The new tax law cut has been passed byCongress and signed by President Bush.The compromise bill was passed withmuch less difficulty than tax laws of previousyears. Overall, this new bill is designedto help jumpstart the lagging economythat the United States has been sufferingfrom for some time. It's also designed togive some immediate relief to a wide numberof taxpayers and provide some incentivesto invest over the next few years.
KEEPING MORE MONEY
The good news is that in July, many ofyou will receive a check. Approximately 25million taxpayers who claimed a child taxcredit on their 2002 returns will receivethis payment. For every dependent childunder age 17, the credit increases to$1000, up from $600. Your check wouldbe for $400 per child, the differencebetween the 2 amounts.
Furthermore, your paychecks are likelyto be a little bigger in July as well. That'swhen the IRS will be adjusting withholdingtaxes according to the new rate cutsand other adjustments in the bill. Theselower tax rates are the rates that had previouslybeen scheduled to take effect in2006. The lower rates will be 35%, 33%,28%, and 25%. (The 15% and 10% rateswill stay the same.)
MARRIAGE TAX PERKS
People have long complained aboutthe marriage penalty under the currenttax law. Often, married couples filingjointly end up paying more than if theywere single and filing their own taxreturn. In fact, sometimes advisors suggestthat couples postpone a weddingfrom 1 year to another to avoid havingto pay the penalty.
Although it's unclear whether thechanges will become permanent, for atleast 2003 and 2004 the marriage penaltywill be eliminated (ie, the standarddeduction will be increased and the 10%and 15% tax brackets will apply to marriedtaxpayers at double the income ofsingle filers).
INVESTING INCOME RATES
Currently, investors who earn dividendincome on their investments have to paytaxes on these sums, as though theincome were ordinary income. This meansthat some people are paying as much as38.6% in taxes. Under the new law, thetop dividend rate would drop to 15%. Thetax rate is a paltry 5% for taxpayers in thelowest tax brackets.
Capital gains tax rates will also godown under the new law, with the topcapital gains rate dropping to 15% (5%for the lowest tax brackets). Both thesereductions apply to sales after May 5.
Like prior tax reform, most of these taxbenefits are scheduled to expire between2004 and 2008. Enjoy them while theylast. if you have specificquestions related to your situation,you should seek advice from an accountant,financial advisor, or tax expert.
Stewart H. Welch IIIis founder of the Welch Group, LLC,
which specializes in providing fee-only wealth management
services to affluent retirees and health care professionals throughout the United States.Mr.Welch has
been recognized by Medical Economics, Money,Mutual Funds Magazine and Worth as
1 of the top financial advisors in the country. He is the coauthor of J.K. Lasser's New Rules
for Estate and Tax Planning (John Wiley & Sons; 2001). He welcomes questions or comments
at 800-709-7100, or visit www.welchgroup.com. This article was reprinted with
permission from the Birmingham Post Herald.