What Should I Do About Rising Taxes?
Special To The Dispatch
OCEAN CITY – With income tax hikes imminent, among others potentially, a
thoughtful plan can help you reduce your income tax burden and control more of
your retirement savings.
Here’s what you need to know.
I hear income taxes may be going up. Which ones are most
likely to affect my retirement plan?
Technically, income taxes are expected to go back up. The sweeping tax cuts
instituted by President George W. Bush in 2001 and 2003 are due to expire.
While Congress may still decide to extend some of the cuts, it’s looking more
and more likely that the income tax breaks affecting wealthier investors and
retirees will indeed be allowed to run out at the end of 2010. That means the tax
rate for the highest income bracket will rise to 39.6% from 35%. Taxes on
qualified dividends and capital gains will also go up. The rate for both is now
at just 15%. Unless Congress changes course, the tax on capital gains will rise
to 20%, and all dividends will once again be taxed as ordinary income—and if
you are in the highest bracket, at the restored, higher 39.6% rate.
So what can I do to limit the impact of these tax hikes?
A slight shift in investment strategy could be in order. For example, many
retirees and people approaching retirement age have historically favored stocks
with high dividends over those with greater upside for producing capital gains.
But with the tax rate on qualified dividends set to jump from 15% to as high as
nearly 40%, you may want to rethink your allocation approach.
Another solution might be to increase the portion of your fixed income
holdings devoted to municipal bonds. Though their yields are typically lower
than those of Treasury and corporate bonds, "munis" are one of the
few investment vehicles generally shielded from federal (and most state) taxes,
so their "taxable equivalent yields" may often work out to be higher.
Finally, while the tax on capital gains should remain comparatively low,
given the likelihood that it is going up you may also want to be more
aggressive about implementing various "tax loss" strategies.
Accounting rules permit you to sell poorly performing holdings and use the
losses to offset your capital gains in other investments. With many stocks still
down off their highs, this could be a good year for finding viable candidates.
And because you can carry the losses forward indefinitely, any losses booked
and not used this year can be used next year (and the year after that), when it
looks as though the capital gains tax could reach 20%.
Merrill Lynch Wealth Management Advisor. She can be reached at 410-213-8520.)