40% of Americans Pay No Federal Income Tax – Fiscal Policy

Disparity of income has been a preponderate subject for politicians and activist groups for sometime, yet in the end, those that earn the higher incomes pay for the majority of taxes.

An estimated 72.5 million Americans, identified as households, pay no federal income tax. The non-partisan, non-profit tax group known as The Tax Policy Center released income tax data it analyzed for 2022 and found that nearly half, about 40% of American households, paid no federal income tax in 2022. The Tax Policy Center study also found that 24 of the 72.5 million not paying taxes, are aged 65 or older, many of which are living primarily on Social Security benefit payments.

Generous tax credits and low tax brackets for low-income earners allow minimal to no federal tax payments. The Tax Policy Center did find that these lower income households did pay their share of state, local, property, sales, and excise taxes. The ultra wealthy, also know as the top 1% of taxpayers, with annual incomes of about $2 million, pay about 42.3% of all of the federal income taxes in the U.S. (Source: Tax Policy Center/Washington D.C.)

Macro Overview – Financial markets started the year off with an eye on earnings, the upcoming election, and developments in the Middle East and Ukraine. Markets are eagerly awaiting for the Fed to finally commence its rate reduction trajectory. Analysts vary on when it will happen, but are expecting that decreases will start before the middle of the year.

Gross Domestic Production (GDP) for the 4th quarter of 2023 came in at 3.3%, stronger than expected by economists. Concurrently, consumers are contributing less to economic growth as measured by Personal Consumption Expenditures (PCE), representing roughly 67.6% of GDP. Consumers contributed 69% to GDP nearly two years ago, when consumer expenditures were higher. Economists track this dynamic closely since two-thirds of GDP is driven by consumer expenditures.

The Baltic Dry Index, which measures the cost of transporting commodities and essential goods globally, has fallen back to pre-pandemic levels. Shipping costs and transportation rates rose sharply during the pandemic, causing price increases from commodities to finished products worldwide. Many economists believe that the drop in shipping and commodity prices is indicative of lower inflation and a possible global slowdown of commerce activity.

Sources: Federal Reserve, Labor Dept., FDIC, OCC, FFIEC, Baltic Dry Index

Benefits Of A Trust Versus A Will – Estate Planning

A properly drafted will or trust is essential for anyone that has assets to leave to heirs. Either a will or a trust allows you to designate anyone you wish as beneficiaries. Both a will and a “revocable living trust” allow you to identify who the heirs to your assets will be.

The main difference between the two is that assets held in a trust will avoid probate upon one’s passing, which is inhibitive to the heirs and costly. A trust structured as a revocable living trust can help shelter family assets from taxes by properly placing assets within the trust. For 2024, the first $13.61 million (per individual) & $27.22 million (per married couple) is excluded from estate taxes with any assets over that amount taxed at the Federal Estate Tax Rate.

If you own property in another state, a living trust eliminates the need to probate that property in that state. A living trust can immediately transfer management of your property if you become incapacitated either physically or mentally. There is no need to go to court to appoint a guardian or conservator.

If you choose to create a living trust, you should also create what is called a pour-over will. It provides for the distribution of any property that is not included in the trust.  It will also allow you to name a guardian for any minor children. (Source: IRS)

Car Prices Are Falling – Auto Industry Review

Years of consecutive increases in U.S. auto sales have put a glut of vehicles on U.S. highways. In addition, a significant number of those sales were with a lease, leading to a rising tide of cars flowing back into the market as lease terms expired.

As automakers have added manufacturing capacity, they have also been aggressive in offering larger incentives on new vehicles in order to maintain record sales momentum. That has put downward pressure on the entire market.

Consequently, the number of drivers that owe more on their cars than they are worth is surging. Americans are paying on a record $1.6 trillion of auto loans currently, according to the most recent Federal Reserve data. That represents roughly half of all licensed drivers in the U.S. Among those that carry loan balances, the Federal Reserve estimates that auto loans make up between 10 percent and 23 percent of their total financial obligations. Auto prices soared as the pandemic took hold in 2020 through 2022, as supply constraints for critical auto components hindered manufacturing and distribution of automobiles globally. Low interest rates on auto loans helped subsidize rising auto prices as consumer demand continued on. (Sources: Federal Reserve Bank of St. Louis)