Archive for Sunday, July 29, 2001

The Motley Fool

July 29, 2001

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Last week's question and answer

My 1999 merger created the world's largest oil company and reunited two firms that long ago were components of the same 19th-century enterprise. Based in New Jersey, I have subsidiaries or operations in about 200 countries and territories around the world. In 2000, I raked in a whopping $233 billion in revenues, generating $18 billion in profit. I boast some 40,000 service stations in more than 100 nations. Who am I? (Answer: ExxonMobil)

Know the answer? Send it to us with Foolish Trivia on the top and you'll be entered into a drawing for a nifty prize! The address is Motley Fool, Box 19529, Alexandria, Va. 22320-0529. Send questions for Ask the Fool, Dumbest (or Smartest) Investments (up to 100 words), and your Trivia entries to Fool@fool.com.

Run rate, run

Q: What's a "run rate"? S.R., Burlington, N.C.

A: Imagine that Buckwheat Pancakes International (ticker: OTAYY) is growing very rapidly from quarter to quarter. Let's say that you need to estimate its current annual rate of sales. You could add up the last four quarters' worth, but that would clearly understate sales, as each quarter's numbers have been rising.

Enter the run rate. Take the most recent quarter's sales of $40 million (up from $34 million the quarter before and $29 million before that). Multiply that by four (for four quarters) and you'll have the company's current run rate for sales: $160 million. This is not a forecast of future sales or a measure of past sales. It just measures the current level of annual sales.

Q: What are the S&P futures that I often see referred to on CNBC? A.R.P., Boca Raton, Fla.

A: Futures are contracts between two parties to buy or sell a certain amount of a commodity (such as oil, soybeans or orange juice) for a specified price at a set future date. (Fail to pay attention and you may end up with truckloads of pork bellies in your driveway!)

Futures are bought by some investors to protect themselves against unfavorable price swings or by speculators betting on where the market is going.

They can be very risky.

S&P 500 futures are based on the price of the S&P 500. Each day the party who bet wrong is obligated to pony up cash.

Un-Foolish, short-term investors pay a lot of attention to S&P futures, as they can indicate the market's likely moves before trading begins for the day.

We pay it little mind, though, as we prefer to focus on the stock market's long-term performance.

Tax law changes

Here's the scoop on some of the big tax changes enacted recently.

For starters, understand that the "refund" of up to $300 or $600 that you'll likely receive soon isn't exactly a refund or a gift. Our friends at the IRS call it an "advance payment." It's really part of the tax rate reduction enacted for 2001 that you'd normally have benefited from after filing your return in 2002. You're just getting it ahead of time. (Don't blame us if your head is starting to hurt we didn't think these things up.)

A much bigger deal than that are the changes to retirement investments. Beginning in 2002, you'll be able to sock away more each year in your 401(k) or 403(b). The amount increases from this year's $10,500 to $15,000 in 2006 and beyond. IRA contribution limits also increase. Instead of the current $2,000, the limit becomes $3,000 for 2002-2004, $4,000 for 2005-2007, and $5,000 for 2008 and beyond. There's also an IRA "catch-up" provision beginning in 2002, permitting those 50 or older to sock away additional amounts. These are really big deals. The more you save for retirement and the earlier you do it, the more comfortable your golden years are likely to be.

If you have qualifying children (or in some cases dependents), there are some additional goodies for you. The child credit increases from $500 to $600 this year and continues to rise to $1,000 by 2010. Also increasing is the maximum credit for childcare expenses and the maximum credit for child adoption expenses which fully doubles next year, to $10,000.

Anyone saving for or paying for education also can rejoice. Education IRA contribution limits increase from $500 to $2,000 next year, and the money now can be used for kindergarten through high school expenses, as well as college expenses. Increasingly popular "Section 529" plans, which permit people to save for college tuitions, now will feature tax-free gains.

These and other changes can save you many thousands of dollars. Take some time to learn more about them. Visit the IRS's friendly Web site at www.irs.gov. For explanations and strategies, visit www.fairmark.com and www.Fool.com/taxes.

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