What Some Investors Are Doing to Anticipate a Tax Increase

August 8, 2012

If no remarkable compromise is reached before December, the American tax code will change dramatically for the new year. Specifically, tax changes brought about by the expiration of the Bush tax codes, along with new taxes from President Obama's health care law, will heavily alter behavior in America's financial markets and will alter decision making on the part of investors at every level, says the New York Times.

In order to speculate about what changes might occur, it is first essential to understand exactly how the tax system will change with the beginning of 2013.

  • A health reform-mandated 3.8 percent surtax will be levied on investment income for individuals who earn more than $200,000 a year, or $250,000 for a couple.
  • Simultaneously, the capital gains tax of 15 percent is set to go to 20 percent next year if the tax cuts from the George W. Bush administration expire.
  • Counting the 3.8 percent surtax, the capital gains tax will be either 18.8 percent or 23.8 percent for high earners, depending on Congress.
  • Finally, the dividend tax is also 15 percent, but could go as high as the income tax rate if the Bush tax cuts expire; for the highest income earners, this would mean an increase from 15 percent to 43.4 percent (income tax rate plus the aforementioned 3.8 percent surtax).

Paul Sullivan of the New York Times interviewed various prominent investor groups to see what the likely responses to these taxes would look like. One strategy, he reports, is to sell off assets before the taxes are implemented, allowing them to be liquidated at the relatively low current rate.

Michael E. Goodman, a certified public accountant and president of Wealthstream Advisors in New York, offers the example of a client trying to sell a Manhattan apartment for $2 million.

  • Were it to be sold this year, it would result in a tax bill of approximately $300,000.
  • But if the owner cannot sell the apartment until next year, she would pay at least an additional $76,000 because of the 3.8 percent surtax.
  • Further, if the capital gains rate goes up to 20 percent as well, her total tax bill on the sale of the apartment would be $476,000, or nearly 60 percent more than today.

Source: Paul Sullivan, "What Some Investors Are Doing to Anticipate a Tax Increase," New York Times, August 3, 2012.

 

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