Not everyone is waiting eagerly to hear the details of President-elect Obama's economic stimulus package. Upper-income individuals are seeking shelter from what are likely to be hefty tax increases. Many financial advisors are urging haste -- suggesting their clients make tax-saving moves before the year end, according to Michael Gray, CPA.
The details of tax changes will be negotiated by Congress next year, says Gray. According to a summary by the Tax Policy Center, Obama has proposed to restore the 39.6% maximum bracket in 2009 that we had under Clinton for single taxpayers with income exceeding $200,000 and married taxpayers who file joint returns with income exceeding $250,000. The maximum rate for long-term capital gains and qualified dividends for those taxpayers would also increase from 15% to 20%.
Ray said upper-income taxpayers who want to avoid those increases can take the following steps:
1. Accelerate ordinary income to 2008. Service businesses can get billings out quickly for 2008 services, and collect advance payments and retainers. Consider exercising stock options during 2008 instead of later.
2. Take capital gains in 2008. With the stock market down, this may not be as beneficial as it otherwise might be. You can sell securities that qualify for long-term capital gains and buy them back. The wash sale rules apply to sales for a loss, but not for gains. Consider postponing capital losses until 2009 for a greater tax benefit.
3. If you make an installment sale, consider electing out. When a sale is made of certain property, such as real estate, for which you receive an installment payment note, you can elect to pay the tax as you receive principal payments. If you want to avoid higher future tax rates, you can elect to report the gain for the year of sale instead of the installment sale method.
4. Dont exchange real estate during 2008. Tax deferral automatically applies to most real estate exchanges. If you want to pay tax currently, dont exchange.
But Gray, who publishes an email newsletter about tax strategies, warns against letting the tail wag the dog and recommends talking to your tax advisor before taking action. Five percent isnt a huge tax difference and shouldn't be the primary motivation for major financial decisions, he said.
Bush tax cuts on the cutting board
Ray isn't alone in warning that the Obama White House is likely to act quickly to kill the Bush tax cuts for households with incomes over $250,000 a year, and some observers say Obama may move to make any new tax law retroactive to Jan. 1, 2009.
That was the assessment of Ken Kies, managing director of the Washington-based Federal Policy Group tax consulting division of Clark & Wamberg LLC of North Barrington, Ill., who spoke to an InvestmentNews webcast last week.
[The administration] is facing a budget deficit in 2009 that could pass an eye-popping $1 trillion, said Kies, who was chief of staff of the congressional Joint Tax Committee from 1995 to 1998. He predicted a repeat of the type of retroactive tax increase enacted during the Clinton administration in 1993.
The incoming administration may call for an increase in capital gains taxes for upper-income households as it announces the next Treasury secretary, Kies said, possibly trying to make any increase retroactive to the date of the announcement in order to avoid a sell-off in the market, he predicted.
The current rate is 15%, and that could rise as high as 20% to 25%.
Meanwhile, an InvestmentNews survey finds that the majority of financial advisers have little faith in Obama's ability to put the nation back on sound economic footing. The survey 968 advisers last week found that 61% lacked confidence in the new commander-in-chief's ability to resolve the country's economic woes.
