Archive for Tax planning

Should you pay more taxes?

We’ve all been flooded with rhetoric lately on the necessity of either a) tax cuts or b) tax increases. It’s been on my mind lately at every level: national health care, State of Illinois cuts to services for disabled people, and a referendum in my school district to increase property taxes. Okay, I’m a liberal so my general impulse is to agree with taxes that look like they’ll improve services or take care of a need not obtainable elsewhere—I’m not actually opposed to paying taxes. But not every single increase. This post is an effort to come up with some principles to help with future decisions. I’m going to try to use some personal financial planning procedures to inform my reasoning.

Is the problem being addressed the result of poor decision making or abuse in the past?

There isn’t a citizen of any country I know of who thinks their government runs efficiently. We tend to scrutinize and complain about the public sector mostly because we feel that the money which funds it comes directly out of our pockets. But, I ask you, have you ever worked for a private company that didn’t have some benchwarmers, incompetents, and people who were missing in action in the middle of the afternoon? Someone who sloughed their work off on subordinates, had an in with the boss, maybe family money, and blamed everything on somebody else? Oh, wait, I got distracted there, since that perfectly describes our current “businessman-in-chief”.

As with personal financial mistakes, you can’t rewrite the past. But making up for these mistakes (personal or public) requires significant belt tightening, enterprising ways to earn more, identifying greater funding sources or some combination of all three. I don’t think that we can ever achieve total perfection—we’re all going to be tempted by some non-essential purchases, and every employer is going to have some non-productive employees they can’t get rid of. But the last choice, not the first, should be a tax increase.

Is the proposed tax reasonable compared to the benefits produced?

In other words, are we getting bang from our buck? Like Woody Allen, in my family it was a sin to buy retail. So before I can support paying increased taxes, I have to know that cost controls are in place, a real plan has been thought through and vetted or beta tested, and that the benefit will be at least commensurate with cost (which immediately disqualifies the current Republican health care proposal).

I am, for example, willing to pay more taxes to support a single-payer national health care system, because countries that have them have clearly better health outcomes at far lower per person cost. I currently pay about $14,000/year in health insurance premiums + $3,500 in deductible. I have yet to see a proposal for even luxurious health care that would cost me an extra $17,500 in taxes, although it appears Paul Ryan will give me the opportunity to pay more for even less coverage. Similarly, I’d gladly pay an extra $2,000/year (my current long term care insurance) if it would guarantee not only me, but every elderly person good quality long-term care.

When I hear that something is pitched as more value to me, I want to be convinced by the numbers. The current school referendum is being pitched to residents as a way to maintain and increase property values. However, I haven’t seen any math that wasn’t, shall we say, a little bit fuzzy. So let’s say that I pay an extra $450/year for 5 years—will my property value increase by $2,250? Or will the increased taxes hold down property values because the cost of carrying the property becomes so high compared to neighboring communities? Arguments that might sound reasonable but have no research to back them up don’t convince me.

On the other hand, if the schools are truly deteriorating, why has there been an increased population of users? One of the arguments for increasing school taxes is an influx of new students, but then there should be an increase in the tax base. Personally, I would have preferred to deliver a baby in the comfort of the maternity care provided to French citizens. But since I’m not a taxpayer or citizen of France, they weren’t eager to provide those services to me.

Is the tax fairly distributed?

As a general principle, people who pay the tax want to derive benefit from it. It’s not a direct payment for services, though. There are some services, and some population segments, that need services but cannot pay for them, or the scale is so big that the costs need to be distributed—the military, services to the elderly and disabled, health care, and education.

Some things can be handled locally, some must have state level participation, and some jobs are so big that the federal government is needed. The larger the vulnerable population or need compared to the tax base, the higher the level we need to go. And we need to consider our society as a whole, not just our individual gain or loss.

Could the same benefits be obtained in some other way with fewer burdens?

I think it’s a myth that private enterprise always does things better, but without private initiative, innovation and sensitivity to consumers also suffer. On the other hand I strongly believe that the government needs to put some brakes on robber baron capitalism, For example, prescription drug prices negotiated by a national health care system can hold down costs for all of us—and I don’t notice drug companies pulling out of business with countries that have those controls.

I’m going to take a deeper dive into some specific issues in future posts—I’d love to hear your comments and reasoning on health care, long term care for the elderly, and college funding costs.

Giving to charity: doing the best you can

By now, your mailboxes (IRL and virtual) are probably crammed with year-end catalogs and heart-rending appeals for donations. But just as with spending, we want to maximize the use of our hard-earned dollars when we make charitable donations.

As I’ve suggested before, it’s worth checking out any potential charity with Guidestar.org and Charity Navigator. These ratings groups aren’t infallible, but they can give you some idea of how well your money will be spent. There are lots of well-known charities whose funds seem to go mainly to publicity and their CEO’s salary. Really, look up a few that come to mind—you’ll be shocked. And just because the charity says they focus on minorities, or women, or autism, or your favorite religious orientation doesn’t mean they’re good stewards. As Harry Truman once said, when anyone prayed too loud in the Amen corner, you’d better go home and lock your smokehouse.

Many of us are considering directing more of our charitable contributions to advocacy organizations this year and going forward.  However desirable and necessary such donations are, they may not be tax-deductible. For example, donations to the American Civil Liberties Union are not tax deductible, although donations to their information and education arm, the ACLU Foundation, are. Another organization that interests me greatly, the National Lawyers Guild (motto: Human Rights Over Property Interests) is also an advocacy organization, and donations are not deductible except to their foundation. However, the Southern Poverty Law Center, which constitutes its mission as fighting hate through education, is a tax-deductible charity organization. You want to look for the term ” 501 (c) 3″ if you’re looking for the tax deduction.  Of course, if you care passionately about current issues, you may not feel the tax deductibility of your gift is the most important factor, or you can allocate some portion to advocacy and the rest to educational or service delivery organizations.

Most of us have a tendency to give small amounts to any request that crosses our paths. However, I’d encourage you to consider a more planned approach. Giving larger amounts to fewer charities actually helps them: it saves on fundraising, processing, and other administrative costs.  Consider where your priorities lie or where you believe there is the most need: rights advocacy (disability, women’s, ethnic & racial groups); international poverty; animal rescue; anti-violence; gun control; legal change are all areas to consider.  While you’re at it, try not to use a credit card until you determine if the charity will be charged the fee for use by that card company (some don’t charge charities, some do).

As with any money management, there will always be more demand than funds available, so do think about your priorities. Many of these organizations will be particularly embattled or short of funds under the next administration, so need for your thoughtful contributions can only grow.

Antiques Roadshow & investments

Vintage Jewelry

Sure, I love it. So much so that when Antiques Roadshow announced that it was going to be in Chicago for the first time in years, I applied for the ticket lottery immediately. They had 19,000 applications for 6,000 tickets, so I was thrilled when we won two tickets.

If you’re a fan, you probably find it at least as addictive as chocolate truffles. Watching other people live at the show, I spent a lot of time wondering just what the show offers. Everyone hopes they’ll pick something from a trash bin that turns out to be worth six figures, and we saw one or two folks who looked like they were being pulled aside for the big reveal.  However, given the lines we saw for painting appraisal, and the absolutely horrible paint-by-numbers art being carried in, I can tell you without a doubt that most of us have absolutely no taste in or knowledge of art. Really, I don’t think I could bear to be an appraiser on that beat, the stuff was so horrible. It must be a thrill to their eyes, too, when they finally spot something good. So, my first lesson is that if you’re going to hang it on a wall, make sure it’s something that has meaning for you, because value is questionable at best.

My second lesson while there is that not only do we probably have little idea of the value of collectibles or much ability to judge such value, but dealers don’t really have a clue, either. You probably know that if you’ve watched many Antiques Roadshow broadcasts, and see the terrible prior advice people have been given, but this time it’s personal. I brought a set of jewelry to be evaluated, which I bought at a reputable antiques show (the Winnetka Antiques Fair) from a reputable and long established dealer. Not one single thing I was told about the jewelry when I purchased it was accurate, at least according to the Roadshow appraiser. It wasn’t the karat weight I’d been told (14kt vs. 15kt.) it wasn’t from the era it had been labeled (U.S. Civil War vs. 1870s), and it wasn’t made where I was told (Italy, vs. England). The only “fact” that slightly mattered to me was that it wasn’t Civil-War era, as I was heavily interested in Civil War re-enacting at the time and that was the “fact” that thrilled me into purchasing the piece.

The third lesson I learned is that the demographic of viewers appears to be baby-boomer or older. Everyone is hoping that something from their early life, or that they inherited, has value. It’s a way of recouping your youth through your possessions—and finding that the changes over time that you see in yourself (perhaps losses) can be redeemed by the increased value of things that once had very low prices. Perhaps it’s innate in us that we want to have something of value that we can pass on to our children.

My biggest fear was that the jewelry would turn out to be worth less than what I paid for it, so it was a great relief to find out that it was worth about 60% more than its original price tag. But I have to confess, one of the games I play when watching the show is, “was it a good investment?”  And mostly, I have to answer no. I purchased this jewelry in 2000. If I’d have plunked my money into, say, the fairly conservative Vanguard Wellington fund instead, I’d have a nearly 200% return for the period. Plus, I wouldn’t have paid to insure it for the last 14 years (although I would have had to pay taxes on the Wellington dividends). You can play this game too—listen to how long the person has owned the object, take the amount they paid, and double it for every 10 years of ownership. If they’re not doing at least that well, financially at least they’d have been better off investing it in a balanced fund portfolio. But truthfully, it was much more thrilling at the time to own the jewelry than it would have been to put the same amount into a mutual fund. Fourteen years later, I’m not so sure. I’ve probably worn the darn thing 3 or 4 times.

Then, there are the things that don’t hold their value—most recently, antique dolls and furniture. You may not buy these things strictly as an investment, but you should be very, very careful that you pay on the low side of whatever the current market value is, be able to judge quality pretty well, and be willing to hold the object for as long as it takes for the category to rebound. And be sure it’s insured and properly cared for in the meantime. Probably, don’t own cats or have small children.

The final ouch! is the taxes on collectibles. I have to believe that a fair portion of those who get a big pleasant surprise are thinking about contacting their friendly local auction house.  I have never seen this mentioned on the show, but if your tax bracket is above 15% on ordinary income, you’re going to be hit with a 28% capital gains tax on the gain you make from the sale (most other long term investments are taxed at no more than 15% currently). Maybe your kids actually do want to inherit that ugly picture.