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Tax News E-Alert |
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Volume 1, Issue 5, November, 2008 |
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Immediate Action Required: It is Time to Update Your Tax Strategy
Over the last few days I have read a plethora of articles predicting what the Obama presidency will mean for U.S. income and estate taxes. Some of the articles have made conflicting predictions and provided contradictory advice. However, using a savvy tax professional to regularly review your strategic tax plan is always prudent. And taking a closer look at your strategy is called for when the economic and political landscape is changing.
One of the basic principles of tax planning is anticipation. Predicting future tax law changes is very problematic. Campaign promises are often…umm… clarified. The vast majority of tax proposals either never become law, or are drastically revised by the time they are enacted. Nevertheless, I will make one prediction: Taxes will increase.
Even though we cannot predict the future with certainty, it is prudent to continually adjust our investment and business strategies based on the current economic and political realities. And strategic planning includes tax planning.
By adjusting your investment and business strategy, you can still prosper in an economic downturn. Similarly, with the proper tax strategy you can legitimately minimize your participation in the coming tax increases.
Many are asking me: “when will these tax increases become effective?” “Can the government increase tax rates retroactively?”
Congress has been adopting retroactive tax increases for a very long time, essentially since the 1930s. The 1913 Revenue Act was the first one with an effective date before the date of the actual enactment. Generally, the increased tax rates are applied retroactively to the year in which it is enacted. But in 1918 and 1926, each of the Revenue Acts was applied to the entire calendar year that had preceded enactment.
President Bill Clinton made two campaign promises regarding taxes. First, he promised a middle-income tax cut. Instead, we got a new gasoline tax. Second, he promised to raise taxes on the wealthy: but he expressly cautioned that the increase would apply only to people living in households with annual incomes of more than $200,000 a year, with an extra surtax applied to millionaires.
What he delivered, however, was increased tax rates on those making more than $115,000 a year. For the surtax, Clinton defined "millionaires" as people who earn a quarter of that amount. Clinton signed the Omnibus Budget Reconciliation Act of 1993 in August of that year, which passed Congress without a Republican vote. The Act generally increased tax rates effective January 1, 1993 (20 days before Clinton's inauguration and four days before the 103rd Congress was sworn in).
The 1993 Act included the following changes:
There are arguments both for and against a retroactive increase in capital gains taxes. Congress has an incentive to give you notice, since the extra selling in advance of a rate increase brings in additional revenue. But I would not depend on it. The argument against telegraphing a tax rate increase on gains is that it could cause a sell-off that would depress the markets.
Now some of us may long for the halcyon 1990s. However, it is possible that those "tax and spend" Democrats in the coming administration and legislature, now fully assuming the reigns of power from those "borrow and spend" Republicans, may be more than just nostalgic for the good old days.
Some say that the world has become flat, and since the U.S. already has some of the world's highest Corporate and Individual tax rates, increasing the income tax rates substantially higher would make the U.S. less competitive. However, there are many ways for the federal government to raise revenue without raising nominal income tax rates. In the U.S. about 27 percent of our annual GDP (Gross Domestic Product) is paid in taxes (federal, state and local). There are 35 countries in the world that pay more taxes as a percentage of GDP than the United States, including the United Kingdom (37%), France (44%) and Sweden (51%).
The United States is the only industrialized country without a VAT (value added tax): essentially a sales tax, applied at each level of production. In addition, fuel taxes are generally much higher in Europe. Many European countries use a high fuel tax to decrease dependence on fossil fuels (that often have to be imported) and reduce traffic and pollution. Obama has indicated that he wants to move us towards energy independence and reduce our carbon emissions. One way to do this is to increase taxes on carbon-based energy sources. In summary, new taxes are coming, and probably sooner than you think. I recommend that you take a fresh look at your tax planning (income, estate, etc.) before the end of the year. Besides year-end-tax-planning, it will become increasingly important to contact your tax advisor throughout the year, as you anticipate, or if you experience significant personal, financial, and business events. Please feel free to contact me at 310-697-1501 or rwelling@rwac.com as soon as possible to schedule your tax strategy session. Best regards, Richard Welling
Richard Welling & Co., LLP 3625 Del Amo Blvd., Suite 290 Torrance, CA 90503 (310) 697-1500
This publication is designed to provide accurate and authoritative information and is distributed with the understanding that legal, tax, accounting, and financial planning issues have been checked with resources believed to be reliable. Some material may be affected by changes in law or in the interpretation of such laws. Do not use the information in this article in place of personalized professional assistance. If you need to discuss any issues found in this article, give us a call. Copyright 2008
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© 2008; Richard Welling & Co., LLP; All Rights Reserved
