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Research Summary

  • Taxes

Investment Opportunity amid Tax Uncertainty?

Why 2010 Could Be the Rare Occasion When It Makes Sense to Pay Taxes Sooner Rather than Later

April 30, 2010

The coming shift in tax rates, along with the uncertainty surrounding transfer tax legislation, makes 2010 a particularly interesting tax year. Given today’s relatively low tax rates and the prospect of higher rates down the road, prepaying taxes in 2010 could potentially enhance the long-term wealth of many investors.

The risks involved in prepaying taxes are well-known: Doing so can reduce precious liquidity, and in the worst-case scenario, investors could end up paying a large tax bill they otherwise might have avoided. That’s why it’s critical to gauge the potential benefit: How likely is it that an investor will be better off—and how much better off—by prepaying taxes?

While every taxpayer’s situation is different, we used Bernstein’s Wealth Forecasting System to model the trade-offs between prepaying and deferring taxes in several specific cases, such as converting a traditional IRA to a Roth, or exercising and converting stock options ahead of the tax hike. Using these examples, our research provides a framework for answering the questions raised by upcoming changes to the tax code.

See the box at right for our full research study.

The History (and Future?) of Income and Capital Gains Tax Rates
Top Marginal Income and Capital Gains Tax Rates
Source: IRS and AllianceBernstein

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