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Special Report: Bush Tax Cut

by Lucas Everidge

The 2003 tax package signed into law late May includes significant changes to the tax code. The official cost, under federal government accounting, is $350 billion, but proponents of the bill declare that the benefits to the overall economy will greatly out-perform the costs. Whether or not you accept the economic arguments, the new law includes big changes in how the government collects revenue. The end result is almost everyone will see a change in how their money goes to Uncle Sam.

Key Provisions of the Tax Act

Capital Gains Top rate falls to 15% from 20%, and for lower-income taxpayers to 5% from 10%. Rate becomes effective May 6. For low-income taxpayers, tax is phased out in 2007. Expires 12/31/08
Dividends Top rate falls to 15% from 38.6%, retroactive to Jan. 1. Tax disappears in 2007 for low-income taxpayers. Expires 12/31/08
Income Taxes Accelerates to this year and next the tax cuts schedules for 2004-2006. Would be permanent
Child Credit Raises the child tax credit to $1000 from $600 Expires 12/31/04
Marriage Tax Breaks Married couples will have a larger deduction than single filers. Expires 12/31/04
Alternative Minimum Tax Raises exemption to $58,000 for married couples and $42,250 for unmarried taxpayers Expires 12/31/04
Business bonus depreciation Expands write-off bonus to 50% from current 30%, effective May 5 Expires 12/31/04
Small Business Expensing Increases maximum to $100,000 from $25,000 Expires 12/31/05

REITS & Real Estate

The 2003 tax package may be a mixed blessing for the real estate industry.

Investors who own REIT stocks will not receive the tax break on dividends that other will - REITS do not currently pay corporate income taxes, therefore Congress exempted them. A REIT (Real Estate Investment Trust) is typically a publicly traded real-estate company that owns commercial property such as malls, apartment buildings and office buildings. REITs must pay out at least 90% of their taxable income as dividends to shareholders, which exempts them from taxes.

The most frequently heard virtue of REITs are their hefty dividends. They are often purchased by investors seeking income-producing stocks. According to Standard & Poor's in May, the average dividend of a REIT was 7%, versus 2% for the S&P stock index. The new tax laws could stimulate other sectors to increase or pay higher yields, bringing these stocks competition.

On the other hand, property owners will benefit from the capital-gains tax cut. The 2003 tax package lowers the rate from 20% to 15%, which would free up capital for additional investment.

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