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The election is rightfully the hot topic of the day … and week … and month.
What occurs after the election – particularly actions by Congress and the President on the fiscal cliff – will very likely impact your investment portfolio.
This puts investors in a quandary. They simply can't wait until after the election for the politicians. Once any bill is proposed or any law is passed concerning the fiscal cliff, the damage or benefits will already be reflected in security prices.
The time to act is now. But action creates other issues, because the level of market uncertainty has certainly risen over the past few months. “What to do?” is on the minds of many investors.
With regards to the fiscal cliff, spending cuts aren't the immediate concern. Taxes are. Especially for income investors.
I'm an income investor and I'm concerned about taxes.
The table below shows both the path we've been traveling on dividend taxes and the dividend-tax cliff that is fast approaching.
Dividend Tax Rates (2003 Forward)
|
2003–2007 |
2008–2012 |
2013 – |
||||||
|
Ordinary Income Tax Rate |
Ordinary Dividend |
Qualified Dividend |
Ordinary Income Tax Rate |
Ordinary Dividend |
Qualified Dividend |
Ordinary Income Tax Rate |
Ordinary Dividend |
Qualified Dividend |
|
10% |
10% |
5% |
10% |
10% |
0% |
15% |
15% |
15% |
|
15% |
15% |
5% |
15% |
15% |
0% |
28% |
28% |
28% |
|
25% |
25% |
15% |
25% |
25% |
15% |
31% |
31% |
31% |
|
28% |
28% |
15% |
28% |
28% |
15% |
36% |
36% |
36% |
|
33% |
33% |
15% |
33% |
33% |
15% |
39.6% |
39.6% |
39.6% |
|
35% |
35% |
15% |
35% |
35% |
15% |
|||
If you are in the upper echelons of income earners – $200,000 or more annually – you are in for a tax shock. Your tax rate on qualified dividends will go from 15% to 39.6% once the calendar flips to January 1. Your dividend tax rate will increase 164%.
A simple example illuminates the severity of the hit. If you are in the higher tax brackets and have $20,000 in qualified dividend income this year, you'll net $17,000. Next year, you'll net $12,080 – $4,920 less.
This tax hit isn't aimed at only the rich, either. If you are in the 15% income-tax bracket and receive $500 in qualified dividends, you'll net $500 this year. Next year, you'll net just $360.
This, my friends, is an assault on your ability to generate income and to accumulate wealth.
The obvious question is, will the worst-case scenario prevail?
We simply don't know; hence the raised level of uncertainty. One thing we do know for certain, though, is that many income investors are already positioning their investments for the scenario they believe most likely will reflect the new reality. Many are already positioning for the worst-case scenario, some for a best-case scenario (no dividend tax increase), and some for a compromise.
I'm also being proactive. I'm not waiting until most of the uncertainty has been removed from the market, because once that happens, my portfolio will have either lost or gained value – and perhaps by a significant amount.
I want to be positioned to avoid losses in a worst-case scenario and to capture gains should a better case prevail.
This month I'll reveal strategies for my High Yield Wealth readers that will help them maintain their wealth and income capacity in a worst-case scenario. I also believe these strategies will help them capture gains regardless of what prevails.
Today's market is imbued with a lot of uncertainty, to be sure. In fact, it’s more than I've seen in years. But with the right strategies and right investments, income investors can protect their cash flow and even participate in future price-appreciation opportunities.
Don’t be left behind.
P.S. Don't like all the uncertainty? Now you can do something about it. I’ve put together a simple petition to tell our elected leaders to avoid this fiscal cliff and keep dividend taxes low. If you feel the same, I hope you’ll join me in signing this petition by clicking here now.