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Why Planners Should Accelerate Client Income in 2012

With the Bush tax cuts set to sunset by the end of this year, it’s time to think about accelerating clients’ income for 2012 in anticipation of higher taxes for 2013 and beyond, according to the founder of one of the nation’s 19th largest RIAs.

“Given the big budget deficits, it’s unlikely that tax rates are going to go lower,” said Deb Wetherby of Wetherby Asset Management in San Francisco. “If there’s pressure on anything, there is pressure for rates to go higher.”

That is going to require a new way of thinking, she said.

“For a long time rates were falling so it was all about deferring income,” according to Wetherby. “It’s really a shift in mindset if rates start to rise dramatically and we think of this idea of accelerating income.”

She recommends the following strategies for increasing income this year while rates still remain relatively low:

1. When clients have assets, with a lot of built-up capital gains, that they are likely to sell anyway in the next couple of years, she said, “they might choose to sell them this year instead of in 2013 and 2014.” Now at 15%, capital gains tax rates have ranged from 20% to 35% in the recent past and could potentially climb back up.

2. Some clients prepay their twice-annual property tax bills – typically due in April and December – to get two tax deductions in one year. If taxes climb next year, however, those deductions will be more valuable in 2013. If that’s the case, 2012 might not be a year to prepay.

3. For similar reasons, charitably minded clients might want to wait to donate to causes until next year to take more deductions in a higher tax rate environment. Many of Wetherby’s clients take advantage of donor-advised funds, which allow them to give money right now, and get it out of the tax column and choose the targets of their giving later. But some clients, she said, might want to postpone this funding until next year.

4. Many companies pay out annual bonuses to employees in either December or January. If taxes are rising in 2013, she said, then the impact of that gift will be greater for employees who get their bonuses in December of 2012 as opposed to January of 2013.

It’s important to look at each client’s unique needs and circumstances, Wetherby said. “But if nothing is changing in your personal circumstances,” she said, in all likelihood “your rates are going up.”

Ann Marsh writes for Financial Planning.



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