Eligibility is limited to those with high deductible health care plans.

HSA funds can be saved over the years. Flexible spending accounts are somewhat similar but that money can not be rolled from one year to the next. The idea with HSA is you can save money in good years so you have money to pay health care expenses in years when you have them.

Health Savings Accounts are meant to cover deductibles, co-pays, uncovered health needs etc. that those stuck with the current USA health care system have to deal with. HSA are best used by people who are healthy, as the idea is to save up money during healthy years so there is a cushion of funds to pay health expenses later.

Health Savings Accounts are not a substitute for health care insurance. The health care system in the USA is so exorbitantly expensive only the very richest could save enough even for relatively minor health needs that are free to all citizens in most rich countries. HSA are legally available to you without health insurance but doing without health insurance in the USA is a disastrous personal financial action in the USA.

And the system is even worse in having ludicrously high charges that all insurance companies get huge discounts on. But if you try to use the USA health system without insurance the unconscionable charges that no insurance company pays will be billed to you. Even if your insurance company paid nothing, the reduction in fees just due to providers not charging the massive uninsured premium charges is critical.

Your HSA contribution is taken out of your paycheck on a pre-tax basis and grows tax deferred.

Withdrawals from an HSA for qualified medical expenses are free from federal income tax. At age 65, you can withdraw money from the HSA to use in retirement for expenses not related to health care. You will owe taxes at this time, but no penalty.

Related: 2015 Health Care Price Report, Costs in the USA and Elsewhere – Health Insurance Considerations for Digital Nomads – Personal Finance Basics: Health Insurance

In 1965 foreign ownership of USA stocks totaled about 2%, in 1990 it had risen to 10% and by 2015 to 26%. That the foreign ownership is so high surprised me. Holdings in retirement accounts (defined benefit accounts, IRAs etc.) was under 10% in 1965, rose to over 30% in 1990 and to about 40% in 2015. The holdings in retirement accounts doesn’t really surprise me.

The combination of these factors (and a few others) has decreased the holding of USA stocks that are taxable in the USA from 84% in 1965 to 24% in 2015. From the report

As with much economic data it isn’t an easy matter to determine what values to use in order to get figures such as “foreign ownership.” Still this is very interesting data, and as the report suggests further research in this area would be useful.

Related: There is No Such Thing as “True Unemployment Rate” – The 20 Most Valuable Companies in the World – February 2016 (top 10 all based in the USA) – Why China’s Economic Data is Questionable – Data provides an imperfect proxy for reality (we often forget the proxy nature of data)

Three tax important to pay attention to 2016 to are:

Payroll taxes

Failure to file accurate payroll taxes or late payments can result in heavy penalties. For deposits that are made a week late, the tax penalty can go up to five percent of the past due amount. Usually the amount of penalty is measured using calendar days beginning with the due date of the tax deposit. The three penalties (failure to pay, failure to file, and failure to deposit) can add up to 33 percent penalties + interest 16 days past the due date.

Payroll taxes are a huge portion of most people’s pay and those that claim some people don’t pay any tax just pretend paying this tax (which is the highest tax most workers pay) isn’t paying tax. The tax rate is 45.3% (7.65% paid by the employer and 7.65% paid by the employee. For the very wealthy this tax isn’t a huge factor as it is only applied to earned income and earnings above $118,500 (indexed to inflation, so the level increases every year) are excluded. The 7.65% figure includes 1.45% for medicare, that has no income limit (so above $118,500 the employee and employer pay 1.45% – a total of 2.9%).

Options like MasterTax tax compliance software are available for businesses to help comply with all the rules. Companies can rely on automated software that houses a rules-driven database (updated with the latest rules) with thresholds and frequencies across different jurisdictions. The benefit is a month-to-month actionable calendar that enables you to make timely payments at no extra cost and without requiring third-party support.

Corporate taxes

Different corporations have to pay a different percentage of corporate taxes, with penalties for late filing and errors in tax records. For example, a C corporation should file a tax return annually, and the filing deadline comes on the 15th day of the third month after the tax year ends. If the deadline is missed, the business faces a five percent penalty of the unpaid tax, and it goes up to 25 percent after the five month late.

Some software provide free audit guidance from trained tax professionals to help you understand C-corporation corporate tax requirements. Businesses can also use these tools to file electronic returns and receive fast tax refunds. Some software have integrated notifications that inform you that the IRS has received your electronically filed tax return.

Gross receipts taxes

Some states impose gross receipts taxes on businesses like transportation companies. For example, a trucking company will have to pay a tax rate of 50 mills (or 5 cents, $0.05) based on gross receipts from baggage, passengers and freight transportation. Failure to file accurately will result in a five percent penalty per month.

In a tax filing software, you can create a custom workflow for gross receipts taxes and keep track of deadlines to ensure you’re filing on time and avoiding late filing penalties.

You will also likely have to withhold income tax from your employees and send that to the state and federal governments. In addition, if you are a retail outlet in many states you will have to collect and forward sales tax to the state (and sometimes local) government.

It doesn’t matter if you buy another house or not, that exclusion of up to $250,000 is all that can be excluded (you must pay tax on anything above that amount – taxed at capital gains rates for long term gains).

For investment property you can do 1031 exchanges which defers capital gains taxes. Otherwise capital gains will be taxed as you would expect (as capital gains).

When you inherit a house the tax basis will be “stepped up” to the current market rate. So if you then sell your basis isn’t what the owner paid for it, but what it was worth when it was given to you.

Related: Looking for Yields in Stocks and Real Estate – Your Home as an Investment – Home Values and Rental Rates

I think one of the things I would do is to make it cost more to hire foreigners. Just slap on a tax of something like $10,000 per year for a visa. If what I decided was actually going to adopted I would need to do a lot more study, but I think something like that would help (maybe weight it by median pay – multiple that by 2, or something, for software developers…).

It is a complex issue. In general I think reducing barriers to economic competition is good. But I do agree some make sense in the context we have. Given the way things are it may well make sense to take measures that maybe could be avoided with a completely overhauled economic and political system.

I believe there are many good things to having highly skilled workers in your country. So if the problem was in recruiting them (which isn’t a problem in the USA right now) then a tax on the each visa wouldn’t be wise, but I think it might make sense now for the USA.

I think overall the USA benefits tremendously from all the workers attracted from elsewhere. We are much better off leaving things as they are than overreacting the other way (and being too restrictive) – but I do believe it could be tweaked in ways that could help.

Outsourcing Made by India Seen Hit by Immigration Law

Related: Relocating to Another Country – Working as a Software Developer – Science PhD Job Market in 2012 – Career Prospect for Engineers Continues to Look Positive

I thought I would look at the real estate tax to property value estimate and rent estimate by Zillow in Various locations.

Arlington, Virginia – real estate taxes were 1% of estimated property value and 17.5% of rental estimate.
Chapel Hill, North Carolina – 1.5% of value and 41% of rental estimate.
Madison, Wisconsin – 2.4% of value and 39% of rental estimate.
Flagstaff, Arizona – .7% of value and 9.5% of rental estimate.
Grand Junction, Colorado – .4% of value and 6% of rental estimate.

This is just an anecdotal look, I didn’t try to get a basket of homes in each market I just looked at about 1-5 homes so there is plenty of room for misleading information. But this is just a quick look and was interesting to me so I thought I would share it. While the taxes are deductible (from the profit of the rental property) they are a fixed expense, whether the house is rented or not that expense must be paid.

A high tax rate to rental rate is a cash flow risk – you have to make that payment no matter what.

In my opinion one of the most important aspects of rental property is keeping the units rented. The vacancy rate for similar properties is an extremely important piece of data. Arlington, Virginia has an extremely low vacancy rate. I am not sure about the other locations.

I wanted to use Park Slope, Brooklyn, NYC but the data was confusing/limited… so I skipped it; the taxes seemed super low.

Related: USA Housing Rents Increased 5.4% in the Last Year (Sep 2012) – USA Apartment Market in 2011 – Top Markets in the USA for Buying Rental Property (2011) –
Home Values and Rental Rates

In my reading stories on the wonderful success of “avoiding the fiscal cliff” seems to amount to passing the George Bush tax cuts again (except this time when in a much much worse budgetary position) and modifying the extent to which the absolute richest benefit from those cuts (so the richest don’t get quite as step cuts as they had been getting but still are getting big cuts from before the Bush tax cuts were made. And the recent trend of treating trust fund babies as the absolute most favored taxpayers was continued (though a few of the absolute richest trust fund babies will have to have some taxes withheld from their windfalls).

I haven’t read anything about them getting rid of the “hedge fund manager” tax favors. Did they? Did they even bother to change the law so retired managers don’t get the super huge tax favors too?

On the spending beyond our means issue they seem to have just decided that having the grandkids continue to fund our spending is wonderful.

If it were up to me I would have continued some of the Bush tax cuts (certainly not for those making more than $200,000 – unless we can cut spending way more than I would guess in which case I would be fine having taxes even for the richest few lowered). I would have continued treatment that reduced taxes owed on dividends and capital gains, though perhaps a bit less than they did. I would cap mortgage deductions (at say $50,000 a year or something).

I certainly would not have supported such massive Bush tax cuts without large spending cuts. If this level of spending is what we intent to do, we need to pay for it and not just bury our kids and grandkids with huge bills. Without spending cuts I would not have voted again for the Bush tax cuts, which seems to be the main extent of their “solution” (taking a bit of the tax cuts for the wealthiest off the plate but pretty much just passing Bush’s tax cut again).

I would have accepted deficits in the next few years (given the irresponsible behavior by our elected leaders for te last 15 years paying our bills for the next few years is not feasible) but the long term trend would have to be much different for me to vote to continue huge Bush tax cuts for today on the backs of our kids and grandkids. We either have to cut spending or raise taxes, likely we have to do both.

The current system is completely unsustainable. We have enormous deficits even with artificially low interest rates. The sustainability of this living beyond our means will be crushed when interest rates rise. We are setting ourselves (or our descendants) up for huge problems.

If you are young and voting for these people you either plan to live fast and die young or are willing to sacrifice your future so your parents and you can live better today at the expense of your kids and grandkids.

No action would have been better than the action they took. The consequences today would have been bad. But the consequences of what they have been doing for decades of making our descendants pay for us living beyond our means is very bad policy and has drastic consequences. It would have been better to address the core issues by reducing spending significantly (hundreds of billions a year) and raising taxes.

I don’t see how you can cut spending enough to matter without significantly cutting military spending and also social security spending and health care spending. TSA security theater should certainly be one of the cuts but it save a few billion maybe tens of billion at most (the security theater problems are more about treating citizens unjustly more than a budget issue). Health care is a special area in that the problem is not a matter of reducing budget allocations but fixing a massively broken system that wastes hundred of billions a year. But it can’t be fixed by just reducing budgets. It has to be fixed by fixing extremely bad policy that will then result in the USA saving hudred of billions a year.

One article says they finally fixed the Alternative Minimum Tax (AMT). The AMT is a good idea but implementation was faulty requiring them to adjust it every year or trap lots of people that were not meant to be. They have supposedly instituted a permanent fix, which is good.

Related: The Long-Term USA Federal Budget Outlook – Political and Corporate Cronyism are not Capitalism – House Votes to Restore Partial Estate Tax Very Richest: Over $7 Million

If you want to really cut taxes you must cut taxes and not pass on paying for your cuts to your kids. It seems pretty obvious those that advocating cutting current taxes the last few decades were only interested in living beyond their means today and foisting the responsibility to pay to their grandchildren. That is despicable behavior.

The fiscal cliff is an opportunity to return to a budget that has the generation doing the spending paying the taxes (last seen in the Clinton administration). The fiscal cliff outcome is going to be far from perfect. But the result will be a much more honorable outcome than foisting ever increasing taxes on future generations to pay for our current spending.

Obviously, if you reducing how much you are adding to your credit card balance each month and start paying your bills that means you don’t get to live off your future earnings today. So you will suffer today compared to continuing to tax the future to pay for your spending.

I hope the compromise results in spending cuts and an elimination of the Bush generation shifting taxes (cutting taxes on the the current wealthy without spending cuts – so just taxing the future to pay for tax cuts today). It is unlikely the fiscal cliff results in us actually paying for our spending (the best possible result is not an elimination of adding to the taxes future generations must pay but just a reduction in the level of tax increases we are imposing on the future every year).

Lots of little things should be done to save a few billion (maybe it could add up to $50 billion a year if we are very lucky). But the serious spending cuts have to come from reductions in military spending, reducing waste in the health care system and making social security more actuarially sensible (social security is not part of the fiscal cliff discussions though). Reducing tax breaks also has to happen, unless absolutely huge spending cuts can be found which is not at all likely.

The concept of the minimum tax rate (AMT – Alternative Minimum Tax) is fine (even good actually), but the implementation now is very poor. Every year they have to pass an exemption to avoid catching millions of actually middle class (say earning $50,000 a year) from being caught by poorly written law. I think they should rework this to be a policy that actually works instead of one they have to make exceptions for every year (they pass the law the current way to avoid paying for the policy they want – it is only waste in order for them to lie about the income level they are voting for).

I wouldn’t mind if the fiscal cliff results take affect without action. Then they can step in and make a few adjustments. Add some spending; reducing taxes on those making less than $100,000; possibly add some adjustments to reduce taxes on investment income (capital gains and dividends). A change to cap the mortgage deduction would make a great deal of sense. Helping people buy a modest house is fine. Taxpayers helping people buy mansions is silly. If we go this route things will be harder at first (and financial markets will get excited and talking heads will bather on and on) but we will get a better long term result. But we will still only be reducing the level of extra taxes we are adding onto future generations. I expect they will compromise before significant fiscal cliff affects take place (which is long after the fake “deadline”).

The debate is mainly about which special interests win (is military spending going to be reduced at all from the enormously high levels, are we going to stop wasting money on security theater, is social security policy going to acknowledge drastically longer life expectancy, are we going to continue the coddling of trust fund babies and hedge fund managers the current politicians have to voting for, how large of excessive health care costs will be tolerated…?) and how large the additional taxes we will pass along to the future will be.

No one is talking about paying for some of of the huge spending we did in the last few decades that we didn’t pay for. No one is even talking about paying for our own spending. Hopefully the fiscal cliff will result in a reduction of the amount of the taxes we are adding to the future every single year. Sadly we are likely to increase taxes on our grandchildren at a much higher rate than if we did nothing (the compromise is largely about who gets to benefit today at the expense of our grandchildren not actually paying for the spending we are going to do and have done the last few decades).

We also have failed to reform the health care system for decades. The costs in the US are double that of other rich countries with no better results. This results in hundreds of billions of dollars in costs to the government annually (health care for employees – including military, government retires, and medicare and medicare). These costs have to be reduced by getting the USA system so it is closer to the rest of the world. Even just getting to mediocre results would save hundreds of billions a year but seems unlikely given how extremely poorly we have done. Mainly this is due to those benefiting from the current massively overpriced system paying congresspeople to avoid any fixes that reduce their personal benefits from the current broken system.

The USA government is likely to foist a large cost on those holding USA government debt in order to reduce the amount of tax increases on future generations. This will take the form of inflation. This means holding USA government debt is risky and not very sensible in my opinion (if you do so use inflation protected bonds). Essentially investors today are betting they can time their investment to avoid the inflation that is nearly inevitable. Given the extremely low payments currently this is a very bad investment idea in my opinion.

The extent of the irresponsible spending and taxing-the-future has been so large that massive levels of inflation in the USA are possible in the coming decades. It is a significant risk to the economy created by those seeking to lower taxes the last few decades by increasing the tax on our grandchildren.

Related: The Long-Term USA Federal Budget Outlook – Economic Consequences Flow from Failing to Follow Real Capitalist Model and Living Beyond Our Means – Anti-Market Policies from Our Talking Head and Political Class – The USA Economy Needs to Reduce Personal and Government Debt – NY State Raises Pension Age to Save $48 Billion

The chart only shows federal income tax data. So the costly social security tax (which is directly based on earned income* so in reality is federal income tax but is handled in a separate account so is consistently not classified as income tax data) for outside the top 5% (income above $106,800 [for 2011] does not have to pay the social security tax) is not reflected in the rates paid here.

Looking at the data excluding social security is fine, but it is very important to remember the social security (plus medicare) tax is the largest tax for, I would guess, most people in the USA. Social security tax is 6.2% paid by the employee plus 6.2% paid by the company – a total of 12.4%. That part of the tax was capped at $106,800 in income for 2011. The medicare tax is 1.45% of income paid by the employee and 1.45% paid by the employer (and it has no cap). So that totals 2.9% (for the employee and employer tax) and brings the total to 15.3%** for most earned income.

Source: Internal Revenue Service. Table via the tax foundation.

Other interesting data shows that the top 1% earn 16.9% of the total income and pay 36.7% of the total federal income taxes. Those in the top 1-5% earn 14.8% of the total income and pay 22% of the income taxes. Those in the top 5-10% earn of the income 11.5% of the income and pay 11.8% of the federal income taxes. So once you exclude the main tax on income (social security) and use adjusted gross income the tax rates are slightly progressive (higher rates for those that are making the most – and presumably have benefited economically the most from the economic system we have).

Given that this is skewed by excluding the regressive (higher taxes paid by those earning less – social security is the same rate for everyone except those earning the very most who don’t have to pay it on their income above $106,800 [in 2011]) social security tax I believe we should have a more progressive tax system. But that is mainly a political debate. There are good economic arguments for the bad consequences of too unequal a distribution of wealth (which the USA has been moving toward the last few decades – unfortunately).

In addition to the other things I mention there are all sorts of games played by those that desire a royalty type system (where wealth is just passed down to the children of those who are rich, instead of believing in a capitalist system where rewards are given not to the children of royalty but to those that are successful in the markets). A good example of the royalty model is Mitch Romney giving his trust fund children over $100 million each. These schemes use strategies to avoid paying taxes at all. Obviously these schemes also make the system less progressive (based on my understanding of the tax avoidance practiced by these trust fund babies and those that believe it is ethical to give such royalty sized gifts to their royal heirs).

I don’t like the royalty based model of behavior. I much prefer the actions of honorable capitalist such as Warren Buffett and Bill Gates that give their children huge benefits that any of us would be thrilled with, but do not treat them as princes and princesses who should live in a style of luxury that few kings have every enjoyed based solely off their birthright. Both Bill Gates and Warren Buffett have honorably refused to engage in royal seeking behavior that many of their less successful business peers have chosen to engage in. Those that favor trust fund babies are welcome to their opinion and have managed to get most of congress to support their beliefs instead of a capitalist model that I would prefer so they are free to engage in their desire to parrot royalty and honor the royalty model of behavior.

* earned income – you also don’t have to pay social security or medical tax on unearned income (dividends, capital gains, rental income…). Again this by and large favors wealthy taxpayers. Everyone is eligible for the same favorable tax treatment but only those that have the wealth to make significant amounts of unearned income get this advantage.

** the social security tax has been reduced by 200 basis points (this relief was recently extended) as part of dealing with the results of the too big to fail banking caused credit crisis. So under the temporary reduction the personal tax rate is 4.2% and the total cost is 13.2%.

Related: Taxes – Slightly or Steeply Progressive? – Taxes per Person by Country – USA State Governments Have $1,000,000,000,000 in Unfunded Retirement Obligations – Retirement: Roth IRA Earnings and Contribution Limits

This is the most that can be contributed regardless of whether the contributions are to one or more traditional or Roth IRAs or whether all or part of the contributions are nondeductible. However, other factors may limit or eliminate the ability to contribute to an IRA as follows:

• An individual who is age 70½ or older cannot make regular contributions to a traditional IRA (just to make things complicated you can add to a Roth IRA) for the year.

Contributions to a Roth IRA are limited based on income. The limits are based on modified adjusted gross income (which is before deductions are taken). The Roth IRA earnings limits for 2010 are:

• Single filers: Up to $105,000; from $105,000 – $120,000 (a partial contribution is allowed)
• Joint filers: Up to $167,000; from $167,000 – $177,000 (a partial contribution)

For 2011 the earning limits increase to

• Single filers: Up to $105,000; from $107,000 – $122,000 (a partial contribution is allowed)
• Joint filers: Up to $167,000; from $169,000 – $179,000 (a partial contribution)

More details from the IRS website and earning limits details.

The income limits do not cap what you can add using a 401(k). So if you were planning on adding to a Roth IRA but cannot due to the income limits you may want to look into increasing your 401(k) contributions.

Related: Add to Your Roth IRA – Add to Your 401(k) and IRA – 401(k)s are a Great Way to Save for Retirement