TORONTO Wealth managers are putting a lot of thought into how to restructure the holdings of their clients to soften a huge U.S. tax hit that may be coming next year, a Barclays Wealth executive said.
Without action from the U.S. Congress, taxes on dividends will more than double to about 40 percent next year for individuals earning more than $200,000 and couples with annual incomes of more than $250,000.
With Bush-era tax cuts expiring at the end of the year, Congress has to find tens of billions of dollars in new funding to prevent the dividend levy skyrocketing. But in an election year, and with a massive deficit still on the books, the political will to act is in question.
As a consequence, wealth managers are looking for new ways to help their clients cope with the tax threat, said Matt Brady, head of Wealth Advisory, Americas, at Barclays Wealth.
In his role at Barclays Wealth, which has $241 billion in assets under management, Brady works with high-net-worth U.S. clients to recommend plans for managing wealth across generations.
The U.S. government also wants to extend personal income tax cuts for all those making under $200,000, but let them expire for those making more.
"In particular the tax on dividend income, unless things change, is going to go from, well, today it's 15 percent to in 2013, it will be 43.4 percent at the margin. But everything is going to get taxed more heavily."
There is also no clarity on the estate tax, he said.
"In the estate tax area, where we also spend a lot of time with clients, no one knows what's going to happen -- I mean, literally, no one knows."
"But if nothing else happens between now and next year, the estate tax rate is going to go to 55 percent, and families worth more than $2 million essentially will be subject to it. So, people are looking at a very significantly increasing potential tax burden."
Wealth managers are scrambling to get plans in place to reduce the impact of that possibility.
"If you can save on taxes, that almost means more than any amount of investment performance because the difference between capital gains, for instance, and ordinary income, is 20 percentage points," he said.
"If you can be efficient in having most of your returns in capital gains, then there is no amount of outperformance that you can realistically achieve that makes up for that."
(Reporting by John McCrank; Editing by Frank McGurty)