During 2002, we are planning to sponsor two
seminars on international tax law. One is for
beginners and the other is for experienced tax
professionals or corporate tax managers.

OFFSHORE TAX BOOT CAMP

The beginners program is set for May 24 & 25, 2002
at Caesar's Palace Resort and Casino in Las Vegas.
We currently have 12 paid registrations and we are
confident we will get more in the next four months.
Those of you who have committed to this seminar can
proceed to book airfare and hotel rooms. Please note
that there is no requirement to stay at Caesar's, where
the room rates are over $250 per night. For current
details on this seminar, see our web page at
http://www.offshorepress.com/ostaxbootcamp.htm

There are still three spots/seats available at our $425
discounted registration fee -- which is a savings of
$250 for the two day program. This discount is offered
on a first-come, first-served basis. To register, call
Vern jacobs at (888) 516-3177. If the phone is busy,
wait a moment because you can leave a message
with your phone number.

TAX CONFERENCE FOR CONTROLLED FOREIGN CORPORATIONS

Our second seminar is intended for experienced tax
professionals and corporate tax managers who are
looking for new insights into the byzantine rules for
controlled foreign corporations. If we get a minimum
of 30 interested registrants, we will proceed to make
plans for a meeting facility, for a definite time and for
high quality instructors.

Most likely, this program will be in the fall of this year
in the Miami, Florida area. We presently have a list of
16 people who have expressed a serious interest in
attending this kind of program. Current details about this
program are online at http://www.offshorepress.com/cfcworkshop.htm

If you are interested in the program, please call me
at (888) 516-3177 or send an email to seminars@...

Vern Jacobs
Offshore Press, Inc.

Are you looking for some ways to pay less taxes?

Now that the year 2001 is past, the financial media
are beginning to crank out their annual articles about
how to save taxes on your tax return.

However, I prefer to encourage clients and subscribers to
start thinking about this year's (2002) taxes because
it's a lot more productive.

Let's face it. Most of us are aware of the deductions
and credits we can claim. Searching last year's
records for overlooked tax deductions is what I call
the "river dredging" method of tax planning.

Real tax savings comes from pre-meditated tax
avoidance -- which is just a different way to point
out that tax avoidance requires advance planning.
for more on that topic see
http://www.offshorepress.com/vkjcpa/pta.htm

Our public (free) web site also has quite a few articles at
http://www.offshorepress.com/vkjcpa/   There are over 50
tax articles that are indexed alphabetically.

If you need a tax advisor (or even a tax preparer) you might
want to look at http://www.offshorepress.com/vkjcpa/taxadvisors.htm
That article includes some very candid comments by yours
truly about tax lawyers, tax accountants, financial planners,
insurance agents and stock brokers.

If you still want to find some ways to save on last year's
taxes, you might check out
http://www.offshorepress.com/vkjcpa/taxtips.htm.  This
was from a seminar presentation I made in early 1998,
but I've reviewed it recently and it's basically still valid.
I don't really know if Money Magazine is still doing their
annual competition between tax preparers, but if they
are, you might be interested in my VERY candid
comments about why that's a useless exercise.

And if that's not enough tax information for you, I humbly
offer my very BEST TAX LINKS page. This is not a
comprehensive list of links to tax web sites. Instead, it's
a list of the links that I actually use fairly often. It's at
http://www.offshorepress.com/vkjcpa/besttaxlinks.htm

However, I can't figure out how to make a decent living
by giving away the "good stuff", so my latest and most
extensive discussion of how to save taxes is not free.
It's available for $67 -- with a 100% money back guarantee
that I will refund your money in full if that report
doesn't offer you some useful ideas to save taxes. For
more information about that report and how to order it, see
http://www.offshorepress.com/legalways2save.htm

Vern Jacobs
jacobs@...
http://www.offshorepress.com

I've just become the victim of email identity theft.

Some junk mail spammer is using my return email address to send junk
email (spam) to people who are not on any of my own opt-in lists.

A person who doesn't know anything about me or my company sent me an
email with "Remove" in the subject line. Included in the message was a
copy of the header in the email this person received.(I've altered the
name of the recipient for his privacy.)

-----Original Message-----
>From: aps@...
>Sent: Monday, January 28, 2002 6:41:44 PM
>To: john_smith@...
>Subj: Got Debt?
>

I knew that I did not send that message because I have never sent
bulk email to anyone that didn't ask to be on one of my lists and I
never promoted any product or service involving "debt". But I have
received junk email with my own email return address.

One of my email domain addresses is www.rpifs.com. That was the
address I used before I changed the name of my company from Research
Press, Inc. to Offshore Press, Inc. and acquired the domain of
www.offshorepress.com. However, the old domain address is still valid
and can still be used for email.

About six months ago, I noticed that some of the junk email I get
every day has a return address "info@..." or some similar
address. It was an annoyance but not worth the time to try to
eliminate the practice.

But now, someone has decided to promote his or her product or service
using my email return address by sending junk email to people who did
not ask to receive any email from me.

From a marketing perspective, it doesn't make any sense. Who would
want to buy anything from someone who disguises their return address?
But some spammer obviously thinks it's worth his or her time and money
to play this game.

Previously, seeing junk email with my own return address was
only irritating. But now they are creating the impression that I'm
sending out spam/junk email.

If they can do that to me, they can do it to you as well.

At the moment, I don't have a solution and I would welcome any
suggestions from anyone on this list about how to prevent this from
becoming a common practice.

Beyond that, if you get junk mail from someone and send them a request
to remove you from their list, don't be surprpised if they respond by
saying they have never sent any email to you.

Vern Jacobs

Dear Subscribers:

For your information, I've been offline and out of communication
since Wednesday. The Kansas City Metro area is in the middle of the
worst ice storm in 120 years and we have had up to 200,000 homes and
businesses without electrcal power. As of mid-day Saturday, our own
home and business is still without power. I'm sending this to you
from a borrowed computer to let you know that if any of you have
tried to get in touch with me for any reason, I'm not ignoring you.

Vern Jacobs

Once -- in the distant mists of time -- it was possible for taxpayers
and tax preparers to memorize various tax rules like the amount of
the standard deduction, the personal exemption, the tax brackets, the
auto mileage deduction and similar amounts. No more. Inflation during
the 1970s caused middle income taxpayers to become subject to the tax
rates of the well-to-do and the Congress responded by introducing the
concept of "indexing" the tax brackets and various deductions,
exemptions or credits to compensate for increases in the inflation
rate. While this introduced a greater degree of fairness into the
system, it also added some substantial complexity. Now, it's an
annual effort for tax professionals to keep up with the new indexed
amounts. Most taxpayers have simply given up.

Recently, the IRS has published some news releases at their web site
(www.irs.gov) with some of the new amounts for the year 2002. I've
included the comparable amounts for 2001. As other inflation indexed
amounts become available, I'll compile them for you.

Minimum Standard Deduction 	        2002 2001
						 ------ ------
	 Single taxpayers 	 700 4,550
	 Married filing joint 	 850 7,600
	 Head household 		        900 6,650
	 Married filing separate 	 925 3,800
	 Over 65 or blind 	 900   900
	 Over 65 and blind 	      1,150 1,100
	 Dependents 		 750       750
	   Or earned income +   	 250       250

Personal exemption 		      3,000 	 2,900

Employee Benefit Plan Limits
	   	                                 2001      2002
						 -----    -----

Maximum 415(b) defined benefit plan amount     160,000 140,000
Maximum contribution to def contribution plan 40,000 35,000
Maximum 402(g)(1) elective deferrals  11,000  11,500
Compensation limit for defined benefit plans   200,000 170,000
Maximum contribution to SIMPLE plans          7,000   6,500
401(k) catch up contributions for over age 50  1,000   n/a
Compensation level for key employee        130,000    n/a
Compensation level for highly compensated       90,000 85,000

A new saver's tax credit of up to 50% of the amount contributed to an
IRA will be available for tax years from 2002 through 2006. The
percentage rate is decreased for joint returns with an adjusted gross
income of more than $30,000 and is eliminated for those with an AGI
of more than $50,000. For single taxpayers and those filing a
separate return, the respective amounts are $15,000 and $25,000. For
those filing as head of household, the respective amounts are $22,500
and $37,500.

The standard mileage rate for the business use of a car will increase
from 34.5 cents per mile in 2001 to 36.5 cents per mile in 2002. The
rate for use in charitable activities remains at 14 cents per mile,
but medical use and deductible moving expenses, it increases from 12
cents per mile to 13 cents per mile.

Vern Jacobs

One of my subscribers pointed out to me that the standard deduction
numbers for 2002 were smaller than for 2001 and it turned out that
the first digit was erased somehow on the standard deduction amounts,
while I was trying to align the columns.

By the way, the columns wes aligned when the message was sent, but
not when it was received. Here are the correct numbers for the
standard deduction amounts. I switched to the courier font for the
numbers and maybe they will stay aligned this time.

Vern


Minimum Standard Deduction              2002      2001
                                        ------  ------
         Single taxpayers                4,700     4,550
         Married filing joint            7,850     7,600
         Head household                  6,900     6,650
         Married filing separate         3,925     3,800
         Over 65 or blind                  900       900
         Over 65 and blind               1,150     1,100
         Dependents                        750       750
           Or earned income +              250       250

Personal exemption                      3,000     2,900

Conference Announcement:

OFFSHORE TAX PLANNING, COMPLIANCE AND MONEY LAUNDERING.

May 2-4, 2002

Nassau, Bahamas: The Nassau Marriott Resort and Crystal Palace Casino.

First Annual Meeting of the Society of Fellows (S-5). Registrants are
entitled to join this professional association.

Mr. Denis Kleinfeld, Mr. Marshall Langer, Mr. Richard Duke plus 43+
other presenters will be there.

Contact: Ms. Sonnya Roa at sroa@... at St. Thomas University. Her
phone number is 305-474-2465 and her fax is 305-474-2469. Her office
address is Ms. Sonnya Roa, School of Law, St. Thomas University,
16400 N.W. 32nd Avenue, Miami, Florida 33054-6459.

Prices for the general public are $1,595 plus $395 for Saturday. If
two or more persons from our list come, they will be entitled to
group discounts. The more registrants from the list, the larger the
discount.

Web Site: http://www.stu.edu/taxconference

Dear Subscribers:

I'm presently engrossed in co-writing a 600+ page (8.5 x 11) manual
for the Offshore Tax Boot Camp that Richard Duke and I will be
teaching in Las Vegas on May 24-25, 2002. Substantial portions of
that manual will be included in the subscriber's web site when it's
done. My next project will be to compile an extensive manual on asset
protection -- that will also be available on our subscriber's web
site.

However, I have to concentrate on the offshore tax manual first
because the seminar date doesn't give me a lot of leeway in working
on it. We do have enough pre-paid registrations for the seminar and
have already booked the meeting room, air fare and lodging.

Meanwhile, as time permits, I will share some news items with you,
like those that follow.

----------------------------------------------------------------
Predatory Lawsuits -- The Asbestos Lottery
----------------------------------------------------------------

I recently stumbled onto this Fortune Magazine web page which states,

"Asbestos lawyers are pitting plaintiffs who aren't sick against
companies that never made the stuff--and extracting billions for
themselves. "

For the complete story, see ....

http://www.fortune.com/indexw.jhtml?channel=artcol.jhtml&doc_id=206477

----------------------------------------------------------------
How to Protect Yourself From Scam Artists
---------------------------------------------------------------

I found an article I had written some time back about some tips on
how people could ward off the enticements of the scam artists with
their promises of huge rewards with little risk or investment. A copy
is now online at http://www.offshorepress.com/scamprotection.htm

------------------------------------------------------------
Jurors Adjust to The Lowest Denominator
-----------------------------------------------------------

Here's a disturbing article at www.lawyersweekly.com.

It seems that "Jurors who are unable to entertain alternative points
of view have far greater influence on the outcome of a trial than
their more reasoned and open-minded colleagues, a new study suggests."

Perhaps that's a confirmation of the adage about "Don't confuse me
with the facts. My mind is made up." In any event, it does help to
explain why jurors tend to be harsh on those who use complex legal
arguments to try to defend themselves. If a plaintiff is injured or
has suffered a financial loss, never mind who's guilty -- let's just
help this poor person by taking some money from the rich guy.

----------------------------------------------------------------------
-----------
Some Recent Verdicts at National Law Journal Web Site
----------------------------------------------------------------------
------------

If you know someone who is wondering about the value of having an
asset protection arrangement, check out the current news at
http://www.verdictsearch.com/news/verdicts/

--------------------------------------------------------------
The Fear Asset Forfeiture Defense Manual
--------------------------------------------------------------

The initial price of of this manual was set at $84 but the
publisher has decided that the price was too low and will
raise the price to $119 as of March 1, 2002. For details about
this guide, see www.fear.org   Their web site also provides
extensive free information about the USA Patriot Act and
its many provisions that affect asset forfeitures.

----------------------------------------------------------------------
-----------
Your Suggested News Clippings Would Be Appreciated
----------------------------------------------------------------------
-----------

While I'm immersed in writing an extensive manual on offshore
tax law and another on asset protection, it will be difficult for
me to spend as much time as I'd like to keep up with the
news on asset protection, privacy and related issues. I'd
appreciate and welcome tips from readers about news items
that are likely to be of interest to other subscribers. Please
include web site addresses so I can confirm the information
and can provide appropriate credit tot he author/publisher.

----------------------------------------------------------------------
--
Do You Know Any Experts on Liability Insurance?
----------------------------------------------------------------------
--

One of my projects has been an extensive report on the
benefits and the pitfalls of liability insurance. If possible,
I'd like to be able to interview a few experts on the
subject. If you are one or know one, please send me an
email with contact information. My email address is
jacobs@...

------------------------------
Do You use PayPal?
------------------------------

In order to make it as easy as possible for people to pay for
my books, reports, seminars and services, I try to provide a
variety of payment options. Today, I added the PayPal service
which ostensibly makes it easy for anyone to send money to
anyone else by email. The service also offers an alternative to
an e-store for those who can't afford the cost of an e-store.

I would welcome and appreciate any inside tips on this service
from any of you who have used it. After you have signed up to
receive payments, the system doesn't let you test it's features
by sending payments to yourself. If any of you have PayPal and
are comfortable with it, it's now available on my web site.


Vern Jacobs

Dear Subscribers:

I received the following query about Medicaid planning from someone
who was visiting my web site on asset protection. Because my mother
and mother-in-law are both living in costly private nursing homes,
this is a subject for which I have a very personal concern. I
therefore took the time to respond to this person's inquiry and am
sharing this with those of you who might have similar concerns. For
those of you who are not yet concerned about this issue, just wait.
You will be. (I have changed the name of this person to protect his
privacy.)

Vern
-------------------------------------
Mr. Jacobs,

I found your website very informative. I was looking for, but did not
find- "HOW TO PROTECT HOME OR ASSETS," from a nursing home should a
person be placed into such a dwelling.  I thought that the Revocable
Living Trust would cover that, but I see it's not so. We are a
married couple, with only one child, How can we protect our home &
small assets for our only daughter?

R. "Jones"
-----------------------------------------------------

Mr. "Jones":

I will not presume to tell you what you should do, but I will be
happy to share what my wife and I have done in regard to planning for
the professional care for our parents and for ourselves.

Both of our mothers are alive but are in private pay assisted living
facilities. One of them has Alzheimers and the other has an
assortment of physical aliments and diminished memory. Neither of
them are likely to ever be able to live on their own without a very
high level of professional care. My wife and I both work and there is
no way that we can care for either or both of them in our home,
without 24 hour a day professional help -- which would cost far more
than the private nursing homes. We would also have to make very
extensive and costly modifications to our home to accommodate them --
or we would have to buy a different style of home to do that.

I discouraged my mother and step-mother from buying long term care
insurance when they were younger. Because they both had some savings
and were in excellent health, I concluded (at that time) that they
would not benefit from LTC insurance. Based on hindsight, that was a
serious mistake.

They are both in expensive assisted living homes now. As we have seen
their savings deteriorate, my wife and I decided to get LTC insurance
to protect our own children from having to worry about how to pay for
our care if (or when) that should become necessary.

Your question presumes that you are anticipating becoming a Medicaid
recipient. My wife and I are trying to keep our mothers out of the
Medicaid system as long as possible. We are not trying to preserve
any of their assets for our own use, even though both of them would
have preferred to leave something to us.

It's my personal belief that Medicaid will be severely limited and
nearly useless in 10 to 15 years. I do not want to plan on reliance
on Medicaid for either myself or my wife. In Kansas and Missouri,
Medicaid recipients must live in a semi-private room that is
basically no different from a hospital room. The local facilities
that accept Medicaid are struggling to survive despite continuing
cuts in funding from the government. Some of them are resorting to
hiring employees with marginal training, experience and work habits.
The private pay facilities get the better quality help and the
Medicaid funded facilities get the leftovers. The turnover in staff
is perpetual. To survive, the facilities must resort to providing
fewer staff for a given number of patients. I believe it will get
much, much worse and will not ever get better.

As the population ages (which it is doing), more and more people will
find that they will need many years of professional level care in a
nursing home or assisted living facility in their later years. That
alone will put great financial pressure on the government to continue
to provide the same level of Medicaid care for the indigent. In
addition, as more and more people seek to utilize Medicaid planning
to preserve their assets for their children, that will add to the cost
of the Medicaid system.  Meanwhile there is a growing pressure to
resist higher taxes to pay for social services like Medicaid. It was
intended to provide for the care of the indigent and not for the care
of those who have the resources to pay for their own care. But, as
the cost of nursing homes and assisted living facilities have grown,
more and more families are looking for ways to strip the assets from
the senior members of their family so that they will become indigent
and thus eligible for Medicaid. There are very few people who have
saved enough or who have a retirement income that will cover up to
$5,000 a month for each person in a nursing home or assisted living
facility.

The Medicaid system is already "bursting at the seams" in the
financial sense and it can only get worse.

Regarding a revocable living trust (RLC), we have established a RLC
for both of our mothers and for ourselves. It gives us the legal
authority to manage the financial affairs of our mothers or each
other. Our own trusts make it possible for our daughters to step in
and take care of our assets if necessary. We also have a durable
power of attorney for each of our mothers and for each of us, as well
as a living will and health care directive. In addition, we have made
advance arrangements for the payment of the future funeral costs of
our mothers and ourselves.

You are correct in your understanding that a RLC does not protect
assets from being taken for nursing home costs. However, if you and
your wife want to subject yourself to life in a Medicaid facility in
order to preserve some of your estate for your daughter, there are
some ways to do that. I personally suspect that many of the
arrangements that are now legal will become illegal in the next few
years. Therefore, there may be a short window of opportunity for
those who want to engage in this kind of Medicaid planning.

Your first step is to contact a local Elder Law attorney because this
area of law is very state specific. Medicaid is a social service
system that is jointly run by the federal and state governments.
There are substantial variations from state to state. In Kansas, a
person can make gifts to a spouse or to children (or even to an
irrevocable trust) equal to the states' assumed (and very outdated)
cost of a nursing home each month. In Kansas, about $1,700 a month
can be gifted and results in one month of ineligibility for Medicaid.
Over a period of a year, that amounts to over $20,000. Such transfers
also remove the income on (or growth of) those assets from the estate.
Such transfers can be used to provide for a higher level of care in
the event that Medicaid should become necessary.

Another option is to make a lump sum gift of a part of the estate.
That will result in a period of ineligibility that will vary from
state to state depending on the amount that each state assumes to be
the average monthly cost of a nursing home. For example, if there
were $200,000 in an estate and a gift of $100,000 were made, and if
the assumed average cost of a nursing home in that state were $2,500,
that would result in a period of 40 months of ineligibility for
Medicaid. Where the actual costs of a nursing home are much higher
than the amount used by the state to compute Medicaid eligibility,
this kind of planning can cause some problems. For example, if the
actual cost of a nursing home were $5,000 a month, the person would
require a minimum of $200,000 of assets (and income) to cover 40
months of costs. If the person's monthly income were $1,500 from
Social Security and pensions, then the out of pocket cost would be
$3,500 per month and the person would need $140,000 for 40 months of
nursing home care during the period of ineligibility. Through a
process of trial and error calculations, you can compute the maximum
amount of a lump sum gift based on these variables.

However, there are some situations where transfers of assets to
children to provide for the future care of their parents are
mismanaged. The children get in a financial bind or they see the
assets as something they can tap into when they want something they
can't otherwise afford. In some cases, the children simply spend that
money and justify doing so on the theory that the government will
take care of their parents. I do not intend to suggest that your
daughter would do anything like that, but for the sake of others who
might be reading this, that should be given some serious thought. A
high proportion of the clients for whom I have done estate tax
planning have had very dysfunctional families and they could not rely
on their children to be responsible stewards of their assets. High
net worth individuals usually utilize trusts or limited partnerships
to ensure that their children will not mismanage the assets that are
left to them.

There are some ways to transfer a home to a child so that the home is
protected if you and your wife become seriously ill for an extended
term. However, the odds that both of you will be in a nursing home at
the same time are very small. Medicaid generally permits a spouse to
retain the home, but the home may have to be sold after the death of
the spouse to repay any Medicaid costs for the spouse who was on
Medicaid.

Two of the best elder law attorneys whom I know have written (or
co-authored) books that offer a great amount of helpful information
on this subject. One of them is "The Medicaid Planning Handbook" by
Alexander Bove. Details about the book are available at
http://www.bovelaw.com/publication3-medicaid.htm  The other is "The
Alzheimer's Legal Survival Guide" by William G. Hammond,  Karen H.
Weber and Mary Helen Gautreaux. Hammond's web site is
http://www.kcelderlaw.com/  Both of these books are available from
Amazon.com.

Here are some web sites that provide further information on this and
related subjects.

http://www.netreach.net/~wmanning/medicaid.htm

http://www.hcfa.gov/medicaid/medicaid.htm

http://www.tcf.org/Publications/Basics/Medicaid/

http://www.law.cornell.edu/topics/medicaid.html

http://www.seniorlaw.com/recent.htm

http://encarta.msn.com/find/Concise.asp?ti=04110000

http://www.law.uh.edu/healthlawperspectives/Medicare/homepage.html

Vernon Jacobs
The Jacobs Report
http://groups.yahoo.com/group/JacobsReport/

Dear Subscribers:

A combination of work committments for the two day seminar
I'm hosting in Las Vegas in late May and some tax return
work makes it necessary for me to temporarily discontinue
any other activitites that consume my time.

This news list will therefore be temporarily suspended until
early June.

Meanwhile, one of the best email news sources regarding
offshore events, news and activities is the Sovereign
Society A-List edited by Bob Bauman. You can sign up at
their web site at  http://www.sovereignsociety.com - and
it's free.

I'll resume news memos to this list in June and I appreciate
your patience.

Vern Jacobs

If you get any correspondence claiming to be from your bank or the
IRS and you are asked to provide information about your bank account
and taxpayer ID number, be suspicious.

The IRS has recently issued a warning about a scheme that uses phony
bank correspondence and IRS forms in an attempt to trick taxpayers
into disclosing their banking data and social security numbers. The
information is then used to steal the taxpayer's identity and bank
account deposits. According to the IRS, this scam has been discovered
all over the country, including Maine, New York, Georgia, North
Carolina, Texas, California and Washington state. Numerous foreign
victims have also been identified.

Further details about this scheme are available online at
http://www.irs.gov/pub/irs-news/ir-02-55.pdf and also at
http://tax.cchgroup.com/news/headlines/2002/nws5202.htm#3

Please forward this to any friends, clients or associates and
encourage them to do the same.

Vernon Jacobs
www.offshorepress.com
http://groups.yahoo.com/group/JacobsReport/

We would like to remind you of this upcoming event.

File Form TD F 90.22.1

Date: Sunday, June 30, 2002
Time: 12:00AM - 1:00AM CDT (GMT-05:00)

If you or a client had more than $10,000 of assets in all
foreign financial accounts (combined) at any time during the
year 2000, you (or your client) should file Form TD F 90.22-1
before June 30th. Copies of the form are available at the IRS
web site at http://www.irs.gov/forms_pubs/formpub.html

We would like to remind you of this upcoming event.

File Form TD F 90.22.1

Date: Sunday, June 30, 2002
Time: 12:00AM - 1:00AM CDT (GMT-05:00)

If you or a client had more than $10,000 of assets in all
foreign financial accounts (combined) at any time during the
year 2000, you (or your client) should file Form TD F 90.22-1
before June 30th. Copies of the form are available at the IRS
web site at http://www.irs.gov/forms_pubs/formpub.html

Dear Friends and Subscribers:

A couple of years ago, I wrote an article asking if anyone knew what
triggered the turn around in the prohibition of alcohol -- but I never
received any response in which someone could point to a specific event
that led to the repeal of the 18th Amendment. Perhaps it was not a
single event but a culmination of issues that finally led enough
voters to say no to prohibition.

Yesterday I received a mailing piece from the "Americans Against the
War on Drugs", which is apparently being sponsored by Former New
Mexico Governor Gary E. Johnson. Their web site is
http://www.aawod.org. It includes some helpful arguments about why we
should stop waging this war. It also debunks many of the arguments in
favor of the war on drugs.

Another web site devoted to this issue is
http://www.csdp.org/ads/failed.htm CSDP Stands for Common Sense Drug
Policy. This web site also provides an extensive collection of links
to other web sites that are both for and against the war on drugs.

A closely related web site is devoted to the subject of forfeitures --
which were authorized by the Racketeering and Corrupt Organization Act
(RICO) that was passed in 1970. (See http://www.ricoact.com/  )
Property forfeitures are an increasing problem and are mainly due to
the failed war on drugs. You will discover a real wake up at this web
site. http://fear.org. FEAR stands for Forfeitures Endanger American
Rights.

While I haven't yet found any Internet resource to confirm my views on
this, I suspect that our efforts to force other countries to
participate in this war against the international drug cartel is
contributing to the resentment of many other peoples against our heavy
handed intrusions into their affairs. This memo was prompted by my
having just received a copy of an article in the New York Times about
how the drug dealers are now believed to be laundering money through
insurance policies -- which represents one more area of financial
privacy that will be destroyed by the drug police. (See
http://www.nytimes.com/2002/12/06/international/americas/06LAUN.html )

As I have indicated in earlier articles, I have never used any drugs
other than what can be purchased over the counter or a very few
prescription drugs -- for very brief periods of time. My concern about
this issue is that we are "throwing the baby out with the bath water".
Government power and control has increased many times since we began
this effort and we have expended ever larger amounts to try to curtail
the distribution and use of illicit drugs. The waste of resources is
huge (and growing) but the destruction of our civil liberties is even
greater. All of this is allegedly to prevent people from causing harm
to themselves from the use of illicit drugs.

In my humble opinion, the real root cause of the war on drugs is
because the politicians needed some kind of emotional issue to cause
most of us to permit them to continue to spend more and more of our
money and to extend their police powers far beyond what was
contemplated by the drafters of our Constitution.

Is it possible to turn the tide and put an end to this non sense and
waste of resources? It won't be easy because there is a HUGE
bureaucracy that benefits from the funds that are being spent on this
endless war. But there is some hope that the war on terrorism will be
a sufficient substitute so that they will let go of their commitment
to the war on drugs. However it might work out, it will require a
growing chorus of citizens who are willing to take a stand and let
their elected representatives know that they want this insanity to
stop.

Although this subject is mostly related to my asset protection
reports, it's indirectly a justification for increased taxation. If we
can eliminate the waste of resources on this endless war, we could
justify even larger tax cuts. I will be contacting my elected
representatives on this issue and if you agree with those who are
against the war on drugs, I hope you will also take a stand. If there
are enough people who feel this insanity has continued too long
already, perhaps we can get the politicians to let go of it and find
some other reason to waste our money.

If you disagree with my views on this and don't want to be subjected
to any other editorial articles you can sign off from the Jacobs
Report by following the instructions below.

Vern Jacobs

Dear Subscribers:


My work schedule has been extremely busy since late last year but I
neglected to send an announcement that I would be suspending the
issuance of this newsletter until after I got caught up with my tax
work. I apologize for the unannounced hiatus since last December, but
I will endeavor to keep this list reasonably active for the rest of
this year.

However, the focus of the Jacobs Report will be on two subject areas.

First, I will send notices to this list regarding significant tax news
or developments with an emphasis on international tax issues and asset
protection topics.

Second, as time permits, I do respond to questions from customers and
subscribers and I'm going to start posting those Q & A messages to
this list.

Vern Jacobs

By now you must have heard that the House and Senate have approved a
compromise tax bill that is expected to be signed by President Bush
before the end of May (2003).

The name of the tax bill is the Jobs and Growth Tax Relief Act of
2003. The acronym is JGTRRA, but a lot of commentators will probably
refer to it as the "2003 tax cut" or the "2003 tax law".

The President and the Republicans are claiming credit for a large tax
cut, but in fact there are some significant objectives that didn't get
included in the final bill. First and foremost, the cuts are not
permanent. Like the estate tax cuts in 2001, they are being phased-in
over a period of years and some elements of the cuts will be repealed
in a future year.

There is no change in the complex phase-out of the estate and gift tax
laws that were included in the 2001 tax law. The 2001 law provided for
the repeal of the estate tax in 2010 with a phase-in of increased
exemptions over a ten year period.  But that law also provided that if
the repeal isn't made permanent before 2010, it will be sunset in 2011
and the law will revert to what was applicable in 2001. President Bush
wanted to make the estate tax cuts permanent, but the 2003 tax cut
didn't include anything dealing with estate and gift taxes.

President Bush also wanted to repeal the double tax on dividend
income, but instead the new law provides for a reduced tax rate, based
on the rates used for long term capital gains. However, while it
wasn't part of the President's proposal, the new law includes a
significant cut in the capital gains tax rate as well. for most
taxpayers, dividend income and long term capital gains (LTCG) will be
taxed at a maximum rate of 15% (down from 20% for LTCG) for most
taxpayers. For taxpayers in the 15% or lower brackets for ordinary
income, the maximum rate on dividends and LTCG will be 5%. But as you
might expect, there are some exceptions and the dividend rate
reduction will be subject to an assortment of complicated rules to
prevent "abuses" by creative taxpayers. I'll try to deal with some of
the nuances of the dividend rate cut in future news releases.

The reduction in tax rates that were part of the 2001 tax law were
phased in over a ten year period. The 2003 tax law speeds up the cuts
for all tax rate brackets over 15%. The top rate for 2003 will be 35%
instead of 38.6%. These rate cuts are retroactive to the first of the
year. The top rate on corporations is also 35% so this reduction makes
the use of a taxable corporation less appealing to  owners of small
businesses.

One of the biggest surprises in the 2003 tax law is the increase in
the first year deduction for business equipment (under tax code
section 179) from $25,000 to $100,000. In addition, a special "bonus"
depreciation rate of 30% of depreciable property (in excess of the
first year write off) has been increased to 50%, for equipment
purchased after May 5, 2003.

Other provisions of the 2003 tax law include an increase in the child
tax credit for 2003 and 2004, an increase in the standard deduction
for married couples and some modest relief from the alternative
minimum tax for individuals.

As time permits, I will be incorporating these changes in the articles
on my web site at http://www.offshorepress.com/vkjcpa/, in the books
that are sold by Offshore Press and in some articles for The Jacobs
Report and other publications. Meanwhile, here are some other Internet
sources for further details on the new tax law.

Vern Jacobs
May 28, 2003

An eight page summary (free) in PDF format
http://tax.cchgroup.com/news/2003JobsandGrowth.pdf

Projected Tax Rates and Variables from 2002 through 2011 (two pages)
http://tax.cchgroup.com/news/10-year2003.pdf

Various Press Releases by the U.S. Treasury Dept.
http://www.ustreas.gov/press/taxes.html

Treasury Dept. Examples of Tax Relief by Taxpayer Group (7 pages)
http://www.ustreas.gov/press/releases/reports/taxreliefin2003.pdf

House Ways & Means Committee Link to Conference Report
http://waysandmeans.house.gov/

Rules Committee Index to the JGTRA of 2003
http://www.house.gov/rules/hr2_conf.htm

PPCNet Summary of the 2003 Law
http://www.ppcnet.com/ppcNet/index.cfm?txtFuse=dsp
ShellContent&fuseAction=DISPLAY&numContentID=26855
&numSiteID=2&numTaxonomyTypeID=11&numTaxonomyID=76

BNA Tax Management Summary
http://www.bnatax.com/tm/2003legis_tm_summary.htm

A somewhat recent development in web technology is the ability to do
financial calculations through a web site (using a java script.)

I recently came across an assortment of links to over 50 financial
calculators. Then I wondered if there might be some more and used a
few search engines to search for "financial calculators". It soon
became obvious that there weren't any calculators to do income tax
estimates, but I knew some were available so I searched for "tax
calculators" and found about half a dozen.

Thus far I have not found any free on-line calculators to do estimates
of the impact of the new (2003) tax law, but I suspect some will soon
be available.

Meanwhile, I have compiled a list of links to web sites that offer a
variety of financial and tax calculators. I have not yet tested more a
very few of them and so you should not assume that I am endorsing any
of them in any way. Over time I'll check them out when I have a need
for them and if I encounter any that don't work or that produce bad
results, I will simply delete them.

If any of you are aware of any helpful tax or financial calculators
that are free or inexpensive, let me know and I'll add them to this
web page. The links are at http://www.rpifs.com/vkjcpa/calculators.htm

Vern Jacobs

Marc Harris is a former US accountant who had moved to Panama and had
developed a very large offshore financial enterprise. He has been the
subject of substantial controversy for many years. Some details of his
background are available at
http://www.miami.com/mld/miamiherald/6067232.htm and at
http://www.quatloos.com/groups/m-harris.htm

According to the KYC News (formerly the
Offshore Business News and Research),

"Offshore financial services provider Marc Harris, who was first
exposed in OffshoreAlert in March, 1998, was arrested yesterday in
Nicaragua and immediately deported to the United States.

Harris was flown from Managua to Miami, Florida, where a criminal
indictment ­ which is still sealed ­ was recently filed against
him by
the Internal Revenue Service.

As was previously the case with three of his clients in Panama, Harris
was not given an opportunity to challenge the legality of the action
through the local courts.

Harris' lawyer, Roger Guevara Mena, and his second wife, Nubia
Gutiérrez Rivas, accused the authorities of kidnapping the
businessman, reported La Prnesa newspaper, of Nicaragua, today.

OffshoreAlert has previously exposed Harris' involvement in
white-collar crime, including money laundering, banking fraud,
securities fraud, insurance fraud and theft of tens of millions of
dollars of client funds.

He moved his operations to Nicaragua last year from Panama, where had
been based for more than ten years, being allowed to operate due to
apparent government corruption.

His group holding company and main operating subsidiaries were
incorporated in the British Virgin Islands and Nevis.

OffshoreAlert will be publishing updates on this breaking story from
its web-site at www.offshorealert.com.

This message has been brought to you by:
KYC News Inc. 123 S. E. 3rd Avenue, #173
Miami, FL 33131, USA.
Tel.: +1 (305)372-6267, Fax:  +1 (305)372-8724
Email: editor@..., Web:   www.kycnews.com"

Our thanks to James Lavorgna, JD for forwarding this news item to us.
   <jal@...>

If you haven't already taken care of your second quarter estimated tax
payment, it will be due on Monday, June 16th. The due date is the same
for personal and corporate estimated tax payments.

June 16th is also the due date for income tax returns by U.S. persons
who are living outside the U.S.

On June 30th, those of you have have any kind of offshore financial
account should look into whether you need to file the Treasury
Department Form TDF 90-22.1. Details about this form and the filing
requirements are included with the instructions to the form, which is
available at the IRS web site at http://www.irs.gov/formspubs/

As a general rule, any U.S. person or entity that has direct or
indirect signature or other authority over a foreign bank account,
securities account or other type of "financial account" should file
this form. The form is only required if the aggregate amount in all
foreign accounts exceeeds $10,000 at any time in the prior taxable
year.

The penalties for a failure to file are extreme. In addition,
taxpayers who have foreign financial accounts should have disclosed
that fact on their Form 1040, Schedule B, Part III. Corporations,
partnerships and estates or trusts are also required to disclose any
foreign accounts with their respective tax return.

Additional information about tax filing due dates is available at
http://www.offshorepress.com/vkjcpa/taxdates.htm

We would like to remind you of this upcoming event.

File Form TD F 90.22.1

Date: Monday, June 30, 2003
Time: 12:00AM - 1:00AM CDT (GMT-05:00)

If you or a client had more than $10,000 of assets in all
foreign financial accounts (combined) at any time during the
year 2000, you (or your client) should file Form TD F 90.22-1
before June 30th. Copies of the form are available at the IRS
web site at http://www.irs.gov/forms_pubs/formpub.html

QUESTION:

A reader asked, "Just curious if this rule (for filing Form TD F
90-22.1) would apply to a foreign annuity, such as a swiss annuity."

REPLY:  The instructions to Form TD F 90-22.1 define a financial
account as

"... any bank, securities, securities derivatives or other financial
instruments accounts. Such accounts generally encompass any accounts
in which the assets are held in a commingled fund and the account
owner holds an equity interest in the fund. The term also means any
savings, demand, checking, deposit, time deposit or any other account
maintained with a financial institution or any person engaged in the
business of a financial institution."

To understand the purpose of this form it's important to realize that
it is NOT a tax form, per se. It is one of a variety of forms used to
attempt to control money laundering. The form is not filed with your
tax return. It is filed with a division of the U.S. Treasury Dept.
that is involved in trying to detect financial crimes and is now
involved in trying to detect money flows within the community of
terrorists. The penalty for not filing this form can be as much as
$500,000 and five years in jail for the mere failure to file the
form.

For a period of time, I was of the opinion that a fixed return annuity
issued by an insurance company was not a "financial account" for this
purpose -- but I no longer believe that the distinction is clear
enough to justify the risk.

The potential penalties are so severe that it makes far more sense to
disclose any and every financial account of any kind so long as the
total value of all the foreign accounts was more than $10,000 at any
time in the prior tax year.

QUESTION:

Another subscriber asked "If an International Business Company" is
owned by a nominee who is holding bearer shares on behalf of a U.S.
person, does that eliminate the need for the U.S. person to file this
form?"

REPLY:  I have seen a web site that states ....

"Through the utilization of a nominee director, your IBC may establish
bank and financial accounts while alleviating you from the reporting
requirements of form TD F 90-22.1."

I disagree. The instructions to Form TD F 90-22.1 clearly dispute this
position.

Here are some Internet information resources that also deal with this
issue.

Vern Jacobs

For some FAQ by attorney Benjiman Knaupp, see
http://www.knaupplaw.com/tdf90FAQ.htm

A copy of Form TD F 90-22.1 and the instructions for completing the
form are available at http://www.irs.gov/pub/irs-pdf/f9022-1.pdf

Also see
http://www.mfainfo.org/neo_apps/article/article.asp?article_id=1257

And  http://www.moneylaundering.com/publications/BSAGuideBooktable.pdf

And some related comments by yours truly at
http://www.offshorepress.com/offshoretax/otbanking.htm

We would like to remind you of this upcoming event.

File Form TD F 90.22.1

Date: Monday, June 30, 2003
Time: 12:00AM - 1:00AM CDT (GMT-05:00)

If you or a client had more than $10,000 of assets in all
foreign financial accounts (combined) at any time during the
year 2000, you (or your client) should file Form TD F 90.22-1
before June 30th. Copies of the form are available at the IRS
web site at http://www.irs.gov/forms_pubs/formpub.html

If you ever wonder why most tax professionals can't seem to
remember the various deductions, credits and other tax variables,
it's not due to dementia. It's because the numbers keep
changing every year and only a few people with extra-ordinary memories
can keep track of them without some help. Until now, it's been
difficult to locate any extensive information on these changing
numbers in the tax laws.

The 2003 tax law continues the pattern of phased-in and phased-out
deductions, credits and other tax variables. The tax law in 2001
introduced extensive phased-in and phased-out changes in the estate
tax exemptions, pension variables and other tax values. In addition,
numerous tax factors such as the tax rates, standard deductions, child
care credit and pension limitations are indexed to keep pace with
inflation. That's beneficial for most taxpayers – but it
causes the numbers to change every year.

I've updated and expanded on my list of tax variables. The list now
includes 85 of the most often used tax variables for tax years from
2001 through 2006.

Authors can refer to these values for reference purposes and tax or
financial professionals can refer to them to help clients with their
tax planning.

The variable tax data is on the Internet at
www.offshorepress.com/vkjcpa/taxdata.htm

The Jobs and Growth Tax Relief Reconciliation Act of 2003 will have a
dramatic impact on investors.

"New Tax Angles for Investors" by Vernon Jacobs, is a concise, plain
English explanation of the new tax law, plus an extensive analysis of
the likely impact of this new law on different kinds of investments.
The 2003 tax law and earlier tax cuts by President Reagan have reduced
the top personal income tax rate from 70% to 35% since 1980. The top
rate on long term capital gains has been reduced from 28% to just 15%,
while the top rate on dividend income has been reduced from 70% to
15%.

These dramatic tax cuts will require investors to re-evaluate nearly
every investment decision in light of these new tax rates.

This unique report is essential for every investor and investment
advisor.  The 39 page report includes a detailed explanation of the
provisions of the new law, an extensive discussion of the history of
the Reagan tax revolution and an analysis of how this new law will
affect investors.

In addition, according to Vernon Jacobs, "The new tax law is
likely to reduce the appeal of tax shelters and offshore tax evasion
and is likely to attract more foreign investment into the U.S."

A free copy of the report is included in the Offshore Press
subscribers' web site.

The 39 page printed report is $18, but the e-book edition is just $9
and the e-book will be delivered within a few minutes after an order
is placed, using a secure credit card order system. Orders for printed
copies can be sent to New Tax Angles, P.O. Box 8194, Prairie Village,
KS 66208. Checks or money orders should be made payable to Offshore
Press, Inc.  Shipping is free in the U.S.. An additional $5 is
required for orders from Canada and $10 for S&H is required for orders
from other countries.

Further information about "New Tax Angles for Investors" is available
on the Internet at http://www.offshorepress.com/newtax4i.htm

Additional news and analysis regarding the new tax law and its impact
on investors will be published in this email newsletter.

Vern Jacobs

Vernon Jacobs is the co-author of the "Offshore Tax Manual"  <
www.offshorepress.com/offshoretaxmanual.htm > and of "Risk Management
for Amateur Investors" < www.offshorepress.com/info-rm4ai.htm  >

The Jacobs Report
July 8, 2003   © Vernon K. Jacobs
Topic Category – Asset Protection: Insurance

Treasury Dept. Finalizes Regulations on Terrorism Insurance

The U.S. Treasury Dept. has issued final regulations about insurance
to cover acts of terrorism, under Title I of the Terrorism Risk
Insurance Act of 2002.  That Act established a temporary Terrorism
Risk Insurance Program under which the Federal Government will share
the risk of insured loss from certified acts of terrorism with
commercial property and casualty insurers until the Program sunsets on
December 31, 2005.

According to Zurich Life,

The Act provides that once an insurer pays losses resulting from acts
of terrorism in any calendar year that exceed a deductible amount
based on the insurer's direct earned premiums, the federal government
will reimburse the insurance company at 90% above that deductible in
that year.

The Act requires insurance companies to participate if they issue
commercial property and casualty policies and are licensed in any
state in the U.S. or U.S. territories. (That would appear to exclude
captive insurance companies based outside the U.S.) Companies that
only issue the following types of coverage are not required to
participate.

1. Health coverage
2. Personal lines of insurance
3. Federally backed insurance
4. Medical malpractice insurance

Acts that do not result in more than $5 million in damages are not
treated as acts of terrorism, which appears to imply that insurance
companies are free to exclude coverage of such incidents.

Internet Resources

US. Treasury Dept. Final Regulations about the Terrorism Risk
Insurance Act of 2002 (TRIA 2002).  This is a PDF file that is about
77 pages long (double spaced)
http://www.treas.gov/press/releases/reports/reg1final.reg.doc

ISO (Insurance Services Office) Comments on the TRIA of 2002
http://www.iso.com/filings/response.html

Zurich North America Insurance FAQs about the TRIA of 2002
http://www.iso.com/filings/response.html

Independent Insurance Agents and Brokers of America – Links to
TRIA 2002 Resources   http://vu.iiaa.net/Terrorism.htm

Forget about how the new tax law favors the rich. The real break goes
to those who are at the bottom of the income brackets –
specifically those in the 10% or 15% brackets.

Based on the new tax law, single taxpayers can now make almost $35,000
tax free and married couples can make almost $70,000 tax free.

Actually, a small amount of federal income tax would be required for
those whose income consists entirely of dividends and long term
capital gains. A married couple can now make $72,400 of dividends and
long term capital gains, and only owe $2,840 of federal income tax.
The amount of income after tax would be $69,560. Their effective tax
rate is 3.9%.

A single taxpayer can make $36,200 of dividends and long term gains
and owe only $1,420 of federal tax, leaving $34,780 after tax. Their
effective tax rate is also 3.9%.

Taxpayers whose total taxable income puts them in the 10% or 15% tax
bracket only have to pay a 5% tax on their dividends and long term
capital gains. Although it's not likely, it's possible for a
taxpayer to have enough dividends or capital gains to be in the 15%
ordinary tax bracket, but if they have no ordinary income (interest,
pensions, etc.), they would end up paying only a 5% tax on the
dividends and capital gains.

Taxpayers who live in Alaska, Florida, Nevada, South Dakota, Texas,
Washington and Wyoming would not have to pay any additional income
taxes because these states impose no income tax. High tax states, such
as New York and Vermont could end up getting more tax revenue than the
federal government from those who income is derived entirely from long
term gains and dividends.

And, dividends and capital gains are not subject to the social
security tax.

By Vernon Jacobs
Author of "New Tax Angles for Investors"
http://www.offshorepress.com/newtax4i.htm

Reprinted from The Jacobs Report
http://groups.yahoo.com/group/JacobsReport/

Here is another litigation opportunity for the plaintiff's trial
lawyers. For now, this issue only affects large companies, but the
legal issues have nothing to do with the size of a business.

If you haven't read the article by Robert J. Samuelson in the
July 14, 2003 issue of "Newsweek" (page 41), it could be worth a trip
to the local library. The article title is "The Tax on Free
Speech".

According to Samuelson,

"What's occurring here is that trial lawyers are road-testing
a new form of corporate shakedown. First, advocacy groups would attack
a company or industry. Next, companies would face a dilemma: be silent
and let the attack stand, or respond and face an expensive and
embarrassing suit."

Why?  Because Nike publicly defended itself against the claims of an
advocacy group that had been accusing Nike of exploiting workers in
Asia. Nike was then sued on the ground that it's public statements
constituted false advertising and that Nike should be required to
prove all of its claims. It isn't clear whether Nike was able to
prove that its public statements were true, but the California Supreme
Court held that "Nike's defenses constituted commercial speech
(which is) not entitled to (the) broad Constitutional protections
(afforded to free speech by individuals.)" The U.S. Supreme Court
chose not to consider whether the case involved free speech and sent
the case back to the California courts for trial.

This means that any company with any operations in California that
makes a public statement in defense of allegations by some public
interest group is at risk of either being sued for false advertising
or having to be silent while various special interest groups vent
their own false claims against the company.

For some additional background see the article on this topic by Henry
Gomez of the Sacremento Bee. <
http://www.sacbee.com/content/business/story/7047511p-7995812c.html >

The Jacobs Report
July 17, 2003

By Vernon Jacobs
Author of "New Tax Angles for Investors"
http://www.offshorepress.com/newtax4i.htm

The following link is to a PDF file describing IRS Notice 2003-34
which explains their position regarding the use of a foreign insurance
company (with minimal insurance activity) to shelter income from
foreign hedge funds. Their central position is that the insurance
company must generate more than half of its business from the issuance
of insurance contracts and that the company must be using its "capital
and efforts primarily from the issuance of insurance." There do not
appear to be any clear measures of these terms and the IRS indicates
they will use a facts and circumstances approach to determine if an
insurance company is essentially a shell that is being used to shelter
investment income.

http://www.irs.gov/pub/irs-drop/n-03-34.pdf

Vern Jacobs

During periods of low inflation, when interest rates are also low, a
lot of retirees are easy marks for those who make preposterous claims
of high rates of return on some kind of investment. If you were to
study the movement of interest rates in relation to inflation rates
over a period of a hundred years, you would discover that when
inflation rates are near to zero, interest rates are greatly reduced.

Without inflation, long term government bonds (over ten years) will
yield about 1.5% to 2% per year. Bank savings accounts and money
market funds will offer similar rates. Most corporate bonds will yield
1/2% to 1% higher depending on the quality of the bonds. Tax exempt
state and municipal bonds will offer rates that may even be a 1/2%
lower. The interest rate on quality residential mortgage loans will be
from 3.5% to 4% during periods of very low or zero inflation. During
periods of very low inflation, the stock market usually does very well
-- with average returns of from 6% to 10% per year -- but those rates
of return are averages and some stocks won't do that well. Utility
stocks may offer returns of about 4% to 5% a year during periods of
low inflation.

Large corporations rarely make as much profit as many people seem to
think they do. An after tax return on investment for a mature publicly
held corporation is likely to range from 5% to 10% a year. Any
business that makes more than 10% a year on its invested capital will
soon begin to attract competition. Credit card companies may charge up
to 20% a year for interest on unpaid account balances, but they also
have a lot of losses. That 20% is their gross income, not their net
income after taxes.

Based on these averages as benchmarks, it's hard to understand why
anyone would seriously expect to make a return of 10% or more per
month on any kind of investment! Yet people will invest in schemes
that promise returns of 50% a month and will argue that there is
nothing wrong with this "investment". But if pressed, few of them ever
get to see any spendable cash because their "returns" are always
reinvested. In many cases, they are constantly encouraged to put more
money into their extremely "profitable" investment.

Any investment that requires little or no time and effort and that
offers returns far in excess of what the large corporations are able
to make is highly suspect and should be approached with great caution
and care.

Vernon Jacobs

Reprinted in part from "Risk Management for Amateur Investors" by
Vernon Jacobs and Richard Fox, Published by Offshore Press, Inc.  For
further details about the book see <http://www.rpi
fs.com/info-rm4ai.htm>

Some investors are hoping we may soon see a resurgence of higher
interest rates.

They should be hoping that interest rates will remain low. Here's
why.

Many (perhaps most) investors don't seem to be aware of the close
relationship in interest rates and the rate of inflation. In the 1980s
when the prime rate topped at 21%, it was because the inflation rate
was close to 20%. (See Note) Today, when interest rates on government
bonds are close to 4%, it's because the inflation rate is still
holding at about 2% to 3%.

As the inflation rate increases, lenders insist on getting a rate of
interest in constant dollars. For example, if mortgage loans are
averaging 4% during a period of near zero inflation, when inflation
rates are 3%, mortgage lenders won't loan their money unless they
can get a return of at least 7%. When interest rates were close to 20%
in 1980, most of that was due to equally high inflation rates.

The problem is that inflation reduces the purchasing value of the
dollar. If you loan money to someone at 10% when inflation is
averaging 8%, the money you get back a year later is only worth $.92.
In two years it's only worth $.85. The investor makes 10% in
interest and loses 8% in the purchasing value of the dollar. The net
gain is only 2%. Investment professionals refer to the rate of gain
after inflation as the "real rate of return".

Many investors don't seem to be alarmed at this. But when
investors receive interest that is taxable, the problem is that the
government taxes the gross return – including the inflation.
Taxes are therefore paid on the total interest.  For an investor in
the 25% tax bracket, a 10% rate of return would result in 2.5% being
paid to the tax collector. The after tax rate of return is just 7.5%.

But what is the real rate of return – after inflation?  It's
only 8%.

What's the real rate of return after taxes?  It's not ½%.
It's a minus ½%. The reason is because you have to reduce the
gross rate of return by the inflation rate before you reduce the
return by the taxes.

That's because the taxes you pay don't alter the loss of
purchasing power. And, to add insult to injury, the government
doesn't let you compute your tax on the real rate of return. No
sir.

They make you compute your tax on the total (nominal) rate of return.

Thus, your after tax rate of return in this example is 7.5% and you
then deduct the 8% rate of inflation – resulting in a net after
tax real rate of return of minus ½%.

When the total return rate is just 4%, and your tax rate is 25%, your
after tax rate of return is 3%. If inflation is only 2%, your after
tax real rate of return is a plus 1%.

That's three times as much as the after tax real rate of return
when the inflation rate is 8% and the total rate of return is 10%.

So let's hope that the recent infusion of money into the economy
by the Federal Reserve won't bring a repeat of the high interest
rates in the 1980s. The alternative is that investors need to protect
their interest bearing investments from taxation through various
methods of tax deferred investing.

Vernon Jacobs
Co-author of Risk Management for Amateur Investors
http://www.offshorepress.com/info-rm4ai.htm

-----------------------------------------------------------------
Note:  According to the St. Louis Federal Reserve, the prime rate
peaked in December, 1980. In June, of 2003, it was only 4%. The last
time it was at 4% was in 1958. The lowest point was in 1934 and 1935
during the worst of the great depression.
http://research.stlouisfed.org/fred2/data/PRIME.txt