By Amy Feldman

It's not something that makes good campaign politics. But given the
crumbling economy and the federal government's budgetary needs, some
Americans are likely to be hit with a tax increase regardless of who
wins the Presidential election.

To be sure, there are vast differences in the tax plans of Barack
Obama and John McCain. Obama's proposal calls for a bunch of
middle-income tax cuts paired with an increase in the top marginal tax
rates to 36% and 39.6% from the current top rate of 35%, to be paid by
families with incomes over $250,000 and singles over $200,000. It
would also increase the rate on those earners for long-term capital
gains and qualified dividends to 20%, from 15%. McCain vows to extend
George Bush's 2003 tax cuts on income and investments. (McCain
recently said he would halve the cap-gains rate, to 7.5%, in 2009 and
2010.) Without new tax legislation, those rates are set to expire at
the end of 2010. With a financial bailout to pay for and a potentially
Democratic Congress, tax experts figure that rates on both income and
capital gains will be in play over the next two years.
"The difference between the two (candidates) is not that Obama wants
to collect more tax, but that he wants to collect it from different
people," says Clint Stretch, director of tax policy at Deloitte in
Washington. "One of the challenges is that both plans would collect
less income tax (than is collected) today. In the Obama world, maybe
fiscal discipline means some tax benefits he would give people don't
come to pass. In the McCain world, maybe the extension of Bush tax
cuts he proposes would not come into effect. It's really a question of
how this gets bargained out with a Democratic Congress -- if there is
one -- because if nothing happens then taxes go up."
It's unlikely that any tax plan will be pushed through quickly, so you
have time to consider your options. Here are four ways you might be
affected by higher taxes and some suggestions for thinking about the
consequences.

Capital Gains

Common wisdom says to sell your winners if you believe rates will go
up. Yes, it's obvious. It's also not always the best strategy. That's
because you're paying taxes early, and you'll need to recoup that
outlay as well as transaction costs through higher gains on your
investment. "Those two things can outweigh the tax savings," Stretch
says. "If you have an investment with a low cost basis and low
transaction costs, then it may make sense to sell. If you have a high
basis or your gain is in the 10%-to-20% range, it probably does not
make sense. For most people you are talking about a reasonably small
amount of money, and there are cases in which taking the gain is
detrimental."

Let's say you own shares of Stock A that is now valued at $10,000, and
your cost basis is $7,000. If you sell now, at the 15% rate, you'll
pay $450 in tax. If you wait, and the cap-gains rate goes to 20%,
you'd pay $600. Is that worth the potential $150 savings, especially
after fees?

"The big question is, 'What are you going to put the money into? And
will you earn enough more to recoup the taxes paid?' " says Robert
Barbetti, an executive compensation specialist with J.P. Morgan
Private Bank (NYSE:JPM - News)in New York. According to his figures,
it would take two years invested in something that offered an
additional two percentage points in return annually to recoup the tax
paid in the example above. To make the right decision, you need to
think about what you're going to buy once you sell, and whether it
offers enough extra return to be worthwhile.

Company Stock

With most 401[k] plans, if you've been laid off or are over 59 1/2 and
eligible for distributions, there's a little-known opportunity to take
company stock out of the plan and pay tax just on its cost basis.
Here's how it works. Say you have 100 shares of stock in Company X
that trades at $50, and your basis is $10. You would take the stock
out and pay $350 in tax, assuming you're in the 35% tax bracket.
The difference between the $50 value and the $10 basis, or $40, for
tax purposes is called net unrealized appreciation, or NUA, and is
taxed at long-term capital gains rates regardless of when you sell.
Even without an increase in rates, that's a nice savings. At a 15%
capital gains rate, you'd pay a total of $950, instead of $1,750 if
you had to pay income taxes on the entire distribution. If the
marginal income tax rate goes up, that benefit becomes more valuable.
Barbetti says that with more people being laid off, especially on Wall
Street, he's been seeing increased interest in this tax move.

Deferred Compensation

If you're lucky enough to have a deferred compensation plan, you know
that the big benefit is tax deferral, which allows money to compound
tax-free until it's withdrawn. That's valuable if tax rates remain
constant or decline. Even if tax rates went up as high as 50%, much
higher than anything under consideration, deferring compensation would
still make sense over the long haul. You might want to reconsider
deferring compensation if you expect rates to rise at the time you
want to take your money out.

You'll need to think about this in advance. If you want to defer base
salary and nonperformance-based bonuses earned in 2009, you will need
to elect to do so by this Dec. 31. Once you choose to defer, you can't
change your mind and take the money out of the plan sooner.

Restricted Stock

If you've been offered restricted stock, you should think about taking
the 83[b] election. That election, which must be made within 30 days,
allows you to pay the income tax up front and pay tax on future gains
at the lower cap-gains rate. If you don't make the election, you pay
tax when the stock vests, regardless of whether you sell it. If the
stock goes up dramatically before it vests, you'll save yourself a
hefty amount of cash by choosing the 83[b].

But if the stock remains flat (or worse, declines), you may have paid
tax (or, worse, too much tax) years in advance for no reason. "You are
triggering tax but not putting cash in your hand, so you need to look
at the opportunity cost," says Deloitte's Stretch.

Say you're given $10,000 worth of restricted stock. If you're in the
35% bracket and make the 83(b) election, you'd pay $3,500 now. If the
stock rises to $15,000 and you sell when you vest, you'd pay an
additional $750 at today's 15% cap-gains rate, for a total of $4,250.
(If the cap-gains rate goes to 20%, you'd pay $250 more.) If you
didn't make the 83(b) election and paid income tax on the full
$15,000, you'd owe $5,250. If you're in the highest marginal rate and
it goes to 39.6% by the time your restricted stock vests, you'd owe
$5,940. That potentially higher tax hit, plus the likelihood that
stock you'd receive has been pummeled in the market rout, is why
Barbetti recommends considering the 83(b) election now. "If you think
your restricted stock will vest in a higher tax year," he says, "then
maybe you bite the bullet and pay the tax this year."

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