http://pittsburgh.bizjournals.com/pittsburgh/stories/2008/11/17/story1.html?b=1226898000^1732986
Friday, November 14, 2008 | Modified: Monday, November 17, 2008 - 6:00 AM
Money managers prepare for Obama's tax policies
Pittsburgh Business Times - by Patty Tascarella
President-elect Barack Obama vowed during the campaign that he would cut taxes for the middle class but raise them for the affluent.
With roughly six weeks left in the year to come up with strategies for clients’ 2008 tax filings, financial professionals are scrambling to guess what changes are likely to be enacted once Obama takes office in January.
They don’t doubt there will be changes. Obama outlined a comprehensive plan that raises capital gains and estate taxes, rewards corporate R&D and job creation efforts stateside, and repeals special breaks for oil and gas companies and those who create jobs overseas at the expense of employment in the United States.
But many believe the roller coaster spins and turns of the stock market over the past couple months will impact the new president’s agenda.
“The economy is the wild card,” said Douglas Kreps, managing director at Fort Pitt Capital Group, Green Tree. “It seems like the rhetoric coming out of the Obama transition team has softened on taxes. The economy is in a fragile state, and they don’t want to be seen as raising taxes and further damaging the economy.”
David B. Root Jr., CEO of Downtown-based D.B. Root & Co., isn’t sure “how much room (Obama) is going to have to increase marginal tax rates in the way he communicated during his campaign because we’re in a recession and have no idea” how long it will last.
“We’re encouraging our clients not to overreact,” Root said. “However, at the same time, we’re suggesting it makes sense to be aware that certain tax items or tax rates may and probably will go up, namely capital gains and possibly dividend rates.”
BEST GUESSES
Root believes it’s “more than likely” the new president will take “some steps” with capital gains, specifically raising the rates from the current 15 percent to 20 percent for those in the upper income brackets.
“In which case, from an investment standpoint, anything we can do to enable our clients’ portfolios to become more tax efficient going into next year will only help,” Root said. “That may mean possibly harvesting capital gains this year and offsetting those with losses that may have occurred over the past two or three months.”
He’ll make sure clients are “maxing out on retirement plans” and taking advantage of over-50 catchup contributions, which aren’t taxed until the investor cashes out.
“A lot of times, those get overlooked,” he said.
Smithfield Trust Co. CEO Robert Kopf is counseling clients to concentrate on their overall game plan.
“I have heard because of the problems in the economy that those tax increases in capital gains may be delayed or deferred, so we’re not getting too worked up,” Kopf said. “What we are doing is counseling customers to harvest losses they may have realized in this bear market and use those losses to offset earlier gains occurred in 2008. They can carry forward losses that would offset capital gain liability in 2009.”
Kreps pointed out that many investors’ gains “have evaporated” with the plummeting stock market.
“The tax planning needs to be revisited this quarter,” he said. “Investors need to come back to the fundamentals with the investments they own and worry a little less about taxes. If your portfolio makes sense long-term, let’s try not to make a short-term decision based on gambling with the tax system when we don’t know what will happen.”
Kreps said the capital gains tax increases likely won’t occur in the current year, but could be implemented in 2009 or 2010.
“Congress and the president-elect will have way more important issues to address with regard to the economy than trying to change the tax code right out of the gates,” Kreps said. “The guy’s boxed in.”
David Hunter, chairman of Hunter Associates Inc. and a former chairman of the National Association of Securities Dealers, is less concerned over the new administration’s potential tax changes than in nudging clients back into the stock market.
“We’ve been more conservative for over a year now than we normally would be, but we’ve got to buy stocks to restore the equity portion of (clients’) portfolios,” Hunter said. “The truth is, they don’t want us to at the moment, and we do this slowly, but stock prices are down a lot more than earnings will be down at many good companies. We’ve got to buy stocks when they’re at these levels if we’re going to be winners long-term.”
The Obama Plan
President-elect Barack Obama’s proposed tax changes include:
The creation of a new “Making Work Pay” tax credit of up to $500 per person or $1,000 per working family
No tax increases for any family making less than $250,000
Repealing a portion of the Bush tax cuts for families making more than $250,000
Returning the top two income tax brackets to their 1990s levels of 36 percent and 39.6 percent
Creating a new top capital gains rate of 20 percent for those in the top two income tax brackets.
Eliminating all capital gains taxes on startup and small businesses to encourage innovation and job creation
Cutting corporate taxes for firms that invest in jobs in the United States
Making the R&D tax credit permanent
Eliminating special tax breaks for oil and gas companies
Repealing tax loopholes that reward corporations that retain their earnings overseas
Source: www.BarackObama.com
ptascarella@bizjournals.com | (412) 208-3832
