Tax Stategies Under Obama Tax Plan

Everyone is aware that President-elect Barack Obama has stated his case clearly that there will be a major tax bill for 2009. As our experience shows, a first-term tax law will probably not see passage by both houses until as late as July; however, it is more than likely that many of the new tax provisions will be retroactive to Jan. 1.

How will the so-called "middle class" be affected? Generally, if you are earning less than $250,000, it is expected that a tax cut could be coming your way.

This could come about with one or more of the following key provisions: a $500 per-wage earner tax credit, based on the first $8,100 in payroll wages; a refundable mortgage-interest credit; an enhanced child care credit; a new education credit; and the elimination of taxes for seniors with income less than $50,000 per year.

What about the so-called high income taxpayers? Unfortunately, if you happen to be in one of the two highest tax brackets - 33 percent and 35 percent - you can expect those brackets to be increased to 35 percent and 39 percent, respectively.

These were the old rates before the Bush tax cuts. Although rumors persist that these proposals for rate increases might be postponed for a year or so while the recession continues, it seems clear that they will, nevertheless, become a reality.

Also, if you earn more than $250,000, you will probably see further limitations on your itemized deductions and exemptions.

Looking ahead at capital gains and the dividend tax rates - the tax rates that need special attention during times of economic crisis.

Again, it looks like bad news for higher earners. For those earning more than $200,000 and families earning more than $250,000, the attractive 15 percent ceiling tax rate for capital gains and dividends is expected to disappear. The plan is to raise their top rate to 20 percent, not an insignificant increase.

Planning tips

Q: Should I sell stock or real estate investments that are at a profit in spite of the down market before the law changes in 2009?

A: Don't be hasty to let the "tax dog" wag the tail. In most cases your primary focus should be on the real merits of your investment. Don't let an extra 5 percent tax hit stand in the way of smart economics. Besides, there is still the chance that the new administration will back off temporarily and postpone the tax increase.

Q: What should I do if the securities in my portfolio are down in value?

A: Welcome to the investor's club of 2008. If the value of your securities has dropped considerably below your cost basis, you may want to consider selling some positions to lock in the tax benefits. This is one particular year that the popular technique known as "harvesting" tax losses could make good sense.

Any unused capital losses that are realized could be carried forward to capital gains that will be earned in future years.

One word of caution. With the market down and everybody searching for the bottom, many are trying to lock in portfolio losses for future tax benefits. Many turn around and buy back for their portfolio the same positions that were sold, in line with their planning strategy.

It looks easy - like putting money in the bank. However, the IRS will be on the lookout for these prohibited maneuvers known as "wash sales." In general, the strategy won't work if you buy back the same, or "substantially identical," security within 30 days.

Retirement under Obama

For retirees it's mostly good news. The early briefings indicate that Mr. Obama is supporting a relaxation of the current penalties for early withdrawals from retirement plans, and a temporary suspension of the required minimum distributions, the RMDs.

Attention estate planners, an important mystery may soon be resolved. Estate planning professionals have long been in a quandary trying to lay out a comprehensive long-term strategy to eliminate unnecessary estate taxes. One reason: No one could predict how much the federal estate-tax exemption would be at the time of the estate planner's death.

Although the lifetime exemption was scheduled to increase in staggered fashion over the past several years, the current law calls for it to peak at $3.5 million in 2009. But, to put it bluntly, even the top experts have been clueless as to how much an estate will have to be worth to be subject to the federal estate tax after 2009 comes to an end.

Well, it seems that the president-elect has been the one to step up to the plate to address this nagging question.

First, he has proposed pegging the top estate tax rate at 45 percent. But, more important, his plan calls for keeping the $3.5 million exemption in place for individuals while, interestingly, providing for a $7 million allowance for married couples.

This, according to the Obama briefing, would effectively eliminate the death tax for 99.7 percent of estates - a major estate planning breakthrough for many Americans.

However, before you run off and make any radical changes with your estate strategy, wait to see more details on the Obama plan, especially how it will work for married couples.

Thomas J. Stemmy, CPA, CVA, EA, an award winning author, is a resident of Annapolis. A partner with Stemmy, Tidler & Morris, a CPA firm in Greenbelt, Tom is the author of "Top Tax Saving Ideas for Today's Small Business." He can be reached at TStemmyCPA@Yahoo.com.

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