SHIFT YOUR MONEY AROUND: If you’ve got stocks in your retirement accounts and bonds and mutual funds in regular taxable accounts, trade places. Here’s why: stock dividends and gains will now be taxed at a maximum rate of 15 percent. That’s a good deal; far better than the 25 percent or higher rate that will eventually be levied against your tax-deferred earnings. Interest from bonds and real-estate-investment trusts, gains from stocks held less than a year and fast-trading stock funds will still be taxed at your regular income-tax rate. It makes sense to put those in your 401(k), IRA or other deferred account.
ENRICH YOUR CHILDREN: Give your kids your winning stocks. Children older than 14 pay taxes at their own rates, which are typically a low 10 percent on income and 5 percent on capital gains. In 2008, just for one year (ain’t tax law grand?), their capital-gains rate drops to 0 percent. They can sell the stock then and use the proceeds for college or to fund a 529 savings plan, says Mark Luscombe of CCH, a tax-research firm.
RETHINK TAX-FAVORED ACCOUNTS: “You shouldn’t feel so bad if you don’t have a 401(k),’’ says Mari Adam, a financial consult-ant in Boca Raton, Fla. The lower taxes are, the less valuable those retirement accounts become. Your 401(k) still offers some advantages like forced savings and immediate tax deductions. But if you’re in a plan that doesn’t have a company match or decent choices, and you have a relatively low tax bracket, the choice of saving within a retirement plan or outside of one becomes less clear. Tax-avoiding investments like annuities and municipal bonds became even less of a deal the moment this bill was signed. They still make sense for some, especially those with high tax rates. But the lower interest rates on munibonds and the higher fees of annuities make the spread between them and stocks and bonds pretty teeny.
BUY STOCKS, EVEN IF YOU NEED THE INCOME: This is Washington’s real message, –says Gary Schatsky, a New York financial adviser. Stocks that offer dividends pay you to wait for their growth. If they lose money, you can take a loss. If they earn money, you pay taxes only at a maximum of 15 percent under this law. Bond interest is taxable at regular income rates of 25 percent or more, and if the economy perks up, interest rates will rise and bond-mutual-fund prices will fall. Where are the good dividend-paying stocks? Generally, drug companies, energy companies, utilities and defense contractors are attractive.
EMBRACE FAMILY VALUES: The child credit for kids under 17 jumps from $600 to $1,000 for 2003 and 2004, falls back to $700 in 2005 and rises gradually to $1,000 in 2010. It disappears altogether in 2011. There’s a similar flow and ebb for the marriage penalty. The bill raises the standard deduction for married couples to $9,500, twice the $4,750 singles get. That won’t help most itemizers at all. It gives married couples a 15 percent tax bracket that is twice the size of the one singles get. That’s a break that will save married couples as much as $900 a year, but just for two years. Then it all goes poof, just like the rest of this bill. Not to worry. Congress will probably be passing a new bill before you’ve paid for the wedding.
