Planning Your Wealth Preservation Options for a Post-Election Economy

October 30, 2008 by  
Filed under Financial Planning

The election will be over in few days.  The end of this interminable campaign has good and bad components.  The good is that we will no longer be subjected to the candidates’ incessant misstatements of fact and making of promises that we know will be broken.  The bad is that the media will dedicate even more coverage to the “economic crisis.”   This will further reinforce the market-crushing fears in the minds of consumers and investors. 

Now is the time for those who base their personal financial decisions on analysis and planning to consider their options for preserving wealth in a post-election economy.  More specifically, although no one can accurately predict what will happen post-election, there are steps that can be taken or evaluated now to cover your bases in anticipation of changes that are possible when a new government is established. 

These are the wealth-preservation issues and options that Mr. ToughMoneyLove is thinking about:

Personal Income Taxes

The hard truth is that income tax rates are going up – way up.  It doesn’t matter who gets elected. Obama has already promised to raise income taxes on those making $250k or more.  He has also promised to decrease taxes on the rest.  The first promise will be kept.  The second promise is likely to be broken.  Why?  Because recent spending blowouts by Congress will send budget deficits so high that taxes will have to be raised to pay for them.  This is why a McCain-Palin administration will also have to accept an income tax increase of some kind. 

Under an Obama administration, the tax increase for the middle class will not be called a “tax increase.”  It will be called something else.  It will be needed to pay for his healthcare initiatives.  For example, Obama will say that he is keeping his promise not to increase income tax rates on the middle class.  Instead, he will say he is increasing payroll taxes which are now used for Medicare and Social Security and half of which are paid by the employer.  

Either way, unless you are a minimum wage worker or close to it, your net take home pay is headed south.  I recommend that you start budgeting and spending now as if you had lost 5% in take home pay.  Save the rest.   If you are now in the upper income bracket, plan on a reduction in take home pay in the 10-15% range.

If you are self-employed, or a small business owner, or are otherwise in a position to accelerate income this year and taking it from anticipated income next year, I would strongly consider doing it.  You will probably save on your total tax bill by taking the income in 2008 rather than in 2009. 

Taxes on Capital Gains and Dividends

The favorable rates on taxation of qualified dividends and capital gains are likely to either disappear or to be “means tested.”  By this I mean that if you are in a high marginal tax bracket, your tax rate on dividends and capital gains are likely to be proportionately bumped up.  Remember, Obama is not a fan of concentrated wealth and is eager to re-distribute it to those who don’t have it.  The IRS will become the wealth re-distribution agent, sending “tax rebates” even to those who do not pay income taxes.  What should you do?  Consider selling at least some of your big market winners (if you have any left) at the end of this year because an Obama-led government is likely to make capital gains tax increases retroactive to January 1, 2009. 

The tax free status of most capital gains arising from residential home sales is also in jeopardy.  Keep an eye on this issue and while doing so, run some numbers on taxation differences that could develop if you sold your home for a substantial profit.  If downsizing or relocating is in your future, in some cases, it could make financial sense to sell before you lose the exemption, thereby saving thousands in income taxes. 

Qualified vs. Unqualified Dividends

Regarding taxation of qualified dividends, be alert to the possibility that some of those dividends you receive may end up being non-qualified.  This means that you will pay taxes on those dividends at ordinary income rates.  Why do I say this?  Because for a dividend to be “qualified” and thereby eligible for favorable tax treatment, it must be paid by a corporation out of earnings and profits.  If the corporation has not made a profit and is not paying taxes on income it distributes as dividends, it may be ineligible for payment of dividends that are deemed qualified.  In this economy, there will a lot more unprofitable companies that will nevertheless struggle to continue to pay dividends so as to keep shareholders happy.  There is not much you can do about this now.  You can only speculate as to whether the dividends you receive will be paid by a company that turns a profit.  But keep the issue in the back of your mind for planning purposes. 

Retirement Plans

Already, some influential Democrats in Congress are calling for a complete revamping of 401(k) plans, including eliminating the ability to exclude employee contributions from income.  Even if such a proposal is adopted, it will likely preserve the existing tax treatment for all contributions made prior to the effective date for the new law.  For this reason, I would consider front-loading your 401(k) contribution to get as much of it as possible grandfathered under the old law.

Second, you should also consider exploiting as many Roth-type investment options as possible.  If you have a Roth-option in your 401(k) plan, I would consider funding it with front-loaded contributions, before income tax rates increase.  Along these same lines, do not forget about the Roth IRA conversion window that for now remains open for 2010.  This will allow even high earners to convert a conventional IRA to a Roth IRA without regard to income levels.  If you are like me and Mrs. ToughMoneyLove, you have been funding a non-deductible IRA these past few years just so you can take advantage of the Roth IRA conversion opportunity in 2010.  If not, consider fully funding it now for 2008 and immediately in January for 2009.  This may let you escape the higher income tax rates on the money going in while preserving the option to exploit the Roth conversion window in 2010. 

Healthcare Funding

This is a tricky area to predict.  If Obama is elected with a filibuster proof majority in Congress, big changes in our healthcare system are almost certain to occur.  If some form of single payer system is adopted, the need for Health Savings Accounts may disappear.  I like my HSA because I treat it as a Roth-type investment vehicle.  Thus, if you are now in a healthcare plan that has an HSA feature, consider front-end funding the HSA to the max, so that you have a chance of preserving grandfathered Roth-type tax treatment of those funds. 

What other wealth preservation options are you considering in anticipation of a new Congress and Administration taking control?


Feed Mr. ToughMoneyLove

FREE UPDATES: If you enjoyed this, please subscribe to receive the newest hard truth from Mr. ToughMoneyLove automatically by RSS feed (what is RSS?) or by spam-free Email.

Share
  • Banner

Comments

7 Responses to “Planning Your Wealth Preservation Options for a Post-Election Economy”
  1. Hi MrToughMoneyLove,

    I enjoyed your post. Your advice is very relevant to the upper middle class, the ones who won’t benefit from middle class tax cuts or tax credits, but not rich enough to have the deductions to lower their tax rates of 30%-50%. You are right that they need to take preventive action now, no matter who becomes President next week. The upper middle class could benefit from some serious study and application of tax planning. This is my first visit to your blog so I haven’t read enough to see if you’ve already written about it.

    I’m one of those people whose job was eliminated at the end of 2003 and we have no health insurance. I went from a full-time industry job as a chemist to being a contractor with a small company to tutor math and science to high school students. Great job (I love it), good pay (but not as good as my old job), and no benefits.

    I still go on as many job interviews as I can get for chemistry positions, but they can hire someone 15 years younger and pay them less, so I don’t get the job. I always ask why they didn’t hire me, and they say I would have to have training since I’ve been out of the lab for 5 years and my past experience is in an area not closely related to the job. I was an analytical wet chemist. Very few companies have wet labs anymore. Somebody else with current lab experience can walk into the job without training. Translation, somebody younger who was taught on new instrumentation. Companies are always minimizing analytical costs because they are a cost-center, not a revenue-producer.

    My son and I have pre-existing medical conditions so we can’t get health insurance period at any cost today. There is a high-priced state pool but they don’t cover what we need covered – mental health. We pay over $400/mo on medications alone. If one of us has a check-up or is sick, we have to pay for it out of pocket. Some months cost us $1000 in medical bills.

    It’s also telling that the U.S., the richest country in the world, is currently 29th in infant mortality. Last year (2007) we were 19th. It’s horrible when we drop 10 places in a year. We should have the lowest infant mortality rate in the world, but we’re 29th. We brag about our world class health care, but we’re 29th. It’s inexcusable.

    Until Hurricane Gustav, my income was above the level where we could buy into the Medicaid program for my son. Since Gustav, we now have a low enough income that I can sign him up and pay a low premium. I make too much for him to get Medicaid for free. Too much is $3000/mo gross income.

    So I’m looking forward to a supplemented system that requires affordable health insurance for children and requires they accept and cover pre-existing conditions. Maybe I can get some insurance, too. I have asthma but can’t afford the medicines to treat it properly. Fortunately, my allergist gives me samples for everything I absolutely can’t live without to keep me out of the hospital.

    The past 8 years have been the biggest redistribution of wealth to the upper class since the 1920’s. And now our old buddy Hank Paulson can give several billion dollars to Bank of America to unfreeze the credit markets, but they have the option of paying themselves bonuses and paying on their own debt instead of that money being used as intended? That just stinks.

    The rich are getting richer and the middle class are getting poorer, especially middle class retirees. My mom is 73 and she had to go back to work part-time to make ends meet. She gets a pension and social security, but they aren’t enough. She even has really good insurance and pays very little out of pocket for medical expenses. Inflation outpaces the pay increases of pensions and social security.

    The millionaires and billionaires of our country pay effective tax rates in the single digits. Your effective tax rate is the amount you actually pay, not the amount on a tax table.

    When I was a chemist, my effective tax rate was about 20% including state and local income taxes. Now it’s only 10% because I have a business on top of my job, so I can deduct a lot. That’s what the rich do, deduct a lot and end up with low effective tax rates. I don’t believe the tax rate on the rich will increase very much. It may go from 7% to 10% but I bet their accountants will find more deductions for them. They plan for the reality that they have a high tax rate and are proactive about lowering it significantly.

    I may not agree with Obama a lot, but I do agree with his underlying principle that wealth and prosperity come from the bottom up, and having a strong middle class. A strong middle class works, gets paid and pays payroll taxes in larger amounts than a weak middle class, providing much-needed revenue to fill in the financial hole this country is in. They also spend more of any disposable income they have, creating more tax revenue. It’s not about rates as much as it’s about total revenue.

    I believe the key to the whole financial crisis won’t be huge tax increases. It will mean closing loopholes, cutting unnecessary spending and collecting more revenue by getting people to work in higher paying jobs and giving incentives to companies who create those jobs.

    A lot of skilled workers are being laid off as I write this. We would all benefit if we can get them back to work making good money.

    Sherri

  2. Sherri – Thanks for your comment. I can’t really argue against anything you have written, as it seems you take a balanced approach to very difficult issues. There definitely needs to be a program available to provide healthcare to you and your son. I am afraid that offshoring has caused the loss of a lot of high tech jobs in the U.S. and it probably affects your field as well. I am concerned that the combination of Obama and a Democrat dominated Congress is going to do things that are not balanced and will be an overreaction to recent events. That will end up hurting everyone from top to bottom.

  3. Miranda says:

    Great post! Some very practical points. Especially the fact that taxes really have nowhere to go but up. Although, I wouldn’t mind having higher taxes to pay for healthcare. I pay close to $5,000 a year for health insurance (and that doesn’t include co-pays and deductibles). If my taxes were increased by $2,500 a year to cover healthcare, I’d be saving money.

    At any rate, I also agree that a one-party government is rarely good for the system overall. One of the pitfalls of our two-party system is that it so quickly can lead to a government dominated by one party.

  4. I already voted for Obama because I feel John McCain’s judgment is very questionable when he named Sarah Palin as his running mate. Had he chosen anyone else on his short list, I could have voted for him in good conscience.

    It wouldn’t be a big issue for me if he weren’t 72 and if he hadn’t had 4 occurrences of melanoma skin cancer. That cancer is deadly and the chances of him living through his entire first term are not statistically very good because he hasn’t survived 5 years past his last cancer occurrence. At 5 years, your probability of cancer recurrence goes down to the same as anyone else your age, race and gender.

    I do not believe Sarah Palin is ready to be the President and won’t be ready anytime soon. She would require a few years of intensive on-the-job training to be able to take over and actually do the President’s job effectively. A VP must be ready to step into the Presidency on day one. She is not ready.

    There may be a majority of Democrats in congress, but from my own state, our Democrats are more conservative then most republicans, so a free ride through Congress still won’t happen if Obama becomes President and 60 Dems become Senators. If our Senator is reelected, she will vote against leftist policies. She has before and she will again.

    I’m a moderate Republican, but that’s why McCain lost my vote.

    Sherri

  5. Sam Spaiser says:

    Hi MrToughMoneyLove,

    I thought that this was an extremely informative post. It’s hard to find people that actually talk about the truth of the two candidates, the truth being that there’s not a heck of a lot of difference between the two. One of the only other news mediums that I am able to get this information from is the Financial Sense News Hour, with Jim Pupplava and John Leoffer. With all of the money creation that is going in between the government and the Federal Reserve, taxes have to go up, or people will get very suspicious where all of this excess money is coming from (the masses generally don’t catch on to inflation until hyper-inflation hits home). I honestly didn’t see any difference between the two candidates, and I would have been choosing between the evil of two lessers. For this reason, I voted for Chuck Baldwin because he got Ron Paul’s endorsement. Ron Paul I think is one of the only politicians that truly understands monetary policy, economics, foreign policy, civil liberties, and the constitutionality of a document.

    Honestly, I think that all of these tax increases will destroy the economy more and knock us into a depression, just like what happened when Hoover raised taxes in the early thirties. It will force a dramatic increase in unemployment, and a sharp decrease in spending. The government always seems to make the same mistakes and the masses always seem to fall for them.

    Why don’t people ever learn?

  6. Sam: I have to admit that, like you, my views on government fiscal and monetary policies are more closely aligned with candidates who are not in the major parties. I have not yet decided if I can spend my vote on one of them.

  7. Sam Spaiser says:

    All I can say is that, you have proven yourself more educated than 98% of the population, so I can tell that no matter who you choose to vote for, it will be based strictly on policy and not based on who can make more false promises.

Speak Your Mind

Please leave a comment and tell us your version of the hard truth...

You must be logged in to post a comment.