2003-08-07 / Savvy Senior


You ask the Senior Question We Find the Savvy Answer Dear Savvy Senior,

I am a 72year old woman with an unexpected financial emergency of sorts. Over the years, I let my husband handle the finances and all went well. We had all we needed, and a little left over for the occasional trip, for grandchildren, and so on. We were comfortable and grateful. But my hus-band recently passed away suddenly and I have been trying to get a grip on our finances ever since. Just last week a friend mentioned over dinner the "new tax law changes" and in par-ticular, "dividend income." She told me this had been in the news recently and that I needed to check into these changes if I have dividend income. What can you tell me? Thanks,

Befuddled Over Finances

Dear Befuddled,

I’m sorry to hear about your recent loss. Actually, the tax change is good news for seniors but please keep in mind that making sense of taxes is no easy feat, and your best bet is to talk with your family stock broker, account-ant or tax preparer.

But yes, your friend is right. There have been important changes to dividend tax laws that could save you and millions of other seniors thousands of dollars each year.

Dividend Income

Periodically usually quarterly the board of directors for many public companies divide part of the profit and return it to shareholders as dividends. Because, dividends are a steady, reliable source of income, they are a favorite with seniors who have conservative investment philosophies.

Tax Law Changes

Until this year, dividends had been taxed at the investor’s ordinary in-come rate, with the top tax rate being 3 8.6 percent, and it dropped according to income level. The dividend tax rate for those in the lowest income bracket was 10 percent. Now, the top tax on dividend income will be 15 percent, and the lowest level of tax will be 5 percent, and it will be re-troactive to Jan. 1, 2003, meaning it will apply to any dividend income re-ceived so far this year, even if those dividends were issued before Congress passed the legislation and President Bush signed it into law.

The president had asked for an elimination of the tax on dividends, calling it unfair and a form of double taxation, since corporations pay taxes on that income when they earn it and shareholders, who actually own the company, pay taxes again when they receive it as income. This has been especially tough on seniors, since half of the 18 million senior citizens who file tax forms each year receive some dividend income. One Congressional Budget Office study found that dividends and interest account for 44 percent of seniors’ incomes, compared with 6 percent for those under the age of 65.

As things happen in Washington, a compromise was reached, resulting in the lower rate instead of the outright elimination of the dividend. Your actual savings will depend on how much dividend income you report each year.

Senior Dilemma

Your question highlights a common problem for many seniors today. Too often, the responsibility for handling financial affairs falls to one or the other spouse, who becomes some-thing of the family expert on taxes, insurance and other financial matters. Should that spouse die, or leave, the remaining spouse is often at wit"s end and perhaps even unaware of sources of income, investments and more. The savvy move, of course, is for both spouses to be informed. Visit your accountant and stock broker together, and take time to cover all the bases.

Savvy Resources

• AARP: Contact the AARP Tax-Aide program, which is a free tax preparation service run by over 30,000 volunteers each spring at thousands of sites around the country. For more information or to locate a site near you, call tollfree 1-888-AAR-PNOW (1-888-227-7669) or visit wwwaarp. org/taxaide.

• Tax Counseling for the Elderly (TCE): The IRS also offers free tax counseling for seniors over 60 and Voluntary Income Tax Assistance (VI-TA) for younger people who need help. Call 800TAX4040 to find a site in your area.

• Internal Revenue Service (IRS): You can order IRS publications by calling 1-800-829-3676. For IRS in-formation or questions call 1-800-829-1040 or visit www. irs. gov.

Send your senior questions to: Sav-vy Senior, P.O. Box 5443, Norman, Okla., 73070, or visit www.savvysenior.org.

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