As you probably already know, our administration signed into law the 2010 Tax Relief Act in December. For months, we were speculating as to whether or not the administration would continue the Bush administration’s tax cuts – a plan that dates back to the year 2000. The significance of this is rather large considering tax rates would have moved from their current levels, 10%, 15%, 25%, 28%, 33% and 35%, to the pre-Bush era levels, 15%, 28%, 31%, 36% and 39.6%. The Bush administration’s cuts will now be extended through the year 2012.
With the way the national debt continues to spiral out of control (topping $14 trillion just recently), the extension comes as somewhat of a surprise to me. No matter what the government does in the foreseeable future, raising tax revenue will be a necessary step if it truly wants to begin correcting its mounting problems. However, because the government is holding off on raising taxes, the extension shows that the economy is still not fully recovered from one of the longest recessions seen in recent history. Although the stock market rewarded people with mid-sized returns in 2010, many investors are just now getting back to their October 2007 portfolio highs.
Other major provisions of the extension include some relief for estate taxes as well as a reduction in the contribution amount workers will be subjected to for Social Security. The estate tax exemption will increase from $1 million to $5 million. The top tax rate will be reduced from 55% to 35%. As for Social Security, employees previously contributed a 6.2% tax on wages earned up to $106,800. Self-employed individuals paid 12.4%. The new act will provide a decrease in tax collected into Social Security as employees will contribute only 4.2% in 2011. Self-employed individuals will pay 10.4%.
It is clear to me that or sour economy has forced the hand of the Obama administration to extend extra relief to taxpayers in the coming years. Some believe that our country has already dug itself out from the hole the recession provided. However, if that were the case, would the government really continue to provide aid?
While maximizing your portfolio’s return may be important, retirement signifies the beginning of your 2nd financial phase of life. During Phase 2, you should first be focused primarily on the protection of your money - and then the rate of return. If you are retiring and leaving the workforce, you are going from paycheck mode to a fixed income. All too often investors fail to properly plan for an inflation-adjusted lifetime distribution from their assets.
William “Bill” Smith
Bill Smith is a RFC and the president and founder of Great Lakes Retirement Group, a Registered Investment Advisory firm located in Sandusky, OH, and Sheffield Village, OH.
For further educational information or to attend one of Bill’s educational classes, please email ContactUs@GreatLakesRetirement.com with the subject line “Blog” to receive more information, or you may visit his website, www.GreatLakesRetirement.com .