Getting Behind The $700 Billion Rescue Package

October has historically been the best month of the year for the market but the first few days of this October looks like it may be much different. We watched the drama play out within the walls of Congress as debates raged whether or not to support the revised rescue bill proposed. Make no mistake about it, there may be political consequences for some of these elected officials as a result of how they voted. In the end, the bill passed both the Senate and the House of Representatives. As for our opinion as your financial advisor, the bill is far from perfect, but becomes a starting point to the stabilization of the credit crisis. It was necessary.

The plan, with Treasury Secretary Paulson as the architect, calls for the government to buy what is being referred to as "toxic" mortgages and other securities from banks for more than their written down value on the accounting records, but less than the government hopes that they will be worth at some time in the future. The idea is to give taxpayers stock warrants in companies selling bad assets to the government so if the companies' values improve, the public will benefit. Only time will tell. What becomes interesting in the passage of this bill is the variety of riders that were attached to the reworked bill to ensure approval in the current framework. The balance of this article is intended to highlight how you may be affected by many of these additions to the bill.

For people with bank accounts, the Federal Deposit Insurance Corporation (FDIC) has raised the amount covered from the long established $100,000 level to $250,000, at least until the end of 2009. Given the magnitude and number of bank failures lately, raising FDIC insurance limits would help protect plenty of consumers. As of June 30, 2008 there was an estimated $7 trillion in deposits with about $2.6 trillion uninsured. Just seeing the higher limit may reassure consumers that they can again feel that their bank account is a safe haven.

The bill includes a number of tax extenders which are tax benefits that have expired or were about to expire. Probably one of the most significant is the implementation of another patch to the alternative minimum tax. Each year, this tax provision has drawn more and more taxpayers into its unintended grasp. Without the now inflation indexed adjustment to the exemption level, the severe drop that was scheduled to take place could have exposed countless additional taxpayers to increases averaging more than $2000. This extension, however, again only covers 2008 and it is our hope that after the election the new administration will address this annual problem once and for all!

Taxpayers will be able to continue choosing between either the deduction for state income taxes and the one for sales taxes. This is particularly important for taxpayers who live in states without their own income taxes. The tax credits for energy efficient home improvements will be reinstated. There will be a new tax credit aimed at purchasers of plug in electric vehicles. This should be an incentive for GM to ramp up the introduction of their Chevy Volt.

People over 70½ will once again be able to transfer up to $100,000 from their IRA to a charity without incurring income tax. Teachers will continue to get their $250 deduction for school supplies, and college students retain access to that $4,000 above the line deduction for tuition costs. A special income tax provision had been created in July that allows those folks who pay property taxes, but do not itemize, to add an additional amount to their standard deduction based on filing status. This was meant to be for 2008 only, but has now been extended through 2009. It is anticipated that there will be increases in the number of families that can benefit from the $1,000 child tax credit by changes in the income threshold required to qualify for refundability. This will apply only to 2008.

The tax extender portion of the bill will add approximately $100 billion more to the rescue plan. The bill does have a section considered to be revenue raisers. Included is one item that investors may not like. It requires securities brokers to report to the IRS the investors cost basis on stock transactions. While it is assumed that the majority of taxpayers honestly report their cost basis to the IRS each year, the Senate estimates that an additional $6.67 billion over 10 years can be collected by instituting this extra check on the process.

So while congressional bill H.R.1424, The Economic Stabilization Act, started out with the intent of helping to loosen up the credit markets, Congress needed to pull out all stops to get enough support. Hopefully, many of us will get some tax relief in the short term as the bill plays itself out.

A final thought! It is unrealistic to believe that the rescue package is the cure all. It is a first step in our economic and market recovery. There will probably be a need for further aggressive moves by the Federal Reserve regarding monetary policy, a coordinated rate cut plan between the Fed and European Central Bankers, another possible stimulus program, and some sense of direction for the country when the election is behind us. The economy is indeed at risk for a more significant downturn if the credit crisis is not fixed so let's all hope that step one proves to be the right start. To close on a positive note let me remind everyone that five of the last nine bear markets since 1950 have ended in the month of October. Let's hope that we can make that six out of ten!

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