As clients try to adjust to yet another tax regime under a new administration in Washington, D.C., what should advisors’ advice be for them through the rest of the year?

“One of the largest unknowns is when the tax changes will go into effect,” said Jason Field, financial advisor at Van Leeuwen & Company in Princeton, N.J. “If the tax changes are retroactive, then it becomes more difficult to plan.”
In most recent news, the House Ways and Means Committee markup indicates that the effective date for the capital gains tax increase to 25% was Sept. 13. The new rate that would apply to gains realized after that date. (The top rate would be 28.8% when combined with a 3.8% surtax on net investment income.) The proposal is winding through Congress right now.

“Wealthy clients feel like they have a target on their back,” said Kara Harmon, partner at Moneta in St. Louis. “Tax increases are [their] hot topic right now.”

“There’s a level of tax-change-proposal fatigue and clients are happy that a conclusion is likely near,” said Mallon FitzPatrick, managing director and principal at Robertson Stephens Wealth Management in New York. “The confusion lies in the differences between the earlier proposals and where we are today.”

Capital gains exposure is one area to watch in the fourth quarter. “After years of strong growth, clients might find themselves in a completely different allocation—and likely higher risk exposure—than their original plan called for, based almost entirely on the growth of the stock side of their portfolio,” said Jeff Winn, managing partner at International Assets Advisory in Orlando, Fla.

Pulling income into the current tax year should be a priority. “For example, if a company is able to pay annual bonuses in December instead of waiting until March, executives earning more than $450,000 would pay up to 4.6% less in taxes,” Harmon said.

Turn to such time-tested strategies again this year as tax-loss harvesting, she added.

Bill Smith, national director of tax technical services at CBIZ MHM’s National Tax Office in Washington, D.C., recommended maximizing the qualified business income (QBI) deduction before the break is curtailed and suggested pushing the numbers of third-quarter business activity numbers, if possible, to the fourth quarter of the year to qualify for the Employee Retention Tax Credit. The latter is on the block as part of the infrastructure bill, but planning for its possible continuation for the rest of the year is advised.

“Taxpayers who qualify for [the net investment income tax to trade or business income] exclusion under current rules, but would be subject to NIIT under the new rules, should act quickly to close deals by year’s end,” Smith added.

High-income earners should “do anything they can to reduce their income” for tax purposes, Field said. “Also making sure all of your benefits that allows you defer income are being maximized, such as a 401(k), IRAs, deferred compensation programs or any other retirement account contributions."

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