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Who Knows?

Here we are finishing out the 11th month of 2008, the long awaited election finally over; John McCain is back in the Senate and Mr. Obama is busily naming cabinet members. Yet the economy remains in turmoil and as I write this article world leaders continue to try to develop a solution. Will they come up with a plan that works? Who knows, but I’m not holding my breath. It all seems like such new territory. And as I see it, therein lies the problem: we common folk don’t know what to do or what to believe. Whenever we find ourselves in this position, it’s best to set aside for a moment what we don’t know and focus for a time on what we do.

We do know the economy is in bad shape and that everyone wants to find a safe haven for their money. In last month’s edition I explained how and why structured settlements remain one of the safest places you could hope to put your money. The trouble is, you have to get hit by a truck to qualify for one.

We also know that changes will likely be made to the federal income tax code. Not only did much of the debate during the election campaign focus on tax code changes, but tweaking the tax code is one of the primary ways that government can influence the economy. All changes will naturally be shaped by political ideology and the realities of the current economic climate. But what specifically will happen to tax rates? That, we don’t yet know.

No matter what other changes may come down the pike, another thing we know is that New York, New Jersey, and Connecticut currently pay the highest combined tax rates in the country. This fact is evidenced by the Tax Foundation’s (infamous) “tax freedom day”. Determining the national tax freedom day involves calculating how many days it takes to earn the money you need to pay your taxes. The Foundation calculated that in 2008, the percentage of the nation’s taxes owed to income earned was 30.8%. Multiplying 365 days by 30.8% gives you the exact number of days: it takes 113 days of work to pay off your taxes, thus making National Tax Freedom day to April 23rd of 2008.

But that was the national tax freedom day…I just mentioned that many of us live in the highest taxed corner of our nation. When is the combined tax freedom day for those of us in New York, New Jersey and Connecticut? Connecticut comes in first (last) with a tax freedom day of May 8th, New Jersey comes in second with May 7th and we New Yorkers come in third by paying off our tax burden on May 5th. Although the top three have high state and local taxes, the main culprit here is the progressive federal income tax. States with large metropolitan areas also have high costs of living and must offer higher-paying jobs. As a result, many of the citizens earn enough to pay income tax at the highest rates—currently 25%, 28%, 33% and 35%. If campaign promises hold up, high bracket taxpayers in these states will bear the brunt.

Okay, it may be “official” that we pay the highest taxes, but what can we do about it? One choice is, you could move to Alaska, as they are number 50 on the chart with a tax freedom day of March 29th. But it’s pretty cold up there and probably a long walk to the nearest Starbucks. No, moving to Alaska is probably not the answer.

Another idea may be to invest in tax-exempt securities. In his November 5, 2008 article in the Wall Street Journal entitled “Thinking Local: Muni Yields Rise to Rare Levels”, writer Tom Herman advocates putting your money in tax free municipal bonds as a means of finding safety comparable to U.S. Treasury bonds while avoiding state and federal income taxes. He thinks these spell opportunity especially for those who live in high tax areas such as New York, New Jersey and Connecticut. On balance, he produced an excellent article on what could be an attractive opportunity for many.

However, he made a key mistake by failing to inform potential investors of the existence of “call features” when buying bonds. Depending on the terms, an investor may not be able to secure the apparent “high rate” for as long as they think because these call features give issuers the right to redeem them early for a small premium. Early redemption happens – naturally – when interest rates decline, thus tossing investors out of their neat investment at the very worst time: when interest rates are lower. Clearly, there are no simple answers when it comes to tax-smart investing, just the exercise of sound judgment based on good and full information.

So, as it relates to claim settlements, what do we know? We know that structured settlements provide benefits that are completely excluded from Federal, State and Local income taxes. Structures are logically even more valuable to people who live in the highest taxed states in the nation. Structures also provide payment security and benefits unequalled by anything other than U.S. Treasury obligations.

As a consequence of our chosen professions, we are in nearly constant contact with those unfortunate enough to have been hit by a truck or suffered some other personal injury. But now, rather than telling them you don’t know where they should put their money, you can tell them “I have some good news: you qualify for a non-taxable and secure structured settlement.”

For a person who has suffered a personal injury, that’s a pretty important thing to…know. Have a case in mind? Call Frank C. Kilcoyne, CSSC at 800-544-5533. I am here to help.

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