As Midnight Fell Last Night Across the USA, States and the IRS Were Keeping Close Watch of Time. Why?

• IRON100
• January 1st, 2010

 

Ok, ok, that WAS last year's cartoon, but it does get the point across at how tough it was early on in 2009. As we head to 2010, though, a still unsettled tax event is about to occur. I think it is again time to address this issue, as so many are unaware of it that it should be reemphasized.

I had a phone conversation with StockTwits Dr. Phil Pearlman earlier this evening to express my New Year's best wishes (which the entire StockTwits crew, and particularly the DieBrokeBlog crew, in this particular case, extend to all of you readers for 2010). When I told him the following, he found it unbelievable, but yet, it is true.

At the stroke of midnight, the Federal Estate Tax goes to zero, as opposed to the threshold limit of taxation being above 3.5 million dollars as it is for 2009. I would imagine families that have that kind of estate are holding their breaths as midnight passes from east to west if a loved one is seriously ill or on a death bed tonight. The expense of that death could be heavy, depending upon which side of midnight tonight that death occurs.

The Obama Administration and the Democrat controlled Congress and Senate were so busy deploying their social agenda in 2009 basically did nothing to settle the unraveling of the George W. Bush Administration tax cuts but to allow most to expire. If you remember I said I was going to tell you what the final verdict was and well, there is not a complete one yet. Forgive me for quoting another blog, but the solution for the current year, if Congress and Senate approve it, will be to authorize a special 15% capital gains tax retroactive to January 1, 2010. That, also, has NOT been approved as yet.

Remember that state estate taxes still apply, and probably for the first time in quite a few years, individual states will debate perhaps initiating or RAISING state estate taxes to fund swelling state deficits. 10 states are on the verge of bankruptcy and as many as a third of U.S. states are very close to that same condition. It is no wonder, that with mandates for Obama's healthcare package putting immense pressure on the finances of many states, that the 14th Amendment's equal protection clause and the 10th Amendment will be used to sue the Federal government over the Medicare payments buyoff given to Nebraska Senator Ben Nelson to secure his vote favoring the Senate version of the healthcare reform bill. 13 state attorneys general are about to challenge this action.

My point to readers is simply this: taxation is about to become quite volatile and the debate over it as powerful and perhaps as heated as at any time since the American Civil War in the USA in coming months and years. States already tapped out by state teachers', state employees' and even state politicians' pensions and health benefits do not have room for further taxation. This is particularly true when it could damage the employers who are the source of that revenue. States may indeed assert their rights under the United States Constitution to block additional fees, Federal mandates, and other forced payments.

If income taxes and estate taxes are not raised, business taxes, transportation and energy taxes, business fees, road tolls, and sales taxes are likely to be raised significantly as shortfalls continue. Individuals’ property taxes will also very likely increase as the cost of education rises also.

This kind of tax change (particularly when it comes to capital gains rates) could force some owners of equities and some fund managers to take capital gains before rates increase, and that could put selling pressure on U.S. equity markets.  Congress is way behind schedule in budgeting the next few years, so there will be stiff resistance to changes at the state level.

What does that mean to you? It means that YOU (not just your CPA, but YOU) must monitor local, state and national news with regard to changes in taxes. I spent the better part of the spring and summer making legal adjustments to my property zoning status for that exact reason! You should too, particularly if you own property or own your own business. Estate taxes will likely be adjusted, but to where, no one exactly knows. As individuals, there are numerous tax exemptions that I will cover over the next few weeks of which individuals can take advantage that might lower the tax burden in one area should taxes increase in another (like mandatory health insurance premiums and potential fines).

The lack of clarity in tax laws will be a factor in market activity this year without question. Equity and real estate selling to account for increased capital gains taxes that might be ratified are probably on tap particularly if they are raised substantially.  As a taxpayer, you will have to keep paying attention to the headlines and be ready to understand the ramifications of tax changes to save money. That is why the tax professionals we have been discussing in previous posts will be very important to consult. You also must be proactive and study tax laws and their changes yourself so that you can ask good questions.

We at DieBrokeBlog will be hunting down this information as it becomes available, reeling it in (though we will probably not shoot it), and report it to you in 2010 and beyond. We will be witnessing history as these changes are made, and it is up to you to prosper or be hurt by it. Knowledge, as Tony Robbins once said, is only potential power. Once you have it, you must act with appropriate speed to benefit from it or to limit the damage changes associated with that new set of economic constraints can do to you.

We at DieBrokeBlog continue to invite the community to exercise its power and to contribute to this blog. If you would like to write for us, get in touch with me at buffalotrader100@gmail.com. There is far too much knowledge in this perhaps best financially-informed community in all social media for it not to be shared. Your contributions are what make the community strong and continue to make it grow.

With that, I will raise my imaginary (I mean, how do you know if I have one or not) glass of champagne and toast to all of you within, and outside of, the StockTwits community a healthy, happy, and most prosperous 2010. May the markets move the way you want and good fortune and cheer head your way!

We will get back to trader taxation issues in next week's post.

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