U.S. Taxpayers Can Profit from Understanding Changing Tax Laws

The Charlotte Observer, N.C

Amy Baldwin

January 12, 2004

Jan. 12--If you haven't started planning how to make the most of the new tax law, start now because many of the changes expire in the next few years, some in 2004.

Here are some steps you can take to make sure more money stays in your pocket and less goes to Uncle Sam:

--Decrease income withholding: With lower taxes on income, capital gains and dividends along with being able to invest more pre-tax dollars in retirement accounts, you probably can reduce the amount of pay you have withheld for federal tax, without fear of owing the government lots of money later on.

This way you get to keep more of your income to invest and spend as you wish throughout the year, rather waiting on a bigger lump-sum refund. It literally buys you time to pay down debt or gain more interest from savings or returns on investments.

"You might as well take that money and put it in your pocket today," said Paul Haisley, who runs his own accounting and financial planning practice in Charlotte.

To do this, go to your payroll department and ask for a W-4 form and adjust your exemptions accordingly, Haisley said. The form offers some guidelines on the back. If you have further questions, he advised contacting an accountant -- chances are your payroll or human resources department doesn't make a practice of doling out tax advice.

--Move assets: Taxpayers who have both taxable accounts, such as brokerage or mutual fund accounts, and tax-sheltered ones, such as IRAs and 401(k)s, might consider making some changes, said Cynthia Anderson, certified financial planner president of Anderson Financial Inc. in Charlotte.

Here's the scenario: You'd put stock holdings in your taxable accounts, taking advantage of lower taxes on capital gains and dividends, and you'd stick to fixed income securities like bonds and bond mutual funds in your tax-deferred accounts, where you'd no longer pay tax on the interest these investments yield. Bond interest is taxed at a higher rate -- up to 35 percent for the top federal tax bracket -- than capital gains and dividends are.

Between 2003 and 2008, the top tax rate on dividends is 15 percent, down from 38.6 percent. The top rate on long-term capital gains, assets held at least 12 months, is 15 percent, down from 20 percent, from 2003-2008.

--Give kids stocks, funds: Tax pros say now is a good time to give some of your stocks or mutual fund shares to your children, who fall into the lowest federal income tax bracket of 10 percent. Capital gains in the 10 percent bracket will be taxed at 5 percent until 2008, as opposed to 15 percent for higher income earners. Just keep in mind that to make this work, your kids must be at least 14, because younger ones are charged the so-called "kiddie tax," which is the same as your tax rate.

--Be nimble: Many of the 2003 tax changes are temporary, being phased out at various points between now and 2012. Stay on top of things. Today's strategy could quickly become outdated.

For example, after 2008, when capital gains and dividend taxes are slated to revert back to their higher levels, it might not make sense to keep fixed-income securities in tax-sheltered accounts and leave stocks in taxable ones.

Said Tom Wilkens, managing director of RSM McGladrey's North Carolina practice: "It is a state of flux every year."

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(c) 2004, The Charlotte Observer, N.C. Distributed by Knight Ridder/Tribune Business News