With the election over, believe it or not, we still face more uncertainty.
We will certainly have Obamacare; however, no one knows what is in Obamacare, as many of the rules have not been written. No one knows exactly how state exchanges will work and what their pricing will be. All we know is that high income earners will be paying an additional 3.8% tax on investment income.
We also know that taxes will increase. It is possible that a high-income earner in Georgia could pay nearly 50% in taxes. Consider the 6% state income tax, 3.8% Medicare tax on investment income, an income tax rate of 39.6% equals 49.4% in taxes—and that is before local taxes, ad valorem tax, sales tax, etc.
There is speculation from the Democrats that the administration may introduce a tax on carbon emissions to help cut the budget deficit. Alternately, the Republicans are saying there will not be any new taxes, but a reduction in available deductions. With the considerable amount of tax deductions and tax credits expiring, we think everyone needs to consult their C.P.A. Investors need to consider converting to Roth IRAs and businesses may need to consider buying equipment this year.
It is certainly frustrating as everyone wants to do something, but we do not know the rules of the game yet. Consider the sentiment from 2011 in the three months leading up to the debt ceiling. In the end, not much changed, as the government merely kicked the can down the road. Likewise, we do not expect much to change in the next six weeks. Perhaps, we will see a patch for the alternative minimum tax. For the most part, we expect the uncertainty to extend into next year. Unfortunately, the longer this is pushed off, the greater chance the economy will slip into a recession.
We believe investors need to keep from making rash decisions. We think they should weigh their options, and seriously consider selling stocks to recognize capital gains this year. Others may consider exercising stock options before the end of the year. Moreover, we believe investors should have a tax aggressive portfolio. Many should be better off in tax-exempt municipal bonds versus a Treasury or corporate bond.
We believe the reality is that people in higher tax brackets will pay more. The question that needs to be answered is, “How will they need to compensate to reach their goals?” Some may have to save more, cut expenditures, raise their income and be more aggressive in their investments. In our opinion, the worst option is to go to cash. Despite the dividend tax increasing, dividend-paying stocks are often paying the best yield an investor can get.
We think investors should consider shifting their portfolios. Perhaps moving dividend-paying stocks into tax deferred accounts. We believe investors should seek companies that do business internationally—not just in the United States. Companies that dominate their market and are positioned for growth is a suggestion. We believe growth is the best defense.
We firmly believe that investors should keep money they need within the next 10 years out of the stock market. Only money that is not needed within the next 10 years should be invested in high quality stocks.
At Henssler Financial we believe you should Live Ready, which includes having long-term money invested in the stock market. If you have questions regarding your investments, the experts at Henssler Financial will be glad to help. You may call us at 770-429-9166 or email at experts@henssler.com.
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