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By Jason Stipp | 02-22-2013 12:00 PM

Despite Recent Compromise, No Long-Term Tax Certainty

Investors still need to plan for long-term tax hikes and keep AMT exposure, itemized deduction limitations, charitable distribution opportunities, and trust taxation on their radars, says Investor Solutions' John Pitlosh.

Jason Stipp: So, John, I'd like to turn to 2013, and some of the things that need to be on investors' radars going forward on the tax front.

There was a lot of concern about the fiscal cliff and some of the Bush-era tax cuts that were set to expire. We did get a resolution on some of those issues. The Bush tax cuts on dividends and capital gains stayed where they were for most investors; however, higher-income investors are facing some higher tax rates on capital gains, on dividends, and on income.

So, a couple of questions for you. The first is, do those higher tax rates on higher-income individuals change how you are thinking about tax planning for them? And secondly, do you feel like there really is certainty there about taxes, or do you think even investors who didn't see a change should still worry about what the tax environment may look like in the future?

John Pitlosh: The law was definitely passed that put a lot of these things into stone, but the stability of what's going to happen going forward, that certainty still isn't there. Everyone outside of Washington knows that spending needs to go down and revenue needs to be raised. So, how are they going to do that? Are they going to do a Simpson-Bowles 1.0, a Simpson-Bowles 2.0, a Mitt Romney plan?

So, the form that all the deficit reduction and all these things could take is going to affect clients, and you can't plan on what's currently in place being there long term, at least from a rational point of view. And if that's the case, then you still need to maintain the same mentality that we had previous to the fiscal cliff year, and that's just maintain flexibility, keep your adjusted gross income down, and just don't rely on any long-term tax planning to be there for you.

So, just as a general theme, one of the things that we've done with a lot of our higher-income clients is making sure you're keeping that … AGI down. So instead of contributing to the Roth 401(k), we're maximizing the pre-tax 401(k), and we're making sure that they're doing a health savings account. We're making sure that if they have access to a deferred compensation [they are taking advantage of that]--anything that will reduce that pre-tax income on Page 1 of the 1040. That's what you want to keep down.

So, while things may have changed on paper, they really haven't in reality for most clients. So, our expectations is that things are likely to continue to change.

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