When President Bush first floated his-cut proposals, I penned a column about its implications, should the measures pass intact. Inevitably, several proposed provisions, including lifetime savings accounts, wound up on the cutting room floor.
Still, the package that Congress passed — the Jobs and Growth Tax Relief Reconciliation Act of 2003 — packs a potent punch and presents a number of opportunities for reps to rebalance and rejigger their clients' positions.
Here's a rundown of the most important provisions of the new:
Dividend Tax Relief for Individuals
Retroactive to January 1, 2003, dividends received by an individual shareholder from domestic and qualified foreign corporations will now generally be taxed at a maximum rate of 15 percent until 2009.
Reduction in Individual Capital Gains Rates
Effective May 6, 2003, the 10 percent and 20 percent tax rates on net capital gains have been reduced to 5 percent and 15 percent, respectively. The change to the maximum tax rate terminates after 2008, and in 2009 the law reverts back to the maximum rate of 20 percent.
Reduction in Other Regular Income Tax Rates
Effective January 1, 2003, the regular income tax rates in excess of 15 percent are 25 percent, 28 percent, 33 percent and 35 percent; the 38.6 percent bracket is eliminated. In 2011, the rates will return to their previous levels and the top tax rate will revert back to 39.6 percent.
Increase in Alternative Minimum Tax Exemption
Effective January 1, 2003 a significant increase applies to the Alternative Minimum Tax exemption amounts for the years 2003 and 2004. After 2004, the exemption reverts to prior amounts.
Increases the Section 179 Expensing
The amount small businesses can claim as an expense under Section 179 has been increased to $100,000. This increase applies to property placed in service in tax years 2003 through 2005. In addition, for the same period, the $200,000 limitation on qualifying Section 179 property is being increased to $400,000.
Elimination of the Marriage Penalty
Effective January 1, 2003, the basic standard deduction amount for married taxpayers filing a joint return is twice the basic standard deduction for single individuals for 2003 and 2004.
Increase in the Child Tax Credit
Effective January 1, 2003, the child tax credit has been increased from $600 to $1,000.
There are a number of ways you can benefit from the new tax laws. To make the most of these opportunities, call your clients and explain how the changes will affect them. If you are so inclined, take that one step further and consider holding educational seminars for key clients and prospects. No matter how sophisticated the client, it is a safe bet that some will find the changes confusing. A conversation that clarifies some of the issues is a great tool for strengthening the client/advisor bond. It is also a good way to kick off some new activity in an account that might have been dormant.
Among the moves that could prove most productive:
Focus on the lower income-tax rates in these coming years.
Accelerate taxable sums before the rates potentially increase again in 2011. This potential increase is especially relevant for executives in transition (retiring, changing jobs). Also, consider exercising stock options or receipt of deferred compensation. Keep in mind, these actions may result in larger state taxes, which, in turn, could trigger the AMT.
If your client can control received income, work with their CPA to take advantage of the “bracket game” by deferring or accelerating income and deductions to take advantage of the lower rates in each year.
With the decrease in personal income tax rates, employees will have less tax withheld from their paychecks. Discuss using these excess funds for deductible IRAs, SEPs, 529 plans and/or other saving vehicles.
Capitalize on lower long-term capital gains and dividend income tax rates.
Consider tax-aware investments with strategies that take into account the attractive rate for long-term gains.
Consider shifting income (and/or assets) to members of a client's family who are in a lower tax bracket.
Talk to your clients about any concentrated positions. With the reduced capital-gains rate, it may be advantageous to sell and diversify.
Work with your small business owners.
Discuss with your small business clients the benefits of the increase in the Section 179 expensing to $100,000. There is a sense of urgency, as the provision only applies to 2005.
Explain how the increased exemption could result in extra cash flow for their business and the possibility of funding retirement accounts with the money (e.g. IRA, SEP).
Put your opportunities into action.
As you've seen, there are a number of ways your key clients will be affected by the new tax laws. Use this as an opportunity to further enhance client relationships and garner referrals of prospective affluent clients. This is also a good time to partner with local CPAs and tax attorneys. By building a team with these professionals, you can not only add value to your existing clients, but also create an ongoing stream of new referrals as well.
Writer's BIO: Susan L. Hirshman is vice president at JPMorgan Fleming jpmorganfleming.com.