Cents and Sensibility
Cents and Sensibility
Question: Is the Legislature doing anything to change the state tax code for IRAs to match the recent federal changes? It is my understanding that despite federal changes increasing the maximum contribution from $2,000 to $3,000, the state code still limits annual IRA contributions to $2000. IRA rules in the hands
of the Hawaii LegislatureAnswer: You are correct. Despite the fact that the federal law has raised the ceiling on IRA contributions in 2002 from $2,000 to $3,000, the state of Hawaii still allows a maximum deductible contribution of only $2000.
When federal tax law changes are made, most states automatically conform to the new laws. Hawaii is not one of them. Hawaii must go through the legislative process to change its tax laws. As it stands right now, you'll be able to deduct $3,000 on your federal tax return and only $2,000 on your Hawaii tax return. This also raises questions concerning the taxation of IRA distributions, such as "What portion of the extra $1,000 is taxable or not taxable at the state level?" "How would this be computed?"" As you can imagine, figuring all of this out could be an accounting nightmare!
Q: In view of the fact that Hawaii is saying they're broke, I'm concerned that they might not raise the IRA limit since that would result in less tax revenue for them.
A: In the past, Hawaii has mostly conformed to changes in the federal tax code, but not always. It's expected that Hawaii will pass legislation this year to conform to the new federal law. Contact your legislators and let them know your feelings on this issue.
Q: What's a municipal bond? Are they good investments?
A: Municipal bonds can be issued by cities, counties and states to finance a multitude of projects. For instance, a state may issue bonds to build additional highways or bridges, or a city may issue bonds to improve its sewer system.
Municipal bonds can provide significantly more after-tax income than comparable taxable investments. Even knowing this, you may be surprised the first time you compare the rates paid by tax-free and taxable investments. Remember, to get the true picture, you must compare after-tax returns.
For example, if you're in the 27 percent federal tax bracket, you would have to find a taxable investment paying 6.16 percent to yield the same after-tax return of a tax-free investment paying just 4.5 percent
Not all municipal bonds are created equally. Before investing, do your homework. Ask about the features of the bond. Is it insured? Does it offer call protection, so the bond can't be called prior to maturity? Both are important questions.
Guy Steele is a financial planner and head
of the Pali Palms office of Edward Jones. Send
planning and investing questions to him at 970
N. Kalaheo Ave., Suite C-210, Kailua, HI, 96734,
or by email at: gsteele2@pixi.com