NEW LEGISLATION PUTS MONEY IN YOUR POCKETS

This "Financial Focus" column is prepared by Edward Jones Investments, headquartered in St. Louis. Jones includes branches throughout the nation, including Cape Girardeau and Jackson.

Have you ever found money in your pockets or purse that you didn't realize you had? It's a great feeling to have a "windfall" of extra cash.

Millions of Americans are experiencing that same feeling as a result of new tax and spending legislation recently passed by Congress. When the dust finally settled, Congress agreed on landmark legislation that provides the biggest tax cut in 16 years and is projected to balance the budget by the year 2002.

The legislation is intended to cut taxes $151.6 billion over the next five years. It includes $35 billion in education tax credits, tax credits for people with children, lower estate and capital gains taxes, added health coverage for thousands of poor children, and deficit reduction. In addition, proposed changes to Medicare are aimed at saving $115 billion over five years.

Amid the haze of media coverage and political rhetoric, however, most of us simply want to know how this legislation will impact us. In essence, it will affect almost every area in our lives, from buying a home to paying for our children's college education to planning for our retirement.

Investors keep more of what they earn

The legislation is good news for investors. The top rate for capital gains taxes was reduced from 28 percent to 20 percent for assets held longer than 18 months. For securities purchased after the year 2001 and held at least five years, the top rate will be 18 percent. This break for assets held five years rewards investors who employ a buy-and-hold strategy.

In addition, the package contains a break for homeowners. You now won't have to pay capital gains on the sale of your home if the profit is below $500,000 and you file jointly. Single individuals may exclude up to $250,000 of gain upon the sale of a home.

And, the legislation increases the estate-tax exemption from $600,000 to $1 million over 10 years. For the owners of qualified small businesses and family farms, the exemption is immediately raised to $1.3 million.

New twists on an old favorite

The tax breaks associated with the Individual Retirement Accounts (IRAs) have expanded substantially. The package lifts the adjusted gross income (AGI) limits for tax-deductible contributions for those who are covered by a retirement plan at work. The new "phase out ranges" (the AGI range where deductibility is phased out) is $80,000 - $100,000 for couples by year 2007 and from $50,000 - $60,000 for individuals by year 2005.

In addition, the legislation paves the way for some new IRAs. You'll now be able to make contributions to a Roth IRA. Although contributions to the Roth IRA are not tax-deductible, all earnings grow tax deferred. Distributions from the Roth IRA are tax-free and penalty free if they meet the following criteria. First, the distribution must be taken at least five years following the first taxable year in which you made your first contribution. Second the distribution must be taken due to the death of the account holder, disability, age 59-1/2, or for first-time homebuyers (up to $10,000). Couples with AGI of less than $150,000 and individuals with AGI of less then $95,000 are allowed to contribute to a Roth IRA.

While annual contributions to a traditional IRA or a Roth IRA are still limited to $2,000, an additional nondeductible contribution of $500 per child can be made to an Education IRA. To contribute to the Education IRA, the child must be under age 18, and your AGI must be less than $150,000 for couples and less than $95,000 for individuals.

And, you'll have greater flexibility. You will now be allowed to make penalty-free (no 10 percent penalty) withdrawals from your IRA for college expenses or up to $10,000 for first-time homebuyers. All in all, the combination of expanded income levels and new types of accounts makes IRAs more attractive than ever before.

More in our wallets

Middle-income families stand to benefit greatly because they will receive income-tax credits for having children and putting them through college. Single parents with incomes as low as $12,000 and two-parent families making up to $110,000 are eligible for the "kiddie tax credit." Parents will receive a $400 tax credit per child ages 16 and under for 1998; this will increase to $500 per child in 1999. Couples with incomes as low as $18,000 can take advantage of the credit. Even if they don't pay taxes, they'll receive a check from the government.

Middle-income families also benefit from tax breaks designed to offset the costs of college tuition. Parents will receive a tax credit each year, and some middle-income families will be able to deduct interest on student loans up to a pre-set limit.

In general, tax credits are more valuable than tax deductions because they are taken right off a person's tax bill. For example, if you owe $7,000 in taxes and have two children, your tax bill would immediately be reduced to $6,200.

As you can see, the new tax and spending bills are good news to parents and investors alike.

The Southeast Missourian does not recommend that readers buy or sell stocks featured in this column, which is provided for informational purposes only.