President Obama’s budget for the upcoming year proposes some significant tax hikes. For example, Obama wants to increase the top tax rates; the 33% bracket would become 36%, and the 35% bracket would increase to 39.6%. This would affect married couples filing jointly with incomes above $250,000 and single people with incomes above $200,000. For these two groups, Obama’s budget proposal would increase taxes by $969 billion over the next decade. This is not the amount they would pay in taxes, it is the increase. Given the drag taxes normally have on the economy and the Democrats fear of reprisals in November, there is a distinct possibility that many middle of the road Democrats will not support the President’s proposed tax hikes.
Also, for folks in these top two tax brackets, the rate on long-term capital gains and qualified dividends would increase from 15% to 20%. The President also wants to reduce high income taxpayers’ itemized deductions. In the past, taxpayers over a certain income limit would lose 3% for every $10,000 of deductions. That does not come into play this year, but the President hopes to reinstate it for next year. Additionally, he wants an overall cap on deductions as if the taxpayer were in the 28% tax bracket. Thus, not only would high income taxpayers be able to deduct less, but the savings from a tax standpoint would also be lower. Here’s a thought: What if Congress extended the Bush tax cuts for one more year so they didn’t have to say they “raised taxes” as the economy is beginning to recover?
If you don’t think federal taxes are becoming more narrowly based, consider this: According to the Tax Foundation, in 1980 the top 1% of taxpayers paid 19.1% of all federal income taxes while the bottom 50% paid 7.1%. In 2007, however, the top 1% paid 40.4% of all federal income taxes while the bottom 50% paid only 2.9%. Thus, from 1980 to 2007, the top 1% of taxpayers went from paying nearly three times the amount of the bottom 50% to paying almost 14 times the bottom 50%.
It comes as no surprise that consumers are what drives the American economy. In fact, 70% of the $14.5 trillion 2009 GDP came from consumer spending. Our GDP is almost three times larger than that of Japan, which is still the second largest in the world. Of course China is chasing Japan and may one day surpass them. Just how big is the U.S. GDP relative to the rest of the world economies? It is 24% of the global economy, and while that is a lot, it’s down from the 32% it represented in 2001. (Source: Commerce Department and International Monetary Fund)
Healthcare reform continues to remain a topic not only in Washington but across the country. It’s easy to understand why this is such a major topic of discussion. In 2009 U.S. healthcare topped out at $6.85 billion per day, or $2.5 trillion for the year, or around 20% of our GDP. (Source: Centers for Medicare and Medicaid Services)
Billionaire Warren Buffett has released his annual letter to shareholders, which millions of people read every year for its wisdom and wit even if they do not own stock in Berkshire Hathaway. This year, the 79-year-old “Oracle of Omaha” shared these thoughts, among others:
“It’s been an ideal period for investors: A climate of fear is their best friend. Those who invest only when commentators are upbeat end up paying a heavy price for meaningless reassurance. In the end, what counts in investing is what you pay for a business β through the purchase of a small piece of it in the stock market β and what that business earns in the succeeding decade or two.”
“Last year we saw, in one instance, how sound-bite reporting can go wrong. Among the 12,830 words in the annual letter was this sentence: “We are certain, for example, that the economy will be in shambles throughout 2009 β and probably well beyond β but that conclusion does not tell us whether the market will rise or fall.” Many news organizations reported β indeed, blared β the first part of the sentence while making no mention whatsoever of its ending. I regard this as terrible journalism: Misinformed readers or viewers may well have thought that Charlie and I were forecasting bad things for the stock market, though we had not only in that sentence, but also elsewhere, made it clear we weren’t predicting the market at all. Any investors who were misled by the sensationalists paid a big price: The Dow closed the day of the letter at 7,063 and finished the year at 10,428.”
Regarding the glut of new houses in the US:
“There were three ways to cure this overhang: (1) blow up a lot of houses, a tactic similar to the destruction of autos that occurred with the “cash-for-clunkers” program; (2) speed up household formations by, say, encouraging teenagers to cohabitate, a program not likely to suffer from a lack of volunteers or; (3) reduce new housing starts to a number far below the rate of household formations. Our country has wisely selected the third option, which means that within a year or so residential housing problems should largely be behind us, the exceptions being only high-value houses and those in certain localities where overbuilding was particularly egregious. Prices will remain far below “bubble” levels, of course, but for every seller (or lender) hurt by this there will be a buyer who benefits. Indeed, many families that couldn’t afford to buy an appropriate home a few years ago now find it well within their means because the bubble burst.”
“If Berkshire ever gets in trouble, it will be my fault. In my view a board of directors of a huge financial institution is derelict if it does not insist that its CEO bear full responsibility for risk control. If he’s incapable of handling that job, he should look for other employment. And if he fails at it β with the government thereupon required to step in with funds or guarantees β the financial consequences for him and his board should be severe. It has not been shareholders who have botched the operations of some of our country’s largest financial institutions. Yet they have borne the burden, with 90% or more of the value of their holdings wiped out in most cases of failure. Collectively, they have lost more than $500 billion in just the four largest financial fiascos of the last two years. To say these owners have been “bailed-out” is to make a mockery of the term. The CEOs and directors of the failed companies, however, have largely gone unscathed. Their fortunes may have been diminished by the disasters they oversaw, but they still live in grand style. It is the behavior of these CEOs and directors that needs to be changed: If their institutions and the country are harmed by their recklessness, they should pay a heavy price β one not reimbursable by the companies they’ve damaged nor by insurance. CEOs and, in many cases, directors have long benefitted from oversized financial carrots; some meaningful sticks now need to be part of their employment picture as well.
Speaking of Buffett, he and Bill Gates are no longer the richest people in the world. They have been knocked off the top of the Forbes’ magazine’s annual list for the first time since 1994. Mexico’s Carlos Slim, 70, now occupies the #1 spot, with a net worth of $53.5 billion, according to the magazine. That’s about half a billion dollars more than Gates’ net worth and $6.5 billion more than Buffett. Slim built a telecommunications empire after buying Mexico’s state-run phone monopoly two decades ago. Gates is now #2, with Buffett as #3 on the list.
Shoppers spent more money in February than any month since the recession started more than a year ago. The better than expected 3.7% gain marked the strongest retail sales gain since November 2007. Although even luxury shops like Nordstrom reported sales increases that beat Wall Street analysts’ estimates, Gallup’s chief economist now sees a "new normal of spending." According to Gallup polls between February 1st and 3rd, one third of consumers are sticking with curtailed spending, bargain-shopping at discounters like Marshall’s, for example, where they may not have looked two years ago. February was the third month in a row to show increased spending; however, levels are still well below 2008. Analysts consider the combined months of March and April as a more accurate measure of consumer behavior, so we will keep you posted.
Florida's unemployment rate is now so high it has tied the state’s record level from 35 years ago, according to a report released this month. 11.9% -- or 1.1 million Floridians β were unemployed in January. The rate is even higher in Tampa Bay at 13.1%, up from 12.4% a month earlier.
We always recommend consulting your tax advisor as the ultimate expert β¦ but there may be reasons to file an extension rather than a tax return on April 15th. For example:
First time homebuyers can still get a tax credit of $8,000 -- and some repeat buyers can qualify for another credit of $6,500 β as long as the contract is in place before May 1 and the deal complete before July 1, 2010. Therefore, if you haven’t wrapped up your purchase by April 15, you may want to speak to your tax advisor about an extension β or claim the credit on your 2010 return.
If your tax return is particularly complicated, filing for an extension almost always beats making a mistake and filing a formal amended return later. Amended returns take longer to process, are more likely to trigger an audit, and must be filed on paper; whereas, extended returns are eligible for electronic filing.
To claim a six-month extension to October 15, simply submit the one-page Form 4868 by April 15, along with any estimated taxes you will ultimately owe. Be careful: if you underpay, the IRS charges 4% interest from April 16 until the date the return is received. You will owe additional penalties if the shortfall is more than 10%. Of course, if you overpay, the IRS' interest meter doesn't begin until at least 45 days after a return is filed.
Next time you want a tomato on your chicken sandwich, you better know to ask for it. Florida’s recent freezing temperatures caused a severe tomato shortage; as a result, many restaurants and supermarkets nationwide are including tomatoes in sandwiches only by customer request. According to the Florida Tomato Growers Exchange, tomatoes are trading at five times the price a year ago. Restaurants such as Subway are using different varieties to limit costs. Even Lloyd’s, an upscale restaurant in Chicago, posted a sign that only plum tomatoes are available. The Wall Street Journal reports that the cold destroyed roughly 70% of the tomato crop in Florida, the largest source of US-grown fresh tomatoes this time of year. However, farmers in southern Florida say the new crop, which they will begin harvesting in April, appears to be normal.
Have you been waiting for the price to drop before buying an electronic reader? You may get your wish. Freescale Semiconductor, which makes the chips for most eReaders including Amazon’s Kindle and Sony’s Reader, has announced a new chip expected to increase battery life, support larger, color screens, and double the speed at which eReaders can flip pages. The chip is also expected to reduce the retail price of eReaders by around $30 to $50, although some industry analysts predict the price of a Kindle could drop by more than $100. A Kindle currently sells for about $260; Sony’s eReader retails at $200. eReaders containing the new chip are expected to hit the market by the end of this year.
Forget to take your pills? Now being tested β¦ a high tech pill bottle cap that sends out a pulsing orange light, then beeps more and more rapidly, when it’s time to take your medicine. The “Glow Cap,” which is now undergoing national tests, can also call or send you a text message to take your pills, as well as generate optional emails or letters to a family member or doctor reporting how often you take your medication. This device was made by Express Scripts Inc., the big St. Louis pharmacy-benefit manager, but other drug companies have similar products. Novartis AG, for example, has rights to a tiny, edible chip which attaches to a pill and signals the patient and others when it hits the patient’s stomach. The Apple iPhone also offers medicine reminders.
As always, we encourage you to give us a call if you would like to discuss anything further. We will visit again soon.
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