BIG TIP: Make sure your tax adviser understands (and discusses with you) the short- and long-term impacts of the changing income tax landscape. When it comes to the financial fuel for your BIG journey, Uncle Sam is a real gas guzzler. Your tax adviser plays a crucial role in helping you plan your BIG journey.

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Quote of the Day: “Why does a small tax increase cost you two hundred dollars and a substantial tax cut save you thirty cents?” Peg Bracken

The future was well predicted in a preceint April 2008 WSJ opinion letter entitled “The Coming Tax Bomb” by John F. Cogan, senior fellow at the Hover Institution and R. Glenn Hubbard, Dean of Columbia Business School. Both have held cabinet positions.

The letter examines the virtually certain impact of the nearly consensus notion that taxes must go up, starting with letting the Bush tax cuts expire. Based on their perfectly logical math, doing so would equate to the largest tax increase since World War II. Presently federal revenues represent nearly 19% of GDP (which is historically high), having only been exceeded during the Clinton administration. Letting these tax cuts expire would bring the income tax burden up to 25% of GDP, the highest level in our history.

By letting the cuts expire, the marginal tax rates will increase across the board: from 13% more tax on the highest income households to a 50% increase in rates on lower-income households. The marriage penalty reappears and the child credit cut by $500 per child. Long term capital gains rates increase by a third from 15 to 20 percent and the tax preference for qualifying dividends disappears, exposing them to a top marginal rate of nearly 40%. It this gets real traction, you might consider shorting the market because it will be a real “look out below”, “where’s bottom” experience. Remember, we’re the only major economy that taxes dividends and capital gains.

Then there’s the estate tax. Under Bush’s plan, estate taxes disappear in 2010, but reappear in 2011 unless Congress changes the legislation. That would mean an exemption of $600,000 per person with the top rate going up to 55%.

Oh, one other happy note, the depth of reach of the AMT (Alternative Minimum Tax) will expand, ensnaring over 25 million taxpayers.

Political points are being sought for balancing the budget, but after reading the article, you scratch your head wondering, “What are the chances?” First, the whole tax increase idea is pretty bad math. Tax revenues tend to increase in lower tax environments due to the velocity of money, the math gets pretty iffy under the assumption that revenues will increase. Further, to balance the budget, Congress would have to tighten their belts substantially. Neither party has declared victory yet in outspending the other and continues to up the stakes.

Unbridled spending by both parties has brought us to this crisis and surely higher taxes will follow and the debt will hamper future growth.

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The BIG Bottom Line: Never in the course of our history has there been a crying necessity for people to take a hard look at how much they are paying in taxes. Tax planning is a vital requirement for anyone who wants to pursue a BIG dream.

Posted in BIG Blog, Finances, Guidance, Income Tax Management