What is Congress Up To?

Your IRAs Are Protected — The Supreme Court gave bankrupt Americans another layer of financial protection in April by ruling that creditors may not seize assets in an Individual Retirement Account.  Previously protected were pensions, 401(k)s, Social Security and other financial “nest eggs” or benefits tied to one’s age, disability, or illness, but not your IRAs.

Bankruptcy Law Reforms — A new law makes filing bankruptcy much more difficult.  Background.  In 2004, about 1.6 million individuals filed for bankruptcy.  Common reasons included lost jobs, medical expenses, and high-interest credit card debt.  Over 70% of the filings were Chapter 7 Bankruptcy filings where approved unsecured debt like credit card debt is forgiven.  285 were Chapter 13 Bankruptcy filings, which require a 5-year repayment plan.

The New Law.  The new law makes it tougher to file Chapter 7 Bankruptcy.  Effective October 17, 2005, you will have to take a Financial Counseling Course and pass a new “means test” to see if you can repay some of the debt prior to filing Chapter 7 Bankruptcy.  The “means test” is required if your monthly income exceeds the median income in your state.  If it does, you must undergo a test calculation to determine if you are able to repay any of the debt.  If the answer is yes, you must file Chapter 13 and repay at least some of the debt on an approved five-year repayment plan prior to writing it off.  There are also changes in defining what assets are exempt from creditors.

The Impact.  The new law is expected to:

a)     reduce filings by as much as 20%

b)     increase legal fees to file bankruptcy

c)      increase lawyer liability for false claims and

d)     increase fraud cases as the courts scrutinize the Financial Counseling industry to minimize abuse of consumers in debt.

Since the new law becomes effective October 17, 2005, you may want to review your options now if you are considering bankruptcy.

Simplified Tax Code — A Presidential Advisory Panel on Federal tax reform has been established by President Bush to simplify tax laws and reduce administrative costs.  The panel will make recommendations to reform and simplify the tax code without changing its progressively higher rate for higher incomers.  Preservation of deductions for homeowners and charitable giving is also a priority of the Panel.  Some of the alternative reform concepts include:

• A Consumption Tax system (sales tax or value added tax) by which taxpayers would be taxed on the amount they spend each year.
• A Flat Tax system by which all taxpayers would pay the same tax rate on their income (e.g., between 18% and 25%).
• Simplification of the many allowable tax deductions and credits to make filing your return easier.

Many deductions could be reduced or eliminated to accommodate the new tax systems proposed, which creates complex issues concerning the impact such changes would have on the economy.  Many argue that moving from an income-based tax to a spending-based tax would favor the wealthy and older segments of the population as those individuals spend a smaller percentage of their income than middle and lower income taxpayers.  It could very likely turn out that reducing the complexity in the tax code is too complex to succeed in the near future.

What is predicted to pass in 2005:

• Permanent lowering of the Capital Gains and Dividends tax due to expire in 2010.
• Permanent establishment of the $1,000 Child Tax Credit.
• Continuation of the higher Section 179 expense limit for purchased assets.
• Raising Standard Mileage allowance for 2006 due to soaring gas prices.