A little more ranting about the fiscal cliff deal

This rant was posted as part of the ShadowTrader Weekend update, in things you should give a pip about
Our fearless leaders have stared into the abyss of the fiscal cliff and did not flinch. They have saved the day. Oh wait, no they didn’t, they flinched like a Chihuahua on Red Bulls. They didn’t solve our fiscal cliff problem, they whined and cried and demanded until the solution made no one happy.
They increased taxes enough to bring in $60 billion a year, less than 2% of just the deficit portion of the spending and made it so we wouldn’t hit the debt ceiling for a WHOLE 2 MONTHS. In doing so they raised the taxes on the average household by $2000 per year (not just the rich), enough to hurt everyone a little. But don’t worry, they will have to come up with something else in the next 60 days that certainly will hurt more.
Again, I am not blaming one party. It is ridiculous to assume that the debt problems can be solved with raising taxes alone or lowering spending alone. This will require both. What we have now is just enough tax increase to reduce consumer spending and slow the economy. Most economists now are expecting the GDP to stop growing and some deflationary pressures in the market.
To our politicians, Congress, The House of Representatives and the White House: That is quite the solution you provided. The nation, we the people, democrats, republicans, libertarians, constitutionalists and all others in poll after poll are calling on both spending cuts and increases in taxes to avoid the debt problems. Have you forgotten what it is like to live within a budget? We understand a budget and what it takes to get it under control. Your bickering and unwillingness to compromise is childish and petty at best. The solution you provided and approved is not what we know is needed. Way to stand your ground on the principles that don’t reflect those principles of your constituents, the people you were elected to represent.
Come together. get it together, get it resolved.

Can Kicked Down the Road

Well this comes as no shock. We have a temporary fix to the fiscal cliff. The can was kicked down the road. The solution they provided created increased revenues of $600 billion over the next 10 years. This increase in revenues is a very small amount when looking at the $16 trillion. The "highlights" though pretty dim are as follows:

-- The tax rate for individuals making more than $400,000 and couples making more than $450,000 will rise from the current 35% to the Clinton-era rate of 39.6%.

-- Itemized deductions will be capped for individuals making $250,000 and for married couples making $300,000.

-- Taxes on inherited estates will go up to 40% from 35%.

-- Unemployment insurance will be extended for a year for 2 million people.

-- The alternative minimum tax, a perennial issue, will be permanently adjusted for inflation.

-- Child care, tuition and research and development tax credits will be renewed.

-- The "Doc Fix" -- reimbursements for doctors who take Medicare patients -- will continue, but it won't be paid for out of the Obama administration's signature health care law.

These changes don't include the changes in the payroll taxes that will be increased as of January 1. The change in payroll taxes will impact the majority of earners. Payroll taxes were reduced in 2011 and will increase from 4.2% from 6.2% again immediately. This means those earning $30,000 will pay an average of $50 a month more. Those that make near $120,000 will pay $200 a month more. This means there will be less spendable income which, as said before, will slow the economy.

Alternative Minimum Tax or AMT

Not surprising at all, I have a question on what is AMT. Alternative Minimum Tax or AMT was created as a way to ensure that taxpayers pay at least a minimum amount of tax. Over the years the tax laws have changed so that there is a large segment that are not subject to this minimum tax but with the roll into 2013, the AMT is something that the majority of us will now need to be aware of and concerned with. A good tax preparer or accountant can help you with this. The AMT has a completely different set of calculations than the regular tax. For the regular tax, you add up your total income, subtract out various deductions and personal exemptions, then calculate the tax. Against the regular tax you can claim various credits to reduce your tax even further. The AMT, however, does not allow the standard deduction, personal exemptions, or certain itemized deductions. Additionally, some income which is not subject to the regular tax is included in the AMT calculations. Your tax under AMT rules may be higher than your tax under regular tax rules.

Some adjustments that many of us use in preparing our taxes that can make you subject to the AMT are:

itemized deductions for state and local taxes

medical expenses

other miscellaneous expenses

mortgage interest on home equity debt

accelerated depreciation

exercising (but not selling) incentive stock options

tax-exempt interest from private activity bonds

passive income or losses

net operating loss deduction

foreign tax credits

exercise of stock options and

investment expenses

This is not all inclusive but it is a list of the primary drivers.

The AMT will impact more of the populations as stated in the previous post (see below). If nothing changes and the tax breaks expire and the AMT is adjusted as expected, the exemptions will go from $48,450 to $33,750 for single and head of household filers, from $74,450 to $45,000 for married people filing jointly and for qualifying widows or widowers, and from $37,225 to $22,500 for married people filing separately.

As an example if you made $110,000 and then deducted out $50,000 in various approved deductions, you may find yourself with $60,000 in taxable income and in a 15% tax bracket and paying $9,000 in taxes. With the AMT (this is an oversimplification but gives you an idea of what the difference might be) you would get your exemption of $45,000 and let's say $10,000 in certain allowed deductions and you still end up with $55,000 taxable income for the AMT. Your AMT tax would be 26% which means that you would pay $14,300in taxes, an increase of $5,300 or 58% more tax paid.

You can get credit in future years for paying the AMT but as you can see, this can have a significant impact to the bottom line, especially when added to the expiring tax cuts.

Also remember, ALL OF THIS IS SUBJECT TO CHANGE as our illustrious leaders negotiate the nations debt crises with our tax dollars.

Source: Code Section 55(d)(1). Lower exemption levels mean that more taxpayers will be subject to the alternative minimum tax calculations.

Expiring Tax Cuts

Many of you probably are not aware that I have done taxes for over a decade and am an RTRP. In doing my continuing education and thinking about the fiscal cliff, it made my stomach turn to think about the tax increases coming our way.

It is important to note that their will be tax increases with the fiscal cliff problems but we already have a number of increases that are happening just because the Bush era tax cuts are expiring. Here is a list of some of the more significant tax increases not counting any that come out of the negotiations over the next week.

The AMT and Capital Gains changes will be a shock and impact many that don't realize it is coming. I have bolded the information that I think will impact traders at the highest level but all of this is important.

The Social Security payroll tax reduction in place for the last two years will increase 2% from 4.2% to 6.2%. This will mean an average of $40 less per paycheck for the average American.

The Child Tax Credit will decrease from $1,000 per child to only $500 per child. Ouch! A $1,000 impact for a two-child family.

The American Opportunity Tax Credit (for educational expenses) will decrease from $2,500 to $1,800 per student (and revert back to being the Hope Credit).

The tax rate on long-term capital gains will increase from 0 to 10% for lower income taxpayers and from 15% to 20% for those with higher incomes.

The tax rate on qualified dividends will increase from 15% to the taxpayer’s ordinary income rate (up to 39.6%).

Itemized deductions and personal exemptions will again be limited/phased out for higher income taxpayers.

The Alternative Minimum Tax ”patch” will disappear and the exemption amount will decrease to $48,450 for single taxpayers and $74,450 more married taxpayers.

Approximately 27 million more Americans will be subject to the AMT.

The Adoption Tax Credit will be reduced to $5,000 from $12,650. It will not be refundable but taxpayers will be able to carry forward unused amounts.

Coverdell Education Savings Account contributions will be limited to $500 per student (down from $2,000 per year, per student).

Income Tax Rates will increase from last year’s 10%, 15%, 25%, 28%, 33% and 35% to 15%, 28%, 31%, 36%, and 39.6%. Yes, that is right some of the lower income tax rates will increase by 50%. How's that for not impacting middle and lower class America?

The maximum Long-Term Capital Gains tax rate will increase from 15% to 20%.

The “Marriage Penalty” returns… Married couples will no longer get an equitable percentage of the single taxpayer amounts for the standard deduction, the 15% tax bracket or the earned income tax credit.

The Child and Dependent Care Credit amounts will decrease due to lower percentages, lower eligible expenses and an lower AGI phase-out.

The top rate for the Estate Tax will increase to 55% (up from 35%) and the exclusion amount will be reduced to $1,000,000 (down from last year’s $5,120,000). So to save money and in the words of Mr Charles Dickens ``If they would rather die,'' said Scrooge, ``they had better do it, and decrease the surplus population.

The Section 179 Deduction will be reduced to $25,000 with a qualifying property limit of $200,000 (down from $139,000 and $560,000 respectively). Bonus Depreciation will be eliminated.

A Random Rant: Nonfarm Payroll = NonFull Story

Nonfarm Payroll = NonFull Story

Today nonfarm payroll report showed unemployment fall to 7.8% but that is not the real story. Remember that unemployment is not the percentage of the workforce that is unemployed, it is the percentage of the workforce on unemployment benefits. From last month to this month our workforce increased by 418,000 people and we created 114,000 jobs which means we still have 304,000 new workers that are without jobs. Because they are new to the workforce, they don’t qualify for unemployment and therefore are not in the unemployment percentage. This month we also saw 342,000 people lose their unemployment benefits not due to getting a job.

I think the number that should be reported is percentage of employed workers. If we look at the total number of people employed as a percentage of the workforce, this provides us a very different number. This number has been steadily getting worse and is at about 91% which would mean that 9% of the workforce is truly unemployed. This still does not account for the under employed or discouraged workers or those holding multiple jobs that would not be seen in that data either. My data source www.bls.gov (just dig a little deeper into the numbers)

House of Cards Swaying

This week, citizens of Spain were revolting in the streets over new austerity measures in attempts to reduce the future debt obligations and to qualify for the bailout funds. Even after the austerity measures, consultancy group Oliver Wyam determined that Spain’s banking industry would need an additional 59.3 billion euros to deal with the economic turn down. This is 59.3 billion euros in addition to the austerity measures and nearly 100 billion in bailout funds. In addition to this bad news, Germany, the largest economy and likely saving grace of the eurozone has seen a significant drop in manufacturing and the business climate report.

Back on our side of the pond, we saw one of the largest net withdrawals of funds from mutual funds in the U.S. by institutions in months regardless of the promise of QE3. We also saw a worse than expected Chicago PMI, falling consumer sentiment, GDP falling short of expectations and lower than inflations numbers and a terrible month for real estate. The house of cards is beginning to sway, the question is how long can new cards be added to sustain the already shaky house.