California Fiscal Update

October 1, 2012

August sales tax collections were down 20% compared to last year and total revenues are down 5.5%. Even though income taxes rose 11.6%, corporate taxes declined over 70%. Meanwhile California’s spending is almost $3 billion more than was budgeted. Hmmm, not the best way to deal with an out of control budget.

The graph above is courtesy of well known financial blogger Mish Shedlock.

The 20% decline in sales tax revenues for August is perhaps the most worrisome signal that California may be heading into recession as people have clearly cut back on their spending. California, often viewed as a bellwether for the trajectory of the rest of the country, may be leading the way into a broader slow down. A 20% decline in sales taxes revenues year over year is substantial and I suggest you keep this data point on your radar screen during the coming months.

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Beyond the Season of Giving: Tax Deductible Gifting

January 1, 2010

We hope everyone had a great holiday season and are enjoying 2010. The season of giving is behind us again and Pacific Mountain Advisors would like share with you an opportunity to give within our community while promoting financial literacy and economic justice at the same time.

Santa Cruz Community Ventures (SCCV) is non-profit (501(c)3) arm of the Santa Cruz Community Credit Union that teaches financial literacy and provides secondary education matching funds for financially distressed foster-youths in their teens. Under the Individual Development Account (IDA) program at SCCV, each young person in the program is required to save $500 from their part-time jobs while they finish high school, and SCCV will provide financial education and a 2-1 match of their savings  for a total of $1,000 (more information here).

At Pacific Mountain Advisors we value financial literacy and believe that an incentive program such as this is an excellent way to educate and promote positive behavior. We want to encourage your support of this excellent program and will offer a matching contribution for the first $500 contributed by clients and friends. Please help us promote financial literacy in our community by making a donation to Santa Cruz Community Ventures and the IDA program. You can donate online Here or write checks payable to “Santa Cruz Community Ventures IDA Program” and send them to:

Santa Cruz Community Ventures
IDA Program
Attn: Ellen Murtha
324 Front St.
Santa Cruz, CA 95060

Please feel free to give us a call with any questions that you may have regarding charitable donations and their tax benefits.

Wishing you all the best,
Pacific Mountain Advisors Team


Is the 2010 Roth IRA Conversion Right for You?

October 9, 2009

There is an important change in Federal law taking place in 2010 that will allow a one year window for anybody (regardless of income) to convert from a Traditional IRA into a Roth IRA. The details of this change are fairly complicated so I will break it down into the key need-to-know elements.

IRA’s provide tax breaks either up front or when money is withdrawn from the account; money grows tax-free while in both types of accounts. Traditional IRA’s allow you to take an immediate tax deduction on contributions, but you must pay taxes when money is withdrawn. Contributions are not tax deductible with Roth IRA’s but the money can be withdrawn later without paying any taxes on your gain.

Up until this change in law you could only convert an existing IRA into a Roth IRA if you met adjusted gross annual income limitations. Now that the government legislators have temporarily removed these constraints and offered us all the “privilege” of making a Roth Conversion, but does that mean we should take them up on it?

Reasons to Convert

  • You expect Federal tax rates to be higher than they are currently when you will be withdrawing from your account in the future.
  • You expect to be in a higher marginal tax bracket during the years in which you are withdrawing money than you are currently in.

Reasons to Not Convert

  • You expect Federal tax rates to be lower than the current levels when you will be withdrawing from the account. (This is very unlikely considering the dire fiscal situation of the U.S. Government. Taxes are more likely to increase than decrease.)
  • You expect to be in a lower marginal tax bracket during the years in which you are withdrawing money than you are currently in.

Important Issues to Consider

  • If you convert in 2010, you have the option to pay the taxes immediately in 2010, or split the payment of taxes  over 2011 and 2012. However you would be required to pay whatever the current rate is, which may be higher if congress raises taxes. Depending on the size of any tax increase, this may cancel out any positive effect of converting and may cause you to pay more taxes than necessary.
  • If you earn more in the future and end up in a higher tax bracket during the time you will be withdrawing money, you may have been better off not converting.

Conclusion
Due to uncertainty regarding future Federal tax policies, converting to a Roth IRA is likely to be less beneficial for most people than it would seem on the surface.  In general, a Roth conversion makes the most sense for:

  • Young individuals in low tax brackets who are beginning their careers
  • Semi-retired or retired individuals who will not be withdrawing from their accounts who currently qualify as low income
  • High net worth individuals that would be subject to estate taxes.

For people converting, t would also be advisable to pay all taxes in 2010 rather than deferring them because of the likely possibility that the government will raise tax rates for 2011 and 2012.

It is very likely that the Feds are simply using this change to try accelerating tax revenues, however, there are still some cases where a conversion makes sense. If you think a conversion might make sense for you, please feel free to give me a call or send an email with any questions you may have about your specific situation.

All the best,

Michael