It’s not that Congress has been sitting still. The Senate voted to raise taxes on those earning more than $250,000 and the House voted to keep taxes low for everyone.
And the 3.8% surtax could go higher if Congress doesn’t begin to work together.
The 3.8% number will apply to individuals who earn more than $200,000 per year ($250,000 for couples). Taxes on dividend income is currently 15% but that could go up, too—as high as the ordinary income rate.
If the current laws are allowed to expire, tax rates could be as high as 39.6%. That’s before the additional 3.8% is tacked on. If dividends are taxed at the ordinary income rate, it would virtually erase the advantage of investing in dividend-paying stocks.
So what’s an investor to do? As Keebler noted, taking large capital gains this year would avoid the extra 3.8% on large, long-held positions that took a hit during the 2008 crisis. They may not have recovered their full value, but they may still harbor significant gains. Becoming subject to the 3.8% surcharge would add insult to injury.
In addition to seeking more tax favored investment strategies, investors may also want to more actively managing real estate investments to guard against creating passive income.
Lastly, wealthy investors are looking for returns that will exceed the increase in taxes. This usually means investing in alternative structures that may have less liquidity. Private equity, hedge funds, and other illiquid investments all have risks that need to be fully understood—even the risk of not being able to meet anticipated liquidity needs to save taxes.
As always, it’s never smart to design investment strategies solely around tax liability.
But the upcoming scenario is another good reason to review client portfolios to see how their tax liability can be better managed within the scope of achieving their prioritized goals and objectives.

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