Courtesy of Julian Block

There’s lots of uncertainty about who will be helped and who will be hurt by the tax packages that President Barack Obama will send to a Democratic-controlled House and Senate. Still, there is no doubt that he wants them to approve tax code amendments requiring wealthier Americans to shell out more for taxes.

Which existing breaks deserve to be continued and for how much longer, and what new ones ought to be introduced and how speedily they should go on the books, are as much political questions as economic ones. All that is clear is that much debate and political horse-trading will lead to important changes. That acknowledged, nobody knows how promptly same-party executive and legislative branches are going to agree on which sections of the tax code need to be overhauled. Look for intensive negotiations on which revisions should become effective prospectively and which retroactively and just how to word hundreds of amendments. Some revisions will be phased in—the kinds of changes that become effective gradually or only after several years.

In all likelihood, many of the new breaks will be targeted—meaning measures designed primarily to encourage certain kinds of activities and to benefit lower- and middle-income families with young children and aging parents. Tax code overhauls inevitably include targeted measures with fine print and other restrictions that rule out participation by lots of people because, among other reasons, their incomes are deemed to be too high to make them deserving.

Many incentives for retirement and education now on the books are phased out—gradually withdrawn—when adjusted gross income exceeds specified levels that are indexed to reflect inflation. Some examples of phase-outs: the credit for children under age 17, write-offs for contributions to traditional IRAs, and deductions for educational expenses.

Fundamentals of good tax planning will still apply

Tough economic times require the White House and both houses of Congress to cut deals on tax rates for capital gains from sales of investments; dividends received by shareholders from corporations and mutual funds; and ordinary income from such sources as salaries, business profits, pensions, interest, and withdrawals from traditional IRAs, 401(k)s, and other tax-deferred retirement plans.

Whatever happens to taxes, many time-honored techniques will still work well for most people. Among them is a standard admonition for investors and business owners out to maximize deferral possibilities. Whenever possible, they should avail themselves of tax-deferred retirement arrangements to hold taxable bond funds, REITs (real estate investment trusts), or high-turnover stock funds that incur short-term gains. Consistent with that approach, they should use taxable accounts to hold shares of mutual funds that generate long-term gains and dividends—assuming dividends continue to be taxed at the rates for long-term capital gains.

That noted, it is still necessary to run the numbers to see if their allocations are appropriate. Moving too much money into tax-deferred plans can cause them to get hit with more overall taxes when they take money out. In any case, their decisions on what types of investments are best held inside or outside of such plans must jibe with their individual risk tolerance and investment aspirations.