This lack of repeal will increase taxes for 17 million seniors an average of $2,034 per year according to the Heritage Foundation, a Washington D.C. non-profit think tank.  That is approximately $170 per month!  Many seniors will find themselves dipping into savings to pay the taxes, if they have savings at all.

             For 42 million families with children, the average tax impact will be an additional $175 each month.  In my experience of working with families, few have the reserves in their budget to be able to afford this additional tax increase.  This will further slow the economy in all likelihood. 

             Business owners will also see tax increases. Many of the 26 million small businesses in the US today are already struggling with the decline in revenue caused by the weakening economy.  Many will be forced to close their doors if they see an estimated tax increase of $3,637 per year. In addition, the death tax, which is the leading cause of termination of successful small businesses, will be reinstated.

              Finally, the marriage penalty tax will be reestablished, forcing married couples to pay more in taxes than single taxpayers.  In the year 2000 the average cost for couples punished by the marriage penalty tax was $1480 per year.  It is estimated that 44 million people will be affected by this tax increase.

             The Wall Street Journal has described this as “the biggest tax increase in our nation’s history.”  What most people fail to remember is that right after the Bush tax cuts were implemented, state and city governments immediately raised taxes and many of the federal funds for the states and cities were cut off.   Those high state and city taxes are still in place to this day.  Adding to the taxes that already exist will result in a substantial burden for individuals, families, seniors and businesses.

Age has privilege based on certain, milestones like turning 65 and gaining eligibility for Medicare, health care at a reduced rate, and reduced real estate taxes. At age 59½ money can be withdrawn from retirement with no penalties. At 24 a student receives financial aid based on his own salary and not his parent’s income.

If income is too low, one can receive food, free medical costs, reduced rent, free tax money, free education, free day care, reduced utilities, and free legal aid.

If net worth is low and income is low, people can have many of the privileges outlined in the previous paragraph. In addition, one may be eligible for free nursing home care.

 Specific occupations also have privilege. For instance, individuals in the military or clergy do not pay taxes on the expense of housing. Veterans receive discounts at many retail stores and can also receive, if qualified, free health care, funeral expenses, education, financial counseling and can receive job preference. If one works for certain non-profit organizations or for the government, student education loans can be forgiven. Parents who work for the government also receive preference for their children on financial aid for college.

With the right knowledge, small business owners can structure income to their advantage from an income tax standpoint. There are numerous benefits that can be offered to employees structured to the advantage of the owner of the business. Profits of the company or business can also receive preferential treatment tax wise.

More recently we see first time home buyers, car buyers, union members, Congress, and attorneys receiving preferential treatment, even in the face of incompetence. Certain large businesses like banks, insurance companies, and auto companies have received advantages created by legislation coming out of Washington. The difficulty in having this preferential treatment is that by the time people discover what benefits are available, the time period to take advantage of these benefits has expired. As a result it benefits only those who keep informed or those who lobby help. In addition, it always results in taking from some people and redistributing it to others. Those who benefit receive value not by their own efforts, but by circumstances.

In United States societies of the past (50’s and 60’s) the check for business greed was customer service and customer satisfaction. The check mate for government is our Constitution; but Congress, as well as the judicial and executive branch of government, has over-reached its authority. The result will lead to socialism. It is not, nor has it ever been, the role of government to give charity, because it always leads to corruption. The church needs to take back it’s authority over feeding the poor, healing the sick, strengthening the weak, and providing clothes and shelter to those in need.

             Proverbs 19:2 says, “It is not good to have zeal before knowledge.”  We live in a society that has zeal and limited knowledge so we miss out on the hidden manna that is available to everyone.

             We have seen many examples where people have sought help at the wrong place or with the wrong people.  Others have found the right people but didn’t know the correct questions to ask.  We know numerous veterans who may be eligible for help but aren’t receiving it because they do not know the rules.  It is often not enough to simply ask a question about taxes and expect to get the right answer from the IRS knowing there are over 71,000 pages of the code. 

             People assume that if they take their taxes to the accountant that the accountant will show them how to pay less in taxes next year.  If you only see your accountant between January and April 15, don’t expect this bleary-eyed person to come forth with all the ways you could have structured your income to pay less in taxes. 

             Equally complex is the college tuition eligibility and financial aid process for reducing college costs.  We have a process for no debt college.  To optimize the result, planning should begin in the eighth grade.  For some we have helped reduce the cost after graduation.

             Most people do not understand the whole process of borrowing and establishing your credit score.  The credit score determines the amount of interest you will pay on a loan.  Our job is to improve the credit score to reduce your interest rate and thus improve your cash flow.

             Food costs can be dramatically reduced by simply understanding how stores merchandize their products and by setting up rules for yourself before entering the store.  Making up lists, using coupons, and checking receipts will add additional money to your pocket.  Even the process of choosing the right store is important to know.

             Utility costs can be dramatically reduced with proper insulation, routine maintenance of your furnace and air conditioner, and attention to energy usage ratings of your appliances.  Additional savings can be found by using water restrictors, fluorescent bulbs, and water efficient toilets.  If the cap and trade agreement happens, you can expect increases of $150 to $250 per month in utility expenses.  Begin making your house energy efficient now. 

             There is so much information available to us today that it becomes overwhelming very quickly.   Be determined and discerning in your search for the best possible solutions.

             Robert Ostrander, CFP®

            SWS Advisors, Inc.

        If the recession has touched your life financially, you might want to do some tax planning to either postpone or accelerate your tax deductions and/or income.   For those anticipating more income this year than next, it may be prudent to accelerate deductions and postpone income.  For those anticipating less income this year than next, consider postponing deductions and accelerating income.  Here are some ways to do that. 

        One example might be to do a conversion of a Traditional IRA to a Roth IRA. This will result in more income in the year completed, but will reduce taxes in future years, particularly after the Roth has been in place five years.  It will be necessary to look at how the additional income will affect your taxes this year before you do complete the process. 

        Another option is to review the assets you hold that have appreciated in value.  As we do anticipate higher capital gain taxes in the future, this may be a good year to sell and take the capital gain in a low income year.  Again, a review of the affect on your overall taxable income is appropriate before selling. 

        From a deductible expense standpoint, consider paying real estate taxes for the year either in December or January depending on which year you anticipate being in a higher tax bracket.  This can result in two real estate tax deductions in one year and none in the other year.  This strategy makes the most sense for those close to a threshold of a higher tax bracket or for those who have itemized deductions that barely exceed the threshold for the standard deduction ($11,400 for married, $5,700 for single).  For those who do not itemize but do pay real estate taxes, this year you can deduct $1,000 ($500 single) for real estate taxes in addition to the standard deduction.  You may have the opportunity to prepay other itemized expenses on your tax return as well.  

        This is a good time of the year to review whether you need to reduce or increase withholding of your taxes.  Most people over withhold and, as a result, they end up making interest free loans to the government.  Many of these same people are borrowing money at excessive interest rates with credit cards.  If you received a substantial refund this past year, file a W-4 form with your employer and increase your number of withholdings.

        Another tax strategy is to look for an opportunity to do income splitting with family dependents.  Many business owners hire their children, transferring income into the child’s lower tax bracket to be used for paying school tuition.  It can also be done for estate tax reasons when assets are substantial.

        This is a great time of year to look at charitable planning.  Presenting gifts of appreciated assets to avoid capital gain taxes may reduce taxes at the end of the year.  The savings and tax reduction is greater with the gifts of appreciated assets.

        First time home buyers or those who have not owned a home in the past three years have an opportunity to receive a substantial tax benefit ($8,000) by purchasing before December 1, 2009.  There has been talk of extending this tax benefit but a final decision has not yet been made.

        Finally, review benefits from your employment to make sure you are taking advantage of all the pre-tax living expenses offered by your employer.  I recently published an article that addresses these opportunities in more detail (click here).

 Robert Ostrander, CFP®

SWS Advisors, Inc.

       What will this mean to the average family earning $50,000 per year?  Using standard deductions a family earning $50,000 will pay an extra $200 per month in federal taxes.  If this was the only tax to be concerned with it might be possible for a family to survive.  But it’s not. 

        By letting the Bush tax cuts expire, those with high net worth (over $1,000,000) will be faced with a confiscation tax (estate tax and state inheritance tax) of 55% for amounts over $1,000,000.  An additional 2% – 19% will be assessed by your state depending on the state of residence and the size of the estate.  Proper estate planning can minimize some of this tax burden.

       The cap and trade (cap and tax) agreements currently proposed before Congress will come in the form of higher fuel costs, costing this same family an additional $300 per month in gasoline prices and an extra $100 -$200 per month in increases of fuel costs in the home.  The impact will force many to look for alternative means of transportation and force those in rural communities to move closer to their place of employment.  Additionally, people will seek lower square footage homes to decrease their heating and cooling costs.

        As if these issues are not enough, the currently proposed healthcare reform may also have tax implications.  Eighty to ninety percent of Americans work for small business.  Under the new plan, if your employer does not provide health care they will be taxed an additional $100 per month and each employee will be taxed an additional $100 per month on $50,000 of income.  This may also lead to higher unemployment.

       Another concern is the impact of inflation as a result of the stimulus package and years of underfunding of Social Security, Medicare and Medicaid.  When the baby boomers begin to tap these resources, the cost of everything will rise, forcing families to increase their income, thrusting average households into even higher income tax brackets.  The impact will reduce any discretionary income the average family may have left under the previous proposals.

       So what is the cumulative effect of all these taxes on the average family making $50,000?  This family could see an increase of anywhere from $400 to $900 each month in taxes (direct or indirect).  For someone making $30,000 each year the cumulative impact would be $300-$500 each month.

       I used to think that Congress would never make destructive decisions because they have some intelligent people in Washington.  My thinking changed in 1986 when Congress caused the Savings and Loan industry collapse by changing the depreciation schedule on real estate from fifteen years to a 29 year depreciation schedule.  More recently we have seen the relaxed home loan mortgage underwriting mandate through Fannie Mae and Freddie Mac that led to the banking bailout.

       How can you respond to this impact on your cash flow?  You may want to let your voice be heard through your government representatives.  On a personal level consider the following:

1. Review assets you have that may be subject to taxes when you sell the asset. You may want to pay the tax on them now rather than later when you could be in a higher tax bracket.
2. Begin to review ways to reduce your energy consumption both in your home and your vehicle.  You may want to live closer to your employment.
3. Review ways to make more of your income fall in the category of benefits through employment to reduce taxes.
4. For large estates, begin to look for ways to reduce the impact of estate and inheritance taxes.
5. Look for the myriad of ways to reduce living expenses.  If you have a business look for ways to improve cash flow, reduce operating expenses, and reduce taxes.
6. Look at repositioning investment assets for this crisis.
7. Pray for the leadership of this nation.

        We have less than two years before these tax increases take affect.  I encourage you to begin making plans to withstand these tax measures.  Not making plans now could be devastating for you and your family in the future.  Please forward this to anyone you think might be concerned with an increase in their family budget.

 Bob Ostrander, CFP®

SWS Advisors, Inc.

Bob has spent over forty years researching ways to reduce living expenses.  He has written books and workbooks to help families and businesses on this subject.  Bob continually looks at the impact of legislation on a personal budget.  This article raises grave concerns for this nation.

The complexity of good stewardship for today’s family has gone way beyond the average person’s comprehension and understanding.  As an independent financial advisor for over forty years, I have found it increasingly difficult to stay abreast of the constant changes in government programs, tax law, health care, debt management, portfolio analysis, technology, food cost reduction, consumer products, automobile maintenance, estate planning, retirement planning, college cost reduction, home financing, extended health care (nursing homes, assisted living, etc.), career management, employment benefits, and personal budget management.  Living expense reduction and asset management is my life’s work, but few financial planners specialize in both of these areas.  If I have trouble keeping up with all the changes, do you think most people in our society have missed taking full advantage of their resources?

 Recently a lady came into my office requesting help because she was about to lose her home.  Her situation was not unlike what I see every day.  In her case, she was eligible for health benefits that would cost her no more than $60 a month, but she was using a plan costing $400 a month.  In addition, she was paying $40 each month for insurance she could never use.  She was also not aware that she was eligible for a property tax reduction of $400.  Because she was behind on her mortgage, she was eligible for rescue funds of up to $3,000 at no interest, yet she had just used a check cashing place at 60% interest to try to keep her home.   There were at least ten other ways that we found for her to save money.  Sadly, she was not tithing during this time so the body of Christ was losing as well.

 You might be thinking the problem is ignorance on the part of the lady, but it’s not.  The systems have become so burdensome that our ‘experts’ don’t know of, let alone understand, all the changes taking place.  I reviewed the lady’s information with a CPA (without revealing her personal data) and he confessed he was only aware of a few of the items that we found would save her money.   A CPA!  And he isn’t the only one.  In the last few years I have helped a financial planner with 30 years experience save over $20,000 and another planner with 15 years experience save $6,000. 

 Saving Without Sacrifice specializes in reviewing over 300 separate ways to reduce expenses, increase income and reduce taxes by analyzing insurance policies, tax returns, business structures, utility bills, investment contracts, deeds, food purchase habits, real estate holdings, employment benefits, debt agreements, government benefits, college cost reduction techniques, and your future goals.   We also assist in providing ways to assist in all future budget purchases.  Our goal is not to change our clients’ lifestyle, although it may be important to do so.  Our goal is to help simplify their life and transform them into wise stewards of the resources that have been entrusted to them.

Every church has vast assets within the body of Christ that either lie dormant or are wasted because people lack the understanding of proper stewardship.  Most churches have responded to programs like Crown Financial Ministries’ ‘Journey to True Financial Freedom’ or Dave Ramsey’s ‘Total Money Makeover’, but for the most part they focus on debt reduction and cutting items out of the budget.  We use our unique principles of living expense reduction to help you save without sacrificing your lifestyle.  Our book, workbook and devotional can help get people started in the right direction.  Our methodical cost containment process will take people from a complex, stressful life of bondage to one of simplistic, peaceful stewardship.  Visit our website, savingwithoutsacrifice.com, for more information.  

Robert Ostrander, CFP®

SWS Advisors, Inc.

 Current health care costs are estimated to be, on average, more than $8,000 for every man, woman, and child in the United States.  I think we can all agree that there is not enough money available to pay for that.  At the center of the problem is the need for law changes limiting excessive lawsuit settlements related to health care that cause the liability expenses for physicians and hospitals to soar.  In addition, the vast majority of physician offices are run inefficiently.  For the most part they are “mom and pop” organizations.  A uniform standard for reporting and for claims processing would go a long way in reducing costs.

I recently met with a physician who does research on longevity and asked him what the most essential steps are to extend life.  His answer surprised me.  Meditation (prayer) was number one, followed by stretching, aerobic and anaerobic exercise, and finally, nutrition.  As individuals we need to take control of our own health.  Most of us know how to be healthy, but we often lack the discipline to follow through to make it happen.

We know statistically is that 2.8% of the people cause 80% of the cost of health care in any given year.  A number of years ago I discussed with an occupational physician the idea of putting a plan together to simply manage the 2.8% of the people who need care.  Unfortunately, those in the position to understand the ways to reduce the costs have no authority in the health care system.  The authority primarily resides with hospitals and insurance companies, who by no coincidence, are also the beneficiaries of higher costs.  The premium payer is often a business, leaving most employees in the dark about the options they have and the costs they pay.

Congress is currently proposing a national health care program.  No country in the world has had success with this kind of a plan because, ultimately, it leads to rationed health care and debt beyond measure.  Congress might take steps to achieve success by introducing a public program for some and private pay for others.  Because the government can hide their expenses, most people fear that it will eventually lead to the demise of the private pay plans. 

Another part of the proposal is to tax health care expenses.  If this is done it will result in substantial increases in taxes for people who work.  It is estimated that 50% of our population pay little or no income tax.  This would reduce their already meager compensation.  To remove the deduction for health care is to tax anyone who pays social security, federal and local income taxes.  Those least affected by this proposal would be the young, those over age 65, and the non-working poor.  The tax increase would result in an average additional tax of $200 each month for every man, woman, and child.  Of course, no one is average so a disproportionate cost would be borne most by older Americans not yet 65 and the working middle class.

Because health care represents one of the most formidable costs in a family budget, our advisors have been diligent in recommending to our clients the proper use of cafeteria plans, health savings accounts and the benefits of employer-paid health care.  We may see the loss of these deductions in the future.  As a result, we are asking our clients to step up their plans to get healthy.  Rationed health care will demand we begin to take care of ourselves.  Remember, 2.5 million Israelites spent forty years in the desert and had no disease.  You can do it too!

Robert Ostrander, CFP®

SWS Advisors, Inc.

 Having been engaged in financial planning for over forty years I am fascinated by the lack of care taken by employees, business owners, ministry leaders and their advisers in the structure of compensation.   Too often significant dollars are spent needlessly because of a lack of understanding of some of the fundamental tax laws.   Structuring compensation properly can benefit the owner, the business or ministry, and the employees, saving thousands of dollars.

I always begin this process by reviewing the personal budget of the owner or ministry leader.  From there we identify future goals of the decision maker so that we can look at what new employee benefits we may want to introduce in the future.  Next, a review of the business budget is done to identify tax liability levels for the company and how money is being spent.  We begin to methodically look at reducing any items in the business budget that may decrease operating expenses.  Businesses can be structured to pay healthcare costs, dental, long term care insurance, eyeglass care, childcare, transportation, parking, adoption, life insurance, disability insurance, educational reimbursement, prescriptions, and moving costs on a pre-tax basis.  Additional deductions can be realized with retirement plans and, in some cases, utilities and housing allowances. 

Casting income differently can often make a dramatic change in the level of tax being assessed.  Using an S-corporation and rental or lease agreements offer ways to achieve income splitting goals.  Other methods involve having children perform duties for the business and for them to receive compensation in a child’s lower tax bracket.  These earnings can then be used to fund various college expenses.  For those charitably minded, there are various techniques that use the business or ministry to make charitable contributions.  This allows for more dollars to go to charity and reduces the taxes paid on most normal charitable contributions.  Most contributions go to charities after twenty percent tax has already been paid and, with current government proposals, we may see that percent go higher.

Employees also have a choice of which benefits they receive.  Most workers take benefits because they have been convinced by the benefit provider’s agent to buy them.  With proper education, we can often reduce the costs and increase the value of the benefits chosen, putting money back in the pockets of the employee.  We do this by reviewing the budgets of each employee to help them choose benefits based on their best value.

The net effect of this process saves taxes, reduces living expenses for the employees, reduces business overhead expenses, and increases both business and employee income.  It doesn’t get any better than that!  Choosing the way money is received and the way expenses are paid is critical in our complex culture.  For more information on how this can be done and resources that can help, visit our website at savingwithoutsacrifice.com.

Robert Ostrander, CFP®

SWS Advisors, Inc.

Tax Stimulus Pros……and Cons

The recent economic stimulus bill has some advantages for certain taxpayers.  The following list represents some of the benefits:

1.                  The first $2,400 of unemployment compensation will not be taxed for those who have lost employment between September 1, 2008 and January 1, 2010.

2.                  Those paying for health insurance through COBRA will only have to pay 35% of the cost.  The balance of 65% will be paid by the employer, but reimbursed by the government.  This is available until January 1, 2010.

3.                  The alternative minimum tax exemption allows for couples earning up to $70,950 and single up to $46,700 to avoid paying the tax.

4.                  Anyone who has not owned a home for the past three years can qualify for the $8,000 tax credit if the home is purchased by December 1, 2009, as long as your income does not exceed $75,000 for an individual or $150,000 for a couple.

5.                  There is a temporary expansion of the Hope Credit for the first two years of post secondary education expenses.  The first $2,000 of expenses receives 100% credit while the next $2,000 receives 25% credit up to $500.  This credit phases out for incomes of $160,000 for married couples and $80,000 for single individuals.

6.                  Those with funds in the educational 529 plans can now use the money for computers and computer technology.

7.                  Buyers of new motor homes, motorcycles, cars and light trucks can deduct the sales and excise taxes on the vehicle up to $49,500 of the vehicle purchase price.  The deduction is phased out for incomes of $125,000 for individuals and $250,000 for couples and is only available through 2010.

8.                  There are some credits available for those who install approved energy efficient improvements in their homes.

9.                  A hybrid vehicle tax credit is available for the first 200,000 sold.

Those with small businesses also have some tax incentives available:

1.                  Equipment, supplies or capital expenses can be deducted for up to $250,000 in the first year under Tax Code Section 179 for 2009.  There are additional bonus depreciation amounts for capital expenditures.

2.                  The new Work Opportunity Credit gives incentives to small businesses for hiring military vets and disconnected youths who are 14-24 with no family or support networks.

3.                  An investor may be able to exclude 75% of the capital gain on an investment in a small company if the stock is held more than five years.  The investment must be made between February 17, 2009 and January 1, 2010.

4.                  For those business owners converting a C-corp to an S-corp between 2009 and 2010, there is favorable tax treatment.

5.                  There is favorable treatment for setting aside estimated corporate tax payments.

6.                  There are some additional incentives for writing off 2008 losses by carrying the losses back to as many as five previous tax years instead of the standard two.

   This stimulus plan was designed to give the American people incentives to stimulate the economy by buying new cars or homes, going to college, or improving energy efficiency.  It also was designed to give employers incentives to hire new employees, purchase more supplies, make investments in small companies and pay taxes.  While all this is said and done, it masks the billions of dollars spent by the government in other areas of the stimulus bill.  Few taxpayers will benefit much from these programs, but for those of you who do, take advantage of the list now.  With the government needing to borrow .46¢ for every $1 they spend this year, we’ll being paying for this for a long time to come.

Robert Ostrander, CFP®

SWS Advisors, Inc.

The short term trend in the market has been upward for equities and although we may see some rocky behavior, the direction appears to be toward recovery.  Our concern, in light of recent behavior in Washington D.C., continues to be toward a highly inflationary season for the long-term.  Warren Buffet recently talked about how inflation taxes those on fixed income by stealing purchasing power.  We fear this sentiment for everyone as new taxes devalue our currency and erode our purchasing power.  The result of these new taxes for US stocks will be repressive.  In turn, global stocks will likely rise more aggressively than US stocks.

The government and business model is myopic and has been for generations.  We continue to see decisions made to ease short-term concerns with no long-term view of the future.  Even though government and business leaders may usher us down a path to destruction, there are plans we can all make to minimize economic damage to ourselves.  What are these plans?

First, everyone needs a Plan B.  What is a Plan B you ask?  A plan B is a plan we carry out if we lose our job, have our pay reduced, lose benefits or we find inflation makes it difficult for us to make ends meet.  How do you get a Plan B?

There are two main ways to develop a Plan B.

1.      Cultivate a network – For those of you who work as an employee subject to others, you can begin to build a network of people who could assist you in finding a new job.  Building your network now can minimize the time you remain unemployed in the future. 

2.      Create your own business – Think about your hobbies or interests.  What do you enjoy doing the most?  Could you turn that interest into an income-generating business?

Secondly, find ways to reduce your living expenses.  Reducing your everyday expenses can free up much needed resources when times get tough.

If you have questions about how this economy and the decisions our government is making affect you, please call.  We understand that you may need assistance in carrying out this process.  That is why we do a preliminary review at no cost. 

Saving Without Sacrifice has assisted countless clients develop their Plan B and we would like to help you as well.  Whether using our extensive resources for developing a network or using our workbook, Saving Without Sacrifice for Small Business, to form a strategic business plan, we can facilitate your development of the right Plan B for you.

Robert Ostrander, CFP®

SWS Advisors, Inc.