In recent years, the president and congressional leaders have threatened tax hikes continuously.  At the end of 2012,  most speculated that dividend and capital gains taxes would skyrocket.  While new health care taxes will hit business owners and retirees hard, the dividend and capital gains tax hikes were stopped by the Congress at the last minute. These tax hikes plus the ObamaCare taxes could have increased the cost of selling a company by more than 50%. With that being said, the government now has a short-term influx of tax payments.  It is speculated that the higher tax revenue receipts were generated  from the last minute tax-avoidance sales.   For example, companies such as Current TV were probably sold at the last minute in December 2012 to avoid major spikes in capital gains taxes.

In the meantime, the S & P 500 companies are still doing 40-50 percent of their business offshore. These US companies doing business offshore are reinvesting much of  their profits outside of the US to target the global customers which represent over 90 percent of the world’s buyers outside of the USA.

The point of this article is that the government should not get to excited about a one-time mass influx  of capital gains  and income taxes for 2012. These temporary flows of tax payments are because people are trying to avoid taxes and not  necessarily because the domestic economy is doing better.

And don’t forget, every 5-6 years, retirees and now baby boomers are “GOING TO CASH” particularly when the stock market is reaching new highs.  Not only is it a strategy, but licensed professionals are required to advise retirees about their time horizon and suitability as they get older. This means that retirees with savings  must sell some stocks or capital assets to generate income.  Moreover, the global investor follows value too and will move out of the USA when things get into technical bubble range for the DOW and S&P.

In the end, there are many US companies citizens that are still carrying forward major losses over the last 3 years along  with many working families that are under water with their house value.

In closing, the only way to solve the fiscal problems would be to use the 4FP “Four Fold Path”.   1) Grow the Economy and Tax Payments 2) Create a Fair Tax System which Incentivizes Productivity 3) Reduce Spending, Corruption and Waste 4) Augment Global Investment into Your Country Though a Fair Regulatory and Tax System.

In the end, keep a keen eye out for big shots at Goldman Sachs or other banks to start putting their clients into some cash if the Dow hits 15500. Even Time Magazine says, “Don’t Fight The Fed but Be Afraid”.

With all of the being said, I may recommend a few companies related to taxes, tax strategy,  and credit.  Intuit (NASDAQ:INTU), Paychex (NASDAQ:PAYX), Equifax (NYSE:EFX)

Lawyer  and Counselor  George Mentz, JD, MBA, CILS, CWM  is a world recognized management consulting commentator and award winning professor who has authored several revolutionary books. Prof. Mentz, an international attorney, has been a keynote speaker globally in Asia, Arabia, USA, Mexico, Switzerland, and in the West Indies. Mentz can be contacted for speaking engagements at www.gmentz.com or www.managementconsultant.us  *No counseling, tax investment or legal advice provided herein.  Please consult with a licensed professional in your jurisdiction before making any important career, financial or legal decision.  All rights reserved by George Mentz, Esq.

Congress’s solution to the debt limit crisis and rising deficits is fully operational, but many are left wondering whether the bipartisan Joint Select Committee on Deficit Reduction (the Deficit Reduction Committee) is capable of fulfilling its mandate when Congress as a whole couldn’t make the hard decisions that were necessary for a long-term solution. And the Deficit Reduction Committee is even more susceptible to deadlock than the full Congress since the Committee is populated by six Republicans and six Democrats.

The super-committee was the end result of months of negotiations between Democrats and Republicans during the debt limit debates. The resulting compromise included $917 billion in discretionary spending cuts over 10 years. The Committee must come up with another $1.2 to $1.5 trillion in cuts.

The Committee must pass a deficit reduction plan by a simple majority vote (7 out of 12). The plan will then go to Congress for a vote. If the Committee fails to reach a compromise proposal or Congress does not adopt the Committee’s proposals, a series of sharp automatic cuts will kick in, slashing budgets across the entire federal government, including the Defense Department.

Read this complete analysis of the impact at AdvisorFX (sign up for a free trial subscription with full access to all of the planning libraries and client presentations if you are not already a subscriber).

For previous coverage of the debt limit fight and resulting compromise in Advisor’s Journal, see Democrats Call Debt Limit Unconstitutional (CC 11-134), Debt Limit Standoff Boils Over (CC 11-115) and Storm Clouds over U.S. Debt (CC 11-85).

Last week, Standard and Poor’s (S&P’s) downgraded the U.S.’s credit rating for the first time in history, moving the US from AAA to AA+. Although Moody’s and Fitch have not followed the S&P’s lead, both agencies indicated that their prime rating is contingent on future U.S. debt reduction.

The debt ceiling agreement reached two weeks ago included a pledge to cut spending by $2.4 trillion over the next 10 years; but the rating agencies have said that the reduction was insufficient, hinting that cuts of $4 trillion or more are necessary.

Although the downgrade could have significant long-term detrimental effects on the U.S. and world economies, it certainly isn’t the economic Armageddon that a U.S. default would have been. In other words, it could have been worse.

Read this complete analysis of the impact at AdvisorFX (sign up for a free trial subscription with full access to all of the planning libraries and client presentations if you are not already a subscriber).

For previous coverage of the U.S. debt crisis in Advisor’s Journal, see Debt Limit Deal Leaves Unfinished Business (CC 11-154), Democrats Call Debt Limit Unconstitutional (CC 11-134), & Debt Deal Talks Down to the Wire (CC 11-139).

President Obama signed a debt-limit compromise bill last Monday—the very day the administration predicted the U.S. would default—averting the financial Armageddon.

Crisis was averted, but where are we a week later?

The agreement allows the debt limit to be increased by a total of $2.4 trillion; but the limit will increase by only $400 billion immediately. President Obama has the power to request a $500 billion increase—although Congress can veto any such increase by a 2/3 majority. The remaining $1.2 to $1.5 trillion is accessible only if matching spending cuts are made.

The agreement also includes $900 billion in cuts, to be made over the next 10 years.

The President’s signature on the bill last Monday was only stage one in a two part process: Congress and the President are going to have to agree on another $1.5 trillion in deficit reduction by the end of the year.

Read this complete analysis of the impact at AdvisorFX (sign up for a free trial subscription with full access to all of the planning libraries and client presentations if you are not already a subscriber).

For previous coverage of the debt talks in Advisor’s Journal, see Democrats Call Debt Limit Unconstitutional (CC 11-134), Debt Limit Standoff Boils Over (CC 11-115) and Storm Clouds over U.S. Debt (CC 11-85).

The August 2 drop-dead date for the debt-ceiling is rapidly approaching, but Congress isn’t phased enough to set aside partisan bickering and solve the Fed’s funding woes.

In a stand against Democratic reticence over deep spending cuts, the Republican-dominated U.S. House of Representatives voted on May 31 to reject a bill that would have raised the debt ceiling. Republicans look to be using the debt ceiling fight to press the President and Congressional Democrats on spending issues.

The administration initially said that the debt-ceiling would be reached on May 16. But when that date passed, Treasury Secretary Timothy Geithner announced that the date could be extended through August 2 using accounting gimmicks and by letting bills go unpaid—for instance, ceasing investments in two government pension plans. The White House has also proposed selling 14,000 pieces of unused federal property to help cut the deficit.

Read this complete analysis of the impact at AdvisorFX (sign up for a free trial subscription with full access to all of the planning libraries and client presentations if you are not already a subscriber).

For previous coverage of U.S. debt in Advisor’s Journal, see Debt Ceiling Approaching: Prepare for Impact (CC 11-100) & Storm Clouds over U.S. Debt (CC 11-85).

Congress on both sides of the aisle is playing a game of political chicken with the debt ceiling; but what would impact mean for the markets and the economy in general?

Although the U.S. hit its $14.3 trillion debt ceiling on Monday, May 16, economic Armageddon hasn’t yet rained down on the U.S. economy. Thanks to some slick Treasury Department maneuvering, the date when the U.S. really reaches the limit has been pushed to around August 2.

But instead of breathing a sigh of relief and resolving to engage in a bipartisan effort to resolve the debt ceiling issue in advance of the August drop-dead date, both sides are likely to wait until the last moment to avoid impact—threatening our fragile economic recovery in the process.

Read this complete analysis of the impact at AdvisorFX (sign up for a free trial subscription with full access to all of the planning libraries and client presentations if you are not already a subscriber).

For previous coverage of U.S. debt in Advisor’s Journal, see Storm Clouds over U.S. Debt (CC 11-85).

Why is this Topic Important to Wealth Managers? The IRS recently released proposed regulations relating to the exclusion from gross income of discharge of indebtedness income of a grantor trust or an entity that is disregarded as an entity separate from its owner. Further, the proposed regulations provide rules regarding the term “taxpayer” for purposes of applying the existing law to discharge of indebtedness income of a grantor trust or a disregarded entity. The proposed regulations thus generally affect wealth managers who have clients/”taxpayers”” who “own” grantor trusts, or disregarded entities.

Generally speaking section 61(a)(12) of the Internal Revenue Code (the Code) provides that income from the discharge of indebtedness is includable in gross income. However, such income may be excludable from gross income under section 108 in certain circumstances.

The proposed regulations provide that, for purposes of applying section 108(a)(1)(A) and (B) to discharge of indebtedness income of a grantor trust or a disregarded entity, the term taxpayer, as used in section 108(a)(1) and (d)(1) through (3), refers to the owner(s) of the grantor trust or disregarded entity. The proposed regulations thus have income tax implications to “owners” of grantor trusts with regards to discharge of indebtedness.

The proposed regulations further provide that grantor trusts and disregarded entities themselves will not be considered owners for this purpose. The regulations will therefore cause those “owners” of grantor trusts and disregarded entities to realize income through the discharge of indebtedness.

Lastly, the proposed regulations provide that, in the case of a partnership, the owner rules apply at the partner level to the partners of the partnership to whom the discharge of indebtedness income is allocable.

Proposed Regulation Application Example:

If a partnership holds an interest in a grantor trust or disregarded entity, the applicability of section 108(a)(1)(A) and (B) to discharge of indebtedness income of the grantor trust or disregarded entity is tested by looking to the partners to whom the income is allocable. If any partner is itself a grantor trust or disregarded entity, the applicability of section 108(a)(1)(A) and (B) is determined by looking through such grantor trust or disregarded entity to the ultimate owner(s) of such partner.

Grantor Trust “Owners”

A grantor who retains certain interests in a trust he creates may be treated as the “owner” of all or part of the trust and thus taxed on the income of the trust in proportion to his ownership. There are five categories of interests for which the IRC gives detailed limits as to the amount of control the grantor may have without being taxed on the trust income. These categories are: reversionary interests, power to control beneficial enjoyment, administrative powers, power to revoke, and income for benefit of grantor. [1]

Generally, a grantor will be treated as the owner of any portion of a trust in which he has a reversionary interest in either the corpus or the income, if, as of the date of inception of that portion of the trust, the value of such interest exceeds 5% of the value of the trust.[2]

If the trust income is (or, in the discretion of the grantor or a nonadverse party, or both, may be) distributed or held for the benefit of the grantor or his spouse, he will be treated as the owner of it. [3]

Moreover, if the trust income is (or, in the discretion of the grantor or a nonadverse party, or both, may be) distributed or held for the benefit of the grantor or his spouse, he will be treated as the owner of it. [1]

For a detailed discussion on the taxation of grantor trusts see Tax Facts: What is a grantor trust? How is a grantor trust taxed?

For more information on the discharge of indebtedness in general see Tax Facts: What are the tax consequences of a discharge of indebtedness?

Tomorrow blogticle will continue to address issues surrounding the private wealth management practice.

We invite your questions and comments by posting them below, or by calling the Panel of Experts.

[2] IRC Sec. 673(a).

[3] IRC Sec. 677(a).

The downgrade of U.S. debt could soon be more than just a threat. Taking note of the US’s large budget deficits and continually increasing government indebtedness, Standard & Poor’s (S&P) gives mixed signals about the state of reform, having changed its outlook on the U.S. long-term credit rating from “stable” to “negative.”

While talks about debt limit increases are still speculative, S&P believes there is a one-in-three probability it will downgrade the U.S. long-term debt rating within the next two years. Such a downgrade could cause an economic catastrophe by signaling that there is a heightened chance the US will be unable to pay its debts as they come due. A downgrade would likely tank the markets, the federal government would be forced to agree to higher interest payments to sell its debt, and consumers would face an even tougher lending environment.

For previous coverage of the U.S. budget in Advisor’s Journal, see Republican Ryan’s Budget Faces Bipartisan “Gang of Six” (CC 11-80).

Your questions and comments are always welcome. Please post them at our blog, AdvisorFYI, or call the Panel of Experts.