Avoid the Confusion of Tax Law Changes

Physician's Money Digest, March31 2004, Volume 11, Issue 6

To stimulate the economy, theJobs and Growth ReconciliationAct of 2003 brought abouta new round of tax cuts. Unliketax laws passed in 2001, with vastchanges, the 2003 legislation was basicallya simple tax cut. These tax cuts containprovisions of interest to investors, but youmay have to look hard to find them.

Retroactive Tax Rates

The new legislation accelerated the taxrate reductions included in the 2001 taxreform. As a result, rates that were to bephased in between now and 2006 becameeffective in 2003, retroactive to January 1.By 2008, taxpayers in the 10% and 15%tax brackets will not be taxed on capitalgains. However, according to the legislation'ssunset provisions, the lower rateswill only be in effect through the 2008 taxyear. In 2009, the capital gains ratereturns to 20%.

Fiscal Opportunities

In addition to increasing your take-homepay, the tax rate changes created anumber of additional opportunities. Let'slook at a few of them:

• Converting to a Roth IRA may bemore attractive. If you convert a traditionalIRA to a Roth IRA, you'll pay taxes onthe amount in the year you make the conversion.By doing it now, you can takeadvantage of the reduced tax rates. Beforeyou convert to a Roth IRA, be aware thatif your modified adjusted gross income ismore than $100,000, or if you are marriedand filing separate tax returns, youare not eligible for a conversion.

• Consider your retirement plan distributionoptions. The lower rates make itimportant to consider all of your alternativeswhen receiving a distribution froman employer-sponsored retirement plan. Ifyou take a lump-sum distribution involvingcompany stock, you have the optionof excluding the net unrealized appreciationon your employer's stock from yourordinary income. With this strategy, youare taxed on the original price of theshares, not their current value—which, ifhigher, could create a larger tax bill.

• Check your withholding rates fromIRA distributions. If you're taking systematicwithdrawals from traditional IRAsand having taxes withheld, you may wantto revisit your withholding amounts. It'spossible you're withholding too much.

There are several tax-saving opportunitiesto take advantage of before the endof the year. As always, consult with yourtax advisor and financial consultant.

Joseph F. Lagowski is vice president,investments, and a financialconsultant with AG Edwards inHillsborough, NJ. He welcomesquestions or comments at 800-288-0901 or www.agedwards.com/fc/joseph.lagowski. This article was provided by AGEdwards & Sons, Inc, member SIPC.