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Get Ready...Get Set...

Finally, summer has arrived. Warm days and balmy nights trigger in me a certain anticipation of all the good things that summer traditionally brings. As the season arrives, it feels like we are standing on a starting line with taught muscles and quivering nerves just waiting for someone to yell “GO”!

However, I am not exactly the running type (as you may have noticed). Nor am I talking about a footrace. Right now, according to Washington DC think tank, the Center on Budget and Policy Priorities at least 47 states are facing significant shortfalls in their upcoming budgets and many are exploring tax hikes to help fill the gap.

California faces the biggest shortfall, currently projected at some $25 billion for fiscal year 2010, but New York is not far behind, with a projected $17.6 billion deficit.1 Why? The recession has sapped the two major sources of state revenue: income taxes (thanks to rising unemployment - fewer people earning taxable wages) and sales taxes (consumers spending less.) Each of these items alone is big; together, they represent a huge hit to tax revenue. What’s a Governor to do?

Even though raising taxes is typically a last resort, many states appear to have no choice now. In fact, it has started already with Pennsylvania Governor Edward Rendell proposing to raise the State personal income tax rate by 16 percent and Delaware Governor Jack Markell wanting to increase his State’s marginal income-tax rates on those earning more than $60,000 a year.2 Now that someone else has finally gone first, the White House itself recently unveiled tax plans that include higher tax rates for couples earning more than $235,000 per year.3 I think I hear someone yelling “GO”, but it’s not a jump off the high dive, it’s a plunge into our collective pockets.

Is the prospect of higher taxes on top of a faltering economy putting you in the mood for sipping iced tea under a live oak or attending ice cream socials? Nope, me neither. The combination is frankly scaring the tea right out of me.

The Tax Foundation calculates a “Tax Freedom Day” every year. This is the day they have calculated when residents of the various states have earned enough to pay their taxes and may now begin to take earned money home to their families. This year, the residents of Connecticut came in last (as usual), working from January 1 to April 30, before earning enough to pay their combined federal, state, and local taxes. Because Connecticut's per capita income is higher than in any other state, its residents pay extraordinarily high federal income taxes. Nearby states New Jersey and New York are not far behind.4 With state and federal governments all scrambling to fill giant gaps in their budgets, how far down the calendar do you expect Tax Freedom day to slide next year? We are literally at the mercy of our governments in that we are compelled to pay the taxes levied upon us unless, of course, you can find a way to avoid paying income taxes.

Former British Minister Denis Healey reportedly once stated that the difference between tax avoidance and tax evasion is “the thickness of a prison wall”. Traditionally, tax avoidance has mostly been accomplished through the use of tax “shelters”. These are a kind of investment that allows (or purports to allow), a reduction in one's income tax liability through the employment of tax-favorable strategies. Although things such as home ownership (thanks to the interest rate deduction), pension plans, and Individual Retirement Accounts (IRAs) can be broadly considered "tax shelters", the term "tax shelter" was originally used to describe a more aggressive kind of scheme that has attracted greater scrutiny lately. The Internal Revenue Service and the United States Department of Justice have recently teamed up to crack down on abusive tax shelters and many of them have now been disallowed. No, for the great majority of us, we will just have to grin and pay whatever tax assessments come our way. That is, unless…

Yes you guessed it; unless you are the recipient of a 104 (a) (2) qualified structured settlement. If indeed you are, you need not be concerned about increases in tax rates or limited deductions or any of the innumerable tax regulations foisted upon us by politicians of every stripe. Since your payments are excluded from gross income altogether, you pay no State, Local or Federal Income Taxes, period. Ever. The Tax Foundation could move Tax Freedom Day all the way to Christmas and it would make no difference to you because your tax freedom day starts every January 1.

In the face of today’s economic and political difficulties, it seems a certainty that taxes will go up and soon. Why be a part of that? Why pay taxes if you do not have to? Why jump when others yell “GO”?

There aren’t too many good things about being involved in a personal injury lawsuit. In fact, no one I know would want or should want to have anything to do with one. However, if you’re already ensnared in one, you might as well take advantage of one of the few good things that the experience offers: total freedom from tax on investment earnings.

Most claimants have no idea that they qualify for this benefit. Help settle your case by helping shield them from the coming tax increases. Want to show them how to avoid paying taxes without going to prison? Call Frank C. Kilcoyne, CSSC at 800-544-5533. I am here to help.

 

1National Conference of State Legislatures
2Leslie Eaton, The Wall Street Journal, April 9, 2009
3John McKinnon, The Wall Street Journal, June 25, 2009
4 Taxfoundation.org