The problem is that inflation eats away at the purchasing power of retirement nest eggs.  Over the course of 30 years (a very likely retirement period these days), a 3.5% inflation rate will cause today’s dollar to buy about 36 cents worth of goods.  To look at it another way, someone who can live today on $50,000 a year would need about $140,000 a year 30 years from now (if inflation holds at that pace).

Lately, the Consumer Price Index (CPI), the most common measure of inflation in this country, rose to 3.6% annually in July.  That’s above the historical average, and worries many experts that it could discourage the Fed from too much more stimulus for the economy.

With no cost of living increases in Social Security checks over the last two years, many retirees are beginning to feel the pinch of what rising costs can do to someone on a fixed income.

The truth is, the CPI measurement of inflation may not be realistic for some people.  People in retirement years often spend more than average on healthcare.  The cost of medical care only accounts for 6.6% of the CPI index.  At the beginning of retirement, healthcare accounts for about 25% of your essential expenses, and near the end of retirement if can account for almost 50% of your essential expenses.  As you get into the later years of retirement you tend to spend less on other things like travel, entertainment, transportation & clothing, so you still need to plan on at least a 3% overall inflation rate.

The good news is, there are ways to hedge your portfolio against the inflation enemy.  Things like stocks, real estate and commodities have historically outperformed inflation.  More recently, inflation protected bonds have also helped investors stay ahead of rising costs.  Many fixed and variable annuities now offer riders that automatically boost income payouts to policyholders each year.

The bottom line is, you need to plan on doubling or tripling your income over a 30 year retirement, even with modest inflationary numbers.  This can definitely be done with some careful planning, and by using a diversified approach to allocating your nest egg.  Working with a competent financial planner will help you accomplish this.

by Susan B. Garland
Monday, August 29, 2011

The death of a spouse is one of the most devastating events of a person’s life. To make matters worse, at a time when you feel incapable of dealing with life’s routines, you’re slammed with an avalanche of financial tasks that require immediate attention. This can be particularly stressful if the surviving spouse, usually the wife, did not play an active role in the household finances.

But despite the pressure to do so, this is precisely the wrong time to make major financial decisions. If you act precipitously, you may make costly mistakes that will be tough to unwind later. “I tell my clients that they should be in a decision-free zone for six months to a year,” says Karen Folk, a certified financial planner in Urbana, Ill.

Don’t put your house on the market. Don’t give away money to your children or charity. Don’t sell stocks or bonds. And don’t agree to move in with an adult child, says Folk. Eventually, any of these steps may make perfect sense. But take a breather in the overwhelming weeks and months after a spouse dies.

One other no-no: Don’t allow a salesperson to talk you into buying financial products, such as an annuity or life insurance. “Ambulance chasers will catch you when you are vulnerable,” warns Kathleen Rehl, a certified financial planner in Land O’Lakes, Fla. Rehl wrote “Moving Forward on Your Own: A Financial Guidebook for Widows” (Rehl Financial Advisors, $20) after the death of her husband in 2007. To drive home her point, Rehl recounts the story of a widowed client who was paid a visit by an insurance agent. The agent came to deliver the proceeds from her husband’s life insurance policy, and he persuaded her to sign over the check for a new policy that she did not need.

A case in point for not making big decisions soon after a spouse’s death is Maureen Saunders. The financial chores following the death of her husband, Hubert, from pancreatic cancer in 2006 at age 65 were crushing enough. Although Saunders, now 58, balanced the checkbook, her husband was the main financial decision-maker, especially when it came to investments. His death left her “in uncharted waters, not only emotionally and spiritually but also financially.”

Saunders had to wrangle with the life insurance company, which didn’t believe she was her husband’s beneficiary. She had a “total meltdown” in the bank when she discovered, after bouncing some checks, that the Social Security Administration had rescinded Hubert’s latest direct-deposit benefit payment. She proved that her husband died after the deadline to be eligible for that month’s payment, but it took weeks for the government to return the money. She did not realize that she would not be eligible for a survivor benefit until she turned 60. “You’re so vulnerable and raw, and there is always another form to fill out,” says Saunders, who lives in St. Petersburg, Fla.

The checklist below can help surviving spouses figure out which tasks to address early on. The tips apply to husbands and wives.

Gather the documents. If your late spouse ran the household finances, it would be great if he left behind an organized filing system as well as all the passwords you need to access computer files. But if you need to dig through the piles yourself, Rehl recommends starting a filing system using colored manila folders. Among the headings: banking, bills, credit-card statements, taxes, life insurance policies and estate documents.

You’ll need to gather Social Security numbers, birth and marriage certificates, military discharge papers, company benefits booklets, car titles, powers of attorney, and current statements for bank, brokerage and retirement accounts. Get 10 to 25 copies of your spouse’s death certificate. The funeral director can help with this. Many financial institutions require a death certificate to close an account or to change ownership of investments.

You’ll need the certificate to transfer title on real estate and to claim life insurance and veterans benefits. Make sure to pay your bills for credit cards, utilities, car loans, property tax, insurance premiums and the mortgage. You could incur late charges if you let these tasks slide. (If you are hit with such charges, ask for a waiver due to the circumstances.) Notify Medicare and other health insurance companies that you will no longer pay your spouse’s premiums. Also cancel club memberships and magazine subscriptions that you don’t need. Explain the situation and you may get a partial refund. Folk suggests that you keep a joint checking account for at least a year. “Occasionally, odd checks to the deceased spouse come in,” she says. “If you close or retitle the account, there won’t be a place to put them.”

Get some help. Charles Simon, a certified financial planner with Taconic Advisors in Poughkeepsie, N.Y., suggests creating a “financial support team.” The group could include an accountant, a lawyer, a financial planner, and a trusted friend or family member who has good financial skills. “In the first six months, you’re in a state of shock,” says Simon, a widower who counts many surviving spouses among his clients. “Your team can help you when you’re least able to attend to details.”

Before Veronica Cavalla’s husband, Peter, died in 2008 at age 68, he managed part of the couple’s investments while a broker handled the rest. Cavalla, 64, says the broker wanted to take control of more of the investments, so she began initialing documents. She didn’t know what she owned. In addition, the new widow couldn’t follow her lawyer’s instructions to retitle property or take other steps to prepare the estate for probate and estate taxes. “Part of my problem was that I was so embarrassed because I didn’t know what people were talking about,” says Cavalla, who lives in Poughkeepsie and recently retired as a registered nurse. “Unless it was a simple matter, I avoided it.”

Eventually, Cavalla’s frustrated lawyer recommended that she see Simon, a fee-only planner who helped her plow through the paperwork. “I should have hired him right away,” she says. If you need to find a fee-only planner, contact the National Association of Personal Financial Advisors (www.napfa.org; 847-483-5400).

Assess your cash flow. While you should postpone big financial decisions, you should take stock quickly of your expenses and income. Make a list of your income sources: Social Security, pension payments, dividends, interest, job earnings and IRA distributions.

Write down your fixed expenses, such as groceries, mortgage payments, utilities and insurance. “Look at your checkbook to see if there are recurring payments on your credit card,” says Simon. Check your deceased spouse’s check register, too. Make a separate list for your discretionary costs, such as gift s and travel.

Some income payments may decline. For instance, if your husband was receiving a Social Security benefit and you were getting a 50% spousal benefit, the spousal benefit will disappear. But some expenses will end as well, such as your spouse’s Medicare premiums.

If you are short on cash, start chipping away on the discretionary spending. “I used to have a 32-foot boat,” says Saunders. “Now I have two kayaks.”

Rehl says new widows should build a reserve for one to two years of expenses in a liquid account, such as a bank money-market account. “Widows worry, ‘Will I be a bag lady?’ ” Rehl says. “With a liquid account, no matter how the market is going, they will feel secure.”

Collect life insurance benefits. If you can’t find the life insurance policy and you don’t have an agent, go through checkbook registers and canceled checks to see if there were any checks written to an insurance company. For a fee, the MIB Solutions’ Policy Locator Service (www.policylocator.com) might help you find the application. Your spouse also may have had a group policy through an employer or former employer or professional or fraternal organizations.

When you file a claim, you may have choices regarding how you will receive the money. Read the fine print carefully. In some cases, an insurance company will place your funds into its own money-market funds and send you a checkbook. Turn down this option, and then place the money in a federally insured bank account or a money-market fund. If you’re instead considering guaranteed monthly payments for life, seek the advice of your lawyer or financial adviser.

Prepare the estate. Until you meet with your estate lawyer, hold off on placing your spouse’s assets in your own name, says Wynne Whitman, an estate lawyer with Schenck, Price, Smith & King, in Florham Park, N.J. If you touch assets in your spouse’s name, you’ll lose any opportunity to “disclaim” the property — that is, allowing those assets to go directly to your children or other heirs. If you forgo these assets, they will not count against your federal or state estate-tax exemption when you die.

You have nine months from the date of your spouse’s death to file a federal estate-tax return. Some states have earlier deadlines for filing returns for state estate and inheritance taxes.

Whitman suggests that you save all receipts related to the estate, especially if the estate’s value is close to or exceeds the estate-tax exemption. “The funeral is a legitimate expense and so is a post-funeral gathering,” says Whitman. “You will need every single deduction.”

Assuming you had named your spouse to make financial and health-care decisions on your behalf in the event you became incapacitated, you will need to designate a new agent for your financial power of attorney, health-care power of attorney and health-care directive.

Check with the employer. If your spouse was employed at the time of his death, call the benefits administrator to ask about benefits due to you. Besides life insurance, these can include unpaid salary and bonuses, accrued vacation and sick pay, left over funds in a medical flexible spending account, and stock options.

You’ll also need to check on pension benefits. Assuming your spouse was retired and you were both receiving monthly pension benefits in the form of a joint and survivor annuity, notify the plan administrator immediately, says Rebecca Davis, a lawyer with the Pension Rights Center, in Washington, D.C. Depending on the type of annuity you chose, you could be due 50%, 75% or 100% of what both of you were receiving before your spouse died. “If you have a 50% option and the plan keeps paying the 100% benefit, it could expect you to send back the overpayment,” says Davis.

If your spouse had a 401(k), it makes the most sense to roll the account into an IRA — assuming you get the go — ahead from your estate lawyer. If your spouse still had accounts from former employers, consolidate them into one IRA. The custodial firm that holds your IRA can help with the paperwork.

The 401(k)-to-IRA rollover can be dicey. Ask the 401(k) administrator to make a direct transfer to the IRA. If the plan instead sends you a check, get it into the IRA within 60 days. If you miss the 60-day cutoff, the IRS will consider the money to be a withdrawal and you will pay tax on the entire amount.

If you were receiving health coverage under your spouse’s employer plan, you may be able to continue on the group plan for 36 months through COBRA coverage. (An employer with fewer than 20 employees is not required to provide COBRA coverage.) Ask the plan administrator if the company will continue picking up the employer’s premium subsidy.

Roll over an IRA. If you are the only beneficiary of your spouse’s IRA, you can roll the retirement plan into your own IRA tax-free. (There are other steps you must take if you are one of several beneficiaries.) Before doing so, make sure your spouse, if he was 70 1/2 or older, took his required minimum distribution before he died. If he didn’t, you must take his RMD by December 31 in the year he died or pay a penalty.

In the following years, after you’ve rolled the plan into your own IRA, you can skip distributions until you’re 70 1/2, allowing the account to grow tax-free. Once you turn 70 1/2, your required distributions will be based on your life expectancy.

It may be wise to forgo a rollover if you’re younger than 59 1/2 and need to tap the account. By leaving the account in your spouse’s name and remaining as a “beneficiary,” you will not pay a 10% penalty on any withdrawals. After you turn 59 1/2, you can roll the account into your own. If your spouse left you a Roth IRA, you can claim the Roth IRA as your own, in which case distributions are never required during your lifetime.

Claim a Social Security benefit. A widow or widower is entitled to a survivor benefit that is equal to 100% of the deceased spouse’s benefit, as long as the survivor waits until full retirement age to collect. You can collect a survivor benefit as early as 60, but your benefit will be permanently reduced a bit for each month you claim before your full retirement age. (It’s reduced by 28.5% if you claim at 60.)

If you were collecting a spousal benefit, you can “step up” to a survivor benefit. At that point, the spousal benefit will disappear. If you are younger than full retirement age and decide to wait to claim the full survivor benefit, you will stop receiving the spousal benefit. If your husband dies before claiming a benefit, you will be eligible for a survivor benefit equal to the benefit he was entitled to at the time of his death.

In a recent survey:

• 58% of investors believed both stockbrokers and Independent Registered Investment Advisors have a responsibility to act in their best interest.
• 63% believed that stockbrokers and Independent Registered Investment Advisors were both required to disclose all conflicts of interest before providing financial advice.

Some of the key differences between Investment Advisors and Stockbrokers

• Investment advisors have a fiduciary duty to act in the best interests of their clients at all times.  Brokerage firms generally are not fiduciaries to their customers adn therefore do not make decisions that are soley in their customers’ best interest.
• Investment advisors provide their clients with a Form ADV that describes exactly how the investment advisor does business and obtains the client’s consent to any conflicts of interest that do exist in the investment advisor’s business.  Brokerage firms are not required to provide customers with any comparable type of disclosure.
• Investment advisors cannot trade with their clients as principal expect in extremely limited circumstances.  Brokerage firms often earn significant undisclosed profits by trading as principal with their customers.
• Investment advisors charge clients a fee negotiated in advance adn cannot earn any other profits from their clients without the clients’ prior consent.  Most investment advisors are paid an asset-based fee, so their interests are aligned with their clients.  Brokerage firms’ revenues may increase even if the customer’s assets shrink.
• Investment advisors manage money in the best interests of their clients.  They do not engage in other business activities like investment banking or underwriting, which brokerage firms do.  These other businesses may cause a brokerage firm’s interest or attention to focus on other areas of the firm outside of their retail brokerage business and customers.

A Higher Standard

Independent Registered Investment Advisors (RIAs) are held to a higher standard than stockbrokers when it comes to putting investors’ interests first and doing the right thing for their clients.  Independent RIAs have a fiduciary duty to their clients which means they must:

• Act in the best interest of thier client
• Identify and monitor illiquid securities
• Observe procedures regarding the allocation of investment opportunities: including new issues and aggregate orders
• Monitor for best execution of trades
• Have policies regarding affiliated broker-dealers and maintenance of brokerage accounts
• Disclose conflicts of interest
• Have policies on use of brokerage commissions for the use of research
• Have policies regarding directed brokerage, including step-out trades and payment for order flow
• Adopt and adminster a code of ethics

Stockbrokers are held to suitability obligations on the part of their broker-dealer:

• Reasonable Basis Suitability – the broker-dealer must believe that the recommended security is suitable for any investor
• Customer-Specific Suitability – the broker-dealer must believe that its recommendation is suitable for that particular investor.

What have you been putting off for a while?  Maybe you need to renovate part of your house, fix your car, or plan that party you’ve been wanting to host.  Maybe you still need to pull together your paperwork for filing taxes, get your estate planning documents updated, review your investments, or get an overall financial plan together.

Whatever it is that you need to do, today is a great day to start working on it.  Big things can be accomplished by taking many small steps, one at a time.  You don’t have to get it all done today, but why not start?  Take the first steps today and begin to MARCH FORTH!

Jim Rohn – “The major reason for setting a goal is for what it makes of you to accomplish it.  What it makes of you will always be the far greater value than what you get.”

Have a great “get it done” day!

On more basic financial matters, average answers showed more promise.  Eighty-eight percent of the respondents knew the definition of diversification, 79 percent knew asset allocation, and 57 percent knew dollar-cost averageing.  And nearly 80 percent of survey takers strongly agreed with the importance of understanding their own financial situation – ranking 7 or higher on a scale of 1 to 10.

In conjunction with the study, Northwestern created a brief 14 question online quiz that you can take at http://www.financialmattersquiz.com and test your own knowledge.  It’s a little heavy on insurance related topics (which makes sense because Northwestern Mutual is an insurance company), but it’s pretty good.

“We know from this study that most Americans want to be financially self-sufficient, and are focused on preserving their lifestyles and protecting against uncertainty,” explains Dave Simbro, Northwesters Mutual vice president – life products.  “This desire makes improving our nation’s financial literacy especially relevant, and we believe the first step is an honest assessment of one’s personal finance proficiency.”

In another study done by Metlife, 53% of more-affluent Americans (investable assets of at least $200,000) believe the help of a professional financial advisor is required when planning for retirement.

It’s interesting that 69% of the American population can’t pass a financial products & concepts quiz, yet only about half of the population feels they need the help of a financial professional. 

If knowledge of financial products and concepts is not your area of expertise (and that’s OK if it’s not), call us today for a no-cost, no-obligation appointment.  We’ll review your current financial situation with you and help you see if you might benefit from the help of a professional advisor.

Most successful people make a habit of setting goals every year.

How do most people go about setting goals for the New Year?  Goal setting is a big part of personal financial planning.  But setting goals is something you should do for all aspects of your life.  I have worked with lots of different kinds of clients and financial advisors, and they all do it differently.  I think the key here is that “you just DO IT!”  Every successful person I know makes a habit of sitting down and using one method or another to set goals for the New Year.  Here are 5 different methods I have heard of that work.  Take your pick, or maybe use a combination of them all…

Categories:  Business, personal, family, financial, spiritual, etc.

This is my favorite way to set goals each new year.  Maybe I like to use it because it’s the way I first learned to set goals.  I think it’s a great place to start, especially if this is the first time you have ever sat down to really think about what you want to accomplish in the coming year.  Make your goals reachable, but still challenging.  Give yourself something to really shoot for.  I was once told that if you aiming for the stars and hitting the mountain top is better than aiming for the mountain top and landing in a pile of garbage .

Blank slate approach

This approach to goal setting usually starts with a list of “what you want” and ignores what has happened in the previous year.  This could also be a great way to get started if it’s your first time really setting goals.  But most people who set goals each year usually have lots of carry over from the previous year.  Works in progress.  Projects in progress.  Goals you haven’t hit yet.  But if you really work on these goals all year long, you should have a really big “DONE” list too.

The “UGLY” list

This is opposite to the blank slate approach.  Here, you start with a list of things about your life or business that you don’t like, that perpetually bug you, create stress, waste time, adn get in the way.  These are things that when you get rid of or eliminate them, you have achieved your goal.  We all know that it’s easier to pull weeds than to grow flowers.  So with this approach, you are setting your goals by first eliminating the “weeds” from your life.

Use the calendar heavily

If you are like most busy people, you already have lots of dates blocked off way out into 2011.  Your calendar is already full with weekly activities and responsibilities.  This only leaves a limited number of “loose” days to go around.  Divide your year by months, quarters, and halves, and note the goals that you want to accomplish by the end of each period.  Setting deadlines for yourself will be extremely motivating and help you accomplish them.  Use the calendar to move items from the “TO DO” list to the “DONE” list.

Constantly monitor and modify

Most successful people I know constantly make and modify goal lists, one way or another.  Yearly goal setting is not something you do and stuff in a drawer.  You need to keep your goals where you can constantly see them, and modify them as needed.  Seeing them each day will remind you of what you want to accomplish, and will help you use your time wisely.

No matter what approach you take to goal setting, just plain doing it is the first and most important step.  Take the next day or so to really think about what you want to achieve this year, and what you want to get rid of in your life.  Do this, and by 12/31/2011, you’ll have a great big “DONE!” list to admire.

If you have any suggestions for goals setting that you’d like to share, please enter a comment at the bottom of this post.  Your contact information will not be displayed on the site.

Make it a productive year!!

We all want to retire early. Rule 72t may be the answer.

Some of you out there may be interested in how to retire early using Rule 72t, or 72(t) of the internal revenue code. As you all know, if you take money out of your 401k or other tax-deferred retirement accounts prior to age 59 1/2, you will not only be taxed on that distribution as ordinary income, but you’ll also pay an additional 10% penalty tax on top of that.  After you add on state taxes, you could end up losing more than 1/2 of your withdrawal to taxes.

Rule 72t provides an exception to the 10% penalty tax so that you can avoid it, as long as you follow some straitforward guidelines in taking these early withdrawals.  Another name for Rule 72t is “substantially equal periodic payments (SEPPs).

The requirements for taking SEPPs are fairly simple.  You can begin taking SEPPs out at any age, but you have to continue taking out the same amount (at least annually) for at least 5 years, or till age 59 1/2, whichever comes later.  You have to make sure you do the following things:

• You need to take out the payments at least once per year
• The payments much be calculated according to one of the IRS-approved methods for determining SEPPs
• You cannot make contributions, transfers (in or out) or rollover into the account from which you are taking SEPPs, nor can you take extra withdrawals from that account.

While these 72t rules are fairly simple, the penalties for not following them are severe.  If you don’t follow these rules, the entire amount that you take out prior to age 59 1/2 may be subject to a retroactive application of the 10% early withdrawal penalty, plus interest.

What are the IRS-approved calculation methods?

There are 3 IRS-approved methods for calculating SEPPs, or 72t distributions.  Keep in mind that once you choose a method of calculation and determine a payment, you cannot change that withdrawal amount for 5 years, or until age 59 1/2, whichever comes later.

Amortization method

The amortization method requires that a “reasonable” rate of interest* be used in the calculation.  Using your retirement account balance (generally as of 12/31 of the year before you start the 72t plan) and the account owners single life expectancy (or joint life expectancy of the account owner and a beneficiary) taken from IRS life expectancy tables, this method calculates the equal payments that can be taken.

Annuity method

Using the annuity method, distribution amounts are calculated by dividing the retirement account balances by an annuity factor based on the account owner’s single life expectancy and a reasonable rate of interest*.  This method essentially turns your retirement account into a lifetime stream of income payments.  Like the amortization method, these 72t payments must remain the same from year to year.

MRD method

The MRD method recalculates your payment every year.  The annual payment is generally the 12/31 account balance divided by the life expectancy from the applicable IRS Life Expectancy Table, based on your age or the age of your beneficiary.  Because the MRD method recalculates the distribution amount every year, this method reacts to teh changes in your overall account balance, so you are less likely to rapidly deplete your account if the balance has dropped due to market decline.

*Note:  IRS guidance provides that the interest rate that may be used is one that is not more than 120% of the federal mid-term rate for either of the two months immediately preceding the month in which payments begin.

If you think you might like to use a Rule 72t distribution to help you retire prior to age 59 1/2, it is very important that you consult a professional financial planner.  You don’t want to make a mistake in how you set this up, the IRS will punish you for it.  Call us today at 1-866-943-4222 for assistance in setting up a 72t plan.

Online identity theft and fraud is big business for criminals.

Everyone should know how to avoid identity theft and fraud.  Every day, con artists and scammers try to victimize millions of American consumers.  And when they succeed, these crimes can seriously affect the lives of their victims, their families, and really all of us. 

Fortunately, many fraudulent offers can be spotted and avoided before they mess up your life.  Having an identity theft and fraud protection strategy in place will give you peace of mind, and help you avoid becoming a victim.  I thought that since today is Cyber Monday and lots of people will be shopping online and getting an inbox full of offers, it was a great day to talk about this.

 Here are some important points to remember:

Warning Signs

• It sounds too good to be true.
• Pressure to act “right away”
• Guarantees success
• Promises unusually high returns
• Requires an up-front investment – even for a “free” prize
• Buyers want you to over-pay you for something you’re selling, and then send them the difference (or send it to someone else)
• Doesn’t have the look of a real business (emails will have misspellings or poor grammar)
• Something just doesn’t feel right

Here are some facts and tips about fraud that you should know:

• Your bank will never e-mail or call you to ask for your account number (or ask you to log into your account online).
• Foreign lotteries are illegal in the U.S.  You can’t win no matter what they may say.
• You should never wire money to someone you don’t know.
• Be cautious of work-at-home job offers.
• Never click on a link inside an e-mail to visit a website.  Type the address into your browser.  (Clicking on the link could download a virus onto your computer, or take you to a different “clone” type site).
• It’s easy for a business to look legitimate online.  If you have doubts, check them out on the Better Business Bureau.
• Only 2% of reported identity theft occurs via the mail.  You can report online fraud to the Federal Trade Commission at www.ftc.gov/complaint
• Retain you receipts, statements, and packing slips.  Review them for accuracy.
• Check your monthly bank statements for charges you don’t recognize.
• Order a copy of your credit report from www.annualcreditreport.com once a year.
• Shred confidential documents instead of throwing them into the trash.  This should include health insurance information (a popular identity theft category).

Helping others around you

It’s never too early to start learning about identity theft and fraud.  If you have kids or grandkids, point out “too good to be true” offers to them and teach them how to watch out for these types of offers.  Also, you should take an active interest in the financial activities of your aging parents or grandparents.  Older adults are often the target of fraudulent scams, so it’s important to help them watch out for these things.  Also, if you ever find out about a scam that’s going around, share this information with friends and family.  Social networks like www.facebook.com are a great way to get the word out and help protect others.

Obama is may extend Bush tax cuts even for those earning more than $250k per year.

By JOHN D. MCKINNON And JANET HOOK
President Barack Obama is open to considering the extension of all Bush-era tax cuts for a year or two, the White House confirmed Thursday, putting to a likely end any debate over whether to extend the breaks for high-income families.

Instead, Congress is poised to grapple with a different set of questions when it returns this month for a final session of the current term: How and for how long should lawmakers grant an extension?

Until now, Mr. Obama and Democratic congressional leaders have said they wanted to extend Bush-era breaks for the middle class only, defined as families making below $250,000 a year. Republicans and a growing number of Democrats favor extending the cuts for all income levels, including the highest, for some period of time. The cuts will expire Dec. 31 unless Congress extends them.

Mr. Obama dropped his explicit opposition to extending breaks on the top income brackets, saying Wednesday he was willing to negotiate with Republicans on the issue. Asked about it Thursday, White House Press Secretary Robert Gibbs said Mr. Obama would “be open to having that discussion.”

Also Thursday, Mr. Obama appeared to offer another hint that he’d be flexible on the issue. He emphasized the need for certainty on taxes, a recent rallying cry for Republicans and business advocates, and termed it “critical to maintain our recovery.”


“I take any signal that the president may be backing off his pledge to raise taxes on small businesses as a good sign, but we have to see where this discussion goes,” said Rep. Dave Camp (R., Mich.), in line to become chairman of the Ways and Means Committee in January.

Many small-business owners file under personal-income tax rates, and Republicans contend that allowing the Bush-era tax breaks on higher earners to expire would hit about half of small-business income. That could slow investment and job creation at a critical juncture in the sluggish economic recovery.

Senior Democratic aides suggested it would be all but impossible to pass an extension of only lower-income tax cuts, given opposition from both Republicans and some Democrats, although Democratic leaders could still bring it to a vote and force Republicans to vote against it. A higher cutoff for extending the breaks—say, annual income of $1 million—also remains an option.

But more Democrats appear set to part with their leadership and support extending all the breaks, at least for a period.

“I think there are a number of senators on our side who will at least listen very carefully to the analysis that would lead you to support a … one- to three-year phaseout of the upper-income tax breaks,” said Sen. Robert Casey (D., Pa.) in an interview late last week.

Many House Democrats still oppose extending the higher-earner breaks. But House Democrats are losing power following big losses in this week’s election, and likely would defer to whatever deal the White House and Senate can reach.

The debate is now set to focus on how lawmakers would design such an extension.

Some Democrats are considering combining a short-term extension for higher earners with a longer-term extension for middle-class earners—an approach aides term “decoupling.” Sen. Casey said a number of his Democratic colleagues were interested in that idea to give certainty to middle-class families while limiting the impact on the government’s already-large deficits.

Republicans said Thursday they opposed decoupling. One House GOP aide called it a nonstarter. It would allow Mr. Obama and congressional Democrats to simply let the higher-earner breaks expire in a year or two; with only the higher-income cuts at stake, Republicans would have little negotiating leverage.

“Decoupling is a tax hike, period,” said one Republican Senate aide.

Republicans want to keep the time frame on tax cuts the same for all income levels. The question then becomes whether lawmakers decide on a short-term extension of a year or two, or a longer-term extension of, say, five years.

The negotiations could drag on into January, when the newly elected 112th Congress is to be seated with much larger Republican numbers.

White House officials said Thursday, however, that they wanted to complete the debate before the Jan. 1 expiration of the Bush-era breaks, to avoid problems that would result, including higher withholding rates for tens of millions of working Americans.