President Obama addressed Congress
and explained the concept of the Buffett
Rule, "People making more than $1 million a year should not pay a
smaller share of their income in taxes than middle-class families pay. To assist
the Committee in its work, I also included specific tax loophole closers and
measures to broaden the tax base. Together with the expiration of the
high-income tax cuts from 2001 and 2003, these measures would be more than
enough to reach this $1.5 trillion target...They include cutting tax preferences
for high-income households."
The one big stumbling block to this
strategy is that
the President doesn't actually write the bills that ultimately become the laws. Instead, the President
only signs or vetos bills passed by Congress. If you grew up
in the 70's like I did, you probably remember the Schoolhouse Rock video,
I'm Just a
Bill. Please take a few minutes to watch this YouTube video for either nostalgic reasons or
as a refresher course in basic Civics.
Let's take a look at the
recommendations made by the Obama Administration. Included in their
report, the current Administration outlines their Principles of Tax Reform as
1. Lower tax
rates. The tax system should be simplified and work for all Americans with
lower individual and corporate tax rates and fewer brackets.
Inefficient and Unfair Tax Breaks. Cut tax breaks that are inefficient,
unfair, or both so that the American people and businesses spend less time and
less money each year filing taxes and cannot avoid their responsibility by
gaming the system.
3. Cut the
deficit. Cut the deficit by $1.5 trillion over the next decade through tax
reform, including the expiration of tax cuts for single taxpayers making over
$200,000 and married couples making over $250,000.
job creation and growth in the United States. Make America stronger at home
and more competitive globally by increasing the incentive to work and invest in
the United States.
the Buffett Rule. No household making over $1 million annually should pay a
smaller share of its income in taxes than middle-class families pay. As Warren
Buffett has pointed out, his effective tax rate is lower than his secretary’s.
This rule will be achieved as
part of an overall reform that increases the progressivity of the tax code.
To be perfectly honest, I don't
find anything too earth shattering in these Principles of Tax Reform. Tax
simplification and the equitableness of the Tax Code have been two issues that
Congress and each President have grappled with ever since the federal income taxes
were enacted on a permanent basis back in 1913.
President Obama's address last
month included some specific changes he would like to see Congress make to
the Tax Code,
Allow the 2001 and 2003
high-income tax cuts to expire
Simply stated, by Congress not
doing anything, the tax rates are set to increase in 2013 for ordinary income, capital gains, and
qualified dividends. The President says that he only wants to see the
tax rates increase for households with income in excess of $250k, however.
President Obama's second suggestion
is to reduce the value of
itemized deductions and other tax breaks to 28 percent for families
with incomes over $250,000 and single individuals with income over $200,000.
Generally, tax deductions reduce a
person's tax liability based on that person's tax bracket. Someone in the
top bracket paying $10k of mortgage interest saves $3.5k in federal income
proposal, even if a taxpayer is in the 33%
or 35% tax bracket, the tax break for their deductions will be
capped at 28%. A person in the top bracket, therefore, will pay an
extra $700 in federal income taxes for each $10,000 of allowable deductions
According to the President's
proposal, "This limit would apply to: all itemized
deductions; foreign excluded income; tax-exempt interest; employer sponsored
health insurance; and selected above-the-line deductions."
A Green Tinted Lining
As part of his address to Congress,
President Obama proposed that Congress pass The American Jobs Act. The
President would like to see this Act include a provision that would cut in half
the Social Security taxes currently being withheld from each worker's wages, as follows:
employee payroll tax in half next year for 160 million workers. Almost every
working American pays payroll taxes, and middle-class Americans face a higher
burden because more of their income comes from wages and salaries. The
President’s plan will cut payroll taxes in half for employees next year. Rather
than having 6.2 percent of their wages deducted in payroll taxes, workers will
only pay 3.1 percent next year. This builds on the 2 percentage point payroll
tax reduction that the President secured for workers in 2011—providing 160
million Americans the certainty of ongoing tax relief and increasing the amount
of that relief by more than 50 percent.
With the Social Security Max
currently at $106,800, this provision would save high-income taxpayers as much
each year. For people in the top tax bracket, this break in Social
Security taxes will offset
the President's proposed tax increase on the first $47,300 of deductions
Wait and See
President Obama's proposal is just
that, a proposal. All we know for certain is that the tax rules in place
right now will continue through 2012. With the next Presidential election
set for November 2012, who knows when Congress will be able to pass a bill
addressing the post-2012 tax rules, and what changes to the tax laws that
bill will contain.
The “Tax Relief, Unemployment Insurance Reauthorization and Job Creation
Act of 2010,” includes an extension of the 100% exclusion from income of the
gain from the sale of qualifying small business stock acquired as discussed
Act contains a number of provisions aimed at encouraging investment in small
businesses. These provisions include an amendment to Section 1202 of the
Internal Revenue Code of 1986, as amended (the “Code”), temporarily permitting
the exclusion of 100 percent of the gain from the sale of certain “qualified
small business stock” acquired after September 27, 2010 and before January 1,
2011 that is held for more than five years by a non-corporate taxpayer.
The new rule extends the deadline for purchasing "qualified small business
stock" by one year.
Qualifying small business stock must be acquired from a C corporation
whose gross assets do not exceed $50 million. The amount of gain eligible for
the exclusion is limited to the greater of ten times the taxpayer’s basis in the
stock or $10 million of gain from stock in that corporation.
Business owners and the
self-employed looking for ways to take some more money out of their business
on a tax-advantaged basis for the benefit of themselves and their spouse
might consider long-term care (LTC)insurance.
Expenses for long term care vary
greatly across the country, but home care costs from $150-$250 for an 8 hour
shift. Assisted living facilities run from $2,500-10,000 monthly depending
upon the location, the level of care and the quality of the facility.
Private nursing home rooms cost even more. And these costs are
expected to triple over the next 30 years when baby boomers will likely need
care. Just one spouse needing care for only 2 years could easily run to well
LTC policies pay benefits when
the insured cannot do 2 of the 6
activities of daily living (bathing and dressing are two ADLs). Severe
cognitive impairment (Alzheimer’s) is another benefit trigger.
For the self-employed or owners
of pass-through entities such as S-Corps and LLCs, the business deduction
for traditional LTC premiums are age based. For 2010, an owner aged 41-50
can deduct $620 (and the same for the spouse too), an owner aged 51-60
can deduct $1,230 each, and owners aged 61- 70 can deduct $3,290 each.
People who are not business owners can apply those same amounts towards
their medical expense deduction (subject to 7.5% of AGI).
Owners of C-Corps have no
deductibility limits on premiums (subject to reasonable compensation). Many
C-Corp owners buy LTC insurance on a 10-pay basis so the policy will be
fully paid in 10 years and get the benefit of sizable business deductions as
well. The premiums are not taxable income to the owner, nor are future
benefits received taxable income. It’s a great way to use corporate dollars
to prepare for retirement.
Many business owners offer
long-term care insurance as a voluntary employee benefit and can pay some,
all or nothing towards the employees premiums. Any premiums paid for
employees (who own 0% - 1.99% of the enterprise) are fully deductible to the
business and are not taxed as income to the employee. Many employers
encourage their employees to participate in the benefit plan by paying as
little as $15 a month towards the employee’s premiums and the insurance is
Businesses with as few as 3
employees in the plan (executive carve outs) can benefit from simplified
underwriting and/or a 5-10% premium discount. For a healthy 55 year old
couple, a pretty good LTC policy can be found for as little as $59 a month
each -- which could jointly preserve up to $800,000 of their assets thirty
years from now when they are likely to need care.
The younger and healthier one
is the better. I bought my own policy at age 40. No matter how many years
one pays premiums, it usually only takes a claim of only 3 months to get all
those premiums back!
Most business owners are not
aware of the CLASS ACT which was hidden deep in the new Health Care reform
passed by Congress that might create unlimited liability for uninformed
business owners and sets up a pitiful national LTC health care program. More
Finally, there are
non-deductible asset-based plans which have been made even more attractive
under provisions of the Pension Protection Act. These insurance products are
either annuity based or life insurance based.
For example, a standard health
female aged 65 might buy a life policy with $100,000 single premium with an
immediate death benefit of $166,000 or LTC benefits of $498,000. If LTC is
needed, she would start accessing her death benefit at up to $83,000 a year
for two years.
If she needed care longer,
there would be another $83,000 for 4 more years available to pay expenses.
If she never needed care, the death benefit would be paid to her
beneficiaries. These are especially attractive plans for people holding
substantial money in low-paying, taxable CDs. And there’s a lifetime 100%
premium-back guarantee for any reason.
Mark J. Orr, Certified
Financial Planner (licensed in many states) has specialized in helping
clients plan for LTC since 1997. You can request LTC quotes and view
educational videos at:
www.LTC-LongTermCare.com. He can be reached at 770-777-8309 for
individual LTC planning consultations.
For 2010, the standard deduction for a single individual is $5,700 and
for a married couple is $11,400. A person will benefit by itemizing once
allowable deductions exceed the applicable standard deduction. Itemized
deductions include state and local income taxes (or sales taxes), real estate
taxes, mortgage interest, charitable contributions, and unreimbursed employee
For 2010, the personal exemption is $3,650.
Individuals will claim a personal deduction for themselves, their spouse, and
The maximum earnings subject tosocial security taxes is $106,800
for 2010 and 2011.
The standard mileage rateis $.51 per business mile as of
January 1, 2011, increasing to $.555 per mile as of July 1, 2011.
The maximum annual contribution into a 401(k) plan or a
403(b) plan is $16,500 in 2010 and 2011. And if you'll be 50 or
older by December 31st, you can contribute an extra $5,500 into your 401(k) or
403(b) account that year.
The maximum annual contribution to your IRA is $5,000 for 2011. And if you turn 50 by December 31st, you can contribute an extra
$1,000 that year. You have until April 15, 2012 to make your 2011 IRA
In a shocking development, the IRS recently
announced that they will be honoring the FICA tax refunds submitted by
residency programs and individual doctors. The catch is that only FICA
taxes paid prior to 4/1/05 qualify.