Are Taxes Forcing 2011 HGTV Dream Home Winners to Sell?
It was just announced that the winners of the 2011 HGTV Dream Home in Stowe Vermont have put their house up for sale . . . for a cool $3,795,000. However, this clip from the story makes you wonder if property taxes aren’t to blame:
The annual taxes on the home are $27,720, according to town appraiser Tom Vickery.
The town-appraised value of the house is $1,521,000 million; however, that’s based on 2005 selling prices and doesn’t take the furnishings and artwork into account. Vickery is working on a townwide appraisal and expects the home’s value to increase somewhat once the appraisal is completed this summer.
OK, so they are paying $27,720 in property taxes on a $1.5 million valuation. They have the house up for $3.8 million, which means the comps are indicating that the assessed value will “somewhat” increase by at least double! In that case, the property tax bill alone will be a whopping $55,440 per year. And that’s before utilities, maintenance, insurance, etc.
This is why I would advise any winner of these dream homes to take whatever cash you can and run . . . as I mentioned in my previous blog on the 2012 HGTV Dream Home in Midway, Utah.
Income Tax Consequences of Winning HGTV 2012 Dream Home in Midway, Utah
photo credit: Hammer51012
Another year and another HGTV Dream Home. This year’s HGTV 2012 Dream Home is a river-front home in Midway, Utah. According to the HGTV contest rules, it comes with a home and furnishings (valued at $1,500,000), cash ($500,000) and a 2012 GMC Terrain SLT2 ($38,755, shown above) for a grand package valued at a cool $2,038,755.
If you win the dream home, be prepared for a hefty federal and state income tax bill (this analysis excludes the myriad of other taxes such as any deed or transfer taxes and, most especially, the property tax which you pay year, after year, after year . . . well, you get the picture). Overall, the federal and state income tax bill comes to a whopping $775,586. Even after using the $500,000 in cash, you will still be left with a tax bill of $275,586 . . . maybe the IRS will let you pay on an installment plan?
Fortunately, HGTV does provide an escape hatch by offering $800,000 in lieu of taking possession of the home, plus the $500,000 in cash and vehicle–for a grand total of $1,338,755. If the winner opts for this choice, they will take home $843,169 free-and-clear after paying income taxes of $495,169.
My suggestion would be take this money and run. One could outright buy a very, very nice home with the cash. For example, check out this home in beautiful Hale’s Location, New Hampshire listed for $729,000 and still have enough left over to put into your IRA. Hale’s Location is one of a handful of America’s tax havens left (all in New Hampshire) where there are no state and local income or sales taxes and very low (in some case no) property taxes. In fact, according to the listing, the property taxes are a mere $1,887 per year.
Intermission: Grandma Got Ran Over by TSA
Just in time for Christmas . . . Remy’s new song “Grandma Got Ran Over by TSA” from ReasonTV.
Have a Merry Christmas (am I still allowed to say that?) . . .
Jon Stewart Nails TARP
I’m generally not a Jon Stewart fan, though I admit he can be very funny even when he doesn’t know what he is talking about. However, this one may just be his best ever as he exposes the dark side of the federal government’s role in the banking bailout. A must watch . . .
Intermission: Remy-Missing You, the Incandescent Light Bulb Song
For those of you who may still be in the dark (pun intended), Congress recently outlawed the venerable incandescent light bulb as a way to encourage the migration to newer, more energy-efficient, more expensive bulbs. Now, Remy has a new song poking fun at this ridiculous law . . . enjoy!
Don’t get me wrong, I have nothing but compact fluorescent bulbs in my house because the price of electricity is so high in New Hampshire. Yet, that is my choice. I’m not going to force my neighbor to do the same thing if he doesn’t want to. Anyone in Congress listening?
Unions Win: Right-to-Work Fails in New Hampshire
photo credit: pweiskel08
Just moments ago, the New Hampshire House attempted to override Gov. Lynch’s veto on Right-to-Work. Unfortunately, the veto override failed 240-139, a mere 14 votes shy of the needed two-thirds.
However, the supermajority vote in the Senate and near-supermajority vote in House shows that there is very strong support in New Hampshire for Right-to-Work. New Hampshire is only one supporting Governor away from enacting Right-to-Work which could happen as early as 2013 (New Hampshire’s Governor is on a two-year term and Gov. Lynch has announced he will not run again).
Another thing we should also worry about are the actions of the anti-Right-to-Work forces who stopped at nothing to get their way. Consider these shenanigans as reported by New Hampshire Speaker O’Brien:
That’s why I have become seriously concerned about the coercion, threats and outright intimidation specific to the Right to Work issue that we have learned some of our colleagues have suffered. Here are several examples, some of which have just come to me today:
• One older representative was told that public emergency personnel might not respond in a timely fashion if they learned of a problem at this representative’s home after a vote to support Right to Work.
• Another representative’s daughter attending a public school was told that she would not be an appropriate candidate for a captain of her basketball team should her parent vote in support of Right to Work.
• Yet another representative who has been supporting the veto override was first told by his public employer he had to work tomorrow. Then he was unexpectedly called in by the head of the employing agency and told that he would be allowed to go to Concord to vote, but that, given the presence of the two unions that had members at the agency, he really needs to vote against Right to Work.
• A representative’s spouse was threatened on the job based upon a vote for Right to Work, leaving that spouse with the impression that he might lose his job or suffer worse consequences if that vote was not for the union bosses.
• A representative’s spouse was told in a telephone call from a senior union official that their pension could be in jeopardy if this representative voted in favor of Right to Work.
These are examples that go beyond the pale, yet do not include the numerous other instances in which union bosses have subtly implied veiled threats against representatives on this issue.
How many more instances of intimidation went unreported? These tactics simply do not belong in America.
Illinois Policymakers say: “The deal is, they take three months of grocery money in exchange for chips and a sandwich”
In a saga that falls into the category, “you just can’t make this stuff up” . . . Illinois policymakers recently enacted one of, if not the largest, tax hike in state history only to find themselves faced with threats of companies leaving the state. The response, give away special tax breaks of course!
Both Sears and the Chicago Mercantile Exchange have threatened to leave Illinois if something isn’t done about their tax burden. So now the legislature is debating SB 397 which would carve out special tax treatments for Sears and CME (pdf).
Included in this discussion is a proposal to increase the state’s Earned Income Tax Credit from to 15 percent from 5 percent of the federal EITC (though the specifics are still in flux). However, the EITC is a deeply flawed policy that hurts the working poor more than it helps. My latest study on the EITC proposal published by the good folks at the Illinois Policy Institute (pdf) finds:
Because taxpayers lose out on the earned income tax credit as their income increases, there is incentive for workers to keep their income under the “phase-out” level. Specifically, the only time during which the government rewards the worker for earning more money is when the worker’s income is moving from zero to $12,750. The federal earned income tax credit only encourages work effort in the phase-in income range where the effective marginal tax rate is negative 40 percent.
The taxpayer is, at best, indifferent during the plateau stage where the effective marginal tax rate is 0 percent. During the phase-out state – $41,000 for a single person and $46,000 for a married couple – the taxpayer is actually penalized with an effective marginal tax rate of 21 percent. Since the income range of the phase-out (21,800 to $46,000) is twice as large as the income range of the phase-in ($0 to $12,750), the federal earned income tax credit is spreading more work disincentive than incentives.
The state earned income tax credit, since it is an add-on to the federal earned income tax credit, only serves to exacerbate the work disincentives. The current state earned income tax credit is worth 5 percent of the federal earned income tax credit, which creates an effective marginal tax rate during the phase-out of 22 percent (versus 21 percent under the federal earned income tax credit alone). When the proposed state earned income tax credit worth 15 percent of the federal earned income tax credit takes effect in 2013, the effective marginal tax rate during the phase-out will increase to 24 percent. Expanding the state earned income tax credit will only serve to further discourage work.
Compounding the work disincentive related to the phase-out of the earned income tax credit are other federal, state and local taxes and other government welfare programs. These other factors increase the effective marginal tax rate faced by people in the earned income tax credit’s phase-out income range. Other taxes add to the tax burden on each additional dollar earned while, at the same time, the money received from other government welfare programs begins to phase out at approximately the same income range that the earned income tax credit begins to phase out.
In fact, a more comprehensive effective marginal tax rate estimate found that the effective marginal tax rate can reach as high as 65 percent! Faced with an effective marginal tax rate that high, many people will find themselves trapped by the earned income tax credit rather than helped by it. Expanding the state earned income tax credit will only dig the hole deeper for those people working desperately to better their economic situation.
Illinois would be better off using this money to lower the personal income tax rate or increase the exemption for all taxpayers, rather than expanding the deeply flawed earned income tax credit.
This was a fun study for me as there was a good deal of nostalgia since it was based on work from one of my first studies that I ever published for the Tax Foundation: “Growth of the Earned Income Tax Credit” (pdf) co-authored with Arthur P. Hall
Additionally, the EITC does nothing for Illinois’s middle class which has gotten clobbered by the recent tax hikes. Watch the video below from Kristina Rasmussen of the Illinois Policy Institute which explains how “the deal is, they take three months of grocery money in exchange for chips and a sandwich.” It’s no wonder why taxpayers are fleeing Illinois.
The State of America’s Private Sector 28: October, 2011
The U.S. Department of Commerce’s Bureau of Economic Analysis recently released their monthly personal income data for October, 2011 (pdf). The chart below shows the private sector share of personal income from January 1959 to October 2011. For October, the private sector share of personal income was 70.8 percent. While a tad higher than September, it’s only because the previous months have been revised lower. So, technically, the private sector made no headway.
While the trend has been up over the last year (after cratering in May, 2009 at 69.06 percent), the current level is still well below the pre-Great Recession level of 74.48 percent in June 2007. With the aging of the baby boomers and Obamacare looming, it’s doubtbul that we will ever get back to pre-recession levels.
What do the Tea Party and the Local Food Movement Have in Common?
photo credit: Fibonacci Blue
The fight against excessive government regulation!
From the Maine Tea Party:
On Wednesday, November 9, Dan Brown, owner of Gravelwood Farm in Blue Hill, Maine, was served notice that he is being sued by the State of Maine for selling food and milk without State licenses. Blue Hill is one of five Maine towns to have passed the Local Food and Community Self-Governance Ordinance, a local law that permits the types of sales Brown was engaged in. By filing the lawsuit, the State of Maine and Walter Whitcomb, Maine Agricultural Commissioner, are disregarding the Local Food and Community Self-Governance passed nearly unanimously by the citizens of Blue Hill at their town meeting on April 4. Residents of Blue Hill will be attending the Selectmen’s meeting on Friday, November 18 to enforce the provisions of the Ordinance. The Blue Hill residents will be instructing the Town of Blue Hill to send a letter to the Maine Department of Agriculture requesting the State withdraw the lawsuit and recognize the authority of the Local Food and Community Self-Governance Ordinance.
Making the Occupy People Go Away
As I sat reading the latest Economist magazine and all of the injustices spouted off by the Occupy folks, I wondered if we all are as helpless as they portray us to be. In their worldview, we are all pawns of the “wealthiest 1 percent.”
Sorry, but I don’t believe that. We (the collective “we”) have more power than they imagine. Here is a simple plan that would a) sock it to the wealthy and b) improve the security of your balance sheet all at the same time.
Step 1: If you earn less than $200,000, sell 10 percent of all your stock-holdings (401k, IRA, day-trading, etc.) over the next year. This sell-off would put downward pressure on stock prices in the stock-market. Whooaa, won’t that be bad?
Well, if you’re concerned with socking it to the wealthy, the drop in the stock-market will primarily hit them. As shown in the chart below, for folks making more than $200,000 net capital gains (gains minus losses) account for 10 percent of their income. For those folks earning less than $200,000, capital gains rarely break 1 percent of income.
It gets even more skewed as you dissect the data even further. For folks with incomes over $10 million or more their reliance on net capitals gains is a whopping 34 percent!
Overall, 84 percent of all net capital gains income is accrued to those earning more than $200,000.
Step 2: Take the money from selling your stock and use it to either pay down debt (that includes your mortgage) or if you have no debt put it into a traditional savings account. This will increase your own personal financial security as well as buttress the overall economy from future debt-fueled financial shocks.
Step 3: Repeat steps 1 and 2 next year, and the year after, etc. until you have completely removed yourself from the stock-market. If you are trapped in a 401k, move your money into a bond fund (preferably Treasuries).
So to the Occupy folks . . . no, we don’t need higher taxes or more government spending to fix the economy. We just need to recognize that the stock-market was never designed as place to passively park your life-time savings. The stock-market is meant to manage the flow of capital to the most economically efficient companies.
And yet . . . the stock-market has been rigged against you, but not in the way touted by the Occupy folks. Inflating the stock-market with retirement funds has transformed the market into a casino and less of an exchange. Since the wealthy had/have more of their wealth invested in the stock-market, it’s no surprise that this inflation has benefited them the most. Of course, the opposite (deflation) is true as well.
As an added benefit, unlike capital gains, paying down debt is non-taxable. For instance, if you have a $200 credit card payment, you will need to earn $250 to $300 (depending on your federal tax bracket and the tax burden where you live) in order to pay that bill. Paying off your credit card means you no longer need to earn money to pay it . . . unearned money is untaxed money 
And just maybe these actions will also help prevent the decapitalization of America.
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