Brian McKibban - Syverson Strege and Company

Economic Stimulus Act of 2008

If you have not yet heard, President Bush signed the Economic Stimulus Act of 2008 into law on February 13, 2008.  The centerpiece to this $152 billion package are the rebate checks that will go out to over 130 million Americans.

Rebates

This new law allows for a refundable credit against tax to most low and middle-income individuals not to exceed $600 ($1,200 for joint filers).  The general idea behind this stimulus is to give back whatever tax was paid for the 2007 tax year, to a maximum of $1,200.

In addition, individuals who are eligible for the basic tax rebate will also receive $300 for each qualifying child.  This additional rebate is added to the taxpayer’s base rebate amount.

There is a “phase-out” provision within this stimulus package that reduces the amount of rebates for individual taxpayers who have adjusted gross income (AGI) over $75,000 ($150,000 for joint filers).  This provision phases out rebates at 5% of the amount exceeding the stated AGI limits.  Based on this, individual taxpayers with AGI of $87,000 (joint filers with $174,000 of AGI) will be completely phased out of their rebates.

Business Incentives

Less widely known are the tax incentives within this stimulus package that are geared towards businesses. 

The first of these incentives is the doubling of the amount of Code Sec. 179 expensing to $250,000.  This package also increases the limit for reducing the deduction to $800,000.  These new amounts apply to property purchased and placed into service in tax years beginning in 2008.

Also included in this stimulus package is a temporary bonus depreciation period for property acquired in 2008.  In order to qualify, the property must be:

1.)   Eligible for the modified accelerated cost recovery system with a depreciation period of 20 years or less.

2.)   Water utility property

3.)   Computer software (off-the-shelf)

or

4.)   Qualified leasehold property

Impact

The overall purpose of the Economic Stimulus Act of 2008 is to “jumpstart” our economy with the hopes of avoiding or pulling us out of a recession.  Assuming that everyone takes their rebate checks and spends them on goods and services, the economy might receive some help.  If the majority of taxpayers use the money to pay down existing debt or save the money for the future, the intended effect may not be felt.  Only time will tell if it works.

For more information on how the Economic Stimulus Act of 2008 impacts your personal situation, please contact your tax professional.

Market Volatility

The stock market has sure taken us on a wild ride over the past few weeks.  So far this year, the S&P 500, an index of U.S stocks, is down 8.6%.  But the downturn is not relegated to just U.S. stocks, with the MSCI EAFE index of international stocks down 10.4% and the MSCI Emerging Market index down 10.8%.

Are recession fears justified?

It appears that investors are pricing in to the market the possibility of a recession in the United States.  Economists and investors are divided as to whether a recession will actually happen.  It is this division, in part, that is driving the volatile swings in the market.

Some economists believe that we are headed into a recession due to the severely weakened housing market.  The economy does rely upon the housing market for a variety of jobs, from construction workers to window manufactures to your local Lowe’s employees.  A fall in the number of homes being built or the number of home remodels could trickle throughout other sectors of our economy.

Other economists are more optimistic, stating that the stock market’s valuation is relatively attractive compared to other “pre-recession” time periods.  Also, both unemployment and inflation rates remain at relatively low levels, which bodes well against a recession being imminent.

So what should we do?

With all of the disagreement among both economists and investors, it is easy to understand why some people are confused.  During these volatile times, it is wise to remember the following proven principles to help weather the storm:

1.)   Maintain an adequate supply of cash (approximately 3-6 months worth of living expenses).  This will help you avoid “dipping” into an investment portfolio during a market downturn.

2.)   Stay adequately diversified.  The age-old principle of diversification never proves truer than during market volatility.  An appropriate mixture of stocks and bonds (comprised of domestic and international holdings), can assist in reducing market volatility.

3.)    Assess whether your risk tolerance has changed.  If you are feeling uneasy about the volatility in your portfolio, you are likely in an allocation that is too aggressive.

4.)   Remember your time horizon.  If your portfolio is not being significantly drawn upon and you have a time horizon of at least 5-10 years before you need the money, then your portfolio should be able to withstand market swings.  Generally speaking, the shorter your investment time horizon (5 years or less), the more conservative your portfolio’s holdings should be (i.e. more bonds) since the portfolio has less time to recover from a market downturn before the money is needed.