Are you worried about your investments and their tax implications? It’s looking as though, after a 10-year period in which taxes on investors have dropped significantly, it is turning around and going the other way--up. However, if you make the right moves now, you can avoid some of the anguish of paying higher taxes -- and perhaps sidestep investment losses.
A decade ago, many Americans faced substantially higher income tax rates. The lowest tax bracket was 15%, rather than the current 10%; it rose to 28% instead of 25%; and it topped out at almost 40%, (versus the 35% that top-bracket taxpayers pay today). A top rate of 20% applied to capital gains, and dividend income was taxed at the same higher rate as most other types of income.
It’s being predicted that higher taxes are definitely in our future. The recently passed health-care bill included a higher Medicare payroll tax rate for some taxpayers earning $200,000 or more (see my blog entry on March 24 about tax implications of the health care reform here).
Higher tax rates won't just increase the amount you pay to the IRS. They'll also make certain types of investments more attractive than others. To protect yourself, you should be thinking now about making portfolio changes to beat the rush once higher taxes actually take effect.
Three important factors to consider (from 3 Smart Ways You Can Fight Rising Taxes by Dan Caplinger, March 31, 2010):
1. The rise and fall of dividends?
Not long ago, dividend-paying stocks were almost considered outdated investments. From a tax perspective, dividends were inefficient; corporations had to pay tax on their income, and if they paid out that income in the form of dividends, their shareholders had to pay another layer of tax on their dividend payments. In response, companies tended to use stock buybacks and other methods of enhancing shareholder value without creating a bigger tax burden.
When the lower 15% maximum rate on qualified dividends arrived, though, dividends got a lot more popular. After Enron, Worldcom, and the myriad other accounting scandals of the early 2000s, shareholders felt a lot more comfortable getting cash directly from their companies. And with many companies having failed miserably in timing their stock buybacks, you might well feel more comfortable making your own decisions about whether to reinvest dividends in additional shares, or take the cash and run.
If tax rates rise, dividends might well fall out of favor again. It's unlikely that even high-yielding stocks like AT&T (NYSE: T), Altria (NYSE: MO), and BP (NYSE: BP) would cut dividends, since such cuts are considered a negative sign about a company's financial health. However, dividend growth could slow or stop as companies seek more tax-efficient uses for their retained profits. In addition, shareholders trying to reduce their tax burden might get rid of dividend-paying stocks in favor of those that rise in value via capital appreciation.
2. Gimme (tax) shelter
Rising rates increase the rewards from tax shelters. As taxes increase, you'll have a bigger incentive to max out tax-favored investments like IRAs and employer-sponsored 401(k) plans.
In particular, going ahead and paying low rates now by converting existing retirement accounts to Roth IRAs might end up being your best move. Loading up your Roth with the stocks that you believe have the most potential -- big-growth prospects that resemble what Amazon.com (Nasdaq: AMZN) and Green Mountain Coffee Roasters (Nasdaq: GMCR) looked like years ago -- will bring you the biggest payoff if you own them inside a tax-free Roth.
3. Go long
Investors can control when and how they pay their taxes on the stocks they own. When tax rates are low, it's less costly to trade frequently. But as tax rates rise, buy-and-hold investing makes a lot more sense. That increases the attractiveness of companies that are stable and solid enough to warrant a long-term investment -- profitable companies such as Coca-Cola (NYSE: KO) and McDonald's (NYSE: MCD), for instance, which have dependable streams of revenue and income. They should become even more popular as higher taxes punish frequent traders.
Similarly, fund investors may well abandon high-turnover funds for ETFs and index funds, which often prove to be the most tax-efficient choices. Passive investing generally brings a lower tax bill, and you have a lot more control over when you decide to cash in your profits and turn over your fair share to the IRS.
No one likes a bigger tax bill. If you plan for higher taxes beforehand, though, you'll have the best chance to come out relatively unscathed. Getting the jump on other investors is essential to minimizing the potential damage to your portfolio.
- Tax bills are lower this year, but they will incre...
- Tax Bills Won’t Rise for Parents Who Keep Older Ki...
- Government Jobs Not So Cushy
- More Than a Million May Lose Jobless Aid Due to De...
- New Jobless Claims Drop By 11,000
- Latest Good Reads
- 5 Lies The Big Banks Keep Telling Us
- Tax credit end not deterring US homebuyers
- Hawaii Governor Vetoes Oil Tax and Other Bills
- Still no Wall Street bill debate in Senate
- Economists: The Stimulus Didn't Help
- Home Prices in Feb Showed First Annual Gain in 3 Y...
- Obama Tells Panel on Federal Debt to Consider All ...
- Paring Back So You Can Retire Comfortably
- Spring Cleaning for your Finances
- Questions for the Tax Lady: April 26th, 2010
- Sales of New Homes Soar With Help of Tax Credit
- Client Confidentiality: an Important Aspect of Leg...
- More American Expatriates Give Up Citizenship
- Bank Tax Tops G20 Meeting Agenda
- 4 Million Will Pay Health Care Penalty
- Low Income Taxpayer Clinic Grant Recipients Announ...
- Family Swindled By Madoff Fights $61 Million IRS B...
- Cost-Saving Moving Tips
- Happy Earth Day!
- Obama to Wall Street: 'Join Us' In Reform
- Existing U.S. Home Sales Climb to 5.35 Million Rat...
- How to Make Next Tax Season Less Stressful by Prep...
- Latest Good Reads
- Small Businesses Get a Boost from Nonprofit Lender...
- Pistons Rick Mahorn files for bankruptcy
- 10 Tax Breaks for the Home, Room by Room
- Wells Fargo Earns $2.4B, Says Credit Is Improving
- No Job For Years and Still Looking
- Summertime, When The Livin' Is Pricey
- 10 Tax Preparers Plead Guilty of IRS Fraud
- 6 Biggest Mistakes Homebuyers Make
- Hobbies and Small Businesses
- Senate Considers Proposal to Curb Foreign-Tax Cred...
- IRS Announces New Advisory Council Members
- GM to Announce It Will Pay Back Government Loans S...
- What to do if you Missed the Tax Deadline
- Questions for the Tax Lady: April 19th, 2010
- California Jobless Rate Swells to 12.6 Percent
- OECD Crackdown on Tax Havens Seen Lacking Teeth
- How to Avoid Giving Uncle Sam a Free Loan
- Tea-Party Activists Stage Tax-Day Rallies
- 5 Lessons from the Obamas’ Tax Return
- Home Buyer Tax Credits Spark IRS Audits
- 10 Arguments Against Paying Taxes (that will not w...
- What’s in a Nickname? The Origins of MLB Team Nam...
- IRS Spending More Time Auditing Small Businesses
- What a Recession Means for Your Business
- Tax Day Freebies!
- Last Minute Tax Tips on the Today Show
- Tax Day 2010: How the Income Tax Put Al Capone beh...
- IRS Data Show Tax Agency Audits Big Firms Less Oft...
- My Appearance on FOX Business Yesterday
- Taxes: Are You Crossing the Line?
- Haiti Relief Workers Qualify for Combat Zone Exten...
- Washington Lawmakers OK $1-Per-Pack Cigarette Tax ...
- 9 Very Last Minute Tax Preparation Tips
- Can the U.S. learn from New Zealand when it comes ...
- 5 Least Tax-Friendly States to Live In
- Tax Resolution Programs
- Nation's Soaring Deficit Calls for Painful Choices...
- No More Taxes on Short Sales, Foreclosures
- Government Goes High-Tech to Catch Tax Offenders
- Questions for the Tax Lady: April 12th, 2010
- Obama Election-Year Jobs Agenda Stalls in Congress...
- US Tax Bite Smaller than Other Nations'
- Poll: More Americans Say Their Taxes Fair
- Avoid Common Mistakes When Filing Your Tax Return
- CDC: States Not Putting Cigarette Tax Funds Into E...
- Understanding The U.S. Tax Withholding System
- More Than 200,000 Jobless Counting On An Extension...
- Big Brother is Watching: IRS Uses Social Media Sit...
- The Joy of Tax
- Top 10 FAQs About IRS Refunds
- 8 Do's and Don'ts For Your 401k
- Cigarette Tax Bump in 15 States Lifts U.S. Fees to...
- What You Can Learn From Your Tax Return
- 2 Years After Tax Law, Michigan's Making Movies
- Top Ten List Of Things To Know About Making Federa...
- Property Tax Rebellion Brewing After Real Estate C...
- Few Will Use Tax Refund to Indulge: Poll
- Are You Finding Difficulty Coping During Tax Time?...
- 3 Smart Ways You Can Fight Rising Taxes
- Charities and Deductions
- IRS Launches New Global Program to Target High Wea...
- Feeling Blue About Pink-Slip Taxes
- Tax Tips for 2010
- The Pros and Cons of Soda Taxes
- Questions for the Tax Lady: April 5th, 2010
- Californians get Improved $10,000 Home Buyer Tax C...
- 5 Myths About your Taxes
- Three New Issues to be Addressed by IRS Industry I...
- Reminders for Last-Minute Tax Filers
- March Unemployment Rate Unchanged At 9.7%
- FactCheck.org: IRS Will Not Need to Hire 16,500 N...
- ▼ April (104)
- ► 2009 (987)
- ► 2008 (410)
- ► 2007 (191)