Advisers say Obama tax break cap would hurt clients

28% limit not a 'helpful' policy for jobs or growth

Apr 5, 2013 @ 4:03 pm

By Mark Schoeff Jr.

President Barack Obama doesn't release his budget until next week, but one proposal it's likely to include — a 28% cap on tax deductions by high-income earners — is being rejected by investment advisers.

“It's a vilification of the people who have played by the rules and have accumulated wealth,” said Troy Logan, managing director of Warren Financial Service. “These people should be thanked, not taxed. I don't think this is a helpful policy for jobs and growth.”

Mr. Obama has included the cap in each of the budgets he's presented to Congress since the beginning of his first term. At first, it focused on limiting itemized deductions but was expanded last year to include a cap on tax deductions for municipal bond interest and employer-provided health insurance, and tax deferrals for contributions to retirement savings plans.

It's an attempt by the president to spread the tax burden more evenly and make households that earn more than $250,000 pay more. But investment advisers contend that such a move would add more complexity to the tax code.

“This is far from tax simplification; it complicates things,” said Tim Steffen, senior vice president and director of financial planning at Robert W. Baird & Co. Inc.

The limitation on the deduction of municipal bond interest would hurt his clients most, according to Mr. Logan.

“A lot of high-net-worth individuals like municipal bonds,” Mr. Logan said. “Anything that increases the effective tax rate on interest income would be problematic.”

Under current law, municipal bond earnings are tax-exempt. If Mr. Obama's plan is approved by Congress, people in the top tax bracket — 39.6% — would have to pay the difference between that rate and 28% on their bond interest.

Curbing deductions for charitable contributions also causes concern among advisers.

“Limiting charitable deductions in any way is a really bad idea,” said Kenneth Klabunde, vice president of City Securities Corp. “Charities across the board provide really critical services for our society. These are funded in large part by contributions from wealthy donors. We should not be disincentivizing those gifts.”

Erin Baehr, president of Baehr Family Financial LLC, also is worried about diminishing the charitable deduction. She said some of her clients “are being squeezed tremendously by taxes” and are already pulling back on donations.

“They're working very hard, and they're not seeing a great benefit from it,” Ms. Baehr said. “They see more and more of their money going to taxes. They don't want to give to charity, because they think government is taking over that role.”

Mr. Obama's proposal is a long way from becoming law. He will release his budget after the Democratic Senate and Republican House already have approved broad budget blueprints that are far apart — with nearly $1 trillion in new taxes in the Senate version and no tax increases in the House version.

In addition, Capitol Hill Republicans say they gave Mr. Obama all the tax increases he's going to get in the fiscal cliff bill approved Jan. 1 that lifted the top two rates back to pre-2001 levels.

But the fact that Mr. Obama continues to push the tax deduction cap gives it some momentum.

“It's probably still a long shot, but it's not as long as it has been,” Mr. Steffen said. “The longer it hangs around, the better chance it has of happening.”

Mr. Steffen makes clients aware of Mr. Obama's proposal but tries to keep it in perspective for them.

“You don't want to overreact to something that may or may not happen,” Mr. Steffen said.

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