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Advice for the financially challenged

2011 January 31
by Asset Protection Solutions

Welcome to the Asset Protection Newsletter & Blog, dedicated to helping our readers to protect their hard earned Assets.  [1] This Newsletter and Blog will also provide you with the information that the money center banks do not want you to know.  [2] Now with the extension of the Bush tax cuts there is even more pressure on congress to find more revenue sources by broadening the tax base.

The Federal Government is like a family that is unable to pay its bills without incurring more debt or invading retirement accounts – David Walker, former US Comptroller General, in a politically crafted understatement said, “We’re on an imprudent unsustainable fiscal path”.

TAXES ARE GOING UP FOR INDIVIDUALS

With the extension of the tax cuts there is even more pressure on Congress to eliminate tax deductions to indirectly raise tax rates.  Why, because the Federal Government in 2010 borrowed 37.4% of every dollar spent.  For the fiscal year 2010 the total deficit was $1.416 Trillion dollars, almost 10% of GDP.  Cumulative debt stands at $13.6 Trillion which amounts to $38,595 for every US citizen.  What does that mean? Well, for Fiscal 2010 each dollar was spent as follows:

  • 21% for Medicare/Medicaid
  • 20% Social Security
  • 17% other Mandatory Expenditures
  • 20% Defense
  • 6%  Interest Expense
  • 16% All Other
  • 100%

What it means is that the Federal Government is like a family that is unable to pay its bills without incurring more debt or invading retirement accounts.  If this trend continues, the percentage of the budget spent on interest expenses will triple by 2020 and by 2025 federal revenues will be completely consumed by three categories: Interest, Medicare/Medicaid and Social Security.  This situation must change and it will.  David Walker, former US Comptroller General, in a politically crafted understatement said, “We’re on an imprudent unsustainable fiscal path”.

The Mortgage Interest deduction is the second most expensive deduction.  The government can save over $600 Billion through 2015 by eliminating this deduction.  Expect further declines in home values and higher effective tax rates for individuals.

The President’s Debt Reduction Task Force and Bipartisan Commission of Fiscal Responsibility and Reform have recommended that with the lower tax rates the tax base needs to be is broadened.  That is accomplished through eliminating deductions from taxable income.  The most targeted deduction is the home interest deduction which is a clear exception to the overall theme of the tax code which denies deductions for personal expenses.  The Mortgage Interest deduction is the second most expensive deduction.  The government can save over $600 Billion through 2015 by eliminating this deduction.  If this deduction is lost, you will see further declines in home values and higher effective tax rates as this one deduction gives most taxpayers a chance to itemize their deductions on Schedule A rather than taking the standard deduction.  Other possible deductions at risk include charitable contributions ($300B savings) and state and local taxes ($290B).  Eliminating business deductions is not as profitable.  Eliminating the top business deduction for accelerated depreciation on business equipment would only save $150 Billion through 2015.

Increasing corporate tax rates is not an option for increased revenues. With corporate tax rates currently at 39.2% which is already the second highest rate in the world, behind only Japan (41.3%), there is no room for increased rates without the risk of losing the tax base to other more business friendly countries.

Expect action soon by Congress to increase taxes for individuals by eliminating deductions.

TAX CUTS EXTENDED FOR ESTATE AND GIFT TAXES

For wealthy residents of Washington State, the attractive “Window of Opportunity” for lifetime family gifting remains in place, at least for now.

The recently passed Tax Relief, Unemployment Insurance Reauthorization and Job Creation Act not only extended the current income tax breaks but also changed the rules for gifting and estate planning for a two-year period, but left the annual gift tax exclusion unchanged at $13,000 per year/per donor/per donee.

Unless Congress acts, higher rates and lower exemption amounts will return in 2013, but currently, the maximum tax rate on gifts is 35%, increasing to 55% in 2013.  The lifetime exemption (or the exemption equivalency amount) for gift and estate taxes is currently $5 million, but will be reduce to $1 million in 2013.

Washington State still has no gift tax and taxes estates at a maximum rate of 19%.  For wealthy residents of Washington State, the attractive “Window of Opportunity” for lifetime family gifting remains in place, at least for now.

Lifetime gifting during the next two years will be critical.  In theory, a married couple can gift up to $10 million without incurring any gift tax, thus significantly reducing their estate for estate tax purposes.  Selection of the proper assets to include in such a gifting strategy is critical.  Use of discounts and family entities is also advantageous as previously addressed in our last newsletter.

ADVICE FOR THE FINANCIALLY CHALLENGED

Be Proactive.  Seek professional help to properly plan your financial strategy if faced with pending defaults.

Be aware that the bankruptcy laws also apply to the affluent debtor who is perhaps hampered by illiquid assets such as real estate.  Bankruptcy can actually be a prudent source of debt relief in situations where one’s wealth is primarily concentrated in “exempt” assets (such as your home and retirement accounts) and one’s income, business or home are being threatened by an overly zealous creditor.  The Bankruptcy can actually help to improve one’s credit score if the debtor has seriously defaulted on any of his or her obligations. Seek professional help to properly plan your financial strategy if faced with pending defaults.

This is what we call “Pre-Bankruptcy Counseling,” which involves careful analysis of your balance sheet and income statement to determine a likely bankruptcy scenario. From that, we determine strategic defaults that are designed to create positive cash flow.  This is the first step toward a new life.  Take advantage of the most powerful legal right that you have, and avoid mistakes in this most important time in your financial life.[3]


[1] This Newsletter and Blog are the property of Asset Protection Solutions, LLC, a Washington limited liability company dedicated to helping its readers protect their Assets.  All Rights Reserved ©

[2] Not that we are not all financially challenged…but, those facing insolvency are particularly challenged because the laws providing relief in these situations are complicated, and good advice during this stage is critical.

[3] Richard Seward is licensed to practice law in Washington and has offices in Seattle and Port Orchard.  The contents herein do not constitute legal advice and do not create an attorney/ client relationship. The content is in the form of legal education and is intended to provide general information about the topics discussed. Many times the reader, in drawing conclusions, may leave out details which would make the conclusions unsuitable. Mr. Seward strongly advises the reader to confer with an attorney in their own state to acquire more information about the specifics of their situation.

The Law Offices of Richard D. Seward

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