Monday, November 16, 2009

California May Be A Good Example of What’s Coming Down the Pipe

California May Be A Good Example of What’s Coming Down the Pipe

The State of California is facing a $26 billion budget deficit. Basically what that means is that they have $26 billion less tax revenue than they require to handle their expenses. To close that gap, the State has two options: either cut expenses or raise more tax revenues – or, perhaps a third option, which would be a combination of the other two. “Wait a minute,” you may be thinking, “do you mean raise taxes on the people?” If you figured that out, you’re impressively smart and obviously qualify to be a big kahuna budget expert.

Before we continue, let me tell you something that happened the other day. A friend of mine who works for the State of Maryland told me that they are not going to receive their scheduled raises this year because the state is running a budget deficit. She wanted me to explain how the State’s budget issues are related to her raise. She became an expert in that area within about 45 seconds.

So let’s get back to California, now. Here are a few of the deficit-busting strategies California has implemented so far:
  • Beginning July 1, State personal income tax rates – GUESS WHAT? – were increased across the board by 0.25 of a percentage point. If the old rate was, say, 5 percent, now it’s 5.25 percent, and so on.
  • Effective November 1, California Law AB17 instituted a 10 percent increase in payroll withholding. While technically not a tax increase, you can call it a forced loan to the State, because the state is basically borrowing 10 percent of the people’s take-home pay until they file their taxes and will pay them no interest.
Are you beginning to understand that ANY government quickly resorts to raising taxes to fill its budget shortfalls? I have been saying this for some time now, but the bigger issue doesn’t seem to have hit home yet. Sooner or later, it has to. California’s problem is $26 billion big.

One of My Mom’s Favorite Sayings

 How about the U.S. federal government’s national debt of – GET THIS – $12 trillion, and counting? In fiscal year 2009 alone, the budget deficit was more than a trillion bucks. So my question, simply, is: What do you think will happen to YOUR income taxes? My mom would often say that if you don’t know what a dead person looks like, simply observe someone who is asleep. All of a sudden, I seem to be remembering all these sayings, even though my mom never thought I was listening back then.

Regardless of where you live in the United States, any income tax increases affect you ONLY if you have “taxable” income. Certain folks in California remain unaffected by the increases in the tax rates not because they are broke and have no income, but because their income – regardless of how much it is – is not considered “taxable.” Our clients are more and more grateful by the day as they watch events around them unfold. Plain and simple, if you don’t want to worry about income taxes, don’t put your retirement savings into taxable 401Ks and IRAs. Period!

This is true today, it was true yesterday, and it will be true tomorrow. And yet I continue to witness far too many folks allowing themselves to be fooled by so-called financial advisors who are clueless when it comes to this issue of keeping retirement money tax-free.

Even 4-Legged Creatures Are Feeling the Deep California Cuts

Another tactic California has employed is reducing the number of days animal shelters are required to hold stray animals from 6 days to 3 days. That’s right. Unless they are claimed by their owners or adopted, the state will not prevent these animals from being euthanized after just 3 days.

To be fair, Governor Schwarzenegger’s office says that the state’s animal shelters “may keep the pets as long as they wish.” Isn’t that good news? Why cut the mandatory holding period in half, then? What does cutting the funds for caring for these pets from 6 days to 3 days really mean? We’re cutting your funds and you don’t legally have to keep these pets alive for 6 days anymore, but you’re welcome to do so, if you wish. It’s not really my place to comment because I’m not in charge of how they do things in California, but it seems to me that the explanation being offered about this animal shelter situation is absurd and just goes to show how far governments, both state and federal, will go when pushed to raise revenue.
For more information about how to keep your retirement income safely tax-free, please visit our website or call us at 301-949-4449.

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