Election years bring investors all sorts of anxieties. Aside from the various campaign promises designed to attract us to a particular candidate, we must also consider which nominee’s policy changes threaten to erode our financial well-being. Such considerations give new meaning to the term political plank, and pocketbook politics always hit home during times of economic and market malaise.
As the general election approaches, everyone who earns a living, invests in the markets and pays taxes should be familiarizing themselves on where the prospective candidates stand and how these positions could affect your wallet.
With that goal in mind, we need to face up to the music and learn to dance around some of the tune changes that could come our way post November.
Take, for example, dividend taxes--an issue that could have serious ramifications for America’s growing population of retirees. Every investor that’s retired needs a rising tide of income from dividends just to keep up with inflation; if dividends are taxed at a higher rate, more and more Americans will struggle to live off their portfolios.
At this juncture, politicos on both sides of the aisle are jostling for media attention and sound bites; we don’t really know what either party’s candidates will do once elected. But thus far the leadership of the Grand Old Party (GOP) has stated that they’d like to renew the lower tax rates, if not make them permanent.
And earlier this month the Democratic nominee shared his views on the subject, suggesting that he would increase the tax on dividends from 15 percent to 20 percent for some, while bumping up even further for others.
The cutoff is based on income: Those who earn at least $200,000 in household income would be fleeced for saving and investing for their future; those who earn less would only be penalized by a tax hike of some 33.3 percent on their dividend income.
As for capital gains, the Democratic candidate is calling for similar tax hikes.
For pundits who argue that hiking the tax on capital gains will really only affect a smaller portion of tax payers, think again.
If we examine the actual tax data from the last reported year, you’ll find that those earning $75,000 or more pay some 93.8 percent of capital gains taxes. Those earning less than $75,000 paid some 6.2 percent of all capital gains taxes.
Get Rich From This International Fund
This fund is already up 8.5% so far this year (while the S&P 500 is down 9.3%). Better yet…it’s currently trading at a 6.5% discount.
Plus it pays out fat dividends you can enjoy while you wait for your big gains. And don’t worry, it’s a safe bet and you can trade it right here in the USA.
Go here and look forward to some quick profits as the price takes back the discount.
And what do you think will happen to the markets as the news of the pending changes in tax law makes its way into the media?
Share prices will tumble even further. Any tax takes away from the anticipated performance of any investment; if taxes on dividends and appreciation are hiked, then the investments have to justify even higher pre-tax performance expectations.
But it might not be all over for investors in a post-November market.
One of the potential benefits of a tax hike on capital gains and qualified dividends would be to make those investments that already are taxed at full ordinary income rates more appealing than their currently tax-advantaged competitors.
This would have positive implications for two of our favorite investment classes. First, we’ll examine the bond market. Bonds and bond funds pay interest and dividends that have always been taxed at ordinary rates. Therefore, with a potential rate hike for common and preferred stocks on the table, bonds look even better as an investment option. And the case for bonds strengthens when we consider that common shares will also trade at a discount to price in the higher tax rates.
But not all bonds are equal. Government bonds, which aren’t fully taxed, and municipal bonds will reap the benefit of higher dividend and capital earnings taxes.
Over the past year my favorite municipal bonds and bond funds have piled on income at a nice and steady clip. The standouts among the non-taxable funds that I recommend in The Yield Letter include AllianceBernstein National Municipal Income (NYSE: AFB) and Nuveen Quality Income Municipal (NYSE: NQU). Both pay an average yield in the low- to mid-5 percent range.
At the current tax rates, that works out to a tax equivalent basis in the low- to mid-8 percent range for most taxpayers.
If bonds don’t strike your fancy, I have a collection of stocks that are just the right ticket for a post-November world.
How would you like to be paid dividends running at 7 to 10 percent or more? And keep in mind that only 10 to 20 percent of these payments would be taxed.
Master Limited Partnerships (MLP), Limited Liability Companies (LLC), Real Estate Investment Trusts (REIT) and other passthrough investments pay piles of cash to unitholders.
I’ve been covering these investment vehicles in Personal Finance for years as well as in The Partnership, a newsletter dedicated to the best MLPs that the energy and infrastructure sectors have to offer.
These are the ideal antidote for any portfolio in a post November election market.
Take, for example, Atlas Energy Resources (NYSE: ATN), a gas and oil MLP that pays a dividend yield in excess of 7.3 percent. And only about 15 percent of that is taxable income; the rest is return of capital and, thus, not part of your income for taxes this year.
It reduces your cost basis because the tax is deferred; you only pony up if and when you sell. Also, in the event of your death, your heirs who are lucky enough to receive your position in such a partnership would not be subject to this deferred tax because the cost basis gets re-set to the current price. The taxes just go away. Needless to say, these investments should be a cornerstone of your estate planning.
And for those of us who have yet to retire, the Democratic nominee is contemplating hiking payroll taxes as well.
How would you like to see a 2-4 percent hike in what Uncle Sam garnishes from each of your paychecks under the Federal Insurance Contributions Act (FICA)? Even worse, if you run your own business, be prepared to shoulder a tax hike of some 4-8 percent since you have to pay both your cut and the employer cut.
And the cap on FICA taxable income is likewise slated for an increase. The Democratic nominee’s proposed modifications would increase the amount of your income that’s taxable to $250,000. For tens of thousands of small businessmen, this would translate into some $31,000 in FICA taxes on top of the additional Federal Payroll taxes on that income--roughly $7,250 under the proposed new payroll tax program.
That’s pretty steep and would be crushing for the small and self-employed business sector that’s responsible for creating more than 75% of all new jobs in the nation.
But given Uncle Sam’s mounting bills, perhaps we should all get ready for giving the Federal Government an ever larger portion of our earnings and savings before November even rolls around.
We’ve all become painfully aware of the current banking and credit crisis. Thus far the Federal Reserve has propped up the banking sector with billions upon billions of financial support, including a massive 10 billion injection into our neediest banks just last Monday morning. Uncle Sam is writing progressively larger checks, which have to be funded by something--either by more debt, or from our checkbooks.
And regulators admit uncertainty about how to determine which banks and financials should be allowed to go under and which should be propped up with Federal cash.
This past week Sun Security Bank in metropolitan Saint Louis found itself in receivership, as the FDIC swooped in to take over the failed bank and liquidate its assets.
Sure it’s a small bank with less than 1 billion in assets. But a billion here and a billion there adds up to real money in the end.
And the megalenders are in dire straits as well. Despite all of the Federal cash and capital injections from sovereign investment funds (SIVs), experts estimate that the 10 largest banks in the US needs to face the music and rollover more than 200 billion in bonds.
Multiply Your Income With More Gains and Less Risk
Four of KCI’s top editors want to share their post election predictions with you and show you how you can bulletproof your portfolio while racking up double-digit gains.
They’ll reveal the choicest picks in the booming energy sector, plus the latest nanotechnology breakthroughs. You’ll also hear why Canadian Trusts have already given investors gains of 63% this year and the exciting prospects for 2009, plus how you can multiply your money 5-10 times with income investing and finally….a complete wrap up of the post election market prospects for 2009.
Follow this link to get the details, but hurry –– doors closing soon.
That reminded me of a campy film released back in 1981 called Rollover, which starred Jane Fonda and Kris Kristofferson. The movie told the story of a major US bank that needed to rollover a massive investment held by a Middle Eastern investment group. I won’t spoil the ending for you, but if you’d like to see how this might work out if the nation’s largest banks don’t convince a pile of bond investors to go along, you might want to track down the film
But, heck, with all of the current and pending waves of new tax dollars flowing into Washington, perhaps Uncle Sam will just roll it over himself.
How About Some Water Music?
No, I’m not referring to Handel’s masterpieces but rather to a little jazz or an orchestral ditty you and I can enjoy under Caribbean skies.
If you haven’t been on one with me, you haven’t had the pleasure of sharing a bottle of something French along with a nice cigar as background music plays and our ship plies the waters of one of the seven seas. And in the morning, we can get on with the business of figuring out how to make the most of the markets.
Even though 2008 has been a difficult year for many of our favorite stocks, bonds and funds, we can commiserate and plan our regrouping for 2009 over a glass of cognac and a fine cigar while cruising the warm waters of the Caribbean.
We’ll talk about out what investments will help our portfolios grow while enjoying warm waters from Miami, on to island stops including St. Barthelemy, through the Panama Canal and finally to Costa Rica.
Click here for details.
Dead Guys of the Week
I love the old standards and the crooners who sang them. Although the masters--Frank Sinatra, Ella Fitzgerald, Mel Torme and, of course, Nat King Cole--made it seem effortless, making great music takes more than just a good set of lungs. It takes an entourage of support, including the music director who manages much of the actual work before and during a stage performance.
And one who served several of the greats, including Nat King Cole, was Lee Young. Young was born in the musically rich city of New Orleans and grew up in the entertainment capital of the world, Los Angeles. He’s dead now at 94 years.
Beyond the music directors, you need a producer and a record label to get the music out to the world. One who made it all happen for many unbelievable talents, including Ray Charles and Aretha Franklin, was the co-founder of Atlantic Records, Jerry Wexler. Jerry’s dead at 91 years.
Speaking Engagements
Fall is the perfect time to enjoy Washington, DC’s outdoor treasures and catch a glimpse of nature’s splendor. And this year you can enjoy the immediate aftermath of the presidential election in the seat of the federal government.
Join Roger Conrad, Elliott Gue and me for the DC Money Show Nov. 6-8, 2008, at The Wardman Park Marriott.
Click here or call 800-970-4355 and refer to priority code 011363 to register as my guest.
I’ll also be appearing at the following events:
- The Financial Advisors Investment Conference, October 2008
- The World Money Show, London, England, November 2008
- The 2008 KCI Investing Cruise, Dec. 1-12, 2008
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