Simply Junior

Over the next year or two it is very likely that tax rates on income, capital gains, and dividends are likely to go up. That is an unfortunate but likely reality especially for those people whom the politicians consider “rich” like most of the people who receive this newsletter. Rising tax rates are a virtual certainty and a promise if leading presidential candidate Barak Obama wins the election this fall (he is currently ahead in the polls). Longer term over the next 10-20 years it is also very likely that we will have higher tax rates due to the current budget deficit and the looming Social Security/Medicare financial shortfalls. Those social programs face severe financial shortfalls over the next 20+ years and taxes will have to be increased, or benefits substantially reduced, or both to keep those programs alive. Fixing the Alternative Minimum Tax will not be cheap either.

Part of the problem is that we have just been spoiled and lucky over the past 20 years by lower than usual tax rates on income and investments relative to US history. The government has kept tax rates low, allowed government spending to grow too fast, run budget deficits, and deferred facing reality by delaying fixing the long term Social Security/Medicare financial problem.

The current top federal marginal tax rate on income of 35% is well below the average in US history and is near the lowest it has been since the 1930′s. The top rate was as high as 90% in the 1940′s and 1950′s, dropped to around 70% in the 1960′s and 1970′s, and dropped to around 50% in the early 1980′s. We have been lucky to have had a top tax rate on income of between 30% and 40% since the late 1980′s. There is lots of room for that top tax rate to go up, looking at history.

The current 15% tax rate on capital gains and dividends is also very low relative to history, and is probably the lowest we will see for several decades. This low 15% rate on capital gains is the lowest since the 1930′s in the US. Typical capital gains tax rates in US history since the 1940′s have been in the 20%-40% range. If nothing happens the Bush tax cuts will expire over the next year or two and then capital gains and dividend tax rates will jump back up automatically.

Presidential Candidates McCain and Obama on Future Taxes
Barack Obama is calling for higher taxes (ordinary income tax, capital gains tax, dividend tax, and social security taxes) on families earning more than $250,000 per year. Obama wants to raise the top ordinary income tax rate from 35% to 39.6%. He says he will not raise your taxes if your income is under $250,000 and “chances are you will get a cut”. He wants to raise the tax rates on capital gains and dividends for “rich” people from the current 15% rate to somewhere in the 20%-28% range. On estate taxes Obama is proposing a $3.5 million exclusion for 2010-2011 and beyond and a top estate tax rate of 45% (the same as the current federal estate tax rate).

John McCain wants to make permanent the current federal income tax rates (top rate of 35%), and cut corporate tax rates from 35% to 25%. He opposes the Obama plan to lift the earnings cap on the social security payroll tax. McCain wants to keep the current 15% tax rate on long-term capital gains and dividends. With a likely democratically controlled Congress he may have to compromise and these capital gain/dividend tax rates may go up anyway to the 20% level. On estate taxes McCain proposes raising the exclusion to $5 million for 2010-2011 and beyond and cutting the estate tax rate to only 15%. Of course all political campaign promises and tax plans from both sides should be taken with a huge grain of salt.

What smart things can you do about rising tax rates?

1. Sell some assets you own that have a big capital gain now while the rates are low. If you have an asset with a large long-term gain that you were thinking about selling anyway in the next couple of years you may want to consider selling it now before the capital gains tax rates go up. This may be especially true if you have other reasons to sell the asset as well (concentrated stock/option position in one stock, concentrated family business holding, large real estate holding, a big holding that has had a huge run up recently, etc.). For investments that you may want to hold for a long time it may be better to just continue to hold on to them and let the tax-deferral continue for many years.

2. Use Roth IRA and/or Roth 401K accounts if you can. Roth accounts are taxed now (with current low tax rates) and are tax-free later when you start withdrawing the assets (and when income tax rates are likely higher). Therefore if tax rates go up in the future you will not care (as much) because assets withdrawn from Roth accounts are not taxed. Many people have incomes that are too high to be eligible for Roth IRA accounts (modified adjusted gross income must be below $116K single or $169K for a couple). Under current law (which may be changed) investors of all income levels will be allowed to rollover their current IRA’s (of any size) into Roth IRA’s in 2010. This could be a smart thing to do in 2010 if future income tax rates turn out to be significantly higher than they are in 2010. Of course if Obama wins the election income tax rates may already be higher in 2010.

3. Continue to give assets with large capital gains to charities. You get the full value of the asset as a deduction regardless if the capital gains tax rate is 15% or 25%. If income tax rates go up your charitable deduction is actually worth more against your income taxes.

4. Factor in higher tax rates in your long-term financial planning. The bottom line is you will need to save more, spend less, work longer, or invest smarter to make up for the higher future tax rates. This is especially true if most of your net worth is in tax-deferred IRA’s and 401K’s which are taxed at the full ordinary tax rates when withdrawn in retirement. Your tax rate in retirement could be as high (or higher) than your current tax rate.

5. Buy tax-exempt municipal bonds. These bonds typically benefit when ordinary income tax rates rise. Don’t buy these in your tax-deferred 401K or IRA accounts.

There have been a lot of changes in the tax preparation and tax filing field over the past couple of decades. Today there are more options than ever when you need to fulfill your yearly obligation to the IRS. Some are free, some are not; some people do it themselves, others go to professionals. One thing does not change though, no matter which option you choose: you are liable for the accuracy of your report, no matter what.

In other words, if you go to someone for tax advice and/or assistance with filing your taxes, and that person is wrong, you are the one who will pay the penalty. The fact that they signed your return is irrelevant at this point. For this reason, many people opt to go the online route, because today’s software does a fine job when it comes to navigating people through their returns.

You will obviously need a computer with an Internet connection, a tax filing program (software or e-file), applicable financial documents, and a couple hours. Some people master it faster than others, but it definitely is something that anyone can do if they set their minds to it.

Filing your taxes online has several advantages. It is more widespread than you think: even if you go to a professional, they are themselves more likely to use exactly that to file your return for you. Secondly, it is convenient: you do not have to bring anything to anyone, and you can get the job done in the comfort of your home. Finally, it is fast: not only is your information sent immediately, but your refund is also more likely to come quicker.

Now, when going through the process, one of the most important documents you will need is the W-2 form. Before you start filling anything, read the back and make sure you understand exactly what everything means. This is not one of those areas where mistakes have only minor consequences. Another practical suggestion is to print out everything you have filed, so you can have hard copies for your records. Remember that if you want to be on the safe side, you will want to keep them for seven years. Also, when filing online, you will receive a confirmation that the IRS has received your information; print that out as well.

Tax filing programs have now come to the point where they can analyze the information that you input and based on that information, pop-ups appear and suggest deductions that you may qualify for. Those programs are updated every year to take into account every change in tax law. This is one of the major perks of choosing that option.

Those looking for free options will be happy to learn that there are plenty of choices for them too. Most of this information will be on the IRS website, where they will find several options they have to file their taxes for free. Depending on your personal financial circumstances, you will likely find one that applies to you. For example, for those who qualify, there may be the IRS Volunteer Income Tax Assistance Program or VITA, and also the Tax Counseling for the Elderly program or TCE. Both of these services are free. Similarly, military personnel who need help filing their taxes can turn to the Armed Forces Tax Council or AFTC for free assistance. Active military member or their family are eligible.

In the end, the online option for filing taxes can help get rid of the stress that comes with potentially making a mistake on your return: the programs have error checkers and calculators built to help you minimize this possibility. Plus, there are many free options for those people who are cash-strapped. It is no wonder then that every year this method gains more and more popularity.

Economy Effects Baby Boomers Retirement Plans

Over one half of all self employed workers are between the ages of 42-65. This age group commonly referred to as “baby boomers,” are faced with a situation that most of them never thought could happen. Many worked for decades at the same job, and saved money in a retirement fund, and invested in the stock market which was paramount in their retirement plan.

Until recently this type of planning seemed to be sufficient enough that they could count on being able to pay their bills and eat for the rest of their lives. However, because of the turbulent economy, for many retirees, or soon to be retirees, a permanent retirement is now out of the picture.

This type of environment has produced challenges for the baby boomer generation, but many of them are facing the challenges head on by participating in the digital revolution. They are the first generation to be tech savvy because for most, computer technology is/was either somewhat incorporated into their jobs or it is/was the basis for their day to day work.

Boomer Generation Strikes Back Via the Internet

Many boomers are working from home by creating income online. The most common of the many online opportunities is affiliate marketing. By being an affiliate, one is basically becoming a “middleman” for selling a product or service.

The affiliate creates articles, or videos, that discuss whatever it is they are helping to sell, and then posts them on the web. If an online customer (there are nearly one billion online users per day, including millions of potential customers) buys the product through clicking a link on their web postings or web sites then they get “a cut” (commission) of the sale.

Internet Affiliate Marketing

It is typical for an affiliate to receive anywhere from 25%-50% commission. Becoming an affiliate marketer is fairly simple. All you need to start is a computer with internet access, an account with a payment site (such as Clickbank which is similar to Paypal but is strictly for affiliates), and some type of word processing software for basic article writing.

Information about beginning online work can be found in e-books, on experienced marketers websites, and through online marketing universities.

Not many of us know of Nikola Tesla who had proposed and even proved that water was a great fuel to make our machines work but with the political influence that was prevalent few decades back, the idea died without reaching the people. Hydrogen fuel or the water fuel is one of the easily available and cheapest of fuels that we have not put into good use. Water is one of the richest source of hydrogen and recent developments in science clearly indicate that hydrogen is one of the fore runners of fuels that are seen as alternative sources of energy.

You can convert your car to use water fuel by just bolting some parts that can be seamlessly attached and removed. Thousands of users worldwide have reported to have obtained a 4 – 5 fold increase in mileage.

Convert your car to run on water and you are in for a real bonanza of sorts. Would you believe it if I say that of the money you use for gas only 20% is apparently useful? No, but that is the truth!

Use water as fuel and the Browns gas that is produced from it through electrolysis makes it a possibility where you can achieve 100% fuel efficiency, meaning you get up to 5 folds increase in mileage. Converting your car to run on water gets simpler with the step by step guide to build this water fuel cell unit, and the day the sale opened, many eager customers got it immediately, and the 60 days money back guarantee was not at all used by anyone. The guide to convert your car to use water just helps you make the seamlessly attachable part which can be developed with less than $100 using some daily used items from your backyard.

Have you considered outsourcing for your small business? If you are like the majority of small business owners, the answer is probably not. In fact, many small business owners fail to realize the unique and cost saving benefits that global sourcing can provide their company.

While business owners are often offered countless tidbits of business advice, rarely does the advice offered include the suggestion of turning to other countries to fill staffing and manufacturing needs. This tip, however, is often one of the most useful that a small business owner can encounter. Outsourcing can easily save a great deal of money without requiring an owner to compromise on quality or production needs.

Several years ago, global sourcing was an option only for the largest companies. Negotiating with factories was difficult and finding skilled labor was almost impossible. A lot has changed in the past couple of decades. The worldwide market makes it easy to outsource manufacturing, skilled labor and call center needs to a variety of countries including China and India. Each company will need to carefully consider their manufacturing and staffing needs to best determine how outsourcing can benefit them. Nearly every small business start-up will find, however, that global sourcing can offer a large variety of cost saving solutions for their business.

Small business owners are often enjoyably astounded when they discover the many opportunities that are available. In fact, outsourcing can successfully accommodate a wide range of business needs. Factories can easily produce almost any product. These goods produced in other countries are often available at much lower price than many business owners are able to anticipate. This is not all. Outsourcing can help with various labor needs. There are many talented professionals available in a skilled labor workforce that can help to affordably meet many company needs and objectives. Call center work is also available at a fraction of the cost.

Business owners that have not considered global sourcing may be missing out on a valuable and cost saving opportunity. Before starting any small business, it is wise to consider the bounty of opportunities available through outsourcing and to determine how they can benefit your company.