Interest rates and taxes expected to rise

As expected, the Federal Reserve (FED) raised rates last week. The federal funds rate is a rate at which banks lend overnight to each other. The increase is small, but its impact will affect investors, home buyers and those who save. This will cause mortgage rates to start ticking up.

This increase indicates the Fed believes the economy has recovered since the economic down turn. The central bank’s perceptions are that the U.S. economy is healthy and no longer needs support. The increase also means the era of low interest rates intended to bolster the economy is over.

Household spending and business fixed investment have been increasing at healthy rates in recent months, and the national housing market overall has improved, but exports have not strengthened. The labor market has shown signs of improvement as well.

A 25-basis point increase in the 30-year fixed-rate mortgage, for example, would probably slow home appreciation by one percent more than expected if the interest rates had not increased. Also forecasted by some is that existing-home sales would then slow by approximately 2.5 percent representing a decrease in sales a year of about 150,000 homes.

The Federal Open Market Committee (FOMC), a branch of the Federal Reserve that is in charge of monetary policy, raised the target range for the federal funds rate by one quarter of one percent to between one quarter of one percent and half of one percent.

According to the chief of the Fed, future interest rate increases will be gradual as care will be taken not to jeopardize the economic recovery.   The FOMC will closely watch inflation prior to another rate decision. The FOMC is expecting inflation will increase to two percent – an objective.

In closing this year, politicians are realizing that Connecticut estate taxes need to be reduced. Inheritance taxes are scheduled to apply to two million or more in assets being bequeathed and taxes on monetary gifts during one’s lifetime.   Connecticut estates valued at two million or more will pay taxes between 7.2 percent and 12 percent of assets bequeathed to others. These taxes are motivating the wealthy living in Connecticut to make another state their primary home; and/or sell businesses so as to prevent their children from having to pay significant taxes on them upon transfer.

Eighteen states currently have estate or inheritance taxes. As most are aware, Connecticut has some of the wealthiest people in the country. Many of this sector reside in Greenwich and realtors are seeing them having little choice but to leave Connecticut because of estate taxes and higher marginal income tax rates.

Small business owners and those self-employed who believe it is more cost-effective to move to another state are considering that option. So it is not just the retirees feeling pressured by taxes.

The issue is how to offset the current budget deficit estimated at $254 million for 2016. Losing the wealthiest residents has other long-term costs to the State of Connecticut as well. They bolster the economy in many ways. Hopefully, the politicians can find ways of attracting new businesses and creating more jobs.

Mary Ann Clark is a realtor with Coldwell Banker at 177 West Putnam Avenue in Greenwich. Questions or comments may be emailed [email protected]

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