Those who support this approach claim that once I (and my wife) are gone, we don’t ‘need’ the money and it’s up for grabs by the government. Yet the same folk pushed to get the estate tax exemption to $11M+ per person. Under the guise of ‘saving the family farms’, as if this were truly their motive. Adding to the irony are multiple New York Times articles, first reporting that Fred Trump, aided by his children, moved large sums of wealth into their names over their lifetimes to avoid proper taxes and the 55% tax rate on gifts over those decades. Second is that the president’s son-in-law also manages to escape any tax via his real estate holdings. In Jared’s case, the write off’s may be legal, albeit an example of how the tax code is structured to favor the rich and not the middle class who worked for decades to save up that $million vs accumulating hundreds of millions via tax loopholes.

Keep in mind, the bill hasn’t passed yet, but if it does, start doing the math. If you have multiple children, the tax hit is reduced. You can reduce it further if you have grandchildren, as the rules for their forced withdrawals are more lenient. If this new law is passed, you can also used Roth conversions over the next decades to move a small amount each year and pay the tax at your rate in retirement. Adding say, $25-$40K each year to your taxable income might have a far lower tax than to add 20% of the retirement account balance each year to your kid’s income.

If this bill is passed, or when I read that it failed to pass, I’ll be back with an update.

EDIT: The billed passed, and an easy estate planning tool for the middle class just went away. We are not likely to get it back.

Now that we are in the midst of tax reform discussion, I find that the minimum wage discussion is inextricably linked to outrage regarding the huge tax cuts the top 1% are bound to enjoy. I understand that the tax code doesn’t address minimum wage, nor does it address healthcare, but there’s no separating them as congress and the senate are both populated by horse traders, always withholding a vote on one issue to get their way on another. If the tax code is about to get changed so the top .2% can save the $100B tax bill their estates might be subject to, it’s only right to discuss how we can help nearly half the US population who are earning a sub-$15 wage.

There’s a cliche that those who don’t study history are doomed to repeat it. Today, this is appropriate to the GOP propaganda suggesting that cutting corporate taxes will “bring back jobs”, “help middle class workers”, and “raise salaries across the board.” This concept was called Trickle Down Economics, and yes, it was proven to have been a failure. Wikipedia offers a Will Rogers quote that gives a bit of perspective:

“This election was lost four and six years ago, not this year. They [Republicans] didnâ€t start thinking of the old common fellow till just as they started out on the election tour. The money was all appropriated for the top in the hopes that it would trickle down to the needy. Mr. Hoover was an engineer. He knew that water trickles down. Put it uphill and let it go and it will reach the driest little spot. But he didnâ€t know that money trickled up. Give it to the people at the bottom and the people at the top will have it before night, anyhow. But it will at least have passed through the poor fellows hands. They saved the big banks, but the little ones went up the flue.”

If a clever quote isn’t satisfying, let’s look at some history –

There are two important things to understand in this graph. In relative numbers, average wages have gone nowhere in 50 years. Less than 18% real growth since 1968. Even worse, the minimum wage has fallen in real terms during this time.

Let me offer you a term you might not have hear before, “Velocity of Money.” When I learned this term in grad school, I thought it was great, I imagined money going through the economy getting spent over and over inside of just one year. That’s actually what this phrase means, it’s the total dollar amount of transactions divided by the money in circulation. This raises a major point. $1000 given to a 1%er (Those making over about $400K per year) is just a rounding error, less than a half day’s wages, and just deposited to their checking account. The minimum wage worker is taking the next dollar, the next hundred dollars, and going to the grocery store to buy food. To the department store to replace their kid’s worn out clothing. In other words, it gets spent so fast that it’s gone before the next pay day comes. If trickle down proved a failure, the bottom up approach would provide spectacular results, if only it could be implemented.

Next, let’s consider the GOP’s recent campaign of 31 Reasons for Tax Reform. I plan to write more on this, but today, I’m thinking about how they suggest that cutting corporate taxes will somehow bring back manufacturing (On the page for Aug 7). It’s not tough to find that Ivanka Trump has her products made overseas and for wages that are sub-$1 per hour. There is no reason to expect that any business with a lower tax burden will use that money to create higher paying jobs, it will simply raise their profits. There are classes of manufacturing, clothing for one, that just aren’t coming back. American Apparel has done an admirable job of declaring their manufacturing to be “Sweatshop Free,” and also filed for bankruptcy a second time.

I’ve continued to see people say that the low wage workers should get an education, college, of course, and get a higher paying job. Now, let me show you why this suggest is remarkably ignorant.

This is a forecast from the Bureau of Labor Statistics. It offers a look at the jobs they expect to grow in number by the most over the next decade, beginning in 2014. What do you see? I’ll tell you the two things that spoke the loudest to me. First, manufacturing didn’t make the list, these are all service jobs. More important, I added the numbers. Of the 4.13M jobs projected, 55% were sub $15, in this case, $26,590 or lower. There is something disingenuous (and innumerate) about the rich person suggesting that it’s possible for everyone to have an above average education and approach an above average wage.  When I go to a restaurant, I’m not thinking my waitperson should go get a better job, I’m hoping that she is making tips and an overall wage that gives her a good life. It gets even more personal when I visit my mother in law, in an assisted living facility. An average $11/hr for personal care aides who are taking care of our loved ones. The same people saying “go get an education” would be disappointed to find they can’t get any care for their own parents when the time comes. I’ll say it to anyone, I love my mother in law. Unfortunately, we are at a point where she needs the care that can only come from 24/7 heath aides taking care of her. They are not lazy by any means, and deserve to be well paid. You can read the full list above, and hopefully walk away with one message – we need people to do these jobs, and all they ask for is that as wealth in the US grew enormously this past half century, their wages should have kept up. The disparity in the graph I offered above is the creation of a shift in the distribution of income, where the newly created wealth went to the top, at the expense of the middle class.

A few years ago, I read an article, The Pitchforks Are Coming… For Us Plutocrats. Written by a multibillionaire who recognizes that the divide between rich and poor is growing, rapidly. You can read the full article, but I’ll share the most frightening part – “But the problem isnâ€t that we have inequality. Some inequality is intrinsic to any high-functioning capitalist economy. The problem is that inequality is at historically high levels and getting worse every day. Our country is rapidly becoming less a capitalist society and more a feudal society. Unless our policies change dramatically, the middle class will disappear, and we will be back to late 18th-century France. Before the revolution.” He goes on to say, “In fact, there is no example in human history where wealth accumulated like this and the pitchforks didnâ€t eventually come out. You show me a highly unequal society, and I will show you a police state. Or an uprising. There are no counterexamples. None. Itâ€s not if, itâ€s when.”

The most unfortunate thing is that the solution is not difficult, in fact, it’s very simple. A living minimum wage has a remarkable domino effect. When people are not going to bed hungry every night, or making decisions between one necessity and another, local crime goes down. The need for medical care due to malnutrition also goes down. When parents are making enough money to make ends meet on only 80 hours a week combined,  they are available to their children, and the next generation performs better. We are at a critical juncture in our history, there’s a choice to be made here that will be regarded by historians as either “the moment we decided as a society to eliminate poverty in the US” vs “the new tax code that spoke volumes about being ‘doomed to repeat it’.”

But. As a numbers guy, I ask, “Where do you draw the line?” And toward that end I wrote to Derek, the blogger I mentioned –

“I don’t dispute that killing off a card completely can provide an emotional reward, a boost to one’s feeling of accomplishment, etc. But, I often say “knowledge is power” and one should know the cost of that decision. A few hundred dollars over 4 years? No big deal. Thousands of dollars? Look carefully at the numbers before choosing the method.

Consider “snowballers” suggest you pay your 8 student loans, all zero interest, $10,000 each, before paying that $20,000 18% card. Of course, that’s an exaggeration, but one that easily illustrates why it’s important to look at the numbers.”

What I expected was an acknowledgement that there are some extreme, contrived, cases when you just pay off that 18% debt first. Nope. His response?

“I used to be like you “a hard-nosed financial professional that only believed in the numbers and percentages. Today, I understand much more about the emotional side of money. If you make no progress over the course of a year, there’s about a 100% chance of giving up. If, however, you pay off a $2,000 loan and get rid of that payment completely, you’ll be charged up and ready to tackle another!

I’d still suggest that people pay off their $10,000 zero interest loan before their $20,000 18% interest loan because there’s a greater percent chance of them getting rid of the smaller debt and continuing their debt payoff journey! Pay a couple thousand extra dollars in interest but paying off the debt is better than trying to save the interest and failing at the debt payoff entirely, don’t you think??”

What? I aimed to find the most ridiculous spread from high rate to low, trying to show how there’s some point where it’s silly to pay off your low-to-no interest debt first. And, with a daughter about to enter college, I figured that an example of 8 low rate separate loans was actually possible. Here’s what this would look like. Do you see what makes this so ridiculous? You graduated college, and the loans happen to be individual loans. The lender could just as easily have made this into one loan with a monthly $664 due. In which case, the snowballers would have no issue paying the “low balance” $20,000 card first. But because these loans are each $10,000, they rise to be the priority, pay them off, get rid of 1, 2, 3, etc as fast as you can, before sending an extra dime to the $20,000 high rate loan.

Let’s look at what happens when we prioritize that awful 18% debt. I happen to choose a total $1,200 available to pay debt, just $236 more than the minimums required. If we pay the low balances first, the interest jumps by over $20,000. A $10K loan is too small to kill in less than a year with only the $236 extra, so the snowball takes 32 months to eliminate one debt, while my plan gets rid of the credit card 18% debt in 56 months. Would you really be happier paying interest-only for 89 months on that 18% debt but feeling great that you have fewer loans, fewer checks to write?

The truth is that most people are not in such an extreme situation. And the real cost may be far less that this contrived example. As I offered on Derek’s site, knowledge is power. Why would you not wish to know the cost of one method vs another? And if you knew the cost, how high (or low) would it need to be to sway your approach to paying off your debt? What could you do with the $20,000 you’d have saved over these 10 years? How much snowball Kool-Aid does one have to drink to state they will stick to a method no matter the cost?

By the way, I do believe in more than numbers and percentages. I also believe one shouldn’t fall for bad advice offered by a celebrity, Dave Ramsey, who takes a “my way or the highway” approach to his advice. Know your options, and decide for yourself.

On a final note, as I was writing this, John, another blogger who writes at Military Fire, also visited Derek’s article, and agreed with me, stating,

“If the snowball method costs you a couple thousand annually, and you make less than $50K a year, you would have to work 13 months a year to recoup that unnecessary interest. The snowball requires nuance. Lets help people work smarter, not harder.”

Derek, on the other hand, wasn’t budging,

“I’m a nerd just like you and understand the percentages perfectly. After helping hundreds of people though, there’s no denying that those who pay off a debt early are far more likely to stick with their debt snowball. To help the most people possible, I’m sticking with this method for life.”

Check out John’s excellent article Debt Snowball: Not a Chance in Hell, because John doesn’t like throwing away money on interest any more than I do. If you comment at either site, let them know that Joe sent you.

How many households are we talking? If we divide this huge treasure over the population, what are we worth, on average? Good question.

We are up to 119.03 million households in the US. When we divide, the result is $779,635.

As a country, this makes us pretty well off. The average family can own a paid-off house worth $235K, and still have $545K which, for retirees, can provide over $20K per year income. Combine this with another $20K in social security, for a couple, and the numbers still look good.

Not so fast. The totals reported, the treasure of nearly $93 trillion dollars, fails to discuss one crucial factor, the distribution of this wealth.

CNN offered a look at how this wealth is distributed.

That leaves just 1% of the total pie for the entire bottom half of the population. Note that while that article was written in 2016, just before the election, it used data from 2013. The point remains, half are sharing just 1% of this wealth. I don’t have a solution, today I am just making an observation. The totals and the averages that are reported are meaningless without digging deeper. A $500K average doesn’t help when your family and others have virtually nothing, but one family has $5M. Keep all this in mind when you see any articles that offer this type of news presented as if we are all somehow better off.

The rules for a recharacterization were very friendly. If, at tax time, you realized the conversion put you into the next bracket, e.g. of a $10,000 conversion, $8000 would be taxed at 15% but the last $2000, 25%, you could send in the paperwork and undo that last $2000. Or, if you moved a stock worth $20,000 and at tax time, the stock is trading at $15,000, just send the stock back to the traditional IRA. On the flip side, if your stocks rose in price, you’d be better off keeping them in the Roth, with tax due on the valuation on the date of conversion.

The Roth conversion hasn’t been removed from the tax code. You should just be careful on the amount and the timing. If your income is stable, and you can forecast your taxable income early on, by all means, take advantage of the opportunity to ‘top off’ your current bracket. If you’re not so sure, you might wish to wait until tax time. I don’t mean April. I mean late November/early December. This is when the tax software comes out and you will have a better idea what your final situation looks like.

Over the last few years, there haven’t been too many deals that I couldn’t refuse. I took advantage of the Amazon credit card. No fee, and 5% back. As a Prime member, I find enough value in my membership to justify the $99/yr. My nearest supermarket or drug store is 5 miles away, and instead of a special trip to grab an item, the savings and free shipping that Prime offers is worth it. In addition, the prime video has a few shows that also provide value. These all add up to making the membership and the card, worthwhile.

I considered the Amex Blue card. The 6% cash back at supermarkets got my attention. The downside is the reward was capped at $6000 in purchases. $95 annual fee to capture a $360 reward. Except, I already get 2% back, so it’s really an extra 4% or $240 less the $95. A $145 gain per year. After that math, I passed.

Here’s what got my attention. After my daughter left for college, we began flying JetBlue, as they had a good fare for our trips. The offer they had was for 60,000 bonus point for signing up for their card and charging $1000 within the first 90 days. The card carries a $99/yr fee, billed early on, but those points are worth about $900. Other perks (such as waived baggage fees) aside, they offer a 5000 point (value – $75) bonus for each year you have the card. As long as I’m flying with them more than once a year, keeping the card will be worth it.

As with any card, it’s a matter of what your spending is with that company. If you are a weekly Target visitor, for example, their branded credit card might be a good deal for you. In the case of the JetBlue card, the perks in addition to the bonus points are worth more than those extra $25 in fees.

A warning is in order. Playing the reward game assumes a few things. First, you budget well and stick to it. The Amazon card comes after you realize you use this company often and the 5% back is money in your pocket. If the card will lure you into spending more, not just shift where your spending goes, I’d avoid the game altogether. You should also be very aware of your credit score. Some credit cards offer a look at your FICO score. You can also use online companies such as Credit Sesame or Credit Karma. It’s important if you have any large credit event on the horizon, such as a home or car purchase, as well as to be sure you are in good shape when applying for this new card. You should also be aware that getting a new card will result in a bit of a hit to your score. The inquiry on your report will cost a few points, and the new card will drop your total accounts’ average age which also is a few points.

For me, I’m not chasing every $100 bonus, I’ve set the bar far higher. Happy to grab a deal that’s worth $500+.

Are you playing the credit card reward game? Let me know what the last deal was that you took advantage of. Leave a comment!

The tables aren’t the actual tax you pay on gross income, but on taxable income which is gross less a number of items, including the standard deduction for single $12,000 or joint $24,000. You’ll note, there’s no mention of personal exemptions, the $4,050 per person, including dependents in your household, that’s gone, in favor of this higher standard deduction. Yes, this means that if you itemized in 2017, that (a) you might not be itemizing any longer, and (b) those who still itemize don’t see the benefit of the higher standard deduction, only the loss of exemptions.

Last, if the bill doesn’t pass, I’ll return and edit, so this page will accurately reflect the 2018 rates, once they are certain. Along with a follow up post discussing highlights of the rest of the bill and the impact of the new tax code details.

I’ll be referring back to this article over the next year whenever the tax table is part of the conversation. Check out the new rate table and start planning for 2018.

The other way is the ‘marketing’ way, giving bits and pieces of information that appeal more to one’s emotions than to their logic. The slide I show here? It’s what the House Ways and Means Committee published last week. It’s not just marketing, it’s a lie. And it’s not a reason to repeal AMT.

First, let’s take a step back. What is the AMT? Do you know? Do you care? 37% of people thought AMT meant a cash machine, confusing this with the acronym ATM. (I made that last line up. But now that I read it twice, I believe it) AMT is the alternative minimum tax. Some time ago, congress realized that there were people who managed to come up with so many deductions that they paid little, and in some cases, no tax at all. The AMT forces tax payers, in effect, to phase out their deductions when at a certain level compared to their income. I’ll offer one example. A couple with $212K gross income. With itemized deductions of $57K, and their 4 exemptions, they have a taxable $139K, and a tax bill of $26K. Keep in mind, they are in the 25% bracket. This means if I go back to the tax return (I’m using 2016 tax software to run these numbers) and drop the income $1000, the tax bill drops $250. But, even though there’s still room in the 25% bracket, the next $1000 of income will show a rise of $325. $75 of which is due to the AMT effect. The taxpayer sees a phantom 32.5% tax rate even though they are the 25% bracket. 

Let’s talk for a moment about the lies. I have never done my taxes by hand. I could, I suppose, but I’ve always bought tax software. In fact, I just threw out my copy of the MacInTax (later taken over by TurboTax) from 1985. It was on a floppy disc, and my wife said it was strange to keep it. My mementos should be about people not 32 year old tax software. But I digress. I’d also guess that few people are doing it by hand. The DIY means using one of the tax softwares each year. There is no ‘double time,’ the software just does it. Those who go to a storefront or individual preparer are also shielded from the efforts, I assure you, they are using software as well. As far as “double tax” is concerned, the incremental tax looks like a higher marginal rate, nothing is doubled. and the overall tax has the smallest of impacts. Except, of course, for even higher level earners who had far more in the way of deductions.

I’ll admit, the AMT calculation is a bit convoluted regarding how different deductions are eliminated as income rises. In general, it will take over $100K in gross income, and a lot of itemized deductions to put you into AMT land. The exemption amount is $84K for a married couple. Whether that number is fair is up for debate. When our politicians want to make some change to the tax code, they should just be honest, they object to the tax and its impact on their constituents, for whatever reason. The way they are marketing their cause is just a smokescreen.

First, let’s look at a bit of the history of the estate tax. In 2001, shortly after my daughter was born, the exemption was $675K. At that time, my wife and I were going to do the ‘responsible’ thing and get life insurance, term policies. $1M each, which was pretty cheap at the time as we were still young. But this meant that if we died, we would leave our child $2M of which $700K would be subject to tax. On top of that, our 401(k) and IRAs would add to this number, and every bit of it taxed. Even at that earlier stage of investing, I knew enough to start planning. $2000 and one trust later, we did not own the insurance, it was owned by the trust, and bought with money gifted to our daughter. The estate tax was always up for discussion and it quickly was raised in the late 2000’s. In 2017, it’s $5.49M per person. And there’s a little additional benefit, the preservation of the exemption for the second to die spouse. This means that if I die tomorrow, in effect, my wife can leave our daughter the $10.98M with no tax due. Just a form to send in when I meet my maker. No need for any lawyer or trust. And no, we’re nowhere close to worrying about hitting that number. Further, we can gift her $28K/year from now until we pass. That’s close to another million dollars. And $28K/yr to her spouse if and when she gets married, or even to her ‘special friend’ if she stays single, and we’re generous. When you bring on the grandkids, the numbers multiply up fast. A couple with 2 children and 4 grandkids has 8 people to gift to (including the spouses) which adds to $224K/yr under the current limits. If one has the money and sufficient offspring, it’s not tough to gift away another $6M or so depending on the situation.

When you look at the distribution of wealth, the data show that only the top .2%, 1 in 500, estates owe any tax at all, and for those who just go over, the tax is minimal. It gets to be quite a bit when billionaires pass away. Say someone worth $10B passes. The $10.98M exemption is tiny compared to this number, and the estate can owe close to $4B.

When politicians push for this cut, until now, it wasn’t because they were rich, that tax wasn’t likely to affect them either. They had some very large donor whose money they wanted to keep flowing. The politicians are great marketers, talking about the ‘small farms and family businesses’ hurt by the estate tax. Let’s talk about farms for just a moment.

Exact numbers aren’t easy to come by, but we have a good hint. Only 3% of family farms have sales over $1M. This results in a value of $5M or so, given that $1M isn’t profit, but gross sales. This type of business is typically valued at 7X profits. It’s not hard to assume that to get past $11M in value we are at fewer than 1% of farms. Now, if the whole point is that the kids want to keep the farm and stay with the business, it would be easy to use the strategies I suggested above. Giving not money, but a percentage each year. Yes, it takes a tax attorney, and yes, the tax code is convoluted, but we are back to the “family farm” rarely being lost to estate taxes. The repealers post, tweet, and write about it as if each and everyone in the country should be outraged over this tax, while 41% of us are not even making $15 per hour. They would like to give their wealth patrons this windfall, but will look to cut SNAP funding by $125B, cut Pell Grants and other pro-college funding, and perhaps worst of all, repeal the ACA.

If you are in favor of repeal, would you mind dropping me a note and explaining why you support it? Given how few will benefit from repeal, I’m very curious. I’ve never heard a real legitimate reason.

I started saving for my daughter’s college the month she was born. We started to save all we could, as I had a forecast, from a spreadsheet I pulled up from then – the cost then was $20,000, as listed on one of the college planning sites, and with a 5% annual increase, this year would cost $48,000, and the 4 year bill, $208K. The cost I tracked was for private, out of state, schools. Better to plan for the high end than to assume a closer state school and come up short.

In the back of my mind, I knew that I was planning to retire early, but looking nearly 20 years out, I made the assumption that we’d both be working until college graduation. This assumption meant we shouldn’t plan to get any aid. In hindsight, we hit a bit of a Catch-22. By saving for college, we pushed ourselves into a situation where we wouldn’t qualify for aid. To be clear, had we planning for the “retirement before college” we might have paid off the mortgage and lined up an equity line for some of our spending over the 4 years. This is the irony to how aid is given. You can own a home with a $200K mortgage, and have $200K in the bank. In this case, that $200K is fair game, you’re paying tuition. But, no mortgage, no savings, you’re likely to get some aid. I’m not advocating this approach, but I am certain there are many who manage to game the system this way.

I do want to look at two things that can snag you, no matter how good your intentions. Both are related to the American Opportunity Credit (AOC). This is a credit of $2500 against college expenses. Not a tax deduction, a credit. It’s calculated as 100% of the first $2000, and then 25% of the next $2000 of college cost. The first potential snag is related to the 529 College Savings Account. This account allows you to save money post tax, and then use the money for college with no tax on the gains. A bit similar to the Roth IRA as far as tax treatment goes. But, here’s the rub. If you take the money for all college expenses from the 529 account, you have no expenses left to claim the AOC. What if you have the exact amount saved? You are still better off using $4000 cash to pay for school. You get back $2500, and can easily afford the tax if you withdraw from the 529 after school is over. In my case, I came very close to using money from a tax-favored Coverdell Education Savings Account (which is pretty similar to the 529) for the full first semester tuition, until I realized this. It would be awful to hit this issue and lose $2500 due to this.

The other AOC issue has to do with MAGA MAGI, Modified Adjusted Gross Income. The ability to take this credit is phased out over the MAGI between $80K-$90K if filing single or $160K-$180K if joint. If you are nowhere near this range, either low or high, you may not have any decision to make. On the other hand, say you were going to be at exactly $90K and filing single. Consider, you are in the 25% bracket, but with the loss of the AOC, the last $10K really cost you $5K. If you can plan ahead and bump your 401(k) or IRA deduction by $10K, your tax bill will be $5K less. Even a stock loss of up to $3K will help you along. For joint filers, the range is $20K wide, so the impact is a bit less dramatic. The $2500 difference over $20K of income feels like a phantom 12.5% vs the 25% for a single filer.

For further reading IRS Publication 970 is a great read to end your exciting summer.

Any questions or comments? Feel free to leave them below.