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Financial Security by Design
925.299.0472 or Fax 925.299.0473
e-mail: lingane@post.harvard.edu
Interest Rates
are only 4.5% on the five year Treasury bond but yields on municipal bonds can be significantly higher. For example, I recently bought a six year LA County AAA revenue bond yielding 4.1%. For someone in a 28% tax bracket, this bond is equivalent to a 5.7% Treasury yield.My broker tells me its all about supply and demand. Foreign buyers have been eager to buy Treasuries since the Asian crisis unfolded and this means that the US Treasury does not have to pay so high an interest rate.
Taxable money market funds and short term CDs provide the same after tax return as the five year Treasury bond. Thus there is no incentive to tie your money up for a long time unless you are convinced that rates are going lower.
Check the Internet at www.bondagent.com for current information.
The 1998 stock market
gave us a healthy scare in the third quarter but my benchmark of diversified index funds was up 23% for the year. Over three, five and eight year periods, the benchmark has grown at rates of 24, 21 and 19%. Congratulations if your portfolio is beating the benchmark after fees.There is a wide performance variation among the benchmark components. The S&P500 component rose nearly 29% in 1998 whereas REITs fell 19%. The stocks of smaller companies were down slightly. International stocks gained 16% overall because of excellent gains in Europe.
Some commentators were surprised by the fall in the REIT market and by the continued under performance of smaller stocks. I don’t try to predict what will happen. Own a little bit of everything and something is bound to go up!
New Tax Credits.
If your dependent son or daughter is under age 17, you could receive $400 per child as an offset against federal tax. Like most recent tax law changes, the "child tax credit" comes with lots of fine print and an income phase out (beginning at $110,000 for married couples.)California tripled the dependent exemption credit and introduced a modest non refundable renter’s credit for lower income taxpayers. Read the fine print.
The federal "Hope Scholarship Credit" could reduce your taxes by as much as $1,500 per freshman or sophomore student who is working towards a recognized educational credential. For older students, or for someone taking less than a half load, the "Lifetime Learning Credit" could reduce your taxes by $1,000 per family per year. There is fine print and an income phase out.
There is a $1,000 deduction (not a credit) for interest paid on student loans. This deduction is phased out for married couples with incomes over $60,000.
Roth Conversions
made it into the big time in December. Customers were lined up at both the Fidelity and Charles Schwab offices in Walnut Creek.When you convert to a Roth IRA, you don’t pay income tax on your non deductible contributions. The IRS has revised Form 8606 so that you don’t report too much income. This is a crazy form; you won’t get it right without reading the directions very carefully.
Your non deductible contributions should be listed on a prior Form 8606. If you do not have your old tax returns, get copies from your tax preparer or the IRS or reconstruct your contribution history. You could save thousands in tax.
California uses a different scheme for non deductible contributions and this means an adjustment on Form 540(CA). This adjustment lowers your 1998 California taxable income but increases it for the three years thereafter. You don’t have to understand this but be sure that your tax preparer does!
Senator Roth was quoted this week as favoring a million dollar conversion ceiling. I’m skeptical about whether they will actually change the law.
Other Good News.
Capital gain holding periods are either short term (one year or less) or long term; last year’s "mid term gains" are history.If you sell your home for less than a half million dollar gain, never used it as a home office or as a rental and meet ownership and use criteria, you do not even have to report the transaction on your federal or California tax returns.
The IRS help line (800-829-1040) is being staffed 24 hours a day, seven days a week. The IRS is auditing fewer tax returns in order to staff the phones.
Make Your Check Out to the "US Treasury."
Congress is trying to polish the image of the IRS by reminding us that the IRS only collects the tax. Rumor has it that checks payable to the "IRS" will continue to be accepted!Please feel free to call or e-mail me with your tax and planning questions or if you wish my assistance with your 1998 income tax returns.
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