The Bottom Line on Higher Taxes

You may have already had your fill of news about the “fiscal cliff” and the increased taxes potentially heading our way.

But if you’re inclined to look, there’s a very good chart produced by Vanguard illustrating the tax outcome if no new legislation is passed.

Taxes will go up for almost everyone on January 1, 2013.  This point is worth mentioning because many people I’ve talked to seem to think that taxes will increase only for those making over $250,000. That’s simply not true.

Here are some rough tax estimates I ran across last week in Investment News magazine:

“The Tax Policy Center estimates that 90% of U.S. households would see taxes increase next year if all the elements of tax relief were allowed to run out and the new health care taxes were implemented.

In this worst-case scenario, the average family would see a $3,500 increase, while the wealthiest 20% would see an average $14,173 boost in taxes. The top 1% of earners would pay an extra $120,537.”

As you can see from the Vanguard chart, even for lower-income taxpayers:

  • the overall tax rate on income will increase;
  • capital gains rates will increase;
  • and dividend tax rates will increase.

Why is it worth mentioning this? It helps underline why it’s critical for the two political parties to compromise and undertake action to a). keep us from going over the “fiscal cliff,” which would cause an economic contraction and hoist unemployment, and b). devise a more palatable menu of tax changes less damaging to taxpayers at all income levels.

What’s the likelihood of that happening?  Most experts believe there will be an agreement, albeit more of a “band-aid” than a “big fix.” We are all hopeful that a compromise comes sooner rather than later to minimize the inevitable damage caused by indecision.

The bottom line? Unfortunately, there’s turbulence ahead. Be prepared for volatility and rocky markets. Does that affect our investment strategy? Not really. We may adjust the investment mix as a result of tax changes, but we think the best investment strategy remains a diversified, fully invested portfolio focused on opportunities to capture total return.

 

 

About Mari Adam

Mari Adam, Certified Financial Planner™ and President of Adam Financial Associates Inc, has been helping individuals and families chart their financial futures for over twenty-five years. Have a question about your financial situation? Ask Mari!

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