One of the important issues of the upcoming presidential race will be the debate over tax policy. It is quite possible that the amount of tax you pay, both as a percentage of income and as a percentage of your investment gains, will change over the next 12 months.
Both candidates are likely to spend a fair amount of time talking about the maximum tax rate on capital gains (currently 15%) as well as the rate on qualified dividends (also 15%). One side of the argument is that a low tax rate encourages investment and the efficient allocation of capital. The other side will argue that raising the tax (a little) will not hinder economic development and will make the tax system more equitable. In other words, many of our wealthiest citizens receive the majority of their cash flow in the form of dividends and capital gains, which are currently taxed at a lower rate than most Americans pay against their wages. Ultimately, it will be up to the voters to decide come November.
In the meantime, think about your own personal tax strategy. There’s an old investment maxim that says don’t let taxes direct your investment strategy. That’s true, but we also shouldn’t ignore taxes when it comes to our investments. Maximizing “after-tax return” is what really matters to individual investors. The timing of investment transactions and the organization of your investments can make a big difference between what you keep and what goes to the government. A good wealth manager will talk to you about taxes, and together with your tax advisor, will help you understand changes in the tax system and how those changes might impact your personal financial plan.
If you would like a second opinion on whether your investment strategy is aligned with the proper tax strategy for your individual situation, contact us for a confidential consultation.