2011: The Year Of The Tax Increase

Unless the U.S. Congress acts, there is going to be a massive wave of tax increases in 2011. In fact, some are already calling 2011 the year of the tax increase. A whole host of tax cuts that Congress established between 2001 and 2003 are set to expire in January unless Congress chooses to renew them. But with Democrats firmly in control of both houses that appears to be extremely unlikely. These tax increases are going to affect every single American (at least those who actually pay taxes). But this will be just the first wave of tax increases. Another huge slate of tax increases passed in the health care reform law is scheduled to go into effect by 2019. So Americans that are already infuriated by our tax system are only going to become more frustrated in the years ahead. The reality is that the U.S. government will soon be digging much deeper into our wallets.

The following are some of the tax increases that are scheduled to go into effect in 2011....

1 - The lowest bracket for the personal income tax is going to increase from 10 percent to 15 percent.

2 - The next lowest bracket for the personal income tax is going to increase from 25 percent to 28 percent.

3 - The 28 percent tax bracket is going to increase to 31 percent.

4 - The 33 percent tax bracket is going to increase to 36 percent.

5 - The 35 percent tax bracket is going to increase to 39.6 percent.

6 - In 2011, the death tax is scheduled to return. So instead of paying zero percent, estates of $1 million or more are going to be taxed at a rate of 55 percent.

7 - The capital gains tax is going to increase from 15 percent to 20 percent.

8 - The tax on dividends is going to increase from 15 percent to 39.6 percent.

9 - The "marriage penalty" is also scheduled to be reinstated in 2011.

It is being estimated that the total cost of these tax increases to U.S. taxpayers will be $2.6 trillion through the year 2020.

Ouch!

But wait, there are even more tax increases coming.

The "health care reform law" contains over a dozen new taxes that will be implemented in stages over the next decade. When you add all of these taxes to the taxes that were mentioned earlier, the result is going to be absolutely devastating. According to an analysis by the Congressional Joint Committee on Taxation the health care reform law will generate $409.2 billion in additional taxes by the year 2019.

Double ouch!

So is it any wonder why the public has such a low opinion of the U.S. Congress?

Every single major poll done on the topic shows that approval ratings for Congress are at record lows.

For example, Gallup's 2010 Confidence in Institutions poll found Congress ranking dead last out of the 16 institutions rated this year.

Of course there are a whole host of reasons why the American people are upset with Congress, but one of the big ones is the fact that we are literally being taxed to death.

However, it is not just federal income taxes that are killing us.

In a previous article entitled "Taxed Enough Already!", we listed just a few of the taxes that Americans have to pay each year....

Accounts Receivable Tax

Building Permit Tax

Capital Gains Tax

CDL license Tax

Cigarette Tax

Corporate Income Tax

Court Fines (indirect taxes)

Dog License Tax

Federal Income Tax

Federal Unemployment Tax (FUTA)

Fishing License Tax

Food License Tax

Fuel permit tax

Gasoline Tax

Gift Tax

Hunting License Tax

Inheritance Tax

Inventory tax IRS Interest Charges (tax on top of tax)

IRS Penalties (tax on top of tax)

Liquor Tax

Local Income Tax

Luxury Taxes

Marriage License Tax

Medicare Tax

Payroll Taxes

Property Tax

Real Estate Tax

Recreational Vehicle Tax

Road Toll Booth Taxes

Road Usage Taxes (Truckers)

Sales Taxes

School Tax

Septic Permit Tax

Service Charge Taxes

Social Security Tax

State Income Tax

State Unemployment Tax (SUTA)

Telephone federal excise tax

Telephone federal universal service fee tax

Telephone federal, state and local surcharge taxes

Telephone minimum usage surcharge tax

Telephone recurring and non-recurring charges tax

Telephone state and local tax

Telephone usage charge tax

Toll Bridge Taxes

Toll Tunnel Taxes

Traffic Fines (indirect taxation)

Trailer registration tax

Utility Taxes

Vehicle License Registration Tax

Vehicle Sales Tax

Watercraft registration Tax

Well Permit Tax

Workers Compensation Tax

Are you dizzy yet?

The reality is that the American people are being drained in dozens and dozens of different ways.

But what did you expect?

Did you think that our politicians would pile up the biggest debt in the history of the world and never ask you to pay for it?

Did you think that we could run deficits equivalent to about 10 percent of GDP without ever seeing tax increases?

The truth is that the U.S. government needs a whole lot more money than even these new tax increases will bring in.

After all, it is being projected that the U.S. government will be spending $2 trillion on the interest on the national debt alone by the year 2020.

To put that in perspective, the entire budget for the U.S. government is less than $4 trillion for 2010.

Are you starting to get the picture?

In the years ahead the IRS is going to be digging deeper and deeper into our pockets and a gigantic chunk of that money is going to go directly into the pockets of those who own our debt.

But very few Americans wanted to listen when this problem was actually somewhat fixable 20 or 30 years ago.

So now we are all going to pay the price - literally.

The US national Debt

The U.S. national debt will top $13.6 trillion this year and $19.6 trillion by 2015, reads the latest guesstimate from the Treasury Department.

Keeping Up With China's ETFs

http://www.minyanville.com/businessmarkets/articles/exchange-traded-funds-china-short-long/3/11/2010/id/27241?page=1

300% Tax Increase?

Well, if the U.S. doesn't take corrective action, and fast, a 300% tax increase is what's going to have to happen for the country to be able to fulfill on the spending promises that it has made to its citizens.

Let me explain.

Aside from tax revenues evaporating, the biggest problem at the state and local level is skyrocketing costs, primarily from overambitious promises made to public workers -- firefighters, policemen, teachers just to name a few -- for their pensions.

A recent article in The New York Times highlighted a study by Joshua Rauh, an economist at Northwestern University, and Robert Novy-Marx of the University of Chicago, that showed that the 50 states have over $5 trillion in pension obligations.

But here's the kicker -- the states only have about $2 trillion set aside to pay for these obligations, leaving a gap of about $3 trillion.

$3 trillion -- that's pretty bad ... no, let me take that back, that's HORRIFIC.

To put that into perspective, the EU forced Greece to adopt draconian cuts because it had exceeded the EU limit of 60% for its debt-to-GDP ratio.

Under that standard, as you can see on the chart below, Rhode Island and Alaska already exceed that, with New Mexico, Ohio, Mississippi and Illinois not too far behind.

Where do you think they are going to get that $3 trillion from? A booming economy? Another tech revolution?

Hardly.

It's going to come from tax increases and spending cuts, something you are already seeing all across the nation.

Or it's going to come from financial trickery and downright fraud; just consider a few examples as cited by The New York Times of the financial gymnastics that states are doing to balance their budgets:

• New Hampshire was recently ordered by its State Supreme Court to return $110 million that it took from a medical malpractice insurance pool...

• Colorado tried, so far unsuccessfully, to grab a $500 million surplus from its state workers' compensation fund that was privatized in 2002...

• California accelerated its corporate income tax this year, making companies pay 70 percent of their 2010 taxes by June 15...

Jim Rogers: The next crisis has already started

From The Pragmatic Capitalist:

Kirby Daley, senior strategist at Newedge Group, and Jim Rogers claim the next crisis has already started to unfold as sovereign debt worries increase and global central banks only exacerbate the issues...

Watch video here...

The US Dollar

That one really gets me. Do the folks in Washington really think that by pushing China's yuan up — and the dollar down — they're going to save the U.S. economy?

Unfortunately, that's exactly what they think. Because Washington's solution is to pay its debts with cheaper dollars.

I'm not the only one who has caught on to this scheme. Consider these other notable people and what they have to say ...

"It's the ... official policy of the central bank and the United States and to ... debase the currency."
— Jim Rogers, Co-Founder of the Quantum Fund

"The current crisis is ... it's basically the end ... of a 60-year period of continuing credit expansion based on the dollar as the reserve currency."
— George Soros, The world's #1 global investor

"Holding dollars today represents risk ... without ... reward!"
— Joseph Stiglitz, Nobel Prize-winning economist

"In the absence of the gold standard, there is no way to protect savings from confiscation through inflation. There is no safe store of value. Deficit spending is simply a scheme for the `hidden' confiscation of wealth."
— Alan Greenspan, Former Chairman of the Federal Reserve

Pay particular attention to this one ...

"By a continuing process of inflation, governments can confiscate, secretly and unobserved, an important part of the wealth of their citizens ... in a manner which not one man in a million can diagnose."
— John Maynard Keynes

The Roth IRA Trap

What You Need to Know Before You Make This Retirement Account Switch

Karim Rahemtulla
Options Expert

Let's talk retirement - and specifically, Individual Retirement Accounts (IRAs).

Simply put, these are accounts that investors set up to save for retirement. They come in various forms, including the two that I'm going to talk about here - traditional IRAs and Roth IRAs.

Investment Resources

Market Wake-Up Call:

Take Back Your Taxes by Profiting from Stimulus Spending

Matthew Weinschenk, Interview

Related Articles:

Tax-Managing Your Portfolio: Five Steps to Cut Your Taxes, Plus Four Tax-Break Options

12 Simple Steps to Legally Lower Your Tax Burden

Your Individual Retirement Account (IRA): Resolutions for Wealth and Happiness

On the surface, a Roth IRA seems like the best bet, as it allows for tax-free accumulation of profits on your contributions. A great idea, for sure. But there's a catch: It's always been restricted to people who earned less than a certain amount. If you earned more, you were forced to use a traditional IRA, where the gains are taxed.

Until now.

A recent change in the tax laws regarding qualifications for Roth IRAs, versus traditional IRAs, should have many folks jumping for joy.

Until this year, you couldn't qualify for a Roth IRA unless you fell below specific income requirements. But the government has now decreed that anyone can have a Roth IRA, regardless of their income level. Furthermore, if you have a traditional IRA, you can switch it over to a Roth - with all future gains and distributions being tax-free.

Super. Break out the champagne, right?

Not so fast...

The Roth Trap

While spending your hard-earned money tax-free when you retire sounds like a great idea, there are catches. Several catches. And you need to be well-informed before you even think about making the switch to a Roth IRA.

Here are just a couple of issues:

~ Government: The government is angling for a lot of cash with this move. Think about the trillions of dollars sitting in retirement accounts. The lure of collecting taxes early on those trillions makes even the sleepiest bureaucrat wake up.

~ Tax Implications: Any money you switch from your regular IRA to a Roth will be taxable. This means you'll pay tax on these funds at the marginal rate over a couple of years.

However, if you're at the 25% tax rate and you decide to make the switch, the amount you transfer will increase your marginal rate and may push you into the 35% bracket or higher.

Ask yourself this: What will your estimated tax rate be at retirement? If it's going to be lower and you're within a few years of retiring, the Roth switch may not be for you.

In addition, the taxes due must come from somewhere. For example...

Switch Now... Or Pay Later?

Let's take a traditional IRA with $500,000 in it.

If you switched to a Roth, you'd owe at least $175,000 in taxes at the 35% tax rate. That would leave your investible capital at $325,000. But the pros tell me that you need to pay that $175,000 out of other funds so your IRA is intact and can earn money tax-free without having to spend years getting your principal back to square one. Hmm, now where can I find an extra $175,000 lying around?

The thinking behind making the Roth tax switch now is simple: Taxes are going up (maybe way up, thanks to our lavish spending habits), so better to cough it up now before you really have to hand over some big bucks later.

In fact, it's not out of the realm of possibility that marginal tax rates will top 50% for the highest earners within a couple of years - something that would make the Roth switch really expensive.

The upside, however, is that tax history doesn't usually change because of fiscal responsibility, but because of political will. Over the past 40 years, we've seen marginal rates decline from over 70% to the low 30% level.

And while we're on the upward slope today, who knows where we'll be in 20 years? Taxes might have declined by the time you take a distribution. So scare tactics aside, let's look at a couple of solutions...

Thinking About Switching to a Roth IRA? Consider This...

~ Status Quo: The easiest thing to do is let your traditional, tax-exempt IRA continue to grow and just pay the taxes at the marginal rate upon distribution. The money you'd have to find to pay the taxes today (compounded at a reasonable rate going forward) would likely make up for a good chunk of what you'd pay in taxes later anyway. And if your rate is lower in the future, you may actually come out ahead if you're looking at a period of 10 or 20 years.

~ Switch in Stages: If you're going to switch to a Roth IRA, don't let the government fool you into thinking that you can pay the taxes over the next two or three years. From what I can tell, it's a gimmick - it wants the money now.

Instead, consider switching over a longer period of time, transferring just enough each year, so that your tax bite doesn't vault you into some ungodly high tax bracket. For example, if you have $500,000 to switch, transfer $50,000 a year over 10 years and pay the tax on that amount - it's a lot more manageable. Check with your accountant that there are no future restrictions on switching your IRA in this way. If not, why do it all at once?

The bottom line: The Roth IRA switch is good news, but it's nothing to write home about. If it was, I assure you the government wouldn't be pushing it so hard!

Good investing,

Karim Rahemtulla

P.S. Please note that this column is just to bring the Roth IRA subject to your attention. Make sure you check with your accountant before you do anything.