Published July 2003

New tax act expands investment opportunities

You’ve probably seen a lot of headlines on the Tax Relief Act of 2003. This legislation, recently signed into law by President Bush, will affect virtually everyone in the country. As an individual investor, you’ve got reasons to cheer the new tax laws. Many people will find that their taxes will decrease 5 percent or more under the new rules.

Let’s review some of the tax act’s key areas and see what benefits they might hold for you:

Lower dividend taxes
If you own dividend-paying stocks, your dividends were previously taxed at your ordinary income-tax rate (e.g., 27 percent, 30 percent, 35 percent or 38.6 percent). But under the new laws, the tax rate on dividends will be cut to 15 percent. And if you’re in the 10 percent to 15 percent bracket, the dividend tax rate drops to 5 percent. These new, lower rates are effective retroactively to the beginning of 2003 until 2009, when dividend taxes are scheduled to revert to the old, higher rates.

Should you be interested in stocks that have a history of paying dividends, there are certain considerations to take into account. First, it’s nice to get the dividend checks. (Keep in mind, though, that stocks do not offer a fixed rate of return and may not distribute dividends. Stocks are subject to market risks, including the potential loss of principal invested.) Also, when a company pays dividends, it can be a sign that the business is well-run and concerned about the needs of its shareholders. Conditions can change at any time, but stocks with a track record of paying dividends tend to be steadier performers relative to nondividend-paying stocks that have a limited track record.

Another advantage to dividend-paying stocks: Investors can consider reinvesting unneeded dividend income into additional shares of stocks.

Lower capital-gains taxes
The capital-gains rate has been reduced to 15 percent from 20 percent for many taxpayers. Taxpayers in the 10 percent and 15 percent ordinary income-tax rate brackets will see a decrease in capital gains taxes from 10 percent to 5 percent. All of these reductions are effective for sales of assets after May 5, 2003. As is the case with dividend taxes, the new rate will remain in place until 2009.

If you’ve held some stocks for many years, and they’ve appreciated significantly, then the cut in capital-gains taxes may benefit you greatly. Previously, you may have avoided selling these stocks — even if your diversification needs had changed — because you didn’t want to face a big tax hit.

However, with the new and lower capital-gains rate, you’ll now find it much more affordable to sell these stocks and make the changes you need to help you properly balance your portfolio. But talk to your tax professional first, as tax considerations should not be the driving factor for making investment decisions.

Other beneficial changes in the tax laws include:

• Lower income-tax rates: Earlier tax-law changes lowered tax brackets for 2006, but the new legislation has sped up the timetable, so that the new rates are retroactively effective on Jan. 1, 2003. The 10 percent and 15 percent rates remain unchanged, but the 27 percent rate drops to 25 percent; the 30 percent rate drops to 28 percent; the 35 percent rate falls to 33 percent; and the 38.6 percent rate drops to 35 percent.
• Reduction of marriage penalty: Married couples who claim the standard deduction should benefit from this accelerated reduction of the marriage penalty tax. The standard deduction for married couples is increased to double the amount of the standard deduction for single taxpayers in 2003 and 2004.
• Increase in child tax credit: The amount of the child tax credit is increased to $1,000 (from $600) in 2003 and 2004. Beginning this summer, the increased amount of the child tax credit will be paid in advance based on information in taxpayers’ 2002 tax return. The maximum amount a family could receive is $800 ($400 per child with a maximum of two children). Small-business owners also will benefit as a result of the tax act.
• Increase in small-business expensing for new investment: This tax act quadruples the maximum amount of investment in equipment that small businesses can expense, from $25,000 to $100,000. This will encourage small-business owners to purchase the technology, machinery and other equipment they need to expand.
• Increase in first-year bonus depreciation: This deduction increases from 30 percent to 50 percent for qualified investments placed in service after May 5, 2003, and before Jan. 1, 2005.

President Bush’s Tax Act of 2003 has given you some great possibilities. Make sure you take full advantage of them.

Eric Cumley is an investment representative with Edward Jones Investments at 1201-C SE Everett Mall Way in Everett. He can be reached at 425-353-2322. Edward Jones is an NYSE-member investment firm with more than 8,000 locations nationwide.

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