As Washington becomes the nerve center of financial services, advisors will be forced to keep pace with the numerous laws, potential laws, Congressional hearings, and regulatory initiatives that stream from the nation’s capital. To kick off the Washington-centric portion of our three-part monthly special report exploring how advisors can respond to the markets and economic crisis, we focus on the American Recovery and Reinvestment Act of 2009, the Obama stimulus bill that was signed into law on February 19, and the move in Congress to create a systemic risk regulator.
The stimulus bill includes a number of tax initiatives that are very relevant to advisors’ day-to-day dealings with clients. Initiative number two from Congress–its self-proposed mandate to create a systemic risk regulator to oversee all financial services activities–is a work in progress, as Congress tries to define what systemic risk is, and determine which entity should act as a financial stability regulator.
On the law, “there are pieces that will become a mandatory part of conversations with clients,” says Michael Kitces, director of financial planning at Pinnacle Advisory Group in Columbia, Maryland. For instance, advisors who are talking to their clients about a new home purchase should point out the first-time homebuyer tax credit. This credit gives first-time buyers an $8,000 credit to put down on a home, but Kitces says “if you’re in a lot of areas along the coasts [$8,000] doesn’t necessarily make a whole lot of difference in what you’re buying.” However, “there are areas . . . where $8,000 toward your home purchase is a material discount to how much it costs to buy a house.”
Also of note is the extension of the Alternative Minimum Tax (AMT) patch for 2009. The exemption for 2009 is $46,700 for single taxpayers and $70,950 for married filing jointly. Since there have been one-year AMT patches for several years now–which usually take place in November and December–Kitces says “the fact that we actually got a patch at the beginning of  is a nice change.” But moving forward, “we still have to deal with the AMT,” he says, and uncertainty remains as to whether there will again be another one-year patch.
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The “Making Work Pay” credit provides in 2009 and 2010 a $400 tax credit for individuals and an $800 credit for married couples filing their taxes jointly. There’s also a new deduction for sales taxes paid on a new vehicle purchase. Kitces says he’s “not sure what constitutes new,” but “it does have to be a purchase; you can’t do a lease.”
Advisors also can’t advise their clients about college planning without going over the higher education tax credit offered in the stimulus package. In 2009 and 2010, individuals attending college will get a credit of up to $2,500 of the cost of tuition and other expenses, however, $4,000 has to be spent in a full year to get the credit. There is a phase-out for taxpayers with adjusted gross income of more than $80,000 and $160,000 for married couples filing jointly.
Do you have clients who have been laid off from their jobs? The stimulus law also offers temporary subsidized COBRA premiums to workers involuntarily terminated between September 1, 2008, and December 31, 2009. Taxpayers with incomes less than $125,000 for single and $250,000 for married filing jointly will receive a 65% subsidy from the U.S. Treasury Department for up to nine months. Kitces says that a lot of clients are not even aware that COBRA exists.