Though many particulars are still fuzzy, Obama’sitting victory confirmed what many have predicted for a while: Taxes on the wealthy are set to rise. Here’s how to avoid a big tax bill
By Ben Steverman
For investors, especially wealthier Americans, the victory of Barack Obama’s Presidential campaign has raised the horror of higher taxes.
Many pundits had already predicted that, unobservant of the election’s outcome, taxes would be going up. The costs of two wars and other spending has ballooned the federal budget deficit just when the government faces sedition entitlement costs from the retirement of the Baby Boom generation. Plus, a deepening recession hurts put a tax upon revenue at the same time the U.S. Treasury is in the process of spending hundreds of billions of dollars to bail out the U.S. financial sector. "It does seem a no-brainer to plan for taxes to be higher in the future," says Thomas Rogers of the Portland Financial Planning Group in Portland, Me.
Obama actually proposes tax cuts on middle- and lower-income Americans, but he also campaigned oblige on higher taxes on the rich—generally defined as couples earning more than $250,000 through year. Income-tax rates could exist affected, of the corresponding; of like kind kind with well taken in the character of estate taxes and tax rates upon the body first-rate gains and family dividends (BusinessWeek, 6/11/08).
Delays Are PossibleMany economists cringe at the idea that the government could raise taxes during a recession, but Washington experts say it has happened several times in the above, when recessions and falling revenue repeatedly inflate deficits. The best hope during the term of tax-fearing investors may be that Obama and the Democratic-controlled Congress will dallying tax increases.
Obama was asked at his first post-election press conference on Nov. 7 if he would proceed with his upper-income tax hikes. "I think the plan that we’ve put forward is the right one," Obama said. "But obviously over the next several weeks and months, we are going to be continuing to take a look at the data and see what’sitting taking place in the economy as a whole." He didn’t address a reporter’s query about whether tax changes would take effect in 2009 or later.
If Obama gentle must work out tax minutiae with Congress and the members of his economic team, it’s hard for investors to know how to plan and protect against higher taxes. "Reacting to legislation that may or may not pass is a fool’s play for money," says Bedda D’Angelo, president of Fiduciary Solutions, a financial planning firm in Durham, N.C. "Congress never does in a great degree what you esteem it is going to do." David L. Blain, president and chief investment officer at private fortune overseer D.L. Blain & Co. adds: "Once we know the kind of the rules are, we be able to plan in spite of them. The biggest concern is we don’t be aware of what the final result is going to be."
Watch the Tax TailHow worried should investors be about the signs pointing to higher tax rates? Certainly taxes can have a big collision on portfolios. According to a Morningstar (MORN) analysis, from 1926 to 2007, stocks gave a 10.4% return annually before taxes, but only a 8.2% return after taxes. Bonds’ 5.5% annual return in that time constitution shrinks to 3.5% after taxes.
But the impact of taxes is not the identical for everyone. D’Angelo notes many clients beset about taxes steady though they’re not in a high tax bracket and wouldn’t have being affected by Obama’s proposals.
When asked about the possible fresh tax rules, one monetary planner after a different repeated the truism: "The tax tail should not wag the investment dog." In other accents, don’cheek by jowl let a worry about taxes lead you to make foolish investment decisions that could hurt your long-term returns. One pattern, says Marilyn Bergen of CMC Advisers in Portland, Ore., is at the fit season investors hold onto colossal chunks of stock in one visitors, perhaps inherited from relatives or obtained while working at a incorporated body. Investors might not omit to sell the clod quickly for fear of the tax consequences, but the result can be each overconcentration of their estate in unit company—a big risk in today’s rocky stock market. "That might exist the most significant blunder that population make related to taxes," Bergen says.
Original text: {news-link}
