Tax Insights

We’ve entered that most wonderful time of year. No, not the holiday season. I mean the election season and the dazzling amount of political mumbo-jumbo, accounting tricks and finger pointing; you know, those time-honored traditions that have become the fabric of our election process.

The tax question we seem to hear most often is: “What will happen if the Democrats keep control of Congress and take over the White House?” Our answer is simple: the tax code will change. Oddly enough, this is the same answer we would give regardless of which party has control of Congress and the White House. You see, both parties seem to be under the mistaken notion that in order for the tax code to work properly, it must be changed regularly, much like you and I periodically change the oil in our cars.

As we look at the political jockeying for the 2008 presidential campaign, although there’s talk on both sides of the fence about tax simplification and alternative minimum tax (AMT) relief, none of the leading candidates offer any radical solutions.

Republicans are focused on President Bush’s tax cuts which expire in 2010, including the current lower marginal tax rates and favorable 15% top rate on capital gains. Although many Republican candidates have proposals for additional tax cuts, the focus is clear: make the Bush tax cuts permanent. Democrats challenge that the Bush plan results in too much lost tax revenue that must be recovered through some other means such as tax increases or spending cuts.

Last week, we gained insight into the Democrats’ plans. Charles Rangel, the House Ways and Means Chairman, unveiled a bill that he and his fellow Democrats believe “would reform the tax code to provide a greater sense of equality and fairness” by providing tax relief to working families. Not surprisingly, the Republicans don’t see it that way and are calling it the “mother of all tax hikes.”

The centerpiece of the Democrats’ plan is the complete repeal of the AMT. The plan increases the impact of the child tax credit so that more lower-income earners will benefit from the credit. It substantially increases the standard deduction for all taxpayers to simplify tax filing for many by eliminating the need to itemize deductions and reducing the number of individuals required to file a tax return.

In order to pay for these tax cuts, personal tax rates for upper-income earners will increase. A surtax of between 4% and 5% would be levied on taxpayers with adjusted gross incomes in excess of $200,000, increasing their marginal rates to nearly 40%. It is also likely that the Democrats will restore the 20% capital gains tax rate and, once again, tax dividends at the taxpayer’s marginal tax rate rather than the current 15% maximum qualified dividend rate.

What steps should you take to better position yourself for the vastly different tax proposals? How do you minimize tax under the ever-changing landscape to more efficiently build your wealth and establish greater financial security?

Our advice is the same regardless of the political environment and provides a solid foundation that efficiently handles the best and worst of tax law changes.

First, our firm understands that the annual tax drag on your portfolio significantly erodes your ability to preserve and grow your wealth. Therefore, we strategically place tax inefficient portfolio positions within tax qualified accounts to avoid current taxation, while tax efficient holdings are held within taxable brokerage accounts, resulting in minimal annual tax drag.

Second, we believe that you should never let the ‘tax tail wag the wealth dog.’ Although many new tax opportunities may initially seem compelling to execute, we recommend a thorough analysis of the new law and its implications on your future wealth. Once understood, we often learn that the tax opportunity is a real dud and execution would have been a mistake.

Third, your financial plan should be periodically ‘stress tested’ for potential tax increases to identify additional steps for strengthening your financial security. Peace-of-mind in this ever-changing tax environment can be achieved through proper analysis.

Like you, we are frustrated with the constant change. However, we continue to rely on our strong foundation and believe tax law changes will typically result in only minimal redirection for your portfolio or plan.

If you have any questions, please don’t hesitate to contact us. If you’re not currently a client, but would like to schedule an appointment, please contact Lisa Reynolds at (513) 792-6648 or [email protected].

Truepoint Wealth Counsel is a fee-only Registered Investment Adviser. Registration as an adviser does not connote a specific level of skill or training. More detail, including forms ADV Part 2A & 2B filed with the SEC, can be found at TruepointWealth.com. Neither the information, nor any opinion expressed, is to be construed as personalized investment, tax or legal advice. The accuracy and completeness of information presented from third-party sources cannot be guaranteed.

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