How the Capital Gains Tax May Affect Retirees

How do you support yourself after retirement?
This is one of those questions that many young people have little interest in, choosing to cross that bridge when necessary. But if you are lucky and don’t keel over at your desk like Tim Russett, that bridge must be crossed.

So how does it work?

Yesterday, I had my first in-depth conversation with a financial planner and it was illuminating. Essentially, you live off of your pension (if you have one), your social security checks, gains from your investments, and the sale of your assets. In a best case scenario, if you can live off of pension, social security and investment gains, you can leave your assets intact. If you are forced to sell off assets, you will obviously have less to invest.

Of course taxes come into play and gains from your investments are subject to a capital gains tax.

So what is a capital gains tax?

The Internal Revenue Service explains: “Almost everything you own and use for personal purposes, pleasure or investment is a capital asset." When you sell an asset for a profit, that profit margin is your capital gain, and the IRS taxes you on it. Capital gains taxes vary depending on the income level of the tax filer and the length of the investment, with separate tax rates for short-term vs. long-term capital gains.

Presently, the long-term capital gains tax rate for most middle income people is 15%, having been reduced from 20% by President Bush in May of 2003. However, President Bush’s capital gains tax cut expires in 2010.

John McCain wants to make the Bush reduction to 15% permanent. Barrack Obama wants to increase the rate to at least 20% and possible as high as 28%.

So if you are a retiree and part of your income is from investments, instead of the Government taking 15% of each dollar of gain, in an Obama administration they will take 20% to 28% of each dollar of gain.

Let’s look at an example for a typical retiree:

Social Security = 12,540
Pension = 21,000
Investment Gains = 20,000 taxed at 15% = 17,000

Total Income: $50,540

If Obama is elected and he raises the capitals gains tax to 28%, total income for the retiree would drop: (20,000 taxed at 28% = 14,400).

Total Income: $47,940

Who can use that $2,600 more, the retiree or the federal government?

A different perspective on Iraq

Much of the dialogue about the Iraq War centers on the past. Politicians love to reformat the arguments to favor their past actions.

Did Iraq have WMDs? Was it wise to invade Iraq? Was al Qaida in Iraq before the invasion? Was it wise to support the “surge”?

Obama repeatedly states that he did not support the Iraq invasion and John McCain did, and John McCain repeatedly states that he supported the “surge” and Barrack Obama did not.

The facts are that of a total of 100 Senators, 48 Republicans and 29 Democrats supported the Authorization for Use of Military Force Against Iraq Resolution of 2002. 1 Republican, 21 Democrats, and 1 Independent voted against. You may be as surprised as I was to learn that Barrack Obama had no part in this vote because he was not elected to the Senate until November 2004. He did come out in opposition to the war as early as October 2, 2002, when he gave a speech against the war at an anti-war rally in Chicago. However, since he was not a U.S. Senator at the time, he did not face the high-stakes choice which confronted fellow Democratic Presidential Primary candidates Hillary Clinton, Joseph Biden, Chris Dodd, and former Senator John Edwards, who all voted in October 2002 to give President Bush power to wage war in Iraq. In fact, Obama is quoted the day before the 2004 Democratic National Committee convention as saying: "On Iraq, on paper, there's not as much difference, I think, between the Bush administration and a John Kerry administration as there would have been a year ago. There's not that much difference between my position and George Bush's position at this stage. The difference, in my mind, is who's in a position to execute."

In any case, selection of the next president should really center on the present and future and the decisions the next president will probably be confronted with during his term in office.

McCain’s views were stated clearly in a March 31, 2007 interview by CNN's Wolf Blitzer while the Senator was in Iraq. McCain said, "Failure is catastrophe. Failure is genocide. Failure means we come back. Failure means they follow us home."

One day later, in a telephone interview with Sen. Obama who was in the U.S., Blitzer asked Obama "What if he's right? What if he's right, and what you're proposing and a lot of Democrats are proposing results in genocide in Iraq?", to which Obama responded:

"Well, look, what you have right now is chaos in Iraq. After having spent hundreds of billions of dollars, after seeing close to 3,200 lives lost, what you now see is chaos. And there's no end in sight."

But today we know there is not chaos and there is an end in sight although there is also no question that al Qaida, though severely weakened, is present in Iraq.

So the question remains, what happens if we withdraw prematurely? Some compare withdrawal from Iraq with withdrawal from Vietnam but this is a flawed comparison. The Vietcong did not follow us across the ocean. Al Qaida on the other hand, already paid us two visits and if we allow them to acquire a comfortable base in Iraq, we can be sure that more visits will follow. At this stage of the war on terror, would it not be a tragedy for the U.S., after so many lives have been lost in Iraq, for the next President to conclude that he would need to remove the next Iraqi regime?

Lessons Learned

I am still reading Doug Feith’s book “War & Decision”, about the lead-up to and conduct of the Iraq War. In it, he mentions some lessons learned that I think can also be helpful in everyday business affairs. Here are a few of his thoughts that I have heavily paraphrased:

Don’t pretend to know more than you know. Don’t be categorical when you should be tentative.

When making decisions, seek out important information, even when it is hard to obtain.

Don’t scorn information from outside sources. Don’t assume that the only reliable information comes from inside your organization.

Don’t be wedded to preconceptions. Maintain a scholarly or scientific frame of mind. Don’t be an ideologue to whom facts don’t matter.

Be honorable about organizational secrets. Don’t leak information you receive because of your position.

Be professional. Your organization’s president has earned the right to make policy and to expect honest support. You can disagree but you still need to support those policies. If you find that you can’t, find another job.

Easier to say than to do?

Good Fellow Vladimir Putin

What do you know, Russian Prime Minister Putin Is one of the Good Fellows.

And when he talks, investors listen. Some also head for the door.

Speaking at an industry conference this week, Mr. Putin, the former Russian president and now prime minister, spoke five sentences critical of a Russian steel company, Mechel, and its billionaire chief executive, Igor Zyuzin.

In a sign of Mr. Putin’s enduring power, the criticism cost shareholders about $1.2 billion a sentence.

Such is the power of Mr. Putin’s words — even after “stepping down” to prime minister in May — that shares in Mechel, a coal mining and steel company, plunged almost 38 percent on the New York Stock Exchange after Mr. Putin complained at a conference in Nizhny Novogorod, southeast of Moscow, that the company was charging domestic customers more than its foreign ones.

The comments wiped out, at least for a day, about $6 billion in shareholder value.

Mr. Putin’s $6 billion speech began simply enough.

“We have a respected company, Mechel,” Mr. Putin said in introducing his subject.

“By the way, we invited the owner and director of the company, Igor Vladimirovich Zyuzin, to today’s meeting, but he suddenly got sick. Meanwhile, it is known that in the first quarter this year the company exported raw materials abroad at half the domestic, and world, price. And what about the margin of tax for the government?”

He added: “Of course, sickness is sickness, but I think Igor Vladimirovich should get better as quick as possible; otherwise we’ll have to send him a doctor to clear up all these problems.”

Igor must be pleased as hell to be on a first name basis with Vladimir.

A National Healthcare System

Many health analysts say that Barack Obama's healthcare program would bring the U.S. dangerously close to Canada's healthcare system. Here are some facts to consider:

1. 70.3% of Canada's system is funded by the government, the remainder by the private sector.
   
2. One of the major complaints about the Canadian system is waiting times, whether for a specialist, major elective surgery, or specialized treatments.
3. 57% of Canadians reported waiting 4 weeks to see a specialist. A March 2 article in the Canadian Medical Association Journal stated, "Saskatchewan is under fire for having the longest waiting time in the country for a diagnostic MRI — a whopping 22 months."
4. A February 28 article in The New York Times quoted Dr. Brian Day as saying, "This is a country in which dogs can get a hip replacement in under a week and in which humans can wait two to three years. In a 2007 episode of ABC News John Stossel cited numerous examples of Canadians who had difficulty accessing health care.

Some residents of Canada travel to the United States in frustration with the limitations of their own health care system, as illustrated by the following examples:

• According to a September 14, 2007, article from CTV News, Canadian Liberal MP Belinda Stonach went to the United States for breast cancer surgery in June 2007. Stronach's spokesperson Greg MacEachern was quoted in the article saying that the U.S. was the best place to have this type of surgery done. Stronach paid for the surgery out of her own pocket.

• When Robert Bourassa, the premier of Quebec, needed cancer treatment, he went to the U.S. to get it.

• In 2007, it was reported that Canada sent scores of pregnant women to the US to give birth.

• Champion figure skater Audrey Williams needed a hip replacement. Even though she waited two years and suffered in pain, she still did not get the surgery, because the waiting list was so long. So she went to the US and spent her own money to get the surgery.

• A January 19, 2008, article in The Globe and Mail states, "More than 150 critically ill Canadians – many with life-threatening cerebral hemorrhages – have been rushed to the United States since the spring of 2006 because they could not obtain intensive-care beds here. Before patients with bleeding in or outside the brain have been whisked through U.S. operating-room doors, some have languished for as long as eight hours in Canadian emergency wards while health-care workers scrambled to locate care."

The Obama World Tour

Some points to ponder:

1. Was Barack Obama speaking as a citizen or a candate? Is it reasonable to believe that he made a speech to 200,000 Germans as a citizen? This was his first visit to Europe in four years. Was it a coincidence that it happened during the U.S presidential campaign?


2. Was it reasonable for Obama to use Boston drivers as an example of auto polution while speaking in the land of the no-speed limit autobahn where Benses and Bimmers fly the highway at 100+ mph?


3. Considering that "we" did not elect Barack Obama to represent us to the Germans, was it reasonable for him to state that "we" had not perfected America. Has anyone from Germany, France, Great Britain, or any other nation stated that they had not perfected their countries?


4. He initially said he did not visit wounded U.S. soldiers while in Berlin because he was restricted from doing so by the military. However the military stated that the only restriction was that he not involve his campaign personnel in his visit. If he had time for the Germans, French, and British, why did he have no time for U.S. wounded soldiers?