Many advisors foresee higher personal tax rates as soon as next year, especially for their affluent clients. Even if Washington manages to enact nothing over the next 15 months, rates will automatically revert to loftier levels in 2011 after the sunset of the Economic Growth and Tax Relief Reconciliation Act of 2001.

"A lot of tax planning is trying to anticipate what future rates will be," says Mike Tedone, the chief compliance officer and director of Filomeno Wealth Management in West Hartford, Conn. Like many planners, Tedone is peppering client meetings with talk about accelerating income into 2009 and deferring deductions to later years-the opposite of traditional year-end advice.

"Rising tax rates shift normal tax planning on its head," says financial advisor William Jordan, president of the Sentinel Group in Laguna Hills, Calif. "For the last 20 years, we have been operating in a declining tax-rate environment and all of our conventional planning is based on that. Now there has been a fundamental shift."

Take Losses, Or Gains?
As an example, says Jordan, "instead of taking losses, this year we will suggest that clients realize gains, to the extent they have gains. Although we don't advise taking action based solely on tax implications, we do think rates on gains are going up."  The Obama administration has proposed raising the capital gains tax from 15% to 20% for individuals in the highest two ordinary brackets. Unless new legislation arrives before the expiration of the 2001 law, 20% will be the rate for taxpayers in the top four ordinary brackets come 2011. Either way, Jordan wants to beat Washington to the punch.

"You have to compare the tax on a gain triggered now versus a potentially larger tax on a potentially larger value later," explains CPA Paul Beecy, a Boston partner at international accounting firm Grant Thornton LLP. He also generally advocates recognizing gains this year.

But with a private business, it's different, Beecy says. "Owners know their product pipeline, marketplace, clients and suppliers, so they have insight into incremental value that could be forthcoming. An analysis we did for a client found that it wouldn't take many multiples of a higher EBITDA to offset the potential increase in tax rates."

When it comes to losses, there's less agreement among practitioners about what to do. Jordan says, "If you can defer losses, that is to your advantage. They'll be worth more later" if they offset gains or ordinary income that's taxed at rates higher than today's.

However, booking losses now and carrying them to future years might accomplish the same objective. Accordingly, Coghlan Financial Group Inc. in San Diego is taking losses as usual. "The opportunity to capture tax losses won't be there forever. The odds of having capital gains and fund distributions in the future are pretty good," says the firm's senior vice president, Josh Willard.

Repositioning Portfolios
The specter of rising tax rates is also affecting how advisors redeploy proceeds after recognizing gains and losses. Higher ordinary rates may suddenly render tax-advantaged investments more attractive than fully taxable ones for some clients.

Another issue is qualified dividends, which have been taxed as long-term cap gains since 2003. "Obama has indicated he would prefer to keep it that way," says Mark Luscombe, a federal tax analyst at CCH, the business info provider in Riverwoods, Ill. That effectively means taxpayers in the top two ordinary brackets would experience the same increase on dividends as on their long-term gains. On the other hand, if no new legislation is passed, the sunset of the 2001 act will turn dividends into ordinary income. "That's actually a more drastic change," Luscombe says.

All of this has the attention of Filomeno's Tedone. Some of his firm's clients shifted their portfolios toward dividends when they first gained special tax status. "Now we are repositioning portfolios in anticipation of not having a favorable rate on dividends, especially with clients who have capital loss carryovers and can therefore take gains this year without tax consequences," Tedone says. Higher taxes on dividends make municipal bond interest more valuable on a relative basis (local governments' fiscal woes notwithstanding), he points out.

Other Tips
Another anomaly this year is uncharacteristically low income. "We're seeing things like net operating losses that many businesses have never actually experienced," says Michael Kitces, director of financial planning at Pinnacle Advisory Group in Columbia, Md. "But low-income years are opportunity years from a tax-planning perspective," he says.

Maybe now the client can make Roth contributions, or convert a traditional retirement account to a Roth. And remember, folks in the lowest two ordinary brackets still pay no tax on capital gains. "For those clients, you may want to harvest enough gains to get to the top of the 15% bracket," Kitces says. That's $67,900 of taxable income for couples, $33,950 for single taxpayers.

You might even counsel clients to take an IRA distribution for 2009, even though required withdrawals may be skipped this year. Tedone has a client whose income has dropped precipitously. He says, "We may in fact recommend that this client take a distribution because they may not have enough other income this year to fully benefit from their deductions. It's not automatic that you don't take the distribution. You've got to run the numbers."

The opportunity to recharacterize 2008 Roth IRA conversions expires October 15, a potentially important deadline for anyone who converted a traditional IRA into a Roth last year before the market's autumn collapse, says CCH's Luscombe. "It may make sense for those people to put the money back into a traditional IRA to avoid paying tax on the higher value that existed when they converted the account," Luscombe says.

Clients also may wish to position themselves to make Roth conversions in 2010 by stuffing as much as they can into traditional retirement accounts this year. There is no income limitation on the ability to convert to a Roth next year, and the income tax hit can be spread over two years, 2011 and 2012. "On the whole, this is unpopular with Democrats but it is a revenue raiser, so I think the Democrats are willing to let it survive at least for next year to get that revenue," Luscombe says.

Don't overlook qualified charitable distributions, which permit clients to give IRA money directly to charity without having to report the withdrawal as income. As the law stands today, this opportunity expires December 31.

Trying to sidestep the kiddie tax? Kitces says the only strategy really available nowadays is to get 18-year-olds and full-time students under 23 to earn at least half their support. For this reason, he says, "more than ever we are seeing families looking to employ children in the family business, which has a lot of other benefits anyway."

Many clients are currently helping adult children buy homes in order to nab the juicy first-time home buyer credit that's available for residences purchased by November 30. But even if the intentions are good, the clients may not fully appreciate the implications of doing this, warns Kevin Gahagan, a principal at Mosaic Financial Partners in San Francisco.

"Make sure clients are aware that gifts in excess of the annual exclusion amount, which is $13,000 per recipient per donor, must be reported to the IRS even if no tax is going to be paid. Clients need to understand that amounts above the annual exclusion use a portion of their $1 million lifetime exemption," Gahagan says.

The full $8,000 credit is available when the home buyer's modified adjusted gross income doesn't top $75,000, or doesn't top $150,000 for two married home buyers. At those levels, the credit begins phasing out over the next $20,000 of income. Home buyers can change their withholding at work to get the tax benefit right away, says CPA Kyle Vineyard, a tax partner at Eichstaedt & Devereaux LLP, a San Francisco accounting firm.

Alternatively, home buyers may amend their 2008 return to claim the credit (even though the house was bought in '09). This helps taxpayers whose credits are phasing out this year, says Vineyard. Amending last year's return allows the home buyer to use last year's income to calculate the phase-out.

Finally, that nemesis known as the alternative minimum tax has already been patched this year, thankfully. Washington-watchers predict that there will also be a patch (an increased exemption amount for the AMT) in 2010 as well. But after that, who knows the change?