Five things … about investing in a rising-tax environment
March 20, 2012 by N/A
11:29 PM, Mar. 18, 2012 |
The fate of the Bush cuts will likely be decided by a “lame-duck” Congress convening between Thanksgiving and Christmas in 2012. If the deadline for the cuts is not extended, the top tax rate on capital gains will rise from 15 to almost 24 percent. The top tax rate on dividends will rise from 15 to almost 44 percent. The estate tax exemption will drop from $5 million to $1 million, and the estate tax will rise from 35 to 55 percent.
Sell assets to take advantage of existing capital gains tax rates. Consider selling assets while the top capital gains tax rate is still at 15 percent. Consider selling a business, dissolving a concentrated stock portfolio, or a position, which has significant unrealized long-term gains.
Defer charitable giving contributions to later years when the higher tax rates take effect (2013). Deducting payments when the tax rates are higher might save you more in taxes.
Municipal bond investments become more attractive. As tax rates increase, more investors may want to reduce the tax they pay. If the top tax rate rises to 43.4 percent, a municipal bond paying 4 percent has a tax-equivalent yield of 7.07 percent. As tax rates rise, so do the tax-equivalent yields.
Consider converting a traditional IRA to a Roth IRA. If tax rates rise, significant value is provided by converting to a Roth IRA. Converting in 2012 may be a good option for many investors. All individuals are now eligible to convert their traditional IRA to a Roth IRA.
Tax deferral offered by annuities and life insurance should be considered. The tax deferral of annuities is very valuable in a rising-tax environment, as earnings are tax deferred until withdrawn or distributed. Life insurance allows tax deferral on the cash value built up during life and tax-free death benefits. If held until death, the death benefit is not subject to federal income taxes.
Seek a professional tax adviser who is familiar with your unique situation to take full advantage of the changing tax law.
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