(1) Countries that went away from the gold standard sooner fared much better during the Great Depression than those that held longer (like the U.S.)

(2) Average inflation, under the gold standard, is determined by the pace at which gold is mined

http://www.j-bradford-delong.net/Politics/whynotthegoldstandard.html

The repeal of the federal estate tax is only in effect for 2010.  After this year, the estate tax is scheduled to be reinstated at levels prior to President Bush’s tax cuts becoming law.  So, rather than receiving a $3.5 million exemption per person and a top tax rate of 45% as was available in 2009, 2011 estate tax law will offer only a $1 million exemption and a maximum rate of 55%.  You don’t have to do the math to realize how big of a change this is.

Secondly, there are some unintended consequences that may come into play as a result of this repeal.  A common estate planning strategy is to use something called a “bypass trust” with the intention of taking advantage of the maximum estate tax exemption.  This strategy was used based on the federal estate tax law being in effect.

Since there is no estate tax for 2010, the wording in the legal documents that are the basis for creation of the trust could be problematic.  They might say something like, “Place all of my assets that are not subject to the estate tax into a trust for my children, then leave everything else to my spouse.”  In the worst case scenario, a spouse could be left with nothing as all of the assets are directed into the trust because they aren’t subject to any estate tax.  Most states have some protection afforded the spouse, however, the potential litigation involved could certainly drain the assets being contested.  This could get especially nasty if there were children from a previous marriage involved.

Another consequence of this repeal is the impact on the “step-up in basis” rule.  This rule basically said that whatever valuation an asset had on the owner’s date of death is the value that the heirs could use as their new tax basis.  For example, if Mrs. Smith died in 2009 while owning stock in IBM that she purchased thirty years ago, under the step-up rule, her heirs could use the stock price as of the day of death to calculate basis for any future sales of the stock.

For 2010, things are a little bit different.  Heirs are only able to use the step-up rule for $1.3 million worth of asset appreciation.  Spouses get an addition $3 million in appreciation.  If Mrs. Smith dies in 2010, depending on the size of her estate, her heirs would need to know what amount Mrs. Smith purchased the IBM stock for, any dividends that were reinvested, and stock splits received in order to assign tax basis.  Not only is this a costly change for heirs, but also a documentation nightmare for tax preparers.  Like the estate tax, the unlimited step-up is scheduled to return in 2011.

Many observers of this mess think that Congress will retroactively impose a fix to undo the estate tax repeal.  However, that is certainly not a given and even if it does happen, what new, unintended consequences will be inflicted on otherwise well-laid plans?

• Should you take losses or pull in capital gains?  It depends on your likely tax bracket…Take a look at your 2008 tax return. The IRS will allow taxpayers to deduct a maximum of $3000 in investment losses against ordinary income.  Many investors had a lot more than $3000 in realized losses in 2008 and, as a result, have a carry forward of the unused losses to 2009.  The opportunity now is that the IRS allows an unlimited amount of realized investment gains to be offset by realized investment losses.  So if you held on to an investment that has recovered much of its value this year, now may be a good time to sell.  If you don’t have any losses from 2008 to use consider selling something at a loss now.  Like we said above, the IRS allows $3000 of realized investment losses to be used as a deduction against ordinary income.  If you are in a higher tax bracket, that can be a valuable tax savings.

• If you are in the 10 and 15 percent tax brackets you can realize capital gains on investments held for more than a year at a zero percent tax rate in 2009.

• Watch out for the social security bubble – Up to 85% of your benefits could be subject to income taxation depending on other sources of income.

• Taxpayers normally subject to required minimum distributions from tax deferred accounts have been granted a waiver for 2009. It may make sense, however, to take some amount from those accounts depending on tax bracket.  Also, remember that you have sixty days from the distribution date to rollover into an IRA if you change your mind.

• Look at making a Roth conversion.  Because of the tax-free nature of the withdrawals, you need to consider your current tax bracket vs. your future tax bracket.

• Consider donating appreciated stock rather than writing a check.

• Make your property tax and estimated state income tax payments by December 31 if you want the write off for federal tax purposes.  Make sure that you consider the implications for alternative minimum tax.

• Weigh 2009 and 2010 together.  For example, you might want to wait until January to make property tax and state estimated tax payments if you think you will be in a higher tax bracket in 2010.

• If you are in the position to do so, you can gift to as many individuals as you wish up to $13,000 as the allowed gift tax exclusion.  If you are married, your spouse can gift $13,000 to those same individuals.

• The Hope Education Credit was renamed the “American Opportunity Tax Credit” for 2009.  This maximum credit for the first four years of postsecondary education is now increased to $2500.  This includes course materials costs in addition to tuition and fees.

Will discussed tax-loss harvesting, an important but often over-looked tax strategy.  Click here to read the article, “Taking the Sting Out of Investment Loses” by Russell Wild, MBA.

He writes:

“The truth is that the falling dollar is good news. For one thing, it’s mainly the result of rising confidence: the dollar rose at the height of the financial crisis as panicked investors sought safe haven in America, and it’s falling again now that the fear is subsiding. And a lower dollar is good for U.S. exporters, helping us make the transition away from huge trade deficits to a more sustainable international position.”

While we agree with Professor Krugman that a lower dollar can help to even out our trade balance, if it falls too low, however, it could create unwelcome inflationary pressures. The Federal Reserve will look to prevent an inflationary event by tightening the monetary spigot which includes raising interest rates.  Krugman argues that this would be a disastrous policy move at this stage of the economic recovery.  He was an ardent proponent of government intervention in the form of stimulus and believes that we didn’t do enough.

Click here for the original article, “Misquided Monetary Mentalities.”

New research has found that men are more likely to take larger risks in their financial decision making than women. Using a sample set of a group of MBA students the researchers looked for a correlation between higher levels of testosterone and a willingness to take a chance on a less likely outcome if the potential payout was greater. After graduation, more male students will follow a career path into investment banking or trading on Wall Street where the stakes are always high.

http://www.fa-mag.com/fa-news/4408-testosterone-may-affect-financial-risk-aversion.html

For me, one of the neatest things about living in the Avent West community has been observing the transformation of homes through remodel, refurbishment and even reconstruction.  In fact, the same could be said about the entire city of Raleigh as it certainly looks a bit different today than when I first arrived in 1986.

Over the last decade or so, the federal government has enacted legislation designed to subsidize energy efficiency and conservation improvements.  The American Recovery and Reinvestment Act of 2009 signed into law by President Obama provides another opportunity for homeowners looking to “go green” while also saving on the monthly utilities.  So if you are thinking about tackling that home improvement project keep in mind that the government may cover a portion of the cost via qualifying tax credits.  Remember that a tax credit reduces your tax liability dollar-for-dollar.  There are two main credits available to homeowners and are summarized below directly from the U.S. Dept. of Energy’s website: home energy efficiency improvement tax credits and residential renewable energy tax credits.

Home Energy Efficiency Improvement Tax Credits

Consumers who purchase and install specific products, such as energy-efficient windows, insulation, doors, roofs, and heating and cooling equipment in existing homes can receive a tax credit for 30% of the cost, up to $1,500, for improvements “placed in service” starting January 1, 2009, through December 31, 2010. See EnergyStar.gov for a complete summary of energy efficiency tax credits available to consumers.

Residential Renewable Energy Tax Credits

Consumers who install solar energy systems (including solar water heating and solar electric systems), small wind systems, geothermal heat pumps, and residential fuel cell and microturbine systems can receive a 30% tax credit for systems placed in service before December 31, 2016; the previous tax credit cap no longer applies.

In addition to the products listed above, qualifying water heaters (non-solar) and stoves that burn biomass fuels are eligible for the $1,500 Home Energy Efficiency Improvement credit.

The state of North Carolina will also kick in a credit toward the Renewable Energy Credit. See the details at North Carolina Renewable Energy Tax Credit

There are many considerations when you plan a home improvement project.  As we all know, living in a fifty-year old ranch or split level requires attention to more than just detail.  When the decision has been made to spend thousands of dollars on new windows or HVAC we primarily want to make sure that we are getting a fair deal and that everything works properly.

However, Uncle Sam wants you to put energy efficiency at the top of your list as well.  So much so that he is willing to put some money back in your pocket.  Also, you’ll feel better about being green and we all get to see another transformation take place.

Distributions from your retirement accounts are not required by the IRS for 2009 but does that mean that they aren’t necessary?  Congress determined that the 2009 waiver of Required Minimum Distributions was a way for retirees to shore up their retirement savings by keeping them invested rather than liquidating at depressed prices.  This makes sense except for a few minor details like making sure that bills are paid and having food on the table.  Many folks simply are not in the position to afford doing without their distributions from pre-tax retirement accounts.  For those who have other sources of cash flow, this waiver does present opportunities for tax planning purposes.

One of the things we tend to focus on during the tax planning process is the marginal tax rate; or, the rate at which the last and next dollar of taxable income will be taxed.  A common example of how the marginal rate can be especially severe for retirees is in the area of Social Security benefits.  The tax code allows that below certain income limits Social Security benefits are not subject to income tax.  However, once those limits are exceeded a percentage of Social Security benefits must be added to the taxable calculation.  This inclusion of Social Security benefits can effectively create a hidden, higher marginal tax rate.  An opportunity that the waiver of RMD presents is in managing the amount of income so that the addition of Social Security benefits is mitigated.

Tax planning often requires looking at multiple tax years in order to reduce the overall tax effect.  Care must be taken so that the efforts related to an earlier tax year are not undone by future cash flow needs that push subsequent tax years into unintended marginal tax rates.  If, for instance, a large expenditure (i.e. new car, medical costs, etc.) is looming on the horizon it may make sense to take a 2009 IRA distribution – even though it is not required – if it allows you to stay away from a higher tax bracket in 2010.  There can be many complicating variables involved in the multi-year analysis, including itemized deductions and the alternative minimum tax to name just a few.  However, the cumulative tax savings can certainly make it a worthwhile exercise.

Required Minimum Distributions are not eligible for Roth conversions so the 2009 RMD waiver provides an opportunity for those taxpayers whose adjusted gross income (not counting the amount converted) does not exceed $100,000.  The benefit of a Roth is that its earnings grow tax-free and the assets of the account will not be subject to required minimum distributions during your lifetime.  There will be taxes due on the amount that is converted, however, so it is important to pay close attention to the projected marginal tax rate during the tax planning process.

Tax planning is an often overlooked and underutilized part of the annual cycle of tax compliance.  Too often folks miss out by waiting until after December 31 to start looking at their tax situation.  By then it’s often too late.  The RMD waiver is another opportunity for some taxpayers to get it right.

Please contact us with questions regarding your investment accounts and to ask what the new RMD wavier means for your personal situation.

IRS form 4868 Application for Automatic Extension of Time must be sent in by the April 15th deadline in order to have a valid six-month extension with the IRS.  Form D-410 does the trick with the N.C. Department of Revenue.

There are many different reasons why you may need to file an extension.  Small business owners, for example, often need to get their business taxes completed before they can do their personal return.

No matter your reason for filing an extension, one rule applies across the board – an extension gives you extra time to file, it doesn’t give you extra time to pay.  In order to qualify for an extension the IRS requires that you “properly estimate your 2008 tax liability”.

You can usually get a pretty good estimate by preparing a preliminary return using the information you know is good – a W-2 for example – and guesstimating the information you need more time to gather.  Then apply the payments you have made through withholdings and/or estimated payments.  For any amount still due a payment should be sent in with the extension.

Some advice for those who don’t have the money to send in with the extension, file the extension anyway.  Remember we said earlier that the extension is extra time to file not extra time to pay?  The IRS can hit you with two separate penalties for not sending in the extension (late filing and late paying) – but only one (late paying) if you send it in.  So sending it in can only help and it certainly won’t hurt.

Whether you file the extension electronically or by mail it allows you six more months to get your act together.

This article was written by Will Holt, a CPA at Financial Symmetry, Inc.