With the health care reform bill that was passed this year costing $1 trillion annually, it is more than likely the government will allow the Bush tax cuts to expire this year, in order to raise revenue to offset that expense, Friedman said. That will result in a plethora of higher taxes that advisers need to be aware of and help their clients navigate, Friedman said. “Ultimately, it comes down to what the President wants,” Friedman said. “He wants the tax cuts to expire for the wealthiest Americans. If Congress extends the Bush tax cuts to everyone, will Obama veto it? His advisers say yes, the president is against tax cuts for the wealthiest.”
That will mean:
- The top tax rate on ordinary income will rise from 35% to nearly 44%;
- The top tax rate on capital gains will rise from 15% to nearly 24%;
- The top dividend tax rate will increase from 15% to nearly 44%; and
- The estate tax exemption will drop from $5 million to $1 million, with the rate rising from 35% to 55%.
Advisers need to work with their clients before the end of the year to prepare for higher taxes, Friedman said. Some tax planning strategies he recommends:
- Sell assets and dissolve concentrated positions;
- Consider municipal bonds;
- Watch for negative effects on dividend-paying stocks;
- Consider Roth IRA conversions;
- Take advantage of 2012 as a gifting opportunity; and
- Consider investments, such as annuities and life insurance, that provide tax deferral and retirement income guarantees
“Build awareness about the potential tax increases with your clients,” Friedman said. “Work with your clients and their tax professionals to review the tax efficiency of their current investments. Suggest alternatives to taxable investments when suitable, and offer reviews to small-business owners.”
Calling the current tax structure an extraordinary opportunity to transfer wealth to children and grandchildren, Friedman concluded: “We may never see an opportunity for transferring wealth like this again.” As a result, attorneys are busy setting up trusts, and financial advisers need to get started on tax planning strategies for their clients, he said.