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Wednesday, April 15, 2009

Happy Tax Day Let's Find a True Stimulus... My Tax Lady Called Me a Trading Monster

The old saying goes "paying taxes is a good thing, it means you made money". This is very true! I agree with this saying I just don't like parting with 28% of my profits. I'll share a quick tax story with you. For the year 2008 I averaged more trades than ever before. This year I received my detailed gain/loss tax statement via UPS Ground. Yes very thick and heavy and almost 200 pages of trade info. As I gave her the papers she looked them over for a second, and said "you're a trading MONSTER!". She looked at me as if I committed a crime. Then she asked me if I has access to Gains Keeper. Fortunately for my tax lady (and my wallet) TDAmeritrade has software called "gainskeeper" which is ideal for doing your taxes. I was able to download the information to a spreadsheet and email it to her. This made it much easier for her to do my taxes; saving her hours of work, and saving me some money! So before next years taxes, you may want to see if your brokerage has access to gainskeeper. This makes it very easy to export data which could save you time or money when you do or get your taxes done in the future.

Speaking of taxes I think if Washington really wants to make this market rally they need to give a tax holiday for traders/investors! They are actually talking about raising taxes which is absurd! In 2003 the taxes were lowered from 20% to 15% for all income brackets and 0% for the 2 lowest income brackets on capital gains. President Obama has already announced in late February that these capital gains adjustments made in 2003 will "sunset" in 2011, or that they will expire bringing the capital gains taxes on long term gains back to 20%. This will certainly cripple the market! I hold things less than a year for the most part so they tax me at my income bracket, which is extremely high considering this extremely volatile trading environment! I can't imagine too many investors/traders made money this year but the ones who have like me are certainly aren't getting any tax break! How about that for a stimulus? Tax me 20% instead of 28% on short term gains and I promise I'll blow that money on some unnecessary goods to help stimulate the economy! No sadly it's just not that easy... But I need to stop complaining, life could be much worse! But for real how about a stimulus plan that will work! Here is my theory about taxing the market:
  1. Cut short and long term capital gains taxes by 1/3 instead of raising them. This would bring the current long term rates above the lower two brackets to 10%, and would decrease the short term taxes on capital gains by 1/3 of the tax bracket rate (bring the rate down 9.33% to 18.67%in my case)
  2. Lessen the time period for short term capital gains from less than 1 year to less than 6 months. This wouldn't help traders like me, but would certainly help those who got into a position, made money, and then needed the money back sooner than they anticipated. Too many times someone gets cash from a position they've made money on back, and spends the entire amount of cash forgetting they need to pay taxes on the gains.
  3. Be able to write more than $3,000 off ordinary income taxes; raising it by 66.67% to say $5,000. In 2008 a lot of people realized a lot of losses. Trust me when people panic they tend to sell at the bottom which many did in those few weeks in October and November... Say someone lost $20,000 realized in the market in 2008 and decided never to invest again. They would roll $3,000 forward for 6 years and in the 7th year they could write off the last $2,000 on their income. Think of it this way: Joe the plumber made $36,000 in 2008, and panicked at the market bottom and cashed out all of his investments. Joe takes a $5,000 bath on his stocks he thought were so great to hold for the past 10 years. Lets assume the only thing Joe can write off are his losses on his stock investments. Joe made between $32,550 and $78,850 which would put him in the 25% tax bracket. Joe can write $3,000 off on his income, but he is still in the 25% tax bracket by $450. However if he didn't have to wait until 2009 to write off the last $2,000 he lost, he would save a lot of tax dollars! If he could write off the $5,000 instead of $3,000 he could lower his percentage to 20% instead of paying 25%! Assuming Joe cannot write anything else except his capital losses he would have paid $8,250 in taxes to the IRS for year 2008, but if he could write off the $5,000 he would pay $6,200 in taxes. This is certainly a stimulus!
There are many other great ideas these are just 3 ideas that would save the average American a bundle! Assuming these were put into place the same amount of money would most likely be paid in dollars to the IRS! If these plans were announced it would cause the markets to rally, causing people to make more money, and pay more $ in taxes but at lower %. These are the things Washington needs to look at doing as ways of stimulating the economy... Happy Tax Day.


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