After President-elect Obama takes office, many experts expect an eventual increase in capital gains and income tax rates for high-net-worth individuals. Though a sagging economy might delay anticipated increases, advisors might want to consider examining the potential impact of higher rates on clients' portfolios and retirement strategies.

What would a change in tax policy wrought by the Obama administration and a Democratic Congress mean for the traditional tax-planning imperatives to defer taxes and accelerate expenses? For those in the upper-income brackets, increases could turn this classic rule of thumb upside down.

Now may be the time for advisors to suggest that clients consider paying some taxes sooner rather than later. For example, clients could realize capital gains now by accelerating the sale of a home or business, avoiding higher rates down the road.

Regardless of whether clients can do anything specific today to ease potential future tax pain, the question that advisors must answer is: How can they now best serve clients who may be affected by the anticipated tax changes?

Spoiled by Low Rates

Advisors can start the discussion with clients by putting the tax picture in perspective, noting that over the past few decades, the nation has been spoiled by historically low rates. "You have to look at history-back in 1981, the top federal tax rate was 70%," twice as high as today's 35%, notes Ed Slott, a CPA and an expert on taxes and IRAs in Rockville Centre, N.Y. from 1950 to 1963, the highest individual income tax rate was a whopping 91%, according to the urban- brookings tax policy center in Washington, D.C.

As far as capital gains tax goes, the last time it was as low as the current 15% was before World War II, according to the center's director, Len Burman. Analysts who don't expect these comfortable levels to last much longer—at least, for the wealthy—cite Obama's public policy predilections, the growing national budget deficit, recent corporate bailouts and increasing pressure to fund Medicare and Social Security.

How high could tax rates go? During his campaign, Obama said that he would make the 2001 tax cuts permanent for low- and middle-income taxpayers, and that wealthy Americans would pay more. "The general view of Obama's policies with a Democratic Congress in power is one of fewer exemptions and higher tax rates for high-net-worth individuals and business owners," says Philip Tortorich, a tax expert and attorney with Katten Muchin Rosenman in Chicago. For individuals earning more than $200,000 or couples making more than $250,000, rates would revert to levels in force under President Clinton, according to Deloitte Tax in Washington, D.C. As things stand, when the Bush tax cuts expire in 2010, the maximum income tax rate is scheduled to revert to 39.6% from 35%, while the second highest bracket will go to 36% from 33%.

The Obama administration may act quickly to make some of these changes retroactive to January 2009. In addition, "some think there might even be a surcharge of 1% or 2% for ultrahigh-net-worth individuals," says Greg Valliere, chief political strategist at the Stanford Washington Research Group. As far as capital gains tax goes, Obama is expected to raise the rate to 20% or possibly higher. "He has mentioned 28%," Burman says.

Rise on the Horizon

Given these expectations, high-income clients will require a more flexible and nuanced tax strategy than those to which some CPAs and advisors still cling. "You could wake an accountant out of a coma, and he would say, 'Defer income and accelerate expenses,'" says Herbert Daroff, a CFP with Bay State Financial in Boston. "But that is potentially a dangerous thing to have been doing because we have had historically low tax rates." 

"People can't be lazy, tax-wise," says Meg Green, a CFP and chief executive officer of Meg Green & Associates in Miami, Fla. "Whenever you can save taxes, you're getting an immediate return on that money. But that's not the only savings people should have. When you're talking about people of great means, it's not 'defer all you can.' "

As Slott sees it, the government needs to raise money to solve a multitude of financial crises, and it has its eye on the "big juicy steak" of Americans' IRAs. Assets in tax-deferred accounts total $18 trillion, and $9 trillion of this amount lies in IRAs. "It used to be a good argument that it was always better to defer, but not in a rising tax-rate environment. The myth was that in retirement, you'd be in a lower tax bracket, but the way things are going now, rates could go up to 45% or 50%," says Slott.