NEW YORK (Money Magazine) - When Congress pushed through a $350 billion tax package in a mad dash before Memorial Day weekend, it signed off on the third largest tax cut in U.S. history and handed a big political win to President George W. Bush.

Here we look at the broad portfolio strategy issues raised by the tax changes and at particular investments and whether investors should be getting themselves worked into a dividend frenzy.

The check's in the mail Child tax credits are to be mailed out according to the last 2 digits of the recipient's Social Security number. Last 2 digits  Mailing date  00 to 33  July 25  34 to 66  August 1  67 to 99  August 8   Source:  IRS

Let's start with the obvious: You don't want to twist your portfolio out of shape in an effort to save a few bucks on taxes. "There is nothing in the tax bill that requires an immediate response," notes financial planner Harold Evensky.

Deloitte & Touche ran asset-allocation models for aggressive, moderate, conservative and risk-averse investors. The study concluded that investors would have to make little or no change to assimilate the new tax law. For example, a risk-averse investor might shift 1 percent of his assets from bonds to domestic stocks. "This thing is really on the margins," says Deloitte's Doug Rogers.

The point to remember here is that taxes are not the key to asset allocation; your goals and risk tolerance are. Whatever combination of stocks and bonds you wanted before the tax cut is still the one you should have now.

The new rules also reinforce another principle of sound investing: holding for the long term. That's because the spread between short-term gains (taxed at income tax rates, now as high as 35 percent) and long-term gains (taxed at 15 percent) is that much wider. The converse is also true: The tax cut magnifies the disadvantages of day-trading and other heavy-turnover methods.

The new rules do, however, make tax-sheltered accounts like 401(k)s somewhat less compelling.

There has always been a trade-off with such accounts: In exchange for having your investments grow tax deferred, you paid regular income tax rates on your withdrawals rather than the more favorable capital-gains rate.

Now, the gap between regular rates and those for dividends and capital gains will be even greater -- at least until the next round of tax changes. (The new law will also make variable annuities and nondeductible IRAs even less attractive than they were before because they offer no pretax deferral and no tax breaks at withdrawal.)

Does that mean you should shift money from your 401(k) to your taxable account? Again, no. The main advantage of retirement accounts -- tax deferral -- continues to make them a good deal for investors.

Your strategy here too should remain the same as before: Sock away money in your 401(k) first (taking advantage of the match). Next, if you're eligible, set up a Roth IRA (where you put in after-tax dollars and it grows tax-free forever), and only then invest in a taxable account.

Where you may want to change your strategy, though, is in determining which assets to hold in your taxable account and which belong in your tax-deferred accounts. Specifically, you'll want more equities in your taxable account (taking advantage of the lower rates on capital gains and dividends) and more taxable bonds in your tax-advantaged accounts (sheltering those payouts from tax until withdrawal). Tax-free muni bonds, of course, remain in the taxable account.

In the long term, the tax reductions will boost investors' returns and make stocks more attractive. In dollar terms, the big numbers will come from the dividend-tax cut (at a cost to the Treasury of $126 billion), not from the reduction in capital-gains taxes ($22 billion).

As a result, everyone has focused on dividends. Indeed, on the day Congress passed the tax-cut legislation, utility stocks, which usually pay healthy dividends, rose 4 percent.

All that attention may be misplaced.

"I wouldn't go out and automatically seek out dividend-paying stocks," says Joel Dickson, Vanguard's in-house tax expert. "They are now taxed at the same rate, but capital gains retain their preference because you can defer capital gains."

The real issue going forward is whether dividend-payers outperform over the long term -- and what impact investors' newfound love of dividends will have in such an uncertain and volatile market.

"Dividends are cash in hand, and you cannot manipulate cash like you can earnings," says Sheldon Lieberman, manager of Hotchkis & Wiley Large Cap Value fund, which is biased toward dividend payers. "Given the scandals of the past few years, there is extra appeal to dividends, with or without the tax cut."

If you do choose to buy dividend stocks, the strategy we have recommended in the past still holds: Stick with companies that have modest payout ratios (dividends per share equal to less than 50 percent of operating earnings per share) and relatively low debt loads (a debt-to-equity ratio of less than 50 percent is a cautious yardstick).

One detail that shouldn't be overlooked: Not all dividends get the tax break. For technical reasons, the majority of preferred stocks and the bulk of dividends paid out by real estate investment trusts will not. Instead, these payouts will be taxed as ordinary income with the top rate now reaching 35 percent.

Does that mean you should avoid REITs? Not necessarily. For one thing, with an average yield of 7.8 percent, REITs will still offer a compelling after-tax payout. And history shows that a dose of real estate stocks can add stability to your overall portfolio. Once again, a tax-law change alone shouldn't dictate your investment strategy.

For mutual fund investors, some dividends will qualify for the 15 percent rate, others will not. That's because mutual funds issue multiple types of payouts and dub them all dividends. Dividends paid by stocks in the fund and passed through to shareholders will qualify for the new tax rate.

Other payouts, such as interest from bonds or various other capital distributions, will not. The Internal Revenue Service is now redesigning Form 1099 (which details dividends received for tax-reporting purposes) so that it indicates which dividends qualify for the new rate.

Complications and unresolved issues? There are plenty.

First, there's the problem of this year: The new tax rules for capital gains went into effect as of May 6, creating two different tax rates for one tax year. When investors match their capital gains and capital losses for the year, will they be required to match first-half gains with first-half losses and second with second? That's still to be determined.

Then there's the required dividend holding period. Roughly, to receive the tax break, you must own the stock for at least 60 days around the "ex-dividend" date (the day on which the stock starts trading without its dividend).

The rule works like the wash-sale rule: Sell too soon and your dividend won't qualify; you'll have to pay ordinary tax rates. To get the full benefits of the dividend-tax break, be prepared to do some careful timing before selling any shares.

Don't be confused by the similar tax rates on dividends and capital gains: You still can't offset dividend income with capital losses. The IRS is rewriting Schedule D, and there are likely to be a lot of errors on this year's returns.

-- Additional reporting by: Jonah Freedman, Tara Kalwarski and Stephanie D. Smith.