"Taxes on affluent Americans are going up next year. Even if we have tax reform it won't be effective until 2014. So we're going to have one year, I believe, of higher tax rates," predicted political observer Andrew Friedman, principal of The Washington Update, in a Webinar August 30.
In 2013 new health-care reform taxes take effect. Plus the Bush tax cuts will have expired, assuming Washington fails to adopt new legislation by December 31.
"We're looking at the top tax rate going from 35% to almost 44%, a cap gains rate going from 15% to almost 24%, and a dividend tax rate going from 15% to close to 44%" next year, said the former law-firm tax partner.
"The prudent thing to do is plan for higher taxes for clients earning $200,000 and up," Friedman said, referring to the income level at which the health-care taxes, as well as numerous revenue-raisers proposed by President Obama, apply to single individuals. (For joint filers the corresponding figure is $250,000.)
Friedman's suggestions include converting traditional individual retirement accounts to Roths for clients who anticipate falling into a higher-income tax bracket in their later years. He also recommends taking gains in 2012 and redeploying the assets tax efficiently.
In that vein, tax-deferred annuities should be considered, said Webinar host William Lowe, president of Sammons Retirement Services, in West Des Moines, Iowa. Lowe added that the coming changes represent an opportunity for advisors to meet with clients about new strategies.
Transfer taxes are also set to increase. Right now clients have an "extraordinary opportunity" to transfer wealth by utilizing today's "unprecedented" $5.12 million per person exemption from gift tax, according to Friedman. The exemption is unlikely to remain so lofty, he said. "I don't think the Democrats are going to allow that again." The Bush cuts' sunset would pare the exemption to $1 million.
Regarding politics, Friedman said, "I think the president has the better chance of winning the election." Republicans' pledge not to raise taxes under any circumstance could hurt them, he believes. "Many independents are in the middle class and they don't understand this concept of not raising taxes no matter how wealthy somebody is."
But soaring gas prices could spell doom for Obama, Friedman said. "If Europe's debt crisis comes to our banking system, I think he'll lose in that instance. What I suggest is to look at polls that poll just independents. That is the best key to this election."
-Eric L. Reiner