What happens now

Illustration by Victor Juhasz

Estate planners were busy at the end of 2012 with the Fiscal Cliff. We all were worried about the

 "death tax" coming back, at lower levels, but it didn't. I called that in November.  Now, everyone has $5.25 million they can keep tax free, and the annual exclusion is up to $14,000 per year, so gifting is easier/cheaper than its ever been. All that fuss, all those trusts, seemingly for nothing. Who has $5 million to worry about, anyway?

We do have higher income taxes, we have more taxes built into dividends and capital gains.  Who knows what our income tax returns will look like come tax season, but if you get a paycheck, you already know that you somehow just got a reverse raise. All for, what, exactly? Deficit reduction? Universal healthcare?

With the "death"/estate tax taken care of for now, planning is pretty straight forward.  Have your affairs set in order for the unexpected (via a will, and maybe a trust) and have your other assets
(bank accounts, insurance policies, investments) styled with beneficiary designations so there is no issue at death. Easy stuff. Now comes the hard part, in acquiring enough wealth to have to worry about any estate or gift taxes down the road, but that's another story.

So, what do I need to worry about now? Not much, but healthcare costs will continue to rise. How is your insurance situation? Are you looking at long-term care, or a government program, like medicare or medicaid? Do you have an elderly parent, or relative that is going to need assistance? "Uncle Steve is in fine health..." for now. If he has a stroke next year, Steve's estate is toast if he ends up on medicaid. Its just not that hard to plan ahead, and you have to do it now, as there is a five (5) year look back period to worry about.  Steve's house? At least the heirs will get that after he passes away, right? Gone, unless you plan ahead or use a LadyBird Deed.

Congress seemingly did us a favor, in restoring the estate tax, but it's a favor that doesn't help too many normal folks.

So, where, exactly, are we? The new taxes, that are supposed to help reduce the deficit? A huge chunk are already spent in the $51 Billion Hurricane Sandy Relief Bill, through earmarks that don't have anything to do with helping the communities affected by the storm.  How hard is it to help those in need, without sneaking in unnecessary, "pork" spending?  We have another debt ceiling crisis coming (we already hit it), which the house just pushed down the road another three months, but at least they didn't have to make that $1 trillion coin. Yet.

Want to get even more upset? Read Matt Taibi's article in the Rolling Stone about the back story and current status of all the Wall Street Bailout Money.  "It's all paid back...taxpayers will make a profit..." all these feel-good success stories seem to be just smoke and mirrors accounting tricks, by taking lower interest loans from the government to pay back their higher interest, TARP/bailout loans and calling it a victory for the common man. "There will be strict rules against paying big bonuses..." yes, but don't worry, there are loopholes as big as Long Island to get around that, and the executives whose risk hurt so many across the country were rewarded handsomely on the back burner.  When I heard a conservative quote that somewhere between 10-30% of the TARP money was just assumed to end up going to "fraud, just because." I was irate. Now that I know more...I'm just disappointed, and frustrated at our leadership.

But that is where we are.  Just make sure you have a plan. 

Post Fiscal Cliff Recap

I'm not going to say I told you so, but I told you so.

Estate and Gift tax wise, we have the same thing as we had before: ~$5 Million exemption amount for estate and gift, portability between spouses, only wrinkle is it is 40% beyond that (up from 35%).

Yes, taxes went up. Yes, payroll tax cut went away. Yes, medicaid/care related taxes went up. This is all bad, but at least you won't have to worry about getting taxed on giving your money away.

The real takeaway is that to preserve your portability between spouses, you will now have to fill an estate tax return, even if you don't owe anything, 9 months after the death of the decedent spouse. This little piece of paper will save you a potential $5 million in exemption, so don't forget to bring it up with your attorney.

Else, its business as usual, except we are all going to take home less money. On to the next debt ceiling debate, and hopefully some serious talks about cutting the deficit and reducing the budget/spending.

Fiscal Cliff Deal Passes the Senate

Here it is: the bill the senate passed, and now its on to the house.  I read most of it.

The "American Taxpayer Relief Act of 2012" is a compromise, but its pretty much what we thought it would be.

The highlights:

·      The level at which tax rates will go up is $450k for families $400k for individuals. Not the $250k/$200k limit initially discussed. Capital gains and dividends rates go up for these people too.

·      Estate tax stays at a $5 million applicable exclusion amount, but the rate above that goes from 35% to 40%. The exclusion amount will go up, as it is indexed for inflation. 

·      Personal exemptions and itemized deductions are phased out at $300k for a family, and $250k for an individual. 

·       Mortgage interest deductions, tuition deductions, stay in place. 

·       Unemployment will be extended for a year. 

·       There are extensions for medicare/aid, clean energy companies, agri-business, indian owned businesses.

·       Payroll tax cuts were not extended. 

The lowlights:

·      Doesn't address the "sequester," the big federal budget cuts that are mandated to kick in to balance the budget, just delays it 2 months. 

·      Doesn't address the debt ceiling, which we apparently hit again, yesterday. That will need to be address in the coming months, AGAIN. 

Summary:

Income taxes go up, but it won't affect many people. Payroll tax cuts will affect a lot of people. Most everything in this bill just kicks the can down the road, a year or two, a month or two, we will have this battle again. We still don't have the budget cuts needed to pay down the national debt. 

And the real kicker: the house swears in a new batch of representatives on Thursday. So, if they don't pass this by Thursday, we start from scratch. Again. Make it happen, Boehner. 

Happy Holidays, and Year End Thoughts

Courtesy, Griswold Family.

Another year is almost in the books. As we all spend more than we probably should on gifts, tacky holiday sweaters, and those gifts you thought you bought for someone else but just decided to keep, it is always good to sit back, reflect, and make sure your affairs are in order for 2013.

Before you kidnap your boss and his wife, because that Christmas bonus for your new pool didn't come through this year, let's go through a checklist:

1. Are your estate planning affairs (wills, trusts, powers of attorney) in order?
2. Have you checked and reviewed beneficiary designations on bank accounts, life insurance policies, and retirement plans? (and paid premiums so your plans won't lapse.)
3. Have you properly documented all your potential tax savings and have you filed any calendar year tax returns?
4. Have you finalized and documented all charitable contributions for the calendar year?
5. Have you contributed to an employee sponsored pension (or 401K), or maxed out your contribution to an IRA/Roth IRA? (It's one of the last good deals out there, if you can spare the money).
6. Have you set up a designation of guardian for any minor children, in case something happens to you?
7. Have you inventoried any safe deposit box, personal safe, or other location where you keep valuables, and have a copy stored off site?
8. Have you digitized or copied important financial and personal documents, family pictures, and the like (...your itunes library) in case you need a backup?
9. Are you travelling? Have a backup copy of your passport and other essential documents (I email a scanned copy to myself, where I can access it via the internet if I ever need it) and checked with credit card companies and cell phone carriers so you don't get his with surprise fees?
10. It is getting down to the wire, but have you thought of gifting or utilizing the current estate and gift tax exemption amounts that expire at year end? (Good luck finding a lawyer to work on this between now and then).

Most importantly, enjoy the holidays. Be good to each other, even though times are tough all around, and there might not be as many gifts under the tree as in years past. Don't even THINK the words Fiscal Cliff. 

And if the whole Mayan Apocalypse thing is real, (which, even the Mayan's don't care about) then thank you for spending some of your last days reading our website.

See you on the other side, one way or another.

 

Charitable giving: what's it worth to me?

Right now, we have an unlimited charitable deduction at death. During life, if you itemize, you can deduct charitable gifts up to set limits, based on income. Right now.

Right now, non-profits, NGOs, 501c(insert number here) entities are plentiful. They are churches, hospitals, and universities.  They are your United Way, your Red Cross, your Greenpeace. Do you care about humpback whales? Maybe not. Do you care about finding a cure for transverse myelitis? You should, but probably not as much as these folks do. All these things cost money, and a lot of it.

On the cover of today's Dallas Morning News was this headline: FISCAL CLIFF- Nonprofits fear donors will cut back on giving if agreement caps charitable deductions. Not to mention, GOP SEEKS FALLBACK IN TAX DISPUTE, and LONG TERM JOBLESS FACE BENEFITS LOSS. See a trend here?

The scene isn't pretty: these folks don't have food or shelter. Who is going to take care of them? They can't get government benefits or housing. They are not really part of the 99%, or even the 47%.

But that's not the point. The point, which I have made in other discussions, is when the economy is bad, people give away less. Take away tax incentives to give away money, and well, its not easy to figure out what will happen.

"Lets fix the loopholes in the tax system." Ok, great. But what are they? If you ask the GOP, this is what you get.  The Democrats don't do nonprofits any favors either, as the President has advocated for capping the deductions as well, and part of their spending cuts is projected to affect grants and aid to nonprofits, as well. Throw in any little bit of a recession, and...

Who is going to end up paying for all these programs, that, we all used to pay for? Not us, not the government (which, indirectly is still us). So they go away. So we don't have anyone fighting Japanese whaling boats. Big deal, until we run out of whales. So we lose some dollars that were going to find a cure for alzheimers and multiple sclerosis. Big deal, until your family is affected.
So the soup kitchens run out of food, and have to turn folks away. Big deal, until "those people" turn up on your doorstep, have to steal because they are hungry, or worse.

The point is, we all lose. It is not about small businesses, the middle class, or the wealthy. When you listen to the pundits on the news talk about "who is getting hurt the most" in any of these fiscal cliff and tax deals, its all of us. Its the whales, it is those with incurable diseases, and its the homeless.

But it is also the middle class family of four, who pay their taxes, give to their church, and do everything by the book.

Enough soapbox. My point, is that we are all vested in this fiscal cliff/tax nonsense. Before you go championing "close the loopholes!" or "raise/decrease taxes!", take time to think what that really means for you: one number might go down, but it might end up costing you more on the back end. The tax system is a mess, no question. But "fixing" a system that we have tried to perfect for as long as we have been a country is no small task.

Here's a holiday toast to them getting it right.