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 maximum value offered is a $4,500 voucher, which requires mileage improvement of 10 miles per gallon for passenger vehicles, 5 miles per gallon for light-duty trucks, and 2 miles per gallon for large light-duty trucks.  There is also a $3,500 voucher if the mileage improvement is 4 miles per gallon for passenger vehicles, 2 miles per gallon for light duty trucks, 1 mile per gallon for large light duty trucks and any pre-2002 commercial truck.  The $3,500 voucher has less of a margin of value for the consumer.  Knowing this, find the average sale price of your vehicle on nada.com.  Your savings is the difference between the sale price of your car minus the cost of having it sold and the $4500 voucher.  It is estimated a vehicle depreciates about one third of its value as soon as it is driven off the lot. 

           To find the best deal, take the price of the new vehicle and subtract the savings from the Cash for clunkers program.  Compare this to the price of a low mileage used car found on nada.com.  The lowest price is the better value if you follow the subsequent steps.

           When evaluating a used car, first check with carfax.com to identify the history of the vehicle.  Next it is best to check with nada.com to identify the average sale price of the vehicle and compare your price to the average.   Also, your mechanic should assess the condition of the vehicle.

            There are other considerations before your purchase.  You need to call your car insurance agent and ask what it will cost for insurance on the new vehicle and the used vehicle.  For the new vehicle, you would need gap insurance because of the extreme depreciation after driving off the lot.  

            Next you may want to consider how you will pay for the vehicle.  It is always best to avoid debt by paying cash.  Credit unions are usually less expensive than banks, but consider equity loans verses car loans so that interest can be written off for federal tax purposes.  New car loans usually have lower interest rates than used car loans.

            Finally “avoid” going to the cash for clunker website at cars.gov.  They will ask for permission to take over control of your computer.  That’s right.   They are asking permission to monitor your e-mails, your phone calls, the websites you visit, and all correspondence.  Here is the exact verbiage from the website; “Any or all uses of this system, and all files on this system may be intercepted, monitored, recorded, copied, audited, inspected, and disclosed to authorized CARS, DOT, and law enforcement personnel as well as all authorized officials of other agencies, both domestic and foreign. By using this system, the user consents to such interception, monitoring, recording, copying, auditing, inspecting and disclosure at the discretion of CARS or the DOT personnel.”  I do not know what any of this has to do with cars, but beware of this intrusion of your privacy.  I now know why the current administration has czars who do not report to Congress.

     Robert Ostrander, CFP®

     SWS Advisors, Inc.

Review your chosen make and model with Consumer Reports to determine the repair experience, the safety record and the fuel efficiency.  You can also look at comparable substitutes that may fit your needs as well.  The quality and efficiency of the vehicle can pay great dividends toward lower ongoing costs.   Car and Driver magazine might also provide information about your vehicle of choice.

The next step is to review with your insurance agent the rating of and insurance cost of the vehicle.  I know a man who purchased a Maserati sports car as his primary mode of transportation.  After his purchase he found out that it could not be insured unless it was his second car.  He was forced to buy a second car so he could have insurance on the first.  He also found out after driving it a while that the car was very uncomfortable for long trips.  This is why spending a little time initially to review your decisions will help minimize costly mistakes.  Proverbs 19:2 says “It is not good to have zeal before knowledge.”

Once you are ready to begin the search for the vehicle we encourage you to use our “car purchase questionnaire” found in our Saving Without Sacrifice In Action workbook.  It lists all the features and options for a car. We would then encourage you to send it to twenty dealers to receive a bid from them.  It also provides resources for average sales prices of vehicles (kbb.com and nada.com) along with a list of websites for car searches, car parts, and fuel cost efficiency information.

If paying cash is not an option, arrange financing before meeting with the auto dealer.  A home equity loan allows for deductible interest and, if done properly, should be paid off quickly.  Next, consider credit union financing before bank financing.  Avoid financing with the dealer because many make most of their money from financing the vehicle as opposed to the actual car purchase.  Do not lease the vehicle.  Too many bad things can happen. 

Buying used is always a better value than buying new.  After identifying the car of your choice have a mechanic check it out and run any tests for potential problems.  For those of you in Christ, pray about your decision.