NYTimes - What Some Investors Are Doing In Anticipation Of Tax Increase

NYTimes ? What some investors Are Doing To Anticipate Tax Increase
Nice article in NYTimes by Paul Sullivan.  He talks about some of the
specific tax increases that are on their way to happening (unless
Congress and the Prez do something about them), and what some folks are
doing to deal with it.
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The tax increases addressed:
1. The 3.8% ?surtax? on investment income for individuals making over
$200,000 and couples making over $250,000.  This one is part of the
Obama Healthcare law.
2. The increase in the long-term capital gains tax from 15% to 20%
(and, therefore, for those making above the thresholds, a total jump
from the current 15% to 23.8% ? plus, not mentioned in the article, the
impending reinstatement of the phaseouts of the personal exemption and
itemized deduction effectively increase the marginal tax rates even
more, since the phaseouts are tied to income).
3. The tax on ?qualified? dividends ? going from the current 15% to
one?s ordinary marginal rate ? as high as 39.6% for the highest earners
(again, in addition to the 3.8% and the phaseouts ? so in actuality,
the marginal income tax on such dividend income can go above 43.4% from
the current 15%)
Some things people are doing:
1. Examine portfolios and realize capital gains this year, before
year-end ? note that this is the opposite of traditional planning
wherein one typically would have tried to harvest losses and postpone
gains, since gains are cheaper this year and losses will be more
valuable against higher future taxes
2. Buying more municipal bonds instead of taxable corporate bonds (and,
presumably, even dividend-paying stocks)
3. Actively manage real estate so that rent will no longer be
categorized as passive income
4. Focus more on getting higher returns than on worrying about the
taxes (if they can do this without increasing risk, I sure wish they?d
tell us how)
Lastly, they point out that even after all the increases, the long-term
cap-gains tax wouldn?t be particularly high in historical terms, and
even so, folks may simply try to postpone realizing gains even longer
than before.  Congress should take note of this last point ? people can
often control when they take capital gains, and the very wealthy can
often postpone it for many many years through a variety of strategies. 
If the marginal capital gains rate it high, the government may collect
less in taxes than they expect.
Anyway, it?s a nice article and even though it focuses on the super
wealthy, some of the lessons apply to a pretty wide audience.
[Copied from my blog post at
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Reply to
David S Meyers CFP
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"He is making a bigger change with his real estate holdings. Mr. Beeman said his wife would start to actively manage the properties they rent out. He says he believes that by doing this, the rents will no longer be categorized as passive income, which is subject to the surtax. "If you have one town house generating a couple of thousand dollars a year, it's probably not worth it," he said. "If you have 10 properties and each one is generating $15,000 in net income, then it is worthwhile. It's a matter of size and if you have the time and ability to do it." "
Explain this. If rental income is no longer passive income, is it not subject to SE tax? What is the benefit in their strategy?
Reply to
Pico Rico

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