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The old saying is that there are only two certainties in life, death
and taxes. Now that we know who the two nominees are for this year's
presidential election, it's time to take a look at what might happen
regarding taxes and how we should adjust our portfolios.
The bottom line is that regardless of
who wins the White House, our taxes are going to go up. That is
going to impact the money that we have to spend at the shopping
center. The result is that we may see U.S. economic growth continue
to lag.
Let's look at the candidate's
position on capital gains, income, payroll, and estate taxes. This
information is derived from analysis of comments made by the
candidates themselves and from interviews with campaign advisors.
The issue that has the greatest
potential of affecting those who are retired or near retirement is
capital gains. We know that President Bush reduced the dividend and
capital gains tax rates to a maximum of 15% and that those cuts are
set to expire in 2010. That means that unless new legislation is
drafted extending them (or making them permanent) that capital gains
tax rates will go up.
Senator McCain has stated that he
wants to make the current capital gains rate permanent. Senator
Obama favors increasing the capital gains rate to 20-25%. Many
retirees rely on dividends and capital gains to supplement their
Social Security, so increasing the capital gains tax rate will
directly affect them. Also, increasing the capital gains tax rate on
dividends may negatively affect the share prices of stocks in
general.
Regarding estate taxes; currently
there is an exemption of $2 million dollars per person with a top
estate tax rate of 45%. The personal exemption is set to rise to
$3.5 million in 2009. In 2010, there isn't any estate tax, but then
in 2011 the personal exemption goes back to $1 million dollars. It's
amazing what they can come up with in Washington!
Senator McCain proposes an exemption
on estates less than $10 million with the highest tax rate on
estates larger than that being 15%. Senator Obama proposes exempting
estates less than $10.5 million, but has a sliding tax rate that
tops out at 45%.
On the positive side, the expiration
of the existing estate tax rates has made long-term estate planning
very difficult. Getting a new plan in place will allow that planning
to be done much easier.
Positions on income taxes differ
between candidates as well. Senator McCain wants to maintain the
current maximum of 35% and Senator Obama may potentially move the
maximum rate from 35% to 52%. I haven't been able to find out each
candidate's position on the Alternative Minimum Tax (AMT). The AMT,
which isn't indexed to inflation, is resulting in many middle-income
Americans paying a much higher tax rate, so whether or not this is
changed is just as important as what the maximum tax rate will be.
Lastly, Senator Obama advocates
removing the OEcap, on earnings subject to FICA (Social Security)
tax. Self-employed individuals currently pay a 12.4% FICA tax on
their wages. Employees of companies pay half that while the employer
pays the other half. Currently, FICA tax is only paid on wages up to
$102,000. Senator Obama has stated that he wants to remove the cap
for those earning $200,000 or more per year. I don't know Senator
McCain's position on payroll taxes.
Keep in mind that small business
owners have their profits taxed as wages, so that is really a tax on
small business. Remember also, that employment growth the past
several years hasn't come from major corporations but small
businesses. So this additional tax has the potential to affect
employment.
Should democrats control the
Congress, the chances of the current tax rates becoming permanent
are low. If Senator Obama wins the election, the likelihood of
passing higher taxes is high. All indications are that the democrats
will control Congress.
From an investment standpoint, I am
concerned about the impact higher taxes will have on our economy.
Moreover, higher taxes won't be used to pay down our nation's debt
but to fund additional programs. The effect of taxes, inflation, and
the decline of the Dollar causes me to favor foreign investments. As
always, selection and proper management is tantamount
In addition to being a
nationally syndicated columnist and Certified Financial Planning
Practitioner, Mr. Voudrie provides personal, private money
management services to clients nationwide. Read more
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