Finally, A Debt Deal Gets Done

The Budget Control Act of 2011 is poised to become law – just in time to meet the August 2 Treasury deadline and reassure world financial markets. The framework of the new law is complex and shows that both Democrats and Republicans can claim some victories.

The federal deficit will be reduced by at least $2.1 trillion. That figure comes from the non-partisan Congressional Budget Office. The savings will be realized over a decade … although it isn’t yet clear where the bulk of the cuts will be made.1

More than $900 billion will be saved through the first wave of cuts.

  • Discretionary spending on defense and non-defense programs will be reduced by $741 billion over a 10-year period. This includes a $350 billion cutback in defense spending at the Pentagon (a Democrat goal in the negotiations).
  • Another $156 billion in savings will emerge as a result of shrinking interest costs on the national debt.
  • Another $20 billion will be cut from education loan initiatives and through efforts to identify fraud and abuse in other mandatory federal programs. (Student loan funding will be reduced to $22 billion by 2021, but Pell Grant funding will increase by $5 billion by 2015.)1,2

A bipartisan committee of 12 will have to recommend between $1.2 trillion and $1.5 trillion in additional federal budget cuts by November 23.

This committee will likely propose cuts to Social Security, Medicare and Medicaid and perhaps further reductions to the defense budget. Its membership will be handpicked. House Minority Leader Nancy Pelosi (D-CA) and Senate Majority Leader Harry Reid (D-NV) each get to select three Democrats; House Speaker John Boehner (R-OH) and Senate Minority Leader Mitch McConnell (R- KY) each get to pick three Republicans.

Congress has to vote on their recommendations by December 23. If the bill is defeated, then automatic budget cuts will kick in on January 2, 2013 – at least $1.2 trillion worth, divided almost evenly between defense and domestic spending. (Social Security, Medicaid, military pay and veteran’s benefits would be exempt; Medicare would not be, according to House Speaker Boehner.)

In addition, a Congressional vote on a balanced budget amendment to the Constitution will occur before the end of 2012. An approved balanced budget amendment would have to be ratified by two-thirds of the states. (This was a key victory for Tea Party Republicans.)2,3,4

The debt ceiling will be raised by up to $2.4 trillion. It will be raised incrementally from the current $14.3 trillion level, dependent on a series of triggers:

The first trigger: the bill’s passage. Congressional approval amounts to a formal declaration that the federal government is less than $100 billion away from hitting the debt cap. Once the Budget Control Act of 2011 is made law, President Obama may immediately raise the debt limit by $400 billion.

The second trigger: the initial $400 billion increase. This move initiates another formal request to hike the debt ceiling by another $500 billion dependent on Congressional authorization. It is widely assumed that Congress will disapprove this request, with President Obama vetoing the disapproval and Congress failing to override the veto. The probable outcome: the debt limit rises by the desired additional $500 billion.

The third trigger: what Congress does by December 23. Here are the possibilities that could play out during the holiday season:

  • If Congress fails to pass the deficit-reduction bill generated by the bipartisan committee of 12, then President Obama can formally request another hike in the debt limit – a $1.2 trillion increase. Congress would likely reject this request, President Obama would use his veto power in response, and Congress would likely fail to override the veto.
  • If Congress passes the deficit-reduction bill, then President Obama gets automatic authority to raise the debt cap by an amount equivalent to the budget cuts defined in the new law.
  • Alternately, if Congress passes a balanced budget amendment and sends it to the states, President Obama immediately gains the authority to raise the federal debt limit by $1.5 trillion.3

Tax hikes for the rich? Not immediately. In a key Republican victory, the two-step bill does not include tax increases or new levies for those in the highest tax brackets. House Speaker Boehner said July 31 that the forthcoming 12-member committee could not approve tax hikes – it would be “impossible” under current federal budgeting rules. Yet with the expiration of the Bush-era tax cuts increasingly probable in 2013 and the possible elimination of some deductions and exemptions in the tax code to generate additional revenue, there is a good chance many Americans will pay out more to the IRS in the near future. The White House says $1 trillion could be saved alone by not extending the EGTRRA/JGTRRA cuts further.5

December isn’t that far away. Expect more drama on Capitol Hill as 2011 ends, with a chance of added volatility in our financial markets.


The Best and The Worst

Rounding up the rankings of places to be (and not to be) financially.

Presented by Rick Gardner

Do you live in one of the worst tax states for retirees? Are you fortunate enough to live in one of the best states to do business? Here is a roundup of the miscellaneous, fascinating rankings offered by leading magazines and websites.

What are the best (and worst) states for business? Well, CNBC has ranked all 50 states based on 43 criteria including quality of work force, cost of doing business, quality of life, state economies and access to capital. Coming in at #1: Virginia. Number two is Texas, number three is North Carolina. The state with the lowest cost of doing business – Iowa – ranked 9th. The bottom three? Hawaii (48th), Alaska (49th) and … Rhode Island? Yes, it was dead last. CNBC cited its 10.9% jobless rate and a corporate tax rate nearly as high.6,7

What are the best (and worst) tax states for retirees? Kiplinger sees four “tax hells” in the Northeast. Vermont is ranked #1 (high property taxes along with state levies of up to 8.95%) and Maine, Connecticut and New Jersey also make the bottom ten. Minnesota is #2, Nebraska #3, Oregon #4 and California #5. As to the best, Wyoming ranks #1 among the “tax heavens”, followed by Mississippi, Pennsylvania, Kentucky and Alabama. Wyoming has no estate tax, no state income tax, and only a 4% sales tax; the state collects abundant revenues from oil and mineral firms.8,9

What cities may be especially attractive for a retiring baby boomer? Fortune offers 4 “great places”, citing ideals among four types of retirement destinations. It ranks Athens, GA as the best college town, Seattle as the best big city, St. George, UT as the best town for outdoors lovers and San Rafael, Argentina as an ideal foreign city for retirement.10

Where could I live well and prosper in my career or business? Kiplinger has ranked its Best Value Cities – metro areas featuring “vibrant economies, a low cost of living, and plenty of lifestyle amenities.” The #1 place to be is … Omaha. Then we have Charlotte at #2, Nashville at #3, and respectively 4th-10th we have Colorado Springs, Knoxville, Lexington, Little Rock, Wichita, Cedar Rapids and Cincinnati. It also identifies the metro areas with the largest household income growth between 2005- 09: Midland, TX (+31.3%), Grand Junction, CO (+24.8%) and Jacksonville, NC (+21.8%) came in 1-2-3, while the three biggest household income declines were in St. George, UT (-11.2%), Muskegon-Norton Shores, MI (-11.4%) and Albany, GA (-11.9%).11,12



This material was prepared by MarketingLibrary.Net Inc., and does not necessarily represent the views of the presenting party, nor their affiliates. All information is believed to be from reliable sources; however we make no representation as to its completeness or accuracy. The publisher is not engaged in rendering legal, accounting or other professional services. If assistance is needed, the reader is advised to engage the services of a competent professional. This information should not be construed as investment, tax or legal advice and may not be relied on for the purpose of avoiding any Federal tax penalty.

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How Long Do You Have to Keep Your Statements?

You’ve probably heard that you should retain copies of your federal tax returns for 7 years. Is that true, or a myth? How long should you keep those quarterly and annual statements you get about your investment accounts? And how long should you keep bank statements before throwing them away?

Your age, wealth and health might shape your answer.
If you are not yet retired, then you may wish to follow the general “rules of thumb” presented across the rest of this article.

On the other hand, if you are retired and there is any chance that you might need to apply to Medicaid, then you should keep at least five years’ worth of all financial records on hand (including credit card statements).

Why? Medicaid has a five-year “look-back” period in many states. To be approved for benefits in those states, you have to prove that you didn’t give away funds during that five-year period. To prove this, you must product complete records from every bank and brokerage account to which you have access, including those held jointly. With all the Wall Street mergers and bank closings in the last five years, these financial records can be really hard to obtain if you don’t have them.

Another special circumstance: if someone you love ends up under court supervision via guardianship or conservatorship, all financial records must be kept from date of that guardian’s or conservator’s appointment until the court gives final approval to the fiduciary’s financial account.

All that said, many people do not need to retain all financial statements “forever.” Here are some suggestions on what to keep and when to purge.

Tax returns
The Internal Revenue Services urges you to keep federal tax returns until the period of limitations runs out. The period of limitations= the time frame you have to claim a credit or refund, or the time frame in which the IRS can levy additional taxes on you. (This is a good guideline for state returns as well.)

If you file a claim for a credit or refund after you file your tax return, the IRS would like you to keep the relevant tax records for 3 years from the date you filed your original return or 2 years from the date you paid the tax, whichever is later. If you claim a loss from worthless securities or bad debt deduction, you are advised to hang onto those records for 7 years. If you…us…filed a fraudulent return or no return, you should keep related/ relevant documents for 7 years. The IRS also advises you to retain employment tax records for at least 4 years after the date that the tax becomes due or is paid- again, whichever is later.

Some tax and financial consultants advise people to keep their tax returns forever, but concede that canceled checks, receipts and other documents supplemental to returns can usually be safely discarded after 3 years. (The standard IRS audit goes back three years.)

Tax records relating to real property or “real assets” should be kept for as long as you hold the asset (and for at least 7 years after you sell, exchange or liquidate the asset). These records can help you figure appreciation, depreciation, amortization, or depletion of assets with regard to the property. You also might want to keep receipts and tax records related to major home improvements- if you sell your home, you can show tomorrow’s buyer how much you put into the house.

Mutual fund statements
The annual statement is the one that counts. When you get your yearly statement, you can toss quarterly or monthly statements (unless you really want to keep them). You might want to quickly glance and make sure your annual statement truly reflects changes of thee past four quarters.

You want to keep any records showing your original investment in a fund or a stock, for capital gain or loss purposes. Your annual statement will tell you the dividend or capital gains distribution from your fund or stock; as you may be reinvesting that money, you have a good reason to keep that statement.

IRA and 401(K) statements
You get a new one each month or quarter; how do you really need? The annual statement is the most relevant. Additionally, you want to hang onto your Form 8606, your Form 5498, and your Form 1099-R.

Form 8606 is the one you use to report nondeductible contributions to traditional IRAs. Form 5498 is the one your IRA custodian sends to you- it is sometimes called the “IRA Contribution Information” or “Fair Market Value Information” form, and it usually arrives in May. It details a) contributions to your traditional or Roth IRA and b) the fair-market value of that IRA at the end of the previous year. Form 1099-R, of course, is the one you get from your IRA custodian showing your withdrawals (income distributions).

If you are 59 ½ or older and have owned a Roth IRA for 5 years or more, the assets in your account become tax-free, lessening your need to save these forms. However, you will want to keep a paper trail before then- if you somehow need to make early or tax-free withdrawals or write off a loss, you need the documentation.

Bank statements
The rule of thumb for most people is 3 years, just in case you are audited. Some people shred bank statements after a year, or immediately, fearing that such information could be stolen.

In some cases, it is wise to hang onto bank statements longer. If you are going through a divorce, if someone tries to take you to court in the future, or if a creditor comes knocking, you may want to refer to them. Your bank may provide you with archived statements online or on paper (but it may charge you a fee for hard copies).

Payroll documents
Most financial and tax consultants advise you to retain these for 7 years or longer if you are a are a small business owner or sole proprietor. The IRS would like you to keep them around at least that long. Again, should there be a lawsuit or a divorce or any kind of potential legal dispute involving your company or one of its employees, a detailed financial history can prove very useful.

Credit card statements
You don’t need each and every monthly statement, but you may want to keep credit card statements that contain tax-related purchases for up to 7 years.

Mortgage statements
The really crucial records are most likely on file at the County Recorder’s office, but it is recommended that you retain your statements for up to 7 years after you sell or pay off the mortgaged property.

Life insurance
Keep policy information for the life of the policy plus 3 years.

Medical records and medical insurance
The consensus is 5 years from the time treatment ends (or from the time medical services are rendered, with regards to insurance). Do you think you can claim medical expenses on your tax return? Then follow the IRS suggestion and retain records for 7 years following the end of the year in which they are claimed.

Is there such thing as “good dept?”

I won’t lie…having a never-ending supply of cash that would allow me to buy whatever I wanted to would be lovely. It would definitely be better than incurring debt. But until and unless you find a way to have a never-ending supply of cash, debt is likely a part of your life. So how can you tell “good debt” from “bad debt”?

To put it simply, bad debt is any debt you incur when buying something that will lose value.  Worse debt (or really bad debt) is debt incurred when purchasing something consumable (meaning it will have NO further value).  This seems logical, right?  You with me?

If bad debt is buying something that loses value, then it stands to reason that good debt involves purchasing something that will gain, retain, or create value.  A home mortgage is a prime example of good debt.

Many people assume bad debts because “that’s just how it is”.  But that’s not necessarily how it has to be.  For example…vehicles.  Many Americans buy cars via automobile loans.  But a new or late-model car loses value the moment you drive it off the lot, and it continues to lose value with every mile it travels.  So why incur bad debt for this?  Well, for many a vehicle is simple a necessity and a loan is the only means they have available to obtain it.  But a large percentage of Americans purchase more car then they really need or can afford.  It’s important, when facing bad debt, to keep that debt in check.  Purchase what you need, with a plan to pay it off as quickly as you can.

Can bad debt turn into good debt?  Yes!  Let’s say you purchase a vehicle by taking out a loan for a portion of the cost- that’s bad debt.  But if the vehicle is a hybrid or electric vehicle that typically has a high resale value and saves you a substantial amount of money on gasoline, your bad debt could turn into good debt.

There are exceptions.  For example…what about student loans?  Your education is only used by YOU and cannot be re-sold.  So is that bad debt?  Not exactly.  As I mentioned before, if a debt creates value, then it can be considered good debt.  A student loan definitely falls into this category, as higher education creates increased earning potential.

We all want to be debt-free.  That takes time.  Until that time, try to get a handle on which kind of debt you are incurring.