Money Buzz 2/04
Mix It Up
In the '90s, investors sought companies that reinvested earnings for higher profits-and those looking for reliable income streams focused on bonds. But a combination of a less exuberant market and a new tax law lowering the tax rate on dividends is changing that picture, says Ross Levin, president of financial planning firm Accredited Investors Inc. in Edina, Minnesota, who advises investors to consider adding dividend stocks to taxable investment portfolios.
"Dividends are taxed at most at 15 percent and, depending on your taxable income, as low as 5 percent," says Levin. "For those in the highest tax brackets or those who require income from their portfolios, that differential is a huge benefit." Ideally, such investors should diversify holdings by buying a mix of stocks or investing through a mutual fund concentrating on dividend-paying stocks.
"If you're going to buy stocks, you want at least five to seven, diversified among industries, and check that they qualify for the tax exclusion," says Levin, who also cautions investors not to focus exclusively on dividend stocks. "You should have a portfolio of both investments that pay a predictable stream of income and others that are growth-oriented."
Got a college-bound kid? Watch out for skyrocketing tuition costs. According to the "Trends in College Pricing 2003" report from the College Board, a national nonprofit association, the average cost of tuition and fees at the nation's four-year colleges and universities has jumped 42 percent for private institutions and 47 percent for public institutions over the past decade. The price tag for a year's tuition at a private university is now a whopping $19,710; a year of public school will run $4,694, according to the report.
"That's only tuition and fees-it doesn't include room and board," adds Jim Boyle, president of Arlington, Virginia-based College Parents of America, a nonprofit that provides resources and information for parents. Over the next decade, Boyle puts the true cost of a year of private college at between $40,000 and $60,000. He says the only way most parents can hope to fund a child's education without incurring considerable debt is to start planning early on. "There are some wonderful savings plans, such as state-sponsored 529 plans, but you have to recognize that this is a high-ticket item and plan ahead," he explains, adding that parents whose children are already college-age should consider Parent Loans for Undergraduate Students, low-interest federal loans available through the Federal Family Education Loan Program.
Put on the Brakes
The small-business write-off for Ford Excursions, GMC Yukons, Hummers and other vehicles weighing in at 6,000 pounds or more (known as the "Hummer loophole") has come to a screeching slowdown. Under the Bush tax cut enacted last May, taxpayers purchasing a vehicle weighing 6,000-plus pounds for business use were briefly able to write off $100,000 in the first year, a measure intended to encourage small businesses to invest in new equipment. But last October, the Senate Finance Committee slashed the first-year accelerated deduction from $100,000 back to $25,000 for hefty vehicles.
The good news: The Committee kept the $100,000 write-off for certain heavy trucks and refrigerated vans-and the $25,000 deduction still far outweighs the $7,660 first-year deduction allowed for a car. Yet Hummer and SUV buyers may want to rethink that fat deduction, say tax experts.
"Once you elect a method for deducting the business use of a vehicle, you can't change it," explains Jim Thigpen, president of Monarch Financial Services Inc. in Roswell, Georgia. "The operating expense method allows the big depreciation write-off in the first year, but a limited one for the rest of the years you own the vehicle. If you use the mileage rate of 37 cents per mile, you can take that for as long as you own the vehicle."
Often, says Thigpen, business owners are lulled by the prospect of a fat first-year deduction, when writing off mileage annually will actually net the biggest long-term tax savings. He advises, "Factor in how long you'll own the vehicle and how much you'll drive it."
Jennifer Pellet is a freelance writer in New York City specializing in business and finance.