Stern Advice-What those election results mean for your wallet
WASHINGTON Nov 7 (Reuters) - The election results were clear, b ut the path forward is not. With Washington moving on with essentially the same trilateral team that froze fiscal policy for the last two years, it's not obvious or certain what will happen to taxes, interest rates, markets and the economy under President Barack Obama, the Democrat-controlled Senate and the Republican-controlled House of Representatives.
"We still live with uncertainty on this that puts us all in planning-land dilemma," says Greg Rosica, a tax partner with Ernst & Young. That doesn't mean individuals can't start to place some bets. There will be financial effects they can't control and some they can.
Here is what you can expect now, and what you can do about it.
-- Make an appointment with your broker and your tax adviser for the week between Christmas and the new year; don't let them take vacation. If Washington does anything to extend important tax breaks that expired at the end of 2011, like the alternative minimum tax patch, it is likely to finish that work the week before Christmas. That means you don't have to jump now to implement your year-end tax and investment strategy. You just have to plan ahead for what that strategy should be under the extended/not extended alternatives. You'll need to get a sense of whether you'd be hit by the AMT under current law.
-- Sell winning stocks in taxable accounts. Some of today's sell-off could be prompted by people wanting to lock in low tax rates on gains before they expire at the end of the year. Currently both capital gains and dividends are taxed at a top rate of 15 percent. Absent a new law, gains will be taxed at a maximum rate of 20 percent and dividends will be taxed as ordinary income -- as high as 39.6 percent plus a 3.8 percent Medicare tax for high earners.
That isn't expected. Most observers believe Congress and the White house will preserve low rates for both of those categories, but maybe not as low as they currently are. This year, anyone with taxable income under $35,350 ($70,700 for couples filing jointly) faces a zero percent tax rate on capital gains this year. If you're in that bracket, sell now. In addition to selling those winners you could give some shares to your low-earning young adult kids.
-- Max out your tax-favored retirement contributions. There's no reason to hold off on contributions to individual retirement accounts, Roth IRAs, and 401(k) accounts, even though you have until April 15, 2013, to make 2012 contributions. Here's why: (1) If you miss a year's contribution you can't make it up in another year; (2) Tea-leaf readers do expect some income tax rates to rise over the next several years, making the tax-favored buildup in those accounts more valuable; (3) An Obama-driven tax reform measure could hurt the tax breaks people get for 401(k)s and other retirement accounts.
The framework-providing Simpson-Bowles deficit-cutting proposal, put forth by Erskine Bowles, Clinton-era chief of staff, and Alan Simpson, former Republican senator, called for elimination of tax deductions for contributions to 401(k) plans and IRAs. Even if a future tax-reform bill doesn't get that extreme, "It's hard to see how those incentives don't get trimmed at least a little bit in a big grand bargain," said Geoff Manville, a principal in Mercer's Washington Resource Group. "They could very well be at risk."
-- Invest strategically. Some sectors will do better than others under a second Obama administration, says Sam Stovall, chief equity strategist at S&P Capital IQ. He has highlighted alternative energy areas, such as hydro, geothermal, wind and solar power, and also, surprisingly, aluminum - it can be produced with lower carbon emissions than steel. He also thinks homebuilders stand to profit from administration efforts to slow or stall foreclosures; fewer homes will come onto the market and more will need to be built. He also believes healthy dividend-paying stocks will hold up well and that taxes on dividends won't revert to punishing pre-Bush era levels. His favorites in a variety of sectors: Darden Restaurants Inc, Atria Group Inc, Chevron Corp, Bank of Nova Scotia, Waste Management Inc, Microsoft Corp and UGI Corp.
-- Bet on low interest rates now and higher ones later. The Obama victory was widely interpreted as a sign that the Federal Reserve Board has the go-ahead to keep buying bonds and holding short-term rates low for a while; the central bank's stated timetable was at least into 2014. But those same expansionist policies could lead to higher inflation and higher interest rates down the road, as the economy recovers. That means you still have a window to refinance your mortgage and lock in other low-cost loans. And you don't have to sell your bonds in a big hurry, according to Guy Le Bas, chief fixed income strategist, at Janney Capital Markets. He views the Obama victory as shaving about 0.25 percentage points off bond yields in the near term. Eventually, though, higher rates would harm bond investors.
-- Expect some consumer protections. Consumer financial advocates and bankers focused on the Senate run of Elizabeth Warren, the consumerist who dreamed up the Consumer Financial Protection Bureau and helped establish it. She is already talking about being the Senate's primary watchdog on such issues as banking disclosures and student loans. At the same time, the Obama administration can be expected to revive its stalled efforts to have financial advisers, brokers and retirement plan advisers all face a fiduciary standard -- meaning they would have to put the interest of their clients ahead of their own. "That proposal will come roaring back," says Manville.