Financial Advisor
Wealthy folks worried that a new administration will raise their taxes sharply by tinkering with Social Security are making plans now to soften the blow. Campaign trail talk by Democratic Sen. Barack Obama, D.-Ill., about shoring up Social Security with a tax on higher incomes has advisors walking clients through ways to reduce the impact. Rich self- employed people would be hardest hit. Among the possible antidotes: Taking a bonus or exercising stock options this year instead of next. Another idea is for entrepreneurs to take smaller salaries to reduce their taxable income. Tax rhetoric by politicians is powerful stuff, as recent activity among planners proves. The election is months away; nonetheless, Social Security talk is one of several campaign tax issues driving a very real effort by advisors to buffer clients now from what they see as looming rate hikes. Many are convinced Democrats will raise rates on capital gains and ordinary income. "We're seeing clients worried about the possible repeal of wage caps on Social Security," said M. Holly Isdale, managing director and head of wealth advisory services at Lehman Brothers Holdings Inc. "My experience is that they are beginning discussions to accelerate income into this year and thus avoid an increased Social Security tax, with the idea to pull the trigger on these plans later in the year." Isdale has been "deferring the details to clients' accountants who have a more detailed view of the entire income tax picture," she added. Under current law, people only pay Social Security tax on the first $102,000 of their income in 2008. (The tax, a part of the payroll tax system, is used to fund Social Security and is separate from a Medicare tax.) Nothing more than that is taxed, so a big share of high- income folks' wages isn't subject to the levy. What has people worried, according to Joan Crain, senior director of wealth management strategies at BNY Mellon Management, is the idea that Obama might change the rules to tax all income. There are also concerns that Obama, if elected, might create a so- called "donut," that would tax the first $102,000 and everything over a higher amount, say $200,000, according to Crain. The idea of the donut is that the system would create a hole that would spare upper- middle-class people some of the tax. "Clients are concerned and annoyed," Crain said. "They're saying that it's another stealth tax increase." The tax rate for affected wages paid in 2008 is set by statute at
6.2% for both employees and employers. So an individual with wages equal to or more than $102,000 would pay $6,324 in tax, and his or her employer would contribute the same amount. An individual who earns $1 million would pay the same amount of tax. The self-employed get a double-whammy; they must contribute for themselves and the business. So, an entrepreneur with $102,000 of income subject to the Social Security would owe $12,648 in tax. Doctors, lawyers and hedge fund partners with substantial self- employment income are among the individuals who fall into this category. "It's real, but it's hidden," said Isdale. "People may say 'You're saber-rattling' but I think it's worth noting and laying out for people what taxes could look like." Obama's campaign didn't respond to a request for comment. His Web site,On top of this, Obama wants to roll back the Bush income tax cuts. High earners will be facing federal marginal income tax rates above
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