How will the new deficit-cutting tax law zap your family’s finances? Let us count the ways:
1. It dubs retirees with incomes as modest as $34,000 as affluent enough to pay taxes on as much as 85 percent of their Social Security benefits.
2. It makes it harder than ever to shift income to your children or grandchildren to shelter assets and build savings faster.
3. It dashes middle-class families’ hopes for any significant new federal help with college costs.
What’s worse, you can only expect more of the same in the Clinton economy, particularly if the anticipated bills for health-care reform become reality.
“Americans’ before-tax income is not going to be growing,” says Brookings Institution economist Barry Bosworth, “and there are likely to be tax increases in the future that will further reduce your savings.”
Thus, for a more secure future, you’ll need to exploit every income-stretching financial edge you’ve got. Among today’s timeliest tactics:
– Upgrade your job skills. For the next two Clinton years, economists expect only sporadic job growth averaging 1 to 1.25 percent a year, about half the rate of the 1980s. Increasingly, the workers who’ll be able to find and hold the best jobs will be those with well-honed specialties and degrees.
Fortunately, a change in the new tax law makes it easier to upgrade yourself. The rule allowing employers to provide as much as $5,250 of tax-free education assistance to employees was reinstated after having expired last June. Although the provision is set to die again after 1994, it stands a good chance of being revived in future tax bills.
So go to school now and get the boss to pay. Taking even a quick preliminary computer course can give some workers an edge in the quest for a promotion, a raise or a new job, says Joseph Duffy, a senior vice president at outplacement counselors Drake Beam Morin in Melville, N.Y.
– Save aggressively for college. More than ever, it’s up to you. For instance, the new law lowered the upfront fees on some federally backed student loans to 4 percent from as high as 8 percent.
Sound impressive? Not so fast. The net result is that beginning next July most young borrowers will see only about $400 extra in the student loan checks they get over four years.
National service-in which students do one or two years of community work in exchange for tuition credits-won’t be a panacea, either. At most, 100,000 out of the 14.3 million U.S. college and graduate students would get the much-trumpeted $4,725 a year in credits to pay for college or repay student loans beginning next July. And the program, awaiting final congressional approval, would be funded only through 1996, at which time Congress would have to vote to continue it.
All this plus the fact that “college costs have been rising far faster than inflation,” says financial planner Faye Kathron Doria of Rochester, N.H., point to one conclusion: “You want investments that can give your savings a boost.”
For families whose college bills won’t come due for eight years or more, she suggests growth mutual funds that invest in U.S. or foreign stocks, such as Janus Fund (no load; up 5.2 percent in 1993’s first seven months) or Scudder International (no load; up 17.2 percent).
Then, when your child is four to six years away from college, start shifting your savings to more conservative choices.
– Consider working longer. Once you retire, it’s not easy to bring in more money to offset Washington’s latest nibbles, like the increase in the taxability of Social Security benefits. If you haven’t yet left the work force, consider delaying your departure.
Why? By building your nest egg a bit more, you can boost your income level in retirement to cushion against any new costs that come over the Beltway from Washington.
– Reassess your trusts. If you currently shift investments into trusts for your children to save on income taxes, take a long, hard look: Starting this year, you may actually have to pay more to the Internal Revenue Service than you would without a trust.
That’s because trusts, which used to be taxed at a 31 percent rate beginning at $11,250, will now have to pay 36 percent when earnings pass-yikes!-the $5,500 mark, and 39.6 percent above $7,500. Under the new tax law, this change is retroactive to Jan. 1, 1993. On $11,250 of income, for instance, you’ll owe an additional $948 in tax. Consult your tax pro or attorney, and consider folding the trust, instead putting the money into a custodial account such as a Uniform Transfers to Minors Act account.
