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Why? Because It's Too Costly Not To!

How valuable is it for you to take advantage of pre-tax savings opportunities? Let's say you have the option of contributing $10,500 per year into your 403(b) or 401(k) plan at work. Remember, contributions to these accounts reduce your taxable salary and grow tax deferred.

Instead of contributing to a pre-tax savings plan, you can pay taxes on the $10,500 of salary, invest the rest, and pay taxes each year on the investment earnings.

Believe it or not, if you contribute $10,500 to your pre-tax savings account each year for 25 years, your account would grow to be worth $1,032,500, assuming a 10% annual return. If you choose not to contribute to these plans, and instead, invest the after-tax equivalent into a similar portfolio, your account would only be worth $451,500 after 25 years. Quite a difference!

Don't Lose Out on Your Capital Losses

Recently, more and more of our clients have been investing in individual stocks. Generally, if you lose money on the sale of one of your investments, you can use those losses to offset other capital gains realized during the year. If your losses exceed your gains, you are allowed to use up to $3,000 of the excess losses to offset any other type of income earned during the year.

There is one exception to this rule. If you sell a stock for a loss, and buy back the stock during the period beginning 30 days before the date of sale and ending 30 days following the date of sale, the loss will be DISALLOWED AS A WASH SALE. If you sell a loser, you should wait at least 31 days before you buy it back, or you could purchase the stock in one of your retirement accounts or purchase stock in a similar company.

With wash sales, the government feels that the sole motivation of your selling the stock is to save taxes, and they generally frown upon transactions that have no other basis except to cut your tax bill.

The Basics of Basic Estate Planning

Just as most people have at least a basic understanding of income taxes, it is fair to say that most people lack a basic understanding of the estate tax system. What people find to be most surprising is that, upon the death of an individual, the government can take as much as 55% of that person's wealth in the form of estate taxes. (I guess they figure a dead person can't complain too much about paying taxes.) You don't even need to be that wealthy to find yourself in the 40% marginal estate tax rate. When you factor in your home, retirement plans, and life insurance, the fair market value of all of your assets that will be taxed upon your death probably adds up to more than you think.

How does the estate tax system work?

Anyone who dies this year or next year, the first $675,000 of their assets will not be subject to estate taxes. If a person's assets exceed that threshold, the excess is taxed at the following rates:

Taxable Estate

Marginal Estate Tax Rate

$675,001 to $750,000


$750,001 to $1,000,000


$1,000,001 to $1,250,000


$1,250,001 to $1,500,000


$1,500,001 to $2,000,000


$2,000,001 to $2,500,000


$2,500,001 to $3,000,000


$3,000,001 to $10,000,000



For example:

Assume an unmarried individual dies with the following:

  • A home worth $250,000 with a mortgage of $100,000

  • Retirement accounts and IRAs worth $300,000

  • Non-retirement savings worth $50,000

  • Life insurance with a death benefit of $500,000

The total taxable estate for this person will equal $1,000,000 and the estate taxes on $1,000,000 will be $125,250!! ([750,000 - 675,000]*.37 + [1,000,000 - 750,000]*.39).

What if you are married?

If you are married, the rules allow all of your assets to be transferred to your spouse estate tax free. Known as the marital deduction, this is a nice short-term solution, as the surviving spouse can take ownership of all of the assets without paying any estate taxes on the assets received.

Taking advantage of the marital deduction, however, could cause the estate of the surviving spouse to be hit with a larger than necessary estate tax bill. With proper planning, each spouse can exclude $675,000 of wealth from estate taxes, for a total of $1,350,000 of assets being passed to the next generation estate tax-free. Without planning, only $675,000 of wealth will be protected.

What can be done to minimize the estate taxes?

One of the principals of basic estate planning is to make sure that each spouse takes maximum advantage of the $675,000 exclusion. To minimize the estate taxes that will be paid upon the your death (or the death of your spouse), there are three steps that you need to take.

  • If you are married, you and your spouse should each have your own will. As part of the will, trusts should be established and funded upon your death.

  • If you are married, your marital assets should not be held jointly. Holding assets jointly will make them unavailable to fund the trusts upon your death.

  • If you have significant life insurance, the insurance should be owned by an irrevocable trust with the beneficiary of the life insurance being the trust. Insurance properly owned in an irrevocable trust avoids being part of your taxable estate.

Good news about estate taxes

If you live to the year 2006, you will be able to shield your first $1,000,000 of wealth from estate taxes. More promising, there has been a lot of talk in Washington about abolishing this tax. As of now, this tax has not been repealed, so you need to do your estate planning under the assumption that the estate tax is here to stay. A great place to find information about basic estate planning is at http://www.PlanningYourEstate.com.

Other considerations

Since the rules pertaining to estate taxes are so specific, you really have no choice but to meet with a lawyer whose practice is limited to estate planning. While you're meeting with an estate planning attorney, ask to have a durable power of attorney and a health care proxy drafted.

  • Durable Power of Attorney: These allow a specific named person to make financial decisions on your behalf in the event you become mentally or physically unable to do so.

  • Health Care Proxy: These allow a specific named person to make medical related decisions on your behalf in the event you become incapacitated


Disclaimer: This issues surrounding estate planning are extremely complicated. This information is only meant to give you an overview of the basic rules. If you haven't already done so, consider meeting with a qualified professional.




Income Taxes

Saving and Investing



  • Income Tax returns on second extension due 10/15/00

  • Someone making $100,000 per year will go over the social security max of $76,200 this month

  • Deadline for re-characterizing a Roth IRA conversion is 10/15

  • Update your net worth statement using 9/30 information

1999 & 2000 TAX FACTS

  • For 1999, the standard deduction for a single individual is $4,300 and for a married couple is $7,200. A person will benefit by itemizing once allowable deductions exceed the applicable standard deduction. Itemized deductions include state and local income taxes, real estate taxes, mortgage interest, charitable contributions, and unreimbursed employee business expenses. For 2000, the standard deduction for a single person will be $4,400 and for a married couple will be $7,350.

  • For 1999, the personal exemption is $2,750. Individuals will claim a personal deduction for themselves, their spouse, and their dependents. For 2000, the personal exemption has been increased to $2,800.
  • The maximum earnings subject to social security taxes has been increased to $76,200 in 2000 from $72,600 in 1999.
  • The standard mileage rate has been increased back to $.325 per mile as of January 1, 2000 from a rate of $.31 per mile as of April 1, 1999.
  • The maximum annual contribution to a 401(k) plan or a 403(b) plan has been increased to $10,500 in 2000 from $10,000 for 1999.

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