Gary Mastrodonato writes a weekly column on personal finance for the Pamlico News. Here is the latest column:

Taxes & Inflation

That nasty "T" and "I" words...taxes and inflation are making headlines again and helping to kick stock prices around like a ping-pong ball. This past week marked up a crazy week of higher taxes and inflation worries and massive stock market declines. Just about the time we have grown accustomed to what economists like to call "benign" inflation, prices are inching up. And taxes will be too!

The classic definition of inflation is a persistent increase in the price of goods and services in the economy as the purchasing power of money decreases. The opposite of inflation, or deflation, is an economy where prices are falling and the purchasing power of money is increasing.

Putting this in perspective, I found a web site, http://www.eh.net/, run by the University of Miami and Wake Forest University where I could enter a value in any year going back to 1665, and relate the purchasing power of a dollar up to year 2003. Checking a few years I found that in the year 1700 today's dollar would buy $23.66 of goods. In 1865 the figure was $11.23. In 1900 a dollar today would buy $21.79, and by 1980 a dollar would buy $2.23 in goods and services.

Inflation has been a constant in our economic history, and except for periods of war and the 1972-1982 years, stayed under 5%. Long, continuous periods of deflation have also been a part of the picture. Historically our long-term deflation was the end result of increased efficiency as we opened the west and made incredible technological advances in the 20th century.

At the top of most people's list for the cause of the current inflation buzz is the price of oil. Unlike the late 1970s and early '80s however, oil is not that big a factor. According to the U.S. Energy Information Administration's web site, http://www.eia.doe.gov/, the importance of oil to our economy is diminishing. From 1973 to 2003 the amount of oil and gas needed to produce $1 of GDP dropped 55%. Energy expenditures as a percentage of our GDP went from 14% in 1981 to 7% of GDP in 2003.

In today's dollars, 1981 oil is worth about $92 a barrel...that's about 50% higher than we are actually paying, and we are using less!

While I realize this is not on your mind when you are pumping $50 worth of gas in the family SUV, keep in mind that our household income has gone up more rapidly than inflation, giving us greater purchasing power today than we had in 1981. To test this go to the http://www.eh.net/ web site, open the link on the left How Much Is That and select the URL for Purchasing Power of the Dollar. Put in your income in 1981 and check the results in 2003.

If you are making more in 2003 than the value of your inflated wages, you have made real gains in purchasing power. This is an excellent illustration of what happens in a healthy, growing economy with a moderate amount of inflation.

Many of the current financial press discussions of inflation center on the impact of rising energy prices and the projected tightening of the job market in 2006 and beyond.

Another view on inflation has been expressed by best-selling author, Harry Dent, in his book "The Great Boom Ahead," and his latest, "The Next Great Bubble Boom," Dent makes a case for inflationary pressures resulting from younger workers moving into the work force. Younger workers cost more to train, are less productive, and more costly to employ. Since they make less and want more, they borrow to finance their entry into adulthood. The net result is higher prices, higher demands for money (increase in interest rates) and higher inflation.

If Dent is correct, since there are fewer young people coming into the work force, this blip up in inflationary pressures will be short-lived and not change the secular trend of inflation, which has been sloping down since 1982.

This week, watch what Federal Reserve Chairman Alan Greenspan further says about rising taxes. He said last week they must rise in order to help offset the climbing record setting deficit. If that's the case, and you know it has to be, the only three certain things in life are death, taxes, and Wednesday night sailing in the summer.

"Before you give me a return on my money, please guarantee me the return of my money.".............Ben Franklin

May God Bless You and May God Bless the United States of America!

Last week's "Finally it's May" trivia question is: What is the 2005 maximum ROTH IRA contribution for a 55 year old for one who qualifies under the income guidelines? The answer is $4,500.

This week's "Spring is in the Air" trivia question is: What was the average price of purchasing a gallon of regular gasoline in May of 1985?

The first correct answer with an e-mail to (mailto:gary@themastersfinancial.com), or calls my office at 252-249-0100, wins a Limited edition "Masters, LLC. Wealth Management" Cap. (www.masterswealth.com)

Gary C Mastrodonato is a local resident of Oriental, NC and has been helping people to plan their retirement and to manage and preserve their wealth for over 30 years. He has created the "Mastering Your Money" radio show which airs on Saturdays from 10:00a.m-11:00a.m. on WTKF 107.3FM. He is the founder and CEO & President of The Masters, LLC. Wealth Management Group. He is authoring a book entitled "Kidcents" a book designed to teach children and their parents and grandparents the basics of investing. Securities Offered through: Securities America, Member NASD/SIPC. Advisory Services offered through Securities America Advisors, Inc. Gary Mastrodonato, Investment Advisor Representative. The Masters, LLC. Wealth Management Group; is not owned by, or an affiliate of Securities America.

State Estate Taxes

Greetings! I'm here from the Government Tax Department and I'm here to help you.
The 2001 Tax Act set the stage for phasing out the estate tax by increasing the exemption amount until 2010 when estate taxes would be eliminated entirely. The sunset provision of the law causes estate taxation to revert to 2001 laws with a $1,000,000 per individual exemption and a top tax rate of 55%.

These law changes are creating problems for state legislatures around the country that count on state death taxes for revenue. This revenue source has been tied to the Federal Estate Tax codes in most cases. With the potential elimination of the Federal tax, states are looking at the unhappy prospect of falling revenues.

The type of state death tax and how it is levied varies from state to state. Death taxes are imposed on the transfer of wealth at the time of death or in anticipation of death. States typically levy an inheritance tax and/or an estate tax. Those who receive the inheritance pay an inheritance tax. The estate that gives or transfers assets pays an estate tax.

The inheritance tax is the oldest and most common form of death tax. It is strictly a State tax since the Federal system does not tax inheritances. The tax is usually graduated and reduced by a number of exemptions. Typical exemptions include the relationship of the giver and the heir, exemptions for bequests to charitable organizations, and exemptions for property on which a tax has been paid.

States like South Dakota, for example, place a higher tax on property left to distant family or non-relative heirs, giving a tax break to property kept within a family. Tax rates vary widely among the states: Indiana's, for example, starts at 1% and graduates to 10% for amounts in excess of $1.5 million. Pennsylvania taxes inheritances to family members at 6% and non-family heirs at 15%.

Rates vary from state to state. Indiana taxes lineal descendants at rates varying from 1% on inheritances of up to $25,000 to 10% on amounts of $1.5 million or more. In Pennsylvania, however, they are taxed at a 6% rate and non relatives are taxed at a 15% rate, regardless of the amount of inheritance.

Estate taxes differ from an inheritance tax in that the rates are imposed on the estate as a whole without regard to the relationship of the beneficiary to the donor. Again specific exemptions apply; the most common being the single specific exemption applying to the entire estate, removing it from the tax base. In 2005 that Federal exemption amount is $1.5 million, increasing to $3.5 million by 2009.

Again there is a large variance in state rates. It's cheaper to die in Ohio where the maximum state estate tax is 7% vs. New York where the maximum is 21%.

California and Washington operate under a different tax structure. Federal statutes allow taxpayers a credit based on state taxes paid. Essentially this allows states to "pickup" taxes that would have been paid to the Federal government anyway. This does not increase the amount paid by the taxpayer, since the state is simply taking from the Federal pocket. As a result, all state inheritance and estate taxes operate as pickup taxes as well.

Expect laws on the state level to continue to evolve. This will impact our transitory baby boomers who are now migrating away from states where they worked and raised families to states where they expect to retire. Wills and trusts done in one state may not work as well in states with different laws.

One thing is certain, even if Congress does away with the Federal Estate Tax, States will see opportunities for raising revenues by imposing new inheritance and estate taxes.

With the income tax filing deadline just recently passed, it's all too clear about the revenues of income taxes that North Carolina collects. If you noticed the "allowed deductions" area of the tax form, there are not very many deductible areas to complete. There is a reasonable explanation for such conciseness. The North Carolina State death tax form is also very direct and to the point. The point is our state wants to collect the tax needed to support its budget needs. And friends, these taxes probably are not going away anytime soon.

May God Bless You and May God Bless the United States of America!

Last week's "Spring is in the Air" trivia question is: What was the price of purchasing a first class postage stamp in April of 1985? The answer is 22 cents.

This week's "Finally it's May" trivia question is: What is the 2005 maximum ROTH IRA contribution for a 55 year old for one who qualifies under the income guidelines?
The first correct answer with an e-mail to (mailto:gary@themastersfinancial.com), or calls my office at 252-249-0100, wins a Limited edition "Masters, LLC. Wealth Management" Cap. (www.masterswealth.com)

Gary C Mastrodonato is a local resident of Oriental, NC and has been helping people to plan their retirement and to manage and preserve their wealth for over 30 years. He has created the "Mastering Your Money" radio show which airs on Saturdays from 10:00a.m-11:00a.m. on WTKF 107.3FM. He is the founder and CEO & President of The Masters, LLC. Wealth Management Group. He is authoring a book entitled "Kidcents," a book designed to teach children and their parents and grandparents the basics of investing. Securities Offered through: Securities America, Member NASD/SIPC. Advisory Services offered through Securities America Advisors, Inc. Gary Mastrodonato, Investment Advisor Representative. The Masters, LLC. Wealth Management Group, is not owned by, or an affiliate of Securities America.