Wealthy clients bemoaning President Obama’s tax reforms may find little comfort knowing they aren’t effective until 2011 — Charles Schwab found 41 percent of investment advisors think the recession will last until 2010, and 35 percent think it’ll take five years for portfolios to regain their losses.
“In other words, the recession could end and stocks could show gains just as taxes increase,” writes Paul Sullivan for The New York Times. He offers five tax tips to help wealthy clients ease the burden of changing tax constraints.
Use capital gains to your best advantage. “People who suddenly find themselves in the highest income tax bracket have a lot of time to figure out how to pay less tax under the new regime,” Sullivan writes. “Small-business owners could particularly benefit from acting early. They could start paying themselves a qualified dividend, which would reduce the value of their company and be taxed as capital gains, not ordinary income.”
Or business owners could sell all or part of the business to an employee share ownership plan, he adds. Any income is taxed at the capital gains rate.
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Don’t overlook municipal bonds. Sullivan cites research from Thornburg Investment Management that shows high-quality municipal bonds have returned 3 percent to 5 percent year-to-date. Municipal bonds are exempt from federal taxes, and if your clients are residents of the state where the bond was issued, they’re exempt from local taxes, as well.