- The Washington Times - Monday, June 16, 2003

There’s a little something for just about everyone in the new tax act. Taxpayers will get many benefits automatically from the Jobs and Growth Tax Relief Reconciliation Act of 2003, which was signed by President Bush late last month. But they will have to make some decisions about savings and investment strategies if they want to take full advantage of the new law, tax experts say.

“It’s best to be proactive,” said Mark Luscombe, an analyst at CCH Inc. in Riverwoods, Ill., which provides tax information and services. “To take maximum advantage, there are things people should start thinking about now, especially about investing.”

Workers who have federal income taxes withheld by their employers should be taking home larger paychecks starting in July.

That’s because the tax act widened the 10 percent tax bracket and lowered the top four tax rates to 25 percent, 28 percent, 33 percent and 35 percent, so paychecks will reflect lower IRS withholding schedules.

What to do with those extra dollars? Mr. Luscombe suggested that workers who don’t need the cash for day-to-day purchases or debt payments consider increasing their contributions to their retirement accounts, where their money grows tax-deferred.

And because taxes were over-withheld for the first half of the year, before the tax rates were lowered, workers in higher tax brackets also might consider “adjusting their W-4 forms to increase their exemptions for the rest of the year,” Mr. Luscombe said. The alternative, he added, is to do nothing and wait to collect a bigger refund in April.

Many taxpayers with children will soon be getting checks in the mail of up to $400 per child.

That’s because the tax act raised the child tax credit to $1,000 from $600, so the IRS is sending out “rebates” for overpayment on 2002 taxes, Mr. Luscombe said.

Low-income taxpayers were left out of the program, and Congress is debating whether the rebates should be extended to them.

Babies born in 2003 will qualify for $1,000 tax credits in April.

Robert K. Doyle, a certified public accountant with Spoor, Doyle & Associates in St. Petersburg, Fla., pointed out that the new tax act also adjusts the standard deduction for couples in an attempt to reduce the “marriage penalty” that forces married people to pay more in taxes than they would if they were single.

“It’s just not fair, and it’s still not fixed,” he said of the tax inequity. “It’s only partial, and it only applies to people who don’t itemize their deductions.”

So married taxpayers in April will, as usual, have to do two calculations.

“The standard deduction will be greater, but taxpayers still have to compare that to what they’d get itemizing and take the best one,” Mr. Doyle said.

The greatest tax savings under the new tax act could go to investors. The tax on capital gains has been reduced to 15 percent from the previous 20 percent. And stock dividends, which were taxed as ordinary income, now will be taxed at the 15 percent rate.

“It will make a difference on how people invest their money,” Mr. Doyle said.

That’s because interest-paying investments, such as bonds and certificates on deposit, are at a distinct tax disadvantage compared with dividend-paying stocks and other equity investments because bond and CD earnings are exposed to the ordinary tax rates of up to 35 percent.

Mr. Doyle suggested savers “think about where they want to keep certain assets, or rethink their asset-allocation plan.”

He said that it might make sense to keep common stocks and dividend-yielding stocks in taxable savings accounts and bonds in tax-deferred accounts, such as individual retirement accounts.


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