Election years always roil financial markets, but this year the situation is exacerbated by the European debt crisis and the ongoing debate on tax reform in Congress. With that in mind, political expert Andy Friedman of the Washington Update advised financial planners to prepare their affluent clients for higher taxes in the near future.
Friedman, below right, spoke during a webinar last week sponsored by Sammons Retirement Solutions to help financial advisors better understand the changing tax landscape and how it could impact their clients. William Lowe, presidents of Sammons Retirement Solutions, Inc., hosted the webinar.
Much of the currently uncertainty stems from the $2.1 trillion in spending cuts scheduled to go into effect in January 2012 under the debt ceiling agreement approved by Congress. At the same time the Bush tax cuts are set to expire. If Congress fails to act and those events transpire, many economists have warned that the U.S. will fall over a “fiscal cliff” into a deep recession that will see a 3.5% slowdown in GDP in the first quarter of next year, Friedman said.
Friedman stated that he doesn’t believe that dire scenario will come to pass. However, he did predict that taxes will go up for the ultra-wealthy, with one possible compromise worked out between the Congress and the president being the raising of the income level above which the tax cuts expire from $250,000 to $1 million.
He further anticipated some spending cuts will be implemented. If the spending cuts are not applied, the U.S. could face another downgrade, Friedman said.
For advisors and their clients, several tactics can be employed to mitigate higher taxes. In particular, Friedman recommended gifting strategies to transfer wealth while the estate tax exemption still holds at $5 million. “There will never be a better opportunity,” he said. “This is certainly a year to talk to your clients about gifts.” Yet Friedman added there could be a “slackening” of techniques used to set up trusts in the future.