Federal spending has increased tremendously over the last 3 years for a variety of reasons. The ongoing wars and the stimulus package are just a couple of reasons for the increase, and revenues flowing into the federal coffers have not kept pace.

Many states are in even a worse predicament, with Michigan being a prime example. Given this environment many experts are expecting tax increases over the next several years. Although many types of taxes may be increased, much of the focus is on federal and state income taxes.

Changes in rates have historically had an effect on taxpayer behavior with respect to decisions regarding investments, income, deductions and funding of retirement plans. Even anticipation of pending changes can alter behavior.

With rates rising on some or all types of income, the relative value of tax-reducing strategies increases. The higher the rates increase, the more attractive some certain types of investments or planning opportunities become to those taxpayers most affected by the increases.

Some of these strategies or investments became less attractive when rates were reduced, particularly dividend and capital gain rates. Now it appears things are about to swing the other way.

Some strategies that will be more valuable in a high-tax environment include:

• Municipal bonds - Obviously, the higher the tax rate, the greater the value of the tax-free income. Municipal bonds from your own state offer income tax-free growth at both federal and state levels. But be careful. Some municipal bonds can be subject to alternative minimum tax.

• Qualified Plans and IRAs - The deduction and tax-deferred growth will be much more valuable in a higher tax environment. This is particularly true because the deductions are taken against your highest marginal rate.

• Insurance and Annuities - These investments were less attractive when rates were cut and federal tax rates on dividends and long-term capital gains were at 15%. The tax-free or tax-deferred build up will be of greater economic value in a rising tax rate environment.

• Intra Family Transfers - Transfers of assets from a family member in a high bracket to a family member in a lower bracket becomes a much better strategy because the spread between their respective marginal rates will be greater than it was before. This is because the tax increases are very likely to affect those in higher brackets and likely leave those in lower brackets unchanged, thus making the difference greater than before the rate changes.

• Capital Gains - If the rate is increased, the volume of trading may decline because the tax cost of the transaction may deter the sale. In other words, re-aligning a portfolio may cost more in taxes so it is less likely to occur. Like-kind exchanges of real estate become much more valuable because the tax avoided, potentially a permanent difference, will be much greater.

There are many more investments and deductions that will be considered more or less valuable in the anticipated higher tax-rate environment. Consider reviewing your strategies now so you can position yourself to lessen the impact of the higher rates.

Michael McCarthy, CPA, CFP, MST, is a Director with Wright, Griffin, Davis and Co.