As anyone who has followed the estate-tax saga can attest, predicting what Congress will do is a sure path to humility. However, income tax rates will likely rise from today's relatively low levels, and the brunt of higher income taxes probably will fall largely on wealthy taxpayers.

If that is the case, advisors should start talking with clients now about shifting income from higher-bracket to lower-bracket family members. Possible strategies include hiring children or even retired parents in a business, or transferring assets to these individuals.

TWO EVILS

Today marginal tax rates are low, at 10%, 15%, 25%, 28%, 33% and 35%. There are two likely scenarios for income tax rates in the near future, neither of which bodes well for affluent taxpayers.

One scenario calls for Congress to do nothing, just as it allowed estate taxes to vanish this year. If so, the tax cuts of the past decade would sink into the sunset, and prior federal income tax rates would be restored. Under this scenario, starting in 2011, marginal tax rates would rise to 15%, 28%, 31%, 36% and 39.6%.

In addition, today's 0% and 15% tax rates on long-term capital gains would go up to 10% and 20%. Qualified dividends (most dividends received by investors) would be taxed at the marginal income tax rates of 2011, rather than today's 0% or 15%.

There's also the possibility that Congress will act on income taxes this year. If lawmakers decide to follow the recommendations of the Obama administration, as set out in the General Explanations of the Administration's Fiscal Year 2011 Revenue Proposals, the so-called Green Book, tax increases will be skewed toward the two highest tax brackets while the other tax rates of 2010 remain in place. "There's a good chance something like that will happen," says Bob Keebler, partner in the accounting firm Baker Tilly Virchow Krause in Appleton, Wis.

Under the Green Book proposals, individuals with income of approximately $200,000 and up would be in the 36% federal income tax bracket, as would couples with over $250,000 on joint returns. All taxpayers with income over $400,000 would face a 39.6% marginal rate. In both of these tax brackets, long-term gains and qualified dividends would be taxed at 20%. Other taxpayers would have the same rates as now exist.

Either of these scenarios could be in place in 2011. However, more bad news awaits taxpayers in 2013. Under the new health insurance legislation, people with income over $200,000 (single) or $250,000 (joint) will have to cope with a 0.9% surtax on earned income and a surtax of up to 3.8% on unearned income.

While the details are still uncertain, the most likely outcome is that clients with income well into six figures will owe more tax in the future, while low- and moderate-income taxpayers may notfeel the pain as deeply. "Shifting income from high-bracket to low-bracket taxpayers saves taxes now," says Julian Block, a tax attorney in Larchmont, N.Y. "Those strategies may be even more valuable in the future." As Keebler points out, it's possible that moving some income from a client to a child or a retired parent could mean a drop from a tax rate of more than 40% to a tax rate of 15% or even lower.

BUSINESS MOVES

Perhaps the most effective income-shifting tactics are available to clients who are self-employed, have professional practices and own small businesses. They can hire low-bracket relatives such as children or retired parents.

Julie Welch, director of the tax department at Meara Welch Browne, an accounting firm in Kansas City, Mo., says her clients employ their children for various jobs such as filing, handling mail, web design and updating contact lists. If Joan Jones is a self-employed consultant in the highest federal tax bracket, she might pay her teenage son Scott $5,000 a year to keep her information technology up to speed. That would reduce her gross income, earned income and taxable income, saving tax at a 35% rate this year and higher rates in the future.

Scott, meanwhile, would have $5,000 of earned income and might not owe any income tax, Welch says. Scott can take a standard deduction-$5,700 in 2010-that would eradicate his tax obligation. Earned income is not subject to the kiddie tax, which limits tax-favored investment income for youngsters.

Even if Scott earns over $5,700, the family can reap some tax savings. Joan will save tax at 35%, 39.6% or more than 40%, while Scott will report income that's taxed at 10% or 15%.

"There are rules you have to follow to sustain the tax deduction for compensation you pay," Welch says. "You must pay a wage that's commensurate with work that's actually done. It helps to have a timesheet or some kind of a log." In addition, payment should be made regularly, maybe weekly or monthly, she says. "One payment at year-end won't look like compensation for work that's been done."