Wealthy investors in America are scrambling to manage possible tax increases that could occur as the result of the expiration of current laws January 1, 2013.
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Investors may have been banking on a Republican win for the White House but now have only about six weeks to examine their tax situations and prepare for what is slated to be drastic changes in tax rates.
The so-called fiscal cliff may not happen in full. The Obama administration is calling for bipartisan efforts to manage the transition to higher taxes for the wealthy and spending cuts that will help reduce US debt.
The President wants to increase overall tax rates to 39.5% from the current level of 35%. He also wants to boost capital gains tax rates to 23.8% and reduce the number of exemptions from estate and gift taxes.
Taking capital gains this year may be partially responsible for the hit to the stock market in the days following the election along with factors from global economies like Europe and China.
But selling positions based on tax considerations can derail long-term investment strategies.
Those who decide to capture gains in 2012 can avoid the wash sale rule that prevents repurchasing the same security within 30 days after taking a loss.
Closely-held businesses may be smart to go ahead and distribute dividends and bonuses during 2012.
The tax rates on dividends may increase to as high as 43.4% in 2013. The current rate is 15%.
Since Republicans maintained control of the House, that provides continued resistance to efforts to raise taxes on the wealthy. Taxes like the 3.8% Medicare surcharge having nothing to do with the fiscal cliff so investors should be reviewing their tax situations from a number of factors.
The most prudent way to manage tax liability is to monitor and plan
throughout the year instead of waiting until year end.
This prevents investors from making investment decisions based solely on taxes and keeps them on track with investment policies designed to achieve their goals.