The most recent changes in the tax law or the Economic Growth and Tax Relief Reconciliation Act (EGTRRA) aren’t necessarily going translate into a windfall for the average taxpayer.
But according to Richard Medve partner in the tax department of CBIZ, if you want to take advantage of the changes in the law the key is planning.
“There were changes but they are mostly back-end loaded,” explains Medve.
What EGTRRA has done is create a tax-free savings options that need to be taken advantage before April 15. Medve explains that education and retirement are the areas most people can see the most savings. “It entails more planning, more than just number crunching, it is about how to minimize taxes not just compliance,” he says.
One of the most significant areas of change in EGTRRA is retirement.
Traditional and Roth IRA contribution limits moved up to $3,000 and there will be more increases in the following years. “Before it was $2,000 and has been since the beginning of time,” says Medve.
Qualified retirement contributions, like a 401(k), also increased $1,000 this year and will continue to increase at the same rate until they cap off at $5,000 in 2008. Also, vesting schedules will be shorter and pensions will be more portable. Being more aware of the law won’t make much of a difference in April, the benefits from these changes entail some long-term planning and increased saving schedules.
“The biggest thing that affects the most people are the changes in education,” says Medve. In addition to raising the education tax credit from $500 to $2,000 the ability to save for education has been expanded both on the federal and the state level. “These are totally tax free, not a deductions and there are no capital gains or appreciation and the money can be used for college or other education, public schools or parochial.”
One of the most interesting new features of the Section 529 plans are the rules surrounding who can save and who can benefit. Both parents, guardians and grandparents can set aside money and now the beneficiary can be changed from child to child, generation to generation. “It is like a trust without the taxable features,” he says. “It is transferable and it can never be depleted.”
Do not ask what the government can do for you. Ask what you can keep from the government. In the case of the new tax law, it’s not so much what you can get back but what you don’t have to put in.
