Tax Changes? What Tax Changes?

In May 2006, a new tax law went into effect that has the potential to affect investors of all stripes.

Because the Tax Increase Prevention and Reconciliation Act of 2005 received only brief attention from the news media, you may have overlooked some of the changes. It's important to understand how this new tax law applies to your situation. The fact that you are reading this means you will almost certainly be affected by some of the major provisions.

The centerpiece of TIPRA is a two-year extension of the temporary lower tax rates on dividends and capital gains (through 2010). Dividends and long-term capital gains are taxed at a maximum 15-percent for Americans in the upper marginal income brackets. For taxpayers in the 10- and 15 percent brackets, the tax rate is 5 percent through 2007 and zero through 2010.

Without the extension, dividend income would have been subject to rates up to 35 percent, and long-term capital gains would have been taxed at a maximum 20 percent in 2009.

An exemption that helped many middle-income taxpayers avoid the alternative minimum tax in 2005 was increased and extended through 2006. The new exemption levels are $62,550 for joint filers and $42,500 for single filers.

Currently, only joint and single filers with modified adjusted gross incomes of $100,000 or less are eligible to convert a traditional IRA to a Roth IRA; income taxes are due on the amount converted. TIPRA changed the eligibility rules: Beginning in 2010, individuals will be able to convert a traditional IRA to a Roth IRA regardless of income or filing status. The new law also allows taxpayers who make the conversion in 2010 to spread the tax liability over two years (in 2011 and 2012).

Distributions from traditional IRAs are taxed as ordinary income, and may be subject to an additional 10 percent federal income-tax penalty if taken prior to reaching age 591/2. To qualify for the tax-free and penalty-free withdrawal of earnings, a Roth IRA must be in place for at least five tax years, and the distribution must take place after 591/2 or be due to death, disability or a first-time home purchase.

For the past several years, tax-law changes have occurred with surprising regularity. To benefit from them, it's important to stay informed and understand how you may be affected.

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We now live in a nation of more than 300 million people. A population of this size must have seemed like a remote possibility in 1967, when we passed the 200 million mark. It must have been almost inconceivable in 1915, when we were at 100 million.

We've changed considerably since we were a nation of 200 million. And we'll probably be even more different by 2050, the year in which the U.S. population is expected to reach 400 million. By considering demographics trends, you can gain a glimpse of what our future might look like.

Anyone who has examined the American landscape during a coast-to-coast flight knows that the United States remains a vast open space. The state of Texas alone is so big that if all 300 million U.S. residents moved there and claimed a half-acre per person, there would still be more, than 32,000 square miles left unoccupied. Alaska has enough land for each person to claim 1.25 acres.

Since 1970, the majority of the population has moved out of the Northeast and Midwest and now lives in the South and the West. Going forward, the population is expected to spread out even more, as technology makes it possible to work from anywhere, and real estate in populous cities becomes more expensive.

The U.S. population may be aging, but the age-related problems we face are not nearly as serious as those facing other developed nations. Our population is growing much faster than those of South Korea, Britain, Russia and China, and the growth is expected to continue for at least the next 50 years.

As competitors in the global marketplace see their populations stagnate and begin to shrink, foreign and domestic investors may prefer the opportunities created by our growing population.

"Demography is the future that already happened," management guru Peter Drucker remarked.

Thus, keeping an eye on demographic trends may provide clues about the future of your portfolio.

Craig Langweiler is president of the Langweiler Financial Group, in Newtown. He can be reached at 215-860-8066 or at: clangweiler@


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