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Happy New Year. Or is it. I can’t help but come back to some old cliches like “be careful what you wish for” and “the more you make the more you spend”
New Tax Laws are in the Books. If you have a sense of humor this will certainly tickle your funny bone. The name of the bill is the American Taxpayer Relief Act. Really? Here is the nature of the tax relief. Those that wanted taxes raised on the wealthy got their wish. Those that didn’t want their taxes raised are in for a big shock. Over the last two years, the amount of Social Security taken out of paychecks was less giving more people money in their pocket. With the new tax bill, more payroll taxes will be taken back out of your paycheck just like the good old days. Less money in your pocket.
If you invest in stocks and you sell stocks and have capital gains, now you are going to pay more tax. So who wants to invest with that kind of disincentive. Candidly this part of the law only applies to those people making more than $400,000. If you don’t make that much not to worry. Of course, how much are you investing of your hard earned income? If you aren’t, then a new plan of action may be appropriate.
So you are not investing in stocks not to worry. But if you have dividends or other investment income say from rental property you will pay a 3.8% tax from Obamacare and a higher tax rate depending on your total income.
For people that go to work everyday in a job there is nowhere to hide. You pay more taxes. Less money in your pocket to do the things you like to do. More money for government. And if you have a high paying job not only are you paying more in taxes, but the dirty little secret is that the deductions like home mortgage interest and property taxes are limited so your tax rate is even higher. Speaking of tax rates. The top tax bracket is now 39.6%. In California, the rate is now over 11%. Add to that the 3.8% Obamatax and the limited deductions and your total tax rate could well exceed 55%. Nowhere to hide.
For people that own a business they will find ways to move money around to avoid paying more taxes. Smart money finds a way to make more money.
What is most troubling about this tax bill are not the perks that were snuck in at the last minute like research credits, nor the extension of the child care and education credits. What is most troubling about this tax bill is that there were no spending cuts whatsoever. So our government which is 16 trillion in debt, constituting about 80% of our gross domestic product, our government which runs a trillion dollar deficit every year, did nothing to lower spending or use the money to pay off it’s loans. In fact, with the new spending provisions through tax credits the new tax revenue will barely cover those expenses.
What this means is that Fiscal Mount Everest will descend on the taxpayers making the Great Depression look like a recovery. When you buy too many toys and can’t pay back the credit cards, when you can’t pay the mortgage, when you can’t pay your student loans, you are bankrupt. There aren’t enough people working and paying taxes for those that don’t. It’s simple cash flow accounting.
In the coming months the negotiations over extending how much the U.S. can borrow and how much spending cuts will occur will make the tax negotiations look like a pleasant Thanksgiving dinner. Be careful what you wish for. You just might get it.
Our times have uncertainty and each day gets more uncertain. Planning, Planning and Planning is how our company is uniquely positioned to guide you and help you relax through these turbulent times. We offer a team of very experienced professionals to put you at ease and give you peace of mind that your plans will work.
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