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Most financial advisors are taking a wait-and-see approach to President Barack Obama’s tax proposal announced Monday, but some say it could pay to prepare clients for some kind of tax reform anyway.

As part of his plan for economic growth and deficit reduction, Obama called for comprehensive tax reform, including the “Buffett Rule,” which would set a minimum tax rate for people earning more than $1 million a year (including capital gains), as well as an end to the Bush tax cuts for the wealthy.

“Until we actually see some kind of a bill, I don’t get too excited about things,” said Christopher Weed, a Stockton, Calif.-based RIA, who specializes in tax planning. Weed sees the media frenzy about the tax plan as a lot of political noise, rather than something concrete to be concerned about. “You do whatever makes sense from a financial perspective, then you worry about the tax consequences later.”

Gerry Klingman, president of Klingman & Associates, an affiliate of Raymond James Financial Services, said it’s very unlikely that any kind of tax reform will pass before the 2012 election. Congress couldn’t compromise on the debt ceiling, so he doesn’t believe anything will come to fruition with a tax plan, especially given the gridlock we’re seeing in Washington. Many wealth managers are fed up with how politicians are dealing with the nation’s economic problems.

“This is not going anywhere before the end of the year,” or by the end of next year for that matter, said Christopher Woehrle, a professor of taxation at The American College. “I would not be rushing out making dramatic changes to a portfolio.”

Taking Some Steps

Woehrle stressed how difficult it is to reform the tax system, and believes Congress won’t be able to rush something through the legislative process. That said, “No question we are long overdue for major reform of the tax code.” The last major reform was in 1986, with the Reagan tax cuts. Former President Reagan proposed the tax reform in November 1984, and it took almost two years to get enacted, Woehrle said.

Stan Smiley, attorney and senior vice president of Cetera’s Advanced Planning Group, said Obama’s proposal might have more legs than advisors think, and that good advisors should at least alert clients to possible outcomes. Taxes will rise one way or another, he said. In fact, the super committee tasked with coming up with a deficit reduction plan is meeting Nov. 23, and will likely address the issue of tax reform, Smiley said. In addition, a 3.8 percent tax increase on unearned income is already on the books to take effect Jan. 1, 2013, as part of healthcare reform.

According to Smiley, the real focus of Obama’s plan is on the increased tax liability for households that make more than $250,000. This would include increased taxes on capital gains and a limit on itemized deductions for that group. He recommends advisors use variable annuities and Roth IRAs because they are more tax-efficient vehicles. He also suggests affluent clients gift as much as possible as a way to avoid paying higher taxes on those assets.

Frank Fantozzi, CEO of Planned Financial Services in Cleveland, Ohio, said he believes the tax plan is pie in the sky, but he’s still talking to his clients about it. Right now, he’s weighing the risk of taking action with clients early versus delaying it and hoping the proposals don’t go through. For clients that are more risk averse, they may want to take action now, such as giving a lot of gifts or taking capital gains sooner.

Klingman recommends clients take income now while the rates are lower, rather than defer income for a later date. Over the last couple years, his firm has been willing to make tax payments because of where rates are. “If all this passes, we would be working hard to defer taxes and hope tax rates would go down again.”

If the Bush tax cuts expire, capital gains rates would increase to 28 percent from 15 percent, Klingman said. At 15 percent, however, clients make economic decisions with their investments, but if rates were to go up, clients would likely hold onto their investments to avoid having to pay it, resulting in less revenue for the government, he added. According to a Congressional Joint Economic Committee study done in 1997, reductions in capital gains taxes historically result in increased tax revenue.

When tax rates go up, clients typically try to minimize their taxes and avoid getting bumped up into a higher tax bracket, Weed said. One way to do this is to avoid selling property in a higher tax environment so the income from the sale doesn’t bump the client up to a higher tax bracket. Clients can also defer pay raises to a future year, or put income into a non-taxable account.

“Taxes are always changing,” Weed said. “You do the best you can with the information you have at the time of the transaction.”