ProVise Management Group
By Ray Ferrara
October 31, 2012
- Hurricane Sandy rocked the East Coast on Sunday, Monday, and Tuesday, causing the stock exchange to be closed on Monday and Tuesday. It has re-opened today, October 31st. More importantly, however, given the strength and size of the storm, the loss of life was not nearly as great as it could have been. To all of our clients, colleagues, friends, family, and others in the region, we had you in our thoughts and prayers and we hope everyone is safe and that any inconveniences caused by the storm are not significant in nature.
- Next Tuesday, November 6th is Election Day. Regardless of your party affiliation, candidate choice, or region of the country, we encourage everyone to vote not just for President, but for all potential candidates in your area. We are blessed to live in a free country and part of our responsibility of living here is to VOTE!
- With less than a week till Election Day there is speculation that the Electoral College could end up being a tie with 239 votes each. Yes, it’s a stretch, but according to some analysts, there are 32 different possibilities as to how that might happen. So, if there is a tie, how does it get broken? Is it by the person with the largest popular vote? No. Do they flip a coin in a big ceremony at the Mall in Washington, DC? No. They actually vote in the House of Representatives, where the Republicans have a large edge. Probably many of you knew it would fall to the House to make the determination, but did you know they don’t vote as Representatives? Rather, each state gets to cast one vote. The person with the most state votes wins. How does each state determine its vote? The Representatives, both Republicans and Democrats gather together and cast votes. In the current Congress there are 33 states with Republican majorities, 16 with Democratic majorities, and 1 where it is tied. BUT it is not the current Congress that will do the voting. It will be the new Congress that convenes next year, so a vote for your member of the House of Representatives could be just as important as your vote for President. From a Democratic perspective, it’s hard to conjure how there would be enough states to swing in favor of President Obama.
- We’ve now had three Presidential debates and one Vice Presidential debate, and we are still struggling to figure out the details of President Obama’s or Governor Romney’s tax plans. This is by design from both candidates, as they know that neither of them will get everything they want should they be elected, and that there will be a lot of horse trading. After all, if you cut revenue from one place you have to make up for that from another revenue source, or you have to make spending cuts that much deeper. We will not discuss their proposals on the business side, but let’s take a few moments to contrast what the candidates have said on the personal side. Almost everyone knows that the President wants to keep rates the same for all taxpayers except for single taxpayers with incomes of over $200,000 and for tax payers filing jointly with incomes over $250,000. He would take the 33% tax bracket to 36% and the 35% top tax rate to 39.6%. On the other hand, Romney proposes cutting everyone’s taxes by 20% which means that the top tax bracket would drop from 35% to 28%. While the President’s plan is politically popular, it does not raise that much revenue. Romney on the other hand, will have to come up with other ways to increase revenue if he intends to cut tax rates as much as he proposed.
- Turning to the investment side of the equation, it is interesting how each of them would approach capital gains. Romney indicated that he wants to eliminate capital gains for all taxpayers other than high income earners, who would pay a tax rate of 15%. He has yet to define, however, what a “high income earner” is. President Obama wants to see the capital gains rate go to 20% for high earners and to leave it the same as it is currently for everyone else. His upper income limit is the $200,000/$250,000 mentioned above. There is a big difference between the two of them when it comes to dividend income, as Romney would tax dividends the same way as capital gains, while Obama would tax them as ordinary income for high income taxpayers and leave them the same for everyone else. Interestingly, while all of the buzz has been about capital gains and dividend income, in the background is municipal bond interest, where Obama plans to limit this tax-free income for upper income taxpayers, while surprisingly, Romney is considering ending the tax-free status all together.
- Where things really get fuzzy, however, is how each candidate would treat deductions. Romney has suggested that there be a cap on the amount that can be deducted from income, and while he has mentioned several numbers, one that consistently comes up is a maximum deduction of $17,000 which includes home interest and charitable deductions. The President, on the other hand, wants to reinstate the position that existed until a few years ago, where high income earners lose part of their deductible expenses - potentially up to 80%. The President’s proposal would not only cap charitable and home mortgage interest deductions. It would also cap the value on such things as student loan interest, contributions to retirement plans, some health insurance premiums, and health savings accounts. Not capped, however, would be deductions for medical expenses, casualty losses, and investment interest.
- While much has been focused on the Presidential race…and it should be…how America votes for the members of the House and Senate will play into whatever the new tax bill might look like. A split Congress between Republicans and Democrats could provide for greater horse trading, while control of both the House and the Senate, along with a President from the same party, would produce a vastly different bill.
- When we try to help people manage cash flow in retirement, we often find that we must give them “permission” to spend their money. In many cases, there is a natural human reaction when one retires to not overspend, even though the retiree’s cash flow and assets are sufficient to do so. However, there are a growing number of people who may be jeopardizing their retirement by giving away too much money, especially to their grandchildren. Given that over the past five years many parents have needed help to pay for their children’s educations, including college, grandparents have stepped up to make sure that their grandchildren had money to go to college, or have provided other gifts. According to a recent study, 62% of grandparents have given money to their grandchildren in the past five years, with the average amount being $8,289. The love of family is a powerful emotion. Fully one-third of these grandparents believe that giving this money away will likely have a negative effect on their future economic security. While it is hard to say no to a grandchild, this could put the entire family into a financial bind in later years, should the grandparents need financial assistance, and then have to look to their children…something everyone wants to avoid at all costs. (Source: Met Life Mature Market Institute study)
- In case you think Congress doesn’t have an excuse to raise the cap on Social Security payroll taxes…guess again. In 1984 11.9% of all taxpayer income was not subject to the tax because it was over the cap. That percentage rose to 16.1% of income not taxed in 2010 and is estimated that by 2021 this percentage will be up to 17.5% if there is no change. It seems that untaxed wages have out-paced the rate of inflation because the cap is indexed each year to the CPI. Without raising the percentage that people pay, Congress could raise more money by raising the cap more quickly. Don’t be surprised if this happens. (Source: Social Security)
- Speaking of Social Security, recipients are beginning to wonder how much of an increase they will get this year. It appears that it will be something less than 2%, which would be about $24 per month for the average Social Security recipient. We don’t have a handle on what the increase might be for Medicare. As in the past, it could wipe out a substantial portion of the Social Security increase…if not all of it.
- We need to correct a Bullet from our last issue. The fifth anniversary of the high water mark for the S&P 500 was NOT October 9, 2002, but was October 9, 2007. We apologize for any confusion this may have caused.
- There are new maximum allowable contribution limits for qualified plans for 2013. Contributions to a 401(k) plan will increase to $17,500 but the catch-up provision for people age 50 and over remains the same at $5,500. Thus, the maximum allowable contribution increases to $23,000. Profit sharing plan contributions will increase to $51,000, or 100% of compensation, whichever amount is lower. The maximum amount of salary to be considered for a defined benefit pension plan is 100% of compensation or $205,000 whichever is lower. Social Security will tax the first $113,700 of wages in 2013. (Source: Department of Labor)
- Put this one under “Security for your cell phone”. According to a recent study, more than 25% of all robberies in San Francisco and more than 33% of all robberies in New York involved the theft of a cell phone. Today, we increasingly use our Smart Phones for all kinds of things, including on-line banking, checking on our other accounts, etc. Please make sure that your cell phone has some type of a password. Yes, we know it is a pain to have to put in that password each time, but it could save you a much bigger pain. Make sure your password includes one capitalized letter, at least one number, and at least one symbol. It should be at least six characters long. Each website you are likely to visit on your cell phone will also require its own password. Don’t use the same one. Make them different.
- Unemployment amongst college graduates is substantially lower than for those without a four year college degree. The cost of obtaining that degree increased about 5% this past year, significantly above the anticipated inflation rate of around 2% nationwide. Tuition at the average public university increased to $8,655 per year, but when you include room and board, the cost is $17,850 per year for an in-state student. Want to attend one of those “fancy” private schools? Expect to pay around $39,500. Recently it has been suggested that an Associate’s degree may be almost as valuable as a four year degree and the cost for attending college for those two years are substantially lower, averaging about $2,959. Is it any wonder that students are graduating with very heavy debt?
- So, if you were going to move to a state which has the absolute best overall tax rate you could find, where would it be? Florida? Texas? California? (That was to make you laugh!). The single best state is….(drum roll please…) Wyoming. It ranks number one in corporate and individual tax rates, number 12 in sales tax, 29th in unemployment insurance tax, and 35th in property taxes. The number two state is South Dakota, followed by Nevada, Alaska, and Florida in the 5th position. Rounding out the top ten, Washington is in the 6th position, followed by New Hampshire, Montana, Texas, and Utah. (Source: Tax Foundation)
As always, we encourage you to give us a call if you would like to discuss anything further. We will visit again soon. Proudly and successfully serving our clients for over 25 years.
RAY, KIM, ERIC, BRUCE, LOU, NANCY, TINA, and JON
©10/31/12 ProVise Management Group, LLC
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