If you’re married, own dividend-paying stocks or have children, Uncle Sam has some good news for you. Recently signed into law by President Bush, the new Jobs and Growth Tax Relief Reconciliation Act of 2003 brings a wide range of changes to existing tax rules. The 2003 tax relief act reduces tax rates on dividends and long-term capital gains, lowers in-come tax rates and increases the child income tax credit available to parents. Here’s a closer look at how these new rules might help you better achieve your financial goals. Shifting the tax brackets You may have already noticed one of the most immediate benefits of the new law: a larger paycheck. As a result of shifting income tax rates, the IRS published new withholding tables in June, resulting in employees withholding less money from most Americans’ paychecks. With the new laws, the rate on the top tax bracket falls from 38.6 percent to 35 percent Other brackets will drop 2 percentage points each to 33 percent, 28 percent and 25 percent. The two lowest brackets will remain at 15 percent and 10 percent. The expanded 10 percent bracket and increased standard deduction for married tax payers filing jointly may help free up extra money to make it easier to save for future goals. For example, estimates show that a married couple filing jointly with a total adjusted gross income of $50,000 claiming the standard deduction, will gain an additional $333 annually under the new law, making a fair amount of additional money available for investing or saving. Similarly, a single taxpayer with an adjusted gross income of $30,000 could save about $50 in taxes this year. The new rules are effective retroactively to Jan. 1, 2003, but if taxes are withheld by your employer you won’t get your reduction for the first half of the year until you file your 2003 tax return. (Source: AMEX) Lower tax rates for dividends and capital gains If you’ve previously invested in dividend-paying stocks, you know that dividends were taxed at your individual tax rate. Under the new law, the dividend tax rate is reduced to 15 percent. For investors who fall in the 10 percent and 15 percent tax brackets, the dividend tax rate drops even lower, to 5 percent. Also under the new law, the long-term capital gains rate drops from 20 percent to 15 percent for taxpayers in the higher brackets. For individuals in the 10 percent and 15 percent tax brackets, the long-term capital gains tax goes down from 10 percent to 5 percent. The new rates apply only to investments owned for more than one year and sold on or after May 6, 2003. The new long-term capital gains rate may help investors who need to diversify their portfolios. For example, if you’ve avoided selling a stock that has appreciated significantly – even though your diversification needs have changed – the new long-term capital gains rules enable you to sell such a stock and properly rebalance your portfolio while avoiding a substantial tax bill. But don’t get too comfortable with the new tax rates. The lower tax rates for qualified dividends and long-term capital gains are only temporary. And short-term capital gains will continue to be taxed at your regular income tax rate. Unless Congress makes further changes, qualified dividend and long-term capital gains taxes are scheduled to revert back to the old, higher rates in 2009. Help for (new and established) families The new law offers significant benefits for families with children and a long-awaited break for married couples. Under the new act, the child tax credit increases from $600 to $1,000 for 2003 and 2004. Parents will receive the increased portion of the child tax credit in advance, based on information from 2002 tax returns. Approximately 25 million families will get an advance refund check of up to $400 this summer for each child under age 17. The credit is phased out for taxpayers with modified adjusted gross income over certain amounts. For married couples, the new law also reduces the so-called “marriage penalty.” The standard deduction for married couples now increases to $9,500, double the $4,750 standard deduction for single filers. Starting this year, married couples who file a joint return and have taxable incomes of up to $56,800 will still remain in the 15 percent bracket. But the marriage penalty relief is short-lived, existing only in 2003 and 2004 unless Congress acts to extend it. Consider potential tax consequences In light of the new tax rules, you may want to explore how a slight shift in your investment strategy might affect your tax situation. For example, by contributing more of your pre-tax dollars to an employer-sponsored retirement account, such as a 401(k) plan, you reduce your taxable income, which may enable you to qualify for one of the new lower tax brackets. Once you have made your decisions regarding the more important aspects of your long-term financial plan including, diversification, asset allocation, risk tolerance and family security, you also may want to take a closer look at your holdings according to tax treatment. Just as it’s a good idea to spread your investment dollars among different asset classes – stocks, bonds and money market instruments – it may also make sense to consider diversifying your holdings into different types of taxable and non-taxable accounts. See your tax professional and/or qualified financial advisor for details. What’s your best move? It’s important to carefully consider how to best take advantage of the new tax rules and rate reductions. Make sure that your approach will maintain a diversified, balanced portfolio consistent with your financial objectives, timeline and tolerance for risk. Your qualified financial advisor can help determine how a change in your investment strategy may benefit your personal economy. American Express Financial Advisors Inc. Member NASD. American Express Company is separate from American Express Financial Advisors Inc. and is not a broker-dealer.
