Category Archives: Tax Planning

Top 10 Benefits and Risks of Forming a Captive

retirement_roadMy Comments: I recently published an eBook with the title CAPTIVE WEALTH!

It explains how to use an 831(b) Captive Insurance Company to create, to grow, and to preserve wealth.

While not a simple idea, it does have the blessing of the IRS if you do it the right way, under the right circumstances. That alone makes it valuable and something to know about.

From the perspective of a successful small business owner, it allows him or her to turn a current expense item into an asset at a later date. Think about it; money spent now comes back later as an asset, which can be used many different ways. This article outlines some of the caveats you should be aware of.

By Donald Riggin, from Guide to Captives and Alternative Risk Financing | November 11, 2013

5 Tax Rules for Investors

IRS-formsMy Comments: What day is it? Yes, it’s HUMP day, especially for those whose career path involves helping others with their tax returns.

Maybe some of what you find here will help you before the next HUMP day, April 15, 2015.

by: Allan S. Roth, CPA, CFP

Compared with taxes, investing seems simple. As a CFP and CPA, a very large part of my practice is focused on maximizing tax efficiency, a strategy that often saves clients tens of thousands of dollars annually. With the higher 39.6% marginal tax bracket and the 3.8% passive income Medicare surtax in effect, tax efficiency is more important than ever.

I don’t define tax efficiency as minimizing taxes, but rather as maximizing the return after taxes. For example, clients might be able to avoid taxes by holding municipal bonds – but if they are in a low enough tax bracket, they might keep more income after taxes by owning taxable bonds.
That’s the better goal.

Tax alpha comes from several sources, including:
* Product selection
* Asset location
* Tax-loss harvesting
* Roth conversion
* Withdrawal strategies

There are some general rules to follow for each of these sources. The one big caveat, however, is that everyone’s situation is different – some clients may have huge tax-loss carryforwards, others may have nearly all of their portfolios in either taxable or tax-deferred assets. That means some circumstances require breaking these rules.


Product selection is one way to increase a portfolio’s tax efficiency. At the most basic level, picking investment products for the long run avoids turnover. Whenever a client sells an asset in a taxable account, it generates a gain or loss with taxable implications. So holding on to assets with gains defers those taxes – that’s like getting an interest-free loan from the government. Meanwhile, some investment products are more efficient than others. Mutual funds or ETFs that turn over their holdings generate taxable gains passed on to clients. According to Morningstar, the median turnover of active equity mutual funds is 49%. This creates both short-term and long-term taxable gains – and, by the way, tends to reduce returns even before these taxable consequences are factored in.

Index funds may also create turnover, particularly those with narrower focus. For example, a small-cap value index fund must sell when a company holding becomes larger or no longer meets the definition of value. Even an S&P 500 index fund must buy or sell whenever S&P makes a change.

The broadest stock index funds, such as the total U.S. or total international stock funds, have the lowest turnover and are the most tax-efficient. Even those funds, however, sometimes must sell to raise cash to buy large IPOs, such as Facebook or Twitter.


Once you help a client choose the appropriate asset allocation, location becomes critical. As a rule, tax-efficient vehicles belong in taxable accounts, while tax-inefficient vehicles belong in tax-deferred accounts, such as 401(k)s and IRAs. (Roth wrappers are much more complex – more on that in a bit.) The Asset Location Guidelines chart offers a general guideline for asset location.

There are several reasons to locate some stocks in taxable accounts. First, capital gains can be deferred indefinitely – by avoiding turnover – and possibly eliminated altogether, passing them on to clients’ heirs with a step-up in basis. And dividends are taxed at 15% for most; even for those in the 39.6% marginal tax bracket, they still carry a 20% rate – lower than ordinary income.

By contrast, holding stocks or stock funds in tax-deferred accounts has three distinct disadvantages:
* It converts long-term gains into ordinary income, which increases the tax burden.
* Because stocks tend to be faster-growing assets, they create more ordinary income later, when the required minimum distributions will be larger.
* It could cause heirs to miss out on the step-up in basis.

What does belong in tax-deferred accounts? Slower-growing assets that are taxed at the highest rates. (Think taxable bonds.) Since REIT distributions are ordinary income, they also belong in the tax-deferred accounts.

One addendum: Although I believe muni bonds are overused, they would be held in a taxable account. Clients should not own stocks in a tax-deferred account while they have munis in their taxable account, however. They would likely earn more by holding the stocks in their taxable account and taxable bonds in their IRAs, and dropping the munis altogether.

What about Roth accounts? Although this is a complex subject (and very dependent upon individual situations), a general rule of thumb is that stocks and stock funds should be held in Roth accounts only when there is no more room (from an asset location perspective) in the client’s taxable account. REITs are often properly located in Roth accounts.

There are many other variables that could change asset locations, of course, including whether a client plans to pass assets on to heirs or will sell them to raise money to live on.
asset allocation

In late 2008 and early 2009, losses were plentiful and recognizing those losses created valuable tax-loss carryforwards. While only $3,000 a year can be recognized, an unlimited amount can be carried forward to offset future gains. With U.S. stocks at an all-time high as of mid-January, harvesting those losses even now is critical as equities are sold for any reason, including rebalancing.

When doing tax-loss harvesting, be sure to watch out for wash sale rules, making sure that clients don’t buy back the same security within 30 days. To avoid having to exit stocks for a month when selling a broad stock index fund, consider buying a similar but not identical fund. For example, you could replace Vanguard Total Stock Index Fund ETF (VTI) with Schwab U.S. Broad Market ETF (SCHB). Because they follow different U.S. total stock indexes, this transaction should keep your client clear of wash sale rules.

It’s never fun to harvest losses, but the silver lining to share with clients is that bad times don’t last forever – and that there will come a time when those losses will save them a bundle.

Roth IRAs and 401(k)s can be critical elements of your clients’ portfolios. A common myth is that the Roth wrapper is better than the traditional account if the assets are held for a certain number of years. This is false. The only things that matter are the marginal tax brackets in the year of the conversion and the year of withdrawal. If the marginal tax bracket ends up higher upon withdrawal, the conversion will have been beneficial.

There’s another factor: Since no one can be certain what lawmakers will eventually do, having three pots of money – taxable, tax-deferred and in a tax-free Roth – is an important way to diversify against unpredictable politicians.

Rather than have clients contribute to a Roth wrapper, I typically have them contribute first to a traditional retirement account, and then do multiple partial Roth conversions from existing IRAs to take advantage of potential recharacterizations later on.

I consider traditional IRAs to be partnerships between the client and the government. As an example: A $100,000 IRA owned by a client in the 30% tax bracket would be 70% owned by that client; converting it to a Roth costs the client $30,000 to buy out the government’s share.

If that client does three $10,000 Roth conversions, he or she will owe $9,000 in taxes – $3,000 per conversion to buy out the government’s share. If they put each $10,000 conversion in different asset classes early in the year, they’ll have up to 15 months or (if the client files an extension) even up to 21 months to see how each performs. If, for example, the assets in one conversion tank and lose half of their value, the client can hit the undo button and recharacterize – thus having the government buy back its share at the full $3,000 original price.

Recharacterization also gives a client a chance to undo an unexpected impact from the dreaded alternative minimum tax. Tax accountants often underutilize the strategy of multiple Roth conversions – which can often be a vital part of tax planning.

When clients transition from accumulation to withdrawal modes, tax strategy continues to be critical. There is a general rule of thumb that a client should spend taxable assets first, tax-deferred assets second and Roth assets last.

It’s not a bad rule to start with, because spending down taxable assets lowers future income when clients will be withdrawing from tax-deferred accounts – which generally have a zero cost basis and generate ordinary income.

But the analysis becomes more complex if a client has an opportunity to pay taxes sooner at a lower marginal rate. If, for example, a client is retired but elects to delay Social Security until age 70 (a wise move for the healthy), a client may have more deductions than income. Thus, it would be advantageous to either take out enough money to stay within the 15% tax bracket ($72,250 for married couples filing jointly), or to do multiple Roth conversions to use up that low marginal tax rate.

From a broad perspective, advisors have a wide range of options to provide clients with tax alpha. Another example: Because most advisors don’t get to design portfolios from scratch, they wind up keeping some existing assets while building a more diversified portfolio. So clients who come to me with S&P 500 funds and want to own a broader index – but have large unrealized gains that would create a tax hit if sold – can create a total index by using a completion index fund such as an extended market index fund, which owns every U.S. stock not in the S&P 500. Just by avoiding the sale of the S&P 500 fund, the client gains a tax advantage.

In most cases, coordinating with the client’s CPA is critical. Since many CPAs do not have a strong understanding of investing, you may need to explain some of these strategies to them. Tax strategy is far from simple – yet if done right, planners can create large amounts of tax alpha for clients in any phase of life.

Allan S. Roth, a Financial Planning contributing writer, is founder of the planning firm Wealth Logic in Colorado Springs, Colo., and is a CPA. He also writes for CBS and has taught investing at three universities.

9 Tax Breaks Expiring at Year’s End

IRS-formsI’m sure you agree that we live in a world of political correctness. Sometimes that’s a good thing and many times it just gets in the way of common sense. Right now, I have to tell you I am NOT licensed or qualified to dispense tax advice. But as a financial planner, for which I am licensed and qualified, I can tell you there are tax issues you should perhaps be aware of. Some of them qualify as simple common sense.

Another year has nearly passed, and it’s time to make sure your have your tax ducks in a row.
It’s important to make sure you know about the key changes made to the tax code before you make your end-of-year moves.

The slogan for this month might just be “use it or lose it.” That’s because there are several tax breaks that are set to expire as 2014 dawns. Whoever your clients are — teachers, students, small-business owners and big spenders to name a few — make sure they take advantage before it’s too late.

“The days of relying on Congress to automatically renew expiring tax provisions … might finally be coming to a close as the strain on the federal budget becomes more evident with each new round of budget negotiations,” wrote William H. Byrnes and Robert Bloink on ThinkAdvisor.

(Not all tax news is bad. The IRS recently gave high-income taxpayers a break with the release of the final regulations governing the new 3.8% tax on net investment income.)

Read about all NINE of them HERE:

A Long Walk Off a Short Cliff

Social Security 3My Comments: An area of expertise that I claim, involves a topic known as “captive insurance companies.” This concept applies to successful small business owners and the companies they own. These folks are in the news a lot lately because they get talked about in the context of the Affordable Care Act and what some pundits say will ruin them.

But since 99% of small businesses have less than 50 employees, which means the PPACA is not in play, there is a more important reason to pay attention, and that’s the government shutdown and the effect a potential default will have on them going forward.

For those of you who are small business owners and don’t know about captives, you can find out much more elsewhere on this web site. (or click on the attached image…) For now, know that it represents a way for you to improve cash flow, minimize risk exposure, and set aside funds for the future with favorable tax consequences.

Sitanta O’ Mahony October 10, 2013

By the time you read this, the fiscal crisis afflicting the US may appear to be over. Indeed despite the markets being roiled by talk of a possible US default, reaching the debt ceiling – as the government is forecast to do on October 17th – does not mean the government will default.

In fact the American constitution prevents such an eventuality; the 14th Amendment states that “the validity of the public debt of the United States, authorized by law” is sacrosanct and “shall not be questioned.” Despite this, perhaps because of remarks by the US press secretary appearing to dismiss the 14th amendment as a solution, the markets continue to be spooked.

Captive insurers are also being affected by the legislative deadlock, and unfortunately this will continue whether or not the impasse is resolved.

Lawrence Prudhomme, vice president at management and consultancy firm GPW and Associates, Inc. says the shutdown of the Internal Revenue Service (IRS), which is closed for business until the impasse is resolved, is one of the most immediate and visible ways the government shutdown is affecting captives.

It is also a short-term issue, he says. “For captive insurance companies domiciled outside the United States, obtaining an employer identification number requires direct contact with the IRS and cannot be done electronically.

So, as a result, until the IRS is reopened, nothing can be done in this area. It’s inconvenient, but not critical to the overall process of forming a new captive. We are anticipating that things will be resolved shortly and any backlogs will be overcome in a reasonable amount of time” says Prudhomme.

The biggest fiscal cliff development which Gary Osborne, President of USA Risk Group, Inc., the largest independent captive management firm in the US, has seen is an increase in firms utilising their captive, or starting a captive, to fulfil obligations under The Patient Protection and Affordable Care Act (PPACA), aka Obamacare.

“We’re seeing a big increase in smaller companies looking at utilising captives to self-insure. Self-insurance can be used to meet the requirements of PPACA and it gives companies much greater flexibility and choice in terms of the coverage they provide compared to remaining in one of the health insurance exchanges”.

Osborne cites the case of Vermont which mandates the provision of unlimited fertility treatments in its exchanges. However if a firm self-insures, a cap of one or two such treatments can be implemented.

“The coverage provided under a self insured plan can be tweaked as long as it meets the minimum federal standard which is generally much lower than many states are imposing under the health insurance exchanges.”

Although states can’t stop firms self-insuring under the federal law, in a bid to maximise higher standards of health care for all employees, they are limiting the ability to buy stop loss insurance and Osborne says this is forcing companies with fewer than 100 employees back onto the exchanges.

The other area in which the impasse is impacting captives is in relation to the renewal of the Terrorism Risk Insurance Program Reauthorization Act (TRIPRA), commonly known as TRIA, which is set to expire on December 31, 2014.

“TRIA is one of the areas the government are considering cutting, people are beginning to question why the government is getting involved and whether or not it’s really needed”, says Osborne. With trenchant cuts in public spending on the table TRIA seems an easy target.

Yet notwithstanding the tag of ‘corporate welfare’ being lobbed at it by the Cato Institute and others, in fact TRIA doesn’t cost a lot of money, says Osborne. “It’s a pooling mechanism, an advance from the government, which insurance companies (including domestic captives) contribute to by paying up to 3% of their premium. Unfortunately it’s one of those symbolic issues that has been caught up in the fight.”

Despite this, Osborne thinks TRIA’s future is assured. “There are enough vested interests fighting for it”. Let’s hope the same can be said for affordable healthcare.

The Legality of Offshore Planning: an Introduction

imagesMy Comments: This blog post by Hale Stewart, derives in part from his expertise with captive insurance companies, and the fact that they are often set up in an offshore jurisdiction to provide a layer of asset protection for those using the concept. There are now approximately 17 states that allow and encourage the creation of domestic captives, as opposed to offshore captives.

Mr. Stewart and I are acquainted as a result of my involvement with captive insurance companies and privately owned medical practices. Physicians are troubled these days by the financial pressures resulting from the PPACA or what many folks think of as “Obamacare”. Introducing a captive insurance company allows the practice owners to keep more of their money and minimize those financial pressures.

A captive insurance company, by definition and design, sells insurance policies to no one other than the company that owns it. It is a valid and economically viable tool that can significantly benefit the owners of a successful small business, if done correctly and appropriately.

by Hale Stewart, Esq. on June 26, 2013

Apple’s tax plan — and subsequent appearance before Congress defending their plan — has again drawn attention to the idea of offshore planning. The overall debate has fallen into the fairly predictable pattern of the political right saying Apple is 100 percent allowed to do whatever they can to lower their taxes, while the political left has decried the practice as a deliberate evasion of taxes.

What both sides have failed to do is place the idea of offshore planning in the context of U.S. anti-avoidance law in order to determine if the structure would indeed stand-up to scrutiny in the event it was challenged in court. While the analysis that follows will hardly be an in-depth treatment, it should serve to highlight some of the legal issues involved with complex international tax planning of this nature.

By way of introduction, there are two core concepts of U.S. anti-avoidance law, both of which are derived from the same case, Gregory v. Helvering. The concept which is by far most cited is that taxpayers are allowed to structure their affairs to minimize taxation. However, just as important — but not cited with nearly the same frequency — is that all transactions must have substance; merely complying with the technical requirements of the code is insufficient.

In Gregory, the taxpayer performed a corporate formation and liquidation over a three-day period. The court ruled this short duration indicated the corporation was not meant to be used for a legitimate business purpose, but was instead a technical shell game used to minimize taxes. In ruling against the taxpayer, the court forever added an additional layer to tax planning — the need to demonstrate transactional “substance.”

Further complicating our analysis are two issues. The first is that “legal substance” is an ephemeral and ill-defined concept. Little to no scholarship has been performed on the idea. The vast majority of courts dealing with this issue gloss over it, usually stating the act of formation is sufficient in and of itself to demonstrate a legitimate enterprise.

However, this is exactly what the taxpayer did in Gregory only to have the court rule against her. Perhaps the best list of factors for practitioners to use to demonstrate substance (or at lease corporate separateness) comes from veil piercing law, where many courts have a list of factors to determine if a company is in fact an “alter ego” of the person incorporating the company.

A strong argument could also be made that the material participation standards of 26 U.S.C. 469 could provide some much needed parameters for comparison. However, no court decision that I’m aware of has formally applied these commonly used and understood concepts to the area of corporate substance.

The best explanation I have found for “substance” is from a law review article titled “Business Purpose, Economic Substance and Corporate Tax Shelters” by Peter C. Canellos (54 SMU L. Rev. 47) where he notes that the vast majority of legitimate business transactions (which would therefore survive a substance over form challenge) have at their core, one of three purposes: increasing profit, lowering expenses or acquiring/raising financing. However, it should be noted that only lowering a tax expense is insufficient.

Unfortunately from a practicing perspective, whether or not a transaction falls into one of the three categories usually falls under the, “I know it when I see it” column.

The second problem complicating an analysis of the transaction is that substance over form law is itself a conceptual briar patch. Despite it’s importance to tax law, no case law book has ever been written on this topic.

Shepherdizing the Gregory case returns over 1,000 cases, law review articles, CLE materials and practitioner’s guides. Courts routinely use various substance over form terms interchangeably and incorrectly, and return conflicting decisions on the same or similar facts. While five actual anti-avoidance law concepts have been cited and developed in the case law (substance over form, the sham transaction, business purpose, the economic substance doctrine and the step transaction doctrine), legitimate scholarly debate could support the contention that there is only one, or three, four and five doctrines.

Going forward, I’m going to look at offshore from three perspectives: substance over form, economic substance and business purpose. Substance over form will use the concepts outlined above (“material participation” and the factors in “alter ego” analysis will be used. There will also be an explanation of legislative intent). I will make the assumption that the economic substance doctrine is a latter day version of the sham transaction doctrine (“sham transaction” language was used primarily in the 1950s-1970s, while “economic substance” language was used from the late 1980s/early 1990s onward; both contain an objective and subjective component). The business purpose doctrine will use the factors outlined in the Frank Lyon case. As the step transaction doctrine is most often used in corporate reorganizations or shorter duration transactions, it will not be used.

Goodbye Capital Gains Tax Breaks

USA EconomyMomentum is building for a tax code overhaul, and lower taxes on stock transactions could be doomed.
By Joy Taylor, May 6, 2013

Tax breaks for capital gains and dividends are likely to end by 2015, as lawmakers look for ways to broaden the tax base, allowing income tax rates on individuals to be cut. There is precedent for this — the tax break for long-term capital gains was axed in 1986, the last time that lawmakers significantly reformed the tax code.

Tax overhaul won’t happen swiftly. Lawmakers won’t have time to complete tax reform until 2014, and when they do finish it, the effective date probably will be prospective, so changes aren’t likely to occur until 2015. There will be plenty of time to mull the impact on your investment portfolio and contemplate actions to minimize the tax wallop.

But discussions will intensify in the coming months. One reason: Senator Max Baucus (D-MT), who heads the Senate committee responsible for writing tax laws, has announced that he’ll leave the Senate when his term ends at the end of 2014. Look for him to push hard for tax reform before he leaves, making a revamped tax code his policymaking legacy.

In the end, we expect long-term capital gains and dividends to be taxed as ordinary income — a big change from the 20% maximum rate they now incur. If President Obama succeeds in winning a top income tax rate on individuals of more than 28%, however, it’s possible that the maximum rate on long-term capital gains and dividends will be limited to 28%.

Consider taking gains before 2015 to lock in the lower rate currently in place. But be careful not to let the tax tail wag the investment dog. Tax savings aren’t the only consideration when culling your portfolio; your moves should also make financial sense. Note that we expect taxwriters to keep the stepped-up basis rule for inherited assets, so 100% of pre-death appreciation on those assets will escape income tax when the heirs sell, regardless of the capital gains rate.

Take care in engaging in installment sales before then. The 1986 law provided that installments received after the capital gains rate rose weren’t protected, even though the sale occurred before the rate change. We expect that a similar rule will be passed this time, too.

Weigh the impact on succession plans for family firms. Corporate redemptions of shareholders’ stock will be hit. Family firms hoping to redeem stock of senior owners to shift control to the next generation will need to take that into account.

Keep in mind that the relative advantages and disadvantages of components in your portfolio may need reevaluating. Dividend paying stocks will lose their tax-favored status if dividends are taxed at ordinary income rates. And there will be no tax disadvantage for having growth stock in retirement plans. Without a capital gains preference, it won’t matter that appreciation on the stock will be taxed as ordinary income when distributed to the owner of the retirement plan or IRA.

And it’s worth noting one other tax reform proposal that affects investors: Stock sellers could lose the right to direct that the highest-basis stock be sold first. They may be forced to use the average basis of their shares to compute the gain or loss recognized on a sale, rather than use the specific identification method. The tax reform plan drafted in the House includes such a provision, and we think it has a good chance of making it into law.

Trim Down Your Tax Obligations in 2013 Without Having to Convince the IRS

My Comments: From time to time, I get requests from various individuals who want to contribute an article for me to use as a blog post, giving them credit. This one is the result of such an effort. The writer has made several attempts to create an easy to read and understandable blog post. He deserves credit for his efforts, so, with some final editing, here is what he has to say.

The apparent motivation is to drive traffic to a web site, in this case one that promotes debt counseling and help in repairing one’s credit scores. I make no claims at all that these folks know what they are doing, or are legitimate in any way.

What I can say is that the suggestions Andy talks about below are not unreasonable, and might indeed have a positive impact on your tax liabilities going forward. But the devil is in the details, and how you go about it will have a lot to do with the outcome you are looking for.

By Andy Raybuck

Are you looking for ways to minimize your 2012 tax bills without having to convince the IRS? If you answered “yes”, you’re pretty much out of luck. But if you want to avoid being in the same position next year, you can still take steps to reduce your 2013 taxes. As the clock strikes midnight on 31st December this year, most opportunities to reduce your 2013 taxes will vanish like bubbles in champagne.

By the time your 1099s or W2 roll in, there’s not enough time to argue about the year you received your income, interest rates or the gains. While everyone is taking steps to reduce their debts and taxes in order to lead a debt free life, you can read through the concerns of this article in order to get some fresh ideas for minimizing your stress.

Bump up your contribution to your 401(k): The money you sock away in your workplace 401(k) account reduces your taxable income and therefore your taxes will also be reduced. You’d be surprised to see how contributing 1% more to your 401(k) affects your monthly income and your budget. Assume you make $80,000 annually and you get paid weekly. If you contribute 5% of your salary to a 401(k), that puts you in the 25% tax bracket. While your pre-tax contribution is $77, this will reduce your pay by $58. You can just bump up your contribution to 6%, you can easily add $92 a week and pre-tax $15 more.
Consider moving to municipal bonds: Apart from a retirement account, if you own a bond fund, you may consider shifting to municipal bonds. The interest you earn from the munis is free from federal income taxes. And if they’re issued by the same state where you reside, they’re even free of state taxes. Presently, a 10 year, high quality muni bond yields 1.7% as compared with a 10 year Treasury bond note that yields around 1.83%. However, it is possible to keep more after taxes by investing in the munis.
Switch to dividends: Dividend-paying stocks will yield more than a Certificate of Deposit or a CD offered by the banks and they’re also taxed at a lower rate. The tax rate on the dividends is 15% for most people and 20% for most single filers who earn less than $400,000 of taxable income. In case of married couples, the limit is $450,000. The interest income from CDs will be taxed at ordinary income tax rates. Only use CDs if you’re not comfortable with the risk factor involved with stocks.
Sell the losers: Did you purchase an Apple stock due to a moment of enthusiasm? If this is in your taxable account, you can sell off the stock. However, if you have enough faith on the future performance of the Apple stocks, you may even buy back the stock after 30 days.
Leverage the tax credits to minimize taxes: A tax credit reduces the amount of tax that you have to pay. The Earned Income Tax Credit is a refundable credit for all those people who work hard but aren’t able to earn a huge amount of money. The Child and Dependent Care Credit is for the expenses you paid for the care of your qualifying children under 13. The Child Tax Credit may apply to you when you have a qualifying child under the age of 17. The American Opportunity Tax credit helps you offset certain costs that you have to pay for higher education.

No one likes to pay higher taxes. With the fiscal cliff hanging over the heads of Americans, it is most likely that consumers will be more worried about reducing their tax liabilities. Start reducing your taxes now by following the above mentioned tips so you can avoid forging birth certificates for your quadruplets next year.

The U.S. Tax System: How Did We Get Here? Pt. 1, the Early Years

IRS-formsMy Thoughts on This: I was taught long ago that no one has a responsibility to pay more in taxes than is required. It’s up to you and I to figure out what is required. So we push the envelope and either through good fortune or because we really know what we are doing, we get it right. At least until a tax audit shows up and says you pushed too hard and got it wrong. But that doesn’t mean you stop pushing.

By Mike Patton | March 4, 2013

Income taxes, payroll taxes, property taxes, sales taxes, import taxes, and estate and gift taxes are just a few of the taxes that we, as Americans, are required to pay. Moreover, we are taxed at the federal level, the state level, the county or parish (in my state of Louisiana) level and even at the city level. Finally, we are taxed while we are alive and some unfortunate souls (although they’re really fortunate) are taxed from the grave. Yes, taxes are as much a way of life as baseball, hotdogs, apple pie and Chevrolet (I’m dating myself). How did we ever get to the point where our government is leveraging our future to the extent it is today? For perspective, I’d like to journey back to the beginning of our tax system and learn how our forefathers addressed this situation.

In the beginning was man and man had a need for governance. To facilitate this, we established a central governing authority to protect citizens from egregious acts from forces within or outside of our borders. Hence, government is a necessary institution which requires proper funding.

When America was founded, we spent little in the way of public purposes. In 1643, the colonists adopted what would be the forerunner to the income tax and called a “faculty tax.” It was assessed on people according to their “faculties” or their “property and ability to earn income.” During the American Revolution (1775-1783) most of the 13 states levied this tax.

Americans have always possessed an independent spirit. Following “oppressive” taxation imposed by England such as the 1765 Stamp Act (imposed specifically on “the British colonies and plantations in America” because of the massive debt incurred by England following the Seven Years war) American colonists began to cry “No taxation without representation.” Their collective emotions reached a boiling point in 1773 with the Boston Tea Party, which eventually led to the revolution.

After independence, another instance of taxpayer revolt began in 1791. At that time, whiskey cost less than 50 cents per gallon and because our government needed to pay down the national debt, levied a 30 cent per gallon tax, the Whiskey Rebellion resulted (which ended in 1794 when George Washington himself led an army into western Pennsylvania and the armed resisters melted away). These are just two examples of Americans rising up in protest of aggressive taxation.

The first national tax system did not emerge until well after the American Revolution. In fact, the Constitution of 1789 gave taxation powers to the federal government to “pay debts and provide for the common welfare of the United States.” Obviously, the federal government’s role is greatly expanded from its earlier days.

In my next post, we’ll look at the period from 1800 to the early twentieth century up to the advent of the modern tax system in 1913. History provides great perspective on the ebb and flow of the tax system. Moreover, if we fail to heed the lessons of history, we may well be destined to repeat its follies.

Legacy, Estate Planning as Important as Retirement

will with clockMy Comments: I expected to be retired now. But I’m one of millions who find it better to keep working and use the daily mental challenge to stay healthy, and because the income is welcome.

But the topic here is not an easy one to resolve. I can attest to the difficulty of talking with folks about their mortality. Funerals are not generally fun events. But they are inevitable and to the extent you can make life better for those you leave behind, I think you have an obligation to at least make an attempt.

By Paula Aven Gladych

People always talk about their plans for retirement, and they spend a good portion of their lives saving money in retirement accounts so they can maintain their lifestyles in their later years. But planning for the future isn’t just about retirement accounts or what you want to do with all of your free time.

According to financial experts, people also need to plan for what comes after their retirement—end-of-life planning.

That means legacy and estate planning, life insurance, long-term care and burial preparations.

Many people don’t want to talk about their own mortality, so they avoid planning for it.

The single biggest gap in legacy and estate planning is education, said David Richmond, president of Richmond Brothers, a registered investment advisory firm in Michigan.

“Do parents talk to their kids as they age about their money and how it is going to come to them? Do we teach, as an American culture, how to give money away or how to manage money? It is not taught in high school or college. It is not taught anywhere,” he said.

Wealthier families have always taught these things because they have more money to pass down, but conversations about money should take place in all families, regardless of income.
Continue Reading HERE...

New Survey Validates That US Physicians are Ailing

healthcare reformMy Comments: Some of you are aware of my efforts to bring a new idea about medical malpractice insurance to those physicians who own their own practice. Essentially, its a financial strategy that causes 50% of the premiums to return when there are few or no claims made in any given year.

Clearly, not all the complaints and problems described below have anything to do with financial issues. However, they are not far below the surface. The adoption of the idea I’m talking about has potentially huge implications for physicians in private practice and what they can expect financially from their efforts down the road. Any help you can provide in getting this message into the right hands will be greatly appreciated.

By James Doulgeris

In the largest survey of its type since one conducted by the Doctor Patient Medical Association a few months back, an even more extensive survey by the Physicians Foundation that generated 13,575 responses from practicing physicians is equally sobering.

The survey was conducted by the recruiting and consulting firm Merritt Hawkins in an e-mail containing 48 questions to 630,000 physicians in active care, 8,000 of which included comments by the respondents ranging from positive to defeated. I believe that the key statistics, quoted directly from the report below, clearly show that the U.S. healthcare system, which has become increasingly out of control year after year for decades, is in real danger of collapse, and that the Affordable Care Act is more the last straw than culprit.

Responses to the survey combined with some 8,000 written comments submitted by physicians reflect a high level of disillusionment among doctors regarding the medical practice environment and the current state of the healthcare system. How physicians will respond to ongoing changes now transforming healthcare delivery varies. Many physicians plan to continue practicing the way they are, but over half of physicians surveyed have reached a tipping point and plan to make changes to their practices. Many intend to take one or more steps likely to reduce patient access to their services, limiting physician availability at a time when doctors already are in short supply.

Key findings of the survey include:

Over three quarters of physicians — 77.4 percent — are somewhat pessimistic or very pessimistic about the future of the medical profession.

Over 84 percent of physicians agree that the medical profession is in decline.
The majority of physicians — 57.9 percent — would not recommend medicine as a career to their children or other young people.
Over one third of physicians would not choose medicine if they had their careers to do over.

Physicians are working 5.9 percent fewer hours than they did in 2008, resulting in a loss of 44,250 full-time-equivalents (FTEs) from the physician workforce.

Physicians are seeing 16.6 percent fewer patients per day than they did in 2008, a decline that could lead to tens of millions of fewer patients seen per year.

Physicians spend over 22 percent of their time on non-clinical paperwork, resulting in a loss of some 165,000 FTEs.
Over 60 percent of physicians would retire today if they had the means.

Physicians are not uniform in their opinions — younger physicians, female physicians, employed physicians and primary-care physicians are generally more positive about their profession than older physicians, male physicians, practice owners, and specialists.

Over 52 percent of physicians have limited the access Medicare patients have to their practices or are planning to do so.

Over 26 percent of physicians have closed their practices to Medicaid patients.

In the next one year to three years, over 50 percent of physicians plan to cut back on patients, work part-time, switch to concierge medicine, retire, or take other steps that would reduce patient access to their services.

Over 59 percent of physicians indicate passage of the Patient Protection and Affordable Care Act (i.e., “health reform”) has made them less positive about the future of healthcare in America.

Over 82 percent of physicians believe doctors have little ability to change the healthcare system.

Close to 92 percent of physicians are unsure where the health system will be or how they will fit into it three to five years from now.

Over 62 percent of physicians said Accountable Care Organizations (ACOs) are either unlikely to increase healthcare quality and decrease costs or that that any quality/cost gains will not be worth the effort.

Physicians are divided on the efficacy of medical homes, and many (37.9 percent) remain uncertain about their structure and purpose.

Over 47 percent have significant concerns that EMR poses a risk to patient privacy

Over 62 percent of physicians estimate they provide $25,000 or more each year in uncompensated care.

Editor’s Note: To read more about the Physicians Foundation report, see Dr. Richard Reece’s blog for an interview with Walker Ray, MD, chairman of the research committee of the Physicians Foundation.