Telling Tips is a series of articles from local experts to help you save money, make better decisions and plan for a better future.
The time to increase the debt level is fast approaching. What everyone should know as the battle begins is where we are starting from. Basically the country brings in $2.1 trillion dollars a year in revenues, and spends $3.5 trillion. The U.S. is spending $1.4 trillion a year more than it earns and the accumulated debt is $14 trillion in the past 10 years.
Basically if the country was a taxpayer, they would earn say $50,000 and spend $83,333 a year – they would have to borrow $33,333 a year and after 10 years they would owe $333,333 – scary stuff.
Income comes from individual income taxes (42 percent), corporate taxes (9 percent), Social Security taxes (40 percent) and 10 percent all others. Remember that 1 percent of tax payers pay 33 percent of the individual income taxes and 5 percent pay half of all income taxes. Over time, the top portion of U.S. taxpayers are paying more of their fair share. It is hard to argue that a “soak the rich policy” isn’t already happening.
Interest accounts for 6 percent of the national budget, defense is 20 percent, social security payments the same 20 percent, Medicare 23 percent, other mandatory programs 12 percent, and all other discretionary spending amounts to 19 percent of the budget. So even if all other government departments were closed down, the country still could not balance its accounts.
It seems that before things totally go off the rails, the time is now to make tough choices to get the country back on an even financial footing. It has to come from a combination of tax increases and reduced spending.
The 2012 elections are the perfect time to see which politician is ready to step up and say that the country cannot keep borrowing and running the country into debt and that it has to balance its books in a reasonable time frame.
Entitlement programs will have to be modified to reflect higher longevity, reduced returns on investments and an aging population.
In the same way that many American families have had to change their lifestyle and spending, so will the federal government. Before we run out of runway.
Coming Tax changes
There is, in no particular order, a list of tax deductions that are particularly at risk as the budget battle heats up.
- Mortgage interest deduction is almost certainly on the table. Look to see a maximum, say $500,000, deductible limit, or a 12 percent tax credit. It costs $100 billion a year and even with a strong real estate lobby the tax deduction is too big to overlook. Look for elimination of Home Equity loans (which are limited already) and second homes as well.
- Charitable contributions. Again another credit limit could be proposed. Charitable contributions have been tightened up over the past couple of years. Generally, unless the charity sells your car within 30 days, your contribution is limited to $500, not the book value. In addition, you have to now list each item you donate (not bags of clothing, etc.) with a fair market value.
- Tax deductible retirement plans. With SIMPLE, IRA, ROTH, SEP, 401(k) and the alphabet soup of complex retirement plans there is a call for a single retirement plan with much less generous deduction limits.
- Employer provided health insurance. There are proposals to cap the amount of company paid health insurance and what would be able to be deductible. Twenty-five years ago (1986) was the last major rewrite of the tax code. Lightning can strike twice in a life time.
Joseph Reisman, of Joseph S. Reisman & Associates, has been serving tax prep and business accounting expertise from his Coney Island Avenue office for more than 25 years. Check out the firm’s website.