As all savvy advisors know, smart tax planning is not only about choosing the right strategy at the right time, it's also about avoiding bush league mistakes. That's what Financial Planning senior editor Ann Marsh found in preparing this month's cover story, "15 Top Tax Strategies for 2012,".
And yet, both Marsh and Financial Planning contributor Allan Roth, who authored a companion story on page 61 on the distinct benefits of Roth IRA conversions, found that uncertainty is complicating planners' best efforts to make or recommend wise choices.
"The big question is whether the Bush-era tax cuts will expire at the end of 2012," Eleanor Blayney, the consumer advocate for the CFP Board, told FP. "So there's a lot of uncertainty. A lot of us assume that, one way or another, taxes will go up. And if not directly, then we may lose deductions."
Planners say all the time that dealing with uncertainty is a core part of their job; after all, if the outlook on taxes, the markets or the events of a client's life were abundantly clear, far more people would be wealthy. The importance of planning for the unplannable is so wide-ranging that the concept shows up even in our story about protecting the trusts created in children's names. If the creators of those trusts do not factor in the possibility that the recipient may wind up in a divorce proceeding, the trust's assets may get divided in ways never anticipated by the person who funded it.
When it comes to tax planning, Marsh tells me, "an advisor or client could miss a single detail and find themselves in a whole world of pain. A single missed signature on an estate plan, paying state or property taxes in the wrong year, or failing to run an alternative minimum tax calculation all can have adverse effects on clients that are difficult to overstate."
Nonetheless, she adds, "there's a seemingly endless number of strategies that wealthy individuals can use to bring their debt burdens down - or at least put themselves in a better position in future tax years. A major takeaway is that the 2011 tax year may be the right time to accelerate realized income while taxes are relatively low. If predictions pan out and taxes rise in 2012, it's possible that estate taxes, dividend taxes and capital gains taxes may take a larger bite of income."
By doing so, planners may be prepared for the probable, as well as the unknowable.
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