NYTimes – What some investors Are Doing To Anticipate Tax Increase

Nice article in NYTimes by Paul Sullivan.  He talks about some of the specific tax increases that are on their way to happening (unless Congress and the Prez do something about them), and what some folks are doing to deal with it.


The tax increases addressed:

1. The 3.8% “surtax” on investment income for individuals making over $200,000 and couples making over $250,000.  This one is part of the Obama Healthcare law.

2. The increase in the long-term capital gains tax from 15% to 20% (and, therefore, for those making above the thresholds, a total jump from the current 15% to 23.8% — plus, not mentioned in the article, the impending reinstatement of the phaseouts of the personal exemption and itemized deduction effectively increase the marginal tax rates even more, since the phaseouts are tied to income).

3. The tax on “qualified” dividends – going from the current 15% to one’s ordinary marginal rate – as high as 39.6% for the highest earners (again, in addition to the 3.8% and the phaseouts – so in actuality, the marginal income tax on such dividend income can go above 43.4% from the current 15%)

Some things people are doing:

1. Examine portfolios and realize capital gains this year, before year-end – note that this is the opposite of traditional planning wherein one typically would have tried to harvest losses and postpone gains, since gains are cheaper this year and losses will be more valuable against higher future taxes

2. Buying more municipal bonds instead of taxable corporate bonds (and, presumably, even dividend-paying stocks)

3. Actively manage real estate so that rent will no longer be categorized as passive income

4. Focus more on getting higher returns than on worrying about the taxes (if they can do this without increasing risk, I sure wish they’d tell us how)

Lastly, they point out that even after all the increases, the long-term cap-gains tax wouldn’t be particularly high in historical terms, and even so, folks may simply try to postpone realizing gains even longer than before.  Congress should take note of this last point – people can often control when they take capital gains, and the very wealthy can often postpone it for many many years through a variety of strategies.  If the marginal capital gains rate it high, the government may collect less in taxes than they expect.

Anyway, it’s a nice article and even though it focuses on the super wealthy, some of the lessons apply to a pretty wide audience.



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