When it comes to tax planning, the general consensus among financial advisers and accountants can be summed up in that old motto: Don't put off until tomorrow what you can do today.
Larry Maddox, a certified public accountant and certified financial planner, is doing all he can to drive home that point to his clients — especially this year. He is a founding partner of accounting firm Maddox Thomson & Associates PC, as well as Horizon Advisors LLC, which manages $150 million in client assets.
With the window closing fast on the current income tax rates of 10%, 15%, 25%, 28%, 33% and 35% for the tax year ending Dec. 31, and the possibility that rates will revert to the pre-Bush-era figures of 15%, 28%, 31%, 36% and 39.6%, high-net-worth clients such as Horizon's are looking for answers. Although an alternate proposal by President Barack Obama would widen the 28% bracket to include single filers with adjusted gross income of up to $200,000 — $250,000 for married couples filing jointly — many of Mr. Maddox's clients still would find themselves in the highest brackets.
ACCELERATE INCOME
Instead of deferring income, as often has been advised, he is telling clients to consider accelerating income into 2010 to take advantage of the lower rates.
To be more specific, Mr. Maddox cites year-end bonuses and non-qualified stock options.
“If you're expecting a bonus, you'll save tax dollars if you can receive it this year rather than next,” he said. “The same is true if you can exercise those stock options before the end of the year.”
This issue of capital gains is another to consider, though Mr. Maddox cautions against putting tax decisions above investment objectives.
“But with [capital gains] rates scheduled to increase from 15% to 20% — an increase of 33% — if you are contemplating a sale in the near future, 2010 would be better than 2011 from a tax standpoint,” he said.
Although he has written about the advisability of converting regular individual retirement accounts to Roth IRAs, Mr. Maddox has some pointed advice for regular-IRA investors who will turn 701/2 before the end of the year.
“Consider taking your first
required minimum distribution during 2010, rather than waiting until 2011, when you would be required to take your first and second in the same year — with higher rates,” he said.
DEFER DEDUCTIONS
In another twist on the past, Mr. Maddox has been counseling clients to consider deferring deductions to 2011, when they can be used to offset income that is expected to be taxed at the higher rate.
Among his suggestions are to defer significant charitable deductions, property taxes (but be sure to consider the effects of the alternative minimum tax) and state income tax payments.
