Tax Changes and How Health Care Reform Affects You

Good morning! We are going to go ahead and get started with the first Coffee Club call of the New Year. My wife and I were having a conversation about do we call it 2010 because last year we called it 2009. So do we call it 2010 or twenty ten? Or does anyone care. That’s my vote!

So anyway welcome to the New Year. To get started in the new year the nitwits in Washington gave us a gift, actually they created this gift about 10 years ago. Starting this year under current tax law and I have to preference that “under current tax law” because they never changed the tax law. So under current tax law, this year is the year that would be ideal for you to pass away. From a tax point of view and that is because there is no inheritance or estate tax this year. So Bill Gates, Warren Buffet, some of the richest men certainly in America if not the world, ideally from an estate planning point of view, this is their year. So their heirs no have to pay any inheritance or estate tax and neither do yours regardless of the size of your estate.

BT: Sounds like a good year for fair play to be out!

Laughter

BF: Everybody kinda knows this piece of the tax law that there’s no estate tax this year. However, the little gotcha that got buried in this tax law is there’s going to be increased capital gains tax and here’s how that’s going to happen. Last year if you inherited an asset then your tax basis/cost basis was the value of that asset the date you inherited the asset. So if you inherited a house from a relative or parent, and they paid $50,000 for that house 30 years ago and now it’s worth $400,000. There is a $350,000 profit. Well you don’t have to pay tax on the $350,000 profit if you had inherited it last year because your stepped up basis was the market value the date you inherited the property. Regardless of property, it could be real estate or stocks, bonds whatever the case may be. Well the rules are different this year. Now when you inherited property or assets (stocks, bonds, mutual funds, real estate) they do not get the stepped up tax basis. So that’s going to put a whole lot more people in the position to pay capital gains tax. In summary, the good news is you don’t have the estate tax, the bad news is your possibly have to pay capital gains tax. And I say possibly because there are some exemptions or limits into who is affected by this capital gains tax. The first million three hundred thousand of assets is not subject to this capital gains tax but anything above that is. There also is a provision for if you are inheriting a small business and also for surviving spouses. But the bottom line is they just seem to put strings to all these different tax laws which we need to be aware of and I’m not sure how this is going to play out the rest of the year. Everything that we’re ready seems to suggest that Congress some time this year eventually is going to get around to fixing this problem. They do recognized that it’s a problem with this capital gains mess and are you subject to capitals gains on inherited assets or not and how to calculate it. The consensus seems to be that they are going to fix that piece of the tax law. They probably going to this year or certainly next year change the estate tax exemption because the irony is this year there is no estate tax and next year the estate tax exemption as the law stands today goes back down to a million dollars. Last year everybody had a $3.5 million exemption so for a couple it was $7 million. This year there is no estate tax, regardless of the size of your estate. And then next year it’s a $1 million dollar exemption so for a couple its $2 million estate tax exemption assuming the estate planning is properly done. So there just doesn’t seem to be any logic behind all this. So the general consensus is sometime this year they will fix it perhaps make it retroactive to the beginning of this year. Stay tuned for when we know of a definite law that’s in place we will let everyone know about it and the impact it might be on your personal finances.

Along those lines, if you find yourself annoyed and frustrated with all the gibberish going on with the tax laws these days whether it’s income tax or estate tax and if you’re like me, my wife and I were talking about this last night about health care and doctor’s offices have to employ people to fill out insurance forms and it’s a whole new profession to just navigate the insurance claim side of the business. And I looked at her and said that ought not to be the place. Why should we have to hire people, whether it’s a business or individual, to fill out insurance forms? There should be a simpler way than that. And the same holds true for taxes. Why do we have to hire people to fill out our tax returns or why do we have to buy software to fill out our taxes? It’s just gotten too complicated. So I’m going to ask everybody to do me a favor. Most of you know perhaps that I’m a fan of reforming our current tax code. I think the country would be a whole lot better off if we just threw the current tax code in the trash can and start over with a different type of tax. The best one that I’ve seen out there is something called the “Fair Tax” and here’s my favor. On our website, I think we’ve got it on the resource page, so if you go to brianfricke.com and there’s a button for resources and at the bottom of the resource page there’s a button that you can click to see how the fair tax would affect you. You can plug in your own personal information and see whether a new tax system like the Fair Tax would be beneficial to your own personal situation. The other thing that we are going to do, we haven’t added it yet but it’s going to be up by the end of the week, is I’d like for you to send a note to the Chairman of the House Ways and Means Committee to encourage him to at least have an open debate pro and con on the Senate floor regarding the Fair Tax. It’s nothing new and it’s been out and about for the past 10-15 years and it has yet to have an open debate on the House or Senate floor and this is where it starts. We aren’t asking that you vote for or against it but just have a good open honest debate about this thing and not keep it in the closet so to speak. Anyway that’s my thought on the one big step forward you and I can take to make a difference in the tax laws going forward.

BT or Toni did I miss anything on the estate tax/capital gains tax change for this year?

Toni: Not that I can think of. The only thing that comes to mind is that the reduced capital gains rates are still in effect for this year so even folks that would possibly end up being in that situation, the capital gains rates are still at a more favorable rate than they were before the tax laws went into effect.
BF: Great reminder!

Okay, so let’s switch gears a little bit and talk about health care. By now everybody knows, I call them the nitwits in Washington and I say that simply because most of those folks not all of them voted for something that they hadn’t actually read themselves. How on Earth can you in good conscious tell me that you’re representing me and my interests and you don’t even bother to read the bill and understand it. And I’m talking about the health care bill. The good news is there is a House and Senate version; those two government bodies have to agree on something before the President can put it in place. So call me the eternal optimist, I’m hopeful that those two government bodies have extreme difficulty in crafting something that they can agree on and put in front of the President so in the back of my mind I am hopeful they can’t even get that far and this thing just dies a slow death. Even if it goes through, I’m still the eternal optimist, some of you may remember over 10 years ago, Congress pushed through a tax that was referred to as the Medicare sur tax. It affected people that would already receiving Medicare benefits whose incomes were above a certain threshold amount (number escapes me right now) but basically it was going to tax the retiree’s that had done a decent job of saving and accumulating money and were going to be okay on their own. And nobody really understood the impact of this tax until after the tax law had gone into effect. And once people started to realize what the effect was, the Congressman Dan Rustinkowski (sp) he was the sponsor of the bill. I remember seeing news reports of this guy. He could not go anywhere in public or private without a huge crowd of retirees sharing with him their thoughts on this tax law. And their thoughts were not kind to say the least. Most of the time the Senator could not go out in public without bodyguards and was wearing a flack jacket because it was so bad. Here is the good part, in less than 90 days that tax law got repealed. It’s amazing what can happen when the public outcry is vocal and significant. So even if we do have health care reform laws that go into effect, I’m still hopeful that once the average American understands the impact to them, that our nitwits in Washington will have a change of heart and modify things to get it closer to something that makes sense. That said, recently I wrote a little article on my thoughts about health care reform. I don’t disagree that we need to reform the health care system, I just disagree in the direction that we seemed to be headed. I have an article about this on my Facebook page, it’s on the company Facebook page in the notes section. I think we also have it on the blog site of the company website brianfricke.com. But the jest of my article is before we create a government health care system, why don’t we just allow the free market system to take effect. In my opinion, and then we’ll open it up to get your thoughts and comments, but my opinion is the health care system today is different than almost any other commerce that goes on in America today and here’s what I mean by that. Today with health care. You can I rarely know what the true cost is of anything we are having done to us and for us and there is little incentive for us to pay attention or care that much. Where else do you and I buy anything where we aren’t aware of the cost. I mean if we are going to buy a car we know what the car is going to cost us before we agree to buy the car. When we go to the grocery store, we have tons of different options on food and groceries we can purchase but we generally if we are interested have an idea of what our bill is going to come to before we go through the check out line. That doesn’t exist currently in our current health care system. And part of the reason is because you and I the consumers don’t have access to the information and aren’t motivated because for most of us, certainly people with health insurance or coverage of any kind. Our view of costs is whatever our copayment is without regard to anything else. So I think the simple solution is to let people know and understand what the costs are and in an extreme case, instead of allow the doctors to fill out the health insurance forms why not just let you and I fill out the health insurance forms. My thinking behind that is, who’s going to like doing that under the current system, but by golly when a bunch of people start complaining, companies, businesses, industries take note and they fix it and change things because they have to satisfy the customer or the customer goes somewhere else. Well today in healthcare, you and I as health care recipients, aren’t really the customer. The customer is the insurance company. The doctors have to placate the insurance companies to keep them happy so the money keeps coming in. Well if you and I were responsible for filling out the claims forms the doctors now have to keep us happy, we’d have a better opportunity of understanding what the true cost was…just a thought. Bottom line is I think the free market enterprise system that America has in place is a wonderful system that the government doesn’t need to be involved in or in the health care industry and they don’t need to be a shareholder in the car industry but that’s a whole other topic.

So thoses are my thoughts and comments and again the purpose of these calls is to inform and to get you thinking about your own situation. I don’t expect everyone to agree with me or with us and that’s okay. We just want you to be aware of what’s out there and to generate and stimulate thinking so you make smart choices about your money so you have the best shot of Worry Free Retirement for you! Regardless of how you might define Worry Free Retirement.

BT why don’t we go ahead and open the lines up if anyone has a question or comment so let folks know the rules if you will.

BT: In just a moment I’ll go ahead and unmute our line which means it will become a party line so we’ll hear everything that is going on in your neck of the woods there. If anyone has a question, just let us know verbally.

Any questions?

Caller: I wanted to just ask you if you had heard any more about this whole concept of the carried interest for people being now taxed at the ordinary income rate as distinct from the capital gains rates which made this attractive to take on that degree of risk?

BF: I’m not sure I understand, so we’ve got ordinary income tax so interest is taxed as ordinary interest?

Caller: No. What I’m talking about is if a real estate person goes into a project as a kind of very small minority partner with a small interest in the thing and perhaps a very low bases. If the project was successful the carried interest might go from sort of a sweat equity position to be worth several hundred thousands or if you’re lucky much more than that. That was called a carried interest. That typically has been taxed as a capital gains tax rate and the threat by the current administration is that they will change that from a capital gain structure to an ordinary income structure which obviously makes it quantum leap less attractive to be involved in taking on that kind of business as a general partner.

BF: I haven’t heard anything one way or another on that particular tax point. Toni or BT?

BT: I have no knowledge
Toni: No but I can see how this would definitely be a hot button in the real estate industry though.

BF: Sounds like it already is.

Caller: I’ll let you know if I hear anything more.

BF: Please do! Thanks Martin. Martin triggers a thought. Right now we’ve got some concern about what’s going on with potential tax law changes. And of course everybody has an opinion about what’s going to happen but the reality is we really don’t know until the laws get passed and then the sad news behind that is even once the law gets passed, it takes usually a period of time for people to dig through it and figure out the true impact. I’ll elude back to my medicare sur tax example earlier. The law got passed and it didn’t really register with anybody for at least a good 30-45 days and then everything hit the fan and people understood. So it’s too early to tell. Any other questions?

Caller: Brian, BJ in Texas. Having been on the medical side as a nurse for many many years and now on the insurance side, I agree with your comments about the health care reform as they would like to call it. But I might add a couple of other comments. 1. Each one of us individually needs to assume some responsibility for our health.

BF: Amen!

Caller: I mean I get so irritated when people don’t take responsibility and they work for a company that has a $1,000 deductible and by February they meet the deductible and say the heck with the rest of the year because the company is going to take care of it. And we have been encouraging our group clients in order to reduce their premiums to gradually raise that deductible and to educate their employ about individual responsibility. So that’s my two cents about that.

BF: One of the things that would make an interesting experiment would be instead of throwing all this tax money in government programs, give everybody a tax credit of $3,000-$5,000 a year to use on health care, whatever you don’t use you keep half and the government keeps the other half. Some kind of a financial incentive for consumers to take an interest in our health care, not just in the services being delivered but also in taking care of ourselves.

Caller: And if we don’t address the issue of children obesity and diabetes, we are going to be in a lot of trouble in a few years.

BF: Yeah. It was interesting, I forget what it was, my wife and I saw this recently, about 10 years ago restaurants in general the portion sizes. Today the portion size is twice what it was 10 years ago.

Caller: We are a super sized society. What also irritates me is I’m 60 years old and in great health. I don’t take any medications but I’m considered high risk by insurance companies because I’m 60 years old.

BF: Shame on you!! But still enjoying life it sounds like.

Caller: You bet.

BF: One last chance, any other questions or comments?

Caller: Brian, Mike Lenzo here. Any new news on the Lehman Brooks Brother Bond values?

BF: Yes. We can follow up with you off line. We are being told 45-50 cents on the dollar payout. And now it’s just a matter of Lehman going through the bankruptcy process probably sometime later this year.

Caller: Thanks

BF: Any other questions?

Caller: This is Cheryl Warren in Rhode Island. I’m curious about what you were talking about in the very beginning concerning the estate change. My mother is 96. She has a number of properties and I don’t even know how to find out what the cost basis. I just thought it would be the stepped up value of whatever the market value was when she died. That would be very difficult for me to find out what the cost basis was.

BF: Yes. And there is the problem with assets that aren’t publicly traded like real estate. How do heirs go back and find out the original cost basis was 40-60 years ago.

Caller: What was the figure you said?

BF: $1.3 million is exempt and then anything over would be subject to tax.

Caller: So the IRS will have to take some best guess estimates because when we sold some property that she had in Topeka, I went back to the appraisers and in Topeka and they have no records of what the house cost when she bought it.

BF: This is true. We’ve seen it already. Folks will have held stocks for decades with dividend reinvesting and stock splits and mergers and stocks have gone up in value and now they want to sell it. So how do you calculate cost basis, it’s just an educated guess and it’s up to the IRS to question it if they ever do. You have to show logic of your guess. I am in the camp of thinking that Congress will change this law, make it retroactive so it doesn’t affect anybody. But that said, today this is the tax law we have to deal with.

BT: We are about out of time.

BF: Thank you everyone for joining us. We’ll be back next Tuesday for another Coffee Club call. If you have a suggestion for a topic, please let us know. We will send out an email with the upcoming topic for next week. Bye now!!

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