Tax Freedom Day

According to the Tax Foundation, “tax freedom day” this year was April 21st, three days later than last year. This is the day that the nation as a whole has earned enough money to pay off its total tax bill for the year. Due to the multiplicity of taxes at various levels of government and hidden taxes buried in living costs, the actual day varies by locale and personal circumstances. But you get the point.

Through April 21, you worked 111 days to reward tax collectors, or 30.4% of the year. In 2013 working and investing Americans paid $4.5  billion in federal and state taxes, or 30.2% of income, says the foundation. I am a patriot and veteran, but when I see some of the things that government wastes money on, paying my “fair share” gets increasingly painful. April 15th is not my favorite day!

 You worked three days longer to pay taxes this year given new levies and exclusions effective in 2013. We may need to add a few more days to render unto Caesar what is his, given 2014 hikes.

 The Social Security wage base cap increases by $3,300 to $117,000. The tax rate for employers and employees remains at 6.2% up to the cap. For Medicare, the employer’s rate is 1.45% on all pay; for employees the rate is also 1.45%, however, the Medicare surtax of 0.9% kicks in for singles earning wages over $200,000 and couples with wages over $250,000—the new threshold for “rich.” Self-employed strivers pay both the employee and employer share and the surtax.

  Upper income seniors will pay higher Medicare Part B and D premiums if modified adjusted gross income (MAGI) exceeds $85,000 for singles, $170,000 for couples. (MAGI is adjusted gross income plus tax-exempt interest, EE bond interest used for education, plus excluded foreign earned income). Surcharges for upper income senior retirees and workers can be as much as $300.10 a month, $3,601 a year.

  Diligent investors will feel the pain at slightly higher levels this year on dividends and long-term gains. The top rate of 20% starts for singles with taxable income above $406,750; heads of households, $432,200; joint filers, $457,600. A 3.8% Medicare surtax increases the rate to 23.8%. Add state taxes and you are around 30%. That is great incentive to spur people to sit on their assets. The government would derive more revenue with a lower tax rate as asset turnover would increase.

  High income earners get itemized deductions trimmed by 3% of the excess of AGI over $254,200 for singles, $279,650 for heads of household, $305,050 for married filers. The good news is that the total reduction cannot exceed 80% of itemizations! Oh, and medical expenses, investment interest, casualty losses, and gambling losses over and above winnings are exempt. Harry Reid likes the part about gambling losses. Zing losers too much and what they lost in Vegas will not come back to Vegas.

  And so it goes...spreading your money around. As a citizen you should pay your taxes. You also should take advantage of every possible deduction, as well as suitable tax-favored investments . Contributing to tax-deferred retirement plans like 401(K), IRA, and similar plans will cut your tax bill. Self-employed persons and closely-held business owners should understand the opportunities governing pension and profit sharing plans.

  Saving for college through a 529 College Savings Plan has distinct tax advantages. Contributions are made with after-tax money but money grows tax free and is not taxed when used for qualified education expenses.

 Tax-free municipal bonds offer tax relief but we encourage professional management by specialist managers that know how to buy and sell bonds efficiently, understand ratings, and who have a strategy in place to manage bonds in a rising interest rate scenario.

  Investments in real estate, energy, and equipment leasing may pass tax savings through to investors. Certain insurance and annuity products offer tax-deferral aspects.

 Financial advisors and savvy CPAs have even more incentive to partner when it comes to saving clients tax dollars. It is a complex game, not one you want to play alone!

 Lewis Walker is President of Walker Capital Management LLC. Securities and certain advisory services offered through The Strategic Financial Alliance, Inc. (SFA).  Lewis Walker is a registered representative of SFA which is otherwise unaffiliated with the Walker Capital Companies. ▪ 3930 East Jones Bridge Road ▪ Suite 150 ▪ Peachtree Corners, GA 30092  ▪ 770-441-2603 ▪ lewisw@theinvestmentcoach.com