|
| |
September
2003 On-line Tax Planning
Exploiting The Tax Cut
President’s Bush’s latest tax cut has something
for almost everyone. The investor tax breaks--
designed to boost the stock market-- lower the highest rate on qualified and
long-term capital gains to 15 percent from 20 percent, and to only 5 percent for
taxpayers in the 10 and 15 percent tax brackets. Meanwhile,
dividends that meet certain criteria are taxed at the same 15 percent, rather
than at ordinary income tax rates that had been as high as 38.6 percent.
Although the tax cut law is straightforward, the
ramifications for individual investors are more complex, especially because of
the "sunset" provisions. In order to take full
advantage of tax breaks, many investors will want to review the new rules
carefully with the help of their tax professionals and investment advisors to
best determine how to keep more money in their pockets.
Here are some thoughts to consider.
1) Should I
adjust my investment strategy?
2) What about all the focus on dividends?
Tax experts note that although the tax cut makes dividends more appealing,
capital gains are often more attractive for tax purposes.
Capital gains can be deferred, while dividend payouts cannot.
There are a few things to bear in mind regarding
dividends:
 | To be eligible for the reduced rates on
dividends you must hold the stock for more than 60 days during the 120-day
period that commences 60 days before the ex-dividend date. If
you don’t, the dividend is considered ordinary income and will be taxed at the
regular rate.
|
| Not all dividends are created equal.
The reduced tax rates on dividends only apply
to qualified dividends from corporations. Many
payments commonly called "dividends" are not considered qualified dividends
under the tax law. For example: a mutual
fund’s "dividend" might include short-term capital gains, interest income and
other forms of income that will still be taxed according to your tax bracket.
The payout of qualified dividends that you
receive from a mutual fund will be eligible for the new lower rates, and the
fund statement will have to indicate which payouts are deemed "qualified
dividends" and which are classified as ordinary income. Also,
be aware that interest earned in a credit union or bank savings account is
often called a "dividend". These are interest
payments, not dividends, and as such are considered ordinary income and taxed
accordingly. |
3) What
should I consider, if I decide to add dividend stocks to my portfolio?
Experts suggest that you identify corporations that appear able to support the
growth of both their share price and dividends. They
suggest you look for:
| Debt-to-equity ratio of less than 50 percent
|
| Dividends per share equal to less than 50
percent of operating earnings per share
|
| Healthy cash flow or a company that is
cash-rich enough to grow the business or increase the dividend. |
The bottom line is,
don’t let the prospect of tax savings drive your investment strategy.
The new tax cut presents many ramifications for
individual investors to ponder.
Please give us a call, at your convenience, for
more information.
Tax
Planning Archives
For More Information Contact:
Bucheri McCarty & Metz LLP
2366 W. Boulevard
P.O. Box 2147
Kokomo, IN 46904-2147
Telephone: (765) 236-2300
FAX: (765) 236-2333
Internet:
info@bmmcpas.com
|
