The stock market rose on the first days of trading in 2013 in the wake of the American Taxpayer Relief Act of 2012, but for many advisors, a concern over future tax hikes still hung in the air after the deal. 

“There are still a lot of questions and/or unknowns for how the ultimate fiscal cliff issue will settle out,” said Seth Kaplan, a vice president at Baird’s Sacramento office. “Much of the agreement pertained to tax rate exemptions and phase outs, but they still need to address government spending, and much of the talk has been built around the idea that there could be some additional tax considerations.”

Some high-net-worth clients are trying to digest the tax hikes that face some of the upper income brackets, according to Ken Meyers, a managing director and financial advisor in Baird’s Grass Valley, Calif., office. Individuals making above $450,000 for couples and $400,000 for singles face a new 39.6% tax bracket. Meyers says his clients bear a large share of the concern over that and other changes as a result of the Tax Relief Act.

“I work with a lot of business owners and a lot them are just kind of feeling like that government keeps getting deeper and deeper in their back pocket,” Meyers said. “They’re going to put off hiring until it’s absolutely essential and they’re being more conscious about how they spending money because they know they’re going to have less to spend because taxes are going up.”

Most of the high net worth clients that Kaplan works with understand the need for the increase in taxes, but are frustrated by the lack of a concrete plan for government spending.

“It’s not such they’re frustrated by paying more in taxes,” Kaplan said. “It’s the frustration that, until government spending is held in check, they don’t think this is will make a difference to address fundamental issues.”

As the government continues to hash out plans for spending cuts, many high income taxpayers could still see their bill to Uncle Sam rise by a few more percentage points, according to Tim Steffen, director of financial planning at Baird.

“Certainty may be short-lived, however, as there are plenty of reasons to think this isn’t the end of the legislative back-and-forth,” Steffen said.

The bill deferred many scheduled spending cuts for two months to give Congress time to make modifications, and moreover, the Congressional Budget Office’s announcement that the bill could increase the national debt by $4 trillion meant that Republicans will be looking for additional spending cuts, Steffen said. And future tax increases are “clearly on the President’s agenda,” Steffen said, referring to President Obama’s goal of achieving $1.6 trillion in new revenue.

Those additional taxes and spending cuts could alter some phaseouts and exemptions, which affect planning for some aspects of a high net worth client’s wealth, such as charitable giving, Kaplan said. The exemption amount for the Personal Exemption Phaseout, for example, which reduces and in some cases eliminates the amount a high-earning taxpayer can deduct, has not been announced for 2013.

“From a rate perspective, this gives us some direction,” Kaplan said. “But many of the higher income people also do things like charitable giving or have interest expense deductions and there may be some considerable phaseouts in those areas that will impact tax planning.”

Even so, both advisors were thankful for the level of planning they had done at the year’s end and expressed some level of relief for the additional certainty and that the cliff was not as bad as some clients had feared.

“That’s a positive,” Kaplan said. “We got that question out of the way, but I still get this feeling from a lot of my clients that people are still waiting for the other shoe to drop.”

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