How Taxing Would the Fiscal Cliff Be For You?

Impact of Selected Fiscal Clif Tax Changes

By Jack N., Communications Analyst and Blog Contributor

I’m obsessive about taxes. Long ago, I created a spreadsheet that tracks my annual federal and state taxes. I can develop what-if scenarios: What if marginal tax rates change? What if payroll taxes go up or down? What if capital gains rates rise? What if certain tax deductions are eliminated?

I know how much I owe in taxes at any time, and I have a pretty good handle on how much I will have to pay in the near-term. That allows me to chart my investment future more accurately.

Which brings us to the fiscal cliff and the intense debate over which of the 2002 Bush tax cuts will survive. You should pay close attention because the outcome could make a difference in your tax strategy, whether you buy or sell securities today, and alter your investing behavior for years to come. Let’s look at a few crucial provisions on the table.

Long-Term Investments Taxed More

The maximum capital gains tax rate is set to rise to 20 percent next year from 15 percent. In addition, individuals in the 10 to 15 percent tax brackets, who pay no capital gains, would pay a 10 percent rate starting in 2013. If you’re looking at selling securities you’ve held for more than a year, you might consider whether it makes sense in your situation to sell in 2012.

Short-Term Investments Targeted

The highest marginal tax rate would move from 35 percent to 39.6 percent and, in general, most households would see higher overall income tax rates. That raises this question: Should you lock in short-term gains – investments held for less than a year – in 2012? Short-term gains are taxed at ordinary income tax rates rather than lower capital gains. This might make sense if you don’t plan on holding a security for longer than 12 months. However, by simply holding an investment for at least one year, your gains will be taxed at the smaller long-term capital gains rate when you sell.

No More Capital Gains Rate for Dividends

Most dividends today qualify for taxation at the capital gains rate. But if the Bush tax cuts are rescinded, dividends will be taxed at the ordinary income tax rate. I am not suggesting you bail out on dividend-producing securities. There are a lot of reasons to buy these securities, but dividends shouldn’t necessarily be the sole reason. Don’t change your investment and trading strategy; just be aware of the potential tax consequences in your calculations.

Higher Federal Taxes Could Alter Your Plans

The Tax Policy Center has calculated that the tax changes outlined above – plus a few others – will cost the average middle class household ($38,521 to $62,434) about $1,710 per year. Households above $101,583 would pay an average of $6,563. You need to determine how you will alter your investment and trading plans if your net household income dropped by thousands each year.

These are tricky times for self-directed investors and traders. You have lots of tools at your disposal at Scottrade to research companies, industries and markets. Scottrade’s Gain/Loss Tax Center also has a number of useful calculators. But uncertainty over taxes will make your decision-making process more challenging. Don’t veer away from your plans, but be mindful of the fiscal cliff’s impact on taxes and be prepared for a course-change.


In Scottrade’s 2012 American Investor Survey, 28 percent of investors said higher income taxes would impact their investment decisions over the next 12 months. How would fiscal cliff tax changes affect your investment and trading decisions?

Jack N. is a communications analyst at Scottrade. He works to demystify the markets and the economy for all types of investors and traders.

 

Also of Interest:

 

Scottrade does not provide tax advice. The information shown is for informational purposes only. Please consult your tax or legal advisor for questions concerning your personal tax situation.

Articles, commentary, and opinions expressed on this site are those of the author and not necessarily those of Scottrade. Scottrade does not guarantee the accuracy of, or endorse, the views or opinions of the author.

The examples and/or strategies described in this blog are for informational purposes only and their use does not guarantee a profit. None of the information provided should be considered a recommendation or solicitation to invest in, or liquidate, a particular security or type of security. Investors should fully research any security before making an investment decision. Securities are subject to market fluctuation and may lose value.

 

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