Track the companies that matter to you. It's FREE! Click one of these fan favorites to get started: Apple; Google; Ford.



Is an Obama Tax Storm Looming?

Watch stocks you care about

The single, easiest way to keep track of all the stocks that matter...

Your own personalized stock watchlist!

It's a 100% FREE Motley Fool service...

Click Here Now

How will President-elect Obama affect your portfolio? Keep reading our special series for the lowdown.

After what seems like forever, the election is finally over. With the new president-elect announcing that change is on its way, investors on both sides of the aisle are wondering whether they're going to end up paying a lot more in taxes.

Barack Obama's tax plan created a great deal of confusion during the run-up to the election, drawing criticism from the McCain campaign that its provisions amounted to wealth redistribution. According to the Obama website, the plan has four primary planks:

  • Provide tax cuts for those earning less than $200,000 (for single taxpayers) to $250,000 (for couples) per year.
  • Make additional tax cuts for seniors, homeowners, those without health insurance, and taxpayers sending children to college or looking to accumulate wealth.
  • Make targeted corporate and capital gains tax cuts to encourage small businesses and job creation domestically, with tax credits to promote innovation and encourage employers to provide health care.
  • Simplify tax preparation for typical middle-class returns.

That sounds fine -- especially if your earnings are below those key levels. But high-income taxpayers can find more details on likely tax increases in the longer version of the plan.

What high-income taxpayers will pay
Specifically, the Obama tax plan will raise several taxes for high-income taxpayers, including the following:

  • The 36% and 39.6% tax brackets will return.
  • Rates on capital gains and dividends will rise to 20%.
  • Social Security payroll taxes could apply above the current wage base limit.
  • So-called "carried interest" on investment partnerships will be taxed at ordinary income rates rather than as capital gains.
  • The estate tax will not be repealed outright, instead locking in the 2009 exemption amount of $7 million per couple.

According to the Tax Policy Center, these changes would result in most taxpayers seeing modest tax cuts -- but those in the top 1% of all income-earners would see their taxes rise substantially.

What will actually happen
The problem with Obama's tax plan is that it was developed well before the financial crisis reached its peak in October. Stimulus packages and government bailouts could already raise the budget deficit to $750 billion next year, even excluding the costs of other proposals the President-elect has made.

Moreover, many are now calling for a second stimulus package to help struggling state and local governments, as falling housing prices and job cuts hurt their tax revenue. Expected layoffs at Citigroup (NYSE: C  ) , Merrill Lynch (NYSE: MER  ) , and Bank of America (NYSE: BAC  ) will cost New York State an estimated $3.5 billion in tax revenue. The governor of West Virginia is even considering suing AIG (NYSE: AIG  ) and other firms to recoup pension-fund losses.

Hiding in the background is the sunset provision of the Bush tax cuts, which will cause taxes to revert automatically in 2011 to higher levels than the Obama plan calls for. It may well take that long for things to recover to the point where higher tax rates would actually generate substantial revenue.

What to do now
So what's the right way for investors to respond to the election? Here are some things to think about:

  • Consider taking capital gains now. If you have any gains left, paying a 15% maximum rate now is better than paying 20% next year or the year after.
  • Don't dump dividend stocks -- yet. Investors have been rewarded for holding high-yielding stocks like Paychex (Nasdaq: PAYX  ) , National Grid (NYSE: NGG  ) , and DuPont (NYSE: DD  ) in taxable accounts. That may change, necessitating some shuffling between your tax-deferred and regular accounts.
  • Watch your taxable income. Many taxpayers, especially retirees who have access to IRA and 401(k) distributions, can control their income. With higher taxes coming, you may want to accelerate income into this year -- and going forward, you'll want to monitor your income closely to get the benefits and avoid the hikes within the new tax laws.

Many investors have worried for months about the effect an Obama presidency would have on their portfolios. The economy's weakness, however, should give you some time to plan before you have to make major changes to your investments.

For more on protecting your portfolio:

At Motley Fool Income Investor, we know how important steady dividends are to investors. Every month, we find stocks that not only pay great dividends but also have the potential to grow. See what we're recommending right now with a free 30-day trial.

Fool contributor Dan Caplinger has been preparing for higher taxes ever since they got cut. He doesn't own shares of the companies mentioned in this article. Paychex, National Grid, and Bank of America are Income Investor selections. Paychex is an Inside Value pick. Try any of our Foolish newsletter services free for 30 days. The Fool's disclosure policy is never taxing.

Read/Post Comments (6) | Recommend This Article (16)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On November 09, 2008, at 7:45 AM, WhiteHatBobby wrote:

    The Obama tax plans were designed to discriminate against investors. There is no common sense involved except to punish hard working people and the investors who have built their nest eggs.

    The socialist nation scares me worse.

  • Report this Comment On November 09, 2008, at 12:29 PM, JoeB423 wrote:

    The right-wing extremists need to stop their whining. Look at the scoreboard. The fend-for-yourself, free-market idealogues have had their chance. How has that worked out?

    It's time to take care of people and rebuild this country from the bottom up. Help people when they need it most, not when they are making enough money to contribute to the welfare of their country.

    It's ironic how ready the right-wingers are to send people off to die, but draw the line over contributing money to their country. It says something about their value system.

    I guess it's true that if a country must depend on its poor to survive it will; but if it must depend on its wealthy to survive the same cannot be said.

  • Report this Comment On November 10, 2008, at 4:02 PM, ShaunConnell wrote:

    The very idea that the free market has "had it's chance" is patently absurd. The last ten years have seen more market manipulation than multiple decades before, and in 1999 the New York Times reported that the financial crisis would be the result of Clinton strong-arming lenders to give loans that couldn't be repaid -- all in the name of "selflessness."

    So. How's that free market working? We don't know. We haven't had it yet. What we /do/ know is that every major recession and even the Great Depression were caused by government action. Every single one.

    How's that government working out for you?

  • Report this Comment On November 11, 2008, at 3:09 PM, Pieterss123 wrote:

    You forgot about the corporate tax rate increasing from 25 to 35%. This may not be a "tax increase" on us personally, but the impact could be just as bad or worse. As taxes increase, business will respond by increasing prices and/or cutting jobs. And since we are currently #2 in the world with our corporate tax rate at 25% (behind only Japan at 28%), we will once again be a world leader with a tax rate which prohibits our business community from truly being able to compete on a global basis.

    We need to remember that Government doesn't generate value and revenue, it just takes money from people and business. Some taxes are necessary, but if taxes are too high (i.e. Obama's proposals), then we will succeed in killing the Golden Goose. For more on this, take a good look at California. We are on the complete wrong track with a $20 billion deficit and more tax increases on the way. Bye Bye companies and jobs............ Hello medicority and socialism.

  • Report this Comment On November 11, 2008, at 3:57 PM, anotherjames wrote:

    JoeB423 Your intentions are good. Your logic needs better understanding.

    The recent economic crisis is not the result of "free market ideaology" or whatever, as there has been more government intervention in the market in the past ten years than arguably in this nations' history. The Bush Administration is not "conservative". It was, in fact, the most economically liberal Republican administration we've ever seen, and that has ruined us. And as far as "right-wingers" ready to send people off to die, understand this - we have a volunteer military. Every single one of our soldiers in every branch is there because he or she made the individual decision to be there.

    You probably picture "the rich" as fat old white guys smoking cigars laughing at shoeless children in the street while they count their cash kept locked in a big Scrooge McDuck vault. You probably also think that if you cut the goose's belly open, and look inside, you'll find even more golden eggs than before! Go for it. See what happens.

  • Report this Comment On November 12, 2008, at 11:18 AM, JrRelic wrote:

    The most successful and affluent people I know, are also the most generous with not only their money but also their time. Why should the people who work hard, live below their means, save money for the future and better them selves and the country or world be punished to help those who may not work as hard or spend more than they make and do little to nothing to better themselves or their world?

    Also taxing a company more will have the opposite effect on the economy than what Obama is saying it will. As a previous poster already stated either or both of 2 things will happen; the company will raise the price of goods to help maintain profit levels or will reduce the cost of producing those said goods, i.e. mass layoffs and moving even more jobs oversees. I would bet real money that the economy would see very healthy growth with smart regulations (not more) and a corporate tax of 12% - 15% across the board. Over 10 years at 15% the amount of revenue from two identical companies the only difference is only is taxed @ 25% and grows at an annual rate of 10%, the other is taxed at 15% and grows at an annual rate of 15%. Both start with a PBIT of $1,000,000.00 the and after 10 years the second company has paid over $583,980 is taxes over the first and has grown to be about twice as big employing possible twice as many people. So you tell me which one is better for the ecomony?

Add your comment.

Compare Brokers

Fool Disclosure

Sponsored Links

Leaked: Apple's Next Smart Device
(Warning, it may shock you)
The secret is out... experts are predicting 458 million of these types of devices will be sold per year. 1 hyper-growth company stands to rake in maximum profit - and it's NOT Apple. Show me Apple's new smart gizmo!

DocumentId: 771855, ~/Articles/ArticleHandler.aspx, 10/24/2016 12:08:40 PM

Report This Comment

Use this area to report a comment that you believe is in violation of the community guidelines. Our team will review the entry and take any appropriate action.

Sending report...

Today's Market

updated Moments ago Sponsored by:
DOW 18,233.25 87.54 0.48%
S&P 500 2,149.94 8.78 0.41%
NASD 5,303.65 46.24 0.88%

Create My Watchlist

Go to My Watchlist

You don't seem to be following any stocks yet!

Better investing starts with a watchlist. Now you can create a personalized watchlist and get immediate access to the personalized information you need to make successful investing decisions.

Data delayed up to 5 minutes

Related Tickers

10/24/2016 11:53 AM
AIG $60.38 Up +0.38 +0.63%
American Internati… CAPS Rating: ***
BAC $16.75 Up +0.08 +0.45%
Bank of America CAPS Rating: ****
C $49.68 Up +0.11 +0.22%
Citigroup CAPS Rating: ***
DD $69.95 Up +0.25 +0.36%
DuPont CAPS Rating: ****
MER.DL2 $11.64 Down +0.00 +0.00%
Merrill Lynch & Co… CAPS Rating: *
NGG $64.24 Down -1.12 -1.72%
National Grid CAPS Rating: ****
PAYX $56.15 Up +0.15 +0.26%
Paychex CAPS Rating: ****