Personal Finance: Tax-rate plans leave uncertainty

The tax-season headache has passed, but stress could intensify this year amid possible tax increases and uncertainty that confounds planning.

Taxes may go up for individuals making more than $200,000 and couples more than $250,000, and perhaps people below that. But how much, and when, is uncertain. The so-called Bush tax cuts from 2001 and 2003 expire at the end of this year, and President Obama has suggested increases for high-income people.

The uncertainty has some financial advisers unwilling to implement typical tax-planning strategies.

Generally, as taxpayers put finishing touches on a return, advisers remind them to plan ahead. Often, the advice is to delay taking income as long as possible if taxpayers can postpone a bonus or wait to bill a client. Another common suggestion is to be on the lookout for deductions and claim them for the current tax year rather than waiting.

But if taxes rise for people with higher incomes, delaying income could be expensive. Taxes for people in the 33 percent bracket could rise to 36 percent, and the 35 percent rate to 39.6 percent. In addition, a new 3.8 percent Medicare tax on investment income takes effect in 2013. So significant deductions could be more useful later.

Planners see little concern for moderate-income clients because Obama has promised to keep their taxes from rising. For them, the advice is the same as usual: If you got a large refund this year, change your withholding so you keep more pay. In addition, make larger contributions to your 401(k) or a tax-deductible IRA if you have no retirement-savings plan at work.

Further, CCH tax analyst Mark Luscombe said to make energy-savings improvements to your home in 2010, before a tax credit expires.

For higher-income people, strategies are more tentative:

Capital gains. When stocks, bonds, or mutual funds held for a year or more are sold, the gains are taxed at a maximum rate of 15 percent. But that could rise to 20 percent for higher-income people, perhaps creating an incentive to sell and lock in gains this year. It also could be wise to take a loss on an investment this year because large losses can offset future capital gains or $3,000 a year in income in future years.

Dividend stocks. If dividends start to be taxed at a 39.6 percent rate for high-income taxpayers, as some propose, they will be a little less attractive to investors than those now taxed at 15 percent, said Tim Steffen of the Robert W. Baird Private Wealth Management group. Investors may want a blend of dividend-paying stocks and so-called growth stocks to diversify portfolios. John Skjervem, Northern Trust Corp. executive vice president, points out that baby boomers might want dividend-paying stocks for the income they will produce in retirement.

Municipal bonds. Munis could become more attractive to investors in high tax brackets because many are insulated from taxes. But Skjervem warns that many cities and states are in serious financial trouble, putting investors at risk that a government body won't pay muni investors.

Getting the bucket right. Investors can put investments that will be subject to high dividend and capital gains taxes into IRAs, which are insulated from taxes. Skjervem said he did not like taxable accounts to be exposed to stock funds or hedge funds with high turnover; he prefers such investments in IRAs.

IRA conversions. This year, investors at any income level can convert traditional IRAs into Roth IRAs and pay the necessary taxes over two to three years. If you are in a high tax bracket, consider carefully whether you want to pay taxes on the conversion in 2011 and 2012, when your tax rate could be higher than 2010's.