Taxing Choices For Investors
Constant changes make planning a portfolio more difficult
A federal bite that is becoming more burdensome is the alternative minimum tax, a separately figured levy that can be trouble for some investors in municipal bonds and for employees who exercise stock options. That's because interest from certain tax-exempt "private activity" bonds, which fund such things as housing or student loans, is not exempt from the amt, and employees who escape immediate regular income tax on options may have to pay the amt.
Because of the way these and other amt provisions are calculated, the levy is spreading and erasing many of the tax cuts people expected. "People come in expecting a refund and walk out owing money," says New York cpa and financial planner Jonathan Gassman.
The tax was supposed to ensure that upper-income people with tricky deductions and other breaks pay at least a minimum amount of tax. But if it isn't changed, a fifth of all taxpayers and 40 percent of married couples--many with rather ordinary financial affairs--could be hit by 2010, warns the Congressional Budget Office. Though often unavoidable, the amt may for now be moderated in some cases by timing when to receive income or claim deductions.
People intent on avoiding tax for as long as possible on U.S. savings bonds, meanwhile, face a new deadline. After August 31 they will no longer be able to roll over maturing e or ee bonds into special hh bonds to further defer tax on the bonds' accumulated interest. So anyone considering this may have to act sooner than planned. Though hh bonds pay only 1.5 percent interest, they can be used to soften a big tax hit from e or ee redemptions, notes analyst William Massey at ria, a publisher of tax guides.
The easing of the estate tax, meanwhile, has planners and heir-conscious investors on edge because few analysts expect the levy to vanish. For 2004, estates of up to $1.5 million are exempt from the death levy, a figure scheduled to reach $3.5 million by 2009.
But planning is iffy since what lies beyond is up in the air, though many planners expect a permanent exemption at roughly that amount. Lessened tax is removing what for some is a cover story. "Estate planning is often more about controlling who gets what and protecting heirs than about saving tax," says First Western's Olsen.
Whatever the issue, getting your ducks in order requires flexibility. "You can plan for the future but only based on what you know today," counsels Mary-Jo Iacovino of axa Advisors in New York. "The laws change, the tax rates change, but you can't predict what they will be."
This is an opportune tax time for investors, whether or not you agree with current policy, says Christopher Bergin, chief executive of Tax Analysts, a research and news organization. A political change could turn things around, but at least for now, Bergin believes fundamental changes are taking place. "There is a shift away from taxing investments and savings," he says. "If that's all you worry about, then this is all very favorable."
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