STOCK MARKET COMMENTARY
For the week of January 7, 2008
THE MARKET
The Labor Department’s December employment report put a chill on Wall Street last week. Employers added only 18,000 jobs last month, the fewest since August 2003, and unemployment rates rose from 4.7 percent in November to 5.0 percent in December, its highest level since November 2005. A service economy reading that beat expectations did little to offset worries about a potential recession. The Dow closed the week at 12,800.18, down 4.20 percent, while the S&P lost 4.50 percent to end the week at 1,411.63. The tech-heavy NASDAQ dropped 6.35 percent to finish the week at 2,504.65.
Population Predictions – As of Jan. 1, 2008, the U.S. Census Bureau estimates the nation’s population at 303,146,284, an increase of 2,842,103 people or 0.9 percent over a year ago. The U.S. registered a birth every eight seconds and a death every 11 seconds. Net international migration adds a person every 30 seconds, for a net increase in total population of one person every 13 seconds.
More Than Half – Although only one in every 38 taxpayers reports an adjusted gross income of $200,000 or more, that group pays 51 percent of all federal income taxes (Source: IRS, BTN Research).
Didn’t Drop – Nearly two out of every five American retirees (39 percent) are spending more money in their retirement years than they did before they quit working (Source: Fidelity Research Institute, BTN Research).
Tax Fact – A taxable income level of $100,000 for a joint return would place a couple in the 25 percent marginal tax bracket in 2008. A decade earlier (1998), a taxable income level of $100,000 for a joint return would be subject to a 28 percent marginal tax rate. Twenty years ago (1988), the corresponding marginal tax rate was 33 percent (Source: Tax Policy Center, BTN Research).
Not As Rich – Only 37 percent of Americans believe their standard of living during retirement will be equal to or greater than the lifestyle they maintained during their working years (Source: Mercer Workplace Survey, BTN Research).
NASDAQ Performance – The NASDAQ was up 9.8 percent in 2007 (not counting the impact of dividends). If you missed the four best days of the NASDAQ in 2007, your return falls to a 2.3 percent loss for the year. If you avoided the four worst days of the NASDAQ in 2007, your return improved to a gain of 23.7 percent. The NASDAQ Composite is an unmanaged index of securities traded on the NASDAQ system (Source: BTN Research).
WEEKLY FOCUS – Congress’ Peter Pan Complex
Again in 2008 as in 2007, Congress has officially extended childhood – at least for purposes of calculating tax on investment income.
The “kiddie tax” specifies the age at which children become a separate tax entity from their parents for purposes of calculating tax on investment income. Prior to 2006, children from birth to age 14 could earn investment income up to two times the standard dependent deduction and be taxed at their tax rate, typically 10 percent. Any investment income over that threshold was taxed at the parents’ presumably higher tax rate. After 14, all investment income was taxed at the child’s lower rate.
In 2006, Congress increased the age to 18 years. A child is considered to be 18 for the entire tax year in which he or she turns 18. For 2007, the standard dependent deduction is $850, putting the threshold for investment income at $1,700. That amount is taxed at the child’s rate. Anything in excess of that amount is taxed at the parents’ rate.
Effective in 2008, the dollar threshold has increased to $1,800 – meaning an extra $100 stays taxed at the child’s rate. In addition, Congress extended childhood to 19 and added in children under the age of 24 who are full-time students and whose earned income is not more than half of their support – regardless of whether or not the child is a dependent. The kiddie tax applies only to investment income, not earned income, so teens with jobs pay income tax on their wages at their tax rate, not their parents’. Individuals who marry before age 18 presumably aren’t children anymore, and if filing jointly, file at their own rate.
Back when the kiddie tax stopped at 14, many families moved investments to the child’s name at that age to take advantage of the child’s lower tax rate. As Congress has increased the age limit, however, that strategy has become less viable. With a capital gains rate of just 5 percent for kids in the 10 percent or 15 percent income tax bracket, however, parents in higher brackets may still want to consider transferring appreciating assets. Call our office for help in determining when assets should or should not be placed in a child’s name.
* The Standard & Poor’s 500 (S&P 500) is an unmanaged group of securities considered to be representative of the stock market in general. The Dow Jones Industrial Average is a price-weighted index of 30 actively traded blue-chip stocks. NASDAQ Composite Index is an unmanaged, market-weighted index of all over-the-counter common stocks traded on the National Association of Securities Dealers Automated Quotation System. The Morgan Stanley Capital International Europe, Australia and Far East Index (MSCI EAFE Index) is a widely recognized benchmark of non-U.S. stock markets. It is an unmanaged index composed of a sample of companies representative of the market structure of 20 European and Pacific Basin countries and includes reinvestment of all dividends. WMCSAI# 265047
