Is Your Portfolio Prepared for Higher Taxes?

By Yann Kostic from the October 2012 Edition

Although Bush-era tax cuts may be extended again this year, over the long term, higher taxes are more than likely. Is your portfolio ready? If not, it’s definitely time to prepare.

By historical standards, today’s tax rates on investments are low. Long-term capital gains and stock dividends are both taxed at a maximum rate of 15%. That’s down from 28% percent and 39.6%, respectively, during the 1990s. But the low rates are unlikely to continue. According to the Congressional Budget Office, the national debt is already at unsustainable levels, requiring higher taxes. Worse: the national debt is to keep on skyrocketing for the foreseeable future. How can you shelter your assets before new rates take effect, whenever that may be?

First, sell your winners before tax rates rise. It’s better to lose a little if they continue to appreciate than to wind up paying higher tax rates down the line.

Second, consider municipal bonds; the income they generate is generally free from federal taxes and from taxes in the issuing municipality. However, in light of the sharply increasing default rate, especially in California, proceed with extreme caution.

Third, maximize your deposits to Roth IRAs while tax rates are low; when rates increase sometime in the future, you’ll effectively be withdrawing money tax-free. You can contribute $5,000 per person this year or $6,000 if you are 50 or older. You can also convert your regular IRAs to Roth IRAs, paying taxes at the lower rates on the money you converted.

For Mexicans and Canadians (all foreigners indeed), I remind you that the U.S. does not tax short term or long term capital gains on accounts held by foreigners.

Whatever you do, do not wait for the last minute. Tax laws can be tricky; they’re always changing and everyone’s circumstances differ. So, before you decide to follow through on these suggestions, it’s a good idea to consult with a financial professional.

Yann Kostic is a Money Manager and Financial Advisor (RIA) with Atlantis Wealth Management specializing in retirees (or soon to be), self-reliant women as well as Expats in Mexico. Yann works with TD Ameritrade Institutional as the custodian of client’s assets. He splits his time between Central Florida and the Central Pacific Coast of Mexico. Comments, questions or to request his Newsletter “News You Can Use” Contact him at Yannk@AtlantisWealth.com, in Mexico: (314) 333-1295 or in the US: (321) 574-1529.

 

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