Taxes, taxes and more taxes!
Watch out! A tidal wave of new taxes is likely to go into effect in 2011 and 2013. These tax hikes will primarily be targeted at higher income earners. We are all aware of what has been happening. Our national debt has ballooned and is still growing. Sooner or later we are going to have to pay for all of the bailouts, stimulus money, war spending and ambitious social programs such as health care. Unfortunately, budget cuts will only take us so far in reducing the debt. Nearly 60% of our national spending is devoted to Medicare, Social Security and other mandatory programs.1 Therefore, be prepared for the likelihood of higher taxes in the future. What follows are some of the likely changes for upper income earners and how to plan for them.
It is very likely the Bush tax cuts will expire for high income earners and the top two ordinary income rates are likely to go from 33% and 35% to 36% and 39.6%. Capital Gains rates could go from 15% to 20%. The tax on dividends could leap from 15% to 39.6%. Several tax increases related to the health care bill our on the horizon as well. Medicare payroll taxes are slated to go from 1.45% to 2.35% in 2013. A new Medicare tax of 3.8% on investment income, including capital gains, interest, dividends, royalties, rent and annuity income is also in the queue for 2013. Estate taxes are also expected to be back in one form or another starting next year. States need all the money they can get as well so don’t be surprised if we see some state tax increases as well.
Plan ahead for these tax increases by considering the following: If you have appreciated investments, you may want to sell them this year to take advantage of lower capital gain tax rates. It may be best to hold dividend paying stocks in tax-deferred accounts. The rate increases will make municipal bond’s tax free income all the more attractive. Overfunded cash value life insurance policies can also be used to provide tax free income though policy loans. Be sure to explore converting all or part of your IRA or 410k to a Roth IRA.
Keep in mind that the majority of these possible tax hikes will only affect top earners. In fact, many taxpayers at lower incomes may actually see their taxes decline. But, if you are single and make over $200,000 or married and make over $250,000, watch out!
1. Barron’s 6-21-10, Watch Your Assets
Damien helps individuals invest and manage risk. He is a Certified Financial Planner™ professional and a principal of Walnut Creek Wealth Management. These are the views of Damien Couture, CFP® and should not be construed as investment advice. All information is believed to be from reliable sources; however we make no representation as to its completeness or accuracy. Not all recommendations are suitable for all investors. Each investor must consider their own goals, time horizon and risk tolerance. Your comments are welcome. Damien can be reached at 925-280-1800 x101 or Damien@WalnutCreekWealth.com.