New tax laws create dramatic savings for investors, business owners, and taxpayers in general. Taxes on dividends and business equipment purchases have been slashed. Don’t miss out on these savings.

     Last October, Congress passed two new tax acts that dramatically reduce your tax obligations in many circumstances. The acts are:

• The Working Families Tax Relief Act of 2004 (WFTRA), and

• The American Jobs Creation Act of 2004 (AJCA)

     The good news is that these Acts – and other recent changes in the tax laws – contain lots of savings for investors, small business owners, families, and taxpayers in general. However, as you will see, you have also lost some popular deductions.

     Here's both the good and the bad news – plus a few other important last-minute tax tips:

1. Much Lower Taxes on Dividends. For 2005 thru 2007, the maximum you will pay on dividends is 15%, if you are a U.S. citizen and are above the 15% tax bracket.

     If you are in the 10% to 15% income tax bracket, your maximum rate on dividends is now 5%. Starting in 2008, if you are in the 10% to 15% tax bracket, you will pay no tax on dividends. (This change in dividends was made by the 2003 Bush tax cut.)

     This change in the tax laws means major savings for many investors. Prior to the new law, dividends were taxed as ordinary income, which means you could have paid as much as 35%. Even worse, combined with the tax on corporate profits (typically taxed at 35%), you could have ended up paying an effective tax rate of 70% on dividends.

     In response to this change in dividend taxation, many more stocks have begun paying dividends, and this definitely should be a consideration in your financial planning.

     What are some good dividend stocks? There are many, but we prefer commodity funds and materials manufacturers. (See this month's stock picks on page 3, and our portfolios, starting on page 7.)

2. Big Deduction for "Production Activities." This new rule applies to production activities in the U.S., including sales, exchange, lease, rental or licensure of property, including farm products, films, electricity, potable water, and engineering or architectural services.

     Amounts are 3% for 2005 and 2006; 6% for 2007-2009, and 9% thereafter. This deduction is limited to 50% of wages you pay. Thus if your 2005 3% deduction was $10,000, but the total you paid in wages was $15,000, you could only deduct 50% of $15,000 or $7,500 (rather than $10,000).

Exceptions: This deduction does not apply to retail sale of food or beverages; or leasing or renting property to a related party.

3. Much Faster Write-Off For New Equipment. Code section 179 of AJCA allows you to write-off capital costs in the year of purchase, rather than over the useful life of the equipment (5 years, 10 years or whatever).

     The 2001 Bush tax cut expands the value of this rule greatly by increasing the allowable write-off from $25,000 to $100,000 through 2007. Off-the-shelf computer software is now also included.

4. No Social Security Tax (FICA) on Stock Options. A recent notice by the IRS (Notice 2002-47, 2002-28 I.R.B. 97) states that until Congress says otherwise, employers don’t have to withhold FICA or FUTA federal taxes when exercising stock options or employee stock purchase plans.

5. Small Businesses Can Now Have More Stockholders. IRS Code Section 1361 sets up special tax treatment for small business corporations.

     The AJCA act makes it easier to operate a small business corporation by expanding the number of stockholders allowed from 75 to 100. It also counts "all members of the family" as a single shareholder.

6. A Tax Break for Hunters and Fishermen. The new tax laws greatly reduce excise taxes on the sale of hunting bows, arrows and fishing tackle boxes. Excise tax on sonar equipment for finding fish is also included.

7. State Sales Taxes Now Deductible. Under the new law, you can either (1) deduct state and local taxes from your federal taxes (including state income and local real estate taxes), or you can (2) claim a general sales tax deduction.

     In computing the amount of the deduction, you can either use tables provided by the IRS or total up taxes from your receipts.

8. Expanded Deduction for Attorney's Fees. Under the new law, you can deduct attorney’s fees paid in connection with various civil actions before you calculate your net taxable income.

     This greatly simplifies deducting this common business expense.

9. Deduction for Cars, Boats and Planes Reduced. Previously, you could deduct the fair market value of your donated vehicles. That made contributing to charities both simple and potentially very beneficial, both for taxpayers and the charities.

     Unfortunately, the charities often sold donated vehicles for far below the reported "fair market value," and, predictably, it was only a matter of time until the tax laws took notice of this discrepancy.

     Under the AJCA, as of January 1, 2005, you can deduct only the selling price of all donated cars, boats and planes. Further you now need written verification from the charity of what your vehicle was sold for.

     In addition to the selling price, your written verification must also include 1) your name and Social Security number, and 2) the vehicle identification number (VIN).

     There are also new, stiff penalties for providing fraudulent information about your vehicle’s selling price.