Your investments and the "fiscal cliff"

Arthur Stein Financial, LLC |
The “fiscal cliff” could impact taxes on your investments in a major way.
The fiscal cliff is the combination of tax increases (result of expiration of Bush era tax cuts), new taxes on high-income individuals and spending cuts scheduled to take place January 1, 2013.
Three of the changes concern the taxation of investments:
  • The maximum tax on capital gains increases from 15% to 20%;
  • The maximum tax on dividends increases from 15% to 39.6% (the same as the new maximum tax rate on earned income); and
  • The maximum tax rate on interest increases from 35% to 39.6%.

In addition, a new 3.8% Medicare contribution tax will be imposed on the net investment income of high-income individuals. High income means singles with adjusted gross incomes exceeding $200,000 and married couples with AGIs exceeding $250,000. this is a result of other legislation, not the expiration of the Bush-era tax cuts.

Some commentators are suggesting
  • Selling securities this year to avoid the higher capital gains rate that go into effect next year. Taxes are then prepaid at the lower capital gains rate.
  • Selling stocks that pay dividends and replacing with stocks that don't.
It’s a difficult issue because no one knows what will actually happen. Congress may (or may not) pass legislation later this year or sometime next year to continue lower rates on dividends and capital gains. We may not know on January 1 what tax rates will be for 2013. Companies may cut their dividends and use the savings to buy back shares or reinvest.
My inclination is not to make decisions now on changes that might or might not happen. Even if changes are made, we don't know what they will be. Congress is unlikely to extend the current tax rates without making additional changes to the tax code.
Please let me know if you are concerned and would like to discuss.
Note: Arthur Stein and Arthur Stein Financial, LLC are not authorized to give legal or tax advice. For information on your specific situation, please consult your tax advisor regarding any tax implications and your attorney for legal implications.