In the year 2011 when the first baby boomer reaches 65 years of age there will be a significant tax increase without an act of Congress. This will happen when the tax cuts put in place under President Bush expire. What I have observed since the Bush tax cuts took effect was an increase in taxes at the state and local level as federal funds were cut back. When the tax increase takes place we will see taxes, at least in Ohio, at an unprecedented level.
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:
- 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.
- 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.
- Review ways to make more of your income fall in the category of benefits through employment to reduce taxes.
- For large estates, begin to look for ways to reduce the impact of estate and inheritance taxes.
- 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.
- Look at repositioning investment assets for this crisis.
- 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.
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