But a big win by Democrats could turn that conventional strategy on its head, Rampell said. Instead of trying to minimize this year’s tax bill, you might try to take as much income as possible in 2016 – for example, by selling a winning stock – rather than risk paying higher taxes on that money in 2017 or 2018.
There's a huge question mark hanging over all these tax matters. When would any tax increase be implemented? Ordinarily, a tax bill passed in 2017 would go into effect in 2018, giving the wealthy plenty of time to prepare. The biggest fear is a tax increase passed in 2017 that's retroactive to the beginning of the year, said Michael Kassab, chief investment officer at Calamos Wealth Management.
It’s happened before. In 1993, a tax bill passed at the beginning of Bill Clinton’s administration affected earnings that same year. If it happens again, the wealthy may have only the last several weeks of 2016 to get ready for higher taxes.
“There really is no way to know,” said Brittney Saks, a partner at PwC based in Chicago. “It’s that uncertainty that’s making people uncomfortable.”
If Clinton gets her plan through, taxes would get both more complicated and harder to avoid. She has proposed new rates on capital gains, so that taxpayers pay higher rates if they hold an investment for less than six years. She’d also give people less flexibility to lower their tax bills with common strategies. For example, she would limit the ability of the wealthy to itemize deductions, with the exception of charitable deductions. She'd also require a minimum effective tax rate of 30 percent on incomes over $1 million — the Buffett Rule, named after billionaire investor Warren Buffett, a Clinton supporter, who declared it isn't right that his secretary should pay a higher tax rate than he does.
Municipal bonds should remain a tried-and-true method for wealthy investors to lower their tax burden. While munis tend to yield less than other bonds, their income generally isn’t taxed. If capital gains tax rates go up, Heider said, investors might also think about investments they can buy and hold for longer periods of time, such as real estate.
There’s good reason to wait and see what actually passes Congress.
“Even if Hillary Clinton is elected president, and even if there is a Democratic Congress, it’s not so easy to change the tax laws,” said Paul Ambrose Jr., a law partner at Cullen & Dykman LLP in Hackensack, N.J., who specializes in estate tax planning. It might not be easy to get lawmakers, worried about their own political futures, to go along with a tax increase.
And not every wealthy person would be affected by a tax hike.
“Just because tax rates may go up next year, it doesn’t mean your tax rate is going up,” said Tim Steffen, director of financial planning at Baird. For example, Clinton’s proposals largely spare high-earning professionals if they have few taxable investments and few deductions.