Taxable

PRESIDENT Bush's proposal to eliminate the income tax that investors pay on dividends has generated speculation about winners and losers. At first, it seemed as if the winners would be dividend-paying stocks, especially preferred shares that pay high dividends. Among the potential losers, it seemed, would be tax-free municipal bonds that would face new competition from stocks and 401(k) investors who would still have to pay income tax on reinvested dividends once they took money out of the plan.

Everybody hates taxes. But for some reason, most mutual fund investors continue to carelessly pay taxes they could easily avoid. Surprising as that is, it's the inescapable conclusion of a study released by Lipper, the fund-tracking company. In fact, the typical investor gives up about one-fourth of his or her profits to taxes, Lipper says. While experts have long recognized this problem, Lipper has produced some fresh numbers. During the past decade, stock-fund investors in the top income-tax bracket gave up an average of 2.5 percent of their assets to capital gains and income taxes each year, while bond-fund investors gave up 1.3 percent.

THEY SAY nothing succeeds like success. But that hasn't held true for Maryland's obscure historic tax credit program. Right now, it's under attack in Annapolis because it has done so well that some politicians think it's costing too much money. It would be a shame if short-sighted legislative thinking were to hobble the program, which has become a godsend for developers who need upfront cash for difficult rehabilitation projects. In places like Baltimore, tax credits literally have made the redevelopment of several neighborhoods a possibility.

I received a payment from my mother's annuity life insurance policy (after she died) in August. I just wondered how much income tax I'd have to pay on this. It's a little over $500. It depends on what type of policy triggered the payment to you, said Robert J. Sclama, former head of the federal and state tax committee of the Rhode Island Society of Certified Public Accountants. For instance, if you were the beneficiary of your mother's life insurance policy, any death benefit you received would be free from federal income tax, he said.

Members of the Maryland Association of Certified Public Accountants are answering readers' tax questions in advance of the April 17 filing deadline. I have been on full disability for the year. The only benefit I receive is from a disability insurance policy that was provided as a benefit by my employer, at no cost to me. I have applied for Social Security but have not been approved. Is the disability benefit taxable? If so, at the full rate? Compensation received under a policy of accident and health insurance paid by an employer for permanent injury or loss of bodily function is fully includable in gross income and taxable to the employee.

IN THE END, it was a hippopotamus that trampled Jason Dettelbach's chances of becoming a millionaire last month. The 24-year-old College Park resident, appearing on the television quiz show "Who Wants to Be a Millionaire" failed to pick out the hippo in a multiple choice lineup as the animal that kills the most people in Africa. Still, Dettelbach walked off with $125,000 and another question: What do you do with a windfall? It's not an unusual situation. Bonuses, inheritances, lotteries and stock options can all of a sudden dump a lump sum in your lap. Local, financial experts say those with newfound wealth may splurge on a new car or vacation, but often end up with the same goal: To not lose what they've gained.

Many investors share a hope: that Washington will someday allow them to put unlimited sums into tax-favored accounts. But for now, they are stuck with rules that limit annual contributions to $2,000 for IRAs and $10,000 for 401 (k)s. If only more could be put in! Imagine the gains that would be realized with no tax on profits for decade upon decade. Actually, you can do just as well in an ordinary, taxable account if you manage things right. In fact, you could do "better" in a taxable account, according to a study by PricewaterhouseCoopers LLP. That's because some of the tax-deferred accounts come with strings attached.