How will capital gains tax be affected if we fall off the fiscal cliff?
By the time you’re reading this, we hope the “fiscal cliff” has been averted. If we’re lucky, our leaders in Washington have crafted a balanced plan to gradually reduce our national debt and get us on a sustainable path to prosperity. If we’ve gone over the cliff, it’s probably looking rocky right now. Most likely, we’ve addressed a few issues and following the lead of our European friends we are kicking the can down the road a bit. What does it all mean to you as an investor?
The primary area where the outcome of the fiscal cliff negotiations will impact the investing landscape are the tax rates on capital gains and dividends. Currently, both dividends and long-term capital gains are taxed at investor-friendly levels of 15% or less. Tax rates on long-term capital gains are likely to rise to at least 20%, while tax rates on dividends will likely rise to your ordinary income tax rate. For those in upper income tax brackets, rates on dividends and short-term capital gains could rise to over 40% when the Medicare surcharge tax is included. Undoubtedly, these potentially dramatic increases in investment tax rates could change investor behavior and impact market prices for certain investments. However, UIMG believes that analyzing all aspects of an investment, not just its tax treatment, is still the prudent course of action before putting your money to work.