc., in Coral Springs, Florida. His asset protection blog can be found at http://trusteeandraservices.ml