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Dr. Mark Skousen explains why he is not surprised to see a sharp Wall Street recovery and why the reduction in capital gains and dividends will pay dividends will into the future.

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Bush Tax Cut Is Very Bullish

Dr. Mark Skousen explains why he is not surprised to see a sharp Wall Street recovery and why the reduction in capital gains and dividends will pay dividends will into the future.

I am not surprised to see a sharp recovery on Wall Street following the passage of the Bush tax cut. It should be called "The Investors Tax Relief Act of 2003." I firmly believe that the sharp reduction on capital gains and dividends will, frankly, pay dividends way into the future. Indeed, subscribers to my newsletter have profited handsomely so far.

For years investors took a back seat when it came to tax relief. Now investors are getting the breaks they desire under President Bush.

Consider:

1. 15% Maximum Rate on Dividends: This is a remarkable tax break, considering that dividends were treated as ordinary income in the past. It just goes to show you how important presidential leadership can be when it comes to tax policy.

(The tax bill barely squeaked through the Senate with a tie-breaking vote by Vice President Dick Cheney!)

Imagine, keeping 85% of all your income from stock dividends.

The dividend tax break gets even better for those whose taxable income is $28,400 or less for singles, and $56,800 or less for married filing jointly: The tax rate is only 5% after Jan. 1, 2003 and ZERO percent in 2008 and thereafter! Talk about tax-free living. (This same policy, noted below, applies to capital gains-a 5% rate on long-term capital gains until 2008, then it drops to ZERO.)

The 5-15% tax on dividends applies to all dividend-paying stocks and dividend-paying funds, including foreign stocks. However, it does not apply to interest-bearing bonds, bond funds, or Real Estate Investment Trusts (REITs). Check with your tax advisor.

My advice: Unless you are earning interest income inside a tax-deferred IRA, pension, or annuity, load up on high dividend paying stocks and funds, and reduce your exposure to taxable corporate/government bonds, bond funds, and REITs.

Best Capital Gains Break in 70 Years

2. 15% Tax Rate on Long-Term Capital Gains: The tax rate on long-term capital gains (assets held for more than a year) is in a long-term decline. Critics call this a break for the wealthy, but the capital gains tax is really a tax on saved investment capital and, once taxed, never returns.

The 2003 Bush Tax Act cuts the long-term rate to 15% for almost all assets (see below for exceptions). Considering that the rate used to be 70% in the late 1980s, this is an incredible break, and there’s no limit on how much capital gains you can take and pay only 15%. Also, capital gains on stocks, bonds, and real estate are not subject to Social Security and Medicare taxes. The idea that you can keep 85% of your profits on long-term gains is remarkable. It’s almost like tax-free living.

Note: As is the case with dividends, the 15% rate is reduced to only 5% for individuals who have taxable income of $28,400 or less for singles, or $56,800 or less for married couples filing jointly, and the rate falls to ZERO percent in 2008.

How to Profit from the Low 5% Dividend and Capital Gains Rate

How to Profit: It pays now more than ever to transfer growth stocks/gold stocks/penny stocks and dividend-paying stocks/funds to your lower-income children or parents. You can give up to $11,000 to each person and pay no gift tax, or $22,000 for a married couple. This will reduce your tax liability from 15% to 5%.

What About Your IRA, Pension Plans, and Investment Annuities!

It is also clear from this legislation that IRAs, pensions, and annuities are worthwhile only if you are engaged in short-term trading strategies (where most income is taxable as ordinary income) or attracting high interest income from corporate and government bonds.

If most of your gains are in the form of long-term capital gains and dividends, it does NOT pay to set up a regular IRA, a Roth IRA, or a stock annuity program. If you can hold onto most stocks and mutual funds for a year or more, it makes more sense to pay the small tax and have free use of your money.

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