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Weekending Financial Scorecard

Here’s the most important financial data that you need to know to be fairly well informed. Each week I post the weekending scorecard of data for 8 financial markets and 10 economic indicators. As of 4/26/2013:

The week stocks, crude oil futures, and gold came up a little, while interest rates slid some. US Recession Watch*  We are enjoying a sluggish recovery, led by low jobs and income growth. There are several things to be positive about, such as slightly good manufacturing output, a little uptick in consumer spending vs last year, and better sales in real estate and automotive. On the negative side GDP increased only 0.1% last quarter and we still have a high Federal deficit and debt and unproductive Federal government to pass a balanced budget.

  • Mortgage Rates  DECREASE: 30-year last/this week: 3.51%/3.47%, 15-year 2.74%/2.71%
  • Dow Jones Industrial Average INCREASE from 14,547 to 14,712
  • S&P 500 INCREASE from 1555 to 1582
  • US Treasury’s DECREASE: 2-Year Note from .234% to .233%, 10-Year Note from 1.720% to 1.668%
  • Crude Oil Futures INCREASE from $88.70 to $92.78
  • Gold prices INCREASE from $1435 to $1,462 (High $1,895 9/6/11) per ounce
  • Euro DECREASE from 1.3048 to 1.3028 (all time 1.59 7/2008)
  • US Dollar Index DECREASE from $82.78 to $82.47

RECESSION WATCH SCORECARD: *

FINANCIALS:* 4 NEGATIVE vs 3 POSITIVE :(

  • Gross Domestic Product (GDP) - Negative, real GDP had a small increase of  0.1% in the fourth quarter of 2012. The economy grew 2.2% in 2012 up from 1.8% in 2012. We really need to see GDP in the 4% – 6% range to fuel an economic recovery. From 1947 – 2012 it has averaged 3.23.
  • Manufacturing output - Positive, for the first time since the first part of last year, we are starting to see some positive change in US manufacturing output. This is a good indication of how industry is doing; it was modestly increasing a year ago, leading to some guarded optimism, but for the balance of 2012 it decreased.
  • US Consumer Spending - Positive, is currently at 88 compared to 72 one year ago. Generally overall the past 12 months has not been strong, holiday spending was down; however, this year we are definitely seeing an uptrend. Economists watch consumers’ spending trends to try to track their confidence in the economy. The more confidence consumers have, the more willing they are to spend money.
  • US Household Debt Service - Positive, as a percentage of people’s disposable income is at 10.69% (June) and has been steadily decreasing from its 10 year high of about 14% in the 3rd quarter of 2008. We are keeping a watchful eye on this number, since early indicators are showing an uptick in consumer debt.
  • The Federal Deficit - Negative, is projected by the Congressional Budget Office to be $1.1 trillion for 2013; this will make 5 years in a row it has exceeded $1 trillion, and this doesn’t include all the money our Federal government borrows.
  • The US National debt - Negative, exceeds $16.7 trillion.
  • Consumer Price Index - Negative, U.S. consumer prices jumped by 0.7 percent in February, the largest increase since June 2009 due to the increase in gasoline costs last month. Annualized growth rate through December for the CPI in 2012 was 1.70%, compared to 3.0% in 2011. The long-term average annualized rate of 3.63%. The CPI is the most common indicator of inflation.

JOBS: 1 POSITIVE, 1 NEGATIVE :|

  • Monthly change in non-farm payrolls – Negative: Just 88,000 jobs were added in March, compared to 236,000 added in February, 157,000 in January, and 155,000 added in December.
  • Unemployment – Positive: Marches rate of 7.6% is a four year low, compared to February’s rate of 7.7%, and December’s 7.9%. This is better than some months in 2012 of over 8% – showing a little improvement. However, keep in mind this ‘Official Unemployment’ rate only tracks those who are without jobs and have actively sought work within the past 4 weeks. Since this statistic does not track all people who are not working, some websites report that the ‘Real Unemployment’ rate is about 15% when all able-bodied people of working age are considered. For a historical perspective: The unemployment rate during the Great Recession peaked at 10.10% in October 2010. In 2012 it has varied in the range of 8.10% – 8.30%, so we are not seeing a lot of change this year. It could be worse when you consider that during the Great Depression it peaked at about 25% in 1933.
  • Initial Jobless Claims for Unemployment Insurance – Neutral: The four week average was hovering around 340,000 but is now back in the 350,000′s. Looking back 52 weeks it averaged about 370,000,  we are seeing a slight improvement in this number. This number is much better than it was in 2009 when it peaked at over 650,000, better than 2010 when it went from nearly 500,000 to the the low 400,000′s and for 2011 when claims were in the low to mid 400,000′s. The lowest we have seen this rate in 10 years is 282,000 in January of 2006, and the earlier part of the last decade we saw the average similar to what we are seeing now. During the Great Depression from 1929 – 1941 there was not the same level of unemployment insurance that we have today, although unions may have had some. It wasn’t until the Social Security act encouraged it in 1935. Today we have the Federal Unemployment Tax Act (FUTA) tax to fund state agencies.

*For an overview of GDP, Unemployment and Recession indicators, see previous article A primer on recession indicators, Gross Domestic Product and Unemployment.

Weekly Financial Data Report

Here’s the most important financial data that you need to know to be fairly well informed. Each week I post the weekending scorecard of data for 8 financial markets and 10 economic indicators. As of 4/19/2013:

The week was bumpy in stocks, crude oil futures came down quite a bit, as did gold and other metals, as fears of inflation eased, and lower estimates of economic growth in China. US Recession Watch*  We are enjoying a sluggish recovery, led by low jobs and income growth. There are several things to be positive about, such as slightly good manufacturing output a little uptick in consumer spending vs last year, and better sales in real estate and automotive. On the negative side GDP increased only 0.1% last quarter and we still have a high Federal deficit and debt and unproductive Federal government to put forth a balanced budget.

  • Mortgage Rates DECREASE: 30-year last/this week: 3.54%/3.51%, 15-year 2.78%/2.74%
  • Dow Jones Industrial Average DECREASE from 14,865 to 14,547
  • S&P 500 DECREASE from 1588 to 1555
  • US Treasury’s MIXED: 2-Year Note from .266% to .234%, 10-Year Note from 1.697% to .,720%
  • Crude Oil Futures DECREASE from $90.95 to 88.70
  • Gold prices DECREASE from $1485 to $1435 (High $1,895 9/6/11) per ounce
  • Euro DECREASE from 1.3115 to 1.3048 (all time 1.59 7/2008)
  • US Dollar Index INCREASE from $82.29 to $82.78

RECESSION WATCH SCORECARD: *

FINANCIALS:* 4 NEGATIVE vs 3 POSITIVE :(

  • Gross Domestic Product (GDP) - Negative, real GDP had a small increase of  0.1% in the fourth quarter of 2012. The economy grew 2.2% in 2012 up from 1.8% in 2012. We really need to see GDP in the 4% – 6% range to fuel an economic recovery. From 1947 – 2012 it has averaged 3.23.
  • Manufacturing output - Positive, for the first time since the first part of last year, we are starting to see some positive change in US manufacturing output. This is a good indication of how industry is doing; it was modestly increasing a year ago, leading to some guarded optimism, but for the balance of 2012 it decreased.
  • US Consumer Spending - Positive, is currently at 79 compared to 76 one year ago. Generally overall the past 12 months has not been strong, holiday spending was down; however, this year we are definitely seeing an uptrend. Economists watch consumers’ spending trends to try to track their confidence in the economy. The more confidence consumers have, the more willing they are to spend money.
  • US Household Debt Service - Positive, as a percentage of people’s disposable income is at 10.69% (June) and has been steadily decreasing from its 10 year high of about 14% in the 3rd quarter of 2008. We are keeping a watchful eye on this number, since early indicators are showing an uptick in consumer debt.
  • The Federal Deficit - Negative, is projected by the Congressional Budget Office to be $1.1 trillion for 2013; this will make 5 years in a row it has exceeded $1 trillion, and this doesn’t include all the money our Federal government borrows.
  • The US National debt - Negative, exceeds $16.7 trillion.
  • Consumer Price Index - Negative, U.S. consumer prices jumped by 0.7 percent in February, the largest increase since June 2009 due to the increase in gasoline costs last month. Annualized growth rate through December for the CPI in 2012 was 1.70%, compared to 3.0% in 2011. The long-term average annualized rate of 3.63%. The CPI is the most common indicator of inflation.

JOBS: 1 POSITIVE, 1 NEGATIVE :|

  • Monthly change in non-farm payrolls – Negative: Just 88,000 jobs were added in March, compared to 236,000 added in February, 157,000 in January, and 155,000 added in December.
  • Unemployment – Positive: Marches rate of 7.6% is a four year low, compared to February’s rate of 7.7%, and December’s 7.9%. This is better than some months in 2012 of over 8% – showing a little improvement. However, keep in mind this ‘Official Unemployment’ rate only tracks those who are without jobs and have actively sought work within the past 4 weeks. Since this statistic does not track all people who are not working, some websites report that the ‘Real Unemployment’ rate is about 15% when all able-bodied people of working age are considered. For a historical perspective: The unemployment rate during the Great Recession peaked at 10.10% in October 2010. In 2012 it has varied in the range of 8.10% – 8.30%, so we are not seeing a lot of change this year. It could be worse when you consider that during the Great Depression it peaked at about 25% in 1933.
  • Initial Jobless Claims for Unemployment Insurance – Neutral: The four week average was hovering around 340,000 but is now back in the 350,000′s. Looking back 52 weeks it averaged about 370,000,  we are seeing a slight improvement in this number. This number is much better than it was in 2009 when it peaked at over 650,000, better than 2010 when it went from nearly 500,000 to the the low 400,000′s and for 2011 when claims were in the low to mid 400,000′s. The lowest we have seen this rate in 10 years is 282,000 in January of 2006, and the earlier part of the last decade we saw the average similar to what we are seeing now. During the Great Depression from 1929 – 1941 there was not the same level of unemployment insurance that we have today, although unions may have had some. It wasn’t until the Social Security act encouraged it in 1935. Today we have the Federal Unemployment Tax Act (FUTA) tax to fund state agencies.

*For an overview of GDP, Unemployment and Recession indicators, see previous article A primer on recession indicators, Gross Domestic Product and Unemployment.

Unemployment Numbers Update, December

Unemployment, New Jobs, and Jobless Claims Statistics:*

  • Monthly change in non-farm payrolls – Flat: 155,000 new jobs were added in December, compared to 146,000 added in November, and 171,000 in October.
  • Unemployment – Flat: December’s rate of 7.8 matched the revised November rate of 7.8% (previously estimated to be 7.7% – which would have been the lowest since December 2008). This is better than some 2012 months over 8% – showing very little improvement. However, keep in mind this ‘Official Unemployment’ rate only tracks those who are without jobs and have actively sought work within the past 4 weeks. Since this statistic does not track all people who are not working, some websites report that the ‘Real Unemployment’ rate is about 15% when all able-bodied people of working age are considered. For a historical perspective: The unemployment rate during the Great Recession peaked at 10.10% in October 2010. In 2012 it has varied in the range of 8.10% – 8.30%, so we are not seeing a lot of change this year. It could be worse when you consider that during the Great Depression it peaked at about 25% in 1933.
  • Initial Jobless Claims for Unemployment Insurance – Positive: The four week rolling average, remained the same at 360,000 as last week. Looking back 52 weeks, the four week rolling average, averaged about 374,750, so we are seeing slight improvement. This number is much better than it was in 2009 when it peaked at over 650,000, better than 2010 when it went from nearly 500,000 to the the low 400,000′s and for 2011 when claims were in the low to mid 400,000′s. The lowest we have seen this rate in 10 years is 282,000 in January of 2006, and the earlier part of the last decade we saw the average similar to what we are seeing now. During the Great Depression from 1929 – 1941 there was not the same level of unemployment insurance that we have today, although unions may have had some. It wasn’t until the Social Security act encouraged it in 1935. Today we have the Federal Unemployment Tax Act (FUTA) tax to fund state agencies.

*Unemployment statistics are an important indicator of how our economy is doing; more people employed points to stronger business growth and to fewer people receiving government entitlements. However, this is a little difficult to track, since the government doesn’t really publish a combined statistic that truly indicates what is happening. Most people who study this issue follow these three indicators: percentage of people unemployed, monthly change in non-farm payrolls, and jobless claims for unemployment insurance. The most discussed statistic is the unemployment rate; reading the explanation above illustrates how this number falls short.

The Fiscal Cliff Deal, Winners and Losers & What It Means To Your Personal Finances

The showdown in Washington over Federal taxes and spending ended with an agreement signed into law this week. Here are the losers and winners that we can see at this point. Further analysis is forthcoming of H.R.8 – American Taxpayer Relief Act of 2012, and will be reported to you later this month.

Winners

  1. Overall Taxes: Joint filers with incomes below $450,00, individuals with incomes below $400,000 and heads-of-households with incomes below $425,000 WILL CONTINUE to enjoy tax reductions put in place by George W. Bush.
  2. Alternative Minimum Tax: Tax payers with incomes below $50,600 (individuals) and $78,750 (married couples filing jointly) respectively, WILL NOT be faced with the Alternative Minimum Tax (AMT). It was set to go to $33,750 (individuals) and $45,000 (married couples filing jointly). This will be indexed for inflation.
  3. Unemployment Benefit Recipients WILL have benefits EXTENDED this year.
  4. Entitlement Recipients of things like Social Security, Medicare and Medicaid WILL NOT face reductions, however expect battles over this one in the coming year, and changes affected by Obama Care, as the economy continues to struggle and deficits increase.
  5. Investors owning stocks that pay dividends, or the long-term sales of stock WILL NOT face increased tax on dividends and capital gains if their income is below the above amount.
  6. Itemizers: Tax filers with incomes below $250,000, heads of households below $275,000 or married joint filers below $300,000, WILL CONTINUE to enjoy the same itemized tax deductions for things like home mortgage interest and contributions to charities.
  7. Politicians benefit by not having to reduce spending for entitlements or cut back on special deals made to specific industries, thus enabling them to continue to receive political support from those groups and entities – in the short run.
  8. Pork Recipients: About $70 billion worth of special tax breaks were written into the bill.

Losers

  • Employees: Anyone paying federal payroll taxes will see an INCREASE in the amount withheld from their paychecks from 4.2%  to 6.2%. If you make $50,000 expect your pay to decrease by 2% or approximately $1,000 for the year, or about $83 per month. This restoration of a tax holiday was inevitable to pay for current and future Social Security and Medicare benefits.
  • Self-employed people will see an INCREASE in their payroll tax from 8.4% to 12.4%, or an increase of about $2,000 if making $50,000.
  • High Incomes Earners with incomes above $450,000 will see an INCREASE in their top tax rate to 39.60% from 35% (individuals with incomes above $400,000 and heads-of-households with incomes above $425,000).
  • High Income Investors owning stocks that pay dividends, or those that sell stock (held long-term), will face INCREASED tax on dividends and capital gains to 20% from 15%, if their incomes exceed the levels described above.
  • Large Estates: Individuals dying with estates in excess of $5 million will see the tax on their estates INCREASE from 35% to 40%.
  • Alternative Minimum Tax (AMT) Payers: Tax payers with incomes above $50,600 (individuals) and $78,750 (married couples filing jointly) respectively, will CONTINUE to be faced with the Alternative Minimum Tax (AMT). Many have hoped to see the AMT go away completely, or income minimums increased substantially.
  • High Income Itemizers: Provisions of the Bill will REDUCE itemized deductions such as mortgage interest and charitable contributions to those with incomes $250,000 and above, $275,000 for heads-of-households or married joint filers above $300,000.
  • Those served by charities: Anyone who benefits from not-for profit enterprises that rely on charitable contributions, may see less benefits being provided to them, or increased costs.  This is due to some limits now being placed on tax deductions given for contributions made to these institutions, from higher income people. Charities and non-profits may be faced with shrinking budgets due to lower contributions.
  • Charities MAY LOSE income due to the reduction of itemized tax deductions for high income donors.
  • Politicians on the right may LOSE political clout, since they relinquished some of their goals for reduced spending. Politicians on the left may LOSE political clout in the long-term, if the the economy fails to recover or we go through another recession. Most US citizens overall opinion of all political leaders continues to decline amidst poor leadership.
  • All US Citizens and succeeding generations will suffer from poor federal leadership when it comes to current economic policy of run-away spending and lack of balanced budgets.

This battle took so long to remedy, due to major philosophical differences, that I wrote about earlier this week, “Do you want to know what the fiscal fight is really about.” Expect the battle to rage on in the coming year. This information should not be relied upon for your individual tax situation: consult your tax, legal and financial advisers.

Do you want to know what the fiscal fight is really about?

This is a non-partisan article about what the fiscal cliff fight is really about. It is a philosophical battle, but if you read the newspapers, and watch TV news, you will not get this story. Believe you me, I have watched and read many commentaries and opinions about this, but no one has yet to boil it down to one article- so I will take a shot at it. In addition, since this is a financial blog, I will try to render a non-political opinion about what this means to your personal finances. Since readers from both sides of the political spectrum’s read this, I will try not to take sides.

First of all, we have an economic crisis in the United States of America.  Real unemployment is about 15%, not the less than 10% that you read about. Secondly, government spending both today and into the future exceeds income or revenue (mainly taxes). The budget deficit exceeds $1 trillion per year, and the total federal deficit is almost $16.5 trillion.  Manufacturing is down, growth of our gross domestic product is lack-luster, and we are headed to long term double and who knows, maybe triple dip recession. Yes housing is gaining strength, the some industries are doing quite well, and there are other reasons to be optimistic, but a strong argument can be made that we are headed to economic disaster because our federal balance sheet is a disaster.

Coming through a recession, we have a lot of people with their hands out wanting financial help. With high unemployment we have people on unemployment benefits. With an aging population we have a large increasing number of people on Social Security, Medicare, and Medicaid. With low incomes coming out of the recession we have a large percentage of people not paying Federal income tax. We have have a large number of people without health insurance, or under-insured (who should be provided for). We have a large percentage of people on food assistance, income assistance either in the form of weekly benefit or an annual bonus check called the Earned Income Tax Credit.  These are a lot of open hands, some very well justified that need help- I agree, but none-the-less, at the end of the day a lot of open hands- but no long term plan to pay for it.

Even if we aren’t paying Federal income tax, we pay a lot of our income out to sales tax, payroll tax (Social Security, Unemployment Insurance, Medicare and Medicaid), gas tax, real estate tax, toll roads, corporate tax that we pay in increased cost of goods- to mention a few. So the poor and low income do pay tax, the point here is the government- federal, state, city and local have high revenues.

The Left’s Viewpoint: To meet the financial needs of our country, such as entitlement programs the tax plan that President Obama wants congress to pass, wants to increase income or revenue through increase in taxes on the rich, and modest cutbacks in spending but not on entitlement programs, and in some instances a desire to increase them, for example extending unemployment benefits.  Class warfare seems to be used as a motivator: “The rich and big business caused the economic crisis, therefore we want to take from them, to help everyone out and fix our economy.” A few of them definitely did contribute to the recession, but really can we tax our way of this mess?

The Right’s Viewpoint:  To meet the financial needs of the country, reduce spending (including entitlements) and move towards a balanced budget. Keep taxes low for everyone, and leave more wealth in the hands of wealthy and business, who create jobs and expand the economy. Really, can we not increase taxes some with spending so high. Okay they say, but reduce spending first.

The 113th Congress of 201 Democrats and 234 Republicans in the House of Representatives, don’t want to budge on these issues, because it comes down to these philosophical differences. If the House can pass something agreeable, then the Senate’s 54 Democrats and  45 Republicans will approve it, and sent it to Obama for his signature.

The philosophy on the left says, we want to be more like a European style social democracy, of high taxes, and a high level of social programs. It puts faith in the government to care for the people in a fair and just way. Society welds power from 3 entities: government, people, and business. Therefore this style of government, seeks a shift to have more power, than people and business. The hope here seems to be government will maintain the freedom and welfare of the majority of people. Government is self seeking, so those in power don’t always care for people well though. I am not saying if you are on the left you totally believe all of this, but this is what seems to be they are saying.

The philosophy on the right says, we want to maintain more freedom for business and people, and the answer to economic problems is better financial management and business growth (which will in turn generate more taxes). The hope is that business and capitalism, hard work and self determinism, good personal financial management (spending saving and investing) will, in the long run, pay for entitlement needs, not taxes and government programs- it doesn’t always do that well, but that’s its hope. The right believes in entitlement programs, but seeks a balance. The people on the right are not heartless, since well researched analysis validates that conservatives give much more money to non-profit entities benefiting the poor than those on the left.  I am not saying if you are on the right you totally believe all of this, but this is what seems to be they are saying.

Conclusion:

1. Compromise: Neither side exclusively has the only answer, both can actually be right and wrong -in part. Compromise doesn’t mean giving up one’s philosophy but, agreeing to work together on a balanced approach- some give and take. A balanced approach takes care of needy, preserves freedom by not shifting too much power to government and business, has modest taxes, AND something that neither party seems to be mentioning much- encourages new business start-ups and growth. A rising economy alleviates many of the financial problems struggling economies face.

2. A good president, majority and minority leaders are ones that supports compromise, works together, and brings both sides together: This battle is frustrating, but actually makes good political theater. Will one philosophy win out here, or will will end up with a good compromise and the best part of both parts will help everyone, not just those on the right and left?

3. The longer we take to answer questions of budgets, taxes and deficits, the longer our economy will languish. The more it languishes the greater the toll to average people’s personal finances. A government that manages money well, taxes fairly, takes care of the poor, secures freedom and encourages business growth – by working together, will be one that lead us to prosperity.

A Primer on Recession Indicators: Gross Domestic Product and Unemployment

Unemployment statistics are an important indicator of how our economy is doing; more people employed points to stronger business growth and to fewer people receiving government entitlements. However, this is a little difficult to track, since the government doesn’t really publish a combined statistic that truly indicates what is happening. Most people who study this issue follow these three indicators: 1- percentage of people unemployed, 2- monthly change in non-farm payrolls, and 3- jobless claims for unemployment insurance. The most discussed statistic is the unemployment rate; reading the explanation above illustrates how this number falls short.

Gross Domestic Product, GDP tracks the size of our economy by calculating the total dollar value of all goods and services produced over a specific time period in comparison with the previous quarter. For 2012 GDP slumped to 2% in the first quarter, and 1.3% for the second, so the announcement of 2.7% for the third quarter is good news. Is this a great indication? Well any increase is good, however this would only add up to 2.1% for 2012. Looking back at the most recent recessions, from a presidential term perspective, provides some challenging information. Economic recovery under Ronald Reagan, GDP averaged 4.4% from 1995 – 2000, assuming you take out his first two years in office, where there was negative GDP, as it took some time for his policies to take affect. Bill Clinton took office in weak economic times, but not nearly as bad as Reagan. Under Clinton, GDP averaged a decent rate of 3.1% from 1994 – 2000. This assumes you don’t take into consideration his 1st year in office, when there was negative GDP. Under President Barack Obama it has averaged 2.1% if you don’t include his first year with negative GDP. How does this compare to those other Administration’s first few years in office? In Reagan’s first 3 good years GDP averaged 5.3%, and for Clinton it averaged 3.4% for his first 3 good years in office.

Technically a recession occurs when business cycles retract, evidenced by down consecutive quarters of GDP, or a 12 month 1.5% or more rise in unemployment.

The US Economy Growing (GDP) at Good Rate, Is It Enough?

The Commerce Department announced Thursday that the Nation’s Gross Domestic Product (GDP) increased at an annual rate of 2.7%, for the third quarter. Is it time to celebrate that the economic recovery has arrived?

GDP tracks the size of our economy by calculating the total dollar value of all goods and services produced over a specific time period in comparison with the previous quarter. For 2012 GDP slumped to 2% in the first quarter, and 1.3% for the second, so the announcement of 2.7% for the third quarter is good news.

Is this a great indication you might ask? Well any increase is good, however this would only add up to 2.1% for 2012. Looking back at the most recent recessions, from a presidential term perspective, provides some challenging information.

  • Economic recovery under Ronald Reagan, GDP averaged 4.4% from 1995 – 2000, assuming you take out his first two years in office, where there was negative GDP, as it took some time for his policies to take affect.
  • Bill Clinton took office in weak economic times, but not nearly as bad as Reagan. Under Clinton, GDP averaged a decent rate of 3.1% from 1994 – 2000. This assumes you don’t take into consideration his 1st year in office, when there was negative GDP.
  • Under President Barack Obama it has averaged 2.1% if you don’t include his first year with negative GDP. How does this compare to those other Administration’s first few years in office? In Reagan’s first 3 good years GDP averaged 5.3%, and for Clinton it averaged 3.4% for his first 3 good years in office.

In conclusion: The economy is growing at a much slower rate that it needs to in order for it to lift unemployment, prevent more middle-class people from sliding into poverty, and to help those stuck there. Fiscal Cliff, Federal Debt, unemployment, and global economic crisis will continue to weigh down progress.

 

Tax Planning: In Uncertain “Fiscal Cliff” Times & Year End Tax Planning

Kevin Koval, CPA, ABV, CFP and Roger C. Nagel, CPA, CMA of Nagel, CPAs*

With the completion of the presidential elections there has been much discussion focused on the so-called “fiscal cliff”. Many economic forecasts have stated that President Obama and Congress need to reach some agreement to avoid the fiscal cliff if the nation is to avoid another recession.  As you probably know, the Bush tax cuts are set to expire at the end of 2012 and there are many other tax changes set to take place in 2013, such as the implementation of the taxes from the Obamacare healthcare plan. Given the disagreements between the President and Congress, it is difficult to predict what will happen to all of the tax cuts that are set to expire at year-end and what the outcome will be.  Year-end tax planning is always a challenge, but many long-time tax practitioners have noted that this could be the most challenging environment that they have faced.

Whatever the outcome of the any agreements between Congress and the President, it is likely that at least some taxes will be increasing and it is almost certain that dividend and capital gains tax rates will not be going down in 2013.  Maximum long-term capital gains rates are set to increase, generally, from the current rate of 15% to 20%. Dividends will be taxed at ordinary income rates instead of the current capital gains rate of 15% in most cases.  The top marginal rate will increase from 35% to the “pre Bush rate” of 39.6% and the rates for other income brackets would increase as well. Regardless of the outcome of any agreements reached between the President and Congress regarding the expiring Bush tax rates, taxes on investment income will rise next year by at least 3.8 percent on taxpayers with higher investment income due to the funding provisions in the President’s healthcare plan. Beginning in 2013, an additional Medicare hospital insurance tax will apply to wages or self-employment of married individuals with earnings exceeding $250,000 or single individuals with earnings greater than $200.000.  There will also be a new 3.8% net investment income tax for individuals exceeding these same income thresholds.  If Congress and the President do not make changes, the combined effect could result in an average tax hike of around $3,500 per household for up to 90% of Americans, and much higher rate for upper-income taxpayers.

It is reasonably likely that rates will be going up for investors, small business owners, and high income individuals, traditional tax planning strategies to defer revenue and taxes may not be applicable this year.  Taxpayers should consider an approach that involves addressing many of the possible changes directly while also making use of all options for deductions and credits, or other tax-advantaged opportunities to lower their taxable income. Planning for these changes should begin now, since it may involve significant modifications in your tax strategy.

Since most advisors are confident that capital gains rates and rates on investment income will be higher next year, taxpayers may want to consider some of the following strategies concerning the potential for higher rates in 2013:

If your portfolio includes significant long-term capital gains, taxpayers should take advantage of the lower rates in 2012.  For upper-income taxpayers who will be facing rates of 20% (barring any changes) on capital gains and the additional 3.8% healthcare tax on investment income their top rate will rise to 23.8% versus the current capital gains rate of 15%.  It may pay to take advantage of the lower rates in 2012 by selling investments with potentially big profits.

While advisors often recommend that taxpayers offset their capital gains by selling investments with capital losses, it may be beneficial to hold off incurring losses to offset against potential gains in the following year that will be taxed at higher rates.

Consider various strategies to accelerate ordinary income into 2012. If you have flexibility on when you can receive payments of income before year end, consider that the income may be subject to lower taxes this year than in 2013. Again, this is counter to tax strategies that are often employed to defer taxable income. Similarly, taxpayers would normally look to increase deductions before year end; it could be beneficial to defer expenses such as charitable deductions until the following year when tax rates will likely be higher.

Another option may be to convert a traditional IRA to a Roth IRA this year, if a conversion otherwise makes sense.

You may want to move dividend paying equity investments into tax deferred or federally non-taxable investments like municipal bonds.

Many taxpayers are accelerating gifts under the current $5 million ceiling on lifetime giving. Not only is there a good chance that estate tax rates will rise (the scheduled Sunset provision is for rates to revert to 55%) but the exclusion amount for estates and gifts will revert to $1 million.

Some other acceleration strategies include exercising stock options, taking bonuses, foregoing 1031 elections, and electing out of installment sales.

The alternative minimum tax (AMT) will apply to 2012 income for many more Americans if not indexed for inflation. At the end of 2011, the AMT exemption was $74,450 for married taxpayers and $48,450 for singles. In 2012, the AMT exemption is $45,000 for joint filers and $33,750 for single filers. In making their estimated payments, taxpayers will need to consider that for 2012 they could be exposed to a higher AMT tax if Congress does not revise the exemption amount.  Additional care will need to be taken to help avoid potential AMT taxes.

Business owners will want to look at accelerating taxable income, but they will also need to evaluate the fact that the Section 179 deduction can be significantly reduced in 2013.  Under Section 179 of the tax code, small businesses can deduct the total cost of some qualifying property in the year it is placed in service, within certain limits, rather than depreciating it over time. The limit on the cost of property (including real property) that can be expensed is now $139,000 which will drop to $25,000 if no changes are made. The total value of the equipment purchased cannot be higher than $560,000. In 2010 and 2011, businesses were allowed to expense as much as $500,000 in equipment and property on one year’s tax return. Additionally, bonus depreciation which was 100% in 2010 and 50% in 2012 is set to expire in 2013.

Business owners need to evaluate the potential for immediate write-offs and 50% bonus depreciation for capital purchases made in 2012 versus being stuck with the longer term depreciation MACRS depreciation schedules for purchases made in 2013. It may pay to make planned purchases of equipment in the current year. On the other hand, faced with higher tax rates business may not want to elect Section 179 or bonus depreciation treatment to preserve more deductions for future years when the rates are scheduled to be higher at least for individual owners operating as Schedule C or as pass through entities.

Like so much in life, we can only plan ahead, confidently, based on what we know to be fact.  Today, we know that tax laws will change back to “pre-Bush tax cuts” on January 1, 2013.  Of course, Congress and the President can intervene, before year end, or even afterwards (and make new rules retroactive.)  This unprecedented level of uncertainty makes good decision making difficult. Consequently, seek tax advice about your specific circumstances.  If you have large, pending transactions, the timing of which you can control easily, then this is a good year to engage your advisors soon to harvest sizeable benefits.

*Kevin Koval, CPA, ABV, CFP and Roger C. Nagel, CPA, CMA of Nagel, CPAs. They can be reached at 505-898-2558 or email pchadwick@nagelcpa.us. They are located at 2240 Grande Blvd SE Suite 103, Rio Rancho, NM 87124.

Hyundai and Kia Overstated Gas Mileage Refund

The U.S. Environmental Protection Agency said Friday that Hyundai and Kia overstated gas mileage ratings for over 900,000 autos sold since late 2010 and into 2012. You may recall their commercials advertising a lot of 40 mpg models. The South Korean company’s explanation for the erroneous estimate was due to  “procedural errors” in their testing and not an intent to defraud.

To help offset the increased cost of gasoline consumed by the affected automobiles, Hyundai/Kia will pay you for your extra gas consumed, plus 15%. To see if you qualify go to HyundiaMPGinfo.com and register and get an estimate. In a full page announcement in today’s Wall Street Journal, further indicated that you must go to a local dealer to verify your odometer reading, and arrange for a debit card to be sent to you.

If you are affected, please let me know. I would be curious what your reimbursement estimate is, for what they say is an average 3% less in gas mileage.

October Unemployment Numbers Announced

Unemployment, New Jobs, and Jobless Claims Statistics:*

Negative: Unemployment INCREASED in October to 7.9% from 7.8% in September: September’s was the lowest rate since January 2009, and was good improvement over August’s 8.1%, so this shows things are really remaining about the same. However, keep in mind this ‘Official Unemployment’ rate only tracks those who are without jobs and have actively sought work within the past 4 weeks. Since this statistic does not track all people who are not working, some websites report that the ‘Real Unemployment’ rate is about 15% when all able-bodied people of working age are considered. For a historical perspective: The unemployment rate during the Great Recession peaked at 10.10% in October 2010. In 2012 it has varied in the range of 8.10% – 8.30%, so we are not seeing a lot of change this year. It could be worse when you consider that during the Great Depression it peaked at about 25% in 1933.

Positive: Monthly change in non-farm payrolls INCREASED: 171,000 new jobs were added in October, compared to 114,000 new jobs in September.

Positive: Initial Jobless Claims for Unemployment Insurance DECREASED: To 367,000 4 week rolling average, from 368,750. Looking back 12 weeks, the average was 364,500; 6 weeks ago it was 375,000, so we will need more weeks of decreases to reverse the year’s increasing trend. This number is much better than it was in 2009 when it peaked at over 650,000. In 2010 we saw a decrease from nearly 500,000 early in the year to the low 400,000′s. In 2011 the claims were in the low to mid 400,000′s, but since October of 2011 they have been below 400,000. The lowest we have seen this rate in 10 years is 282,000 in January of 2006, and the earlier part of the last decade we saw the average similar to what we are seeing now. During the Great Depression from 1929 – 1941 there was not the same level of unemployment insurance that we have today, although unions may have had some. It wasn’t until the Social Security act encouraged it in 1935. Today we have the Federal Unemployment Tax Act (FUTA) tax to fund state agencies.

*Unemployment statistics are an important indicator of how our economy is doing; more people employed points to stronger business growth and to fewer people receiving government entitlements. However, this is a little difficult to track, since the government doesn’t really publish a combined statistic that truly indicates what is happening. Most people who study this issue follow these three indicators: percentage of people unemployed, monthly change in non-farm payrolls, and jobless claims for unemployment insurance. The most discussed statistic is the unemployment rate; reading the explanation above illustrates how this number falls short.

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