Washington (June 9, 2003) -- The new tax law seems to answer many investor prayers, but before rushing out to completely overhaul your portfolio, you should take into account some of the sunset provisions built into the law – and how they might complicate long-term planning, experts say.
Under the The Jobs and Growth Tax Relief Reconciliation Act of 2003, signed into law last week by President Bush, the highest capital gains tax rate, as well as the tax on dividends, was shaved to 15 percent.
The new capital gains tax applies to assets sold on or after May 6, 2003, but the 15 percent rate is scheduled to return to its higher, 20 percent level as soon as the clock strikes midnight on Dec. 31, 2008. Dividends will also return to their higher levels.
Congress may make the provisions permanent because they’re bound to be popular with taxpayers. But a steep downward shift in the economy, or the possibility of a new Democrat-led Congress following either the 2004 or 2008 elections could lead to a new law canceling out some or all of these provisions, or legislators who may simply let them die.
“For the most part, you’ll have to be making some sort of bet as to the political will of Congress,” said Bob Trinz, editor of RIA's Federal Taxes Weekly Alert. “I would imagine that whether or not these provisions are sunsetted would largely depend on who's living in the White House.”
California CPA and financial planner Irv Rothenberg said the sunset provisions make it difficult to focus on long-range planning, but it does give him some ideas for his clients.
“We will be looking at different strategies in accounts that are subject to taxation. As a general rule, we would look to put assets that had high taxation into deferred accounts. Now the question is, ‘Well, is that still appropriate?’ Maybe now we would focus more on having those gains show up in taxable accounts -- if they're long-term. If you leave them in a 401k, you’re going to take them out as ordinary income sometime in the future. Maybe investors should take the tax bite up front and that's the end of it.”
CCH principal tax analyst Mark Luscombe said if Republicans hold onto the White House and Congress in 2004 and 2008, there’s a good chance the tax benefits will stay.
“I think if the Republicans had their way, they would extend the provisions by and large regardless of the economic positions and the deficit posture,” said Luscombe. A Democratic Congress, however, would most likely get rid of any benefits that appear to mostly benefit the rich.
-- Tracey Miller-Segarra
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