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  • The estate tax will not be repealed outright, instead locking in the 2009 exemption amount of $7 million per couple.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.

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