Some clients and advisors thought they were gone forever.

Advisor Ben Tobias was all smiles as he strolled out of his first year-end planning meeting with clients, on the last working day of August. "What was really nice was that we had capital gains to talk about this year. From the investment side, tax planning is going to be a much more pleasant experience for advisors than it has been recently," says the namesake of Tobias Financial Advisors in Plantation, Fla.

It may also be less rote. Certainly you (and your competitors) have read how the 2003 tax act's 15% levy on dividends and long-term gains argues for equity investing in taxable accounts. In client cases where that makes sense, year-end portfolio pruning is the ideal time to readjust allocations, says planner Diane Compardo, with Moneta Group in St. Louis. "If you're going to take losses, you may not want to simply reinvest back" in the same asset class, she says. But before loading up margin investors with dividend-payers, however, you should know that dividends taxed at the 15% rate do not qualify as investment income that allows deduction of margin interest. You have to determine whether the client is better off deducting the interest or paying tax at the favorable rate.

Of course, there's more to end-of-year tax planning than portfolio strategizing, particularly this time around. The checklist for 2003 includes important IRA deadlines (see sidebar) because this is the first year that clients are required to follow regulations issued by the Internal Revenue Service in 2002. There are also non-investment implications of the Jobs and Growth Tax Relief Reconciliation Act of 2003 (JGTRRA), enacted in May. The good news is that advisors who take year-end planning seriously just might save the economy.

Begin preparations for the meetings by ensuring that your tax-projection software incorporates the latest federal law, acknowledging that you can't automatically assume state income tax savings. Many revenue-hungry states have disavowed changes enacted by Washington during the last few years, such as the bounteous depreciation write-offs for business owners. "Decoupling [from federal law] by the states seems to be the hallmark of the Bush tax cuts," says Mark Luscombe, principal federal tax analyst at CCH Inc., the Riverwoods, Ill., business-information provider.

As always, there are variables to consider before making any moves, such as financial aid possibilities. "Shifting income and assets to a child may save some taxes, but it could cost the kid a lot more in grant and scholarship money if he is eligible for aid," says Certified College Planning Specialist Rick Darvis, president of College Funding Inc., in Plentywood, Mont. "You've got to do financial aid planning at the same time you're doing tax planning."

And you can never count out AMT. Alternative minimum tax is likely to snare more clients this year because JGTRRA lowered the regular tax, improving the odds that the alternative minimum will be higher. You must be extremely careful to avoid recommendations that produce no benefit under alt min.

Setting The Agenda

Current goings-on call for revisiting moves that clients previously have tabled. JGTRRA's reduction of ordinary rates has led some to exercise their non-qualified stock options. For those who are leaving jobs, the drop in the capital gains tax has increased the attractiveness of taking distributions of employer stock from retirement plans, compared with rolling the shares to an IRA. With an in-kind distribution, the employee pays ordinary tax on the shares' basis and gets long-term treatment on the appreciation to date of distribution.

New Nitty-Gritty

You should remind estate planning clients that while the exemption from estate tax rises by $500,000 on January 1, to $1.5 million per individual, there is no corresponding jump in the amount that is free from gift tax during lifetime, says Gayllis Ward, a senior vice president and head of the tax department at Fiduciary Trust Company International in New York. This contrasts with recent history, in which the exemptions changed in lock step. "Clients may have the misconception that since the (estate tax exemption) is rising, they should make additional lifetime gifts. You need to disabuse people of that notion," Ward says.

Review estimated taxes in the wake of JGTRRA to ensure that clients have not overpaid at year-end, advises Diane Pearson, a Certified Financial Planner licensee and director of planning at Legend Financial Advisors in Pittsburgh. "The law has dramatically lowered the quarterly estimates that some of our clients have to make," she says, particularly those receiving substantial dividends. Seniors who wait until year-end to take required IRA distributions "can't assume that the amount withheld in 2002 is going to be the same amount you need to withhold for 2003," Pearson says. The estimated tax paid in may be the lesser of 90% of 2003's projected tax or a safe-harbor amount based on the client's 2002 tax. But when relying on the current-year projection to avoid Internal Revenue Service penalties for underpaying, you have to consider AMT if the client will owe it, Ward points out.

While headlines have screamed about JGTRRA's depreciation provisions, it is knowledge of the finer points that's key to securing maximal benefit. The Section 179 election to expense purchases of equipment (including off-the-shelf software, per new rules) allows write-off of the first $100,000 spent in 2003. However, the deduction is phased out for businesses purchasing between $400,000 and $500,000 of property, and eliminated above that, says David M. Spitzberg, a CPA in Jenkintown, Pa. There is also an income limitation on the deduction, which essentially means the election can not be taken if it creates, or increases, a business loss. But sole proprietors can use the election to fashion a loss as long as it offsets other earned income that they have, including spousal earnings. See the Instructions to Form 4562, Line 11 for details.

After electing first-year expensing, so-called "bonus" depreciation kicks in. Business owners may deduct 50% of the cost of new equipment that has a depreciable life of 20 years or less, if acquired after May 5. If purchased before then, or if acquired pursuant to a binding written contract that was in effect before May 6, you get 30%. Remaining asset costs are depreciated under the regular system, MACRS.

When fully coordinated, the three depreciation deductions-Section 179, the bonus and regular depreciation-combine to generate outsized tax savings. For instance, a client who buys $250,000 of qualifying property may be able to deduct 76% of it, or $190,000. How? The first $100,000 may be written off under Section 179. The remaining $150,000 is available for bonus depreciation, producing another $75,000 of write-off. That leaves $75,000 to depreciate via MACRS, yielding $15,000 more in deductions, assuming five-year property such as automobiles and computers. When purchasing assets with differing depreciable lives, it is best to apply Section 179 to the longest-lived, according to the brain trust at CCH Inc. That leaves MACRS depreciation for property with the shortest lives-assets that generate larger yearly deductions.

Bonus depreciation is only available this year and next, so clearly there is incentive for capital spending by business owners-a variable that, at least in theory, stimulates the economy. By articulately and convincingly demonstrating the potential tax savings to clients, advisors can help lead the charge to economic recovery.

New IRA Deadlines For 2003 Year-End

Final required minimum distribution regulations issued last year impose three deadlines on IRA inheritors.

October 31 is the one-time remedial deadline for trusts that previously failed to provide required documentation to IRA custodians on a timely basis. "If there wasn't compliance with trust reporting requirements in the past, there is now an opportunity to qualify trust beneficiaries as designated beneficiaries and possibly extend payout of the account," says David M. Spitzberg, a CPA in Jenkintown, Pa. By Halloween, the trustee must furnish the custodian with a copy or summary of the trust document indicating the trust beneficiaries as of September 30 in the year following the IRA owner's death.

Another chance to fix old problems expires New Year's Eve. Account inheritors taking distributions under the five-year rule because the owner died before the required beginning date can switch to withdrawing over the life expectancy of the designated beneficiary if, by December 31, they take out amounts that would have been distributed to them had the life-expectancy rules then in effect been followed ("catch-up" distributions). This year's withdrawal, however, is based on the new rules, Spitzberg says.

The deadline with perhaps the widest applicability is the final regs' onus on beneficiaries who inherited an IRA after a post-1985 death. By December 31, these beneficiaries must redetermine the account's designated beneficiary by applying the final rules to the old facts, says CPA Michael Jones, a partner at Thompson Jones LLP in Monterey, Calif. Locate the beneficiary designation form in effect at the death and ascertain whether any named beneficiaries were eliminated by September 30 of the following year. Next, look up the designated beneficiary's life expectancy in the new Single Life Expectancy table issued last summer (in IRS Publication 590, Appendix C), using the age attained in the year after death. Then reduce that by 1.0 for every year since to determine the denominator for the 2003 required-withdrawal calculation, Jones says.

It is possible that redetermination will change the designated beneficiary and, hence, the life controlling payout of the account. "By year end," says Jones, "you've got to figure out the correct measuring life and withdraw the correct amount to avoid the 50% tax for failing to distribute enough."