The new law extends several important tax-reduction provisions over the next five years, with implications for investors concerned about funding college and retirement, and for taxpayers who may be subject to the Alternative Minimum Tax.

Extension of lower capital gains and dividend rates

The recently lowered tax rates on dividends and capital gains have been extended through the end of 2010. This is welcome news for all long-term investors and a great reason to review how your assets are allocated across various accounts. For example, it may make sense to hold at least some stocks outside of retirement accounts to benefit from the lower rates on dividends and capital gains (a maximum of 15%.). In a retirement account, such as an IRA, the gains on these assets would be taxed at the higher ordinary income rates when withdrawn.

Alternative Minimum Tax Relief

The Alternative Minimum Tax (AMT) was originally designed by Congress to ensure that wealthy individuals could not avoid income tax by exploiting weaknesses in the tax code. When the AMT rules were introduced in 1969, they did not affect those with relatively modest incomes. Since AMT rules were not indexed for inflation, more taxpayers now feel its impact. The new law increased the amount of income that can be excluded from AMT, but only did so for 2008. While this change in the tax law was a benefit for many taxpayers in 2008, millions of individuals will still be subject to AMT and should consult with their tax professionals about options to avoid or reduce AMT exposure. One strategy is to select municipal bonds that avoid investments with exposure to private activity bonds, a common trigger of AMT.

Roth IRA conversions for everyone

Starting in 2010, Roth IRA conversions will be available to all taxpayers regardless of income. Currently, and through 2009, taxpayers with more than $100,000 in modified adjusted gross income (MAGI) are ineligible. Unlike traditional IRA accounts, withdrawals during retirement from a Roth IRA are not taxable, a great benefit for investors who are interested in tax-free income during retirement. And since the IRS does not require minimum distributions from Roth IRAs in retirement, Roth investors can potentially leave more of their retirement assets to beneficiaries. Note, however, that income taxes are due when you convert to a Roth IRA.

“Kiddie tax” extended to age 18

The new tax law somewhat reduces the tax benefits of custodial accounts, such as UGMAs and UTMAs, by extending the age to 18 for which a child's assets are partially taxable at the parents' rate. For the 2008 tax year, the investment income of children up to age 18 will be taxed as followed:

* First $900: No tax due

* Next $900: Taxed at the child's rate

*Any investment income over $1,800:Taxed at the parents' highest marginal rate

Tax-free alternatives, such as 529 College Savings Plans, become even more attractive by comparison. In addition to the tax benefits of 529 plans, many programs offer convenient investment options such as age-based portfolios, which allow you to choose a portfolio based on the age the child is beginning college. Also, college savings within a 529 plan are treated more favorably for federal financial aid purposes than assets held in a custodial account.

My Two Cents Worth……

The Tax Increase Prevention and Reconciliation Act of 2005 includes many provisions that are not covered in this brief summary, which focuses primarily on certain beneficial aspects of the law with regard to retirement and education savings accounts. There have also been several extensions/revisions to this Act over the last year, so please contact your tax advisor for more information. Effective tax planning can make a significant impact on both the growth of your assets and the growth of your income in retirement. Please remember that helping yourself will ultimately help others.

*This information is not meant as tax or legal advice. Tax laws are complex and subject to change. Please consult the appropriate professional tax advisor to see how these tax laws apply to your situation. Capital gains, if any, are taxable for federal and, in most cases, state purposes. For some investors, investment income may be subject to the federal alternative minimum tax.

(Jeff Cady is a Senior Financial) •