Guide to Bush Tax Cut Law

 

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2003 BUSH TAX CUT LAW

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(For analysis and information about the 2001 tax cut law, see below.)

Lots of useful analysis is available online that should help investors figure out what to do to their portfolios in response to President Bush’s 2003 tax cut law. Here’s a recap:

STRATEGY

Retirement funds. Almost every commentator urges investors to keep contributing fully to tax-deferred accounts such as IRAs and 401(k) plans -- for example, S&P chief economist David Wyss in Business Week and  Jeffrey Eischeid of KPMG in this Scripps Howard News Service article. The lone contrarian is Linda Stern, personal finance columnist for Reuters.

Taxable vs. tax-deferred funds. For investors who can save more money than they’re allowed to put into tax-deferred accounts, it’s a good idea to keep the more heavily taxed investments inside those accounts, while concentrating  lower-tax investments such as dividend-paying stocks and long-term growth stocks and mutual funds outside them. So suggest David Wyss in Business Week, personal finance columnist Jonathan Clements in The Wall Street Journal, and RIA tax analyst Jim Seidel in the Orange County Register.

REITs. Financial advisors differ about real estate investment trusts, which are still taxed fully. Avoid them, says David Wyss in Business Week. They’re still fine, says Jeffrey R. Kosnett in Kiplinger.com. Put them in your 401(k) or IRA, say Jonathan Clements in The Wall Street Journal and Jim Seidel in the Orange County Register.

High-yield bonds. Put them in your 401(k) or IRA, say Jonathan Clements in The Wall Street Journal, Jim Seidel in the Orange County Register, and Evan Snapper of Ernst & Young in Scripps Howard.

Preferred stocks. The dividend tax cut makes them more attractive, says CBS Marketwatch.

Foreign stocks. Avoid dividend-paying foreign stocks, says David Wyss in Business Week. Their dividends aren’t covered by the 15 percent rate, as domestic stocks dividends are.

Variable annuities. The new tax law adds to their disadvantages. In addition to their high fees and surrender charges, they now convert low-tax capital-gain and dividend income into high-tax ordinary income, notes Brent Brodeski, managing director of Savant Capital Management. “An absolute no-no for tax-watchful investors.”

DETAILS OF THE NEW LAW, PLUS COMPARISONS

Estimated tax payments. If you have to send in these quarterly checks, they can be smaller, but figuring out how much smaller can be complicated, even with IRS help.

Your paycheck. Minor advice about adjusting your tax withholding. (To see this, you’ll need to go through a free, but cumbersome, signup at CBS Marketwatch.) The basic message: “Many wage earners will see slightly higher paychecks after July 1, but they may want to err on the side of caution when it comes to trying to recoup their retroactive overpayments for the first half of 2003.”

Other details.

Calculator. A tax-relief calculator (which takes an estimated 10 minutes to complete) from TurboTax.

Comparison. Also from TurboTax, a dozen paired charts showing the differences between the new tax cut law and the old one.

What the Bush tax cut law means to you -- many simplified versions:

  • From H&R Block.
  • From Kiplinger’s Personal Finance magazine.
  • From MSN Money personal finance columnist Liz Pulliam Weston.
  • From CNN and Money magazine, with a rough but super-quick tax-saving calculator, based only on your 2002 adjusted gross income.
  • From SmartMoney magazine, with displays showing how the new law affects seven types of taxpayer and a chart called "How Long Will They Last" that plots the sunset dates for each tax-cut provision.
  • That last chart is a variation on Washington Post charts showing how the various types of tax relief will change, year by year.
  • From the Orange County Register, an item-by-item account that dates from just after the House-Senate compromise on the tax plan. (Watch out, though. This description includes planned changes related to rental conversions, the kiddie tax and PMI that were DROPPED just before the final version passed.)

WHAT’S NOT SO NEW:

For recent-history buffs, online analysis and explanations of President Bush’s original 2003 tax cut proposal include:

Online explanations of the original Bush tax cut bill:

  • A pro-Bush but factual analysis from SmartMoney
  • A fairly dry, seven-page analysis from CCH Inc., an Illinois-based legal information and software firm. The CCH summary includes a number of aspects that have received little publicity so far. But neither the CCH analysis nor the SmartMoney account explores how individuals' investment strategies would be affected if the proposal passes. They also omit the proposed reduction in capital-gains taxes for shareholders of profitable, tax-paying, non-dividend-paying companies.

 

2001 TAX CUT LAW

Only a few Web sites have taken an in-depth look at how individuals can revise their financial plans to take advantage of the “Economic Recovery and Tax Relief Act of 2001.” With rare exceptions, most tax sites present just the facts about the law, without examining how it could change personal-finance decisions.

A few exceptional sites that can help:

New opportunities when saving for college (Kiplinger’s and Money)

New opportunities when saving for retirement (Money)

New opportunities from top to bottom (PricewaterhouseCoopers) All the big accounting firms have prepared summaries of the new law, but the best by far comes from PricewaterhouseCoopers. Admittedly, this 53-page document is a bit on the technical side -- the title (“Planning Opportunities Under the New Tax Law”) clues you in to the fact it’s addressed more to financial planners than to Mr. and Mrs. Average Taxpayer. But much of the language is comprehensible, and the summary is jam-packed with observations about financial changes people might decide to make because of the new law -- for example, shifting income to children under age 14, making charitable contributions earlier, or contributing to a household employee’s IRA. The file can be downloaded (in Adobe Acrobat’s pdf format) from PWC’s Web site.

New options when saving for college (Kiplinger’s and Money)

Kiplinger's and Money magazine are among the first to take their analysis of the new tax law to the next level. Not just “What happened?” but also “What does it mean I should do differently?” The Kiplinger's focus is how parents might decide to revise their college savings plans because of the changes in federal tax law.

CHANGE 1: BOOST FOR 529 PLANS

The new law gives parents even more incentive to invest through a 529 Plan, if they aren't already doing so. If they already are, it rewards them more. “State college-savings plans have always been appealing, with earnings that were tax-deferred and then taxed at the student's rate when used to  pay college bills. But freeing the earnings from taxes altogether makes 529 plans almost irresistible,” Kiplinger’s says.

CHANGE 2: NEW COMPETITION -- EDUCATION IRAs

The new tax law expands the appeal of education IRAs. Kiplinger's notes   one reason: You can direct the investment portfolio yourself. “While the   simplicity of (529) plans appeals to many investors, the limits on  investment choices rankle others. If you'd feel straitjacketed, then consider the new and improved education IRA,” the magazine’s site says. These IRAs have a higher annual contribution limit of $2,000, starting in 2002. “Like retirement-flavored IRAs, education IRAs are offered by banks, mutual funds and brokerage companies -- and you have full discretion to buy and sell what you want. Like Roth IRAs, you get no tax deduction when money goes into the account.”

For a few other distinctions between the two college-savings options -- and suggestions for deciding between the two -- see Money magazine. “We think 529s have the edge, especially if you live in a high-tax state whose plan offers generous tax perks, such as New York and Michigan. You can salt away more money (up to $250,000 in some states) in funds run by seasoned managers such as Fidelity and TIAA-CREF, with no income limits. ... One exception: Education IRAs are better if you might use them to pay for elementary and secondary schools.” .

New options when saving for retirement (Money magazine)

The magazine’s online site notes that the tax law raises annual retirement-plan  contribution limits, but says this won't affect the vast majority of retirement savers, because they were nowhere near the old, lower limits. Money simply advises, “Take full advantage of all tax-sheltered plans available to you. Under the old law, your annual 401(k), 403(b) or Keogh contributions -- plus your employer's match and other pre-tax benefits such as profit sharing -- could not total more than 25 percent of your compensation. The new max is the lesser of 100 percent of your pay or $40,000."

Just the facts

 Sensible-Investor has found useful sites in these categories:

The official word on the law

For an official view of the law overall, check the Joint Committee on Taxation’s 15-page summary.

More details of the law

Taxsites.com provides a wealth of links to Web sites that describe the new tax law.

For an overview of the tax cut law, visit the Fairmark Press site, which attempts plain talk about taxes. The Fairmark presentation is fairly readable. For example, “Even before the new law, taxpayers faced a smorgasbord of benefits relating to expenses of higher education. The relief act adds appetizers and dessert. These tax benefits are now so generous I'm thinking I should have a couple more children just so I can send them to college.”

About.com provides a summary of the law, plus links to more information about it.

The SavingforCollege.com site run by accountant/author Joseph Hurley takes a quick look at education-related provisions of the new tax cut law. In general, Hurley says, “One thing the new law will not do is simplify the college planning process. The new provisions will serve to make the timing and coordination of benefits, along with income tax reporting, a much more complicated process.”

 

ref: Tax Cuts

 


 

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