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The IRS Defense

The IRS Commissioner John Koskinen has spent a lot of time on Capitol Hill this past week answering questions about the Internal Revenue Service’s targeting ofirs certain political groups and the ongoing Congressional investigations.

Depending upon your political persuasion, you probably see this as a potential conspiracy deserving investigation, or you think this is nothing more than political grandstanding in an election year. Beyond the political theatrics, which are part of all Congressional hearings, there are some serious issues involved, not the least of them is the Service’s response to Congressional inquiries.

While you may disagree with the premise and conduct of the investigations and hearings, the IRS’s response is troubling, irrespective of political affiliations or leanings. As an American taxpayer, do you think you could handle an IRS audit the same way the IRS is responding to Congressional inquiries?

Documentation and Missing Information

The timeliness of providing documentation to Congress has been a point of contention. The investigation started over a year ago, yet some documents still have not been produced. The biggest bombshell hit last week, when the IRS informed Congress it could not provide some of the e-mails from Lois Lerner (the IRS official at the center of the controversy who has pled the 5th Amendment at two different Congressional hearings) due to a computer crash. They noted that six other employees also involved in the investigation experienced computer failures and lost e-mails during the same time period. Despite knowing about these computer issues in February, the IRS didn’t notify Congress until June, but notified the Treasury Department in April.

Everyone has probably encountered computer issues and lost information before. That’s understandable. However, the IRS has strict documentation requirements for taxpayers. You are required to retain your documents for at least three to seven years; sometimes longer. An IRS auditor can disallow a deduction if you don’t have the appropriate documentation.   Imagine telling an IRS agent you can’t produce the requested documents because of a computer crash and you destroyed the backups. Consider how skeptical the agent would be if you knew about it early in the audit process, but waited for months before disclosing it. Do you think the agent would take your word that all is okay and move on?

The IRS is also contending it doesn’t matter that some of the e-mails have been lost, as they cite the thousands of documents they have provided. This is analogous to providing boxes of receipts to substantiate your business expenses, but not providing the ones for your personal vacation you deducted as a travel expense. You can argue with the agent that the mounds of unrelated documents prove everything is legitimate, but it may not be. Furthermore, the agent is under no obligation to simply take your word for it.

The Law v. Common Sense

In a tense exchange between Commissioner Koskinen and South Carolina Congressman Trey Gowdy, the Commissioner stated there was no criminal wrongdoing by anyone at the IRS. Congressman Gowdy, a former federal prosecutor, asked what federal statutes Mr. Koskinen had reviewed to determine no criminal wrongdoing had occurred. The Commissioner responded that he hadn’t reviewed any laws. Instead, he was relying upon common sense that nothing inappropriate occurred.

Try using the common sense argument with the IRS. No Mr. IRS auditor, I don’t know what the law says about reporting that income or deducting those expenses, but relying upon common sense, it must be okay. Certainly the IRS agent will agree with your common sense approach and ignore the tax code.

Attitude

All of the IRS officials’ testimony seems to project an attitude that we’ve done nothing wrong; trust us; now leave us alone. In his recent testimony, Commissioner Koskinen’s demeanor appeared brash, indignant and borderline arrogant when responding to questions. Some of his supporters cheered his behavior, and thought he was standing his ground while being bullied by the Republican interrogators. While no one deserves to be disrespected or berated, the Commissioner showed no sense of remorse for anything and projected an aura of annoyance that he was being questioned.

Again, you should put this in context of an IRS audit. Imagine meeting with an IRS agent and displaying the same type of defiant attitude. Theoretically, IRS personnel should conduct themselves in the same manner no matter how you act or what you say, but do you honestly think that’s true? A basic understanding of human nature tells you that a contentious and condescending attitude will cause the auditor to be more suspect and less lenient in accepting anything that’s questionable.

The IRS Defense

Therefore, the next time you are audited by the IRS, consider employing the IRS defense strategy.

  • You don’t have to worry about missing documents if you inundate them with other information, and if can’t produce the documents, they should just trust you that everything is correct;
  • You don’t have to apply tax law, so long as your common sense tells you it’s correct;
  • You can be brash, indignant and uncooperative because you’ve done nothing wrong, and the IRS is responsible for wasting your time and taxpayers’ money.

On second thought, maybe this isn’t a very good defense and could cost you a lot of time and money in the long run. However, if it works for the IRS why shouldn’t it work for you? Furthermore, if this is how the IRS acts when it’s scrutinized, why should taxpayers be expected to act differently?

The IRS and I Don’t Know

irsThe recent IRS scandal involving targeting of certain conservative groups applying for tax-exempt status is troubling on many levels. The more questions asked and the more information uncovered, the disconcerting it gets.

Aside from the potential abuse of governmental authority or violation of civil liberties, the lack of information, knowledge and candor by the IRS officials testifying before Congress is incredulous. Former acting IRS Commissioner Steven T. Miller could only muster a meek apology for not providing good customer service to the affected groups when he testified. In addition to Mr. Miller, multiple IRS officials have testified before Congress over the past three weeks. When questioned about who was responsible for this additional scrutiny, the same basic response is offered every time, “I don’t know. Without sounding overly critical, their response is lame.

The initial response from the IRS and White House blamed two rogue employees in the Cincinnati, OH Service Center. Doesn’t it make sense you might know the names of the individuals if you say its two people? Even if someone didn’t know their identity at the time, I think you could track them down in three weeks. Additionally, the Treasury Inspector General for Tax Administration (TIGTA) investigated this practice for nearly a year before the report was made public. Why wasn’t the TIGTA able to determine who was involved?

As some of the groups targeted by the IRS have come forth, it is obvious involvement went beyond two low-level employees in Cincinnati. IRS inquiry letters have been produced from multiple locations, signed by various individuals, including Lois Lerner, the head of the IRS Exempt Organizations Division responsible for approving these applications.

These are not low-level employees who are testifying. They are highly paid professionals responsible for the direction and operations of the IRS. It’s not realistic for them to know everything happening at the IRS, but it is their job to find out. Professing ignorance and blaming subordinates is not commensurate with they pay and position.

As someone who interacts with the IRS on a continual basis and has responded to countless IRS inquiries and audits, telling an IRS agent “I don’t know” isn’t sufficient. You may not know the answer at the moment, but you have to find out. When you meet or talk with an agent, you’re supposed to be prepared to answer their inquiries. Justifiably, IRS personnel get frustrated and annoyed if you can’t answer many of their questions and everything is delayed.

The IRS sends you a list of questions or inquiries ahead of time. While Congress may not provide a list of questions in advance, questions like “How did this happen?” or “Who is responsible?” seem rather obvious. To appear before Congress without any ability or intention of answering those questions is mystifying.

As some Members of Congress have already pointed out, the IRS should be held to the same standards of cooperation and responsiveness they expect from the U.S. taxpayers. If “I don’t know” won’t fly with the IRS, “I don’t know” shouldn’t fly for the IRS.

Targeted by the IRS

irsIf you have ever been audited by the Internal Revenue Service (IRS), it’s natural to feel like you have been singled out. It’s like getting pulled over for speeding. Regardless of your actions, you often feel like the authorities should be spending their time pursuing more important criminals. Despite your feelings, rarely are you being targeted by the IRS.

Shockingly, the IRS admitted last week that they had unfairly and inappropriately targeted certain nonprofit organizations because of their beliefs and affiliations. For over two years, IRS employees signaled out conservative groups with names or verbiage including “Tea Party,” “Patriot” and “Obamacare” for additional scrutiny. The IRS admitted this in advance of the pending release of a report by the Treasury Inspector General for Tax Administration (TIGTA) criticizing their behavior.

The IRS claimed the targets were nonpolitical and initiated by low-level employees in the Cincinnati, OH Service Center. The additional scrutiny may not have been ordered by a political appointee, but it seems obvious the additional attention and inquiries were politically motivated. Over the past few years “Tea Party” has as much a political connotation as Democrat or Republican. Additionally, it doesn’t appear any liberal-leaning groups received the same scrutiny. As a result, it seems hard to believe the IRS actions were not politically motivated.

It also appears the knowledge of this behavior went much higher than a few low-level staffers churning through documents in Cincinnati. Lois Lerner, the head of the IRS Exempt Organizations Division, found out about it in June 2011, and despite her instructions to change the review guidelines, the additional inquiries continued throughout 2012. In May 2012, Douglas Shulman, the IRS Commissioner at the time, and Steven T. Miller, his deputy and the current acting Commissioner, also learned of these targeted reviews. Both of these men failed to notify Congress, despite questions from several Senators and Representatives regarding the IRS scrutiny of these conservative groups.

No matter your political affiliation or beliefs, this acknowledgement by the IRS should be of grave concern for all Americans. It’s an extremely precarious position when government officials at any level, abuse their authority for political purposes. Those actions are characteristic of dictators and oppressive regimes; not what’s expected in a free, democratic republic.

You may not have much regard for the ideas and people affiliated with the Tea Party movement, but that should not matter. If the IRS has the ability to target them, they can also come after you.

The IRS claims no exemption was ultimately withheld from any applicant. This reassurance is also subtle claim of exoneration for their actions. The IRS is essentially trying to assert “No harm, no foul.” Even though no exemption was denied, it doesn’t mean these organizations didn’t suffer injury. Given the complexity of the rules, taxpayers often hire professional advisors. These organizations may have incurred substantial fees complying with the additional IRS inquiries, not to mention the delay in being able to pursue their stated mission.

The abuse seems limited to a certain group of employees handling a specific group of taxpayers and is not widespread throughout the IRS. If you receive an IRS notice, it’s probably not politically motivated. However, these actions, albeit limited, set a very dangerous precedent and deserve exceptional scrutiny by our leaders and the public at large.

No one likes to be examined or questioned by the IRS, but it’s part of dealing with a voluntary tax system. However, no one should ever be targeted for political purposes. Dealing with the IRS can be annoying, but being targeted for your political beliefs or affiliations is absolutely wrong, and should be criminal.

Paying Sales Taxes

online shoppingBypassing the Senate Finance Committee, the Senate passed a bill on Tuesday which would allow states to collect sales taxes from the certain out-of-state retailers.  Since the bill hasn’t passed the House, it’s not law yet, and although the bill passed by a 69-27 vote in the Senate, the future in the House is much less certain.

So what does this mean for you if this bill eventually becomes law?  In theory… nothing.  In reality… you’ll be paying more taxes.

Here are a few relevant facts about sales and use taxes.

  • 45 States and the District of Columbia collect sales taxes.
  • Although referred to as a sales tax, the tax is technically a tax on the use of purchased property and services.  That’s correct… states charge you a tax for the “right” to use something you bought.
  • Since states don’t trust you to pay the correct or full amount of tax, they impose an obligation upon the seller to collect the tax at the time of sale.  Since this is the mechanism for most people paying the tax, it is primarily known as a sales tax.
  • States would like to impose the collection requirement upon every entity selling merchandise to a resident.  However, a 1992 U.S. Supreme Court case restricted a state’s right to impose a collection requirement to those sellers who had a physical presence in the state.

The original clashes over sales tax collection were prior to the advent of the internet and primarily involved mail order sales companies (i.e., those companies that constantly mail you catalogs).  With the boom of the internet and online shopping, the issues have become more nuanced and pronounced, as the battles involve state tax authorities, local retailers (i.e., brick and mortar businesses), online merchants, and governments needing more revenues to balance their books.

States estimate the unpaid tax exceeds $20 billion annually.  Understandably, most state and local politicians are pushing hard to get this legislation passed.   Brick and mortar businesses see it as leveling the playing field.  By not collecting sales taxes, the total purchase price of an item is less expensive, thereby providing an advantage to retailers who don’t collect sales taxes.

Having lived in Vermont for many years, I know the advantage to retailers not collecting sales taxes.  Vermont has a sales tax, and New Hampshire doesn’t.  New Hampshire retailers have a distinct advantage.  Although they may not advertise the absence of sales taxes, people from all over Vermont travel to New Hampshire to make purchases with the sole intent of avoiding the sales tax.

If you buy something out-of-state without paying a sales tax, you’re supposed to remit the required tax to your state tax authorities.  Whether it’s intentional, an oversight or a misunderstanding of the law, few people ever self-assess the taxes owed on their out-of-state purchases.   In all likelihood, if the tax is not collected at the time of sale, it will never be paid.

If the tax is paid by the customer not the seller, why such resistance to collecting the tax?  For most businesses, it’s the cost of compliance.  Sales taxes are assessed and collected at the state level, which means there are 46 different sets of rules.  For instance, clothing may be taxable in one state, but not in another.  Many states also allow city, county and municipal governments to assess their own tax.  As a result, a business would need to keep up with constantly changing rules in each jurisdiction, collect the tax and potentially file hundreds of tax returns.  The cost may easily be absorbed by a billion-dollar national retailer, but could be way too much for a local business selling a few items a week over the internet.

The new legislation changes the rules of taxation.  It’s intended to supersede the U.S. Supreme Court case and eliminate the physical presence requirement.  Essentially, any business selling more than $1 million to out-of-state customers would be required to collect and remit the tax to the appropriate tax authority.

Unless you live in Alaska, Delaware, Montana, New Hampshire or Oregon (states without a sales tax), the legislation is good news and bad news.  The good news is that your state will likely raise some additional revenue by collecting sales tax on purchased items being shipped into your state.  The bad news is you’ll likely be paying some of that tax.  If you’re a business owner looking to create an online sales presence, be prepared.   If you cross the sales threshold, you’ll be required to collect the tax on any sale in the U.S. and be ready to pay large fees to the software providers and professionals you’ll need to help stay in compliance.

The bottom line on this legislation is this

  • You’re ecstatic if you’re a politician looking to raise revenues or if you’re a brick-and-mortar business feeling like your online competitors have an unfair advantage.
  • If you’re a small business whose tax compliance burdens have just multiplied exponentially, you’re probably concerned with how much it’s going to cost you to comply with this mandate.
  • As an average citizen, you’re probably torn between being glad your state and local government will have more money and being unhappy that some of that money is coming from you.

Where Did The Money Come From?

paying taxesThe Congressional Budget Office (CBO) released their preliminary estimate of the monthly budget deficit for January.  The CBO estimated the government overspent by a measly $2 billion in January 2013. This compares to a monthly deficit of $27 billion in January 2012.

Hold on before you think we’re making much progress towards reducing the $1 trillion plus deficits of the past four years.  This was only one month out of twelve.  The CBO estimates the cumulative deficit for the past four months is $295 billion (the U.S. fiscal year starts on October 1), and the Fiscal 2013 total deficit is projected to be $850 billion.

The CBO reported a $36 billion uptick in revenues collected in January 2013 over those collected in January 2012.  Some politicians and pundits are already citing these numbers as being indicative of the success of the increased taxes, which were part of the fiscal cliff deal reached on January 1, 2013. It’s a stretch to make this claim, but that rarely matters in the world of politics.

The CBO estimated the government collected $9 billion more in Social Security taxes.  These additional taxes arose from the additional Social Security taxes collected after January 1, 2013.  The 2% temporary tax holiday was scheduled to expire December 31, 2012, and further extension was never a serious consideration.  Social Security is already headed towards insolvency, and continuing a reduced rate would have only exacerbated the problem.  It’s a stretch, but since Congress could have extended the lower rate, you could make the argument these additional revenues were part of the fiscal cliff deal.

Although the remaining additional $27 billion may have been collected in 2013, most of it is not attributable to the fiscal cliff deal.  The increased tax rates only affected high income individuals on income earned after January 1, 2013.  Most super wealthy people pay their taxes through estimates, not withholdings, and the first quarterly payment is not due until April 15th.  Thus, the first real increase in revenue from the higher 2013 taxes won’t be collected by the Treasury until April 2013.

So where did the money come from?  In all likelihood, most of it was additional 2012 taxes which were paid in 2013.  Quarterly estimated taxes for individuals are due April 15th, June 15th, September 15th and January 15th of the following year.  Based on my experience, most wealthy people pay their fourth quarter installment in January of the following year.  Odds are that most of the additional $27 billion in tax revenues actually relates to taxes paid for 2012, not the increased taxes due for 2013.  It’s a reasonable conclusion, since many high income taxpayers accelerated income into 2012 to avoid the anticipated higher 2013 tax rates.

The additional revenues may be good for the country and the economy.  However, I think it’s a little too early to declare success and victory from the increased tax rates.  I believe the verdict is still out, but to make a fair assessment, you have to understand where the money comes from.

Avoiding the Cliff but what about the Abyss?

US Capitol-WinterCongress and President Obama finally reached an agreement to solve the “fiscal cliff.”  The compromise, the American Taxpayer Relief Act of 2012, was reached in the early morning hours of January 1, 2013.

Many of our illustrious leaders in Washington tried to sound reasonable by saying no one got what they wanted but it was the best deal they could reach.   Essentially, they were saying you may not be happy, but be satisfied.

It’s a sad day if this was the best they could do.  I have two primary contentions with the deal they reached.  First… the timing and process of the solution, and secondly, the absence of any meaningful changes in federal spending.

The process was extremely political, and the American electorate should expect more… no demand more… of our leaders.  The fiscal cliff was primarily created by two pieces of legislation.  In December 2010, Congress temporarily extended the “Bush tax cuts” until December 31, 2012.  Thus, they have known for two years tax rates would increase unless they passed legislation to extend or change the rates.  The other part of the equation was the spending cut provisions agreed to in August 2011 to settle an impasse on increasing the debt limit.  Thus, Congress and President Obama have known for 18-24 months the fiscal cliff was coming but didn’t resolve it until after the deadline passed.

I have many smart and successful clients.  It has been exceptionally frustrating and difficult for them to make business and financial decisions without knowing what the future tax rates and rules will be.  Even on December 31st, no one knew what the rules would be the next day.  In my opinion, it was an absolute lack of leadership and prudence on behalf of both branches of government, both houses of Congress and both political parties.

Although the process was frustrating, the most upsetting part of the compromise was the complete absence of spending cuts.  The tax increases are projected to raise over $600 billion of additional revenue over the next 10 years, and all spending cuts are postponed, at least for another two months.

Fiscal Cliff statementPresident Obama campaigned on a balanced approach to deficit reduction.  How can you consider $620 billion of additional revenue and no spending cuts a balanced approach?  Our political leaders have promised the spending cuts will come soon, but that’s what they promised when they passed the law in August 2011.  It was easy to promise future cuts, but when it came time to actually implement a spending reduction, they postponed them once again.

Don’t be deceived into thinking the new tax revenues will make any significant dent in our debt or deficit.  $620 billion is a lot of money, but it’s over the next 10 years.  The U.S. Government is currently overspending by $1.3 trillion each year.  The additional revenues will help, but we’ll still rack up an additional $10+ trillion in debt over the next decade, based on current spending.  The exclusion of spending cuts in this deal was another missed opportunity.  Spending cuts are never easy or popular, but I’ll offer two guarantees; 1) spending cuts will come and 2) the longer we wait, the more painful they will be.

There may have been some political winners from the whole fiscal cliff debacle, but I believe we, the American public, were the real losers.  The deal cut may have averted the fiscal cliff, but the absence of any real spending cuts pushes us closer to a financial abyss.

Arithmetic

A few weeks ago, former President Clinton scored political points while criticizing the economic plan of Gov. Mitt Romney.  He touted the Federal budget surpluses during the final years of his presidency.  He went on to say he was able to balance the budget by simple arithmetic.  He also invoked the simple arithmetic principle to argue that Gov. Romney’s plan didn’t add up and would result in a large tax increase on middle class Americans.

The truth is that neither Gov. Romney nor President Obama’s plans pass the arithmetic test.  A detailed analysis of their plans is far beyond the scope if this article, so I’ll briefly summarize.

The highlights of Gov. Romney’s plan:

  • Cut tax rates by 20% for individuals and lower the corporate rate to 25%
  • Have preferential rates for interest, dividends and capital gains
  • Eliminate loopholes and limit certain deductions for higher income taxpayers

The criticism of Romney’s arithmetic is there aren’t enough loopholes to close which will offset the reduced revenue from the lower tax rates.  Deductions would also have to be limited for lower income taxpayers to make the numbers work.

The main point of President Obama’s plan:

  • Increase the tax rates for people making over $250,000
  • Eliminate the preferential rate for dividends and increase the capital gains rate

These changes are estimated to raise an additional $70 billion in annual tax revenues.

The arithmetic doesn’t work for either of these plans to balance the budget.  For the 2012 budget year, the federal government overspent by $1.1 trillion, and the total national debt has exceeded $16 trillion.  Since the government spends approximately $3.5 trillion each year, it’s a monumental task to close a $1.1 trillion deficit.

The U.S. Treasury collects approximately $2.2 trillion in income tax revenue each year.  To balance the budget under the Romney plan, all current deductions would need to be cut in half to raise another $1 trillion.  Deductions would have to be limited even more if the tax rates are reduced.  The Obama plan is no better.  Even if his tax changes were implemented, he’s about $1 trillion short to balance the budget.  By simple arithmetic, the numbers don’t add up… for Romney or Obama.

We can’t tax our way out of the hole we are in.  We must cut spending in order to balance the budget.  This is not Washington semantics for cuts by reducing the rate of growth or cutting the amount you hoped to spend.  It means actually spending less than the $3.5 trillion we spent last year.

On this front, I give the edge to Gov. Romney.  You or I may not agree with his proposals or priorities, but at least he’s willing to talk about cutting federal expenditures.   He was criticized and ridiculed after the first Presidential debate for trying to kill Big Bird, because he advocated ending the federal subsidy to the Public Broadcasting Service.  He has also been willing to tackle the “third rail” of politics – Medicare and Social Security.

In contrast, I can’t think of one significant cut in federal spending proposed by President Obama.  Counting money which would have been spent for the war in Iraq but isn’t going to be spent doesn’t count in my book.  It’s like saying you cut your spending by $5,000 for the vacation you didn’t take.  Furthermore, the budget deficit for 2013 will still be over $1 trillion without any spending for Iraq.  Instead of talking about spending cuts, the President is pushing for more “investments” (aka spending) for teachers and infrastructure.  These may be good things, but it doesn’t address how to balance the budget, and taxing the rich more isn’t going to close the gap.

Politicians are very good at using sound bites and obscuring the truth.  President Clinton was right… balancing the budget is simply a matter of arithmetic.  In this case, both candidates (and most members of Congress) probably need a remedial math class.

Should I Refinance My Mortgage?

Mortgage interest rates are at historically low rates.  Consequently, you may be wondering if it makes sense to refinance your mortgage.  Although there may be a variety of reasons for refinancing your mortgage, there are probably three primary reasons for you to refinance your mortgage.

  1. Lower your payments by borrowing money at a lower interest rate
  2. Convert your adjustable rate mortgage to a fixed rate
  3. Access some of the equity in your home (this isn’t as common or easy as it was a few years ago)

Since there are costs associated with refinancing a mortgage, the decision to refinance may not be a slam-dunk.  Essentially, you are paying money today, to save more money later.  As an example, assume that refinancing reduces your monthly payments by $50 per month.  If you have 25 years remaining on your mortgage, you will save $15,000 over the life to the loan.  If you assume you will pay $5,000 in closing costs to refinance, you save $10,000… over the next 25 years.

There are many different mortgage calculators available which will help you calculate your savings.  You can click here for one, or search the internet.  Keep in mind, internet calculators are only estimates, and the computations from your lender may be different.

Here are a few additional things to consider in your decision to refinance.

  • The time value of money – In my simple example above, you save $15,000 over the next 25 years, but you have to pay $5,000 up front.  Not only does it take you over 8 years to recoup your $5,000, you also lost the opportunity to invest that money and earn a rate of return (hopefully).  With interest rates on liquid assets near zero, the time value consideration may be nil.
  • Income taxes – The only refinance costs you can deduct are points paid to reduce the interest rate.  Unlike points you pay when you initially purchase your home, points paid on a refinanced mortgage must be amortized over the life of the loan (25 years in our example).  With a lower interest rate, your current mortgage interest deduction will also decrease, which could cause your current tax liability to increase slightly.  Although you’ll come out ahead by paying less interest over the life of the loan, your total benefit might be reduced by a smaller mortgage interest deduction.
  • Length of ownership – Since it’s likely to take you a couple of years of reduced payments to recoup the closing costs, you need to consider how long you plan to stay in your home.  If you expect to move in the next few years, the monthly savings may not be sufficient recoup your out-of-pocket costs for the refinance.
  • The loan process – The mortgage financing industry has changed dramatically.  It’s not easy for anyone to get a mortgage in today’s market.  I’ve had clients who experienced difficulties and delays in getting their refinancing approved, even though they could have easily written a check to pay off their existing mortgage.  The aggravation may be worth it, but expect the approval to be a hassle.
  • Market value – The fair market value of your home may be one of the biggest stumbling blocks to a refinance.  Market value is what prevented many people with subprime and adjustable rate mortgages from being able to refinance.  If you don’t have sufficient equity in your home, you won’t be able to refinance, even if you’re making your current payments, and the refinance will make it easier for you to continue making your payments.

Many advisors will tell you that the interest rate should at least 0.75-1.00% lower than your current rate for a refinance to be economically feasible, but depending upon your situation and long-term goals, a smaller rate differential might still be beneficial.

My advice is to run the calculation with an online calculator and see if it makes sense to you.  If the closing costs can be recouped within the next 5-7 years, and you don’t plan to sell before then, talk to a mortgage broker and get their advice.  A reputable broker will be able to give you a more accurate estimate of what it’s going to cost, the savings you can expect, and the process involved.

Refinancing your mortgage can save you money.  However, there are costs involved, and you want to make sure the benefits exceed the cost.

The Supreme Court Rules on Obamacare

In a 5-4 decision, the U.S. Supreme Court upheld the constitutionality of Obamacare (the Patient Protection and Affordable Care Act).  Lawyers, politicians, journalists and citizens are scouring the judicial rulings to understand its implications.  The law is exceptionally complex, so it will take time fully comprehend the ramifications of the ruling.

Here are a couple of the most significant elements of the Court’s ruling.

  • The penalty for failing to purchase health insurance is equivalent to a tax, which Congress has the authority to assess.  Thus, the individual mandate is Constitutional.
  • Congress does not have the power under the Commerce Clause to force you to purchase insurance.
  • Congress can require states to increase their Medicaid roles and provide financial incentives to do so, but it can’t withhold all Medicaid funding if it doesn’t.  It seems confusing and contradictory and will likely lead to further litigation.

Here are a couple of quick thoughts and observations.

  • The logic of the Court regarding the individual mandate was interesting.  Apparently, Congress can’t force you to purchase something, but they can tax or penalize you if you don’t.
  • The Medicaid issue is one of the most unclear parts of the ruling.  Unlike the individual mandate, it seems Congress can require the states to increase their Medicaid roles, but can’t penalize them if they don’t.  The issue hinges on state sovereignty, and it will be interesting to see how this plays out, especially since several states have already passed legislation opting out of Obamacare or the individual mandate.
  • The split ruling was no surprise, but it was a shock that Chief Justice John Roberts upheld the constitutionality and Justice Anthony Kennedy did not.  The unpredictability of judges and juries is what’s often referred to as the hazards of litigation.  No matter how strong you think your case is, a judge or jury may see it differently.

Today’s ruling by the Supreme Court isn’t going to end the discussions or fights over Obamacare.  There is still a lot more to come.

I welcome your comments and thoughts regarding the Supreme Court decision.  Click here if you would like to take a quick poll on whether you agree or disagree.

Social Security Groundhog Day

You may have seen the movie “Groundhog Day” which was released in 1993.  In the movie, Bill Murray plays weatherman Phil Connors who was sent to Punxsutawney , PA to cover Groundhog Day, only to find himself repeating the same day over and over again.  No matter what he does, he can’t seem to escape Groundhog Day.

The annual report from the Trustees of the Social Security Administration seems like its own version of Groundhog Day.  Every report seems to be a repeat of the prior one.  The reports warn of the coming insolvency of Social Security and Medicare, but it’s projected to be far enough into the future, that no one seems to worry too much.

The 2012 report estimates the Social Security system will become insolvent in 2033, three years earlier than what was predicted a year ago.  The fiscal status of Social Security has been known for years, yet Congress and President Obama reduced the employee’s contribution rate to the Social Security system from 6.2% to 4.2% for 2011 and 2012.  The rate reduction was intended to stimulate the economy, and they argued it would have no long-term impact on the solvency of Social Security.  Anyone with a rudimentary understanding of economics and finance could tell you paying less taxes into a system that is already paying out more than it receives, will have a negative effect.  Only Washington politicians are surprised by the updated figures, or at least act surprised.

The staunch defenders of this ridiculous argument also contend the system is solvent for more than the next two decades.  They point to the trillions of dollars in the Social Security Trust Fund as the saving grace to the system.  You can read this article to learn the fallacy of this belief.

There are a couple of other facts in the report which might cause concern.  In 2011, the government collected $691 billion of Social Security Taxes and paid out $736 billion in benefits.  It appears there was a $45 billion shortage in 2011, but there wasn’t.   The Social Security Administration collected $111 billion of interest on its IOU’s from the US government, so it reported a surplus of $66 billion, rather than a deficit.  So where did the $111 billion of interest come from?  It’s part of the $1 trillion of additional debt the U.S. Treasury issued over the past year.

It’s easy to get lost and confused by the Federal government’s accounting methods, which may be intentionally arcane.  So here is the bottom line… call it what you want, but the U.S. government borrowed an additional $45 billion to pay out Social Security benefits in 2011.  If you read the report and analyze the projections, you’ll see this number is only going to grow exponentially over the next two decades.

What is it going to take to change the situation?  I really don’t know if we’ll ever realize what’s happening as long as the government keeps sending out checks.  But what happens if they stop?  It’s unlikely to occur, at least for a long time, but what would have happened if the U.S. Treasury wasn’t able to borrow the additional $45 billion? Since there are no real assets in the Social Security Trust Fund, $45 billion in checks would not have been sent.

So in essence, it’s like we’re stuck in our own Social Security Groundhog Day, but there is a difference between us and the character Phil Connors; Phil Connors recognized he was stuck and tried to change it.  Sadly, most of us don’t believe we’re living our very own Groundhog Day.