Why is this Topic Important to Wealth Managers? Provides discussion on current situation of federal tax “stand-off” as it relates to clients’ planning objectives. Gives insight into market participants current choices in dealing with the Tax Cut dilemma.
Congress’ inaction is causing concern for many high net worth taxpayers. Clint Stretch, managing principal of tax policy at Deloitte Tax LLP in Washington says, “uncertainty over taxes means some individuals are ‘vulnerable to hysteria’ ”. And that some financial advisers are urging clients into “unnecessary or unwise transactions.”  With “[a]n estimated 315,000 U.S. taxpayers earn more than $1 million, according to the Joint Committee on Taxation”, it leaves a lot of room for opportunity and error.
Jim Kirby, a tax attorney in Dallas, estimates “70% of his clients are calling about the potential tax increases.” Now that the “third quarter is coming around,  people are getting concerned about what they should do to mitigate tax increases next year,” he said.
Greg Rosica, another tax attorney in Tampa, Fla., said the “looming increases were turning tax planning around 180 degrees.” He noted, “[t]he pattern is normally to defer income until the following year, ever in hopes of avoiding or lessening the tax on it. Now ‘with higher income and capital-gains taxes [to come], it’s accelerating income,’ ” 
While other firms are, “advising clients on how to defer income well beyond next year—for example, in annuities and retirement accounts, for when a client may have less income to tax”.
What are key options wealth managers and their clients are considering in regards to the pending expiration of the tax cuts by the end of this year?
- Have a plan- The plan should include simple calculations, and projections based on estimates of different variables. For example, what are the projected tax implications if the rates don’t change versus if the rates do. After all, spending a little time now can save money later. The Tax Foundation offers a free online calculator application.
- Close any pending transactions- Dan Zucker, a partner at the law firm of McDermott, Will & Emery LLP in Chicago, says, “[a]s for capital gains, those thinking about selling an appreciated asset such as a business or real estate should try to complete the sale this year.”
- Explore the tax free bond market- Some local and municipal bonds meet the requirements for tax free treatment of income. Therefore, any change in tax rates won’t change the tax free income treatment to begin with.
- Exercise other financial options that may be available- “Accelerate any income you can into this year at the 35 percent highest marginal rate,” says Joe Spada, wealth manager, referring in part to distributions from closely held companies, or, “If you have a choice, get your bonus in December, rather than January, and move deductions into 2011. Most people make charitable donations at the end of the year. Push it to January.”
According to a recent USA Today/Gallup poll, 37% of taxpayers support keeping the tax cuts in place for all tax payers. “44% want them extended only for those making less than $250,000 and 15% think they should expire for all taxpayers.” 
Tomorrow’s blogticle will discuss more relating to the Bush Tax Cuts.
We invite your questions and comments by posting them below, or by calling the Panel of Experts.
 “Top Earners Lose Cost of BMW If Bush Tax Cuts Expire”. Bloomberg. Margaret Collins.
http://www.bloomberg.com/news/2010-09-10/biggest-earners-lose-cost-of-new-bmw-after-bush-tax-cuts-expire-next-year.html. 9/10/2010. Last Accessed 9/10/2010.
 “Upper-Income Taxpayers Plan for Hike.” Wall Street Journal. Gary Fields. http://online.wsj.com/article/SB10001424052748703791804575440030095999188.html?mod=googlenews_wsj. 8/21/2010. Last Accessed 9/10/2010.