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ABOUT FINANCE
How JGTRRA May Affect Your Finances
By Michael L. Brunner
The recently enacted Jobs and Growth Tax Relief Reconciliation
Act* introduced a $330 billion tax and economic growth package
designed to stimulate the U.S. economy through a variety of
tax cuts and credits. The results of these changes may cause
you to rethink your current investment strategy. Following
are the highlights of the new legislation and some steps you
may want to consider.
Lower ordinary income tax rates. You will see less federal
tax withholding from your paycheck this summer. Consider contributing
this excess cash into your company's 401(k) plan, flexible
spending plan or even a payroll deduction 529 plan. If you
pay estimated taxes, be sure to recalculate your payments
based upon the new rates.
Dividend-paying stocks may become more attractive. The maximum
tax rate on dividends for individuals falls to the more generous
capital gains rate of 15 percent, (or 5 percent if your capital
gains rate is currently 10 percent). If you are seeking current
income with some growth opportunities, you may want to consider
shifting a larger percentage of your portfolio to high-quality
equities that have a history of increasing their dividend
payment over time. Most, but not all, will qualify for the
lower dividend rate, so check with your tax adviser for the
tax treatment of specific securities.
Lower taxes on capital gains. Long-term capital gains rates
are lowered to 15 percent and 5 percent. Distributions from
401(k) plans and other tax-deferred retirement accounts are
not eligible as either capital gains or dividends available
for the reduced rate. So if you are drawing from a retirement
account, you may want to consider favoring equities in your
taxable accounts, and fixed income in your retirement accounts.
Also, if you are heavily invested in highly appreciated securities,
now may be the ideal time to realize your gains at the lower
capital gains rate and diversify your portfolio.
Higher child tax credit. In 2003 and 2004, the $600 child
tax credit is increased to $1,000. In 2005, the child tax
credit reverts to present laws, currently scheduled to be
$700. You would realize the $400 savings in the form of a
refund check later this summer, based on filing status and
income on your 2002 return.
Establish or add to an Education Savings Account for your
child. These accounts allow your money to grow tax-free, provided
you use the money for education expenses (including grades
K-12). The maximum annual contribution is $2,000.
Relief of the marriage penalty. For couples filing a joint
return, the standard deduction will increase to twice that
of a single filer and the 15 percent bracket will expand in
2003 and 2004. In 2005, this provision reverts to present-day
levels.
Consider putting the savings into a traditional or Roth IRA.
For couples where one spouse works, establish a spousal IRA
for the nonworking spouse and contribute the maximum annual
contribution of $3,000.
Relief of the alternative minimum tax. The AMT exemption is
increased to $58,000 for married-joint filers and $40,250
for single filers for 2003 and 2004.
Slightly fewer taxpayers may be subject to the alternative
minimum tax. If you reside in a state with high income taxes,
exercise incentive stock options or realize a substantial
capital gain, you may unexpectedly find yourself subject to
the AMT. Be sure to work closely with your tax adviser throughout
the year to assess your potential liability and address this
alternative tax.
Special depreciation allowance for businesses. The recently
introduced first-year depreciation allowance of 30 percent
for certain property has been increased to 50 percent for
property acquired after May 5, 2003, and before Jan. 1, 2005.
Businesses looking to expand operation should consider making
any necessary capital expenditure by December 2004, the scheduled
sunset date for this provision.
Expansion of Section 179 expensing for small businesses. The
existing $25,000 Sec. 179 deduction limit on certain property
is increased to $100,000 for property purchased in tax years
2003 through 2005. Additionally, the $200,000 income threshold
for phase-out is increased to $400,000 during tax years 2003
through 2005.
Eligible business owners should consider reinvesting the tax
savings in a qualified retirement plan. Recently, many new
retirement plans have been introduced, including the One-Person
401(k), which make economic sense for small business owners.
Before taking any action, contact your tax, legal and financial
consultant to see how the new legislation may benefit you
and to determine whether changes to your financial plan may
be appropriate.
*Although many
provisions are retroactive to Jan. 1, 2003, the legislation
expires or "sunsets" beginning in 2009-some provisions
expire sooner.
Smith Barney does not provide tax or legal advice. Please
consult your tax and/or legal adviser for such guidance. Smith
Barney is a division and service mark of Citigroup Global
Markets Inc.
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