IF YOU'RE FEELING light-hearted about the new year, chances are that's because the old year wasn't so bad for you either. There are lots of benefits ahead, at least for the people who can afford them.
If you and your accountant used to spend a lot of time keeping you out of the highest tax brackets, both of you will find that chore easier this year. The top tax rate on investment income has now dropped from 70 percent to 50 percent. That's still a long way from the zero rate that a good tax shelter can produce--and there are some new dodges in the tax code that deserve your attention--but it's worth a thought as you plan your investment strategy.
This is also a good time to reestablish relations with that rich aunt. No doubt she is aware that she can now make gifts of up to $10,000 without paying a gift tax, and she's probably looking around for a suitable beneficiary. Speaking of beneficiaries, we might note--at the risk of some indelicacy--that the old lady is getting on. She'll probably also want to update her will to take account of the fact that the estate tax will more or less wither away over the next few years. That might make her less interested in that tax-exempt foundation she's set up and more interested in you.
There is other good news. Income tax rates will fall by about 10 percent come July. For middle-and upper-income taxpayers that should more than offset the increase in the maximum Social Security tax that just went into effect. If you're a two-earner family you'll get an additional tax break and perhaps some more help in paying the baby sitter. If you're thinking of investing your tax savings, the economic recovery expected in the spring might help the stock market a bit. But interest rates are likely to stay high, so a money market fund might still be your best bet--particularly for that tax-free IRA retirement account you'll want to set up.
Of course everything isn't rosy. More people are now unemployed than at any time since the Great Depression and many others are likely to become unemployed over the next six months even if the economy starts to improve. If you're one of these unfortunate millions you'll find it harder to get by because long-term unemployment benefits have been cut back, rules for getting food stamps and welfare have been tightened and there are no public service jobs. Community service agencies of all sorts are also feeling the pinch, and lines for low-income housing are growing.
The millions of people in low-wage jobs are going to find it harder to scrape by. The minimum wage isn't going up in the foreseeable future, and it already buys a good deal less than it did several years ago. Without the pressure from a rise in the minimum, all wages at the lower end of the scale are likely to lag. If you're trying to support a family in one of these low-paying jobs, you may also find that you can no longer get any help from welfare, food stamps or medical programs. Tax breaks won't help you because you probably don't earn enough to have to pay income tax, but Social Security will be taking a slightly larger bite from your paycheck. You may also soon find yourself paying higher sales taxes on the things you buy as states and localities try to raise money to pay for the new burdens that the federal government has shifted to them.
So it's a mixed picture for the year ahead. We might sum it up by saying that--if you didn't already know it--you'll be better off rich.