Disclaimer: Information contained below was accurate as of the date of publication. Due to frequent tax law changes, information may no longer be accurate. For the latest tax information, please contact a member CPA.

SAVE TAXES BEFORE THE TAX SAVINGS SUNSET

by Andrew D. Schwartz, CPA

During President's Bush's three years in office, he has signed two major tax acts into law.  He has also signed a few smaller tax changes into law as well. While just about everyone will save taxes thanks to these new rules, there are a few issues that most taxpayers can't overlook.

First, the recent tax law changes have made an already complicated tax code even more complicated.  Usually, following a change in the tax rules, there is a period of confusion and interpretation, while everyone tries to figure out how the new rules will impact their taxes.  With so many changes in such a short period of time, many people are having trouble digesting all the rules.

To make matters worse, most of the new rules are scheduled to sunset, or expire, down the road.  At that point, the previous set of rules will once again become law, and the new rules will be out.  As of now, the 2001 Tax Act is scheduled to sunset in 2010, and the 2003 Tax Act is scheduled to sunset in 2008.

If you're hoping to minimize your tax burden, planning ahead has become more important than ever.  But unlike previous years, you can't plan just one year in advance anymore.  Instead, to minimize your taxes, you now should think ahead to the year 2010.

Here are a few strategies that could save you some taxes:

Don't Wait To Purchase Your Equipment

Check this out.  If you purchase $250,000 of equipment during 2004, and the equipment has a five year life, you can claim up to $190,000 in depreciation this year.  Wait a year, and the allowable first year depreciation drops to $130,000.  Wait another year, and the allowable first year depreciation drops again to just $50,000.

The reason for such a sharp decline is two fold.  First, the Section 179 deduction, which is the amount you can write-off the year you purchase your equipment, remains at $100,000 through 2005, and then gets cut by 75% (to $25,000) in 2006.  Plus, the amount of equipment you can purchase in any year before the 179 deduction begins to phase out decreases from $400,000 through 2005 to $200,000 in 2006.

The second factor is that the allowable "bonus depreciation" that you can claim, which equals 50% of the cost of the equipment in excess of the Section 179 deduction, is scheduled to expire at the end of this year.

With such a large difference is allowable depreciation over the next three years, waiting a few years to purchase equipment could greatly reduce your upfront tax savings.  If money is short, consider taking out a loan to finance the equipment you want to purchase.  Just make sure that the equipment is up and running by the end of the year.

Position Your Portfolio

Many of the recent tax law changes impact how your investment income will be taxed.  For most taxpayers, the tax rate on corporate dividends and long-term capital gains has been reduced to 15% through 2008, while the maximum tax bracket for most other types of income remains at 35%.   When making decisions affecting your investment portfolio, here are some tax-saving ideas:

• Consider waiting at least a year and a day before selling your investments within your taxable accounts so you will benefit from the reduced long-term capital gains rate.  Remember, the maximum tax rate on ordinary income, which includes short-term capital gains, is currently 35%.

• Within your taxable accounts, consider holding individual stocks, tax-efficient mutual funds, and index funds since they qualify for the reduced tax rates. 

• Interest bearing investments, non-qualifying preferred stocks, REITS, and most actively managed mutual funds might be better suited for your tax-deferred accounts.

Tax-Free in 2008

Are you aware that people in your family might owe no capital gains taxes in 2008?  Under the current rules, the tax rate on corporate dividends and long-term capital gains for people in the lowest two tax brackets will be only 5% through 2007.  And then, in 2008, the tax rate will be 0%.

To take advantage of these reduced rates, consider making gifts worth $11,000 per year of appreciated property to your children and grandchildren.  If you're married, you can double the amount of the gifts to $22,000.   Once that person turns 14, start liquidating these assets, being careful that the capital gains realized don't push the person into the next tax bracket.

Plan Ahead

By planning ahead, you should be able to save taxes before the tax savings sunset.

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LIFE SETTLEMENTS: A SECONDARY MARKET FOR LIFE INSURANCE

by Jake King, Regional Director in New England, Gateway Financial Distributors

Imagine for a moment there exists a world where several buyers stand ready and willing to purchase your car at substantially more than its trade-in value, and you get to choose the highest bid.  No advertising, no price negotiating, and no expense to you.  Science fiction?

Actually, such a world now exists for owners of life insurance policies that are no longer needed, no longer affordable, or no longer serve their original purpose.  The life settlement industry has created a secondary market for policies intended for lapse or surrender.

The life settlement industry was spawned by the viatical settlement industry, which created a secondary market for terminally ill policyholders who needed life insurance benefits prior to death to pay for the costs of care.

Policyholders who would qualify for life settlement are generally older than 65, have deteriorating health but are not terminally ill, and have realistic life expectancies of between 4 and 15 years.  Qualifying policies will have face amounts of between $100,000 and $5,000,000 and be beyond the contestability period (which is generally 2 years from the date the policy was taken out.)

The creation of a secondary market for life insurance could not be more timely.  Substantial declines in the equity markets coupled with near historic lows in short-term interest rates have devastated the portfolios and income of many seniors.  Because of this "double whammy", these seniors may not be able to afford the premiums on their current life insurance policies, and are forced to consider lapse or surrender of these policies.  A life settlement provides the senior with an alternative: sell the policy to a 3rd party in exchange for a lump sum payment in excess of the cash surrender value.

In 2002, life-settlement providers paid approximately $340 million to acquire policies with an aggregate cash surrender value of $94 million.  This represents an increase of 262%!  The market for senior-held life insurance is quite large.  It is estimated that seniors currently own $500 billion in life policies of which $100 billion would likely qualify for life settlement.

Secondary markets exist for virtually every financial asset.  Thankfully, that list now includes life insurance.

Jake King is a Regional Director in New England for Gateway Financial Distributors, a nation organization that represents the leading, institutionally-funded life settlement companies.  To submit some basic information to find out what a life insurance contract might be worth, please complete our Life Settlement Qualifying Worksheet available on the bottom of that page.

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