Most experts agree that taxes are on the rise, especially for higher-earning taxpayers.
This could have a profound impact on investments if money isn’t managed properly.
There are, however, some ways to potentially improve a portfolio’s tax efficiency, allowing investors to keep more of their money.
Increases on the horizon?
Unless federal legislation is passed, the so-called Bush tax cuts will expire on Jan. 1.
Under the Obama administration’s proposals, these tax cuts would be extended for most taxpayers but allowed to expire for married couples earning $250,000 or more, or individuals earning $200,000 or more. This means the potential for three significant changes:
1. Income tax rates could increase to 36 percent and 39.6 percent from 33 percent and 35 percent.
2. Long-term capital gains tax rates could increase to 20 percent from 15 percent.
3. Qualified dividends tax rates could follow the capital gains increase to 20 percent from 15 percent, or worse, qualified dividends could follow ordinary income tax rates up to 39.6 percent.
Tax-management measures
There are some methods and investment vehicles that can be used to avoid short-term capital gains, which are taxed at the same rate as ordinary income. By holding stock for more than a year, investors may be able to pay long-term capital gains rates instead.
Also, with dividend-paying stocks, investors should make sure to hold on to them long enough for dividend payments to be qualified. This period is generally more than 60 days during the 121 days surrounding the ex-dividend date. Otherwise, those dividends are taxed as ordinary income.
Municipal bonds, which are issued by cities, states or counties to raise funds for long-term projects, may become more attractive to investors if income taxes rise. Municipal-bond yields, however, could decline as a result of increased demand.
Investors who choose to include municipal bonds in their portfolios should be sure to perform due diligence on any single issue purchased or rely on dedicated investment management teams that can better navigate the municipal bond markets. Although municipal bankruptcies are rare, they do happen and given the budget deficits for these local governments, the rising concerns are real.
Whether investors are accumulating wealth or living off the investments already made, a combination of tax-smart strategies can help preserve more wealth.
Consider speaking to a financial adviser about your investment goals, time horizon, and income and protection needs to create a plan that includes appropriate tax-efficient investment strategies.
Paula Dougherty, CFP, ChFC, CLU, is a senior financial adviser with Dougherty & Associates, Ameriprise Financial Inc. in Springfield. She is licensed in Missouri, Arkansas, Kansas, California and Arizona, and may be reached at paula.j.dougherty@ampf.com.[[In-content Ad]]
