The recently enacted Jobs and Growth Tax Relief Reconciliation Act delivers a $330 billion tax and economic growth package to stimulate the U.S. economy. As a result of these changes, you may want to re-think your current investment strategy.
Following is a list of the changes and some steps you may want to consider.
Lower ordinary income tax rates. Starting this summer, less federal taxes are being withheld from your paycheck. And, if you pay estimated taxes — as many farm businesses do — you must recalculate your payments based upon the new rates.
As a result, dividend-paying stocks may become more attractive to you. The maximum tax rate on dividends falls to 15 percent, or 5 percent depending on your income. If you are seeking current income with some growth opportunities from your investments, you may want to consider shifting a large portion of your portfolio to high-quality equities that have a history of increasing their dividends over time.
Lower taxes on capital gains.Long-term capital gains rates have been lowered to 15 percent and 5 percent. Distributions from 401(k) plans and other tax-deferred retirement accounts are not eligible for these reduced rates. 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 time to realize your gains at the lower capital gains rate and diversify your portfolio.
Higher child tax credit. For 2003 and 2004, the $600 child tax credit has been increased to $1,000. In 2005, it reverts back to present law, which will make it $700. That equates to a $400 savings in the form of a refund check, which most taxpayers received in late July or early August. That refund is based on your filing status and income in 2002.
Consider taking this tax savings and establishing, or adding to, an Education Savings Account for your child. These accounts allow your money to grow tax-free, provided you use the money for educational expenses.
Marriage penalty relief. 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 this tax savings into a traditional or Roth IRA. For couples where only one spouse works, establish a spousal IRA for the non-working spouse and contribute the maximum annual contribution of $3,000.
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. Farmers who are looking to expand their operations 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 equipment and property has been increased to $100,000 for items purchased in tax years 2003 through 2005. In addition, the $200,000 income threshold where the deduction phases out has been increased to $400,000 during tax years 2003 through 2005.
Eligible farm 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 makes economic sense for farming operations.
Before you take any action, contact your tax, legal and financial consultant to see how the new legislation may benefit you. Then, determine whether changes to your financial plan may be appropriate.
David Chlus is first vice president of investments with Smith Barney, Inc., in Utica, N.Y., and a partner in a 90-cow dairy.