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.