September 21, 2006 Reagonomics at 25 Twenty five years ago, Ronald Reagan signed the Economics Recovery Tax Act (ERTA). The bill cut the personal income tax rate by 25% across the board, indexed tax brackets for inflation and reduced the corporate income tax rate. The achievement of Reaganomics can only be understood by recalling the miserable state of affairs that Newsweek summarized when it wrote in 1981 that Reagan "inherits the most dangerous economic crisis since Franklin Roosevelt took office 48 years ago". The economy was enduring a cycle of rising inflation with growing levels of unemployment. Mortgage rates topped 20%. Terms like stagflation and the misery index entered our vocabulary. The perception of American economic weakness encouraged the Soviet Empire to bold adventures as reflected by Soviet tanks in Kabul and Communists on the march in Nicaragua and Africa. Two remedies were undertaken, monetary restraint was needed to break inflation which was accomplished by Paul Volcker at the Federal Reserve and cuts in marginal tax rates would restore incentives to save and invest instead of spending and borrowing. The results have been better than its supporter hoped for. The Dow Jones Industrial Average first broke 1000 in 1972 but, a decade later, was barely above 800. In the 25 years since Reagonomics however, the Dow has climbed above 11,000 accounting for an increase in "national wealth" of $25,000,000,000,000 (trillion!). To match that increase in percentage terms, the Dow will have to rise to 150,000 in the next twenty five years. American living standards have risen steadily and U.S. businesses have created entire industries that did not exist a generation ago. Not bad for a President dismissed as a dreamy former actor. In his 1989 farewell address, Reagan said, "People say that I was a great communicator. It would be more accurate to say that I communicated great ideas." He was right and a remarkable global prosperity has followed in his wake. The challenge for current and future political leaders is not to forget it. Wall Street Journal August 12-13, 2006 p. A8 More Vehicles Certified for the Hybrid Tax Credit 2007 Toyota Camry Hybrid 2007 Lexus GS 450h 2006 Honda Civic Hybrid CVT 2006 Honda Insight 2006 Honda Accord Hybrid AT 2005 Honda Civic Hybrid MT 2005 Honda Civic Hybrid CVT 2005 Honda Insight 2005 Honda Accord Hybrid AT Internal Revenue Ruling IR 2006-86 6/1/06 Internal Revenue Ruling IR 2006-67 4/25/06 Non-Qualified Deferred Pay Plans Targeted The IRS is gearing up for audits of 2005 nonqualified deferred pay plans including rabbi trusts, hunting for violators of the new rules for salary deferred after 2004. Under those regulations, if deferred funds can be accessed too easily before retirement, the funds will be taxed on the date they vest, not when later paid to the employee. Currently, agents are bearing fruit auditing severance packages of executives by uncovering a host of violations including failing to report administrative support as income. Kiplinger Tax Letter 4/2/06 Tax Increase Prevention and Reconciliation Act A new Federal Tax Act passed on May 17, 2006 provided for minimal Alternative Minimum Tax Relief and a two year extension of the low capital gains and dividend tax rates to 2010. But, overlooked, were the tax increases. The main tax increase to individuals involved raising the age to 18 from 14 that a child will be taxed on any unearned income at the parents’ marginal tax rate. Because of the tax increase, parents may want to rethink using custodial accounts for college costs. 529 plans now may be a better option because the kiddie tax does no affect them and payouts for college are tax free. Coming up in 2010 will be the ability for unlimited conversions of Traditional IRAs to ROTH IRAs; the $100,000 AGI cap on switching an IRA to a ROTH is repealed after 2009. On conversions in 2010, the taxpayer can spread the tax due over two years. This implicitly negates the income limits on ROTH IRA payins since taxpayers can make nondeductible contributions to IRAs between now and 2010 and then convert the accounts to ROTH IRAs in 2010. They are taxed only on the preconversion earnings and the tax is spread over two years. Thus, they get a nice head start on building a ROTH at a low tax cost. Kiplinger Tax Letter 5/19/06, 6/2/06 Home Heating System Credit For tax years beginning in 2006 and 2007 an individual can take a credit against his or her New York State personal income tax based on the costs incurred by him or her on or after July 1, 2006 and before July 1, 2007 that are directly associated with the replacment of an existing home heating system. The replacement system must be installed in a residence that is the taxpayer’s principal residence at the time the costs are incurred, the residence must be located in New York State and the installation must be completed before December 31, 2007. The amount of the credit is equal to 50 percent of the costs incurred on or after July 1, 2006 and before July 1, 2007 and the credit cannot exceed $500. If you have any questions about the foregoing or any other finanial matters, please call us. Remember, We’re Here For You !!