By Edward Leone JR. DMD MBA RFC
Contact Information: leonee@vzw.blackberry.net
At my last posting for the month of August, we were waiting for the national debt strategy to be revealed. Well here we are a month later and we are still waiting for the national debt strategy to be revealed. Congress will be back in session over the next several days and the President will be telling us how we will experience a revival in the job market. What do you predict will happen?
Bonnie Lee did a great history on the tax code for Fox Business. In case you didn’t know, our tax code exceeds 5 million words and 71,000 pages. Who can possibly assimilate all of this? Back in 1939, there was no tax withholding system. Those who paid taxes calculated their obligation and paid the bill by April 15th. The withholding system was put into place in 1942 to help pay for WWII. Today businesses spend grand amounts of money on the processing of payroll tax withholding obligations. In 1913, the maximum tax rate was 6%. As WWI peaked, the maximum rate went to 77%. Clearly, tax rates today are flatter running from 10% to a maximum of 35%. It is a fact that 47% of the population pays no income tax. That is the nature of our progressive tax system. We learn from the writing of Barry Ferguson RFC in the Register, which is a publication of the International Association of Registered Financial Consultants, that the complexity of the code affects all who pay taxes. The form 1040 is 2 pages long and has an instruction package which is 174 pages long. Individuals spend a combined 6 billion hours per year complying with the tax code and spend $384 billion doing so. The IRS employs 90,000 workers and costs $11 billion to operate. Can this process be simplified? It is evident that the bureaucracy associated with tax collection continues to expand.
Another bureaucracy which has grown and distorted beyond its original intent according to Steve Forbes is the IMF. The International Monetary Fund was established at the end of WWII to provide short-term emergency loans to countries in economic difficulty. It was a natural result of the Bretton Woods agreements on the relationship between international currencies. In 1971, the US removed the dollar from the gold standard. As a result, fixed currency exchange rates slipped away. The IMF purpose in helping governments keep exchange rates steady was gone, but IMF has persisted. Many feel that its approach to dealing with international economic distresses experienced by some governments does more harm that good. We do need for a new system of currency exchange to be established.
Many individuals with the means to do so are taking advantage of soft real estate markets in locations such as Florida, Arizona and Nevada to purchase vacation homes at reduced prices from the experience prior to 2007. Of those fortunate enough to execute these great deals, it is common to occupy the vacation home for a part of the year and rent it to others from time to time also to generate rental income which could defer ownership and maintenance costs. Tax rules regarding this strategy are quite complex and need to be clearly understood. If you rent your vacation home for 14 days or less per year, the rental income is tax-free and you can claim mortgage interest and taxes as deductions on your 1040 filing. If rental period exceeds 14 days, all rental income must be reported for tax purposes. Under certain circumstances, it may be necessary to deduct only a part of property expenses since the property may be considered both personal residence and rental property depending on rental sequence and personal use time. Consult IRS Publication 527 and your tax accountant.
Tax considerations are obviously of concern to individuals and business. Income tax, corporate tax and capital gains tax rates along with compliance are challenges to all in this very difficult economic environment. What would you like to see change with these fiscal issues?
For the Record:
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Suggested Reading:
“Quantitatve Investment Analysis” by DeFusco, McLeavey, Pinto and Runkle
Leonesmoneymonitormonthly's Blog 