25 post-JGTRRA tax planning strategies.

• Author: Bernstein, Phyllis
• Position: Jobs and Growth Tax Relief Reconciliation Act of 2003

The Jobs and Growth Tax Relief Reconciliation Act of 2003 offers a myriad of planning opportunities. This article presents 25 tax strategies stemming from that legislation, for investments, businesses, gifts and individuals.

The sweeping tax cuts enacted by the Jobs and Growth Tax Relief Reconciliation Act of 2003 (JGTRRA) offered immediate tax relief to individuals and small businesses. (1) The law also reduces taxes significantly for investors, by lowering the rates on earnings from investments (including dividends). It provides major tax incentives to help businesses grow and thrive. However, because many of the new law's benefits are retroactive and all are temporary in nature, tax advisers will have to help clients strategize to minimize taxes. This article presents 25 tax planning tips to accomplish that goal.

Investments

1. Take advantage of the rate spread: Because of the 20% spread between the 15% capital gain and 35% ordinary income rates, investors may have to adjust their investment strategy, by changing asset allocations between taxable and retirement accounts. Thus, investors with both types of accounts should examine how their investments are allocated. They may be better off having investment vehicles such as taxable bonds in retirement accounts, because interest is still taxed at ordinary income rates, as are retirement distributions. They should move dividend-paying stocks to taxable accounts, because of the significantly lower dividend tax rates.

2. Use the long-term capital gain rate: Long-term capital gains on sales and exchanges will be taxed at lower rates, so the one-year holding period becomes even more important. Investors should avoid short-term capital gain, as it is taxed as ordinary income.

3. Does the capital gain rate reduction matter?: While the reduction in the capital gain rate is generally beneficial, most investors have significant capital loss carryovers and are unlikely to directly benefit from the rate reductions for the foreseeable future. (The most likely beneficiary is an entrepreneur who sells his or her closely held business or an investor who sells a large amount of low-basis stock.)

4. Concentrate positions and diversify low-basis stock: With the reduced capital gain rate, it may be advantageous to sell and diversify a stock portfolio. This may be the perfect opportunity for investors to sell some low-basis stock that they have been holding for too long, as the tax rate on the gain may never be lower. Many individuals with heavy positions in inherited stock or stock received from the sale of a business or held for a long time should consider the investment implications of such a move.

5. Capitalize on lower dividend tax rates: All other things being equal, the lower tax rate on dividends makes dividend-paying stocks more attractive. The immediacy of a dividend in hand vs. a future potential capital gain is advantageous. Thus, an income deferral (to take advantage of lower rates in future years) may not make sense. No one knows how long the new rates will be in effect and future tax deductions are less attractive at lower marginal rates.

6. Taxable vs. tax-free bonds: The change in tax rates should prompt investors to reconsider whether to invest in taxable or tax-free bonds. An investment in tax-exempt bonds will lose appeal as the after-tax yields on taxable...