Tax Increases in the New Year


The Heritage Foundation recently summarized a list of the 13 tax increases that started January 1, 2013.  Seven resulted from the deal that Congress and President Obama struck at the end of 2012 to help avoid the fiscal cliff, and the other six are tax increases from Obamacare that also began this year.  Here is the list summarized by Charles Dubay:

13 Tax Increases That Started January 1, 2013:

Tax increases the fiscal cliff deal allowed:

1)      Payroll tax: increase in the Social Security portion of the payroll tax from 4.2 percent to 6.2 percent for workers. This hits all Americans earning a paycheck—not just the “wealthy.” For example, The Wall Street Journal calculated that the “typical U.S. family earning $50,000 a year” will lose “an annual income boost of $1,000.”

2)      Top marginal tax rate: increase from 35 percent to 39.6 percent for taxable incomes over $450,000 ($400,000 for single filers).

3)      Phase out of personal exemptions for adjusted gross income (AGI) over $300,000 ($250,000 for single filers).

4)      Phase down of itemized deductions for AGI over $300,000 ($250,000 for single filers).

5)      Tax rates on investment: increase in the rate on dividends and capital gains from 15 percent to 20 percent for taxable incomes over $450,000 ($400,000 for single filers).

6)      Death tax: increase in the rate (on estates larger than $5 million) from 35 percent to 40 percent.

7)      Taxes on business investment: expiration of full expensing—the immediate deduction of capital purchases by businesses.

Obamacare tax increases that took effect:

8)      Another investment tax increase: 3.8 percent surtax on investment income for taxpayers with taxable income exceeding $250,000 ($200,000 for singles).

9)      Another payroll tax hike: 0.9 percent increase in the Hospital Insurance portion of the payroll tax for incomes over $250,000 ($200,000 for single filers).

10)   Medical device tax: 2.3 percent excise tax paid by medical device manufacturers and importers on all their sales.

11)   Reducing the income tax deduction for individuals’ medical expenses.

12)   Elimination of the corporate income tax deduction for expenses related to the Medicare Part D subsidy.

13)   Limitation of the corporate income tax deduction for compensation that health insurance companies pay to their executives.

Consumers Plow Ahead

In spite of negative news on the Fiscal Cliff issues, the economy is showing continued improvement.  Here is the latest economic commentary from Brian Wesbury and Bob Stein of First Trust that shares more detail…

The Pouting Pundits of Pessimism have been in a froth over the “fiscal cliff,” but US consumers seem to be ignoring them. Shoppers hit stores in droves over the past four days, both in person and, increasingly, on-line. It’s not an economic boom, but it sure isn’t a recession, either.

Sales for the full first weekend of holiday shopping – Thursday through Sunday – are up 13% versus a year ago according to the National Retail Federation. On average each customer spent 6.3% more than last year.

ComScore says online Black Friday sales were up 26% from a year ago and surpassed $1 billion for the first time ever. Online sales on Thanksgiving Day itself were up 32%. This strength was confirmed by Coremetrics, an online data-gatherer affiliated with IBM, which says Black Friday internet sales were up 20%.

The weakest report was from ShopperTrak, a Chicago-based firm that has monitoring devices at 40,000 retail outlets and malls around the country, measuring foot traffic, which reported a 1.8% decline for Black Friday. However, when they add back Thanksgiving Day, the total for both days was up 1%.

The calendar is interesting this year. Thanksgiving always falls on the fourth Thursday of November, and because November 1st was a Thursday in 2012, the shopping season will be the longest possible. In addition, the Internet is making shoppers savvier, while retailers have more data. As a result, we think the middle and latter stages of the shopping season will be stronger than the early stages.

While some wonder how sales can be up, it is clear that more jobs, higher earnings and smaller debt burdens are all positive forces.

In the past twelve months, the unemployment rate is down a full percentage point, payrolls are up 162,000 per month, and total private wages and salaries are up 4.6% from a year ago. Meanwhile, consumers have whittled down their debts, so that monthly financial obligations – mortgages, rent, car loans/leases, and other debt service – are now the lowest share of after-tax income since 1984.

In the near term, jobs and incomes may take a hit from Hurricane Sandy. But, any hit would be temporary. For example, the recent spike in unemployment claims suggests zero net change in payrolls for November. However, weekly unemployment claims have already started to recede, so a rebound in jobs will come in December or very early next year.

Autos sales were doing well until Sandy hit in late October. Next Monday we get November auto sales, which were probably held down by Sandy as well. However, all the storm did was postpone sales. That, plus the need to replace vehicles damaged in the storm, will cause a surge in car and truck sales in December and early 2013.

Meanwhile, housing keeps picking up steam, with housing starts up 42% from a year ago, new home sales up 27% and existing home sales up 11%. We expect these gains will continue in the year ahead as the pace of home building still has a long way to go to get back to normal (so inventories stop falling) and more workers qualify for mortgages. In turn, this means more growth for consumer spending.

The bottom line is that for the fourth year in a row, consumer spending is on an upward path. Unlike some economists, we don’t think this causes economic growth. Instead, we take it as a sign that the economy continues to leave the wreckage of 2008-09 further behind. It’s a Plow Horse economy, still, with consumers taking the reins.”

– First Trust Economic commentary by Chief Economist, Brian Wesbury, and Senior Economist, Ben Stein, 11/26/12.

End-of-Year Economic Issues

The individual investor has been hammered in the last month about the “end-of-year“ Fiscal Cliff issues coming due all at one time.  In turn, many people are asking what the markets and economy might do after the November presidential election if Congress and the White House fail to act on this.  Here are three dreaded Fiscal Cliff issues all coming due on December 31st:

  • Mandatory cuts on defense spending
  • The need to increase the Federal debt ceiling
  • The temporary Bush tax cuts expiring 12/31/12

Though all of us won’t know the outcome until it happens, we are optimistic that resolutions will be made to prevent the Dec. 31st Fiscal Cliff from happening.  We will continue to monitor this issue for our clients.  In the meantime, Brian Westbury’s recent “No Recession Yet” video helps explain some of the issues.

A Q&A on QE3

Below is an interesting Q&A by Al Lewis who is a columnist for Dow Jones Newswires in Denver, CO.  This interview below addresses some of the common questions and concerns people are asking now about QE3…

A Q&A on QE3 by Al Lewis, September 15th:

Q: Why did Federal Reserve Chairman Ben Bernanke launch a third round of bond buying known as quantitative easing, or QE3, last week?  A: Because the stock market told him to. How else can he keep the Dow Jones Industrial Average above 13000? Companies are warning of slower earnings growth.

Q: How big is QE3?  A: $40 billion a month—indefinitely. This is on top of the $45 billion a month the Fed is already spending on another program called “Operation Twist” through the rest of this year.

Q: Phew, is that all?  A:Hardly. Since 2008, the Fed has dumped more than $2.3 trillion into the economy, artificially levitating the values of stocks and real estate against the ravages of an economic reckoning.

Q: What will the Fed buy with this QE3 money?  A: Mortgage-backed securities. It is betting that the way to fix a deflated housing bubble is to blow another one.

Q: Does the Fed really just print all this money?  A: No. That would take eons. The Fed simply adds zeros to its magic spreadsheet, and violà, money!

Q: Isn’t this a Ponzi scheme?  A: Of course not. A Ponzi scheme is illegal. This is a Bernanke scheme.

Q: Is it working?  A: Every new QE is an admission that the last one didn’t work. Since the first QE in late 2008, America’s economic growth has mostly been described as “anemic.”

Q: So why will QE3 last indefinitely?  A: It spares Mr. Bernanke the humility of announcing QE4, QE5, QE6 ….

Q: Will this finally lower unemployment?  A: You tell me. The Fed has launched QEs and held interest rates close to zero for nearly four years. The unemployment rate has remained above 8%.

Q: So why call it a “recovery”?  A: It’s not as depressing as the term depression. A depression can be defined as a prolonged period of high unemployment.

Q: Why not just call it that?  A: Another theory holds that a depression is impossible as long as Mr. Bernanke can keep creating money.

Q: Won’t this cause inflation?  A: Only if you eat food, burn gasoline, require medical attention, purchase commodities or pay college tuition. Bottled water is $1.29, and air is still free.

Q: Why haven’t QEs worked?  A: It’s a global economy and QEs simply leak out of the bucket. Companies, for instance, may use the cheap money to expand abroad. And consumers may use it to buy more Chinese goods.

Q: So why do it?  A: The money flows into banks to strengthen their balance sheets. Corporations use it to lower borrowing costs and launch stock-repurchase programs. The ensuing boost in corporate performance helps executives collect “performance pay.”

Q: Won’t the Fed eventually have to sell the trillions in bonds it is buying? How will it be able to find enough buyers?  A: Don’t ask. Nobody knows.

Q: How do QEs contribute to our national debt?  A:The Fed’s purchases of U.S. Treasurys lower the interest rate our government pays to issue them. This can only encourage more borrowing. Since 2008, our national debt has risen more than 60% to more than $16 trillion.

Q: Isn’t that astronomical?  A: Yes. But we can now measure the national debt in lightyears. A lightyear equals nearly six trillion miles. At $1 a mile, our national debt is only 2.6 lightyears.

Q: Why lightyears?  A: Because our economic woes are indefinite, and that’s why QE3 is indefinite. Mr. Bernanke should change his name to Buzz Lightyear: “To infinity and beyond!”

—Al Lewis is a columnist for Dow Jones Newswires in Denver. He blogs at; his email address is”

Actuaries Say Retirement Worries are Increasing

Below is some informative material prepared by Karen DeMasters of Financial Advisor News on 8/16/2012 that talks about retirement views of both pre-retirees over age 45 and retirees.  It is apparent that both retirement income and the need for sufficient financial resources are on the top of retiree’s minds.  We hope this post finds you doing well and off to the beginning of a good Fall season …

Actuaries Say Retirement Worries are Increasing – More than one-third of pre-retirees over age 45 do not expect to be able to retire, an increase of 6% over the number reported in 2009. That pessimistic view comes from the latest survey by the Society of Actuaries, “2011 Risks and Process of Retirement Survey Report.” The society surveyed 1,600 people over the age of 45, including 800 retirees and 800 pre-retirees.

Of those who do not expect to retire, 45% say it is because they lack the financial resources to do so. Of those with financial concerns, three-quarters of retirees and 87% of pre-retirees say they will need extra income. Fifty-nine percent of retirees and 80% of pre-retirees say they need to build more assets. And 33% of retirees and 61% of pre-retirees say they need to keep employee benefits.

“Current trends in retirement indicate that people may need to work longer than they originally planned,” says actuary and retirement expert Carol Bogosian, spokesperson for the Society of Actuaries.

“Individuals often have a difficult time estimating how long they can expect to live, how much they will earn on their investments and how much they can spend each year to avoid running out of money,” she adds. “In fact, many people are just guessing about how much money they will need in retirement.”

The majority of both pre-retirees (89%) and retirees (77%) also say staying active is a reason to keep working in retirement. However, those who do expect to retire often overestimate the amount of time they will be able to keep working. While half of retirees report they retired before age 60, just one in 10 pre-retirees think they will retire that early. Half of pre-retirees expect to work until at least age 65.

“There is a big gap in the age at which pre-retirees expect to retire and actual retirement ages of those who have retired,” says Bogosian. “This may be partially due to involuntary retirement and health problems. This gap, together with the failure of many people to plan for a long enough retirement period, may indicate significant future financial problems for many.

For those retirees who have continued working, half have found employment with a company other than the one they retired from, while 29% have continued to work for the same company. Twenty-two percent have started their own small businesses or become self-employed. Thirty-one percent of pre-retirees who plan to retire say they will also start a small business.”  –Karen DeMasters

Why the Long Face?

Below are some interesting thoughts from First Trust written by their Chief Economist, Brian Wesbury, and his team.  We thought you’d find the information helpful to consider, and hope you and your family are enjoying a good end to the summer…

Why the Long Face?  Back in early 2009, the University of Chicago Booth School of Business and the Northwestern University Kellogg School of Business teamed up to create the Financial Trust Index. The latest readings from July 2012 show that just 21% of Americans trust the financial system and only 15% trust the stock market.

For many, this negativity is understandable. The stock market is still below levels it reached in 2000, housing prices are still down and many people just cannot shake off the fear that was created in the 2008/09 Panic.

But, the lack of trust must be about more than this. Since the bottom for equities on 3/9/2009, when the Booth/Kellogg survey found just 13% trust in the stock market, the S&P 500 is up 120%, with dividends included. More importantly, the S&P 500 index is up more than 1100% in the past 30 years.

In addition, real GDP has been growing now for 12 consecutive quarters, private payrolls have climbed for 29 consecutive months and housing has clearly turned a corner. Yes, there have been slow patches (in 2010, 2011 and 2012), but in each case, even this year, the economy picked up again without falling into recession.

In other words, the negativity (the lack of trust) seems excessive. It is ignoring the good parts of the past and focusing on the bad parts.

Or, maybe there is another explanation. Right now the political fog is so thick that you can cut it with a knife. And, because politicians find it effective to scare people into voting for them over the other guy, our political leaders and their spokesmen and women are very busy trying to find things to make us worry about.

For example, last Friday, it was reported that payroll employment rose 163,000 in July, which was much better than expected and a sign that a recession is still unlikely.

Nonetheless, the political spinmeisters focused on every negative piece of the jobs data they could find. The unemployment rate rose to 8.3% and if we add discouraged workers, it was 15%. The labor force participation rate, which the bears ignored in the past few months, fell in July. The sky is falling they said.

And when the right side of the political equation says all these negative things, the left side says another Great Depression is coming unless the US government spends more money or the Fed prints more money.

So, the average investor reacts with fear when leaders everywhere are bashing the economy and telling everyone that will listen that the world is about to come to an end if their plans aren’t followed immediately.

Don’t get us wrong, our models clearly show that the economy could, and would, do better if government spending were reduced as a share of the economy. Moreover, uncertainty over regulations, new healthcare laws and the potential of future tax hikes are also holding growth down and unemployment up. But that doesn’t mean that the economy is about to fall into recession or the stock market is about to collapse.

We expect the economy will continue to expand, earnings will continue to grow and stock prices will continue to rise.

The reason for our optimism is relatively simple. Technology, driven forward by the relentless spirit of entrepreneurs that don’t let political fears stop them, continues to raise productivity. This is happening despite what we think is wrong-headed fiscal policy.

In addition, the Fed is not tight, which is the number one cause of recession. We do not expect the Fed to pull the trigger on QE3, but quantitative easing was never necessary for growth. The Fed’s near 0% federal funds rate is enough and always has been.

In the end, the way for investors to avoid mistakes in this environment is to watch the data and avoid the political spin. The economy is not great, but with so few people trusting the market and financial system, opportunities abound. If the market can hang in there with so little support, imagine what happens if fiscal policies turn for the better.

Consensus forecasts come from Bloomberg. This report was prepared by First Trust Advisors L. P., and reflects the current opinion of the authors. It is based upon sources and data believed to be accurate and reliable. Opinions and forward looking statements expressed are subject to change without notice. This information does not constitute a solicitation or an offer to buy or sell any security.

Easter Inspired Thoughts – Tuesday

Are you prepared?  On Tuesday afternoon Jesus went to the Mount of Olives which overlooks Jerusalem.   Here he spoke about many things, much of which included instructions on the “end times.”  During Easter we can easily understand why he would address final things.  And while there is debate today on several different end-time events, Jesus was crystal clear about one thing, “…you do not know when the time will come.” (Mark 13:32-37)

When we look at our lives, the most obvious thing we know will happen is death (in a physical sense).  What we don’t know is when this will occur.  Some of us may receive guidance from doctors, but the exact day or hour is certainly unknown.  However this fact doesn’t excuse us from the need to plan.  Consider retirement… many various assumptions come into good retirement analysis, one of which is longevity.  The problem is none of us really know this answer, just like we don’t know exactly what the markets will do, how our investments may fluctuate, or what unexpected needs may surface that try to derail our best laid plans.

Planning for tomorrow doesn’t mean that you will predict exactly how things will turn out.  Rather it focuses more on being good stewards of what is entrusted to us… more on making sound decisions today with strategic but flexible plans that can hopefully weather the unexpected storms of life.

Consider today that you ultimately aren’t in control.  Yes, this is a humbling thought, and at times even downright scary.  But reality is that we don’t know exactly how long we will live, much less what things may unfold tomorrow… or in the next hour!  But there are things you can do now that will help you stay “on guard” and “awake” for what’s coming down the road.  Realization of this can help us all keep a better perspective, and ultimately help us do as the Boy Scouts of America pledge… to simply “Be Prepared.”

Easter Inspired Thoughts – Monday

How important is money?  The week of Easter is the climax in the life of Jesus, and on Monday (today) he returned to Jerusalem and found money changers in the Temple (Mark 11:15-18). 

It’s very true that “money and finances” are important in our lives as they help put food on the table, send our children through school, and pay for medical needs, among many other necessary things.  But do we put money in its proper place of importance?

A simple challenge today is to think about these things… and not to just pray for our families, friends and everyday needs, but also to begin praying about our finances and the role money plays in our life.

Recovering from a Market Drop

We all remember that time… the 2008 and 2009 market drop.  What a scary time that was for investors and even advisors, nationwide.  Now a few years later, we are hearing mutual fund investors ask, ”Have I recovered from those drops?”  Well here are some things we are seeing as we review client accounts.

Many investors are near a complete recovery, if the following happened:

  • Investors stayed in the market and did not try to “time out”
  • Investors maintained their investment allocation in equities at the same level of risk.  For example, a 75% stock investor prior to the drop stayed invested in practically the same equity allocation throughout this time.  Yes, changes could be made, but overall equity allocations remained about the same (No reduction in risk level, such as moving from Moderate to Conservative)
  • Investors did not redeem any sizeable amounts from their investments.  It was very important to maintain at least the same amount of shares as prices recovered.  In fact, as dividends and capital gains were paid out, investors who reinvested these amounts actually accumulated additional shares which proved to be very helpful in regaining lost ground as share prices recovered

We have also seen added benefits for investors who continued to invest (buy additional shares) during any significant market drops.  This is typically done best through “periodic investment plans” or automatic bank drafts, which takes advantage of an investment strategy called “dollar-cost-averaging”.

We hope this helps as you consider your situation.  Yes, some of the suggestions that advisors gave to their clients back during that ugly drop are proving true as time goes on, especially if investors stick to their game plan.

Understanding Dividends

On the heels of Apple announcing they plan to start paying dividends, I hope you find this information helpful and enlightening to your situation.

Most people understand “interest” from savings accounts and CD’s. But few truly understand dividends, how they work, and the benefits long-term. So let’s try to explain.

Simply speaking dividends are payments from corporations to their shareholders (investors of the company). Prior to each dividend, the board of directors declares the amount to be paid to shareholders. Dividends are usually paid quarterly and can be distributed in cash or reinvested to accumulate additional shares. Today you may find companies or stock mutual funds that pay reasonable dividends in the range of 2% to 4% each year.

Many investors prefer stocks or mutual funds that pay reasonable and predictable dividends. These dividends can supply a stream of income compensating the investor with some form of return, while they wait for a potential longer-term overall return.

Stocks that pay dividends can generally be less volatile than companies that pay no dividends. One reason for this is that the investor is compensated for their investment risks each quarter, through the dividend, rather than waiting long-term to receive any potential benefits of growth. Keep in mind this is a general principle and is not always the case for all stocks and mutual funds. Also, savings accounts and CD’s are typically guaranteed (FDIC insured) and stocks are not. This means that the investor can see fluctuations in the value of their stocks or mutual funds. Remember, past performance doesn’t guarantee future investment returns. That said, also remember that dividends can provide some benefit in the meantime while investors wait for longer-term potential growth.