Tuesday, January 29, 2013

The Tax Tail

It has often been said that one should not let the “Tax Tail” wag the dog.  In the context of financial decisions, that means that tax effects are a part of the picture but not the whole picture.  For example, when deciding to buy a house vs. renting, the interest deduction is one of the considerations but by no means the main one.  You must also consider other factors such as: will the house appreciate in value; do the house payments, taxes, and maintenance leave me enough cash to live on; and do I want the added responsibility of maintaining a house?
Most decisions that involve some tax consequence have other important considerations.  Take for example, whether to invest your savings in securities vs. a rental house.  The differences in tax treatment are important, but so are the differences in management responsibility.  There are many times when the rental house would yield a better long-term financial result but the investor may not be cut out for managing rental property and all the hassles that go with it.
In conclusion, to make a good financial decision you need to know how your taxes will be affected, but don’t stop there.  Consider all the other aspects of the decision too, including whether you are just plain comfortable with your decision.

Friday, January 18, 2013

Congress Acts

I don’t know about you, but I was surprised that Congress actually passed a tax bill in time to avoid a huge log jam for the 2013 tax filing season. The law is not all that bad either, or maybe my expectations for this Congress are so low that any law looks good to me. Anyway, they did make some fixes that were long overdue.

Congress finally addressed the Alternative Minimum Tax in a reasonable fashion by permanently increasing the exemption amount and adding a provision for adjusting it for inflation so they do not have to come back to this every year. If you are unfamiliar with the Alternative Minimum Tax just consider yourself lucky and move on. Wonder of wonders, we finally have a permanent estate tax exemption at $5,000,000 plus inflation adjustments. For several years there has been such uncertainty in the estate planning area that people could not do confident planning in this area. Now that we have some surety we can make reasonable decisions about our estates. We also have permanent tax rates consisting of the current rates with the addition of a top rate of 39.6% on high incomes.

Most of the other provisions in the law are either for one year or for five years, giving Congress more time to address these important issues. Even though there are many unanswered questions or short-term fixes, at least it does not look like they will have to come back half-way through the tax filing season to make last minute or retro-active changes. Halleluiah!

Tuesday, January 8, 2013

Payroll Tax Holiday Ended

You have probably heard by now that the Payroll Tax Holiday ended 12/31/2012. This means that employers are required to, once again, withhold 6.2% (up from 4.2%) of your earnings for  Social Security tax. You might not have noticed back in 2011 when your net pay was increased. My guess is that you will notice when your net pay decreases. Hope you enjoyed that tax holiday!