Realistically, it's always tax season, and that means it's never a bad time to be calculating this year's tax bill and developing effective strategies for next year.
In 2002, thanks to the Economic Growth and Tax Relief Reconciliation Act of 2001 (EGTRRA, or "Egg-Tray" as it has been dubbed by more than one Washington wag), there were lots of new rules to learn. Check with your tax advisor for a comprehensive review and answers to questions about how this new law affects your taxes.
In its major provisions, EGTRRA is a bit of a puzzle. On one hand, it reduces tax rates for practically all taxpayers. On the other, these rate cuts expose more individuals and families to the Alternative Minimum Tax, which has the potential to more than offset advantages gained by the rate cut.
Some of the new rules may have a direct impact on your insurance plans, as well as on your retirement, education and estate planning. A few highlights...
As many Americans became aware in recent years, watching your retirement savings and investments carefully is essential. It's ultimately up to you to make sure that your plan is secure and that you're maximizing its potential.
Under EGTRRA, if you fund an IRA account on a regular basis or participate in your employer's 401(k) or 403(b) or maintain your own Keogh, SEP or SIMPLE plan, your contribution and elective deferral limits will change annually.
Increased Retirement Plan Rollover Flexibility
Since December 31, 2001, you may be able to roll over a distribution from your IRA into a qualified plan on a tax-free basis.
Also since 2002, a teacher or other individual moving from a nonprofit organization to a for-profit organization can transfer their 403(b) account balance into the 401(k) plan sponsored by their new corporate employer. Previously, the only rollover option was to move the money into an IRA account.
Section 529 plans allow you to contribute a certain amount per child (there is no limit to the number of children, and it can be a nephew, or grandchild) to a special higher education savings account run by individual states. Each state's contribution limit is different.
All assets, including earnings, under all 529 plan accounts established for the benefit of a particular beneficiary must be aggregated when applying the limit. New contributions will not be allowed once this limit is reached. Earnings, however will continue to accrue. Maximum contribution limits are adjusted periodically.
Potential investor of 529 may get more favorable tax benefits from 529 plans sponsored by their state. Consult your tax advisor for how 529 treatment would apply to your particular situation before investing.
Under EGTRRA, qualifying distributions are not subject to federal tax**. Also, parents can now average five years worth of gifts (currently up to $55,000 per individual, $110,000 per married couple filing income taxes jointly) in a single year##. You may participate in any plan, no matter where you live, and there are no geographic restrictions on what school a student attends.
**For withdrawals not used for qualified higher education expenses, earnings are subject to income taxes at the distributor's rate plus a 10% federal tax penalty. The tax legislation exempting earnings on qualified withdrawals from federal income tax expires on 12/31/2010, unless extended by Congress.
##Note that if death occurs within five years of making an accelerated gift, the estate receives only a pro-rated gift exclusion based on the number of years survived.
Please contact your Registered Representative for more information on 529 plans and/or obtain the appropriate disclosure statements and the applicable prospectuses for the underlying investments of the 529 Plans we have available. Investors are asked to consider the investment objectives, risks, charges and expenses of a portfolio carefully before investing or sending money. The disclosure statements and prospectuses contain this and other information about the investment options and their underlying investments. Please read this material carefully before investing or sending money.
The other tax-sheltered education account, Coverdell Education Savings Accounts (formerly Education IRAs) is also attractive. Unlike 529 plans, Coverdell plans have both income and contribution limits. Since 2002, the annual maximum contribution jumped from $500 to $2,000. The contribution limit is phased out for single taxpayers with income between $95,000 and $110,000, and for married taxpayers filing jointly with income between $190,000 and $220,000 (up from $150,000 to $160,000).
Unique to the Coverdell plans, the money can be withdrawn federally tax-free to pay for qualified education expenses for qualified private elementary and secondary schools not just college. (State and local taxes may apply.)
EGTRRA contains the much-discussed phase-out of the estate tax. The estate tax disappears completely in 2010, for one year only. After 2010, the tax code reverts to pre-EGTRRA rules, and the estate tax exemption will be $1 million.
In 2001, the estate tax applied to estates worth in excess of $675,000 with a top rate of 55 percent. In 2002, the ceiling rose to $1 million, and the top rate dipped to 50 percent. In 2003, the estate tax exemption remained at $1 million, but the top rate dipped to 49%. In 2004 the estate tax exemption was $1.5 million and the top rate dipped to 48%.
Estate-planning experts suggest reviewing and updating, if necessary, your will to avoid any confusion caused by the roller coaster estate tax.
Taxpayers can also take advantage of the annual gift tax exclusion. The annual gift tax exclusion is $11,000 for individuals and $22,000 for couples to help reduce their taxable estates. Experts also urge older affluent taxpayers to consider carefully how they will transfer assets to the younger generations.
One easy way to provide for a member of a younger generation over time is to gift a Roth IRA. Individuals with incomes in excess of $110,000 and couples who earn more than $160,000 cannot open a Roth IRA. But you may establish a Roth IRA for a child or grandchild with earnings.
The Roth IRA is an attractive vehicle because it grows tax-free and, if certain conditions are met, all distributions are tax-free. If your child is 16 and you invest the maximum in a Roth IRA for 10 years, starting this year, your investment could grow to $2.1 million by the time your child is 60.
Note: You may only contribute the maximum if your child earns at least $3,000 a year. Otherwise, the limit is 100 percent of your child's earnings.
Neither New York Life nor any of its financial professionals are in the business of offering tax advice. You should consult with your professional advisors to examine tax aspects of any topics presented.
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