Tax Relief Act Questions

OCEAN CITY – Today, part two of last week’s discussion on how the new

the $858 billion tax law enacted in December – formally known as the Tax Relief, Unemployment Insurance Reauthorization and Job Creation Act of 2010 (the "Act") will impact you.

Does the new law affect my municipal bond holdings? Probably only in the short-term, says Christopher J. Wolfe, chief investment officer for the Private Banking and Investment Group at Merrill Lynch Wealth.

Municipal bond prices, which had been surging in anticipation of higher demand for sources of tax-free income, have retreated since the Act’s passage. It doesn’t help that Congress also chose not to renew the taxable Build America Bond program. With Build America Bonds no longer an option for raising revenue, more jurisdictions are likely to be crowding back into the tax-exempt bond market even as concerns continue to mount about municipal credit risk. All the same, Wolfe believes worries of muni defaults should be monitored closely.

"We expect the vast majority of municipal bonds to fare well over the next few years," he says. "However, there are growing concerns around municipal budgets and pensions which may cause some issuers to reschedule or reorganize their bond payments."

Are there any particular provisions retirees should know about? As a bonus to those who are at least 70 ½, the Act keeps in place a provision allowing them to give up to $100,000 directly from their IRAs to charity without incurring any income tax. Although you can’t claim a deduction for the contribution, it can help satisfy your required minimum distribution for the year, thereby reducing your income tax liability.

What else can I consider to take advantage of the lower tax rates now?

If you haven’t already converted traditional IRA assets to a Roth, you now have two more years to act and pay tax at low rates on the conversion

Could this legislation help to lift the stock market? That’s impossible to forecast, but Wolfe notes that reducing uncertainty around tax policy and lowering market volatility could steady price-to-earnings multiples or even give them a boost in 2011. More importantly, he suggests that the actual passage of the Act itself sends a positive message about cooperation in government.

"Agreements are being forged in a very partisan Congress, and that is good for investors, chiefly because it shows that Washington isn’t entirely broken," he said.

Additionally, this is a good time for investors to take a step back and carefully assess the tax and fiscal environment going forward.

(A Merrill Lynch Wealth Management Advisor. She can be reached at 410-213-8520.)