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The tax cut that was signed into law has several big pluses for those that want to take advantage of an otherwise shaky bill.
The amount of money that can be contributed to your IRA or 401(k), 403(b) and 457 plans has been increased significantly. But like so many other features of the plan, it will be phased in for some, and phased out for others.
Since 1981, the $2,000 limit has been in effect for contributions to IRA accounts for individual investors. That number will be increased to $5,000 after an increase to $3,000 in 2004, $4,000 in 2005 and finally in 2008, the final increase will become effective. After that, the figure will rise $500.
But before you get excited by what the face value appears to be, it is important to remember that this will only help the individual investor keep pace with inflation.
The $5,000, with inflation factored in is only $2014 in 1981 dollars.
The amount you can save in your 401(k), 403(b) and 457 plans has also increased from $10,500 to $11,000 next, $12,000 in 2003, $13,000 in 2004, $14,000 in 2005 and in 2006, the amount is raised to $15,000.
The over 50 crowd is also allowed to make additional contributions if they so desire, saving an additional $500 next year, and $1,000 in successive years after that. Inflation will eat away at the additional contributions that a save is able to make to their 401(k), 403(b) and 457 plans also. In addition to the increased amounts provided in the tax bill, someone over 50 could save an extra $1,000 next year, $2,000 in 2003, $3,000 in 2004, $4,000 in 2005, and $5,000 in 2006 moving forward.
A very small percentage currently save the maximum amount allowed under the current law. In fact, half of the accounts have a balance of just over $15,000. Still there are roughly 70 million Americans who have no retirement savings at all.
The downside comes when Congress raises income levels used to calculate these numbers and employers, who follow these numbers, lower their matching contribution.
I really can't leave this alone. The more I have a chance to research the tax bill that President Bush signed into law on the 7th of this month, the more I find the fog thicker than the last time I looked.
Tax cuts are easy. Getting it passed seemed easy too, although the resistance was there, it was, at best, only token in nature.
Congress is now turning its head toward spending whatever is left of this surplus, which one reader was quick to point out, is really "our" surplus. But is it real, has always been the burning question by those that just can't see more than one year down the road. I am included in that group. Unless there is an economic growth spurt, the Treasury will, without a doubt, have to dip into the surpluses of Medicare and Social Security to pay for the tax cuts scheduled for '04 and '06, and to pay for the marriage penalty relief that is scheduled to kick in 2005. The estate tax repeal will eat up another portion of those program's surpluses when it is repealed in 2010.
But there is one little gimmick built in that is quaintly referred to as the "Cinderella" provision. On midnight of 12.31.2010, the whole tax bill is terminated. This was done to keep the bill in line with the $1.35 trillion the Finance Committee agreed on. If that was not added to the bill, the package would cost the surplus an additional $4 trillion while dipping even deeper in the programs I mentioned before.
In all likelihood, many of the promised tax cuts will be taken away before anything happens. It is politically easier that way. It is easier than cutting services provided by the government. It is easier than turning away retiring baby boomers. It is easier than seeing through the fog.
The Tax Bill
Mr Bush was hired to blame as they say in the management game. If it goes wrong, then he probably had something to do with it. It is the nature of the job. But when things go right, you had better be sure that you had something to do with it before you start claiming credit. It doesn't work both ways, I'm afraid.
The Senate Finance Committee has sent the revised budget for full scrutiny to the Congress, where, if they were smart, they would scrape the whole thing and start over.
The $100 billion that the president seems to think we need immediately, was a Democratic victory in the tax plan. If that hadn't been added, the average tax payer would not have seen a single dime until 2006. But George says we need it, so it must have been his idea. The whole idea behind this flawed tax proposal was to get the surplus back into the pockets of those that contributed. The original tax plan would not have helped with energy bills, that he claims will help in a crisis that "we cannot conserve our way out of"
How is this supposed to work? Don't expect a check in the mail.
The Senate bill would reduce the tax rate on the first $6,000 of taxable income for individuals, $12,000 for couples. Doing this will amount to more take home pay, or about $300 and $600 respectively over the course of the year. Less than a dollar a day. Next year, the tax brackets would be altered downward by three percent in each category except the 15%.
The bill as it stands now will not get full approval because there are too many flaws, including the estate tax repeal scheduled for 2011. This will be the topic that breaks the bill.
My father once told me during a conversation about capital gains that being taxed for winning was better than not winning at all. The Senate Finance Committee is currently wrangling with the budget whose heart is based on an enormous tax cut. Any spending that is to be done will be directly related to the amount of Mr. Bush's proposal will be permissible. Early reports have mentioned a number closer to $1.25 trillion over ten years with a $100 billion to be doled out immediately. It may not stimulate the economy the way its proponents had hoped, but it is definitely a step in the right direction. The end result will be the creation of a lower tax bracket beneath the current 15% level. But those at the top, won't fare as well. The top earners that currently pay 39.6% will probably get less of a break than otherwise hoped for by the proposal's author. Mr. Bush wanted that top rate reduced to 33% but the committee will probably settle for a 36% rate. The amount of the savings, $200 billion, was at the heart of that decision.
Unfortunately, in a progressive system, the wealthy do pay a larger amount than those at the bottom of the ladder. They do not get more in the way of services. Their water doesn't taste twice as good. Their heat doesn't make them twice as warm. But their tax bills do help with the surplus so much so that tax cuts at the top usually rile up the most heated arguments.
But it is just as my father says: Winning is worth paying for.
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