With tax changes expected shortly after President-elect Barack Obama takes office, high-net-worth individuals are doing what they can to limit the damage to their bank accounts.
During his campaign, Obama said he would cut taxes for middle-class workers and that no one earning less than $250,000 would experience a tax increase. But he also said that "the wealthiest 2 percent" would pay more as the Bush-era tax cuts expire and rates return to their previous higher levels.
The Obama administration will be under pressure to raise taxes in order to address the growing federal budget deficit. Changes to tax law could come as early as next year; President George W. Bush backed major tax legislation that reduced taxes during his first year in office. U.S. News spoke with Phil Tortorich, a partner at the Chicago-based law firm Katten Muchin Rosenman, about how high-net-worth clients are gearing up for such changes. Excerpts:
How will the anticipated tax changes affect your wealthy clients?
We have a sense that the general tendency will be to increase capital-gains taxes and the upper brackets of income tax. Capital-gains taxes [on earnings from equities held for a year or longer] are expected to go up to 20 percent and possibly as high as 28 percent [from the current maximum of 15 percent] for taxpayers earning over $250,000. The highest income tax rate is expected to go up from 35 percent to 39.6 percent for people earning $357,700 or higher.
How quickly would these changes happen?
I would expect this to be done early on in Obama's administration to deal with the bailout situation. [Raising taxes] will offset the cost of the bailout bill. It's easier than cutting spending. It could happen as soon as 2009.
Are your high-net-worth clients worried?
We have a whole host of clients who are looking for ways to lock in their capital gains at [the current] lower rate. If they can incur capital gains now, they think they'll be better off in the long run, which goes against conventional wisdom, which is to wait and defer taxes as long as possible.
Is there a way to incur the tax early without selling your assets?
We're looking at strategies, especially trusts, to trigger the gain but retain the assets. With [certain kinds of] trusts, we can sell assets between trusts and have the capital gains occur. Also, because of public concern over perceived tax loopholes, clients are concerned that trust strategies they can put in place now may not be available in the future, so they want to implement strategies now before the future laws take the ability away.
What about the potentially higher income taxes—can high earners do anything to avoid them?
Professional athletes, corporate executives, and others with large signing bonuses are trying to finish their contracts and get the extra payments made in 2008. If they can get that done by the end of the calendar year, they can lock in the 35 percent rate instead of [the anticipated] 39.6 percent. When you're talking about 10, 20 million dollars, a 5 percentage rate difference is significant. You could get a savings of $600,000.
So people want to get contracts signed before New Year's?
Yes—instead of protracted negotiations and getting every last nickel out of a contract, you may be better off, if you're close, to just sign the thing and get it executed and implemented and paid upfront. Force payment during this year. Instead of getting paid a million per year for five years, get a lump sum upfront.
What about people who are earning over $250,000 a year but not millions? Can they do anything to reduce their taxes?
For people with wages and salaries, you can't really pull income into 2008. You could ask for a paycheck to come on December 31 instead of January 1, so, little things, but that's still only a fraction of your annual income. There are also other little things, such as delaying deductions until next year, which is the opposite of what is traditionally recommended.