Saturday, December 1, 2012

See the pictures here of how is going to cause a long and painful death for Walmart and other Brick and Mortar businesses.

I have not seen these pictures before of an's "Product Fulfillment Center".  Fancy name for gigantic warehouses around the country that serve a particular geographic area. 

It seems this should be something Wal-Mart fears long-term. 

Technological change advancement, peoples willingness to use that technology, and new patterns of buying behavior will serve to accelerate "creative destruction" in the retail sector. 

A Tax To Die For...Here I briefly explain another "Fiscal Cliff" tax issue: The Estate ("Death") Tax...

One of the least talked about aspects of the "fiscal cliff" is the Estate Tax, sometimes referred to as the "Death Tax".  It is the Federal Tax owed on the value of a what someone leaves behind to their heirs.  Here is how it works, in its simplest terms.

See the graphic below (the left hand potion of the graphic) for the tax rate as it is now, as it might be if the "Bush Tax Cuts" expire and what the President would like it to be. 

You can see the tax rates expressed as a percentage and the amount that is EXEMPT from the tax in BOLD.  Any estate with an assessed value UNDER these threshold amounts would not be subject to the estate tax at all.

Example: at the "Current Policy" if an estate is valued at $6.12 million the first $5.12 million is exempt from taxation, but the Estate Tax would claim 35% of the remaining $1 million---$350,000 tax due.

Under Obama's Policy $2.62M ($6.12M - $3.5M) would  be subjected to a 45% tax = $1.18M tax due.

If Bush Taxes Expire $5.12M ($6.12 - $1M) would be subjected to a 55% tax = $2.82M tax due.

Source: Wall Street Journal
The circles on the right show how much in potential revenue each of these policies my bring into the Federal coffers (color coded to the info on the left) over a 10 year period (divide by 10 to get yearly tax revenue). 

One of the difficulties with this tax is that it can place the heirs of the deceased in a awkward and potentially damaging financial situation.

Refer to the  example I used above.  Assume this was your grandparents situation but ALL of the estates value was tied up in land and a nice house that sits on that land. Assume in their last will and testament they bequeathed it to you because they wanted it to stay in the family. 

Because all of the value is in a "non-cash" asset, YOU would have to come up with the $350,000 (OR the tax under the other alternative measures) to pay the Estate tax. OUCH!  If you could not pay the tax, then you would be forced to sell the property to pay the tax (or borrow it, I suppose)

I tend to think most estates in the US are this way---values are tied up in non-cash physical assets like houses and land and heirs struggle to maintain what they have been bequeathed. 

Whether that is right  or wrong, well, I don't know and never will.  I don't have any rich people in my family so this is an issue I can only write about and not actually experience.  :)

Thursday, November 29, 2012

One element of the Fiscal Cliff explained here. This one LIKELY will affect your paycheck in January. Ouch!

One element of the "fiscal cliff" that just about all wage earners, regardless of income, are affected by is the 2 percentage point DECREASE in the Social Security tax that workers have enjoyed since 2010.  (You didn't know you had a tax cut??) .  It is currently at 4.2% from its "normal" longstanding 6.2%.  The tax is applied on your gross pay (wage X hours worked. Or from your salary if you are a salaried worker).

This temporary reduction was implemented as part of a "fiscal stimulus" bill/law. It served as a quick and easy way to get money into the hands of people, and the assumption was that it would likely be spent in the economy and provide a needed jolt for the demand for goods and services.

This reduction seems small for each person, and it is, but in the aggregate it is roughly about $120 billion on an annual basis injected into the economy.

Because it amounts to so little per person the economic thinking is people wont notice it, hence will be more likely to spend it than to give it much thought about saving it.  This is not entirely true for all people, but it does seem a very likely outcome.

The trade-off from this particular tax cut is that the $120 billion is supposed to pay Social Security benefits for current recipients.  Those benefits are going to be paid regardless.  This will necessitate borrowing to compensate for the tax cut.

There is no such thing as a free lunch.

The consensus right now seems to be this tax cut will expire and go back to 6.2%.  But, as with all things political, we will have to wait and see.

Yesterday I showed you how someone with an income of $45,000 can pay NO Federal income tax (47%-er) . Today I use the same household and show you how they are a major tax PAYER. These things are never as easy as they appear...

Yesterday I wrote a blog entry on how a person or household with an income of $45,000 can end up paying no Federal Income tax on that income and can actually be a net recipient of tax dollars (.  See that HERE.

Today, I want to show that this same household DOES pay federal taxes, but not necessarily the Income Tax. The taxes they cannot escape paying are Payroll Taxes,---Social Security and Medicare taxes. These taxes are dedicated to paying benefits for retirees and other eligible recipients.

The Social Security tax is 6.2% of income and it is applied to income earned up to $110,100.  Any income OVER this amount is NOT subject to the Social Security tax.  So the MAXIMUM that can deducted from someones paycheck is $6,826.20 ($110,100 X 6.2%).  For our sample household, they would pay $2,790 ($45,000 X 6.2%) in Social Security taxes.

The Medicare tax is 1.45% of income and it has NO INCOME LIMIT! As with tax policy, it depends of the what the definition of "income" is. Capital gains and dividends are excluded from the Medicare tax (Social Security tax too), which are generally the province of "the wealthy".  So, our household pays $652.50 ($45,000 X 1.45%) in Medicare taxes.

Remember, these are MANDATORY TAXES. 

The total payroll taxes paid by our sample household is ($6,826.20 + $652.50) $7,478.70.

Federal Income taxes AND payroll taxes both go to the same place---the Federal Governments General Budget--the Big Pot o' Money that is spent on all things federally budgeted for. Social Security and Medicare taxes make a stop through their respective Trust Funds, but only for accounting purposes.

If we add this amount to the "negative" income tax  of  $637(refunded) mentioned at the top, then our sample household effectively has a tax rate of 15.2% ($7,478.70 minus $637.00  then divided by $45,000 X 100).

In this light, our household is certainly not a "47%-er" and net recipient/taker of tax dollars, but percent-wise, they are a major contributor. 

These federal taxes are not the only federal taxes paid by our household. There is the Federal gas tax, other excise taxes levied on a variety of goods we consume, and tariffs on imported goods. These other taxes are more difficult to see, but they should be considered in the over all discussion of tax policy, in my opinion.

Wednesday, November 28, 2012

See here how easy it is too have a pretty good paying job (teacher?) and be a member of the "47%" at the same time. Nice graphic and my explanation of why it is so...

It is rather easy, actually, given the aggregated tax policies enacted over time.

There are some basic deductions  that you are allowed to subtract from your total income. These deductions effectively reduce the amount of income that is actually subject to the income tax.  Deductions reduce your income subject to tax dollar for dollar.


There are some basic tax credits that you are allowed to subtract from your total tax bill.  Tax credits reduce your taxes owed dollar for dollar.  Notice the difference between a deduction and a tax credit.  This is important when discussing tax policy.

Both of these are dependent on whether you qualify for them. Some everybody is entitled to and some you get only if you meet certain criteria.

Deductions and tax credits are enacted to further some social, economic, or political goal. Individually,  they are supposed to serve as an incentive to bring about a desired outcome that benefits society.  Collectively, they could serve that purpose OR collectively create problems and/or inefficiencies. 

The following graphic illustrates how a person (or household in this case--a family of 4) earning $45,000 per year in income can owe no Federal Income Tax on that income by using the available income deductions and tax credits.
Source: The Economix

 This assumes the families total income from all sources (wages, interest earned on savings accounts, and "other") is $45,000.

This couples filing status is "Married, filing jointly" (I  assume) and includes both of their incomes combined OR it could be just one of them is the sole income earner.  It does not matter.

Right off the top, they are entitled to take a deduction of $11,900 for just being married. I will keep it at that and do another posting on how your tax bill will be affected by other potential filing statuses.  This deduction ("subsidy") serves to help reduce taxable income in an effort to help defray the cost of running a household with the goal of keeping families together and encourageing couples to stay married. That is/was the intent of the tax policy.

Next, the taxpayer can deduct from taxable income, $3,800 for each person in the household who is legally dependent on the taxpayer. Generally this means children, but it could be a parent, grandparent, or other dependent. You also INCLUDE yourself AND your spouse in the calculation.  This equals ($3,800 X 4)  $15,200.  See how you and your spouse were "double counted" in the calculation, first for being married then as a member of the household.  Assuming no other deductions you are allowed to take, the your income that is ACTUALLY subject to taxation is now ($45,000 - $11,900 - 15,200) $17,900.  This amount is called your "Taxable Income".  It is derived after taking all of your legally available income deductions.

The Federal Income tax owed on $17,900 is $1,813.  If we stopped right there this is how much the taxpayer would write a check to the IRS for ASSUMING they did NOT have any "Federal Withholding" from their paychecks throughout the year.  We will assume that for this exercise, but is likely they would have had some withheld.  Any withholding would off-set the amount of tax owed, either partially or totally.

This  taxpayer now finds they are entitled to a Child Tax Credit of $2,000 ($1,000 for each child). Taxpayers with an adjusted gross incomes of $110,000 or less are eligible for this credit, so this is not necessarily a "gift" to lower income people, however it benefits them a great deal.  Remember, tax credits reduce your taxes owed dollar for dollar.

Now, we subtract that $2,000 from our taxes owed of $1,813 and we now owe -$187.00 in taxes. Sweet!!  The Child Tax Credit is considered a "refundable tax credit" which means if the credit results in a negative number, the taxpayer owes $0.00 in taxes but they are entitled to the $187.00 too!

We are not done with our tax credits yet.  The next one is called the  "EITC", which stands for Earned Income Tax Credit.  This credit is targeted towards low income people--single, married, with or without children.  It is considered a significant anti-poverty policy and enjoys significant bi-partisan support in Congress and the Presidency.  The EITC is WAY TOO COMPLICATED to explain in a few sentences. Wikipedia has a pretty good summary of it here.

This family qualifies for this tax credit too, to the tune of $450.  Because this credit is 'refundable" as well, we subtract it from our tax bill, which currently is a negative $187.00.  So if you add this credit to the the total, this family will receive a tax REFUND check of $637.000. 

This family effectively pays no federal income tax on their $45,000 AND they get an extra $637 to consume or save.

This is certainly a form of income re-distribution BUT as I mentioned earlier, both of these tax credits in particular enjoy bi-partisan support, historically. 

So, now you know how someone earning $45,000 per year can have no tax liability and receive a refund check as well. 

This is a working person (could be a teacher with THAT salary) who would be considered a member of the 47%.  Working and has a good job,  but the net recipient of tax dollars.

Hope this helps with your understanding of the issue.
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