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Wealth Management

The New “Tax” Stimulus Plan

by Robin S. Davis, CFP

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The New “Tax” Stimulus Plan Take from the rich and give to the poor.  That is the new proposed tax plan, or should I say, the existing tax plan inflated.  The powers that be in Washington feel that they can pay off the deficit by increasing taxes on the wealthy, even though it has been proven that the government collects less taxes when they increase them.  So what will it stimulate then?

An increase in tax rates and decrease in tax deductions leads to one line of attack:  people will invest in tax-saving strategies.  Saving and investing in tax-free, tax-deferred, and/or tax-sheltered vehicles, buying and holding securities to avoid capital gains, and increased contributions to retirement plans will become the norm again.  Although returns are not very high, tax-free government or municipal bonds will be in demand as they were in the 80's when tax brackets were very high.  

Tax-deferred strategies would include investing in fixed or variable annuities, certain types of life insurance products, retirement plans such as corporate pension plans, non-profit organization 403b plans, self-employed pension plans and individual retirement accounts (IRA's).  Current law allows participants of these plans to defer taxes until age 70 1/2 or longer, at which time an annual taxable minimum withdrawal must begin.  The hope is that the tax rates will go down again by then.   

Tax-sheltered investments include certain kinds of investment trusts or limited partnership type investments.  As an example, these trusts or partnerships may invest in certain types of real estate that create depreciation deductions against income.   Other real estate trusts are designed to create tax credits which are a dollar for dollar reduction of one's tax liability.   

Closed-end index funds are already becoming more and more popular as they are very cost effective and pay out little or no capital gains at the end of the year.  There are many other types of tax-managed accounts and programs that people will be taking a closer look at as the proposed budget calls for higher taxes on wealthier Americans.  

Corporate retirement plans will also be stimulated by the stimulus plan.  This is actually a good outcome as businesses who have done away with these plans in recent years may once again start up profit-sharing plans, Keogh pension plans, 401k plans and Simplified Employee Pension plans in order to contribute as much tax deferred income as possible, again hoping marginal tax rates will be lower when they retire.

The next area of taxes that the government will effect is the inheritance tax, or death tax, as it is a lot easier to tax estates of people who are no longer living.  The wealthy were just starting to get a break as the estate tax-free exemption was recently increased to $3.5 million per person.  This could be short lived, though, as it is currently subject to return to $1 million per person in the year 2011.  There used to be hopes of the $3.5 million amount being made permanent before the event of bailouts and stimulus packages doubling the deficit.  There may be little chance of that happening now causing investors to purchase investments in the tax-advantaged strategies mentioned above and investigating all avenues available to them to lower the taxability of their estates to their heirs.  

Whether you like certain things about the current budget and hate others, what's certain is it will definitely stimulate something.  It will stimulate more creative investment plans, more well-thought out estate planning techniques, and should stimulate a wealth of knowledge understanding your individual, corporate and trust tax returns as errors in tax preparation and missed tax deductions account for millions of dollars in mistaken tax liability.  The higher the taxable income, the higher the probability of mistakes taking place.  I recommend double checking all tax documents and having an intense conversation with your tax preparer to explore all avenues, especially about future tax returns.  

Taxes have not been as much of an issue in recent years as they have been in the past, but it has been said that history repeats itself.  Continuing to invest the same way as you have in the past expecting different results in the future could prove to be a very big mistake.  As always, your overall investment mix, goals, family situation and time horizon  will affect any decisions you make regarding which assets you should be holding going forward.  

Robin S. Davis is a Certified Financial Planner™, a member of the Financial Planning Association, and is the owner of Davis Wealth Enhancement Group, Inc., in Stuart, Florida. She has been advising retirees since 1984 and has held over 500 public seminars on financial issues. She is the author of the book Who's Sitting On Your Nest Egg? Why You Need a Financial Advisor and Ten Easy Tests for Finding the Best One. Davis expresses the importance of utilizing a competent financial advisor. For more information, please call (800) 896-5422 or (772) 463-4441, visit, or email:

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