lindley (1)

Business Insider

Lindley Estes is a business writer for The Free Lance-Star and This blog is on Fredericksburg-area business. Send an e-mail to Lindley Estes.

RSS feed of this blog

This week’s (6/27) investing column

INVESTORS, particularly those with high incomes, should start adjusting their portfolios to protect against what promises to be an increasing tax burden.

That was the gist of the cover story in last week’s edition of Barron’s. The cover image shows Uncle Sam reaching his hand into a man’s back pocket to pull out his wallet, and the story is titled “Watch Your Assets.”

“It isn’t hard to see what’s happening,” Barron’s writes. “The national debt has become gargantuan, and is still growing–thanks to bailouts, wars and ambitious social programs.”

Barron’s suggests that a soaring federal deficit and a national debt that is now 89 percent of U.S. gross domestic product will almost certainly force Congress to raise taxes. It’s likely that high earners–couples making more than $250,000 a year and individuals making more than $200,000–will get hit hardest.

Taxes could increase for this group on incomes, dividends, capital gains and estates. The Tax Policy Center is quoted in the article as saying the top 1 percent U.S. taxpayers will shoulder 85 percent of the tax burden. This wealthy group can expect an average $28,500 increase in their tax bill next year, while many lower earners will see tax cuts.

Barron’s lays out a number of measures that wealthy Americans can take now to lessen the bite of increasing taxes over the next few years. Here are some of the suggestions:

  • Consider selling some investments that have appreciated in value considerably and paying the capital gains taxes under this year’s lower rates. People might even consider buying the investments back later this year at a lower basis.
  • Wait to apply carry-forward losses toward future tax years, when rates are higher and the losses will pack a bigger punch.
  • If taxes on dividends increase as expected, consider holding income-generating stocks in an IRA or other tax-deferred account.
  • Consider holding tax-free municipal bonds in taxable accounts, though be sure to first calculate the tax-equivalent yields on other investments to ensure munis provide the better after-tax return.
  • Take out loans against whole-life insurance policies that have been overfunded with cash.
  • If you have stock options or bonus payments coming to you down the line at work, consider taking them this year.
  • Weigh the benefits of converting traditional IRAs to Roth IRAs, whose distributions are tax-free after the account holder reaches the age of 59. Taxes will be assessed on the conversion, but the bill wouldn’t be as high this year. Anybody is eligible to convert their traditional IRAs to Roth IRAs, though there are income caps for future contributions to Roth accounts.