Wise Wealth Management

Dennis Covington | Principal

Insights on the keys to enjoying a "healthy wealth".

Focusing on Things You Can Control-Part 3: Wealth Enhancement

March 2009

(In describing our investment philosophy to clients we often tell them to not worry about things they can’t control (e.g., stock market gyrations) and instead focus on things they can control: fees, taxes, etc. The same thing goes for other areas of managing wealth. This is the last of a three-part series in which I have been exploring some areas of wealth management that clients’ DO have control over.)

There is no denying that we will see changes to federal tax policy over the next few years; newspapers and magazines are full of stories and opinions on the matter. One of our roles as wealth managers (in partnership with our clients’ tax advisors) is to identify provisions that may help them save tax and thereby enhance their wealth.

Many new provisions in the tax code were set into motion with the American Recovery and Reinvestment Act of 2009 that was signed into law in February. Among the more significant new items to consider:

• Sales Tax on Vehicle Purchases is deductible towards Adjusted Gross Income (AGI). For 2009, this legislation allows all taxpayers a deduction for state, local, and excise taxes paid on the purchase of a new car or light truck. The deduction phases out at AGI levels of $125,000 for singles or $250,000 for married-filing-jointly.

• Alternative Minimum Tax Relief is extended for 2009. The legislation increases the AMT exemptions for 2009 to $46,700 from $46,200 for individuals and $70,950 from $69,950 for joint filers. Also, beginning in 2009 an individual may offset the entire Regular Tax Liability and Alternative Minimum Tax Liability by the nonrefundable personal credits.
• Small Business Stock Capital Gains — An individual who invests in the stock of a small business and holds that investment for at least five years may exclude up to 75% of the gain realized on the disposition of that stock, provided certain requirements are met. This provision is effective for investments made after the date of enactment and before January 1, 2011. For this purpose, a small business is defined as a corporation with less than $50 million in gross assets.

Some provisions that may benefit your children or grandchildren:

• The First-Time Home Buyer’s 10% Credit is increased up to $8,000 for purchases between January 1, 2009 and December 1, 2009. Despite what was proposed as the legislation made its way through Congress, the final legislation continues to limit the home buyer’s credit to first-time home buyers (defined as someone who hasn’t owned a home in the three years before the purchase). The most significant change made by the legislation is that the new credit does not have to be repaid. The home must be occupied as the buyer’s principal residence within 24 months of the purchase. The credit phases out for taxpayers with adjusted gross incomes in excess of $75,000 ($150,000 in the case of a joint return). The credit is refundable and is recaptured if the home is sold within 36 months of the purchase date. A buyer who purchases a home after January 1, 2009 under the new rules can claim the credit on a 2008 return to speed receipt of the credit. A buyer who purchased a home before January 1, 2009, must go with the old “interest free loan” credit.

• The American Opportunity Education Tax Credit replaces and improves upon the HOPE scholarship credit. The American Opportunity Credit is allowed for up to four years of undergraduate education, and for 2009 and 2010 the maximum credit will be $2,500 in each year and 40% of the credit is refundable. The credit phases out at AGI levels between $80,000 and $90,000 for singles and $160,000 and $180,000 for married filing jointly.

• A Student Computer Purchase may be treated as a qualified education expense for Section 529 plans in 2009 and 2010. This includes software and peripheral equipment.

While many tax planning strategies sound great in isolation, when viewed from 30,000 feet they may have unintended negative consequences on other parts of your life. Therefore, the most important role we play as a wealth manager is in helping clients evaluate tax planning ideas to ensure they align with our clients’ values and help them accomplish their most important goals.

This summary is intended to highlight some of the provisions of the Act and is general in nature. As with any important planning matter, consult with us and your tax advisor before relying on the summaries above.

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