Minimizing the Impact of Next Year's Tax Increases

Just so you know, your taxes are going up next year. Yes, the Bush era tax cuts are due to expire at the end of 2010. Among other taxes, the federal estate tax – aka the ‘death tax’ – is coming back in 2011. In a perverse way, it creates an incentive to check out in 2010, but I’m not encouraging anyone along those lines. Move at your own pace.

The Obama tax increases are kicking in as well. Just with the recently enacted ‘health care reform’ legislation, you’ll see higher taxes on everything from passive income (dividends and interest – if any bank still pays you interest) to tanning salons, with much in between. Then there’s that alleged ‘financial regulation’ bill that nobody has read. What’s in it? We’ll find out, I’m sure, to our eventual regret.

What’s the immediate impact of this? The stock market is selling down as people take their money off the table. Do your deals this year. Don’t take the chance of getting taxed out the kazoo next year.

Plus, instead of reinvesting funds in new stock ideas, people are buying gold and silver. As in, “Why bother taking risks? Let Atlas shrug.”

In general, my view is that if you think you’ll need certain amounts of cash in the next two years or so, for daily living, for school tuitions, for nursing home costs, etc., then you need to sell shares and build your war chest. Don’t count on any stock to hold up under the pressures that are coming.

If you sell anything now, one thing that’s certain is that you’ll pay a lower capital gains tax this year than next. Right away, you’re eliminating market risk – of which there’s a lot – and saving taxes.

Byron King
for The Daily Reckoning