Starting in 2013, federal and state taxes hikes are set to hit many of the nations hardest working families and retirees. If you have a company or appreciated asset that you are planning to sell, you may want to do it before the end of the year. Beginning in 2013, the cost and taxes on selling any tangible asset or your business may go up by a whopping 60 percent.

The established tax rates on long-term gains and qualified dividends will expire on December 31, 2012. Starting 2013, the federal tax rate on long-term gains will go up to 20% (or up to 10% if a taxpayer is in the fifteen percent tax bracket). In addition to this tax hike, the state income tax is added to the 20 percent. Thus, if you live in New York for instance, your federal and state combined tax to sell an asset for a profit would be about 28% if you add the 8 percent New York state income tax. But wait, there is more. Beginning in 2013, you will also be hit with another new tax on long-term capital gains and dividends where you get whacked with an additional 3.8% “Medicare contribution tax.

Also starting in 2013, the distinction between ordinary and qualified dividends will disappear, and all dividends will be subject to the ordinary tax rates. Thus, the maximum rate on dividends is scheduled to increase from 15 % to max out at 39.6% as the Bush Taxpayer Relief Act provisions expire. Thus, taxes on fixed income dividend assets will go over 100%. I would only assume that these new taxes may hurt the share price and demand for dividend yielding stocks.
To sum it up, if you have worked for 30 years in New York to build a company and you sell your small business for $500 thousand dollars, your federal taxes will go up on that retirement sale from about 15% to a whopping 23.8 percent in federal taxes plus state tax. And yes, you then would owe on top of that another 7 or 8 percent to the state of New York to bring you up to well over $150,000 dollars or 30% percent of your retirement being gobbled up by the state and federal governments.

To make a comparison, there may be some folks in a (state with no income tax) such as: Texas or Florida right now who have recently established residency. By the end of the 2012 year, they can sell their stock or company in a long-term capital gain transaction with the tax rate at a flat rate of 15% or only $75,000 dollars. This is 100% less than what the New Yorker or Californian might pay in 2013. “Viva el la Estado de Texas y la Florida” …..

From a philosophical standpoint, the less federal tax on capital gains, the more money that goes into a local economy where the seller resides. In the end, high capital gains rates tend to freeze up assets, constrict the sale of property, and the middle class generally end up waiting till they die to sell a company so as to avoid the capital gains taxes. Overall, if a taxpaying citizen does not receive a reasonable majority of the proceeds from the sale of a business or property, they will not sell or spend or circulate the money in local communities. Further, if people don’t sell things, taxes are not generated.

This whole capital gains tax debate brings me back to a vivid but real experience. I remember as a teenager reading the list of the Forbes 400 richest people in the world. The list in the 70′s was primarily people who inherited money, businesses, assets, or trusts. This list made me believe that being rich may be just luck and inheriting a 2nd or 3rd generational business. However, after the tax rates were lowered in the 80′s, the list changed quickly over the next few years to be comprised mostly of hard working folks who were “self-made”. Thus, my personal belief in the possibility for all Americans to become prosperous changed. The moral of the story is that lower tax rates helps create new wealth and new abundance. In sum, the incentives for hard work are directly correlated to the potential rewards, and everyone benefits from creativity and inventions in the form of cures, technology, and even tax receipts. And of course, higher taxes reduces global investing into new American ventures that may grow the economy.

For instance, even if you read the self-help book, Super Rich, by the famous music mogul Russell Simmons, you will see that even Mr. Simmons claimed to have used the favorable capital-gains rates to sprinkle around the vast proceeds from the sale of one of his businesses and share some of his good fortune with his workers who loyally invested their energy into his company over the years. I personally commend Mr. Simmons for rewarding his people for their contributions.

In the end, we must continue to think of ways to incentivize the hardest working and provide reasonable benefits for those who contribute with great creativity and effort.
Some Ideas for our Readers to Avoid Undue Tax:
1. Subchapter S Corporations may be more useful going forward to mitigate self-employment taxes or other taxes. However, dividend rates are going up if nothing is done by the administration.
2. The Purchase of ETFs, Funds or Stocks that do not produce interest or dividends may be a better investment for long term growth. iShares S&P 500 Growth Index Fund (NYSE: IVW) and WisdomTree LargeCap Growth Fund (NYSE: ROI) Read more: http://www.benzinga.com/analyst-ratings/analyst-color/12/02/2320350/growth-etfs-for-all-seasons#ixzz20LhXdkeF
3. Use of Tax Deferred Variable or Fixed Annuities or Self Directed 401Ks or IRAs may also become even more popular.
4. Read my previous article on Estate Tax Adjustments in 2013 and learn to prepare for those tax hikes and changes.
5. Consider donating appreciated assets to charity rather than cash to avoid undue taxes.

Dr. George Mentz is a world recognized wealth management commentator and 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  To become a Chartered Wealth Manager please contact the AAFM

*No tax investment or legal advice provided herein. Please consult with a licensed professional in your jurisdiction before making any important financial or legal decision.

http://www.irs.gov/taxtopics/tc409.html

http://www.benzinga.com/personal-finance/financial-advisors/12/06/2691411/new-tax-rates-and-adjustments-for-2012-income-and-

http://www.smartmoney.com/taxes/income/what-obamacare-may-mean-for-taxes-1335896160486/

http://www.thestreet.com/story/11598139/1/time-to-avoid-2013-capital-gains-hike-is-now.html

http://businesscertification.org

Why is this Topic Important to Wealth Managers? Today we present a discussion on the national debt limit. This special report discusses the issue surrounding the national budget troubles. Because the topic is being discussed throughout the country and around the world, wealth managers may be in a better position to advise clients knowing the details of the federal financial position.

Generally, the debt limit is the total amount of money that the United States government is authorized to borrow to meet its existing legal obligations, including Social Security and Medicare benefits, military salaries, interest on the national debt, tax refunds, and other payments. The debt limit does not authorize new spending commitments. It simply allows the government to finance existing legal obligations that Congresses and presidents of both parties have made in the past.

Failing to increase the debt limit would likely have catastrophic economic consequences. It would cause the government to default on its legal obligations – an unprecedented event in American history. That would likely precipitate another financial crisis and threaten the jobs and savings of everyday Americans – putting the United States right back in a deep economic hole, just as the country is recovering from the recent recession.

Congress has always acted when called upon to raise the debt limit. Since 1960, Congress has acted 78 separate times to permanently raise, temporarily extend, or revise the definition of the debt limit – 49 times under Republican presidents and 29 times under Democratic presidents.  In the coming weeks, Congress must act to increase the debt limit. Congressional leaders in both parties have recognized that this is necessary

However, last week Mary Miller, Assistant Secretary for Financial Markets at the U.S. Department of the Treasury, issued the following statement reaffirming the projected date on which the United States will exhaust borrowing authority under the statutory debt limit.  Treasury has committed to providing Congress with updates each month of when extraordinary measures taken to keep the nation from defaulting will be exhausted.

“On the basis of careful analysis of actual and projected revenues and expenditures, the Treasury Department continues to project that the United States will exhaust its borrowing authority under the debt limit on August 2, 2011.  Secretary Geithner continues to urge Congress to avoid the catastrophic economic and market consequences of a default crisis by raising the statutory debt limit in a timely manner.”

If Congress fails to increase the debt limit, the government would have to stop, limit, or delay payments on a broad range of legal obligations, including Social Security and Medicare benefits, military salaries, interest on the national debt, tax refunds, and many other commitments.

Defaulting on those legal obligations would also likely cause severe hardship for American families. Additionally, it would call into question the full faith and credit of the United States government – a pillar of the global financial system. The ensuing financial crisis from a default , as mentioned above, would have catastrophic economic consequences, potentially including the loss of millions of American jobs. And it would likely lead to higher borrowing costs, reduced retirement savings, and lower home values for families across the nation.

Tomorrow we revert back to our series and discussion on wealth management in today’s economic environment.

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

Why is this Topic Important to Wealth Managers? The subject presented today provides wealth managers with valuable information to provide to clients interested in self-funding their retirement. The current projections of the Social Security and Medicare programs actually opens the door to present annuities and other insurance products as one means to that end. Astute wealth managers will realize this opportunity.

Each year the Trustees of the Social Security and Medicare trust funds report on the current and projected financial status of the two programs. The 2011 report was recently released.

The 2011 report shows the financial conditions of the Social Security and Medicare programs are far from great. Projected long-run program costs for both Medicare and Social Security are not sustainable under currently scheduled financing, and would require program modifications if disruptive consequences for beneficiaries and taxpayers are to be avoided.

Both Social Security and Medicare, the two largest federal programs, face substantial cost growth in the upcoming decades due to factors that include population aging as well as the growth in expenditures per beneficiary. Through the mid-2030s, due to the large baby-boom generation entering retirement and lower-birth-rate generations entering employment, population aging is the largest single factor contributing to cost growth in the two programs.

In only 25 years by 2036, one year earlier than was projected in last year’s report, the Social Security Trust Fund will have completely exhausted its assets and projected incoming revenues will be insufficient to maintain payment of full benefits. In only 13 years, by 2024, Medicare’s Hospital Insurance Trust Fund is projected to exhaust its assets, five years earlier than was projected in last year’s report.

Social Security expenditures exceeded the program’s non-interest income in 2010 for the first time since 1983. The fund experienced a $49 billion deficit last year (excluding interest income) and $46 billion is the projected deficit in 2011. This deficit is expected in the long run to increase as the retirement of the baby boom generation swells the beneficiary population.  It is projected that tax and interest income will be sufficient to pay benefits through 2022, after which the Trust Fund will be drawn down until depleted in 2036.

Under current projections, the annual cost of Social Security benefits expressed as a share of workers’ taxable wages will grow rapidly from 11-1/2 percent in 2007, to roughly 17 percent in 2035. Costs display a slightly different pattern when expressed as a share of GDP. Program costs equaled roughly 4.2 percent of GDP in 2007, and are also projected to increase around 50% to 6.2 percent of GDP in 2035.

The projected 75-year actuarial deficit for the combined Old-Age and Survivors Insurance and Disability Insurance (OASDI) Trust Funds is 2.22 percent of taxable payroll, up from 1.92 percent projected in last year’s report. This deficit amounts to 17 percent of tax receipts, and 14 percent of program outlays.

Relative to Social Security’s combined Trust Funds, Medicare’s Hospital Insurance (HI) Trust Fund faces a more immediate funding shortfall. HI has run cash deficits since 2008 and under current projections will continue to do so until Trust Fund assets are exhausted in 2024, at which time dedicated revenues would be sufficient to pay 90 percent of HI costs. The share of HI expenditures that can be financed with HI dedicated revenues is nevertheless projected to decline slowly to 75 percent in 2045.

Finally, Medicare costs are projected to grow substantially from approximately 3.6 percent of GDP in 2010 to 5.5 percent of GDP by 2035.

As was mentioned earlier, the shortfall of federal funds available for retirement has presented a compelling reason to provide clients with annuity and other retirement products.

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.

Why is this Topic Important to Wealth Managers? This blogticle presents discussion related to the new Affordable Care Act which affects Medicare participants. Thus, it is important for wealth managers to be informed on the changes which will begin to appear so that they may better prepare clients who receive Medicare benefits.

The Patient Protection and Affordable Care Act and the Health Care and Education Reconciliation Act collectively referred to as the Affordable Care Act, [1] includes a number of policies intended to help physicians, hospitals, and other caregivers improve the safety and quality of patient care and make health care more affordable. The idea is by focusing on the needs of patients and linking payments to outcomes, delivery system reforms should help improve the health of individuals and communities and slow national health care cost growth.

On March 31, 2011, the Department of Health and Human Service released proposed new rules to help doctors, hospitals, and other providers better coordinate care for Medicare patients through Accountable Care Organizations (ACOs).

ACOs are designed to create incentives for health care providers to work together to treat an individual patient across care settings – including doctor’s offices, hospitals, and long-term care facilities. The Medicare Shared Savings Program will reward ACOs that lower growth in health care costs while meeting performance standards on quality of care and putting patients first. Patient and provider participation in an ACO is purely voluntary.

Today, more than half of Medicare beneficiaries have five or more chronic conditions such as diabetes, arthritis, hypertension, and kidney disease.[2] These patients often receive care from multiple physicians. A failure to coordinate care can often lead to patients not getting the care they need, receiving duplicative care, and being at an increased risk of suffering medical errors. On average, each year, one in seven Medicare patients admitted to a hospital has been subject to a harmful medical mistake in the course of their care.[3] And nearly one in five Medicare patients discharged from the hospital is readmitted within 30 days [4]– a readmission many patients could have avoided if their care outside of the hospital had been aggressive and better coordinated.

Improving coordination and communication among physicians and other providers and suppliers through Accountable Care Organizations may help improve the care Medicare beneficiaries receive, while also helping lower costs. According to the analysis of the proposed regulation for ACOs, Medicare could potentially save as much as $960 million over three years.

Under the proposed rule, an ACO refers to a group of providers and suppliers of services (e.g., hospitals, physicians, and others involved in patient care) that will work together to coordinate care for the patients they serve with Medicare. The goal of an ACO is to deliver seamless, high quality care for Medicare beneficiaries. The ACO would be a patient-centered organization where the patient and providers are “true partners” in care decisions.

Any patient who has multiple doctors probably understands the frustration of fragmented and disconnected care: lost or unavailable medical charts, duplicated medical procedures, or having to share the same information over and over with different doctors. Accountable Care Organizations are designed to lift this burden from patients, while improving the partnership between patients and doctors in making health care decisions. People with Medicare will hopefully have better control over their health care, and in turn their doctors can provide better care because they will have better information about their patients’ medical history and can communicate with a patient’s other doctors. Medicare beneficiaries whose doctors participate in an ACO will still have a full choice of providers and can still choose to see doctors outside of the ACO. In addition, patients choosing to receive care from providers participating in ACOs will have access to information about how well their doctors, hospitals, or other caregivers are meeting quality standards.

Tomorrow’s blogticle will continue to discuss important planning aspects of 2011.

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

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[1] Public Law 111-148; Pub. L. 111-152.

[2] Medicare Payment Advisory Commission. MedPac Report to Congress: Promoting Greater Efficiency in Medicare. June 2007. Medicare Payment Advisory Commission.

[3] Daniel R. Levinson, Adverse Events in Hospitals: National Incidence Among Medicare Beneficiaries, Department of Health and Human Services Office of the Inspector General, November 2010.

[4] Stephen F. Jencks, M.D., M.P.H., Mark V. Williams, M.D., and Eric A. Coleman, M.D., M.P.H. Rehospitalizations among Patients in the Medicare Fee-for-Service Program. N Engl J Med 2009; 360:1418-1428.April 2009.

Why is this Topic Important to Wealth Managers? The decision to buy long term care insurance is an important on for most clients. We have thus presented information relating to the sale and purchase of long term care insurance contracts.

Long term care can mean many different things, but any chronic or disabling condition that requires nursing care or constant supervision can bring on the need for long term care services. Long term care means not only care in a nursing home, it can also mean nursing care in a patient’s home and help with the activities of daily living, such as dressing, eating, bathing and taking medicine.

There are many different services that would fall under the definition of long term care. These services include institutional care, i.e., nursing facilities, or non-institutional care such as home health care, personal care, adult day care, long term home health care, respite care and hospice care.

Long term care is very expensive, and most people cannot afford to privately pay for long term care services for very long. For example, nursing home costs are approximately $376 per day in Long Island, New York or $137,240 per year. It is estimated that persons in nursing homes stay for 2½ years on average. [1]

Home health care is also expensive. The average cost of home health care in New York State in 2010 was approximately $20 an hour. Assuming 20 hours of care per week, this represents average home health care costs in New York of over $20,000 per year. Furthermore, the chance of needing some type of long term care services is fairly high. It is estimated that over 40% of all persons who were 65 years old in 1990 will enter a nursing home during their lifetimes.

Moreover, Medicare does not pay for most long term care services. Therefore, individuals should generally not rely on Medicare to meet their long term care service needs. Medicare does not pay for custodial care when that is the only kind of care needed; and skilled nursing facility care is covered by Medicare but only on a very limited basis.

Insurance as an alternative

Since the cost of long term care will not be covered by the Federal Government, insurance policies are one way that individuals can protect themselves. Most insurance policies covering long term care services currently being sold are indemnity policies. Indemnity policies are those that pay a specific dollar amount for each day an individual spends in a nursing facility or for each home health or home care visit.  Some of these policies pay the daily benefit amount regardless of the charges; others will pay covered charges, or a percentage of covered charges up to the daily benefit amount.

Over time, as nursing home and home care charges increase, the daily dollar amounts which are payable under these policies do not increase, however, insurers selling these policies are usually also required at the time of sale to also offer an “inflation protection” benefit. This benefit increases the daily benefit amount over time to help keep pace with inflation and increased expenses. Without the “inflation protection” benefit, an individual will be paying a larger amount of money out-of-pocket should one need to avail oneself of nursing home care or home care.

Some insurers also offer an option to increase the daily benefit amounts and maximum policy benefit at a future time. Under this option, an individual has the ability to increase the amounts every specified number of years. Unlike an inflation protection benefit purchased at the same time as the policy, if an individual opts to increase the daily benefit amounts and maximum policy benefit under this option, the premiums will increase based on the individual’s attained age at the time he or she opts to increase the benefit.

Tomorrow’s blogticle will continue to discuss wealth management planning techniques.

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

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[1] For insurance statistics in this article see generally, New York State Insurance Department. A Consumer Guide to Long Term Care Insurance in New York. December 2010. http://www.ins.state.ny.us/ltc/ltc_guide.pdf. Last Accessed 4/4/2011.

Why is this Topic Important to Wealth Managers? Discusses certain provisions applicable to wealth managers of the National Health Care Legislation that was signed into law in 2010.

The Patient Protection and Affordable Care Act, [1] and the Health Care and Education Reconciliation Act of 2010, [2] are generally known as the national health care legislation.  The new laws created a number of changes in the health care insurance system, in general.  These changes will be discussed throughout the week, as presented below.

Under the new law, each individual is required to have “minimum essential coverage” for each month of the year starting in 2014. “Minimum essential coverage” means whichever; a government sponsored program such as Medicare, Medicaid, and TRICARE; an employer sponsored plan; plans in the individual market; and grandfathered health care plans.[3]

For those individuals who choose not to obtain minimum essential coverage, imposed is a penalty to be included in the taxpayer’s annual return.  The penalty applies to each month where the individual is not covered equal to an amount of 1/12 of the average cost of “bronze” level coverage,[4] or, the greater of an annual set dollar amount, which is pegged at $695 for taxable years 2016 and beyond, or a set percentage of the taxpayer’s household income, currently 2.5 percent beginning after 2016.[5] (The Legislation includes a phase in schedule for both the flat dollar amount and the percentage of income. The flat dollar amount is $95 for 2014, $325 for 2015. The percentage of household income is 1 percent for 2014 and 2 percent for 2015.)

Generally, most individuals are required to maintain minimum essential coverage. Few exceptions nevertheless apply, which include, certain low-income individuals who cannot afford coverage, members of Indian tribes, and individuals who suffer hardship.  Further, exempt from the coverage requirements are individuals who object to health care coverage on religious grounds, individuals not lawfully present in the United States, and individuals who are incarcerated. [6]

As was discussed in an earlier blog, the new law created additional employment taxes to pay for additional Medicare coverage.

First, the new tax adds an additional .09% on earned income for those earning more than $200,000 or $250,000 if filing jointly with regards to Medicare.  The total employee contribution for those affected by the surcharge is 2.35%, while the employer’s tax will remain at 1.45%. [7]

Second, the laws created a hefty 3.8% tax on net investment income for those with AGIs (Adjusted Gross Income) over the $200,000/250,000 limit.  Net investment income in this context generally means interest, annuities, dividends, royalties, rents, and capital gains. [8]

For a detailed discussion on the Medicare revenue provisions see generally, Advisorfyi-The National Health Care Bill Invoice.

Tomorrow’s blogticle will continue the discussion on the health care legislation.

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

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[1] Pub. L. No. 111-148.

[2] Pub. L. No. 111-152.

[3] The Patient Protection and Affordable Care Act, Pub. L. No. 111-148, Section 5000A (f) (2010).

[4] The Patient Protection and Affordable Care Act, Pub. L. No. 111-148, Section 1302 (2010).

[5] The Patient Protection and Affordable Care Act, Pub. L. No. 111-148, Section 10106 (2010).

[6] The Patient Protection and Affordable Care Act, Pub. L. No. 111-148.  Section 1501, as modified by section 10106.  (2010).

[7] Patient Care Patient Protection and Affordable Care Act, Pub. L. No. 111-148, Section 9015, as amended by the Health Care and Education Reconciliation Act, Pub. L. No. 111-152, Section 1402 (2010).

[8] Health Care and Education Reconciliation Act, Pub. L. No. 111-152, Section 1402 (2010).