Affluent investors are likely to face double- and even triple-digit increases in tax rates in 2013, but a new whitepaper offers tips on planning for this eventuality.
Andrew Friedman, a principal in the Washington Update, which focuses on the impact of public policy on the financial services industry, has previously warned that sharp tax hikes are all but certain in less than a year. No matter the political complexion of the next Congress and regardless of whether President Barack Obama is reelected, it is he and the current divided Congress who will preside over the lame-duck post-election legislative session dealing with the expiration of Bush-era tax cuts.
Whether the president feels newly empowered because of his re-election or stands on his previous pledges despite defeat, he is likely to veto any measure renewing tax cuts for affluent Americans; congressional Republicans in the House will face the choice of compromising on a bill that renews the tax cuts for the less affluent or to see the entire measure expire.
At the same time, new taxes enacted with the president's signature health-care law take effect next year, so that families with incomes above $250,000 will pay an additional 3.8% tax on investment income.
The result of these combined tax increases, according to the whitepaper by Friedman (above), will be a tax rate on dividends rising from 15% to 43.4% for an increase of almost 300%. He calculates the top tax rate on capital gains would rise from 15% to 23.8%–an increase of nearly 60%; the estate tax would rise 55% as the tax rate rises and the old exemption amount is restored; and the top rate on ordinary income will rise from 35% to 43.4%–an increase of almost 25%.
The Washington Update whitepaper details eight strategies investors can employ in this rising tax environment.
