The looming fiscal cliff has most investment advisers on edge, but one tax expert is cautioning them not to jump off.
“We don't know if taxmageddon is upon us,” John Kilroy, a senior wealth planner at The Vanguard Group Inc., said last week during a federal-tax-update session at the FPA conference. “Focus your tax planning on this year.”
Instead of trying to plan based on guesses about what is going to happen Jan. 1, when a combination of tax increases and spending cuts goes into effect unless Congress acts, advisers should concentrate on the basics of tax planning and consider moves to achieve tax efficiency, Mr. Kilroy said.
“To specifically try and plan for something we just don't know about is a gamble,” he said in an interview. “Whatever comes down the road is going to be changed again.”
CAPITAL GAINS
One of the steps advisers may want to take is to calculate whether their clients fall within the income range in which the alternative minimum tax is to be phased out. If they are within that range, they will be taxed at the marginal rate — for example, 35% for the highest earners.
But if their clients move or convert assets into a Roth individual retirement account, it will boost their adjusted gross income and they can move out of the marginal range, and back to the 28% AMT rate. It's the area that Mr. Kilroy calls the “AMT sweet spot.”
Many investment advisers are wary of the AMT, but Mr. Kilroy urged them to make it part of their tax planning routine.
“There are certain situations you want to embrace it, not dread it [or] avoid it,” he said.
The so-called AMT patch, which establishes the income level at which the AMT doesn't apply, is one of many tax policies that Congress hasn't yet renewed, although it might be addressed after the election.
“In the lame-duck session, they're probably going to create some kind of short-term extension [of all tax cuts],” Mr. Kilroy said.
mschoeff@investmentnews.com Twitter: @markschoeff
