Retirees and business owners are among those who may score big benefits.
The Jobs and Growth Tax Relief Reconciliation Act of 2003 was signed into law on May 28, but investment advisors and investors are still facing as much uncertainty as opportunity. That's not what your clients want to hear, however. They want to hear how you're going to use the new act to advance their goals and create greater sanity and certainty in their investment and tax planning.
Even that is no easy feat, thanks to the schizophrenic and piecemeal fashion in which lawmakers cobbled out the latest tax act. With a burgeoning deficit hanging heavy over Congress, and the continuing debate about the cost of the tax reductions, a number of the act's changes are temporary. Many expire as soon as 2004. Some expire and return to previous rates under the 2001 tax act. Others extend to 2011. The net effect is a winding course of rate changes and strategies.
Leave it to advisors, however, to make sense of even the most convoluted and obtuse provisions. Here then, without further fanfare, is what advisors across the country are telling clients about the opportunities that abound in the new tax act.
Gifting Now And In The Future
Although changing and expiring estate and gift tax rates are enough to craze even veteran Washington, D.C.-based estate attorneys, some pretty spectacular light is at the end of the tunnel. So says Stephen Bonick, president of Tax and Financial Planning Associates of Beverly Hills, Calif.
Bonick, who held a tax planning seminar at The Peninsula Hotel overlooking the Pacific Ocean earlier this year to help clients explore the impact of the tax law changes, says the act creates a tremendous tax and estate planning opportunity.
It's timing and family circumstances, however, that will decide who benefits the most from the tax reduction strategy the law makes possible. For example, Bonick is recommending that those who want to make gifts to younger folks who are over age 13 and in the 15% tax bracket should do so now. In 2008, both capital gains and dividend rates go to zero for those in the lowest tax brackets. "This creates a tremendous opportunity to shift wealth out of estates, especially appreciated stock," says Bonick.
The idea would be for the recipient, or donee, to sell the appreciated stock in 2008, while he or she is in the 15% tax bracket and is able to pay a tax rate of 0%. The fact that the dividend rate, too, falls to 0% for those in the 15% tax bracket in 2008 is also advantageous, the planner says. "So even if someone couldn't sell the appreciated stock until mid-year and the company wound up paying say $100,000 in dividends, they'd still have a 0% dividend tax rate in 2008."
For clients who are interested and able, Bonick is recommending that they gift up to their $1 million lifetime exemption soon, preferably in stock that is already highly appreciated or has the likelihood of appreciating.
"I think this is a perfect way for taxpayers to make the gifts they want to make to younger donees and eliminate taxes at the same time. For those donees who might want to use proceeds for college or marriage or buying a home in 2008 or after, all the better. They're able to do it tax free," says the tax-savvy advisor.
Bang For Your Retirement Buck
Do clients still want to make 401(k) contributions in situations where their contributions are unmatched by employers? More advisors are arguing that it might not be investors' best bet going forward.