CW 463 – Ashlea Ebeling – Reducing Your Capital Gains & State Taxes with Attorney and Associate Editor at Forbes

In Jason’s Creating Wealth intro he talks about how cool it would be to ride in a self-driving car to get to his Meet the Masters event in California. He also talks about oil being the next big thing in the United States and why real estate is still the best asset to obtain when the economy is experiencing inflation, deflation, or stagnation.

Jason’s guest today, Ashlea Ebeling, is a Forbes editor and has fantastic insight into the different tax situations happening across the United States. Ashlea talks about state, federal, and income tax on the show. She also shares insight about what you can do to reduce your state taxes, where not to die, capital gains, and more.

Key Takeaways:

5:10 – Oil may be the next economic boost for the US.

9:30 – The three basic economic scenarios are inflation, deflation, and stagnation.

11:50 – The central bank is getting ready to raise their interest rates.

17:18 – High rise condos are not good from an investment point of view.

20:34 – Gen Y are coming of age to be able to rent property and combine that with student loan debt that there will be a lot more people renting homes instead of purchasing them in the next 10 years.

24:10 – Should Jason host two or three episodes a week? Let him know!

25:22 – How do we get to more than 100% in tax? Ashlea explains.

30:50 – How do you get around state taxes? There are four ways you can do this.

34:20 – New Jersey and Maryland have both state and inheritance taxes.

38:21 – Jason is not a fan of Roth IRA, but Ashlea is for it.

43:10 – Ashlea says that there are a lot of new tax law changes happening right now that people need to pay attention to.

Tweetables:

How many people do you know that have started with very little money and created real wealth with the stock market?

Bond yields have been plunging to historical lows.

Washington state has the highest state tax rate at 20%.

Mentioned In This Episode:

http://www.businessinsider.com/bond-market-panic-phase-of-financial-crisis-2015-1

http://www.forbes.com/sites/ashleaebeling/2014/09/11/where-not-to-die-in-2015/

http://taxfoundation.org/

https://twitter.com/ashleaebeling

Transcript

Jason Hartman:

Welcome to the Creating Wealth show. This is your host Jason Hartman and this is episode 463. Thank you for joining me listening near and far in 164 countries world wide, gosh, you know, if we could touch every country wouldn’t that be cool. I haven’t noticed any listenership in North Korea. That’s a bummer. Oh, well. Well, it’ll be great to touch countries everywhere, that’ll be good, and, guess what, they’ve discovered the most earth-like planet yet just a few days ago. This one is, gosh, 80 light years. You know, that’s not far. If you can just ram it up to 186 miles per second, you’d be there in 80 years. That’s not bad, right? A spaceship is like a self-driving car. You know how much I love the idea of self-driving cars.

In fact, on a day like today, I love it more than ever because I need to get into the car right after this and drive to the socialist republic of California for our annual Meet the Masters event. I’m so excited to see everybody. I know many of you listening will be there and it’s just going to be a great time. I’m looking forward to that, but it’ll be so nice if I could get into that Mercedes that I described on the last episode and it would basically be like my living and it’ll be like having any real break. I mean, the break would be walking to the car, getting coco in the car, getting all the stuff I need for the event in the car, sitting there, maybe pull out the laptop, take a little nap; I don’t know, location, location, location ain’t what it use to be. I really want you to think about that as real estate investors.

That means you can live in Phoenix for a heck of a lot less money that you can live in Los Angeles or Orange County or San Diego, and, heck, with gas prices so low, you can just be there. It’s really easy to be there if you have an autonomous vehicle. It’s not chore at all. In fact, it might be a pleasure. So, that’s something to think about.

Larry Summers, you know Larry Summers, he’s the former US treasury secretary aka Lawrence, of course. He is out talking about energy, about oil, about shale, and how this could be America’s next big economic booster. This is a  Reuters article that I saw. A couple of things here strike me really interesting. He says the United States has the chance to be the energy economy of the next decade. What Saudi Arabia has been the last 2 or 3 decades, Summer said on Saturday, the affect of allow oil exports would reduce, rather than increase, American gas lean prices.

Now, we haven’t allowed oil exports, I don’t know if we’ve ever allowed it, at least, not in a long time. I don’t really know how long it’s been since we’ve had it, I wanna say maybe it was like World War 2 is where we may basically may have said we don’t allow anybody to export oil from the US, because you know the US looks at that as though it’s a big part of their national security. We didn’t think we had that much oil here until recently. Thank you to all of you geologists who technological gurus, and I’m sure there’s some quants working for those oil exploration companies too that figure everything out. It’s so good to have people in the world that are good at math and so smart. I’m not one of them!

So, I’m glad you’re here to help us out with all this stuff. You know, they go out and figure this out. Suddenly, America’s like this energy rich country, right. We didn’t think we were. So much for Chris Martenson, who we had on the show a couple of times, who I like a lot, so much for all the peak oil people. Now, some of the people say that, you know, shale and some of the fracking technologies and all of these, sort of, we’ll call them energy 2.0 or oil and gas 2.0, maybe, methodologies. They say these wells will not last as long or these fines; I guess they’re not really wells, they won’t last as long, they’ll dry up sooner. A lot of people disagree with that. I don’t know who is right or wrong, but the peak oil people and the gold bug people and the Bitcoin people; boy, they’re real diehards, aren’t there? We shall see, we shall see, folks.

If America because a legit oil export, Summer actually could be right about that. You think if you export something like oil that, you know, you’d sell it on the world market and of course that has to be traded in dollars, the reserve currency, so much for all those bricks trying to trade outside of the dollar, huh. You’re not making such dent in things if we’ve got such a commanding force in the oil market, that’s for sure. All the brick countries.

What happens is when you export more and when you create more demand for your product, of course, naturally, more efficiency is developed, more incentives is developed. More people are out there working on how can we produce more, right? How can we produce more. As they’re working on that, that is likely to make the price lower. So, I actually rarely agree with Summers, but on that I would agree that probably would happen.

Also, they talk about core inflation being very low in the US and around the world and just a little reminder, we’ve talked about this many, many times, but when you hear about the core rate or the core inflation, remember that strips out food and energy. It’s not in the consumer price index basket when they talk about core. When ever you hear that word, core, kind of run for the hills, because you know it’s a misnomer. Granted, energy, especially oil energy, is becoming much, much less expensive. We’ll see how long that’ll last, but I don’t know. It’s amazed me. I was only right on one prediction, okay, that it’ll go below 80 and it did on short order there, but we shall see what happens there.

You know, there are forces out there that are lessening demand for oil. Why on real estate show are we talking about this you might be asking. Well, it’s vitally important because as commodities investors. Remember, we are really in to the idea of package commodities investing, of assembled commodities investing. So, one of those commodities that is a decent size component in the ingredients, if you will, of a house or an apartment building that you might buy is the cost of energy and the cost of petroleum products, because there’s a lot of petroleum products in the house.

Heck, what do you think insulates the wires? Well, plastic products, right. What are those are made of? They’re made of oil. How about insulation in the walls? I bet there’s a lot of petroleum products there. You know, it’s just all over, this is everywhere. You know, that may soften construction of a little bit, but then you see these demand increases. So, one of the things I learned about a long time ago was the supply and demand curve. At some point these two things in the world of economics they meet, right, and when they meet that means that the demand increases as the supply becomes more affordable and more people buy.

New markets are even created and expending the whole size of the market. You know, this could lead to a greater standard of living for people around the world and lend to increase demand, but ultimately, maybe it softens housing costs a little bit.  Maybe instead of the cheapest house you can build being $75 dollars per square foot, maybe it’s $70. I know we’ve talked about the complete opposite for a long time on the show about inflation and the way that affects us.

Remember, of the three economic scenarios, the three basic ones, of course; there are modifiers to this, but the three basics to this are inflation, deflation, and stagnation, not to be confused with stagflation, which was the Carter era misery index. Stagflation is when you have inflation, but you have a very stagnant economy and that’s really no fun, at all, and that, of course, we had under Jimmy Carter. So, when you have these..of course, the inflation, we’re going to hit the ball out of the park with inflation following my philosophy and that’s my..philosophically I don’t like it, but as a selfishly I love it, because it’s great, It makes my strategy just rock, but the other strategies we do pretty well too.

In a deflation or a stagnationry..stagnationry? Maybe I just invented a word. Stagnationry environment. We are probably one of the few investment groups, investor groups, that are getting any real yield on our investments. Now look, the stock market was down the tubes just recently and now it’s back up. Who the heck knows. I mean, overall, Wall Street doesn’t work. I mean, how many people do you know that have started with very little money, take your pick for very little, and created real wealth and take your pick for what that means too in the stock market. You know, you don’t anybody probably, but you know lots of people who did that in real estate, in income property, the most historically proven asset class in America.

So, there’s this…when I lived across town here in Phoenix, there was this hair salon and had massages and stuff there too, this salon, and I thought it always had a good name, it was called Mood Swings. So, Mood Swings, that must be a melody that stock market investors really, really suffer from, because, I mean, that just must be nuts to live that way. To think you’re actually an investor when your mood is swinging back and forth constantly because the market is up one day and you’re happy and the market is down the next and you’re depressed. That’s absurdity! That’s not way to live, that’s not way to invest.

Getting back to the article here, interest rates, you know, I’ve said many times I’ve been surprised by interest rates. I think they should be higher. Well, in the article it says here, Fed chairman Janet Yellen lays the groundwork for the feds first interest rate hike in nearly a decade. The fed changed interest rate guidance last month at its policy setting meeting adding language and in-statements that the central bank is moving closer to raising rates. I think we should be seeing higher rates, it’s just crazy that we haven’t, but that’s the way it is. It’s a shocker. Maybe some of you disagree that it’s a shocker, but overall I think it is.

Now, another really interesting article and this one is a Business Insider article from a few days ago and it says, the title is, It’s Like We’re In A Panic Phrase Of Financial Crisis. What’s fascinating is it starts out by saying, “Over the past few days we’ve seen stocks plummet and oil prices crash, but the most interesting moves have been occurring in the global bond markets where bond yields have been plunging to historical lows.” Okay, I’ve never been a fan of bonds, you’ve heard me say that many, many times. I do not like bond investments.

“2015 starts off with the average of the G3 10-year government yields below 1%” Says Steven Englander, Citi Group’s global head of G10 FX Strategy. “The G3 currency group is made up of the US dollar, the euro, and the yen.” Okay, now, check this. This is mind blowing if you think about this, “On Tuesday, the US 10-year yield got as low as 1.959%,” below 2%, “and Japan’s 10-year yield fell as low as,” get this, “0.288%. In the eurozone, the German 10-year yield got as low as 0.443%.” The French yield low as well, I don’t need to read you the number. You get the idea.

So, it says, “This is the first time ever that rates are this low, as even during the 1930s rates were well above current levels in both the US and abroad,” Englander said. “”It is also striking,” he goes on to say, “that this is not happening during the panic phase of a crisis, but after the panic is over and we have had significant recoveries in asset prices globally,” he adds. “More a sign that investors think we are going nowhere for a long time.”

So, this is a crazy time. He goes on to say, “The global economy is arguably fragile, but it’s hard to argue that we’re in the middle of any sort of panic.” Okay, so we’re not. This could be secular stagnation, but it could also be a policy impasse. So, the helicopter Ben kind of concept and that’s Ben Bernanke a former fed chair who famously said, absurdly, that he would drop money from a helicopter if he needed to to stimulate the economy. So, these are, as the old Chinese saying goes, interesting times. There are very interesting times, but one of the things I love about income property is that rents are very, very slow, very slow to adjust and so are prices.

So, you can lock those yields in with licenses. I look at the apartment complex in which I live and, yes, for those of you who haven’t been listening to the show regularly, I own lots of income property, but I am personally a renter, because I think being a renter is a pretty darn good deal for me, especially if you’re renting a higher en property, then it’s a phenomenal deal.

You know, I’ll give you an example of one, by the way. I made an offer recently on a 5,000 square foot, gorgeous, penthouse condo here in Arizona. It’s right on the water, yes, there’ water in Arizona, believe it or not. What they call a lake and a river here is kind of misnomer if you’re from anywhere else, but anyway. It’s on the water and this gorgeous place. I mean, just stunning. 5,000 square feet, okay. It’s been listed for sale for a long time, it’s not listed for lease. It’s currently listed at 2.5 million dollars. I told them I’d pay them $5,000 a month rent and they said no. They I told them, well, I’ll pay them $6,000 a month and they said no.

I can’t believe, you know, they’ve got a vacant place and they’re walking away from $72,000 a year from me, but then they said, well, we think the market value is $8-10,000 per month. I’m thinking, well, look it, I’mma just check the RV ratio, right, the rent to value ratio or RV ratio that I’ve, you know, my little trademark way of analyzing these deals as a quick rule of thumb way to look at it. The RV ratio, if I invested 2.5 million dollars and some real estate, I wanna get $25,000 per month out of that. So, even if I haven’t done the deal yet, at $8 or even at $10,000, it would be a pretty good deal, because I would be much better off using that 2.5 million dollars else where.

By the way, I like living in penthouses. The penthouse idea is pretty cool for a bachelor like myself, but man, I don’t want to own that stuff. High raise condos are just not good on the investment scheme. Maybe they’ll be a time where I’ll make the exception and think they’re good, but I haven’t really thought they were good so far. Again, rents are slow to adjust, high end owners are completely clueless about what their property is worth or where they should be allocating their money or investing, so good for us! Okay.

Back to what I was saying, my building is like 97% occupied. When I moved here about a year and one month ago, this place was only 60-65% occupied. So, the rental market is booming. I mean, I see it first hand in my own place, I see it in the properties our clients own. Look, the population is increasing and even though rates are incredible low, it is still, relatively speaking, hard for people to qualify for properties. That’s something you should all be aware of and should invest for. The next 10 years, the demographic is coming at rental property are nothing short of phenomenal.

Although we’ve talked about it before, I will remind you, okay, we’ve got generation Y, the largest demographic cohort in American history. 80 million people, larger than the baby boomers by 4 million people, they are coming right into the prime rental years if they’re not in them already, some are in them already. There are a huge group, a huge demographic cohort, and then we’ve got the situation where we’ve got the same people, poor them, saddled with ridiculous amounts of student loan debt, okay, keeping them likely to be renters rather than owners, because that’ll make it even harder to afford, much less qualify, for buying your own house.

They have this anemic job market and they saw their parents in their formative years, in their teen years for many of them, get crushed in the housing market. They also because the employment market isn’t that great and because they’re tech savy, they can realize that, you know, mobility is great. It’s the best thing you can have on a resume and they also realize that they don’t really have to live at any particular place. You know, a lot of them are going to be working out of home even if they’re going to be working for a company. So, this is all good.

Add one more factor to that, at least, there may be some others that I’m not thinking of off hand that I may have mentioned on prior episodes, but I add one more factor now is that the marriage rates are dropping like crazy. I mean, people, finally for once, I’m in the trend. I also thought, I gotta get married, I gotta get married, and I’m still into the idea of getting married even though what I told you about Elon Musk on the last episode blah blah, I don’t have to worry because he’s way richer than I am. So, you know, I definitely like the idea of getting married, for sure, but overall societal marriage rates are plummeting.

So, with that, there’s less of an incentive to go buy a house. You’ve got a tremendous opportunity to serve these people, to rent to these people for another good decade and the population is increasing. So, you know, as the old saying goes, don’t wait to buy real estate, buy real estate and then wait. It’s a pretty good opportunity, for sure.

Our guest today is Ashlea Ebeling. I can’t remember how to pronounce that name because I interviewed her a while back. She’s from Forbes magazine. I read a really interesting article that she wrote about the state tax in New York and this just shows you how completely misguided government is in so many ways and it’s just absurd, right. Totally misguided in that it could be a 164%. Yeah, you heard that right. 164%. That is not a misprint. It’s not a misread. So, she’s going to talk about that and talk about some different tax scenarios in different states and the bottom line of all of this though is you want to position your portfolio largely, as much as possible; you may make somewhat of an exception here and there; in business friendly, land lord friendly, and tax friendly states. You know what, by enlarge, those are the markets we recommend. Go to JasonHartman.com, click on properties, check out those markets.

By the way, I wanted to let you know we are having a little problem with our website. It’s kind of minor. Well, it’s sort of minor and major at the same time and we’re trying to troubleshoot it right now. We’ve got some good people on it, but if you look at properties on our site and you fill out, you know, a request to be contacted about one of those properties, that little feature stopped working recently. We just realized it recently because thankfully one of you told us. Do not use that until further notice. Just use the contact us or, you know, you can just call our office too. Our phone number is on the website. Just use the contact us form at JasonHartman.com rather than the drill down area in the property performance section, but you can look at some awesome properties there.

Look, these properties, the projection show them performance at overall return on investment of well above 20% in most case even above 30-40% in many cases. Life is not perfect. Real estate is far from perfect. It’s just better than everything else that I know of even if it goes half as well, you are still going to be in much better shape than probably anything else you can do out there. So, check it out at our website. Let’s get to our guest today.

By the way, one more thing that I want to mention, I have been thinking about, we’ve been doing this heavy pace of production lately. Every Monday, Wednesday, Friday for several months now and it’s pretty hard to produce that much content and to get the time to do it for you. I love doing it, but you know, I do have a business to actually run, believe it or not. We are in the real estate business. It requires some attention for sure.

So, we may go to the two episode a week schedule down from three. We’re thinking about that, so if you have any feedback for us, let us know. If you love three episodes a week and say, Jason, gosh! You should have 7 episodes a week, one every day, tell me that and, you know, maybe we’ll just keep it up at 3 episodes per week, but we are thinking of scaling back to two episodes per week.

At Meet the Masters event this weekend, I plan to get some feedback from our wonderful audience on that, because every person in that room is pretty much listening to the podcast. So, thanks for joining me for the monologue potion of the day, let’s get to our guest Ashlea from Forbes magazine is here with us.

It’s my pleasure to welcome Ashlea Ebeling to the show. She is an associate editor with Forbes magazine and Forbes.com. She wrote an interesting piece recently about the New York state tax and how we should be aware of a 164%, yes you heard that right, marginal tax rate and profiles different states around the country and their tax situation and a whole bunch of interesting things. So, it’s a pleasure to have her on today. Ashlea, welcome, how are you?

Ashlea Ebeling:

I’m just fine. Thanks for having me on the show.

Jason:

Well, it’s good to have you. First, let’s dive into this article. I mean, this is insane! I can not believe it. How do we get to more than 100% tax.? As if 100% isn’t bad enough.

Ashlea:

So, New York state tax has this provision called a cliff and people are trying to change it. It’s obviously a problem, but the one thing is New York made sweeping changes to its state tax law just this year and they doubled the amount that is exempt. So, if you had over 1 million dollars before, you would owe a state tax on that amount and they doubled it now to 2.625 million, but the cliff problem is if you die with 5% than that new 2 million dollar number, you face this cliff and that’s where the crazy marginal tax rate would come in.

I can give an example. So, Sharon Klein with Wilmington Trust, she kind of gave me an exact example, because the New York state department of taxation, they did a summary memorandum on the new law, but they neglected to spell out of the affects of the cliffs. So, her example was a taxable state of $2.625,000 would pay no tax, but if you had $2.1 million dollars, you’d have a tax liability of $49,000, so that’s more than the $30,000 of an increase of the value of the state. So,  your state has gone up by $37,000, but your taxes would go up by $49,000. So, that’s the affect of the cliff.

Jason:

Boy, this is crazy.

Ashlea:

So, the lesson is people need to know about state to state taxes. The federal estate tax is almost..that’s been changed, so there’s a big, big exemption. The federal exemption of $5 million per person indexed for inflation is now permanent and that is indexed for inflation, so next year the exemption it’ll be $5.43 million. So, obviously most people don’t have to worry about federal estate taxes as all. In the meantime, the state estate taxes can be as long on inheritance taxes it starts at the first dollar and the states with state taxes, New Jersey is the lowest exemption with $675,000. So, people with a nice house, they’re in a state tax territory.

Jason:

Right, they certainly are. So, what do you think, what change do you think will come to this law?

Ashlea:

Well, there are people trying to change that cliff, so it’ll be more gradual. So, that’s a possibility that could get tweaked in the next legislative session and the good news in New York is the law that’s been put in place is it’s eventually going to match the federal exemption in two year. In 2017 the New York state exemption will match the Federal exemption. For most people it’s not going to be an issue.

Jason:

So, when one looks at a state to consider a move, they need to consider what life stage they’re in. If they’re in their career stage and are earning a lot of money, you obviously want a state with no or very low income tax. If you’re retired as mom retired many years ago and she, you know, I told her she should move to Texas and she said, no way, the property taxes are too high and she didn’t care as much as income tax. Texas has no state income tax. So, it really depends. It’s like, where to live during your career years, where to retire, and then where to die. Where to retire and die may be two different things, right?

Ashlea:

They’re very different. It’s going to depend on each family’s specific situation, but you’re right you’re going to have to look at the whole tax picture. You want to look at income tax, sales tax, property tax, there’s a state tax, gift tax. It’s a little crazy that there’s that much to look at, but it makes a huge difference and then for retirees, there’s state pension tax breaks that come into play. So, that’s another. That even goes into the category of income tax, but you have to see whether your state tax is social security or whether it doesn’t. My mom just moved from Virginia to Connecticut, so now her social security is being taxed when it wasn’t in Virginia.

Jason:

Wow, okay, so you’re in Connecticut, I believe, right? And that’s the only state with a gift tax?

Ashlea:

That’s right, Minnesota had one, Tennessee got rid of theirs, I think that was 2012 and Minnesota put one in in 2013 and then last year..earlier this year they finally got rid of it again, so gift taxes are a bit controversial, but the idea with the gift taxes is that the state don’t want people giving big amounts to their heir in a way to avoid the state to state tax. So, Connecticut, for example, has a 2 million dollar limit that you can’t give more than that without having to pay a tax that would go to 12%.

Jason:

So, do we see a lot of people in these states where you have a high state tax, you know, especially in New York, what do they do to get around it? Do they use a charitable remainder trust or what is the vehicle they’re using or do they just try and spend all their money before? I’m spending my children’s money…

Ashlea:

There are probably four big ways that people avoid or get around the state estate taxes. One would be moving, so you could be in New York and then also have a home in Florida and you’d make Florida your residence, but you’d have to really do it, you’d have to be there more than a 183 days a year, you’d have to change bank accounts, drivers licenses, there are all kinds of residency rules to make sure New York doesn’t pull the estate back into their territory. So, moving is the big one. Everyone says Florida all the time, but there’s 7 of these no income tax states.

The second big move that people do is setting up a traditional credit shelter or bypass trust when the first spouse dies and that puts the money that goes into that trust would then be exempt from a state tax, but the tricky thing is is on the federal level you don’t have to worry about, because there’s something called portability and you have all of this..So someone who has $5 million dollars when at the federal level they can send the money over to their spouse and the it’s protected even without a trust, but the state level there’s still more of a need to a trust and estate planning.

Jason:

Very interesting. Anything more you wanna say about different taxes in different jurisdictions, because I want to just wanna touch on some of the other stuff that you’re following and writing about.

Ashlea:

Well, if we look at the, for the state estate taxes, it’s 19 states plus the district of Colombia that have these taxes and why you need to keep track of it, we have an interactive map that we keep on Forbes.com called where not to die and every year it’s updated. There were 8 states that were ensuring changes for 2015, so that’s one place to look. The tax foundation has great maps on tax climate on income tax, taxes on all these other states, so that’s another place for people to look.

Jason:

I’ve seen some very complex charts as you were talking about the comparisons a few minutes ago. I’ve seen very complex charts in terms of all 50 states or maybe 51 one with district of Colombia, 52 with Puerto Rico, which has got some very desirable income and capital gains tax opportunities right now. It’s just a really complicated metrics of all these different issues one needs to consider.

Ashlea:

Well, when you’re thinking of capital gains tax, that’s another thing that people completely don’t think about and that can be taxed in California. I think it’s up to 10.3 there is the top rate for income tax. So, if you’re selling real estate that you know that when you’re going to into it with the capital gains rates are going to be. Not just the federal rate, which has been increased now to 20% to higher income earners, plus there’s another net investment income tax and then there’s the state capital gains tax. You have to add all of those together to really know what your tax rates are going to be.

Jason:

So, I’m looking at the where not to die map now. I found that while you were speaking just a moment ago and I guess the red states, are those the undesirable ones?

Ashlea:

Those are the estate tax states. The blue states are also undesirable in their inheritance tax state and again that’s something a lot of people don’t know. The difference in New Jersey and Maryland, they have both the state and inheritance taxes are a little different, because it’s who gets the money, who pays the tax, whether or not you pay the tax, so Pennsylvanian is a good example. It used to be the spouses paid Pennsylvanian inheritance taxes of 6% tax rate and then people complained about that, because generally for state taxes, spouses don’t pay state taxes at all.

You can give anything when you die to your spouse and it’s state tax free, so this inheritance tax, they were paying 6% in Pennsylvanian, they cut it to 3% in 1994 and then the next year they cut it to 0% and then they get similar to other states, but there’s still..in Pennsylvanian, if you have an estate going to children, grand children, or parents, it’s a 4.5% tax and if it goes to a bother or a sister, it’s a 12% tax, if it goes to a nephew or a niece, it’s 15% tax. So, New Jersey has a similar law to that too and there’s people changing it there too where they think it’s not fair if you’re single and giving your estate to your sister, you’re taxed, but if you have children and you’re going it to them, you’re not taxed.

Jason:

Yeah, very interesting. We should mention the red and blue on this map are not political red and blues, so..

Ashlea:

No, but to some extent to it is if you see like the north east as this big chunk of estate tax states. Washington has the highest rate. Washington state has the highest rate of 20%.

Jason:

Wow, that’s something else.

Ashlea:

Then, the interesting thing, there is prescient for repeal. If you look at this map a few years ago it had a lot more estate tax states. North Carolina and Indiana repealed their taxes in 2013 and Kansas, Ohio, and Oklahoma all repealed theirs in 2010.

Jason:

It is interesting that it follows the political map to some extent and that doesn’t surprise me, but tell us about some of the other stories you’re working on. I know you cover some real estate stuff. I’m kind of looking at your portfolio here on Forbes.com.

Ashlea:

One of my favorite topics is philanthropy and you mentioned charitable remainder trusts, that’s something that’s another great tax move for people who are charitably inclined and I had a nice example of a son who inherited a vacation house in the family and they put it in a charitable remainder trust and then it’s a way to give, to give real estate to charity that works.

Jason:

What do you think of the Roth IRA versus the traditional?

Ashlea:

Well, we at Forbes are huge fans of Roth IRA, but again, it’s a tax place, so if you’re going to be in a higher bracket in retirement, it’s a total no-brainier, you definitely should do it, but some people who should be doing, but aren’t thinking about it are actually in a low tax bracket now and they’re young, so they should be putting money in a Roth, because they don’t get any advantage of the pre-tax that you would for a regular traditional IRA.

Jason:

So, just to explain to the listeners who don’t know, a Roth basically says, pay the tax now, but let it grow tax free. So, you can take it out and the idea is that the tax rate would be much higher later in the future as the country is more fiscally insolvent and looking for money and you’ll just have that money that’s compounded for you over the years tax free because you paid the tax earlier. My fear and why I…maybe I’m just being too paranoid, but the reason why I’m not a big Roth proponent is I just think the government is going to become more and more hungry in years to come and they might just change the law. I mean, what is to stop them from doing that?

Ashlea:

Some people do have that fear and I can’t say that’s implausible, that it could never happen, but I think that’ll be such a outcry that it wouldn’t happen and then another point, you’ve got this two buckets. You automatically, if you’re at a work place plan, any employer money that goes into a plan and earning pre-tax, so some people like doing some Roth, some pre-tax to hedge their bets and whether you actually take money and pay taxes on it to do a Roth conversion, which you can do to try and get more money into a Roth that that’s would be more of a heads in a basket way of what you’re saying.

Jason:

I think these retirement plans are going to become the low hanging fruit in a hopefully not, but a very likely, unfortunately, I think, desperate where the government will say, you know, they wanna nationalize them or, you know, it’s just so easy to attack the retirement plans.

Ashlea:

Well, they’re already proposals out there in the administration that you can only put a certain amount in your retirement plans and after that point then once it’s a, I think, it’s at 2million dollars, once it’s at a certain balance, they’re different numbers depending on the different proposal that you wouldn’t be able to add anymore. So, when you say the proposals out there there’s a reason to be somewhat scared.

Jason:

It seems like the guard against that might be to have a retirement plan whether it be a Roth or traditional that’s one issue that we’ve already discussed, but have it be self-directed, because if it’s self-directed and the assets aren’t just with big brokerage firms and really simple electronic transactions, that’s not going to be low hanging fruit for the government. You know, the self-directed plans if you’ve got, if you own some notes or mortgages, you own some real estate…

Ashlea:

Self-directed plans are great for people who are…you have to really research what you’re putting in with them and make sure you’re not worried about the self-dealing rules, but there are definitely is a place for those for folks. I think though if the government puts in limits, they’re going to apply across the board whether it’s self-directed or through a regular brokerage. Theoretically if you have Roth money in there, you have more money in if they’re just putting limits on and not making a difference between Roth and pre-tax, you can basically have a bigger retirement pot with Roth money.

Jason:

Very interesting. Any other stories that you’re working on or have recently covered that you wanna talk about? Just thought I’d open it up for you.

Ashlea:

Well, I guess the biggest one I finished that got a lot of attention was about the upcoming 2015 tax filing season, which you wanna think about fourth quarter, but the IRS commissioners are warning that it’s going to be the worst season ever and congress is now back in lame duck session and they have 50+ tax extenders that expired, tax clause that expired at the end of last year they still haven’t they decided what they’re doing with. So, there’s a lot of tax news by year end that people should pay attention to, because what happens on those bills is going to affect your tax that you’re paying when you write your check in April or when you’re getting a refund, you’ll get less of refund.

Jason:

Ashlea, so, when you say it’s going to be a really difficult season, what do you mean by that? Law changes, audit risk, what?

Ashlea:

So, law changes, because of these tax extenders, whether some of them..and it’s everything from taking the reduction for sales taxes to teaches to buying $250 worth of supplies to $4,000 college tax breaks, commuter tax benefits, it’s a big list. So, chances are one of the things on that list will affect you and if they don’t, if congress doesn’t get around to figuring out what they’re going to do with those laws by early December, then the IRS commissioner that’ll delay the whole processing of returns, they might have to delay the start of the tax season and that might potentially delay refunds.

Jason:

Wow, what a mess. You know, I remember I was talking to Steven Forbes and then he gave a speech to our group and he just, you know, as a proponent of flat tax, he is so right. You know, he just said, let’s just drive a stake to the school system and start fresh, because this is so overly complex. I mean, I can’t believe it, Ashlea, you know, I am scared to death to sign my tax returns every year, there’s no possible way I can understand the hundreds and hundreds of pages that I’m putting my name on every year. I mean, I don’t even think one highly qualified CPA can understand all of that.

Ashlea:

Well, there are always people say three people get three different answers if they file your taxes for you, which is unfortunately is right and if you call the IRS hotline, you might get two different answers if you call two times and then good luck calling because they’re predicting 34 wait times for the 53% of the people that actually hang on till they get a live person there. So, I wished I had better news on that front, but that’s kind of the way it is. You do the right thing and try and understand the tax laws and get the right kind of advise and one of the reasons they also said about the delay is they’re putting..they’re going to have on the website, on the IRS website a list of tax prepares and obviously if you go to a CPA or an enrolled HN, they’re high standards they have to hold too, but there’s never been a problem with unregulated tax prepares, so we always have to warn people of that. They are going to put up, the IRS is going to start putting up on their website a database of qualified tax preparers.

Jason:

Very, very interesting. We will see how it’ll turns out. Ashlea, give out whatever website you’d like, is it just Forbes.com or something specific?

Ashlea:

Oh, so Forbes.com. The where not to die you can type in if you’re interested to learn more about estate state taxing and my name is Ashlea. So, that’s an easy why to find my articles too and I’d love you to follow me on Forbes or Twitter.

Jason:

What is your Twitter?

Ashlea:

Just Ashlea Ebeling.

Jason:

Okay, Fantastic. Well, thank you so much for joining us, Ashlea. Very informative.

Ashlea:

Thank you, me too. Take care.