Don’t Forget State Estate Taxes

Posted on November 6, 2011 by Edi

Don’t Forget State Estate Taxes

Don’t forget your state of residence and state estate tax changes when planning your Estate. Many differences between states require that you carefully review your estate and include state rules into your financial plan! Even when you determine that you are exempt from federal taxes you may still have unexpected significant estate taxes at the state level. Larger estates are more likely to have both but you’d be surprised that in some states how smaller estates may also qualified.

Nearly half of U.S. states impose an estate or inheritance tax regardless of whether the resident’s estate also owes federal estate taxes. Two states, New Jersey and Maryland, levy both estate and inheritance taxes!

Florida, Nevada, and Alaska are among states generally thought to be attractive place to retire, not only when you are living — because there is no income tax — but also when you die. Neither estate nor inheritance taxes are charged in these states.

Many estates owe taxes to multiple states because the deceased person owned a vacation home or other tangible property such as a boat outside of the state they lived in when they died. Intangible property, such as stocks and money in bank accounts, is taxed in the state the individual legally resided in at death, regardless of where the investments are physically located.

In California, we’ve phased out Estate taxes after 2005 and there is no inheritance tax. Executors of estates of persons who died on or after Jan. 1, 2005, are no longer required to file a California estate tax return.

Imposing just an estate tax, with exemption amounts ranging from $338,333 to $5 million, are Washington, Oregon, Minnesota, Ohio, North Carolina, Hawaii, New York, Delaware, Connecticut, Massachusetts, Vermont, Maine, Rhode Island, Illinois and the District of Columbia. Rates vary from 7% in Ohio to 19% in D.C.

Six states collect just an inheritance tax, which is paid by the heirs and not the estate, and generally increases for beneficiaries the more removed they are from being close family members. Rates range from 9.5% to 20% in Pennsylvania, Tennessee, Kentucky, Indiana, Iowa and Nebraska.

New Jersey begins taxing estates at $675,000 and has a maximum rate of 16%, in addition to a maximum 16% inheritance tax on beneficiaries who are not spouses or parents, or children or other lineal descendants. New York has a $1 million exemption for its estate tax, which also tops out at 16%.

Of course, states are always changing tax rules. So be mindful and consult a tax attorney before filing.

Edi Alvarez, CFP^®BS, BEd, MS

www.aikapa.com

Who benefits most from our Tax Code?

Posted on November 2, 2011 by Edi

Business Corporations and Taxes

Warren E. Buffett and Bill Gates stated clearly that too many wealthy individuals pay unusually low taxes to the federal government. I’d like to share the information gathered so far on Corporate America so that we might be able to understand our current tax code.

Recently a review showed that 280 of the biggest publicly traded American companies faced federal income tax bills equal to 18.5 percent of their profits during the last three years — just a bit over half the official corporate rate of 35 percent and lower than their competitors in many industrialized countries.

Mr. Buffett, said that the tax code is unfair, he paid just 17% in federal taxes last year, about half the percentage his secretary paid. I want to know how much his secretary earns to pay 34% in effective federal taxes – this seems a bit high but his point is still valid. Business owners are not treated the same by the tax code as employees – should they be?

This corporate review, examined the regulatory filings of these companies to compute each year’s current federal taxes. The study does understate tax payments because it omits deferred taxes that they may pay in future years. Since it did not analyze actual tax returns but used publicly available corporate regulatory filings many companies dispute it.

If 17-8% is the going Corporate average rate then we must look more closely at the 70 companies (a quarter of the 280 corporations) which owed less than 10 percent of profits in federal income taxes and the 30 companies that had no federal tax liability for the entire three-year period.

Why is this currently important?The Congressional super-committee will report on November 23rd how we’ll cut the budget deficit and is considering revamping our tax system. The goal would be to simplify corporate structure and reduce corporate taxes. Corporations claim that the current system puts American companies at a disadvantage with competitors abroad and encourages them to shift jobs and investments overseas. Is this real or a bargaining chip?

My view is that the current tax system rewards companies that aggressively avoid taxes. A quarter of the companies in the study had a federal tax bill of 35 percent of their profits, while a similar number had an effective rate of less than 10 percent. Therefore not all corporations are equally sharing in the tax burden. Maybe the solution is to close the loopholes & force a minimum tax burden on profits for all corporations instead of lowering the rate.

Among the companies that the study said escaped a liability for all three years were Boeing and Ryder System, which benefited from the additional depreciation intended to stimulate the economy. Boeing officials countered that they had paid some federal taxes, but would not say how much. They said that their lower rate was from tax breaks intended to encourage hiring. Boeing claims to have hired 9,000 workers this year as a result of their tax credits.

Other companies include General Electric and Wells Fargo who claim respectively that new job creation and the Wachovia right downs where their reasons for reduced tax liability.

The fact is that corporations are paying a smaller share of taxes than in previous decades. According to the IRS they paid a total of $191 billion in federal income taxes in 2010, which is about 1.3 percent of the nation’s gross domestic product (GDP). That is down from about 6 percent during the 1950s.

Despite this decline the Americans for Tax Reform, said that the United States system was not competitive because it taxed income earned around the world, instead of just in this country. On the other hand Citizens for Tax Justice countered that about two-thirds of the American companies with significant profits overseas actually paid more in taxes to foreign governments than they did in the United States.

But should we not consider the total tax? The bottom line for a company is not how much they pay one country but how much they pay overall.

On the other hand, I can agree with the Citizens for Tax Justice’s request that the federal government end the subsidies and shelters that favor companies that game the system.

How can the supper-committee come up with real budget saving unless the loopholes are closed?

What do you think?

Edi Alvarez, CFP^®BS, BEd, MS

www.aikapa.com

IRS: Banking transactions reported early 2012

Posted on November 1, 2011 by Edi

Banking Expenses are Going Up
Expect our fees to follow

The Internal Revenue Service just released this FAQ – that they are providing special transitional relief to banks and other payment settlement entities required to begin reporting payment card and third-party network transactions to the IRS on new Form 1099-K. These are the fees that banks are trying to find a way to pass on to us, the consumer.

By law, reporting is scheduled to begin in early 2012 for payment card and third-party network transactions that occurred in 2011.

See details at:
http://www.irs.gov/newsroom/article/0,,id=249029,00.html

What is a third-party settlement organization?
A third-party settlement organization is a central organization that has the contractual obligation to make payments to participating payees (generally, a merchant) in a third party payment network. Characteristics of a third party payment network include: (i) the existence of a central organization with whom providers of goods and services have established accounts, (ii) an agreement between the central organization and providers to settle transactions between the providers of goods and services and purchasers, (iii) the establishment of standards and mechanisms for settling such transactions and (iv) the guarantee of payment in settlement of such transactions. The most common example of a third-party settlement organization is an online auction-payment facilitator, which operates merely as an intermediary between buyer and seller by transferring funds between accounts in settlement of an auction/purchase. Third-party settlement organizations charge sellers a fee for facilitating the transaction. Under the reporting requirements, these entities must report the gross reportable transactions of the businesses to which they make payments provided the payee satisfies certain transaction volume and dollar thresholds.

Edi Alvarez, CFP^®BS, BEd, MS

www.aikapa.com

Government Policy To Watch

Posted on November 1, 2011 by Edi

Financial Policy in the news
Government policy that will impact our bottom line

1. Senate replaces Obama tax increases with millionaires’ tax

When President Barack Obama announced his jobs package in early September, he proposed paying for the measure with a series of tax increases on individuals making more than $200,000 and families making more than $250,000. Among them was a 28% cap on the tax exemption for municipal bond purchases and a hike in the tax on “carried interest” for private fund managers from the capital gains rate to the individual rate. In their version of the jobs plan, Senate Democrats replaced the Obama tax increases with a 5.6% surcharge on millionaires. The tax would apply to adjusted gross income less investment interest deduction above $1 million. Senate Democrats believe that the $1 million threshold more clearly delineates the difference between the middle class and the wealthy.

2. Obama’s jobs plan sliced, diced, stalled in Congress

In rallies around the country earlier this fall, Mr. Obama touted his jobs package and urged Congress to “pass this bill now.” By October, he was hoping that Congress would approve at least parts of it. It’s been slow going. The Senate blocked the entire $447 billion measure from getting to the floor. It was then diced up into smaller parts, and some blocked later on. The first portion of the package to get any traction was a provision to repeal a tax on government contractors that is set to go into effect in 2013. The bill’s prospects in the Senate are unclear.

3. Bills to promote crowd funding, raise SEC registration thresholds pass House Financial Services Committee

A bill that is similar to another piece of Mr. Obama’s jobs package was approved by the House Financial Services Committee on Oct. 26, would allow so-called crowd funding to finance startup companies by allowing the firms to pool small investments up to $5 million without having to register with the Securities and Exchange Commission. State regulators object, arguing that the bill would foster fraud.

4. What is the Buffett Rule? Capitol Hill steps into the definition vacuum

As he ramped up his re-election effort this fall, Mr. Obama proposed a so-called Buffett Rule. Named after Warren Buffett, the idea is that middle-class taxpayers should never fork over a higher percentage of their earnings to the federal government than the wealthy. The notion is based on Mr. Buffett’s suggestion that it is wrong for him to pay taxes at a lower rate than his secretary. A new bill, imposes an additional 5% tax on income from $350,000 to $500,000, 10% on $500,000 to $1 million, 15% from $1 million to $10 million and 20% on income exceeding $10 million. Another group has put forth a far different concept – taxpayers would be allowed to donate money to the Treasury Department to help pay down the national debt. This last ‘concept’ has always been available BUT has yet to generate any income.

5. Republicans try to set rates on capital gains and dividends at 15% permanently and remove health care tax

House and Senate Republicans are attempting to bring some certainty to tax policy through a measure that would set capital gains and dividends rate permanently at 15%. If Congress does not extend the Bush tax cuts, the capital gains rate will rise to 20% and dividends will be taxed at individual rates beginning in 2013. In addition, the GOP is trying to get rid of a 3.8% Medicare tax that will be assessed on investment income starting in 2013 to help pay for the health care reform law. Not sure how they plan to pay for it in a balanced budget BUT it may be a way to stop Obamacare by stopping its funding.

6. Legislation could allow retirement account borrowing to pay mortgages

Retirement savings advocates are wary of a bill that would allow penalty-free withdrawals from tax-exempt pension and retirement plans in order to pay mortgages. It already allows it in 401K plans. I would prefer that they borrow than withdraw BUT not for mortgage payments without a financial plan that helps them get ‘real’ to their current financial situation.

7. DOL on fiduciary-duty rule

The Labor Department is making clear to the financial industry that it is not abandoning a regulation that would significantly expand the definition of “fiduciary” for investment advisers to retirement plans. The agency withdrew a proposed rule in September which would increase regulatory and liability costs, and would drive brokers out of the individual retirement account market because it would subject them to fiduciary duty for the first time. But why would we want brokers who don’t follow fiduciary duty to be in the individual retirement market?

Edi Alvarez, CFP^®BS, BEd, MS

www.aikapa.com

Taxes prior to Debt Super Committee Vote

Posted on November 1, 2011 by Edi

2012-13 Tax Planning
– Prior to Debt Super Committee meeting deadline (Nov 23rd)

There are at least 60 income tax provisions scheduled to expire at the end of 2011 but even if they do the most significant income tax changes are expected in 2013.

The Bush tax cuts are set to expire and income tax rates rise in 2013. At that time, itemized deductions would once again be partially phased out, the estate tax exemption will drop precipitously and the estate tax rate will jump unless they are re-enacted. At the same time we’ll begin the new healthcare surtax in 2013 that will result in 3.8% tax increase on
certain types of investment income and a tax of almost 1% on wages above a specified threshold.
Between now and 2013, we expect much talk about changes but the Congressional bipartisan ‘supercommittee’ is considering controversial revenue-raising measures, such as limiting itemized deductions for high income tax payers and other altered tax treatments. The vote & recommendations on November 23rd will play a large part in our confidence that our economy will begin to grow soon before the tax increases in 2013.

Our long term success still remain with business growth and ability to create and support well paying jobs.

What does this mean for investors? That we plan for what we know, not what might happen. But we keep our eye on what changes are approved so that we can adjust and still reach your personal and professional goals.

This year and next year (are consistent with 2010) present us with tactical and strategic decisions that may require action before those rules expire.

Here are two lapsing provisions:
AMT Patch was extended from 2010 to 2011. If Congress
does not extend it, the AMT exemption for 2012 would
return to earlier, lower levels and will result in more tax owed.

The portion of the Federal Insurance Contributions Act (FICA) tax that goes to Social Security was reduced temporarily in
2011 from 6.2% to 4.2%. With no extension, the higher rate
returns in 2012.

Edi Alvarez, CFP^®BS, BEd, MS

www.aikapa.com

Greek Reaction Demonstrates Fragility of EU

Posted on November 1, 2011 by Edi

European Unity and Global Markets
Reaction by Greek Prime Minister

Greek Prime Minister George Papandreou seemingly took the world back to square one. Papandreou will have a referendum to approve the latest, second, bailout for his country. The agreement signed last week and agreed to by Greece is now up for a referendum.

With that, global markets crumbled. In early trading here the S&P, DAX and FTSE are off and dropping. Bank stocks are leading the way with 10% drops not at all uncommon as the Greek vote calls into question whether or not the entire deal struck last week will need to be renegotiated. What is surprising is that the referendum does not seem to have a date.

Some believe that “The Papandreou decision is kinda smart, who is he to unilaterally commit his country to financial servitude for the next decade or so without the backing of Parliament?” Considering that his government did the bulk of the spending it is a political calculation to refuse to now comply with the Maastricht Treaty which forced other member nations to bail Greece out, again.

The net result is an unexpected sell-off, that could last – ending a rather positive run of data regarding the U.S. economy.

It is time to buy during smaller market growth and then selling each time fear rises. The super committee meets this month – prepare for another period of volatility.

Edi Alvarez, CFP^®BS, BEd, MS

www.aikapa.com

Debit Fees are off for the near future

Posted on October 31, 2011 by Edi

Bank of America Reverses Debit Fees

Bank of America Corp announced that it will not implement the $5 monthly fee for debit card use in 2012.

Not only was this a move that would cost them current clients, it would also cost them new clients. They were left alone when rivals backtracked on charging fees on debit cards. Other higher account fees remain.

JPMorgan Chase & Co and Wells Fargo & Co last week decided to not implement similar programs. SunTrust Banks Inc and Regions Financial Corp decided that they would end monthly charges and reimburse customers.

Banks explained that they needed to increase fees to maintain their earnings in view of the new regulations regarding the fees they charge retailers when consumers swipe their cards. The fees sparked a firestorm of criticism from consumers and politicians – even shareholders.

Bank of America began softening its stance last week suggesting that clients would have ways to avoid this fee. It appears that their goal was to direct clients to use their Bank of America credit card.

The reversal is another embarrassing about-face for Bank of American CEO Brian Moynihan since his request for a modest increase in dividend was denied by the Fed. Reserve Board.

Edi Alvarez, CFP^®BS, BEd, MS

www.aikapa.com

Readings: Two is Enough

Posted on October 28, 2011 by Edi

Edi’s Book Readings
Two is Enough
by Laura S Scott

I was fortunate to share an evening with seven wonderful women who had read and wanted to discuss this book. We shared a drink and our thoughts.

I want to share and recommend this book for you to read or scan as a general education for everyone to understand different groups in our society. I think it is particularly a good read for anyone starting or considering having children. Children are a wonderful addition to a family that welcomes and is prepared to provide for them. All agreed that having children should be a very conscious thoughtful decision for every couple.

What persists with me even today is that 20% of couples may be childless – sounds like a fairly large group. Do the individuals share enough in common? They do if we consider their financial and retirement planning needs.

In the US singles and couples without children are not usually addressed as a group and I thought this book did a good job at educating all of us on why couples choose or don’t choose to have children. For me it was enlightening to see that we’re past the idea that having children is a requirement to have a life well lived.

If you get a chance to read it – let me know your thoughts.

Edi

Edi Alvarez, CFP^®BS, BEd, MS

www.aikapa.com

Warning regarding “Registry of World Businesses”

Posted on October 27, 2011 by Edi

Warning about the Registry of World Businesses.

If you receive an email requesting that you send your information to the European Trade Register please read the following thread and do not register your business – the year currently requested in this scam is 2012/13. If you have already made payment then report it.

The Thread outlines the Registry of World Businesses:
http://blog.mxlab.eu/2010/03/09/registration-of-the-world-business-directory-20102011/

The Terms on the Registry of World Businesses website: Notice #1 and most importantly #7 since this ‘free service’ will cost you almost 3K euros.

Terms and Conditions for Insertion

1. All orders are governed by the terms and conditions stated hereinafter. Acceptance of any modifications of these terms shall be subject to EU Business Services Ltd. (the service provider) prior written agreement. By sending his/her order, the subscriber accepts these terms unless he/she sends a cancellation within a period of seven days after the date of the signing/stamping of the order note, after which the contract will come into force. To be effective, the cancellation must be given in writing and must be sent by registered post with confirmation of receipt.

2. The service provider will place the insertion to the data base of the European Trade Register within a period of three weeks after receiving the order. The data of the subscriber will be used as stated in the order. The invoice will be sent by post. Payment will be made by the subscriber on the service provider’s bank account as mentioned on the invoice 14 days after receiving the invoice.

3.The subscriber must provide exact details of his/her business and/or his/her professional activity. On the basis of these details an insertion shall be drawn up., within a period of two weeks after the date of the invoice, the subscriber can make such corrections or alterations as he/she may consider appropriate and return them to the service provider. Upon the expiry of this period without receiving such corrections or alterations, the details shall be published in its original form. Should errors appear in the publications and these errors are based on the details provided by the subscriber, the subscriber shall be the only person liable for such errors. In the event that the service provider should have printed incorrectly the details provided by the subscriber in the online edition of the European Trade Register, the subscriber is entitled to a free extension of his/her subscription for one year. The liability of the service provider due to the aforementioned incorrectly printed details provided by the subscriber is limited to an amount of Euro 990. Decisions relating to advertisement positioning in certain sections of the European Trade Register or the designated categories are at the discretion of the service provider.

4. At the beginning of the second, third and following years of the subscription the service provider will send the subscriber an invoice, the payments for the second, third and following years have to be done on the bank account of the service provider as mentioned. All invoices are payable two weeks from the date of the invoice. The service provider has the right to terminate the contract in the event of non payment within the aforementioned period of two weeks without a prior written notice.

5. The service provider is not liable for damages caused by any technical or other failure arising in the data base of the European Trade Register or any technical failure of the data base of the European Trade Register. The service provider is not liable for damages caused by any error in the data base of the European Trade Register. Contractual technical specifications including but not limited to hosted domains for publishing adverts may be altered unilaterally for technical/security reasons by the provider. The customer shall be notified by email.

6. The insertion into the data base of the European Trade Register is granted for three years and will be automatically extended every year for another year, unless specific written notice is received by the service provider or the subscriber two months before the expiration of the contract. This contract shall come into force seven days after the day the subscriber has signed the order and therefore shall end three years later.

7. Unless agreed otherwise beforehand by the service provider, the price stated corresponds to the price of one year insertion. The price of the first three years is Euro 2970. In the event of the extension of the contract under the terms defined in the order section, the price of the access for each year shall continue to be that originally stated.

8. In order to be effective, all undertakings notified verbally to the service provider’s employees must be necessarily confirmed in writing.

9. The place of jurisdiction in any dispute arising is the service provider’s address.

10. The agreement between the service provider and the subscriber is governed by the law of the juridical seat of the service provider.

Edi Alvarez, CFP^®BS, BEd, MS

www.aikapa.com

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Don’t Forget State Estate Taxes