The Cliff of 2013

Here are two links to outline the real and potential tax increases in 2013.

Obamacare: Impact on Taxpayers

The Fiscal Cliff: A Primer

social security, taxes

The myth of the 0% capital gains rate.

Congress passed a tax law that made capital gains tax free for those whose taxable income results in their taxes being taxed at less than 25 percent. However this law does not really apply if you are receiving a social security benefit. What happens is the capital gain is not directly taxed, but that same capital gain increases the amount of your social security benefit that is taxable.

In my case a capital gain of $10,150 resulting in a federal tax increase of $778 or a 7.67 percent equivalent tax rate. In the state of MN the same capital gain results in a tax increase of $915 or 9.0 percent equivalent tax rate. The two together are taxing that amount at a 18.9 percent rate. It raises my total tax obligation by 87.8 percent.

So much for a zero capital gains rate. Social Security benefits effectively cancels the tax law. The only way it would remain at zero percent would be if your SS benefit were already taxed at 100 percent.

capital gains, social security, taxes

The debt limit increase makes things worse

Increasing the debt limit does not solve the debt crisis, it exacerbates it. Next year this time the US debt will be north of $16 trillion and we will be wondering what happened to that debt reduction plan.


The Demolition of Building 60 in Camarillo

from Rubin Sanchez;

Hello all
Now we know the fate of building 60, other wise known as the back plant. It’s being torn down as we speak. I drove down there and took a photo. Attached is that photo. The East wall is gone and you can see the back of the coaters and ovens. To the left is what’s left of the wet end warehouse. There is nothing but ruble. You can’t get too close as they have a security guard. You are not supposed to get closer than the wall of Solvent Recovery next to the parking lot. I guess he didn’t see me soon enough as I got a little closer to take this photo. I will try to take more photos as the demolition continues. The security guard said it should take up till August.


Demolition of Building 60


Minnesota Gasoline Tax Rates

Here is the rate increase table for MN gasoline taxes for vehicles;

Date Increase ($) Total ($) Pct Increase (%)
original NA 0.200 NA
04-01-2008 0.020 0.220 10.0
08-01-2008 0.005 0.225 12.5
10-01-2008 0.030 0.255 27.5
07-01-2009 0.016 0.271 35.5
07-01-2010 0.004 0.275 37.5
07-01-2011 0.005 0.280 40.0
07-01-2012 0.005 0.285 42.5

The federal gasoline tax is $0.184 per gallon.

For the average driver getting 25 mpg and driving 12,000 miles per year they would pay about $74 in federal tax and in 2011 (before 7/1/11) about $112 in MN gasoline taxes.

More gasoline taxes by state

taxes , ,

Roth IRA’s are not what you might expect

Retirees are often lured into a Roth IRA. The idea of not paying an income tax on withdrawals is almost irresistible. I had the same thought my self so I decided to examine the pros and cons of an Roth IRA vs a Conventional IRA.

What I determined was not exactly what I expected. I put together a spread sheet using the examples of a Roth IRA initially taxed at both 15 percent and 25 percent. And the same amount invested into a conventional IRA at the same tax rates.

The problem with a Roth IRA is that the initial tax must be paid either from your income, or from another IRA sets you back by the amount of the tax. Given the same investments and term of the investment, the one with the lesser initial value will be forever behind the one that grew without taxes withdrawn. That can be seen clearly in the table below. If the initial tax bracket is higher than the withdrawal tax bracket of a conventional IRA the difference is even greater.

One the positive side, one never knows what a future Congress will do to the tax brackets. With the Roth IRA you know the rate of taxation from the time you make the initial withdrawal or conversion. You cann’t make the same statement on what the tax brackets will be 10 or 20 years from now. History has shown that the lower brackets tend to expand upward with inflation, that is they are indexed. But if a financial crisis were to occur all bets are off as to what the tax brackets might be some years from now.

If your current marginal tax bracket is 25 percent that $1000 becomes $750 to invest, and in 10 years at 7 percent growth you will net $1475. A conventional IRA will accumulate $1967 of the same period, but taxes on withdrawal (assuming a 15 percent rate) will be $295, netting $1672 or $197 more than the Roth IRA. While higher total taxes are paid on the Conventional IRA, the net is likely to be higher than with a Roth IRA.

Longer investment periods or rates of growth will have no effect on the outcome, assuming that both types of IRA are invested in the same investments.

Comparing a Roth IRA to Conventional IRA
Description Roth IRA  15 IRA 15 Roth IRA 25 IRA 25
Beginning Amount $1,000.00 $1,000.00 $1,000.00 $1,000.00
Tax Rate on Invested Amount 15.00% 0.00% 25.00% 0.00%
Taxes $150 $0 $250 $0
Net Investment $850 $1000 $750 $1000
Assumed Growth Rate 7.00% 7.00% 7.00% 7.00%
Years to maturity 10 10 10 10
Proceeds before Tax $1,672.08 $1,967.15 $1,475.36 $1,967.15
Tax Rate on Proceeds 0.00% 15.00% 0.00% 25.00%
Tax on Proceeds $0.00 $295.07 $0.00 $491.79
Total Taxes Paid $150.00 $295.07 $250.00 $491.79
Equivalent Tax rate 8.97% 15.00% 16.94% 25.00%
Net Proceeds $1,672.08 $1,672.08 $1,475.36 $1,475.36
I was comparing a Roth IRA to a Conventional IRA, and was surprised that maybe a conventional is better in some ways.

A Roth IRA does have some advantages over a conventional IRA however. They are not subject to the MRD – Minimum Required Distribution that an IRA starting at age 70½, and there are no penalties for early withdrawal. My plan when I hit the MRD age is to take the MRD, and roll the excess amount into a Roth at the end of each year.

For more information on a Roth IRA see here.

IRA, Uncategorized , ,

Doing the Math on Social Security COLA and Medicare Insurance Premiums

For retiree Social Security provides a significant source of income for most recipients. But the lack of cost of living adjustments for two years running, and the ever increasing Medicare Insurance premium will nullify the next COLA expected in 2012.

In 2009 the average social security beneficiary received $1171.60 per month. [Reference] Out of that they took $96.50 for the Medicare insurance premium. Leaving a net benefit of $1075.10. In 2010 the Medicare premium was increased 15 percent to $110.50. [2010 Medicare Premium] Because there was no Social Security COLA in 2010 the Medicare premium increase was deferred. We hear now that there will be no COLA in 2011 either. It is likely that there will be another Medicare premium increase for 2011, and another likely again in 2012 thanks to ObamaCare.

The 2011 Medicare premium is now set to $115.40.[Reference] So pending increases in Medicare Insurance premiums now total $18.90 or 19.6 percent. It will require a average Social Security benefit to increase 1.6 percent to break even on the Medicare premium increases that have been deferred.

If a COLA is determined to be needed in 2012, the percentage is not known at this time, but what ever Medicare Insurance premiums that have been deferred since 2010 will become effective the year a COLA is provided.

The Medicare insurance premium in 2010 was an increase of 15 percent. Because of ObamaCare passing in 2010 it is highly likely that the 15 percent increases will continue. If that is the case and in all likelihood it will be a 4 percent COLA will result in a net benefit increase of 0.08 percent in 2012, or about a dollar.

So if you are expecting a big COLA in 2012 after two years of no COLA at all you will be sadly disappointed. By then the Medicare premium will be $146.00 and it will consume any nearly all of any increase that the COLA might of provided.


social security, taxes ,