During the 15-month period from Oct. 1, 1981, to Dec. 31, 1982, savings institutions (banks, S&Ls and credit unions) will be authorized to issue tax-exempt savings certificates.
These CDs will be issued in $500 denominations with a one-year maturity. The rate of return will be pegged at 70 percent of the previous week's rate on one-year Treasury bills.
Thus the rate on newly issued CDs will change weekly; but once issued, the rate will remain unchanged for the full one-year term.
The maximum amount of interest excludable during the entire period will be $1,000 per taxpayer ($2,000 on a joint return). So if you file a joint return for 1982 and exclude, say, $800 of interest under this rule, the maximum you can exclude on your 1983 return will be $1,200.
These tax-exempt CDs are not for everybody. If you're in a tax bracket of 29 percent or less, you'll come out ahead with a taxable return equal to or exceeding the then-current yield on one-year Treasury bills.
In fact, because of the spread between T-bill rates and the higher yields available from money market funds, even a 33 or 35 percent taxpayer may do better in the funds.
The money market funds have the additional advantage of liquidity. Early withdrawal of the CD will make all the interest taxable (including any you may have received -- and excluded -- in a prior year).
But the money in the tax-exempt certificate will carry federal agency insurance, not available in most money market funds.
Even investors in a high enough tax bracket to make the yield attractive will have to shop around. Yields on individual municipal bonds, tax-free mutual funds and unit trusts may look better despite the absence of federal deposit insurance.
The hope is that these tax-exempt certificates will make large pools of money available to the savings institutions at a lower interest cost than now. In turn, this is expected to provide additional funds for residential housing at reductions from today's stifling high interest rates.
Utility dividends: To encourage investment and at the same time reduce the cash drain on utility companies, a four-year tax break is offered to investors who accept dividends in the form of additional shares of stock rather than in cash.
For the tax years 1982 through 1985, individuals who participate in a company-sponsored dividend reinvestment plan may exclude from income up to $750 a year of such dividends (up to $1,500 on a joint return).
(Caution: This tax break applies only to the issuance of new shares under plans operated by the utility company. It will not be available for dividend reinvestment plans run by brokerage houses, such as the Merrill Lynch Sharebuilder program.)
If you sell the shares within a year after the dividend distribution date, the full selling price must be included as ordinary income. And if you sell any common stock of the same company during that year, to the extent of the number of shares received as dividends you are considered to have sold the dividend stock itself.
A sale after the one-year holding period will be treated as a long-term capital gain with a cost basis of zero.
Dependent care: Starting in 1982 the tax credit allowed for expenses associated with care of a child, or other qualifying dependents, will go up.
As in the past, the care must be necessary to permit you to work for pay (or to look for such work). In the case of a joint return, both spouses must work unless one is a full-time student or unable to care for himself or herself.
The new ceiling on qualifying expenses goes to $2,400 for care of one qualifying child or other dependent, and $4,800 for two or more -- up from $2,000 and $4,000 this year. Unchanged: Total expenses claimed cannot exceed the earned income of the lower-earning spouse (or of a single person claiming the credit).
If Adjusted Gross Income is over that amount, the percentage allowed is reduced by one percent for each $2,000 of AGI in excess of $10,000. It levels off at a 20 percent credit for taxpayers with AGI over $28,000.