What Moldmakers Need to Know about Investing

Revised tax plan helps investors take advantage of tax breaks, allowing them to plan for long-term strategies.


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With the recent passing of the economic stimulus package, many investors are anxious to take advantage of possible tax breaks and investment incentives. But, while the latest plan is something to certainly take into consideration, be careful not to let it dictate your investment decisions.

To better understand how the stimulus package may affect individual investors, let's take a closer look at some of its key elements. One of the major highlights for the average investor is the acceleration of previously enacted income tax cuts. Rate cuts that were originally scheduled to be rolled out from 2004 through 2010 will now be put into effect, retroactive to January 1, 2003. Tax withholding tables were adjusted by July 1, 2003, so wage earners will have less tax taken out of their paychecks.

To illustrate the effects of these rate cuts, consider the following examples. Previously, the highest marginal income tax rate for a married couple was 38.6 percent. However, the new law has reduced this to 35 percent. As a result, a couple with a combined annual taxable income of $320,000 will save over $11,500. On the other end of the scale, the lowest tax bracket will continue to be 10 percent, but will now be extended to the first $14,000 of taxable income (for a married couple) rather than the first $12,000.

Another major component of the stimulus package that could have significant implications for individual investors is the reduction of the double taxation of dividends. Remember, dividends are corporate profits that management wants to return to its shareholders in the form of a payment. While dividends will continue to be taxed at both the corporate and shareholder level, investors will now be taxed at a maximum rate of only 15 percent. Previously they paid a rate equal their personal income tax levels, which could run as high as 38.6 percent. Let's take a look at an example of how this works.

If a company makes a profit that amounts to $100 for each shareholder, that $100 would be taxed at the 35 percent federal corporate tax rate, leaving $65 for the company to distribute to the shareholder as a dividend. Next, the shareholder must pay taxes on the $65 dividend check, at his individual rate. Assuming that rate is 30 percent, the shareholder is left with just $45.50. Under the old rules, more than half the profit has already been lost to taxes. However, under the new economic stimulus package, the shareholder will be taxed at a maximum rate of 15 percent going forward, meaning he would have $55.25 left after the two rounds of taxes.

Along with reducing the dividend tax rates, the legislation is also reducing long-term capital gains tax rates between now and 2009, when the old rates come back into effect. The current long-term capital gains tax rates are 10 percent for tax payers in the 10 percent and 15 percent tax brackets, and 20 percent in the 27 percent bracket and up. The new legislation will lower the long-term rates to 5 percent for taxpayers in the 10 percent and 15 percent brackets and for taxpayers in the 27 percent bracket and up, the long-term rates will be 15 percent.

The child tax credit for children younger than the age of 17 increases from $600 to $1000 for only 2003 and 2004. Based on information from 2002 tax returns, the IRS plans to send families who qualify, an advance refund of $400 per child for 2003 sometime between July and August. To qualify for a full credit, a family's modified adjusted gross income (MAGI) must be less than $110,000 for a married couple, and $75,000 for a single head of household. The credit is phased out for families with MAGIs above these amounts.

The new legislation also has benefits for small businesses. The initial cost of certain capital goods that can be depreciated in the year they are put into service, rises from 30 to 50 percent between now and 2005. The expense amount for a small business increases from $25,000 to at least $100,000 between now and 2005. A business eligible for expensing also changes from $200,000 to $400,000 of capital purchases.

The end result of the economic stimulus package is more money for investors. Whether they choose to save it for retirement, fund a child's education or even spend it, taxpayers will have more personal income at their disposal.

While both of these aspects to the new economic package can work well for investors, it's important to remember that investment decisions should be based on their own merit, not solely on tax considerations. Meet with a tax advisor prior to making any changes in investment strategies. Also, now would be a good time to speak with a financial consultant to take a look at overall financial positions. They can help plan long-term strategies that will put everyone in a position to take advantage of any new breaks in the future.

A. G. Edwards does not render legal, accounting or tax preparation advice. You should consult your tax and legal advisors for your specific situation.

For more information contact Daryl Kersting of A.G. Edwards & Sons, Inc. (St. Louis, MO), Member SIPC at (800) 926-9223. A.G. Edwards & Sons, Inc. concentrates on helping people in the manufacturing industry invest their money and gives them access to some of the best asset managers in the U.S.

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