With Tax Law Changes Looming, Consider These Strategies

While nothing has been decided just yet, it looks likely that Congress will soon pass sweeping tax law changes. With most of these changes revolving around taxes on higher incomes and estate taxes, those in the upper tax brackets should probably prepare to make some adjustments to their strategies.

The adjustments you need to make will depend upon your exact situation, and these decisions should be made under guidance from a financial professional. But if you’re curious about the direction in which these tax law changes are headed, analysts say the following measures are likely to pass through Congress:

• Preferential tax treatment to long-term capital gains could end
• We could see a new wealth tax on high-earning households
• Certain changes related to estate planning, possibly increasing taxes on your future heirs
• Changes to taxes on carried interest
• And possibly others

Increasing the capital gain tax to 39.6 percent sounds alarming, but will probably only affect about one percent of taxpayers. The higher tax only applies to those whose annual incomes exceed $1 million. But if you fall into that group, it would be wise to begin considering your options now. Those might include selling certain assets now, while you can take advantage of the current lower capital gains tax. Or, you might prefer to hold those assets for the long haul, waiting for future political changes that might lower those taxes in the future. In some cases gifting strategies might also help you to transfer assets.

If your income is at least partially derived from a retirement account, you might feel concerned about the possibility of higher income taxes. If you convert to a Roth account now, and pay the tax at a lower rate, you could enjoy non-taxable distributions in future years. You might also wish to investigate other tax-advantaged investments, such as cash value life insurance.

As for the possibility of higher estate taxes, we luckily have many options at our disposal to begin distributing assets now. Gifting, within the gift tax exclusion limit, is one popular option. Establishing a trust or making tax deductible gifts to charity can also help you to leave a legacy, without triggering burdensome taxes for those you intend to help.

Of course, we definitely don’t recommend that anyone attempt to make big changes to their financial plan without professional guidance. Try not to worry too much about what you hear in the news, and make an appointment with us to discuss your options instead.