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Heavy Over All Our Heads

"We will not be able to simply grow our way out of the problem," Walker added. "The numbers speak loudly: Our projected fiscal gap is simply too great."

The nation can probably deal with the problem, Walker said. "Fiscal necessity can be the mother of invention and of much-needed reforms in government programs and activities," he said. But how it does so, and how soon, will make a major difference in who feels the pain and how badly they feel it. Sooner is better than later in terms of causing less pain, but sooner is always harder politically, as we can see from the Bush opponents' fulminations over whether Social Security is in a crisis.

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And for those of us making long-term investing decisions now -- something we are increasingly forced to do as we "take control" of pensions, college costs, medical insurance and maybe even Social Security -- the government's fiscal condition is more than lines on a chart.

Are taxes going to rise? If so, for whom and by how much? That's a key question for planning.

For example, the principal feature of 401(k) plans and traditional IRAs is tax deferral, which means leaving taxes unpaid now while agreeing to pay them later. That's an advantage if future taxes are the same as present ones or lower; but if the reverse is true, deferral is a loser.

If taxes do rise, then Roth vehicles -- Roth IRAs plus the Roth 401(k)s that will become legal next year -- look a lot more appealing. You fund them with after-tax dollars, meaning you pay the taxes now, but the accounts are tax-free when you take the money out later on.

Then there's the question of what happens to interest rates and the value of money.

Putting a chunk of your savings in bonds is usually recommended as you get older because they help avoid some of the volatility associated with stocks. If heavy government borrowing drives up interest rates, bonds may be great. On the other hand, if a huge deficit triggers soaring inflation, fixed-income investments won't do well.

If Walker is right -- and he and the GAO are certainly as expert as anybody -- there is no easy way out. Programs likely will be cut and taxes raised. Anyone under 70, and even those older people who have children and grandchildren, should be demanding that the politicians stop arguing about what constitutes a crisis and start working on solutions. If they don't, we'll have a crisis about which there'll be no argument.

Much has been made in the past couple of years of the great tax breaks that were allowed for big sport-utility vehicles used in business. These were cut back last fall, but before that it was possible to buy one of these tanks and essentially write the entire cost off in a single year.

But suppose you did write off the cost and are now tired of wrestling this beast into parking spaces or leaving your wallet bleeding at the gas pump. If you wrote the whole cost off the year you bought the SUV, your "basis" is now zero, notes Bob D. Scharin, editor of Warren, Gorham & Lamont/RIA's Practical Tax Strategies, a journal for tax professionals. That means if you sell it, whatever price you get is a taxable gain.

But there's a way around that, and the Internal Revenue Service recently made it a little easier to use.

The solution is good ol' section 1031 of the tax code, which allows owners of certain business assets to exchange them for others of "like kind" without recognizing a taxable gain. It's normally thought of for real estate transactions, but it can apply to equipment.

Thus it is that you can lumber down to the dealer in your SUV and trade it in without tax. Further, the IRS determined, in private letter ruling No. 200450005 last year, that you can trade your behemoth in on a car and still qualify for 1031 treatment.

"We conclude that SUVs and passenger automobiles are like-kind property for the purposes of Section 1031 of the code and the regulations thereunder," the agency said.

Section 1031 exchanges involve a number of technical rules, but if you trade your SUV in at a dealer, there should be no problem, Scharin said. "This could be a reason why you may want to trade it in rather than selling it, even though you can get somewhat more by selling it. If you sell, you need a qualified intermediary" and other trappings to make sure you qualify, he said.

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