July 24, 2012

Financial Freedom Is Not Free

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As I take a summer vacation with my family, I tend to wonder if the multitudes of people on the beaches and at other vacation spots across the U.S. really comprehend the price of that luxury. I’m not talking about the literal cost of the trip, but more about having the personal and financial freedoms to even take a vacation. 

My father wrote a wonderful blog post about a personal experience he recently had in Washington, D.C., reminding us to remember every day that Freedom is NOT Free. His post was mostly about the personal and political freedoms we as Americans enjoy, thanks to the fearless soldiers who courageously put themselves in harm’s way or sacrificed their lives for our benefit. 

However, the point he indirectly makes is that those same dedicated individuals also helped lay the foundation for our financial freedoms as well, so that anyone is free to work hard, be self-sufficient and become an entrepreneur, inventor, writer or even financial advisor today.

Yet as I look at our current governance, it seems that quite a different message is being communicated through society and with our tax code. Basic financial freedom and the many privileges it affords have, indeed, become truly 'free' for too many Americans, but not in a good way.

The Obamacare PPACA law, for example, was recently upheld by the Supreme Court, which ruled that legally it’s a tax. But the notion that government-subsidized health care is 'free' or an inalienable right, is absolutely ludicrous to me.

Per the law, starting in 2013, if you don’t have health insurance coverage you will pay a tax penalty, assuming you don’t qualify for an exemption. However, if you do have health insurance coverage and make more than $250,000 a year, ObamaCare will actually tax you more, thereby penalizing you and making you pay for someone else’s free health care coverage! We all know that many Americans work very hard every day just to make ends meet, so it’s wrong to assume those who don’t buy health insurance are somehow irresponsible. However, if they can’t purchase an important basic need such as health insurance, how can they pay for a cell phone, iPod, iPad, cable TV or a newer model vehicle? Should they expect the government (and the taxpayers) to pick up their insurance tab, while we as a country spend ourselves off a financial cliff? 

For example, USgovernmentspending.com reports that in 2011, the cost of all federal, state and local social welfare programs was an estimated $745 billion; $473 billion of that at the federal level. Even in Hawaii, with a population of only 1.3 million people, the state’s department of human services provided almost $5,200 a year in food stamps to 77,133 households, or more than $401 million/year. We as a country can’t continue at this pace. The government can’t keep mandating that hard-working families who behave responsibly and make good financial decisions pay more, while reinforcing to others in our society that someone else will be responsible for you and that “financial freedom is free.”

Similarly, clients often ask me how it’s possible that half of American households pay no federal income tax. As a CPA, I can tell you that it’s quite possible, even on income well above welfare-qualifying limits. For instance, in 2011, a married couple with four children all under age 17 could have earned roughly $66,100/year without paying any federal income tax. This is calculated as follows:  

  • Adjusted gross income of $66,100 - six exemptions at $3,700 each = a $22,200 deduction
  • Married, filing joint standard deduction of $11,600 = taxable income of $32,300
  • Four children under the age of 17 =  $4,000 child tax credit ($1,000/child)

The tax credit completely cancels out the federal tax burden on their taxable income of $32,300. While that tax code works to the benefit of this hard-working family, it doesn’t support our country’s need for true financial freedom long-term.  

Yes, raising children is expensive; trust me, I have three of my own. However, assuming that a family of six versus a family of two without children should keep, at a minimum, $4,000 more for having children rather than not, raises the question, “Whose financial responsibility are the children?” Is it the government or the parents who freely chose to have children?

Are we creating a society where the financially responsible segment of our society is forced to pay in some way for the other 50% of our society? I’m in no way advocating we let anyone go hungry, but we have to make people at least somewhat financially responsible for their choices. My concern is that government has created an expectation that the cost of financial freedom is sometimes free – if not totally free in some instances, often paid for by someone else. 

As financial advisors, we help families accumulate wealth, invest it prudently and retire securely. But given the state of our government and society, it seems our services will be more valuable than ever if we want to help the best country in the world maintain its financial freedom. I’d urge all of us as advisors to find more ways to educate every American on how to live within their means, become overly self-sufficient and save more than they ever dreamed possible, because our country’s future growth and financial freedom depend on it.  True financial freedom require a sacrificial cost of today for the future benefit of tomorrow, but remember, it is never free.

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