October 5, 2010

Where Did Those Credits Go?

richardBy Richard J. Schillig, CLU, ChFC, LUTCF
Independent Insurance and Financial Advisor

We are all concerned with government spending especially “deficit” spending and the potential for tax increases. The Government Accounting Office has once again reported another month in which the treasury has spent more money than it has taken in – I think something like 24+ consecutive months now of deficit spending.

An article in USA Today on 7/21 quoted Congresswoman Blanche Lincoln (Ark) “in just six short months, American taxpayers will face the largest tax hike in history unless Congress takes action.” This quote was in July – as of this writing in October, Congress has not acted on 2 very important tax credits. These credits affect both higher income (wealthy) households AND average middle class households. The result is higher tax for most of us. Let’s take a look at these tax credits scheduled to expire Dec 31, 2010.

For the higher earning households and those accumulating some wealth, it is estimated this will affect more than half-
million American families who will end up paying the reestablished estate tax during this next decade. Remember way back to 2001 – then congress voted to gradually raise the estate tax exemption while cutting income tax rates.

That phase-out ended – and let me be clear on that – it was the estate tax exemption that increased gradually over the past 9 years. This exemption is scheduled to expire at the end of this year. Right up until the end of last year – 2009 – most estate tax planners and estate tax attorneys expected Congress to step in and reinstate the exemption…that has not happened. Right now – in 2010 – there is NO estate tax. If you are wealthy – OR have a larger estate – this is the year to die for your family’s benefit. We don’t think too often of having an estate big enough to be impacted by the estate tax. But look at the value of our homes and values of small businesses and farmer assets with property values. The estate tax is returning at the end of this year. It’s a big increase for higher income

As important – another tax credit expiring at the end of this year that we have not heard too much about is the ‘Making Work Pay’ tax credit. This credit was introduced last year as part of the government’s stimulus package. This credit continuing through the end of 2010 is helping to boost paychecks by up to $400 for single filers and up to $600 for joint filers by reducing the amount of tax withheld from each paycheck. This reduction could be over at the end of 2010 unless congress votes to extend the credit. According to recent article in CNN Money – the Making Work Pay credit is for the middle class and will impact a large number of households. Taxpayers who make $75K or less are eligible to receive this full credit while those making over $75K are receiving a partial credit. It is estimated that this credit helps out more than 75% of American households.

Both tax credits currently impact a large number of households. These credits are going by the wayside unless Congress acts before year-end. But wait – there’s more – a 3rd ‘suspended’ tax that is creeping back that we don’t hear too much about either is the RMD – Required Minimum Distributions – for our IRAs and other qualified accounts. Recall RMDs were suspended in 2009 but they are back in 2010.

Folks you hear me say all the time…..taxes are a threat to our retirement – the higher the tax we have – the lower our income. Regardless of the amount of assets we have or the amount of our income, we are all going to be subjected to the risk of higher tax and consequently lower income. This higher tax is creeping up on all of us without much fanfare. Continued deficit spending by our government is going to result in a review of current tax rates and perhaps increases. Those debates will bring in a good deal of publicity but for the time being, expiration of tax credits is quietly increasing our tax liability.

Planning with qualified retirement assets and/or non-qualified retirement assets may help reduce or substantially eliminate tax. Annuity portfolios properly arranged and managed does help with the taxation risk to our income. Note our ad below referencing the huge tax deferral benefit of annuities. Call on us anytime for additional details.