Stern Advice-What those election results mean for your wallet

Wed Nov 7, 2012 1:24pm EST
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By Linda Stern

WASHINGTON Nov 7 (Reuters) - The election results were clear, b ut the path forward is not. With Washington moving on with essentially the same trilateral team that froze fiscal policy for the last two years, it's not obvious or certain what will happen to taxes, interest rates, markets and the economy under President Barack Obama, the Democrat-controlled Senate and the Republican-controlled House of Representatives.

"We still live with uncertainty on this that puts us all in planning-land dilemma," says Greg Rosica, a tax partner with Ernst & Young. That doesn't mean individuals can't start to place some bets. There will be financial effects they can't control and some they can.

Here is what you can expect now, and what you can do about it.

-- Make an appointment with your broker and your tax adviser for the week between Christmas and the new year; don't let them take vacation. If Washington does anything to extend important tax breaks that expired at the end of 2011, like the alternative minimum tax patch, it is likely to finish that work the week before Christmas. That means you don't have to jump now to implement your year-end tax and investment strategy. You just have to plan ahead for what that strategy should be under the extended/not extended alternatives. You'll need to get a sense of whether you'd be hit by the AMT under current law.

-- Sell winning stocks in taxable accounts. Some of today's sell-off could be prompted by people wanting to lock in low tax rates on gains before they expire at the end of the year. Currently both capital gains and dividends are taxed at a top rate of 15 percent. Absent a new law, gains will be taxed at a maximum rate of 20 percent and dividends will be taxed as ordinary income -- as high as 39.6 percent plus a 3.8 percent Medicare tax for high earners.

That isn't expected. Most observers believe Congress and the White house will preserve low rates for both of those categories, but maybe not as low as they currently are. This year, anyone with taxable income under $35,350 ($70,700 for couples filing jointly) faces a zero percent tax rate on capital gains this year. If you're in that bracket, sell now. In addition to selling those winners you could give some shares to your low-earning young adult kids.

-- Max out your tax-favored retirement contributions. There's no reason to hold off on contributions to individual retirement accounts, Roth IRAs, and 401(k) accounts, even though you have until April 15, 2013, to make 2012 contributions. Here's why: (1) If you miss a year's contribution you can't make it up in another year; (2) Tea-leaf readers do expect some income tax rates to rise over the next several years, making the tax-favored buildup in those accounts more valuable; (3) An Obama-driven tax reform measure could hurt the tax breaks people get for 401(k)s and other retirement accounts.

The framework-providing Simpson-Bowles deficit-cutting proposal, put forth by Erskine Bowles, Clinton-era chief of staff, and Alan Simpson, former Republican senator, called for elimination of tax deductions for contributions to 401(k) plans and IRAs. Even if a future tax-reform bill doesn't get that extreme, "It's hard to see how those incentives don't get trimmed at least a little bit in a big grand bargain," said Geoff Manville, a principal in Mercer's Washington Resource Group. "They could very well be at risk."   Continued...