Year End Tax Planning - 2020

Those earning over $400,000 (single and joint filers) and those with income over $1M, likely breathed a collective sigh of relief when it became apparent that the Democrats likely would not take the Senate. This means that Biden won't be able to jam through his "tax plan".

Even though the political situation remains a bit murky, there are some year-end planning items you may wish to consider:

Retirement Accounts

-Max out your retirement account. If you have deductible IRA, 401k, or a 529 plan and haven't yet maxed out the contributions, consider doing so. You will get a deduction for IRA and 401(k) contributions on your federal return and possibly a deduction for a 529 plan contribution on your state return. Note that if you have non-deductible or Roth IRA/401(k) plans, then this will not apply.

-Make a Roth conversion. With Biden likely ascending to the presidency, tax rates likely won't go down further from where they currently are. Thus, you may want to pay more taxes at these historically-low rates. One way of doing that is to convert some of your pre-tax IRA/401(k) funds to a Roth plan. You will increase your 2020 income and taxes, but you may be paying lower taxes now than higher taxes in the future on those dollars.

Charitable Contributions

-$300 above-the-line deduction for cash contributions. As part of one of the stimulus bills during the pandemic, you are now able to take a $300 deduction for a cash-only (i.e. cash, check, credit card) contributions to eligible charities. In other words, even for those who normally do not itemize and instead take the standard deduction, you will still be able to benefit from this deduction.

-Donor advised funds. If you are charitably-inclined, then you may want to consider making a donation to a donor advised fund. The mechanics behind this would be to make a large contribution in one year and reap the related tax deductions (for itemizers only), and have the fund disburse the funds over time. Many people make a contribution for multiple years in one year and itemize, don't contribute the following and take the standard, and then contribute again in the third year and itemize. This strategy is for those who would only itemize in years in which they make the contributions. 

-Donate appreciated securities. Aside from reaping the aforementioned $300 deduction for cash-only contributions, it is much more tax efficient to donate appreciated stocks and other securities instead of cash. The reasoning behind this is that you won't be subject to the tax on the gain from the security and you also receive a full deduction (for those who itemize) for the fair market value of the security. Compare this to if you sell the security, pay the tax on the gain, and then donate cash. By donating the security directly, you avoid the capital gains tax.

-No AGI cap on contributions. Normally, you are only able to take charitable contribution deductions up to a certain percentage of your income. However, one of 2020's stimulus bills did away with this requirement for 2020. You will now be able to deduct up to 100% of your AGI. In other words, if your AGI is $120,000 and you contribute $130,000, you will be able to deduct $120,000 instead of $60,000 (or less).

Prepay Expenses

-Prepay tuition. If you have a tuition payment in early-2021 and haven't had any in 2020, prepay it so that you can yield some credits on your 2020 return. Undergrads can get a credit up to $2,500 and graduates and professionals can get up to $2,000. Note that the latter can only take a credit for 20% of their expenses. Thus, professional must pay $10,000 to get the full $2,000 credit.

-Prepay real estate taxes. If you expect to itemize deductions in 2020, then you should consider prepaying your real estate taxes if you have not yet paid up to the $10,000 cap. Note that due to the cap, there is no benefit to paying more than $10,000.

Odds & Ends

-Tax loss harvest. If you currently have net taxable gains and some unrealized losses in your portfolio, then you should consider selling some of the losses in order to offset your gains. You can then buy a very similar security (i.e. a similar ETF or a different stock in the same industry) and not be subject to the wash sale rule. Note that you can use $3,000 of net losses to offset your ordinary income. Beyond that amount, there isn't a tax benefit to realizing losses.

-Estimated taxes. You should consider running a projection of what your tax liability will be in April. If you expect to owe additional taxes, then you will want to consider paying them in advance to offset IRS penalties for late-payment. If you expect to get a refund (read: euphemism for overpayment), then you will want to ensure to not pay any more for 2020. If you scheduled a payment for Q4 on January 15th, you will want to cancel it.

Summary

The items above are a shortlist of what you should consider when reviewing your tax situation this month. However, these are only the tip of the iceberg. You personally may have many other ways to either save on 2020 taxes or set yourself up for a better tax outcome going forward. An experienced tax planner would be able to uncover many of those opportunities.

Why a Tax "Refund" is NOT a Good Thing

It seems that the vast majority of Americans like to receive tax "refunds" when they file their tax return. Who wouldn't like to receive a potentially large check at tax time? It's basically free money, right? 

Wrong.

Let's analyze this a bit further. What exactly is a tax "refund"? If you receive money from the IRS when you file your tax return, it is most likely due to the fact that you overpaid your taxes throughout the year. Stated differently, the "refund" you are receiving is simply money you paid to the IRS which you didn't need to. If you would have paid a lower amount of taxes to the IRS, your "refund", which is a euphemism for overpayment of taxes, would have been lower or nil. In fact, if you reduce your payments enough, you will need to pay additional taxes when you file.

Let's look at it from a different perspective. When you overpay your taxes throughout the year, a couple of things happen:

a. You have less cash for personal use, and

b. You provide the government with more cash than they require you to pay

Does the government act like a free market institution and pay you interest on your generous "loan"?  Certainly not. This is ironic given that they charge you interest (and penalties) when you don't pay them enough.

In sum, if you are receiving money back when you file, it means that you provided the feds with an interest-free loan during the year. 

Does this sound like a good proposition to you? 

Man, Economy, and State -- A Libertarian Review

In Rothbard's magnum opus, he takes you step-by-step from an economy consisting solely of one person--termed a Robinson Crusoe Economy--to today's economy, consisting of billions of people, showing that the same laws of economics apply equally to both scenarios. He deduces what he terms the "true laws" (1) of economics from the simple praxeological axiom that every man acts. This is done "in a logical, cause-and-effect" (1) manner.

Throughout the book, Rothbard--in a very scientific manner--shows the reader that although they may believe that a planned economy would be the most organized system, it is instead a purely free market that would result in the most efficient and beneficial economy, while socialism and interventionism by default cause chaos in an economy. He also differentiates the free market from the government-controlled market by showing that both parties to a transaction in a free market are always made better off--else they would not have entered into the transaction in the first place (6). On the other hand, all transactions in a planned economy are based on coercion and thus hurt at least one of the parties to the transaction, since that party would have preferred to not have entered into the transaction.

Other notable contributions made by Rothbard throughout his book are his analysis of the business cycle (2), the monopoly 'problem' (3), IP (4), as well as his discussion of the origins of money and prices (5).

Libertarian Take-away

This book, though quite formidable-looking to the average lay person in terms of its sheer size, can be quickly comprehended and understood. Rothbard, unlike Mises in his Human Action, assumes that the reader has no previous economic knowledge. Thus, this book is much more highly recommended to the beginner in economics than Human Action, since it is written for the layman.

By the end of the book, the reader is nearly all-knowing when it comes to economics. This is due to the fact that Rothbard dissects the economy step by step and covers almost every topic related to economics that one can imagine. If one is looking for a one-stop-shop for everything economics, they must read this book.


Citations and Links:

Book (free-online): https://mises.org/library/man-economy-and-state-power-and-market
Study Guide (free-online): https://mises.org/library/study-guide-man-economy-and-state

1. Page 786
2. Pages 852 and 994
3. Pages 651 and 688
4. Page 747
5. Page 624 (highly summarized)
6. Pages 614, 624, 946

Equilibrium - A Libertarian Review

Set in an Orwellian future, the elite forces of an all-powerful government are on a mission to find and destroy any last remnants of human emotion. This is due to emotions and all forms of artistic expression having been outlawed since the founding of the state of Libria after WWIII, which was supposedly caused by men having negative emotions and passions.

The main character, Preston, is one of Libria's most skilled and ruthless assassins and destroyer of art. However, things begin to change when he is forced to kill his partner after witnessing him reading a book of poetry and then getting told that emotions are what make life worth living. After this incident, Preston fails to take the emotion-negating drug and thus starts to experience feelings of his own. This leads to his ambitious young partner becoming suspicious of his being a "sense offender".

Preston eventually meets with the head of the resistance to Libria and its drugs--the Underground. They enlist Preston to assassinate the head of the state, Father, since he is one of the few people capable of being granted audience with the man. Preston pledges to try his best. However, his young partner and Father are keen to the scheme and set Preston up. Although Preston falls into the trap, he ends up killing his way through his partner and an onslaught of guards, and making it into Father's office to confront him one-on-one.

The movie ends with Preston getting the better of Father after a titanic battle between the two men. Preston, from Father's office, then overlooks the state of Libria being "liberated" by the Underground.

The allure of this film to the libertarian is in its representation of an all-tyrannical state, and its effects on the individuals within that state. Though this sort of state rule seems quite unlikely in this day and age, one can perhaps find many parallels between those methods of rule with those found in the world today. America and the other states may not be as outwardly tyrannical in an Orwellian and Librian fashion, but they are indeed as tyrannical in more of an insidious Huxlian manner--which may be much harder to form a resistance against.

The Quiet American - A Libertarian Review

This movie (1) is set in Vietnam during the 1950's when the French colonists were fighting the Ho Chi Mihn's Communist forces. Thomas Fowler--a British journalist in his 50s--is a correspondent for the London Times, covering the conflict. He meets a young American aid worker--Alden Pyle--who immediately falls in love with the former's Vietnamese mistress Phuong.

Although it seems that Phuong is in love with the older Fowler, she above all else desires to marry a Westerner so that she may move to their country with them. The problem is that Fowler is already married; and because his wife is a devout Catholic, he has not been able to divorce her and marry Phuong. This lead to Phuong leaving Fowler for Pyle, who she will be able to marry and then move to the U.S. with.

While all of this is going on, a "third power" (not French and not Communist) arises in Vietnam in the person of a General The. Pyle lets it be known that he supports this man and his cause since he believes that colonialism is not the answer to the problems in Vietnam, but Communism is not either. This seemingly noble idea runs into the fact that since the new general's rise to prominence, there has been an increase in atrocities (more like terror attacks) throughout the country that the West is blaming on the Communist forces. Fowler soon discovers that the "third power" The is behind these attacks, with American aide, in hopes of acquiring even more aid from the U.S.

Fowler then finds out that Pyle is not truly an aide worker, but really a CIA undercover operative sent to the country to find such a "third power" and assist in the rise of it, by means of the aforementioned terrorist attacks. Thus, Pyle had been complicit (directly or indirectly) in all of the killings of innocents that had been taking place. Once he finds this out, he agrees to assist his Vietnamese contacts assassinate Pyle.

The movie ends with Pyle getting stabbed and killed, and then Phuong returning to Fowler, who promises her that he "will never leave" Vietnam or her.

Links

1. http://www.amazon.com/The-Quiet-American-Michael-Caine/dp/B00005JLXB
2. https://www.corbettreport.com/?s=gladio+b - For more on the staging of terrorist attacks in foreign countries by the CIA in the furtherance of their objectives, please research "Gladio B"

The Wisdom of Laotse - A Libertarian Review

I shall first discuss the layout of this book--the 1948 Modern Library edition (1). The editor has kept the original Laotse text at the beginning of each chapter; however, he then usually includes related writings on the topics by Laotse's greatest disciple, Chuangtse. These additional writings are very useful in expounding the ideas of Laotse, and in a manner than any regular layman can readily comprehend. This is not to say that all of Laotse's writings are hard to grasp, but they tend to be quite philosophical and may require many re-readings to fully comprehend.

The main tenant of Taoism is that all things in the universe originated from the same source, what the authors term "the Tao". The authors then spend the rest of the book spelling out the implications of this. Some of the main ideas expressed are as follows (in no particular order):

• Life and death is a natural cycle; thus, do not mourn one's passing
• All distinctions in the world are arbitrary; they result from differing viewpoints
• The world is in a constant state of change; worldly things are temporary in nature
• Worldly desires tend to lead to the destruction of character/one's self
• Inaction--allowing natural forces to take place--is how to realize one's highest self 
• Be like water; benefit all, compete with none (be humble)
• Laissez Faire in government allows the citizenry to reach their fullest potential

While much of the book expounds the Taoist world view, the authors also take the time to highlight the differences between their belief system and that of the Confucians. The Confucians' creed boils down to "humanity and justice" in all human interaction, including that of the state. Both of our authors show the reader why this is the wrong course to take--though it sounds quite noble in its intentions--and why Taoism is to be much preferred.

Libertarian Take-away

Murray Rothbard claimed that Laotse was the first libertarian (1). The reader of this book will be quick to find out why. Not only does the main tenant of Taoism--inaction--conform to the libertarian principle of the non-aggression principle, but many of Laotse's subsequent teachings also directly relate to that of libertarianism. For instance, Laotse greatly stresses the harm that "humanity and justice" practiced by the state must always lead to; while extolling the effects that a policy of Laissez Faire in state affairs would result in. He sums this idea up by asking the pertinent question of, "if one cannot take care of himself, how can he take care of the world?". He also touches upon the destructive and immoral nature of war and all forms of violence, going so far  as to say that "the violent man dies a violent death". These are but two of many such nuggets of wisdom that the libertarian will find in this gold mine of a book. This book is highly recommended not only as additional ammunition in the libertarian reader's arsenal, but also due to the positive effects it can have on altering the way the reader looks at the world.


Links 

1. http://www.amazon.com/The-Wisdom-Laotse-Modern-Library/dp/B000EETKIA
2. https://mises.org/library/ancient-chinese-libertarian-tradition 
3.  https://en.wikipedia.org/wiki/Laotse
4.  https://en.wikipedia.org/wiki/Zhuang_Zhou

The Americanization of Emily - A Libertarian Review

This is a very powerful film (Link 1) about the realities of war. It is a drama, with its various dialogues about war, a comedy, with many downright outrageous scenes, and also romantic, with Charlie and Emily's relationship.

Set in the months before and including D-Day, Charlie is a "Dog Robber" for an American admiral of the Navy--someone who must see to it that the admiral is very well fed and taken care of during the war. The setting is in London, far removed from any battlefront. Emily is one of Charlie's drivers and initially finds him very distasteful since he both is chauvinistic as well as not remorseful in getting to enjoy many of the items that the average British citizen has not been allowed to eat or possess during the war. However, she eventually warms up to him after attending one of the parties that he set up for the admiral. From then on, the two fall madly in love with each other.

The two are seemingly quite different. Emily is quite proud of being a war widow and having a father, brother, and cousins that have also died in war. On the other hand, Charlie believes that there is nothing to be proud of in regards to a soldier's death; that it is truly living that one should admire and respect. This conflict comes to a head when Charlie is sent to film  a live movie of the invasion of Normandy and believes that he will be able to avoid actually taking part. Emily believes that it is cruel and very dishonorable to wish to avoid the invasion while thousands of other soldiers will not be so fortunate. It is then that Emily breaks off their relationship.

After it is believed that Charlie dies on Omaha Beach, Emily comes around to Charlie's feelings about war. She lets it be known that she no longer is proud of death during war.

Throughout the film, there are several scenes that contain bitter criticism of war and how it is perpetuated. The most important of these is when Charlie meets Emily's mother (Link 2). During the exchange between Charlie and the mother, Charlie states that it is the public that are most to blame for continual war--not the generals and politicians at whom the finger is often pointed. He explains that it is the people and their glorification of war that makes it palatable to the public at large. For a current example of this, one only needs to look at how members of the U.S. military are treated--and often worshiped--by the average American.  This is the main message of the film. To put it another way, war will never truly end so long as it is seen as honorable to fight and die for one's country.

It can clearly be seen that the world today--especially in America--is not even close to this philosophy. However, if more and more people begin to see war for what is truly is (Links 3-5), then we may one day achieve this noblest of ideals.

Links

1. https://www.youtube.com/watch?v=7MUd06J-F4w&spfreload=10
2. https://www.youtube.com/watch?v=reUstMn4bM8&spfreload=10
3. https://www.youtube.com/watch?v=01-2pNCZiNk&list=PLfZW33CKLKfuIrh0abieHTVYlxZV22zgE
4. http://ronpaulinstitute.org/
5. http://antiwar.com/