Middle class tax “relief”


Mitt tin man

Mitt tin man (Photo credit: JonMartinTravelPhotography)

I’ve been trying to keep a lid on my personal political views on the off chance that there’s someone in my area who actually likes Mitt but jeez, I’ve just about bitten through my tongue. And I’m only grinding my teeth over the second debate—I got stuck on Mitt announcing with glee that under his tax plan (I guess he has one somewhere) the middle class taxpayer would no longer pay taxes on dividends, capital gains, or savings.

Ugh, these dumb statements are making my box of rocks so heavy that I just have to say something…and Barack, why didn’t you jump on that?  You need a fee-only financial planner on your debate team. (If I have one complaint against our President, it’s that he has no instinct to go for the jugular. Actually, maybe that’s not so bad.)  Aside from the fact that none of us actually pays taxes on savings, a large share of my clients aren’t exactly living off their currently-taxable dividends or capital gains, either. Whoops, that would be Mitt himself, who might just get out of paying anything at all, much less the pitiful 13% or 14% his accountants couldn’t figure out how to weasel out of.

I’m happy when my clients are maxing out their 401ks or 403bs and maybe managing a Roth or some sort of IRA and a college savings plan. For most people, the bulk of their investments are already sheltered in these accounts, or plunked into their house. People who have significant investments outside of their retirement savings are also less likely to be “middle class” by any usual income tax definition—they’re at least waving at the 1%. BTW, the top 1% is actually those earning over $343K, but since both candidates seem to like a $250K figure, let’s just go with that.

So let’s just say you somehow managed to accumulate or inherit $100,000 in a brokerage account or some mutual funds that are in plain vanilla taxable accounts.  Let’s say you plunked that $100K in a Total Stock Market Index fund, which yields about 1.8% right now (I’m not considering capital gains here, just the dividends, because I’m assuming for now that you just hold on to it). So, each year you’re getting $1,800 in dividends and paying $270 in taxes. Gee thanks, Mitt, I’d sure like to give up my home mortgage interest deduction and get back $270 instead. In other words, these ballyhooed savings are pretty insignificant compared to the stuff that might really count—like more secure retirement funding, college cost reduction, etc. I’d be willing to give up that $270 if I didn’t have to cough up $25K/year for college or wring my hands about long-term care insurance or the myriad of other things we Americans are “free” to purchase in the open marketplace, but which every other Western nation provides for their citizens.

How about retired people—maybe that will help them? Let’s ignore the 1/3 of retirees that are living on Social Security alone—after all, Mitt does (ignores them, that is).  For most of the people I see who would fall into the “middle class”, the bulk of their income is coming from 401ks, 403bs, etc., and those withdrawals are taxed as ordinary income, anyway. There are very, very few people who could be classified as both “middle class” and who have significant income from capital gains or dividends. There’s another name for people who live on investments that generate significant capital gains, interest, and dividends—they’re called “rich”. Or maybe, friends of Mitt.

And what about the clients that ARE coupon clippers (bonds, not newspapers)? No one yet has come into my office saying that lower taxes would solve all their money problems. Across the board, my clients are worried about retirement, college costs, job security or business viability, and the cost of long term care. On the other hand, I do see plenty of people who feel they’ve been robbed by the financial “services” industry, whatever their income, investment or education level. But I doubt that that’s on Mitt’s radar. After all, those folks are friends of Mitt, too.

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Financial lessons for anyone, from college financial aid


"Digging", detail from the Hunterian...

Image via Wikipedia

I’m really in the trenches this year. After being a know-it-all for some time about the college financial aid process, I’ve finally had to do it close to home. While the process itself included all the forms I expected, I did learn a few tricks which are relevant to your money management even if you don’t have a college-age child.

  1.  It doesn’t get any better if you avoid it. If something has a deadline (for example, choosing your 401K investment mix, assembling records for taxes, or choosing the right options for your flex-spending account) your ability to think this through and get adequate information decreases as the deadline gets closer.
  2.  With any important financial move, follow up. It’s hard to believe, but two of the schools my daughter applied to lost significant parts of her application, which had to be re-sent.
  3.  The more complicated the transaction, the more follow up needed. Financial systems are set up to have lots of checks and fail-safes. Why? Because, guess what, they fail. If you are making a transfer of accounts, for example, you or your financial advisor needs to be watching it like a dieter looking at pizza.
  4.  Don’t ignore your accounts for long periods. I once had a major brokerage transfer someone else’s $250,000 account into one I was managing. The actual owner never noticed, and you can bet his broker never told him.
  5. Get names or follow-up is hopeless. Dear daughter has been trying to send some supplementary materials (recent awards, extra recommendations) and, at one school, has been given five different names on who is actually reviewing her admissions. Turns out two students with her name are applying this year to the same school. Belongs in Ripley’s Believe It or Not. I wouldn’t believe it but it’s happened before—two people with the exact same name had a checking account at the same local bank and one of them became, temporarily, $10,000 richer. This was only discovered after the rightful owner’s checks began bouncing all over town. Straightening out these snafus required quite a bit of contact with one person who could keep the details straight and be accountable for fixing the problems.
  6. Things you dread turn out to be easy, and things that are hard you never see coming. Everybody worries about filling out the FAFSA, but this year’s version takes about 10 minutes if you have your tax return. On the other hand, the CSS/Profile (for private schools), took hours, lots of extra explanations and several calls to the organization about what I still believe are errors in this year’s form.
  7. Good records are important. Having to reconstruct or unearth financial records in a time of stress makes everything worse. Really, it’s worth spending an hour on the weekend entering spending and investments in Quicken or Mint.com, filing those papers or creating a decent file system on your computer, and reading an article or two on something financial. You’ll be so grateful when you fill out those college apps, try to do taxes, or retire; you’ll have a better idea of whether you can retire and how much money you really need; you’ll have some check on runaway spending; and your heirs will thank you. Put in that spade work. It’s all good.
  8. You can go broke saving. It’s important to analyze whether an action really puts you ahead. Sometimes people get so focused on getting financial aid that they make poor investments (often, annuities) that reduce their assets for aid, but are also high cost and hard to get out of. People justify bigger houses for the mortgage interest tax deduction, not realizing that they are spending much more to save just a little. Is it worth your time? Is it worth the cost?
  9. Most authorities are already hip to your little tricks. College financial aid officers and the IRS generally clue in to the most “creative” strategies pretty quickly. In the case of the IRS, just how much money and time do you want to spend in an audit? (see #8 above!)
  10. On the other hand, you are entitled to what’s due. There’s no reason not to apply for financial aid if you’re on the borderline. In the larger scheme of things, spending a day filling out forms could have a pretty big payday. If you really do work out of your home, you’re entitled to home office deductions just the same as any business deducts its expenses.

In college applications as in life, the more complex the system gets, the more “controls” are introduced, the more money at stake, the more that can go wrong. Good luck, and keep on top of it!



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What we can learn from Mitt Romney’s taxes


Tax Preparation

No wonder he didn’t want to release his taxes. Yes, it’s true, Mitt Romney is different from you and me—he’s way, way richer. Than most everyone on the planet. I’m no fan of his and he deserves every bit of the outrage people are expressing. It’s not that he’s done anything illegal, it’s the smarminess of it all. But maybe there’s just a tiny, envious part in all of us that whispers, “I wish I could do it, too.” I don’t think that will carry him into office (at least, I hope not), but there are a few useful lessons to be learned from scrutinizing his strategies.

  1.    Starting or being a partner in a successful business is the way to wealth. Okay, having a really successful parent doesn’t hurt, either, but if you don’t already have one, you probably can’t get one. Your own business offers some significant tax opportunities, both in deductions and in ways you can pay out money to yourself.
  2.   Park your accounts where you’ll pay the least taxes. For most of us, this probably isn’t the Cayman Islands. But any of us can do some smart asset allocation, choosing to plunk the appropriate investments in either taxable or tax-deferred/nontaxable  accounts, e.g., generally bonds in non-tax, capital gainers in taxable (at least for now) Of course, it’s a little more complicated than that. Maybe you should see a financial planner.
  3. Keep updated and scrutinize those returns—you can bet he has a phalanx of estate planners and tax attorneys who are on top of this. Things do change, and small changes in tax law can cost plenty.  More than one set of eyes on a problem can come up with more solutions.
  4. Have an estate plan in place. Romney’s kids aren’t going to be wards of the state. I guarantee he’s got a complex and thoroughly thought-out estate plan. If you don’t have a will and all the appropriate powers of attorney, pick up the phone NOW and call your attorney. If you don’t know one, pick up the phone NOW and call me, I’ll give you some names.
  5. Buy and hold. Do you think Mitt checks his portfolio every day? He’s looking for long-term capital gains, which cost less in both taxes and trading costs.
  6. Don’t miss the itemized deductions. One of the most common mistakes I see is people who have a little side business and don’t take deductions for their costs. When I ask, I’m usually told, oh, I don’t want to depreciate my house. You don’t have to! It’s a different item! So deduct those 5,000 ink cartridges you buy, and the amount of phone service attributable to your business, etc., etc.
  7. Give to charity. I probably wouldn’t select the same charity he did, but at least he gave something. Actually, quite a lot. Do it. It’s only right.
  8. Don’t forget the State you live in. Each state has its own quirks and you, or your accountant and financial planner should review your individual picture to make sure you’re taking it all in (and complying with local law).

That should get you started. The Wall Street Journal had a pretty good article on this same topic (although they perpetuated the same misinformation about home offices.) Here’s a link—if you can’t get the full text, email me and I’ll send it to you through my subscription.

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