Tax law changes that take effect this year will make a difference in your personal finances. Some will happen automatically, and some of these new tax deals require you to take some action now.
- The tax cut. Here’s one change that will benefit all workers, and it will show up in your paycheck, because you’ll take home more money. Clearly, it wasn’t just the rich people who got a tax break. In fact, all taxable income above $28,000 will be taxed less this year than for 2003. And the lowest tax bracket of 10 percent now applies to the first $7,000 of income for singles and $14,000 for married couples. That’s up from $6,000 and $12,000 last year–a big percentage tax cut for the lowest income bracket.
- Kids worth more. Kids are worth a $1,000 credit against your 2003 taxes. You may have received an advance check of $400 last summer. If so, you can claim only the remaining $600 tax credit on your 2003 tax return. You’ll get that full $1,000 credit on your 2004 tax return when you file next year. Plus, if you’re employed and hire someone to help care for your children, you can get up to $3,000 in additional tax credits per child. The tax law is made up of incentives, but I’m not sure that $1,000 credit is enough incentive to have children–or offset their cost!
- Save more. You can put away more money in your employer’s 401(k) retirement plan this year–up to $13,000 if you’re under 50 and an extra $3,000 if you’re over 50. But you have to take action to ask your employee-benefits office to increase your monthly contribution. Most companies have reprogrammed their computers to automatically calculate the amount you need to contribute from each paycheck in order to reach the over-50 maximum. Just ask.
By the way, I recognize that many of my readers have no possibility of saving $13,000 a year because you need the money to live on. But if you put away just $3,000 a year for the next 30 years, and if your company matched your 401(k) contribution at 50 cents on the dollar, and if the money grew at just the average historic gains of the stock market (a bit over 10 percent with dividends reinvested) you’d have a cool $1 million in your 401(k) plan in 30 years. Now isn’t that tempting?
- Rewrite your will. Starting this year, you can exempt $1.5 million from the combined estate and gift tax–up from $1 million last year.
Just a few years ago that exemption was only $600,000. Since that was the figure for many years, estate plans established bypass trusts specifically referring to the $600,000 exemption. Make sure your will or living trust is flexible on that point, allowing for the annual increases and not specifying a fixed amount.
By 2010, the exemption will rise to $3.5 million. (That’s the best year to die, if you’re planning ahead, because the following year, 2011, the law reverts to the original higher rates and lower exemptions.)
- Keep investing. If you hold investments more than one year, you’ll pay a lower rate on capital gains. The maximum long-term capital gains rate for taxpayers in the highest brackets (25, 28, 33, and 35 percent) was cut to 15 percent on gains taken after May 5, 2003. And for taxpayers in the 10 percent and 15 percent brackets, the top rate drops to 5 percent. Taxes on dividends fall, too, with the top rate only 15 percent on dividends paid since January 1, 2003.
- Deduct college costs. This year parents can write off $4,000 in college costs on their tax returns, up from $3,000 last year. Many parents of college students aren’t aware they can take this deduction.
- Social Security payments. Here’s another automatic bonus. You’ll get slightly more money in your Social Security check this year as a result of a modest 2.1 percent cost-of-living adjustment, but there is also something you won’t see on your next Social Security check. Starting January 1, the government removed your Social Security number from the check, the better to guard against fraud!
How is the government paying for that Social Security increase? It won’t come out of your paycheck. Your FICA payroll deduction remains the same. It’s just one more future IOU for the Social Security trust fund. In fact, there’s one thing you might have noticed about all of these changes: They put more money in people’s pockets. It’s no coincidence that this is an election year. And that’s The Savage Truth.
Terry Savage is a registered investment advisor and is on the board of the Chicago Mercantile Exchange and McDonald’s Corp. She appears weekly on WMAQ-Channel 5’s 4:30 p.m. newscast and is a columnist for the Chicago Sun-Times, where this essay first ran on January 8, 2004.
© Terry Savage Productions