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2003 BUSH TAX CUT LAW
(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 overall
More details of the tax-cut law
How much
will you save overall?
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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