There is a lot happening in Washington these days with regard to proposed tax legislation which may affect you. Beyond the political rhetoric a number of house and senate bills are being offered.
When President Obama announced his jobs package in early September, he proposed paying for the measure with a series of tax increases on individuals making more than $200,000 and families making more than $250,000. Among them was a 28% cap on the tax exemption for municipal bond purchases and a hike in the tax on “carried interest” for private fund managers from the capital gains rate to the individual rate. In their version of the jobs plan, Senate Democrats replaced the Obama tax increases with a 5.6% surcharge on millionaires, S 1660. The tax would apply to adjusted gross income less investment interest deduction above $1 million. Senate Democrats believe that the $1 million threshold more clearly delineates the difference between the middle class and the wealthy.
On the other side of the isle House and Senate Republicans are attempting to set the capital gains and dividends rate at 15% permanently. The bills, HR 3091 and S 1647), attempt to codify the 15% rate that will vanish if the Bush administration tax cuts expire Dec. 31, 2012. If Congress does not extend the Bush tax cuts, the capital gains rate will rise to 20% and dividends will be taxed at individual rates beginning in 2013. Sponsors of the bill are confident that it can win House approval. They’re not certain, however, that it will be considered in the Senate. Meanwhile, the GOP is trying to get rid of a 3.8% Medicare tax that will be assessed on investment income starting in 2013 to help pay for the health care reform law. Sen. John Cornyn, R-Texas, introduced the bill, S 1738.
The other ‘big idea’ being floated by the President and some democrats is the so-called Buffett Rule. Named after Warren Buffett, the Omaha, Neb., billionaire investor, the idea is that middle-class taxpayers should not pay a higher percentage of their earnings to the federal government than the wealthy. The notion is based on Mr. Buffett’s suggestion that it is wrong for him to pay taxes at a lower rate than his secretary- even though he is paying far more in dollar terms. Mr. Obama, however, has not defined exactly what the Buffett Rule is. Rep. Alcee Hastings, D-Fla., has offered a bill, HR 3105, that would impose an additional 5% tax on income from $350,000 to $500,000, 10% on $500,000 to $1 million, 15% from $1 million to $10 million and 20% on income exceeding $10 million. A group of Republicans have put forth a far different concept. Under the Buffett Rule Act, HR 3099 and S1676, taxpayers would be allowed to donate money — beyond what they owed in taxes — to the Treasury Department to help pay down the national debt.
It is likely that the effective tax that most people pay will be going up after 2012. Whether this is the result of higher rates, less deductions, an additional flat tax or all of the above is not certain. Tax rates in the United States are at historically low levels and remain low compared to other countries. As with any other financial planning tax planning should be part of any overall investment strategy.
At the very least you and your financial advisor will want to pay close attention to what is happening in Washington and at most you may want to contact your representatives to express your opinion. We recommend against making any changes based upon possible legislation but rather waiting until any bill has been passed into law. The only certainty about Washington is that things will continue to change!
