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The top 8 planning tips from the new tax law. (Feature: Special Advertising Section).

With $330 billion in tax cuts, one would expect the "Jobs and Growth Tax Relief Reconciliation Act of 2003" to be hundreds, if not thousands of pages in length, with inordinate complexity and a myriad of planning opportunities and pitfalls. However, this Act comes in at about 20 pages, and several of its more expensive provisions do not have much planning potential, like a 2% rate cut, or a child credit or marriage penalty relief for which you either qualify or you don't.

But there are still a number of provisions that provide some real planning opportunities or that could cause problems for practitioners, for example:

1. Generally, clients would be advised to invest for capital gains to take advantage of the deferral and preferential rates. The Act taxes both types of income at the same rate. As for the deferral, it becomes less compelling at lower rates, and with rates this low, one might choose to take gains currently in case there is a change in the rates with a change in politics, the economy, or other circumstances.

2. The reduction in the tax rate on dividends and capital gains might cause one to re-think efforts to shelter long-term investments from tax within a Roth IRA or a tax sheltered annuity to take advantage of tax-free appreciation. These are taxed at very low rates outside the IRA, and the taxpayer has greater freedom to choose investments and greater access to capital.

3. Investment in tax exempt bonds will be much less attractive as after-tax yields on taxable investments increase. This changes planning for taxpayers and for issuers of exempt bonds.

4. Lack of state tax conformity with new Federal rules on bonus depreciation and Section 179 expensing may cause complexity for taxpayers and practitioners, and extreme complexity for multi-state businesses.

5. Payments on installment sales completed before enactment will receive the benefit of lower capital gains rates, but installment sales should be structured with an eye towards increases in capital gains rates, currently scheduled for 2009.

6. Long-term capital gains on sales and exchanges after May 5, 2003 are taxed at lower rates, so the one-year holding period becomes even more important.

7. Section 179 expensing is increased to a maximum of $100,000 and the level at which phase-outs of expensing rises from $200,000 to $400,000. This allows a quick recovery of capital from now until 2006, with proper planning.

8. The individual AMT exemption amount is increased for this year and next, making it easier for some to avoid the AMT and allowing some escape altogether from AMT by structuring transactions with AMT consequences within this time frame before 2005..

William R. Stromsem, CPA, Esq., is Director, AICPA Tax Division. This outline of the tax bill is intended to provide a framework for learning the new provisions. More detailed information and resources are available at the AICPA.
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Author:Stromsen, William R.
Publication:Journal of Accountancy
Date:Aug 1, 2003
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