There’s been a lot of talk about the looming fiscal cliff lately and it looks like Congress and the president won’t be able to reach a deal by the end of the year. There’s still a chance something may happen but you should start preparing your budget for the worst.
Plan on taxes going up for everyone because each side appears to be on opposite ends of the negotiating spectrum. They’ll get back at it and try again after the Christmas break but that only leaves them a couple days to work it out and it doesn’t seem like there’s any real motivation for democrats and republicans to work together.
Should no deal be reached, the following tax increases will occur:
- Income tax rates will go up across the board
- Special tax treatment of dividends will expire
- Long term capital gains tax rates will increase from 0% to 10% and 15% to 20%
There are a few wise tax moves to consider knowing this information. If you have stocks with large capital gains, it may be a good time to realize these gains by selling the stocks now and paying the lower capital gains rate. That way you’ll pay taxes at the lower 0% or 15% rate where as if you wait until next year to sell, you’ll pay 10% or 20%.
Since the special tax treatment on dividends is set to expire, you might want to rethink your allocation towards dividend stocks. As a young investor, I don’t think it makes sense for me to tilt towards dividend stocks and now I think it makes even less sense. Older investors should take a look at their portfolio and re-assess their allocation toward dividend stocks now that the taxes will be that much higher.
If you have income from a taxable retirement account, it may be a good idea to take out more money this year. I would take out enough to fill up my current tax bracket, since next year you’ll be paying more in taxes when everyone’s income rate goes up.
Fiscal Cliff Market Timing
I’ve gotten a few questions about what moves, if any should be made to a portfolio in anticipation of the fiscal cliff and my answer has been the same every time. If you’re worried about the fiscal cliff and how it will affect your stock portfolio, you probably need to reconsider your stock allocation. This is a good time to assess your risk tolerance because minor speed bumps like this should not change your investment strategy nor keep you up at night. If it is, then you should consider lowering your stock allocation.
And now on to some of my favorite articles from December, enjoy:
Little House in Guatemala, Week 7 on Reach Financial Independence
Where Does The Money Go When Raising A Child on Debt Round Up
It’s a Wonderful Life on Money Life and More
How much do we spend on the Holidays? on Planting Our Pennies
What Are Some of Your Unique Christmas Traditions? on Frugal Rules
How to Decide What Financially Matters in the New Year on Work Save Live
What I Learned About Blogging From My First 50 Posts on Luke 1428
Transfer Money by ACH Push, Not Pull on The Finance Buff
End of 2012 Blog Update on Modest Money
Luxury on a Shoestring in the Lakes on Budget Blonde
Reflections on Home Ownership on Leigh’s Financial Journey
Carnival of Wealth on Control Your Cash
Nerdy Finance on Nerd Wallet
Festival of Frugality on One Smart Dollar
The Wealth Builder Carnival on Wealth Builder
If I forgot to include anyone in my link round up or you’d like to be considered in the future just drop me an email at yourPFpro@gmail.com
Happy Holidays and Merry Christmas!
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-Harry @ PF Pro
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