Federal Budgets and Other Fantasies: Your Weekly Update

This week as we submit our federal income tax returns, we get the jolting news that an even larger “ extraction” is proposed, and may be required in the relatively near future.

Focusing on the administration’s view of the need for additional revenues, the President submitted his budget (albeit three months late). Within it are a host of potential new taxes and deduction limitations. When some middle ground is eventually found, we suspect this will mean yet a further tax increase for many whom we serve.

At JL Davis, we prefer to stay “apolitical” and focus strictly on wealth management; helping our great clients accumulate, grow, preserve and pass on assets. We believe that the better educated all of us are on important financial issues like taxes, the better financial decisions we’ll all make.

So, we’ve compiled a list of important tax elements from the President’s budget. It’s important to keep in mind that these are just proposals—for now.

Feel free to share the attached with others—and let us know if you’d like someone added to the Weekly Update recipients.

All the best,
Lee and Jeremy

This Week’s Quotes:


“I like to pay taxes. With them, I buy civilization.”
~Oliver Wendell Holmes


“We content that for a nation to try to tax itself into prosperity is like a man standing in a bucket and trying to lift himself up by the handle”
~Winston Churchill

JL Davis Thoughts This Week:

It would be interesting to see Mr. Churchill and Mr. Holmes debate President Obama’s budget from last week. Within their quotes above is the essence of the debate we see continuing over the next several years. A debate with consequences for us all.

As for the President’s budget, following are a few elements of his proposal that will be very important to follow:

~A retirement savings cap provision limiting tax deductible contributions to most retirement savings accounts (401k’s, 401b’s, etc.) when the account balance reaches a federally approved level.
~Limiting the tax value (to 28 % of income) the exclusion for employer-paid health insurance and for employee contributions to pension plans
~Changing the recently re-enacted estate tax rules ($5 million exemption, 40% top rate) to 2009 era rules ($3.5 million exemption/45% top rate).

At 30,000 feet, the President’s budget asks for both deficit reduction and new revenues, but sadly, does not appear to ever balance at any point in the future. Therefore, we believe a fierce debate ensues with both deficit reduction and additional tax revenues getting approved eventually. Our view is that regardless of what is said, everything is on the table: Social Security, Medicare, cost of living elements, so-called “means testing” for benefits, taxes, deductions, and plenty more.

The bottom line: It’s never been more important to maintain your personal wealth management plan in excellent order than it is right now, today. Any thought of reliance on government sources of income and benefits must be tempered with the need to rely on plans of our own making—and we better get about making them!

We are here to help you do precisely that.**

A summary of the budget’s other proposals can be found at http://www.naifa.org/advocacy/documents/ObamaBudgetRecaplongversion.pdf

Additional Sources:
http://www.whitehouse.gov/omb/budget
http://www.nytimes.com/2013/04/14/us/politics/president-obamas-budget-revives-benefits-as-divisive-issue.html?pagewanted=all&_r=0
http://articles.washingtonpost.com/2013-04-11/opinions/38463903_1_entitlement-reform-obama-budget-calls-president-obama


Market Week: April 15, 2013

The Markets

Despite a brief slide early on Friday, the Nasdaq and S&P 500 had their strongest week since the first of the year, and both the S&P and Dow industrials continued to set new all-time highs. Meanwhile, gold, which had been slipping for months, plummeted more than 4% on Friday into official bear market territory; it ended the week at roughly $1,500 an ounce, its lowest close in almost two years.


Last Week's Headlines

•President Obama submitted a controversial $3.8 trillion budget proposal for 2014 that the White House said would reduce the national deficit by more than $1.8 trillion over the next 10 years. That estimate would not include existing deficit reduction measures, some of which could be replaced by new budget provisions. Some of the proposals most likely to provoke debate include a change in the way Social Security and other government payments are adjusted for inflation; cuts in payments to Medicare providers; a roughly $3 million limit on tax-deferred retirement savings account balances; a 28% cap on tax deductions/exclusions for higher-income households; a requirement that households with incomes over $1 million pay at least 30% of their income (after charitable giving) in taxes; business tax credits for hiring new employees and offering retirement savings plans; a higher top estate tax rate and lower estate tax and gift tax exclusions beginning in 2018; a change in the tax treatment of carried interest; and additional spending on infrastructure projects, education, and research.
•Minutes of the most recent Federal Open Market Committee meeting showed that members continue to debate how long the Fed's monthly bond purchases should continue. The minutes were released early after it was learned that the minutes had been distributed the day before to some congressional employees and many top Wall Street firms.
•A 3.4% drop in energy costs after a sharp run-up the month before helped cut inflation at the wholesale level by 0.6% in March, according to the Bureau of Labor Statistics. However, not including food and energy prices, which can change greatly from month to month, wholesale prices rose 0.2%.
•A decline in gas prices also helped lower retail sales, which fell 0.4% in March. The Commerce Department said spending at gas stations was down 2.2%; electronics and general merchandise also took a hit. However, overall sales were still 2.8% higher than last March.
•European finance ministers agreed to let Ireland and Portugal take seven extra years to repay their bailout loans despite a Portuguese court's recent rejection of some of the government's proposed austerity measures. Meanwhile, the head of the Bank of Japan said that recent quantitative easing measures there could last longer than the scheduled two years if necessary.


Eye on the Week Ahead

As earnings season moves into high gear, several key financial and tech companies will release reports. Manufacturing and housing data also are on tap. Investors in precious metals also will watch anxiously for any sign of a halt to gold's sharp selloff.

Key dates and data releases: international capital flows, Empire State manufacturing survey (4/15); consumer inflation, housing starts, industrial production (4/16); Fed "beige book" report (4/17); Philadelphia Fed manufacturing survey (4/18); options expiration (4/19).
Data sources: Includes data provided by Brounes & Associates. All information is based on sources deemed reliable, but no warranty or guarantee is made as to its accuracy or completeness. Neither the information nor any opinion expressed herein constitutes a solicitation for the purchase or sale of any securities, and should not be relied on as financial advice. Past performance is no guarantee of future results.

The Dow Jones Industrial Average (DJIA) is a price-weighted index composed of 30 widely traded blue-chip U.S. common stocks. The S&P 500 is a market-cap weighted index composed of the common stocks of 500 leading companies in leading industries of the U.S. economy. The NASDAQ Composite Index is a market-value weighted index of all common stocks listed on the NASDAQ stock exchange. The Russell 2000 is a market-cap weighted index composed of 2000 U.S. small-cap common stocks. The Global Dow is an equally weighted index of 150 widely traded blue-chip common stocks worldwide. Market indexes listed are unmanaged and are not available for direct investment.

Prepared by Lee Davis** and Broadridge Investor Communication Solutions, Inc. Copyright 2013