Who pays the 3.8% investment tax?

10:30 AM investment, pay, tax No Comments

Business Week | By Tony Nitti, Forbes

Hint: It isn't you. The bulk of the burden of a new tax on net investment income falls squarely on the top 0.1 percent of Americans. But they also reap an exclusive tax benefit.

As I have covered in nauseating detail, the 2013 tax year adds a new wrinkle -- some taxpayers will pay an additional 3.8 percent surtax on the lesser of:

1. the taxpayer's "net investment income," or

2. the excess of the taxpayer's "modified adjusted gross income" (this will be equivalent to adjusted gross income in most cases), over $250,000 if married filing jointly, $125,000 if married filing separately, or $200,000 for all other taxpayers.

In (very) general terms, "net investment income" includes income from interest, dividends, rents, royalties, passive activities and gain from the sale of most properties.

The new tax, which is imposed and governed by Section 1411, is expected to raise $123 billion between 2013 and 2019. But who's going to foot the bill?

The quick answer is obviously "the wealthy," as the tax generally only applies to taxpayers with adjusted gross income in excess of $200,000, which immediately limits its application to roughly 2 percent of the population.

And while yes, the "wealthy" will be on the hook, it is the uber-wealthy who will pay more than half of the $123 billion price tag.

According to this study performed by the venerable eggheads at the Tax Policy Center, while the wealthiest 1 percent will bear 88 percent of the total tax burden, the average increase in tax for the richest 1 percent will be only $23,000.

(Immediately ducks to avoid onslaught of pointy objects thrown by people dressed like the Monopoly guy.)

The richest 10 percent of the richest 1 percent -- or the richest 0.1 percent, if you're into decimals -- however, will pay a whopping 52.5 percent of the total cost of the new tax, with an estimated per-taxpayer annual addition of $131,000.

Before you decry the new tax as patently unfair due to its narrow focus, keep one thing in mind. There are still preferential tax rates afforded long-term capital gains and qualified dividends. These rates are currently at a maximum of 23.8 percent, which while less favorable than 2012's top rate of 15 percent, is still a far cry from the top ordinary rate of approximately 44.6 percent.

And according to a separate study performed by the TPC, this rate arbitrage will amount to a $542 billion dollar tax benefit over the period 2013-2017, an amount that is four times larger than the tax increase caused by the new net investment income tax.

And just like the net investment income tax, the beneficial rates applied to long-term capital gains and qualified dividends are not the concern of the unwashed masses; in fact, during 2011, the top 0.1 percent recognized 75 percent of all capital gains.

It would follow then, that the richest 1 percent receives nearly all the benefit of this $542 billion tax benefit. This math is supported by the TPC, which finds that taxpayers with income in excess of $500,000 enjoy 85 percent of the $542 billion tax benefit resulting from lower rates on certain investment income, while those earning less than $100,000 only receive 1.4 percent of the benefit.

So in summary, the wealthiest taxpayers in America will be footing over 88 percent of the $123 billion price tag of the new net investment income tax, but they also will be benefitting from 85 percent of the $542 billion tax savings resulting from the preferential rates afforded these types of income.

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10 tips to pay for college in 2014

12:30 PM 2014, college, pay, tips No Comments

| By Christina Couch, Bankrate.com

College is still expensive and financial aid is still tricky to land, but help is available.

From crowdsourced student loans to tuition freezes, here are 10 ways to pay for college, reduce college costs, boost your savings and score more financial aid in 2014.

As the White House pushes higher education institutions to control their expenses, more colleges are seeking ways to help families understand and minimize their costs, says Daniel Reed, vice president of federal issues for the California Association of Student Financial Aid Administrators and senior financial aid officer for Point Loma Nazarene University in San Diego.

"I think the trend is going that way towards freezing tuition or at least reducing the amount of tuition that increases by year," he says.

Several public school systems, including the University of California and Iowa State systems, have already proposed tuition freezes for the upcoming year. Antioch College in Yellow Springs, Ohio, is even going so far as to offer a full four-year scholarship to all admitted 2014 students.

One financial aid change in 2014 will impact dependent children of unmarried and same-sex parents. Under 2013 law, the Free Application for Federal Student Aid -- the document that the federal government uses to assess financial need -- has based a family's financial aid package primarily on the income and assets held by the student and, if unmarried, the parent or legal guardian who claims them as a dependent. This means that in cases of unmarried parents and same-sex marriages that aren't federally recognized, financial information on only one parent has been assessed.

Starting with the 2014-2015 school year, the FAFSA will collect information on both legal parents, regardless of marital status or gender. Though the Department of Education states that "most students will be unaffected," the change could dramatically impact federal aid packages for some students to pay for college, says Barmak Nassirian, director of federal policy analysis for the American Association of State Colleges and Universities, a research and advocacy nonprofit for approximately 420 public four-year institutions.

"When you factor in more aid resources, resources that have historically been excluded, you actually drive down the amount of aid eligibility that the applicant is entitled to," he says.

Federal aid may be harder to get for some students, but aid that isn't based on financial need is increasing. The National Center for Education Statistics reports that the proportion of undergraduates receiving merit-based aid more than doubled from 1996 to 2008 and the average merit award rose from $4,000 to $4,700. Some research and advocacy organizations like the Education Trust and the New America Foundation criticize the shift in merit awards as primarily benefiting wealthier students who have greater access to resources that can make them more academically competitive.

"There used to be twice as much need-based aid as non-need-based aid at public colleges and universities, and now they're about even," says Michael Dannenberg, director of higher education and education finance policy for The Education Trust.

For students of all income levels, increased funds for talented students to pay for college means an increase in the value of top-notch grades and academically challenging courses. To increase merit aid eligibility, students should keep their grades up, start the search for aid awards early and work with their academic advisers to build a rigorous high school curriculum.

With college costs increasing, it's no shock that many borrowers can't pay their student loans. The Department of Education reports that almost 15 percent of all federal loan borrowers default on their student loans within three years of beginning repayment. That's why the government is increasing its outreach to inform qualified borrowers of their income-driven repayment options.

"If you're going to miss payments and this program that exists is sitting there for you that could literally make the difference between you defaulting or staying current, I think that's a huge benefit for a family," says William Wozniak, director of marketing for ISM College Planning in Indiana.

Under the income-driven repayment plans, eligible federal loan borrowers can have their monthly student loan payments capped at 10 percent or 15 percent of their discretionary income and forgiven after 20 or 25 years of consecutive payments, though they'll have to pay taxes on the amount forgiven. Borrowers who work in public service professions will have their debt dismissed after 10 years of repayment without tax consequences. Borrowers can estimate their monthly income-based payments at StudentAid.ed.gov.

Changes also are afoot for some 529 plans. Regulated by individual states, the popular college savings vehicles all provide financial aid advantages and federal tax-free growth on funds, but each has its own fee structure and state tax incentives.

In 2014, some plans will undergo significant changes. For example, North Carolina will end the up to $5,000 state tax deduction it historically has offered to residents who hold in-state plans. Pennsylvania is lowering fees in its 529 plans while Wisconsin is considering a move to increase its state tax incentives.

If you're considering opening a 529 plan, read the terms carefully and do some comparison shopping, says The Education Trust's Dannenberg.

"(A family's) own state's 529 may not be the best choice for a family because of the different fees associated with different plans," he says.

Federal student loans almost always provide better interest rates and borrower protections, but if you need a private loan supplement, new crowdsourced funding sites could potentially provide lending alternatives or better loan terms than traditional financial institutions. While sites like PigIt.com provide a platform that allow "dreamer" college students to raise educational funds by offering incentives like work or gifts in return, Upstart.com offers crowdfunded loans in exchange for a percentage of the borrower's income over the next five to 10 years. The catch with crowdfunded finance is that not everyone gets their campaign fully funded.

"When people put out there that they want to be a doctor or they want to do this or they want to do that and they're at a strong school and they're going to do wonderful things and they have high GPAs, I think those students probably fare better in who's going to get money," says ISM College Planning's Wozniak.

Before starting a campaign, students should make sure to read the site's fine print and compare online financing options to loans offered through the federal government, banks and credit unions.

"A big part of what your price will be is the college you choose, and right now college selection choices are too often underinformed if not irrational," Dannenberg says. "People would be well advised to not simply associate price tag with quality ... That's not true when it comes to higher education."

One of the easiest ways to score financial aid is to apply to schools that offer lots of it to students like you. The National Center for Education Statistics' College Navigator tool can help you find institutions that offer substantial aid packages to families in your income bracket while The Education Trust's College Results Online database can identify colleges that are similar to your dream school in net price and academic competitiveness.

With higher tuition prices and more student debt on the line, Point Loma Nazarene's Reed says that it's even more important for families to financially plan ahead. That means not only creating a college savings strategy early and taking advantage of compound interest, but also having a serious chat about how much debt the family can handle.

"A lot of people tend to think 'someday I'll pay this back,' but really should be thinking about 'should I take out this much money,' and seeing in my chosen career path what my starting salary is," Reed says. "I know that's a hard conversation to have with an 18-year-old traditionally coming into a college experience, but the more we can encourage students and families to think ahead, the better off they'll be on the repayment side."

According to the National Association of Colleges and Employers, the average 2013 college graduate had a starting salary of $45,327, with humanities and social science majors ranking lowest with average salaries of $37,791 per year, while engineers bring home more than $62,000 annually. Students can find starting salary information for their majors at NACEweb.org.

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How much of your pay should you save?

12:30 PM pay, save, should No Comments

| By Libby Kane, LearnVest

Often, the last thing on your mind when you get your paycheck is 'How much of this am I going to put in the bank?' But you know you have to save -- here's a primer on how to do it.

When it comes to making financial progress, we can all agree that saving for the future is a critical part of the equation. But how much are you supposed to be socking away exactly?

According to the 50/20/30 rule, your monthly budget should be divided into three distinct categories of expenses: 50 percent should be reserved for essentials (think housing and food), 30 percent should be allocated for lifestyle choices (things like nights out and 121 channels of cable) … and at least 20 percent should go toward what we call “financial priorities,” which include debt payments, retirement contributions and, of course, savings.

Since these percentages are divisions of your net pay -- the after-tax income that you bring home -- someone who makes, say, $35,000 a year should set aside at least about $4,800 for financial priorities.

Think that sounds like kind of a lot? You aren’t alone.

That’s why we spoke to LearnVest Planning Services CFP® Tonya Oliver-Boston to find out if we really need to allocate 20 percent of our income toward financial priorities each year—and how much of that 20 percent should go into savings.

For many people, putting at least 20 percent of their net pay toward financial priorities isn’t actually all that difficult. In fact, Oliver-Boston finds that the biggest problem clients generally face isn’t that they can’t manage to allocate the 20 percent for financial priorities—rather, it’s that outsized debt, like student loans and high credit card balances, that eats up most of that 20 percent, leaving little left over for savings. But as Oliver-Boston cautions: ”Even if you have debt in excess of 20 percent of your net income, you still need to find a way to save!”

Translation: Prioritizing one financial priority doesn’t mean that you can ignore the others—be it debt payments, adding to your emergency fund, contributing to your retirement, or other savings goals, like accruing enough money for a down payment on a house.

So what’s the best way to divvy up that 20 percent across all of your financial priorities? ”It depends on the individual situation,” says Oliver-Boston. “But emergency savings and payments on high-interest debt tend to fight for first priority.” Retirement, she adds, is usually a strong third because it’s critical for your long-term financial health, followed by other savings goals, like that down payment we mentioned.

Need real-life examples? According to Oliver-Boston, if a client has a lot of high-interest debt but also has emergency savings, the client’s first priority would most likely be the debt because she has money in place to support her should she find herself in a situation in which her income could no longer cover her living expenses. If a client is cash-strapped, however, putting money into an emergency fund would probably take priority because the client doesn’t have the necessary cushion to cover her day-to-day expenses should an emergency arise.

In most cases, it’s unlikely that you simply don’t have the money to put toward your financial priorities. It’s more likely, explains Oliver-Boston, that you’re devoting too much of your income to another category of spending.

For instance, if your essential expenses are in excess of 50 percent, there’s a good chance that the culprit is a rent or mortgage payment that’s too high for your income. There’s good news and bad news here: On the bright side, you can quickly free up a lot of money. On the not-so-bright side, you’ll have to make a big change to do it … like a move.

“It’s a sticky situation,” says Oliver-Boston, “because you can’t make a client move. But when it’s pointed out to you that the troublesome element of your budget is a fixed percentage, it shouldn’t be surprising that you don’t feel like you’re getting ahead.”

If it isn’t your fixed expenses that are throwing your budget out of whack, then it’s probably your lifestyle choices. This, too, is changeable. Since few things you truly need fall into this category, you should be able to eliminate lifestyle expenses fairly easily. That said, since dinners out tend to add up slower than, say, rent, it might take a while.

“It’s almost like weight loss,” says Oliver-Boston. “Changing your essential expenses is the equivalent of having surgery—it’s immediate, so you see the change right away. But changing your discretionary spending is like losing a pound a week. It will take a bit, but you’ll get there.”

To be fair, Oliver-Boston qualifies, the people who are having trouble saving 20 percent aren’t necessarily making unwise choices when it comes to properly allocating their money. “During the downturn, a lot of people used credit cards to get by without an understanding of how much debt is too much,” she says. “And now they’re getting jobs at lower pay rates, plus the student loans they deferred are now due.” So although many people in this situation are working, she says, they’re not making as much, so they continue to use credit cards to get by. “For these people,” she says, “the change they would need to make in their lifestyles to save enough money would be dramatic.”

But regardless of whether your budget is a little unbalanced or you’re recovering from a major financial shock, Oliver-Boston’s advice for finding the funds for your financial priorities is the same. “First of all, you need to take a realistic look at your expenses, because turning a blind eye isn’t helping anybody,” she advises. “And, second of all, you have to be willing to change.”

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