prolit and only have to pay taxes on $40,000 - his $20,000 tax payment would amount to an effective tax rate of just 20 percent. For those in the 40 percent bracket, the effective long-term rate was just 16 percent. The new tax bill eliminated that exclusion, which means that most investment-oriented taxpayers will be taxed at the top 28 percent rate in 1988, and at anywhere from 28 percent to 36.5 percent this year. Does that mean an investor should have sold his stocks and taken his profits before Dec. 31 ? Or would it make more sense to hold onto the stock through 1987 and 1988, and defer taxes for several years before payment? These questions have caused a number of planners to reexamine then view of the stock market over the next tour years, to calculate the time value of money under different interest rate scenarios, and to help clients clarify their short- and long-term investment goals. Another area of change will be in limited partnerships — that is, in investment vehicles which avoid the double taxation associated with the corporate structure and slock investments. Under the old tax code, it was possible for financial planners to offer tax relief simply by adjusting the client's portfolio mix between investments that offered depreciation and interest write-offs, and such income producing investments as bonds or high dividend stocks. The new tax law divides a taxpayer's income (and losses) into three "baskets": one represents salary income, another includes dividend and interest income, while the third is reserved for distributions and losses from "passive" limited partnership activity Financial planners can no longer help a client offset "portfolio" or "salary" income with "passive" investments designed to generate losses in the early years, and return capital gains or profits in later years. In addition, planners will have to work
harder to put money away on a tax-free basis for their clients' retirement years. The most widely publicized change is the limitation on Individual Retirement Account contributions for middle- to upper-income taxpayers who already have some kind of pension arrangement at their place of employment. However, there are other, less well-known restrictions. High-income executives can no longer put a maximum of $30,000 into their 40l(k) and 403(b) plans; the maximums are now $7,000 and $9,500, respectively. As an alternative, they will be looking harder at the insurance industry's annuity products — particularly variable annuities, which invest in stocks, real estate and other areas with high appreciation potential. In sum, the changes are too iarge to be categorized; they affect the entire spectrum of investments, tax planning, income deferral and income shifting and, ultimately, till the various ways that Americans save, invest and work toward their financial goals. The task for the nation's estimated 50,000 financial planning professionals is, first, to help their approximately 4.3 million clients avoid the inevitable problems that arise when something as large as the American economy shifts gears in all sectors at once. Second, they will be actively looking for tax planning and investment opportunities during the two-year changeover. And perhaps most importantly, they will be helping investors in all parts of the economy to cope with and understand the way their financial lives have changed, now and in the future. Hubert L. Harris Jr. is president of the International Association for Financial Planning, headquartered in Atlanta. A 1965 industrial management graduate. Harris also served as assistant director for Legislative Affairs in the Office of Management and Budget during the Carter Administration. GEORGIA TECH ALUMNI MAGAZINE
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