Post-JGTRRA investment management strategies.

• Author: Doyle, Robert K.
• Position: Jobs and Growth Tax Relief Reconciliation Act of 2003

The Jobs and Growth Tax Relief Reconciliation Act of 2003 (JGTRRA) was the third major piece of tax legislation enacted in the past three years and one of the shortest tax acts in recent history (just under 25 pages). Despite its length, it delivers monumental planning strategies for clients.

Overview

From an investment management perspective, the JGTRRA's major provisions are as follows:

1. Ordinary income rate reduction. The JGTRRA reduced the four top income tax rates for individuals, estates and trusts, from 2003-2010:

   From To Decline 38.6% 35% 9.3% 35% 33% 5.7% 30% 28% 6.7% 27% 25% 7.4% 2. Capital gain rate reduction. The JGTRRA reduced the top long-term capital gain rate for most individuals, estates and trusts from 20% to 15% for sales after May 5, 2003, a 25% decrease.

3. "Qualified dividend income" category. The JGTRRA created a new category of investment income--"qualified dividend income," which is taxed to most individuals, estates and trusts at a 15% rate, effective Jan. 1, 2003. Pre-JGTRRA dividends had been taxed at the ordinary income rate. The reduction in the tax rate represents a 61% rate decline for most taxpayers.

   The lower dividend and capital gain rates are scheduled to expire after 2008, creating more planning opportunities. Tax-efficient investing is a priority for clients; it is not how much they earn that matters, but how much they get to keep.

   Building an Investment Plan

   Just because dividend income may be more advantageous from a tax perspective than interest income, not all clients should automatically be shifted to equity portfolios. An adviser must first understand a client's needs and expectations for the portfolio, beginning with goals and objectives. The adviser must then assess the client's tolerance for risk and volatility, and need for portfolio income and appreciation. Finally, the adviser should consider the asset allocation most appropriate to meet the client's needs.

   Exception: Not all portfolios will be affected by the JGTRRA; some investment clients have no tolerance for volatility and no need for additional income or growth. Due to their aversion to volatility, their portfolios will usually be heavily invested in insured municipal bonds. Even with the JGTRRA's reduction in the ordinary income tax rates, municipal bond income still makes sense for many of these investors. There are also growth-oriented clients with portfolios already heavily allocated towards equities.

   Assessing a portfolio: The...