Book Gains In Your Portfolio in 2012, Defer Charitably Donations ‘Til 2013
My latest as INQUIRER COLUMN..
POSTED: Tuesday, November 13, 2012, 3:01 AM
Now that the presidential election is over, Wall Street and financial advisers are telling clients that taxes are going up. We rounded up a sampling of opinions about potential tax hikes now up for debate in Congress, and possible fallout from the budget-cutting, tax-raising consequences of the fiscal cliff, if it happens.
Ratings agencies may downgrade U.S. debt for a second time should Congress disagree about the debt ceiling and decide not to address long-term fiscal deficits, notes Barbara Novick, BlackRock Inc.’s vice chair and head of government relations.
U.S. Treasury bonds would be affected by another downgrade, as ratings firms specifically tied potential downgrades to progress on deficit reduction.
“This time, a downgrade may be more than a reputational issue,” Novick writes, as many mutual funds and pension funds are prohibited from holding assets that are single-A rated.
Those investors may have to dump Treasuries if the United States suffers a second downgrade.
Cash-rich companies that both pay and increase dividends remain among BlackRock’s picks – even with a possible dividend tax hike to between 20 percent and 25 percent, up from 15 percent currently. U.S. dividend payout ratios are at record lows, and are ripe for increases.
Most health-care stocks should do well if Congress strikes a deficit-reduction deal. Financials will struggle with low interest rates and lots of rules, but BlackRock favors mortgage lenders, due to the nascent U.S. housing recovery.
Municipal bonds might lose their tax-exempt status, even at a time when state budgets need help. However, BlackRock argues that the muni bond market could stomach a 28 percent cap on the munis’ tax exemption, if it applies to newly issued bonds only.
Morgan Stanley strategist Jeff Applegate expects that Congress will act to delay higher taxes, such as ending the popular tax cuts on capital gains and dividends that were put in place by President George W. Bush.
The existing Bush-era tax rates are still set to expire at the end of 2012, but Applegate thinks existing rates will be extended for most taxpayers for one year – with some compromise for upper-income brackets – to give politicians time to address them in 2013.
Come Jan. 1, higher-income-bracket investors will be subject to the 3.8 percent Medicare surtax on their portfolio gains.
Also, medical expenses in excess of 7.5 percent of a person’s adjusted gross income can be deducted as part of itemized deductions. Starting with the year 2013, the 7.5 percent threshold will increase to 10 percent of adjusted gross income.
Rick Rodgers, president of Rodgers & Associates in Lancaster, recommends that his clients accelerate any large medical payments in 2012, or prepay insurance premiums for 2013.
Personally, he has converted a traditional IRA to a Roth IRA, booking capital gains this year and paying the taxes.
“The mistake most people make is they defer their income. That’s not sound anymore,” he advises. Move assets into tax-free bonds, college savings plans, and other qualified nontaxable accounts.
As for charitable deductions, those can wait, he says: accelerate income this year and defer donations until next year.
Taxes on the sales of your homes could also be a lot higher next year, warns Scott Meyer, a partner at Montgomery McCracken, Walker & Rhoads L.L.P. in Philadelphia.
“For many of the people, that’s likely the biggest chunk of unrealized appreciation in their portfolio” of assets, Meyer said in an interview.
This one is worth your attention:
If you were to sell your home in 2013, instead of this year, the profit above the tax-free amount would be hit by a 20 percent capital-gains tax and might be subject to the 3.8 percent Medicare surtax, too. There are various thresholds on what amounts to tax free: your marital status, income, and the amount of gain you make on the sale. Check with your accountant or tax adviser to find out whether you are subject to the Medicare surtax. If you are, selling before 2013 would help you avoid the tax.
All of this sparks a remark by Bill Smith, CBIZ managing director, in Bethesda, Md.: “It’s never bad to be rich. But right now it’s a bad time to be rich.”