Editor’s note: Marc Leavy,CFP? is a regular financial columnist for Business Reform Magazine, the leading Christian business magazine with over 100,000 readers. Each issue features practical advice on operating successfully in business while glorifying God.
The markets slid down slightly this week and were ready to rally but went on holiday instead. The market’s rally fizzled Friday as traders decided to take some money off the table and prepare for a long weekend. Perfectly reasonable given the nation is on Orange alert.
Overall, the economy is beginning to percolate and this package should add a few degrees of heat. Expect to hear of more and more companies declaring dividends – for several reasons – one of which is the new tax package.
President Bush once derided this package as “itty bitty.” Indeed compared to the two trillion dollar budget, it is. However, it should serve as some sort of stimulus. It is unfortunate the President’s package was cut in half, not by Democrats, but by “moderate” (code for liberal) Republicans like Senators Voinovich and Snowe. Their arbitrary assertion that $350 billion was enough of a tax cut hobbled a popular President’s plan.
The bill also employs Congress’s latest gimmick, the “sunset” provision. The term means that whatever provisions are in place in this bill expire in 2008. The trick is used to quell the chant, “deficits as far as the eyes can see” by changing future tax revenue estimates. It is a bogus tactic that does little real good except to provide political cover.
The bill cuts long-term capital gains rates to 15%. Stock dividends are no longer treated as ordinary income and they will taxed at a maximum rate of 15% as well. That means that short-term capital gains, long-term gains and dividends will be taxed at the same rate and will almost always be lower than income taxes.
The package immediately accelerates the phased-in marginal rate reductions from the last tax package and drops the top four rates to 35%; 30% and 27%.
The Child Care credit increases from $600 to $1000 this year and the increase will be paid out in advance, starting in July, based on last year’s return. So, expect a check for $400 for each child you claimed on last year’s return. Child Care credits are phased out if your income exceeds $110,000 for families filing jointly and $75,000 for singles.
The “marriage penalty” is addressed by increasing the basis standard deduction for married couples to double that of the standard amount for singles – eliminating any “penalty”.
There were no changes to IRA or 401(k) plans although the President’s plan did propose new tax favored savings plans.
The changes may mean that more taxpayers will be susceptible to the convoluted confines of the AMT – Alternative Minimum Tax – a parallel tax code that ensures no one gets off too easy.
This is the President’s second tax cut package. Neither one was “robust” but a few billion here and there and pretty soon you’re talking about real tax relief.
Marc Leavy, CFP? is a Certified Financial Planner. Principled Investing teaches Solomon’s principles of investing and offers wisdom regarding comprehensive financial planning for a fee. You may contact Marc at [email protected] or visit www.principledinvesting.org.
