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 At age 59½ money can be withdrawn from retirement with no penalties.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.

        If you are healthy and have no chronic diseases, life insurance offered through your employer will likely be more expensive than what is offered through non-group coverage. Proper selection of the coverage for reduced rates and adequate coverage is necessary and we can assist in that process. Group insurance may be the best alternative for someone with chronic diseases. It should be noted that a loss of employment will also mean a loss of group coverage.

        If you are without credit card debt, we generally recommend that you take advantage of matching contributions by your employer to your retirement plan. This is why we encourage young people to avoid debt early in their careers. Money invested early and accumulating over many years grows dramatically. Time and compound interest is often referred to as the eighth wonder of the world.

        If your employer offers a flexible spending account (FSA or 125) sit down and review all your medical expenses that you anticipate for the next year. This should include prescriptions, chiropractic medicine, eye glass care, dental, medical costs not covered by health insurance, and any other related expenses. You can find a complete list through your employer or with a Google search of section 125 medical expense deductions. Some plans allow .14¢/mile to and from the doctor’s office with proper documentation. This benefit has tax savings of a minimum of 20% and as much as 40% for some people. Be accurate in your estimates because if you do not use it, you can lose it.

        Some benefit plans allow for pre-tax payment of mass transit deductions to and from work as well as pre-tax parking. This is offered under Section 132 of the IRS tax code. If the cap and trade agreements take place this may be the preferred method of travel because of the high cost of fuel. If your employer does not offer it, suggest to you human resources manager that he/she look into adding it to the options. This plan benefits the employer as well, saving the FICA tax for the mass transit expense.

        Another benefit offered is tuition reimbursement under Section 127 of the code. This benefit allows the employee to be reimbursed for successful completion of educational courses offered that will bring value to the employer. Often it requires a commitment to the employer for a stated number of years. The permissible amount is $5,250 each year. I almost always recommend long-term disability for employees because it represents a catastrophic risk potential. In some cases I recommend supplementing group long-term disability with an individual plan.

        I also recommend short-term disability for those with limited financial resources. I have never been a fan of accident policies or disease specific policies. They require specific risks to occur for collection of the benefit. Sometimes a family history of disease will sway my thinking.

        Dependent care benefits can also be taken pre-FICA and pre-tax for adults or children. Up to $5,000 annually is permissible as a payroll deduction. It is important to have a review of this benefit to see whether to take the pre-FICA benefit or the child credit. Your accountant can assist you with this decision.

        If you are planning an adoption this year, be sure to take advantage of the pre-FICA and pre-tax benefit that allows up to $10,390 to be payroll deducted. In addition, there is also a tax credit available for adoption. Be sure to discuss this option with your employer because this benefit saves your employer as well.

        Proper selection of benefits can be a significant benefit to employees. This is why planning is so important. Each year most of the benefits must be determined in October or November for the next year. It is worthwhile planning how to take these benefits. Be sure to call us if you need help.

Robert Ostrander, CFP®

SWS Advisors, Inc.

Medicare Part A is hospital insurance and pays some of the cost of skilled nursing care, hospice care, and home health care.  This coverage costs about $400 each month unless you have paid Medicare taxes for 30 quarters (7½ years).  Once these taxes have been paid, there is no monthly cost associated with this coverage. 

Medicare Part B covers physician’s services, most outpatient hospital services, and other related services.  The monthly cost for this coverage is just under $100.  With this coverage, certain deductibles, coinsurance and copayments may also apply.

Medicare Part D covers prescription drug coverage.  The costs vary by provider but average about $25 per month.  You may enroll for the first time or change carriers once each year between November 15 and December 31.

About twenty percent of the population works for an employer that supplements Medicare coverage in retirement.  Often, a retired employee has personal coverage as well as coverage for their spouse until the retired employee dies.  At this point, the supplemental coverage has to be replaced by the spouse.  This is important to note, as I frequently deal with a surviving spouse who is unaware of this loss in coverage.  Failure to recognize this change often causes out of control medical expenses and confusion to the spouse about the reason for the increase in these expenditures. 

The rest of the elderly population can satisfy supplemental medical coverage with Medicare Advantage plans or Medicare Supplement plans.  The Medicare Advantage Plans are part of a network of physicians where participants are restricted to the health providers in the network.  The Medicare Advantage Plans have less cost and are most often available in large metropolitan areas.  The disadvantage is limited physician selection.  The Medicare Supplement Plans are best for those away from metropolitan areas or those who want to select their own health provider.

Because there are substantial numbers of people born between 1946 and 1964 (baby boomers represent 78 million people) that will be entering the Medicare window in the next twenty years, it is expected that either health care benefits will be greatly reduced or costs will increase significantly.   It will become increasingly difficult for elderly people to find and afford adequate health care.  It is likely that many will be forced to live with their infirmities.  This is why it may be important for those in all age groups to begin eating right, exercising and setting up disciplines for a healthy lifestyle.

Robert Ostrander, CFP®

SWS Advisors, Inc.