Friday, May 12, 2006

What the tax bill means to investors...and you

Flexo put up a nice post with a high level macroeconomic summary of the new tax bill. You can read it here.

After reading it I decided it was important to research more details, per CNN Money:

Capital Gains & Dividends
  1. The bill will extend for two years the 15 percent rate on long-term capital gains and dividends. For low-income taxpayers, that rate will be 0 percent.
  2. After 2010, the rates are scheduled to revert to 20 percent for long-term capital gains - 10 percent for those in the lowest tax bracket - and one's top income tax rate for dividends.
  3. The key beneficiaries would be those with larger taxable trading accounts (NYC Money might like this) with dividend paying stocks.

AMT

  1. Tax year 2006 AMT income exemption levels are increased. The new exemption levels will be $42,500 for single filers, up from $40,450, and $62,550 for joint filers, up from $58,000.
  2. In addition, when calculating whether they're subject to AMT, taxpayers will be allowed to use all nonrefundable personal credits to offset AMT liability. Normally, these credits often end up being disallowed under AMT.

ROTH's available to everyone

  1. All taxpayers, not just those with modified adjusted gross income of $100,000 or less, to convert their traditional IRAs to Roth IRAs starting in 2010.
  2. A partner from Delloite Tax, LLP said that conversion makes sense unless the tax payer expects to be in a substantially lower tax bracket at retirement (think 15% bracket).
  3. There is an expectation that taxes owed for the conversion would come from savings in taxable accounts, versus diminishing your retirement accounts.
  4. This is one you need to spend a little time analyzing. The right decision could add substantial savings, while the wrong decision can have substantial costs. The CNN article does a good job illustrating them.

I, personally, am pleased with the tax changes, though I'm said to hear that some tuition tax credits were removed. That's a shame. Then again maybe it will put greater pressure to reform the corrupt and non-market driven higher education system's tuition policy.

Have a wonderful day,

makingourway

2 comments:

Dude said...

I've been unable to open a Roth IRA due to the income limitation. Year 2010 will be great. I believe they will allow you to delay paying taxes for one year on half on your 2010 conversions and two years on the second half. I skimmed over this artile in USA Today and didn't get a chance to finish it or read it in more detail. I'll have to check this out again.

The difficulty is in determining if I will be in a higher tax bracket in 2010 or when I retire. I suspect I will not be working by the time I'm ready to tap into the IRA account. Then maybe logically I'll be in a lower tax bracket after I retire. The problem is who knows???

makingourway said...

apollo,

I've never been able to open a Roth IRA either. I'm looking forward to 2010.

Being able to delay paying conversion taxes will be very attractive for many people.

I imagine your tax bracket challenges will also be related to maintaining your investment discipline. If you hit your targets, the theory seems right, you'll certainly have enough time to push yourself into a fairly high tax bracket. I imagine you'll also have some kind of pension for the military duty.

All of my IRA contributions were after tax. I wonder what that means for conversion. I assume I'll only owne money for the appreciation since it's been in the account, versus the actual contribution.

Who knows? I'm sure it will be clear in a few years.

Thanks so much for the comments,
regards,
makingourway