I was reading that 40% of residents in the Washington D.C. area plan on traveling for the holidays, not surprising given the presence of the federal government, and 90% of the 2.3 million people in the area plan on leaving by car. AAA’s annual survey reported these results earlier this week and given how many cars are in the area (the D.C. beltway is always a mess), It’s guaranteed to be some massive gridlock as people bolt.

We’re going to be staying put with family visiting us. We swap out travel time with cooking time but I think that’s a fair trade. I enjoy cooking more than I enjoy sitting in traffic or taking my shoes off at the airport so it’s all good here.

How do you plan on traveling? By car, train, boat, or airplane? And far will you be traveling? I’m curious who will be traveling the farthest or the most this year!

(Photo: Andreas)

As we near the end of 2012, the fiscal cliff is becoming bigger and bigger news. If nothing’s done, taxes will go up for everyone and we’ll have another fine example of politicians being politicians. Remember, this was something completely man-made. They did this in the debt ceiling debate because they figured that something this drastic would never actually happen. It would be severe enough to spur politicians to agreement and it appears, as the days pass, that they underestimated their ability to recognize great pain.

Unfortunately for everyone else, there really isn’t much that we can do about it. When you combine the uncertainty of a deal getting done and the certainty of tax rates going up, I’ve been mostly on the sidelines in terms of changing anything specific. I have sold stock holdings I’ve had for several years but the logic behind them has been mostly housekeeping, not taxes. A few of those holdings I sold because I wanted to capture those gains (and harvest as many losses as I can) since taxes on long term capital gains will almost certainly go up, deal or not.

Other than that, I haven’t done much of anything else. Have you done anything because of the fiscal cliff?

(Photo: aidanmorgan)

Here’s an interesting question that popped up in my head as a result of Warren Buffett’s op-ed last week – should the bar for “high income” be at $250,000, $500,000, or some higher value? Should the bar be at a dollar amount relative to median income or should it be a calculated based on how many taxpayers it would capture?

In 2008, 4.3 million tax returns had an AGI above $200,000. That represents 3% of the total returns that year. Median income for 2008 was $52,029, or approximately one fourth of that figure.

My feeling is that we should probably tie our tax returns more to the median income, rather than calculating approximately how many people it will affect. I think $250,000 and $500,000 are simply nice round numbers people like to use but the reality is that very few people make over $200,000. 3%. Three people out of a hundred earned more than $200,000 in 2008 (granted, I know things can be deferred and there are other games to play but let’s keep it simple).

This makes me wonder… does it matter? There will be so few people, percentage-wise, that are affected if the bar were set at $250,000 compared to $500,000 that I hope this isn’t a sticking point!

What do you think? Where do you think the bar should be?

Warren Buffett wrote an op-ed piece in the New York Times on Sunday in which he argued that there should be a minimum tax for the wealthy. His argument for a minimum tax hinged on a variety of reasons but the first one stuck out for me (the wealth gap reason is another powerful one) – most people don’t decide whether or not to invest in something based on the tax rate. An investment is either good or it’s bad. How it is taxed, or how much of it is taxed, only comes into play at the margins. I’m by no means wealthy but when I approach an investment the first thought isn’t – do I want to do this because my long term capital gains rate may go up from 15% to 20% next year? Do I want to do this because it’s taxed at ordinary income tax rates instead of long term capital gains rates? It’s probably not what you do either. Taxes play a role but it’s often to help determine what I invest in, not whether or not I invest.

I pick stocks with qualified dividends because I know those dividends will be taxed at 15% instead of my marginal rate, which is much higher. If long term capital gains rates disappeared tomorrow, I’d still invest in dividend stocks. For some of my savings, I’d rather take a yield of 3-4% of dividends taxed at 25% than have them sit in a 0.9% savings account taxed at 25%. I know there is greater risk in stocks, over savings accounts, but there’s also greater gains. The lower rate does impact how much I invest but that’s really at the margins. I suspect most wealthy people aren’t really spending that much time playing with dividend stocks yielding a few percent.

What is Buffett proposing? A minimum tax on income above a certain amount – 30% of taxable income between $1 – $10 million and 35% on amounts above that. No need to muss or fuss about deductions and whatnot, just a simple rule that all income above $1 million is taxed at a certain amount. He’d also like to extend the Bush tax cuts for everyone making under $500,000 (up from President Obama’s line at $250,000). I like the simplicity of the rule and I think the goal is reasonable – try to bring in revenues of 18.5% of GDP while spending 21% of GDP (I’m not a government budget expert so I don’t know how reasonable those % figures are).

Finally, I really enjoy reading everything Buffett writes. I enjoy his humor and how simple he makes things when explaining it. If you aren’t a regular reader of his shareholder letters, do try reading a few.

What do you think of this plan?

Now that we’re past election season and all the fun Your Takes associated with that, I wanted to revisit an NPR piece on six policies economists love but politicians hate. Several of the six policies have made appearances on a Your Take but I wanted to jump to the juicy one next – should we be legalizing marijuana? Medicinal marijuana is already legal (or effectively decriminalized) in nineteen states. As it stands right now, the federal government has cannabis as a Schedule I drug – the same classification as heroin and LSD.

Here’s the policy that economists would love:

Six: Legalize marijuana. Stop spending so much trying to put pot users and dealers in jail — it costs a lot of money to catch them, prosecute them, and then put them up in jail. Criminalizing drugs also drives drug prices up, making gang leaders rich.

The argument is that marijuana is not as dangerous as other drugs, certainly not as dangerous as heroin and LSD. The money we currently spend on drug law enforcement could be used for other purposes. We would be able to generate more tax revenue if we taxed the sale of marijuana and we’d also be able to make it safer by regulating it, as we do with nicotine. Lastly, with it being legal, it would be cheaper and it would take all the criminality out of the economics. Cheaper marijuana means lower profits for dealers and less motivation for the crimes that are associated with it.

While nothing is ever as simple as that, I think legalizing it (especially when cigarettes are legal) is a sensible idea.

What do you think?

(Photo: caveman_02223)

Every single morning, I wake up and I look at a handful of sites that do the hard work of finding useful news and information on the web. Years ago, I used to load up CNN Money and sites like that, scan by RSS aggregator for stuff, but I’ve always left feeling I got a big dose of “this is what you should care about” rather than what I actually cared about. I didn’t get interesting, I got information for mass consumption.

So I started looking for sites that curated content. We don’t really do that much here, though I occasionally share interesting stories in the Friday roundups, because I don’t think I can devote as much time to finding the really good stuff. For that, I rely on others. I thought I’d share a few of my favorite sites and see if you had any truly epic suggestions of others I should look at.

(click here to continue reading…)

With the election next Tuesday, it’s natural that the Your Take the Friday beforehand would be this one – will you be voting? Why or why not?

I’ll be voting. Our polling place is actually just a ten minute walk from our house so I’ll wander over sometime mid-morning and cast my ballot. There are some very interesting referendum questions here in Maryland. There’s one that would expand gaming, offer in-state tuition to undocumented immigrants who pay their taxes, and same sex marriage. With the exception of marijuana, those three are probably the three biggest issues (or at least in the top five or ten) in any state and we have three at once. It’s been interesting seeing the blitz of advertising regarding all three but the polls will ultimately decide what happens here in Maryland.

I’d ask you who you’re voting for but I think that’s best left for Tuesday.

My friend Rob asked me an interesting question the other day – “Say you underpaid your taxes one year, but you were one of those nutjobs that sends money directly to the office to reduce the national debt. if you sent in the same or a greater amount than you owed, could you claim that you had paid the government in full?”

With the public debt at around $16 trillion (and by around I mean $66 billion over $16 trillion at the time of this writing), you might be tempted to chip in a few bucks by mailing a check to the Bureau of the Public Debt. My answer to Rob’s question is that the nutjob would be out of luck. When you pay down public debt, you mail a check to the Bureau of Public Debt, a bureau of the Department of the Treasury, for the express purpose of paying down the debt. When you pay down the debt, the money actually goes into a fund and is considered a gift. When you mail in your tax payment, it’s made out to the Department of the Treasury and you’re paying down your personal debt/obligation.

I asked Kay Bell, of Don’t Mess with Taxes, and she confirmed that it was a gift and it won’t offset your tax liability. That said, you could (and should) claim it as a donation tax deduction which would lower your liability if you itemize deductions.

What do you think?