Sell. That’s the message from some financial advisers, who are telling wealthy clients that the remainder of 2012 amounts to a last-chance sale on federal tax rates. Taxes are set to rise in January, pushing the top rate on dividends to 43.4 percent from 15 percent and the top rate on capital gains to 23.8 percent from 15 percent.
Even if Congress averts the so-called fiscal cliff of tax increases on investments, income, and estates, pressure to reduce budget deficits will mean higher taxes eventually, said Ron Florance of Wells Fargo & Co. The answer is to take advantage of historically low rates and move taxable income and investment gains into this year, said Florance, managing director of investment strategy at the company’s private bank.
‘‘It’s the opposite of what people normally do,’’ said Florance, whose clients usually have at least $1 million in investable assets. ‘‘You’re paying taxes today in anticipation of higher rates in the future.’’
Advisers at companies including Wells Fargo, Bank of America, Bank of New York Mellon, JPMorgan Chase & Co., Northern Trust, and U.S. Bancorp are discussing with their wealthy clients such strategies as selling appreciated securities, relocating assets to tax-deferred retirement accounts, converting IRAs, exercising stock options, and making large gifts to heirs this year.
Tax cuts first enacted during George W. Bush’s presidency and extended in 2010 are set to expire Dec. 31. Unless Congress acts, the tax increases along with automatic federal spending cuts will combine to form the so-called fiscal cliff.
Federal taxes on ordinary income will rise up to 39.6 percent from 35 percent. Long-term capital gains rates will increase to a maximum 20 percent from 15 percent, plus an additional 3.8 percent for high-income earners as a result of the 2010 health care law.
People may miss the opportunity to take gains while tax rates are low and rebalance because they’re not considering how well investments in riskier assets such as stocks, high-yield bonds, and real estate have performed this year, said Florance.
Investors with dividend-paying stocks should revisit where they hold them with the potential jump in levies on that income, said a BNY Mellon official. One strategy is to sell the securities this year if they are in a taxable brokerage account and move them into a tax-deferred individual retirement account, he said.
People also should look at the types of accounts they are using for their retirement savings, said Suzanne Shier, director of wealth planning and tax strategist at Chicago-based Northern Trust. ‘‘We’re asking people to take a hard look at Roth conversions again,’’ Shier said.
Some advisers are telling clients not to panic and to watch what Congress does between now and the end of the year as the laws may change. ‘‘Whoever wins this election, one outcome isn’t going to be utopia and the other Armageddon,’’ said Florance. ‘‘You need to be tax-smart, not tax-paranoid.’’
Margaret Collins and Richard Rubin writes for Bloomberg News.