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Tax planning ahead of the Obama administration

November 05, 2008

Now that the election has been decided, the pieces of the tax planning chessboard are being rearranged. How should taxpayers react?

Even with the election settled, there is still uncertainty. While the Obama campaign called for tax increases on high-bracket individuals and an increase in the capital gain and dividend rates, it's possible that he will at least delay a big tax increase in the face of a recession. Tax geeks will be watching closely to see if he really plans to plunge ahead with a tax hike, Hoover-style.

Still, there's reason to believe Senator Obama meant what he said. The area most ripe for tax planning this year is capital gains. While the plunge in the stock market has eliminated this problem for many taxpayers, it still is a live issue for others. The likely increase in the capital gain rate from 15% to 20% - a 33% increase - makes a big difference. If a taxpayer has the ability to sell an asset now that would otherwise be sold in the next three or four years, it might well pay to do so.

If it turns out that the new administration is serious about jacking up taxes right away, year-end planning will take an unaccustomed turn. High-bracket taxpayers will be looking to accelerate income to 2008 that would otherwise be taxed in 2009 at higher rates; likewise they will want to save their deductions for 2009, when the higher rates will make them worth more. We'll be talking about ways to do this in the coming weeks.

It's premature to do anything more serious until the new administration begins to take shape. In particular, it would be unwise to do things that are hard to undo, like terminating an S election, until we see what hope and change turn into in the House and Senate.

The TaxProf has a roundup of academic views of taxes in the Obama administration.

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