Maximum Tax Efficiency

Our conversations with investors have uncovered three major perception mistakes about the tax rate hikes that will befall U.S. taxpayers next year.

Mistake #1: Don’t trade stocks

Many investors have been adequately trained over time to resist the urge to trade stocks (or other marketable securities) in order to avoid high tax burdens and oppressive trading commissions.

Laws are about to change.  Unless the law is adjusted, tax rates from trading stocks (capital gains taxes) will be among the lowest investment tax rates.

Secondly, in the past, investors saw their investment values negatively impactedby the high cost of trading commissions.  Recently, a price war has begun and many investment custodians have greatly reduced or eliminated trading commissions altogether.  Investors should not discount the possibility of commission-free investment markets in the not too distant.

Mistake #2: Buy & hold investors will escape the tax hikes

For the past seven years, most ordinary dividends have been taxed at 15%.  Prepare for that rate to increase by more than two timesnext year.

Although the final tax rates could be changed, if the law stands as is, for the wealthy the dividend tax rate could be as “high as 39.6% and could rise as high as 43.5% when the tax imposed on couples who earn more than $250,000 a year to pay for health care reform goes into effect in 2013” according to Investment News.

Obviously, this tax hike will not affect tax-deferred retirement accounts.  Yet we would suggest the potential mass exodus of taxable investors from dividend payers could materially affect the price of those same dividend payer investments left behind inside tax-deferred accounts.  Stay informed.

Mistake #3: Fail to maximize tax-advantaged contributions

Investors continue to procrastinate and fail to plan to maximizetheir tax-advantaged investment contributions.  In spite of the looming tax hikes, too many investors miss opportunities to fund tax-advantaged accounts (such as SEP-IRA for business owners).
Next year, more than ever, make it a priority to talk to your investment, tax and legal advisors to take advantage of intelligent tax planning.

This information is not yet law.  Moreover, Arlington Hall Research is not a tax advisor and you should consult your tax advisor for your personal tax guidance.  At the same time, misconceptions on tax policies could prove disadvantageous for your investment monies.  Investment tax planning based on misconceptions such as those shown above could prove catastrophic for uninformed investors.