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Presidential election, expiration of tax cuts loom in planning efforts

NORTH BAY – With several key tax provisions set to expire and a new president taking office in six months, experts are predicting changes that could affect the amount of money individuals and businesses must send to the government.

While details are sketchy, experts are predicting that regardless of which party controls the White House, increases are likely for taxes on dividends, capital gains and ordinary income for high-earning taxpayers.

Local CPAs say individuals, particularly those who own closely held business, should carefully watch upcoming tax proposals to property position themselves.

“We’ll hopefully know more by December, but it’s quite likely that we should be strategizing towards … accelerating income into this year and deferring deductions into next year,” said Doug Paul, a consultant for Novato-based Ghirardo CPA.

Tax provisions signed by President Bush in 2001 and 2003 reduced the top income tax rate to 35 percent from 39.6 percent and lowered the top dividend and capital gains rates from 35 percent to 15 percent. Those tax cuts are set to expire at the end of 2010, but it is possible that changes could happen sooner under a new president.

Taxpayers who expect higher rates in the future can use several strategies to pay more taxes now at the lower rates. Business owners can take excess profits and pay themselves bonuses or dividends, but they have to be careful not to violate “reasonable compensation” limits set by the IRS.

“The IRS just doesn’t allow you to take all your [company] earnings out in compensation,” said Buddy Wall, a partner with Moss Adams LLP in Santa Rosa.

Investors who are planning to liquidate their portfolios should consider that tax increases are looming in the next year. Since the investment tax rates could increase as early as 2009, investors need to look at the tax impact of selling this year, and weigh that against the fact that the major stock indexes are down more than 14 percent from the beginning of the year. “You’ve got to look at that low capital gains rate of 15 percent and that dividend rate at 15 percent,” Mr. Wall said.

Complicating matters for taxpayers are expected changes to the alternative minimum tax, a parallel tax system impacting many higher-earning individuals in California. The AMT has a lower rate than the top regular tax rate, but it doesn’t allow taxpayers to deduct major items such as state income taxes or property taxes. Individuals are required to calculate their tax liability under both systems and then pay the higher amount.

Since the AMT is not indexed for inflation, it could hit more taxpayers at lower income levels each year, but so far Congress has passed a series of one-year fixes to increase the minimum income level for the tax. A similar fix is expected for 2008, but nothing has been passed yet.

“At this point, there’s not much you can do,” Mr. Wall said. Tied to the fate of the AMT are other key tax provisions such as deductions for research and development, college tuition, state and local sales taxes and charitable contributions. Those deductions have been attached to in AMT bills, but could also be voted on as stand-alone proposals.