Tax planning generally includes tax deferral–why pay now if you don’t have to?

“After years of recommending tax deferral,  I’m suggesting accelerating tax payments,”  Dean Mioli, director of investment planning for the SEI Advisor Network, told Financial Planning. “I’m not advocating this for every taxpayer, but it can make sense in some cases.”

This departure from the norm is due to the possibility that next year’s tax rates will be higher than this year’s rates. To capitalize on what Mioli called a “huge marketing opportunity,” SEI “has created a Tax Planning Tool Kit” for advisors, who can help clients navigate today’s  uncertainty about future taxes. “We don’t expect advisors to be tax experts, but we think they can take the lead role in coordinating individual clients’ interactions with tax professionals,” said  Kevin Crowe, solutions unit leader at SEI.

When might paying tax in 2012 be a savvy move?

“Suppose a client will need cash soon,” Mioli said. “The client may plan on selling assets to pay for home remodeling or college bills or closing on a second home. By taking long-term capital gains now, the top tax rate will be 15%, which is relatively inexpensive.” If those gains are taken in 2013, the top tax rate might be 20% while high-income clients will face a 3.8% surtax on investment income as well.

Similarly, stocks are up this year so some clients might want to sell, in order to rebalance their portfolios. “Instead of doing it in January, when gains will be taxed at 2013 income, clients might want to take any taxable gains in 2012,” Mioli said.

Just as high-income clients might want to accelerate gains into 2012, to avoid the 3.8% Medicare surtax that goes into effect next year, lower-bracket clients also may want to take gains now. “Take a retired couple with $50,000 of taxable income this year,” Mioli said. “They can take $20,000 of long-term capital gains by the end of 2012 and owe no tax.” The 0% tax rate on long-term gains, which goes up to $70,700 this year for married couples filing joint tax returns, is set to expire after 2012 and an extension is uncertain.

Tax strategies to accelerate income into 2012 go beyond taking long-term gains. Roth IRA conversions now can avoid taxable distributions from traditional IRAs in the future; IRA distributions push up the owner’s gross income and may trigger the 3.8% surtax. “In addition,” Mioli said, “clients with non-qualified stock options might want to exercise them this year, even though they’ll owe tax for 2012. Starting in 2013, this stock option exercise not only might make the client’s investment income subject to the 3.8% surtax, it also counts as compensation and could trigger the new 0.9% surtax some people will owe on earned income.”

Register or login for access to this item and much more

All Financial Planning content is archived after seven days.

Community members receive:
  • All recent and archived articles
  • Conference offers and updates
  • A full menu of enewsletter options
  • Web seminars, white papers, ebooks

Don't have an account? Register for Free Unlimited Access