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THE BLUE MONEY REPORT.

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The Blue Money Report
"Money, like number and law, is a category of thought. "
~ Oswald Spengler

Welcome to the Blue Money Report

Today's Commentary: 12.20.02
A Taxing Situation, part 3

Note from the Editor:
This is the last in a three part series on taxes. This column deals with some useful ideas about your protecting your income as you prepare for year end and 2003.

So here we are at the end of 2002 and the economy has refused to cooperate, the Senate has a leader whose thinking has proven archaic, a President whose posturing will lead us to war in the early part of the next year, and the cuts that have been proposed in the tax laws will not have any beneficial effect on the majority of those who pay. Although the tax cuts will have an effect on those that pay the majority, it still isn't going to be what it was intended to be, a stimulus.

So as in any year end, we should be thinking about what to do to protect what little we have (left). There are some really simple things that can help you right now, if you can afford them. Because of inflation, which has been low but is not expected to remain so, the amount of income you will be taxed on will increase even without the rates changing. So what can you do in the short run to help alleviate this increased burden.

Make you January mortgage payment this year. This is easier said than done but if you have a sizable payment and the loan is young (meaning the lion's share of the payment is still interest) the deduction against income can help.

If you know what your tax situation is on a state level. make the payment now instead of waiting. This also goes for property taxes. Often folks will make these payments over the course of two or three payments. Finding a way to make that payment in full will be to your advantage especially of you had carried those taxes from 2001 into the current year.

If you have a bonus coming, ask if you can take it in the next calendar year. The answer will probably be no, but ask anyway.

If you are self employed and you are owed money, consider letting those folks have until after the first of the year.

And lastly, if you have any capital gains that can be sold next year, wait and to do it. Unless of course you are selling to offset losses. that would be otherwise non-deductible. If you have assets that are currently valued at a loss, plan on selling those now.

If you plan on using the higher education tax deduction for classes that will take place in the first three months of the new year, attempt to make your tuition payment in December.

"A fool and his money are soon parted. It takes creative tax laws for the rest."

~ Bob Thaves

Children can be costly but the cost of their care can be deductible. Some business have arrangements called flexible spending which pays a portion of dependent care costs. These payments are actually a better way to go that trying to apply for the child care credit. 2003 will see some changes in this arrangement though and you should be aware that if these changes are substantial, claiming the credit might be to your advantage. This is something that a good accountant can help you with.

The cost of education can be deducted in certain instances. If you adjusted gross income is less than $65,000, $130,000 in the case of those that are married and filing joint returns, you can deduct up to $3,000 of qualified higher education tuition for you, your spouse or your dependent. There is also the possibility that your student loan, which may not have been deductible previously, might be eligible for a deduction. If you are participation in a Coverdell Education Savings Account you now have until April 15th to make contributions. Previously those payments had to be made by the last day of the previous year.

Much has been written here about the President's tax plan. If you would like to see how it might effect you, click here. be aware though that the saving portrayed with this curious calculator should be read from the percentage saved, not the monetary figure. For example, a couple, married and filing jointly earning $50,000 under the current plan you pay $8,403(16.81%) whereas under the Bush plan you would pay $7,595 (15.19%) for a savings of $808 (1.62%). But a couple whose earnings are $150,000 would under the current plan pay $37,782(25.19%). Under the Bush plan they would pay $32,595 (21.73%) for a savings of $5,187 (3.46%). That's a savings for the six figure income of 1.84% more than the lesser wage earner.

Today's Commentary: 12.18.02
A Taxing Situation, part 2

Note from the Editor:
This is the second in a three part series on taxes. This column deals with Four basic rules you follow from an investment standpoint. On Friday, I will offer some useful ideas about your protecting your income as you prepare for year end and 2003.

Rule Number One.

There is no better investment or tax break, for that matter, than the availability of a tax deferred account such as an IRA or a 401(k).

In the case of the IRA, the $3,000 a year contribution should never be ignored. If you haven't participated in a company sponsored retirement plan, or if your income falls below $34,000, $54,000 if you are married, this payment is one of the most important you can make. A simple weekly $57 payment can achieve this all important tax deduction and give you a key component to your retirement plan. If you haven't made a contribution yet this year, to catch -up in time for the April 15th deadline that figure jumps to a little over $210 a week in order to make the maximum contribution for the 2002 tax year.

One piece of good news is the opportunity now allowed those who have fallen behind in their retirement plan or who by age 50, haven't contributed enough. These folks will be allowed to load their accounts in an effort to catch-up by making an additional $500 a year payment.

Another note about IRAs and company sponsored plans: You may be allowed to contribute a percentage of the $3,000 even if you are a member of such a plan. It is a complicated formula but your accountant should be able to help you.

401(k) plans are too often ignored when in fact these plans can be calculated to provide you with the necessary cash allowed to exist day to day. It may not be the full amount allowed, but this pre-tax contribution is an invaluable tool even if employers have ceased with matching funds. In some cases, a portion of your pre-tax income designated to such a plan may even increase your after tax income because of a reduction in your overall taxable income.

Either way, you can contribute up to $11,000, which seems like a lot but shouldn't stop you from making something. But if you are able to make that contribution and haven't yet, get with your employer and ask if you can make a catch-up payment. Can you say year-end bonus?

Rule Number Two.

The idea of converting to a Roth may or may not have crossed your mind. A Roth can be a sneaky little benefit for tax payers because when you are eligible for withdrawals, the tax has been paid. This post tax contribution won't help you now, but now might be a good time to make the conversion for two reasons: In many funds, the losses you have suffered may offset the tax penalties you will need to pay if you convert. The penalty will be assessed against contributions and accumulated earnings up to that point. (Or you could leave your traditional IRA alone and open a Roth account. There is no penalty against this.) The second benefit of a Roth is in the issue of estates. A Roth is a better plan to pass onto heirs because there is no forced requirement for withdrawal. And the big bonus comes from the fact that the taxes have been paid and your heirs are not liable to pay them again.

"A fine is a tax for doing something wrong. A tax is a fine for doing something right."

~ Anonymous

Rule Number Three

If you have been an investor in the stock market and have experienced losses, now is the time to sell to offset capital gains. This is handy exemption against ordinary income also for up to $3,000 of losses ($1,500 if married and filing separately). Any losses greater than that can be carried forward against income or capital gains until the losses are used up.

According to the accounting firm of Bottaini, Galluci, and O'Hanlon, capital gains or losses on the sale or trade of investments should be either classified as short term (held less than a year) or long term. Mr. O'Hanlon points out that even though these two types of losses or gains are subject to different rates in the event of a net gain, "a net capital loss resulting from either category can work to your advantage". The reason he says this works is due to the long term capital gains tax rate is generally lower than the rates of ordinary income. yielding greater relief for those losses.

Rule Number Four

While we are on the subject of investments and taxes, your mutual fund has a tax liability that could have a negative effect on you. If you own a mutual fund outside of a retirement plan, you need to be aware of the distribution date. This is when your fund pays its taxes on their capital gains or dividend payments. The fund itself may have stayed in negative territory all year long, but those taxes still need to be paid. If you can, find another fund in a different fund family and sell those assets buy purchasing a different fund. You must remain in that other fund for at least 31 days but be sure that the fund you are buying isn't about to do the same thing. If it is, purchase it after their distribution date to avoid paying taxes for their capital gains.

It is also important to note that Rules Three and Four might have you dealing with what is called a "Wash Sale". Essentially, when you sell a security at a loss, and ‹ within 30 calendar days before or after that sale - you buy substantially the same security, you have made a wash sale.

The IRS views that pair of transactions as a wash because although you had a loss on the sale, you also went right ahead and bought the stock, or very similar stock, to replace the shares you sold. The IRS suspects that you only did the two transactions in order to claim a loss on your return, without actually letting go of the stocks. That¹s why you can¹t take a deduction for a loss on a wash sale.

Wash sales also violate Section 9(a)(1)(A) and Rule 10b-5 of the Securities Exchange Act of 1934 if the purpose of the trade is to create a false or misleading appearance of active trading in a security. The law suggests that in a wash sale you are only pretending to sell at a loss.

Be careful of the Wash Sale Window. If you sell stock for a loss, you should not buy substantially similar stock within the wash sale window. The wash sale window consists of 61 calendar days 30 days before the sale date, and 30 days after.

Today's Commentary: 12.16.02
A Taxing Situation

Note from the Editor:
This is the first of a three part series on taxes. This column deals with some of the current topics and policies that the administration has championed recently and how they might effect you. On Wednesday, I will offer some useful ideas as you prepare for year end and 2003.

If President Bush is to be believed, the tax cuts that he will propose will help each and every American. True or False?

False

President Bush is a tried and true supply side Republican. And to his credit, there are two things that he understands and has made the basis of his career in government, first on the state level, and now on the federal level. The first is cutting taxes and his devotion to making reparations to the Bush, Sr. reputation.

Since 1913, when the individual income tax made its debut, the Democrats have earned their reputation as the party who raises taxes to pay for services. Over that time frame, the Democrats have boosted the individual tax six times, compared with their attempts at lowering it only twice.

The Republicans, on the other hand, have found the means to reduce taxes all but once during that time frame and it was Bush41 who broke the string. In no way am I saying that the current Bush is spearheading his policies to fix Daddy's reputation. What I am saying is, tax cutting is what a Republican does. But it is important to note that during that time frame, those tax cuts have done little historic good for the folks who need it.

The thinking goes like this. Republicans tend to have more money. Republicans tend to be more self sufficient as a result of this greater wealth factor, shunning vital services such as Medicaid and generally not taking advantage of earned income tax credits. They are more likely to receive dividends from their investments and if they earn more, as a result, they tend to pay a greater amount in the way of taxes.

The last part is the impetus behind the Bush tax package. He knows that his party is supporting far too many Democrats and because poor folks tend not to vote, cutting taxes for those that tend to go to the polls, guarantees one thing.

Votes. That and no one can disagree that the situation that Democrats have found themselves, is not the best.

Can the recent proposal to end the double taxation of dividends have any real effect on you? True or False?

False

The word dividend in tandem with tax relief has everyone looking at companies whose bottom line is healthy enough to distribute the wealth with their shareholders. Many of these companies are stalwarts of staid industries which translates into old school businesses which further translates into non-tech. But who wins if the tax free zone is extended to include these payments?

Perhaps it is easier to focus on those that would be hurt by such a move by the administration. If your fund relies on growth to makes it's mark, this will not help you. Value companies do pay some dividends but those that do are few and far between. So value investors will find little to cheer about. REITs already have some sort of dividend deduction plan in place so there would be no added benefit to increasing your portfolio percentage to take advantage of the cut. Municipal bonds would not be affected. Their tax exempt status wouldn't change but their possible attractiveness might and not to the upside.

Funds whose investment charters suggest equity income have long based their performance on dividends and would benefit somewhat from the change in the code. These funds are still treading water with the rest of the group and may not see any instant relief should the dividend suddenly become tax free.

Here is why folks are getting so excited about the prospect. This double taxation works like this. Companies pay taxes on profits and then those that payout dividends redistribute those profits to shareholders. Then these dividends are taxed again at shareholder level. This cuts the real profit generated by the company by over 50% in most cases. This has definite pressure on the willingness of the investor to save or invest.