“Beginning in 2013, many clients can expect their taxes to increase, and in some cases, the increase may be substantial,” Janus tells advisers in “Preparing Your Clients for a World of Higher Taxes,” a white paper by the firm’s retirement and tax experts. The breaks on ordinary income tax and long-term capital gains, originally scheduled to sunset on December 31, 2010, could very likely expire at the end of this year, unless a compromise is reached in Washington. Rates would then revert to the higher, previous levels of several years ago, Janus said.
“While it’s possible, maybe even likely, some kind of
compromise will be reached in Washington, no one knows at all what it will look
like,” said Matt Sommer, vice president and director of the retirement strategy
group at Janus. “The earlier advisers and clients start to think through the
possibilities, the more prepared they will be at year-end if action is
If the sunset on the tax breaks is not extended, the current 10% income tax bracket will be eliminated, replaced by 15% as the new lowest bracket. The 25%, 28% and 33% tax brackets will each bump up by three percentage points to 28%, 31% and 36%, respectively, and the highest 35% rate will rise by 4.6 percentage points to 39.6%. Also, the 15% long-term capital gain rate will increase to 20%, and qualified dividends, currently taxed as long-term capital gain, will be taxed as ordinary income. Further, the $5 million exclusion amount and maximum 35% rate for gift, estate and generation skipping transfer purposes is scheduled to revert to $1 million and 55% in 2013.
One of the strategies that Janus recommends advisers consider for clients who own a highly appreciated asset, such as a business or real estate, is to sell those assets in 2012. Advisers might also suggest that clients spread out year-end deductions across their 2012 and 2013 tax returns, because of higher ordinary income taxes. Another relief, for the same reason, could be to maximize employer retirement plan contributions.
Janus also notes that high-net-worth clients might want to take another look at investments that maximize after-tax returns. These include municipal bonds, whose interest payments are federally tax-free and often state tax-free. If a client holds a growth-oriented investment for at least one year, it will be taxed at the more favorable long-term capital gains rate, rather than the higher ordinary income rate. Investors might also want to consider tax-efficient mutual funds with low portfolio turnover and less frequent capital gain distributions, Janus said.
Advisers can obtain a copy of the detailed, 10-point “Preparing Your Clients for a World of Higher Taxes” report by calling 1-877-33-JANUS (52687) or visiting the Janus adviser website here.