Archives Reprint

   Q: Are reverse stock splits good or bad?

   -C.S., Shelby, N.C.

    A: We can't think of any reason why a reverse split would be a good thing. It's generally just companies in trouble that execute reverse splits, in order to prop up their stock prices so they look less embarrassing. For example, imagine a stock trading at $1 per share. If you own 150 shares and the company announces a 1-for-10 reverse split, then you'll suddenly have one share for each 10 that you owned. You'll now hold 15 shares, priced around $10 each. Note that before and after the split, the value of your shares is the same: $150. All that happened is the company increased its stock price by decreasing its number of shares.

    Some companies execute reverse splits in order to avoid being de-listed from stock exchanges that have required minimum price levels.

    It's often smaller, less well-known firms that do reverse splits, but several years ago, AT&T executed a one-for-five reverse split.

    Q: What are "defensive" stocks?

   -J.L., Allentown, Pa.

    A: A defensive stock refers to a company whose fortunes don't fluctuate too much in relation to the economy. For example, people might put off purchasing cars, home stereo systems or fur coats during a recession, but they'll still be buying food, gasoline, prescription drugs, electricity, telephone service and diapers. They'll still use their banks. Food, energy, health care, etc., are defensive industries.

    Tax Tips

    Think about taxes only in April, and you'll likely leave money on the table. With recent tax law changes, planning is critical. These tips may help you pay less in taxes in 2004.

    n Because of the favorable 15 percent tax rate on dividend income, holding stocks that pay dividends can be more attractive than other cash-generating securities, such as bonds.

    n Long-term capital gains (gains on assets held for more than one year) are taxed at a maximum 15 percent rate. So when you decide to sell a stock, consider your holding period and remember that long-term gains can allow you to reap significant benefits.

    n Take advantage of increased contribution limits to tax-deferred retirement accounts. By contributing to your employer-sponsored retirement plan - such as 401(k), 403(b) or 457 plans - you'll reduce your taxable income and won't pay taxes on savings and earnings in the account until you take distributions. With the 2004 contribution limits raised to $13,000 for most plans, you could slash your tax bill by saving for the future. If you're age 50 or older in 2004, you can make an additional $3,000 "catch-up" retirement contribution.

    n Just because you don't itemize your deductions doesn't mean that there aren't deductions and credits available to you. Deductions for alimony paid, student loan interest, job-related moving expenses, medical insurance for the self-employed, a penalty for an early savings withdrawal, expenses for educators, college tuition and self-employment taxes are available to you regardless of whether you itemize your deductions.

    There are also many tax credits available, such as the Hope and Lifetime Learning credit, the retirement contribution credit, the foreign tax credit, the adoption credit and the dependent care credit. If you qualify, all of these credits (and more) can be used to reduce your taxes without itemizing your deductions, so make sure to check your eligibility for any or all of them. Find a financial adviser to help you, if you want. We offer tips on that at www.fool.com/fa/finadvice.htm.

    We'll offer more tips next week. Meanwhile, learn more at www.irs.gov.

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