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Is Our Tax System Fair?
Wednesday, July 16, 2014 16:37

Tags: social security | tax law | Taxes

The media seems to cover income tax issues on an ongoing basis. Many advisors are not CPAs, so explaining concepts to clients can be quite challenging at times.  One of the most controversial topics centers on “regressive” vs. “progressive” tax structures.  So what do these terms mean? Understanding the definitions are important to forming an opinion about how to create a “fair” tax system.  

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The terms “regressive” and “progressive” refer to who pays relatively more tax than others.  A regressive tax causes lower-income people to pay a higher percentage of their incomes than higher-income people.  A progressive tax causes higher-income people to pay a higher percentage of their incomes than lower-income people.

 

For example, the sales tax is considered a regressive tax.  Why?  As a consumption tax, the tax is relatively higher for lower-income people.  Since lower-income people tend to spend more of their earnings on consumables than higher-income people, they will pay more percentage-wise.

 

On the other hand, the Federal income tax is progressive because the tax brackets increase as income increases.  Thus, higher-income people will pay more percentage-wise than lower-income people.

 

Surprisingly, Social Security is a regressive tax.  The Medicaid portion (1.45% for employees and 2.9% for self-employeds) is neither regressive nor progressive because it is imposed on all earned income.  However, the Social Security tax (6.2% for employees and 12.4% for self-employeds) is only imposed on earned income up to $117,000.  So, employees earning under $117,000 pay a total of 7.65%, but employees earning more than that pay only 1.45% on the higher earnings.

 

Attempting to not get into politics, I’d like to share some of my thoughts as both a CPA and financial advisor. In my opinion, low income taxpayers need a break. No matter what changes are made to our tax systems, there needs to be no tax on people earning less than poverty level. This is currently not an issue from an income tax standpoint, but it is a huge issue when talking about Social Security. As a tax person, I have seen several cases where taxpayers were disabled or unable to work in full time jobs. Rather than take social assistance (like Welfare or food stamps), these people worked in their own businesses to earn enough money to make ends meet. Unfortunately, at tax time, although no income taxes were due, they were subjected to 15.3% Social Security tax. Because there is no exemption for low income earners, this tax can cause extreme hardship.

 

Where should the line be drawn between encouraging success without taxing high income earners too much? I can’t say I have the answer to that. I think there needs to be a balance. And, I don’t believe that the AMT accomplishes what it was designed to do: Eliminate unreasonable advantages from tax loopholes. When the primary “loopholes” are state taxes and mortgage interest, the AMT unfairly burdens those people living in states with high income taxes and home prices. Is it fair to require Californians and New Yorkers to pay more tax?

 

Unfortunately, there are no easy answers. We can’t start from a “clean state” and change everything at once. That would cause economic crisis. However, we can begin to make changes that will move our tax system to one that is more “fair.” What will eventually happen is anyone’s guess!

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Protecting The Innocent
Sunday, June 29, 2014 20:04

Tags: annuities | client education | selling

I've written about the "evils of annuities" before. What is amazing to me is that annuity-pushers are still ripping people off and getting away with it!

Here's a case in point. A friend of mine emailed me that her parents were talked into buying an annuity. They were invited to a "free" steak dinner by a "financial planner" to listen to an "educational" presentation. (The quotation marks are intentional. The sentence should read: They were enticed into a sales pitch with a steak dinner by a shyster.) After hearing the presentation, the signed up for an annuity in the amount of $40,000.
 
Now, $40,000 might not seem like a lot for those of us advising clients with portfolios of several million dollars. For my friend's parents, $40,000 was a huge chunk of their savings. The scumbag who sold them this annuity made a commission many times over the cost of their dinners. And who knows how many others fell prey to this scheme?
 
Let's look at the problem. My friend's parents did not have much in liquid savings. Sure, they have some IRAs, but non-retirement cash was minimal. Now, the vast majority of it is tied up in an annuity.  If they want to take money out, it will cost them seven percent of what they put in! The penalty will decline to zero after seven years. In other words, my friend's parents will lose money if they want or need to access their funds prior to seven years from now. At ages 75 and 78, this seems almost criminal. 
 
What if they manage to let the annuity grow without taking money out? Should they utilize the funds down the road, any growth would be subject to tax at ordinary rates. Growth from investments held personally would be taxed at lower capital gain rates. If the annuity passes to their heirs, the ordinary tax on the growth will be payable by them. If my friend's parents had let their funds grow in a taxable account, any amounts passed on to their heirs would avoid tax altogether (because of the basis step-up).
 
As RIAs, we can't protect everyone. But we can educate our clients, friends and employees in the hope that they will share this warning with their circles. 

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If You're An Advisor In Maryland: Tell Your Clients That Living Longer Could Make Their Heirs Wealthier
Tuesday, June 03, 2014 15:21

The good news for UHNWIs residing in Maryland is that the longer they live, the wealthier their heirs will be. The bad news is that if they die within the next four years, their heirs may have to pay state estate taxes. 

 
On May 15, 2014, Governor Martin O'Malley signed into law a bipartisan bill "recoupling" Maryland state and federal estate taxes over the course of the next five years.

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David Albert, CPA, JD, CFP, who was kind enough to put me on his email newsletter list, says in a blog post that the state disconnected its rules from the federal system in 2004 and enacted a cap of $1,000,000 on its estate tax exemption, even though the federal estate tax exemption is more than five times greater.
 
As a result of this new law, Albert says the number of Maryland estates that will be exposed to the Maryland estate tax will be significantly incrementally reduced in stages over the next five years, when the Maryland and federal estate tax exemption will be at parity.
 

 

 

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Receive Two Continuing Education Credits For Today’s Webinar, "75 Ways To Generate Tax-Alpha (Part 1)" by Bob Keebler -- Plus Big Discounts On Bob's Tax Aides For Advisors
Thursday, May 29, 2014 11:14

Tags: tax efficient investing | Taxes

Bob Keebler at 4 p.m. ET today delivers the first installment of a two-part webinar program, entitled, “75 Ways To Generate Tax-Alpha.” The special 100-minute session will give you twice as much CPE as our usual one-hour sessions, and Part 2 will also be a two-credit session. In addition, attendees at today’s webinar will receive big discounts on the following tax tools for professionals from Keebler Tax & Wealth Education:

  • The Advisor's Guide to The Top 30 Tax Planning Ideas for 2014 is 148-page guide for professionals about: bracket management, income smoothing, income shifting, reducing taxable Income, net investment income tax strategies and wealth transfer strategies. With more than 60 examples about using utilize these strategies with your clients, this is a handy reference guide for any financial advisor. While the guide costs $99 normally, A4A members attending today’s will receive a discount code for a 30% discount ($69).
  • Bob Keebler’s Roth Conversion Calculator is an Excel spreadsheet for calculating whether a client should convert. Its graphical reports allow advisors to quickly absorb results and change assumptions. Moreover, unlike other calculators, it’s not a “black box.” You’ll able to look “under-the-hood” and determine how the calculations are made. Comes with a 34-page guide to conversions, a sample client marketing letter, and a sample client memo to help you better explain Roth Conversions to clients. While the guide regularly sells for $49, A4A members attending today’s will receive a discount code 50% discount ($24.50).

 

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How To Use Behavioral Finance Techniques To Generate “Advisor Alpha” In Financial Planning Relationships
Saturday, April 12, 2014 12:39

Scott Burns and Uri Pomerantz, who have designed an app to help financial advice professionals capture the three-percentage points of return annually squandered by consumers on common behavioral finance mistakes, spoke yesterday at an A4A continuing professional education webinar entitled, Applying Behavioral Finance Research To Mass-Affluent Financial Planning Engagements.

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Burns and Pomerantz, who met at as graduate students at Harvard, and have a track record for trying singlehandedly to make the world better, have built an app that tries to optimize advisor alpha, a concept Vanguard Group a year ago researched. They spoke about the underlying concepts of their financial planning app, Guide.
 
Their software uses behavioral finance techniques to maximize advisor alpha. It’s a pioneering effort that could influence advisor technology significantly by shifting focus of advisor apps to advisor alpha and behavioral finance.
 
Burns and Pomerantz agreed to speak about the underlying concepts behind their software and were faithful to that commitment. We’ll cover the software in another post. I asked them to focus on the behavioral finance ideas driving their software because it uniquely applies behavioral finance lessons to financial planning relationships. Behavioral finance techniques are often discussed with regard to mental mistakes in investing. But this growing body of knowledge has not been applied to making consumers more likely to succeed at achieving long-term financial planning goals.
 
If these the two young entrepreneurs are represent the future of the profession, our children are in good hands. Burns and Pomerantz both have demonstrated a deep commitment to making the world better.  
 
Burns, a CFA charterholder, served in the Peace Corps in Kazakhstan, where he grew an NGO to financial sustainability and taught economics at a regional university. Then, as an investment manager in Moscow, he deployed commitments from a $160 million private equity fund and served on the boards of several Eastern European logistics providers. More recently, he built an emerging-markets line of business in a major European energy consulting firm (part of a $2 billion annual revenue DNV group). He holds a graduate degree from the Harvard Kennedy School of Government in International Development.
 
Pomerantz, at 21, co-founded a non-partisan, non-political microfinance fund working with Israelis and Palestinians, and has since been involved in finance and technology work at major corporations (consulting at McKinsey and Company, investment banking at Goldman Sachs) as well as smaller, entrepreneurial organizations. He is an experienced programmer and worked as a Program Manager and Business Development Manager at Microsoft, and contributed to various strategy and technical roles at IBM and several Silicon Valley startups. as a B.S. from Stanford University in Symbolic Systems, a graduate degree from Harvard University in Economic Development, and an MBA from Stanford Business School.
 
Attendees gave the session a 4.2 star-rating. Below are comments from those attending:
·       Awesome. We need more programs that help us deal with behavioral issues and specifically how we can help move the needle. Hopefully, Guide financial will provide us with some practical tools to accomplish just that.
·       Nothing new for the advance planner. This was more suited for the beginner. Disappointed in this presentation.
·       Great webinar -- very engaging!
·       One of the best I've seen. And thank you for continuing to do these.
·       Thanks for asking them to record a tour of their software. It will be easier to see how they implement what they talked about.
·       Very respectful of their audience. Can't wait to see their demo.
·       Good.
·       Very helpful and interesting
·       Great presentation. I would have enjoyed hearing more about their business model for Guide and the cost to employ their software.
·       Time for questions during webinar.
·       Pretty good stuff. Interesting
·       Very interesting, I'd like to learn more about them
·       It was ok.
·       Interesting software product and discussion on behavioral finance. The first few charts were very informative, particularly the one about the difference in ending value of an account in which the participant increased his contribution from 3% to 8%. That was remarkable. It's ironic because the clients who complain the most about their returns, etc. are the ones who don't want to save the amount needed to reach their goals. I could see that issue percolating in these charts.
·       I wish that they had spent more time doing a demo of the software.
·       The webinar seemed to be about establishing the fact that people act in accordance with certain principles of behavioral finance. But I would hope that an audience of financial advisors would know that. I would have preferred more concrete suggestions of how to apply behavioral finance principles to client interactions/ client management, and would REALLY have liked more time on the software the presenters have developed. I don't care if the webinar is a "product pitch" if the product if effective.
·       Right out of Dan Ariely's Irrational Behavior class.
·       Not bad, yes they need to work at this. Not sure if they know what we do, manage client capital not babysit people who are trying to save. Nice objective but economically not viable. But, maybe their software could be used and, thus, I thought your suggestion on the software was good. Let's see!
·       Probably better suited for advisors with younger clients.
·       I would like to see the software and how it works.
·       Would have appreciated less chatter from Andrew and allowing more time for questions. Thx.
 
 
 
 
Awesome. We need more programs that help us deal with behavioral issues and specifically how we can help move the needle. Hopefully, Guide financial will provide us with some practical tools to accomplish just that.
Nothing new for the advance planner. This was more suited for the beginner. Disappointed in this presentation.
Great webinar -- very engaging!
One of the best I've seen. And thank you for continuing to do these.
Thanks for asking them to record a tour of their software. It will be easier to see how they implement what they talked about.
Very respectful of their audience. Can't wait to see their demo.
Good.
Very helpful and interesting
Great presentation. I would have enjoyed hearing more about their business model for Guide and the cost to employ their software.
Time for questions during webinar.
Pretty good stuff. Interesting
Very interesting, I'd like to learn more about them
It was ok.
Interesting software product and discussion on behavioral finance. The first few charts were very informative, particularly the one about the difference in ending value of an account in which the participant increased his contribution from 3% to 8%. That was remarkable. It's ironic because the clients who complain the most about their returns, etc. are the ones who don't want to save the amount needed to reach their goals. I could see that issue percolating in these charts.
I wish that they had spent more time doing a demo of the software.
The webinar seemed to be about establishing the fact that people act in accordance with certain principles of behavioral finance. But I would hope that an audience of financial advisors would know that. I would have preferred more concrete suggestions of how to apply behavioral finance principles to client interactions/ client management, and would REALLY have liked more time on the software the presenters have developed. I don't care if the webinar is a "product pitch" if the product if effective.
Right out of Dan Ariely's Irrational Behavior class.
Not bad, yes they need to work at this. Not sure if they know what we do, manage client capital not babysit people who are trying to save. Nice objective but economically not viable. But, maybe their software could be used and, thus, I thought your suggestion on the software was good. Let's see!
Probably better suited for advisors with younger clients.
I would like to see the software and how it works.
Would have appreciated less chatter from Andrew and allowing more time for questions. Thx

 

 

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