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Financial Planning > Tax Planning

OBAMA & TAXES: 2008 VS. 2009 (Nov. 5, 2008)

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The busiest season for taxes is usually in the spring but it could pick up in the next two months as small business owners and high net worth individuals try to protect their assets from anticipated changes in tax law with a Barack Obama presidency, according to tax attorney Phil Tortorich, who is based in President-Elect Obama’s hometown of Chicago..

“Most immediately, we’ll see our clients looking to get the most from estate tax minimization,” says Tortorich, who specializes in estate planning law as a partner at Katten Muchin Rosenman LLP. “That will be true through the end of the year especially as they try to make changes before any major new policies go into effect.”

President-elect Obama is expected to take a more regulated, Clinton-esque view on family limited partnerships and close any perceived “loopholes” that currently allow clients to transfer assets to minimize their tax burden, according to Tortorich.

Individuals with appreciated assets (or low-basis assets) could also be impacted by the new president as details of his proposal on capital gains taxes show a hike to 20 percent. Here again, many clients are already considering methods of intentionally incurring capital gain now in order to lock in the 15 percent long-term capital gains tax.

While this goes against conventional wisdom of deferring tax recognition events for as long as possible, the large potential increase in the tax rate makes it more effective to pay the tax now, according to Tortorich.

“The problem most clients face is how to trigger the gain while also retaining the asset”, says Tortorich. “Various trust techniques can be utilized in this regard to allow the beneficiaries to continue to have the benefit of the asset but also allow the capital gain to be triggered resulting in a step-up in basis for the asset.”

Under an Obama presidency, small businesses will be under more scrutiny, as well, but there are also options in risk management scenarios for owners to use captive insurance programs and lessen their tax burden. President-elect Obama has said he will increase taxes on individuals making more than $250,000. In the case of a business owner who has an S corporation, all of the business income passes through to the individual’s return and is taxed by the individual even if no distribution is made by the company. Moreover, the president-elect has discussed increasing payroll taxes which will also increase the cost of running successful businesses.

As a means of offsetting some of these increased taxes on the business owner, a business owner can consider a captive which provides for alternative risk management in a tax efficient solution. Many of those business owners will start to look for creative measures now to avoid a larger hit down the road and Tortorich figures to be a central part in many decisions.

“The general view of Obama’s policies with a Democratic congress in power is one of less exemptions and higher tax rates on high net worth individuals and business owners,” says Tortorich. “We’ll certainly be busy in the days ahead as we answer the questions and concerns for people during this transition period.”


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