Friday Financial Five – October 9, 2015

Friday, October 09, 2015

Dan Forbes, GoLocalWorcester Contributor

Closing the carried interest loophole

Political debates often involve the promise of a more reasonable tax code but pushing changes through is not easy once the elected official takes office. The “carried interest loophole” is the latest perk to catch the public’s eye as an unfair advantage for hedge funds and private equity firms. The firms structure as investment partners, while the managers act as a general partner. The typical compensation structure is “2 and 20” – 2 percent automatically per year and 20 percent of profits on the investments. That 20 percent is taxed as an incentive or “carried interes," allowing for a much lower tax rate as capital gains and the avoidance of billions in taxes. The end result is a much lower marginal tax rate for these individuals than one would expect, with very little evidence it leads to a public good.

Non-deductible contributions need a Form 8606

More and more high income earners are employing the strategy of making after-tax contributions to an IRA account that are not deductible on their tax return. They convert those contributions to a Roth IRA in order to take advantage of the Roth’s benefits. What sometimes is missing from the contribution to the non-deductible IRA is the filing of a Form 8606. This form allows the IRS to identify the taxpayer’s non-deductible contributions and account for them from a tax perspective. This, accompanied with a descriptive letter when a contribution is made, should help avoid double taxation on those funds when they’re withdrawn.

Retirement plan lifetime income options

The perceived gap in 401(k) plans occurs when it comes to providing lifetime income. Insurance companies would like to fill that gap and are pushing for more annuity options in retirement plans but they have less than 10% penetration at this point. That may be changing, as evidenced by GM’s recent decision to add the insurance product to their 401(k) offering. Not everyone using a 401(k) has the investment savvy to differentiate between investment options, nor the inclination to figure out how to withdraw the retirement funds as income. While the annuity option will allow for a more predictable income, it may amount to much less than current pensioners are receiving from their traditional defined benefit plans.

Medicare open enrollment approaches

October 15th begins the enrollment period for those eligible to apply for Medicare coverage. A great resource to get details on program options is www.Medicare.gov. There are plenty of sections allowing enrollees to review plan and prescription drug options, as well as verify in-network doctors and costs. Enrollees should start the comparison process as soon as possible to avoid any unnecessary expense. The enrollment period ends December 7th, otherwise known as Larry Bird’s Birthday.

Bill Gross suing PIMCO

When one of the most recognizable faces in investing leaves a company amidst mysterious circumstances, it makes sense that fireworks will eventually follow. For Bill Gross, co-founder of the Pacific Investment Management Company, those fireworks are starting with a lawsuit aimed at recouping “hundreds of millions of dollars” from PIMCO for wrongful termination. Gross was fired just before the end of the third quarter last year and contends that a $250 million bonus played a part in the timing of his ouster. With Gross’ estimated net worth at roughly $2 billion, reports are that any money recovered from the suit will go to various charities and foundations.

Dan Forbes, a CFP Board Ambassador, is a regular contributor on financial issues. He leads the firm Forbes Financial Planning, Inc in East Greenwich, RI and can be reached at [email protected].

Related Slideshow: Massachusetts Business Rankings

See how Massachusetts stacked up.

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WalletHub

Massachusetts has 2015's 28th highest insurance premium penalties for high risk drivers, according to a WalletHub report.

Mass is behind Colorado and New Mexico who come in at 26 and 27 spots respectively while Mass is ahead of Tennessee and the District of Columbia who rank 29 and 30 respectively.

Massachusetts ranks 14th overall in the category of DUI conviction annual premium increase with an amount of $756.

Massachusetts ranks 20th overall in the category of speeding over 20 mph annual premium increase with a total of $261 while ranking 21 overall in the category of two accidents annual premium increase with a total of $1,364.

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WalletHub

Massachusetts has been ranked as the 5th most eco-friendly state in the country, according to a recent study by WalletHub.

Mass ranks tenth in environmental quality and fourth in Eco-Friendly Behaviors landing them in 8th overall.

Mass is behind Minnesota and New York who are in the fourth and third spots respectively, and in front of Washington and New Hampshire who come in at the six and seven spots.

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The Economist

Small Business Friendliness Grade: D+

The Economist grades states on an A+ to F grading scale for its small business climate. Massachusetts ranks near the bottom of the nation, joining New Mexico and New York in receiving D+ grades. 9 states scored worse than a D+ in the Economist rankings.

Overbearing bureaucracy and excessive licensing is stifling small business in America.

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CNBC

#25 CNBC

CNBC ranks each state in cost of doing business, economy, technology and innovation.

Massachusetts' unemployment rate as of May 2014 was 5.6 percent. The state added 9,100 jobs in the month of May.

Forbes

#13 Forbes

Forbes ranks each state in business costs, economic climate, and growth prospects.

The most damning in the commentary:

Massachusetts’ business costs, including labor, energy and taxes, are the highest of the 48 contiguous states—only Hawaii is higher—at 20% above the national average.

ChiefExecutive.net

#47 ChiefExecutive.net

ChiefExecutive.net ranks each state in taxations and regulations, workforce quality, and living environment.

The most damning in the commentary:

Taxation and regulation are always the key barometers. Massachusetts and Oregon are the worst.

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Tax Foundation

#25 Tax Foundation

Tax Foundation ranks each state in corporate tax rank, sales tax rank, and unemployment insurance tax rank.

Massachusetts ranked #49 in unemployment insurance tax.

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Wallet Hub

#10 Wallet Hub

Wallet Hub ranks each state in ROI rank, state tax rank, and overall government services.

Massachusetts ranked #49 in worst roads and bridges, but ranked #7 in overall government services.

ALEC

#41 ALEC

ALEC ranks each state in economic performance and outlook.

Although Massachusetts ranked low in economic performance, a forward-looking forecast is based on the state’s standing in 15 important state policy variables. Some of these variables include top marginal personal income tax rate and sales tax burden.

Kauffman Foundation

#29 Kauffman Foundation

Kauffman Foundation ranks each state in entrepreneurship.

Entrepreneurial activity generally is highest in Western and Southern states
and lowest in Midwestern and Northeastern states.

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Free Enterprise

#18 Free Enterprise

Free Enterprise ranks each state in performance, exports, innovation + entrepreneurship, business climate, talent pipeline, infrastructure.

Massachusetts's reputation as a hotspot for science and technology endures in this year's rankings. The commonwealth is a center for STEM jobs and university research and development, ranking 4th and 2nd, respectively, in those two categories. It also ranks 6th as a center for high-tech establishments. Massachusetts is taking aggressive steps to bolster economic activity with high-impact university-industry R&D projects and new tools for tech-based startup companies.