WASHINGTON Nov 7 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
-- 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.