November 16, 2021

Lifting SALT Deduction Would Help the Rich

Manhattan residents who itemize their federal tax returns pay an average $102,000 in state and local taxes – more than anywhere else. The second highest tax tabs, nearly $50,000, are in Marin County, the home of musicians and movie stars across the Golden Gate Bridge from San Francisco.

Other enclaves with large bills for property, sales, and income taxes include Falls Church, Virginia, a high-income community outside Washington, D.C., and Teton County, Wyoming, where the super-wealthy buy property on the open range surrounding Yellowstone and Grand Teton National Park.

In 2017, Congress put a $10,000 cap on the amount of state and local taxes – or SALT – that all homeowners could deduct on their federal income tax filings. The proposed reconciliation bill being hashed out in Congress might increase or remove that cap.

The Brookings Institution argued that lifting the cap would “massively favor the rich” at a time U.S. inequality is already at historic levels. There is no shortage of evidence to back that up.

High-income Americans on both coasts and in major cities like Chicago and Dallas would save thousands of dollars from lifting the cap on SALT deductions. In Santa Clara County, home to Silicon Valley, for example, the average high-income taxpayer who itemized reported that they paid nearly $47,000 in state and local taxes in 2018, according to the bipartisan Tax Foundation’s analysis of IRS data.

But due to the current cap, the IRS permitted county residents to deduct only about $9,000 for their SALT taxes. (The number is slightly below the $10,000 cap because some itemizers take smaller deductions if, for example, they are renters and don’t pay property taxes.)

One proposal gaining currency in the House would increase the cap on deductions from $10,000 to $80,000, as an alternative to eliminating it entirely. Garrett Watson, author of the Tax Foundation report, said that either raising the cap or another idea – limiting the cap to the nation’s top earners – would still mainly benefit the top 5 percent.

But, he added, preserving some type of cap, even if it’s more generous, “will be less regressive than eliminating it altogether, because the folks at the very top – the multimillionaires and billionaires – would still face that curtailed SALT deduction.”

The Tax Policy Center, an affiliate of the Urban Institute and Brookings, estimates that repealing the cap on SALT deductions would increase after-tax income for households earning more than $100,000 by between 1 percent and 2 percent. Families with lower earnings would be unaffected. …Learn More

May 11, 2021

Psychology Added to CFP Certification

Financial advisers have no shortage of clever strategies to dispense to their clients. The tricky part is getting the psychology right.

Human beings have all kinds of hang-ups about money. Presumably, someone who’s walked into a financial adviser’s office has broken through the first barrier to getting help: denial. But even then, blind spots and fears can get in the way of a client choosing or executing a financial plan, even if it’s clearly beneficial.

To that end, psychology is being added to the educational curriculum – along with the longstanding topics like risk management, tax planning, and investing – required for advisers to get certification as a Certified Financial Planner, or CFP. 

Money “is a very emotional topic,” said John M. Loper, a CFP and director of professional practice on the CFP Board. That, he said, is a compelling reason for addressing clients’ psychological issues head-on: “If you can’t connect with your client, it’s going to be difficult for them to take your advice.”

The idea came out of feedback the CFP received in a 2019 study, but COVID-19 pushed the issue to the forefront, he said. The psychology curriculum will include managing crises, such as pandemics and stock market drops, that have severe financial consequences.

Wells Fargo’s Michael Liersch, who has a PhD in behavioral finance, said that giving financial advice is challenging because some people are uncomfortable even starting a conversation about money. In families, it’s often a point of contention between husbands and wives or parents and children. Talking about money risks exposes big differences in how it should be used, and the conversations can turn negative.

“People think it’ll be disruptive, so they don’t bring it up,” said Liersch, head of financial advice and planning for Wells Fargo. …Learn More

January 21, 2021

Struggling Workers’ Financial Woes Mount

The COVID-19 economy is really a tale of two worlds.

The stock market and housing market have largely shrugged off the economic slowdown. But severe financial problems are brewing for millions of workers who have lost their jobs or are earning less in a lackluster economy.

The assistance passed by Congress will certainly help. Still, half of all workers reported in a Transamerica Institute survey late last year that they are experiencing at least one employment disruption, whether a layoff, reduced work hours, shrinking paychecks and commissions, or an early retirement. A crisis also looms for thousands of renters if the Centers for Disease Control allows its eviction moratorium to expire at the end of this month.

Paying taxes is another big worry. When the pandemic struck and unemployment spiked last spring, the IRS postponed the deadline for filing federal taxes by three months, to July 15.

COVID-19 hasn’t gone away – and neither has concern about paying taxes. More than half of taxpayers said they might have to borrow money to pay their 2020 taxes this April, according to a LendEdu survey last month.

Other aspects of Americans’ financial problems were captured in two more surveys about the pandemic’s impact:

The Millennials who are still saddled with student loans have struggled for years to pay their other living expenses. The COVID-19 relief bill gave them a respite by suspending their monthly payments for most of 2020, and the U.S. Department of Education extended that at least through January. But one financial problem has been replaced by others for the young adults who are unemployed or earning less.

About one in five people in their late 20s and 30s reported in a 2020 survey by Georgetown University’s business school that the pandemic forced them to take a variety of stopgap financial measures. These have included dipping into retirement funds, delaying or reducing credit card payments, and getting food and rental assistance from non-profits. …Learn More

March 28, 2019

How China Trade Affects Social Security

If you don’t know this fact about Social Security, join the club. The percentage of earnings for all
U.S. workers combined that is subject to the Social Security payroll tax is falling. Growing income inequality is the reason.

Thirty-five years ago, Social Security taxes were levied on 90 percent of all workers’ earnings. By 2016, this taxable share of earnings had declined to 82.7 percent, according to federal data, and it will continue to drop over the next decade.

The payroll tax is 12.4 percent of an individual worker’s earnings, with half deducted from his paycheck and half paid by the employer. But the tax has a cap: once earnings reach $132,900 – the cap for 2019 – they do not have to pay the tax for the rest of the year.

This is where inequality comes in. Since incomes above the cap are growing much faster than regular workers’ incomes, a bigger share of earnings is escaping the cap every year.

The decline in the taxable share aggravates the existing problem that benefits being paid out by Social Security now exceed the tax revenues coming in.

A recent study identified growing U.S. trade with China as one important factor that is shrinking the share of earnings subject to the payroll tax.

China is now the largest source of U.S. imports. The increase in trade volume over several decades has contributed to U.S. income inequality by sharply eroding earnings for workers in the low-wage, low-skill industries that have lost factory jobs to China. But trade with China has actually been good for workers in the top 1 percent – their earnings have increased slightly. Think of the high-tech entrepreneur selling software to a Chinese manufacturer. These are the types of people who stop paying the payroll tax partway through the year, when their earnings exceed the cap. …Learn More

January 16, 2018

Know About the Roth 401(k) Surprise?

Financial experts and writers often tout the Roth 401(k)’s main selling point: when the money is withdrawn in retirement, it won’t be taxed.

Well, that’s not entirely true.

An employee’s own money saved in his Roth account over the years is, indeed, shielded from income taxes when he retires and starts pulling out the money. That’s because the worker had paid the taxes before he put the money into the Roth.

But employer contributions to Roths are different. Employer contributions and any resulting investment earnings are taxed as income in the year that the money is withdrawn.

“Most everyone I talk to is shocked by this and surprised,” said CPA Sean Stein Smith, a business and finance professor at Lehman College in New York. Understanding the difference between the two types of savings plans offered to employees – Roth versus regular 401(k) – is already complicated enough, he said, and the tax distinction only adds to the confusion.

The reason withdrawals of employer contributions to Roths are not exempt from income taxes is because they are no different than employer contributions to regular 401(k)s. They are another form of income, just like your hourly wages. However, no taxes are deducted from a worker’s paycheck for Roth and regular 401(k) contributions when the employer puts them into the account. So the worker eventually has to pay the taxes – they are simply being delayed.

The next logical question is, how do you know how much you owe in taxes? What if you withdraw retirement income from both a Roth and a traditional 401(k) over the course of a year?

Figuring out the tax bite “is not your problem,” said Jaleigh White, CPA for a Louisville, Kentucky, investment firm and member of the National CPA Financial Literacy Commission for the American Institute of CPAs. …Learn More