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.
Tax Increases
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
Carnivals
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 [email protected]
Happy Holidays and Merry Christmas!
Track All Your Accounts With Personal Capital
Personal Capital lets you see all of your accounts in one convenient place. Sign up now for free.-Harry @ PF Pro
Thanks for the inclusion Harry. I really appreciate it. I hope you had a great Christmas and enjoy the new year!
No problem buddy, happy holidays!
Thanks for including our post, Harry – have a great rest of Christmas!
You too 🙂
Thanks for the mention! I hope you had a very merry christmas!
I did, still have some leftovers to tackle today 🙂
I’ve gotten a few questions about asset allocation and the fiscal cliff as well and I just tell people that there isn’t anything they should do. I guess it all comes down to whether or not you’re a long-term investor or a speculative trader. I personally believe in sticking with a certain allocation for the long-haul, so for my clients there isn’t anything we change.
Hope you had a great Christmas and thanks for the link!
Yes that’s an excellent point. If you are a speculative trader you need to know what the government is going to do and how it will affect the markets before everyone else knows. How the hell would I know that? haha
I’m not doing anything in my portfolio. I think a lot of the downside of the tax increases for investments, and the loss of earning power from companies, is largely priced in already. I think if one were going to sell, then it should have been done months ago. I think that when they do reach a “solution,” it won’t really resolve any of our real issues. A “solution” in most politicians’ and investors’ minds is to drink more alcohol in order to avoid the hangover (more borrowing, more revenue, more printing, etc.).
You may have time to navigate around debt ceiling discussions. They’re just starting to make their way into investing circles because everyone was so concerned about the fiscal cliff. I think they’ll raise the ceiling (in February or March), meaning you should buy productive assets beforehand (oil, farmland, gold [not quite productive but a great hedge against a weakening currency]).
Thanks for the links. Gonna get cracking on em.
Merry Christmas Matt! Since there is no way to know ahead of time what’s going to happen, I don’t think there’s any reason to tilt towards one asset class or another. Like you said, a lot of this stuff is priced in already so in order to make money off of it you have to know what’s going to happen before everyone else and before the stock price reflects that information. I don’t feel confident in my ability to predict that type of stuff which is why I haven’t changed anything in my portfolio..
Same to you Harry, and Happy New Year!
I think with all the money printing, asset purchases, and artificial lowering of interest rates, it’s fairly easy to predict that productive assets are undervalued. When the Fed announced more easing a few weeks ago, the markets barely moved, even though it was more than expected. That tells me that investors are resistant to any more easing. The heroin is losing its effect.
Gold didn’t budge either, which tells me that investors were pouring into gold beforehand because of the expected easing. Now that Fed policy doesn’t seem to affect it, it tells me that investors weren’t in it long term, but rather for the Fed-induced pops. Since countries like the US and Japan can still get away with selling bonds at record low yields, that tells me that the world has not yet figured out that devaluation of currencies is bad, and can’t go on forever. That means that gold still has room to go up.
This monetary policy will end badly, and energy stocks are selling cheap. ConocoPhillips is yielding close to 5%, Exxon’s at 2.6%, and natural gas stocks are super cheap because the asset is getting crushed. NG goes for $3.8/BTU in North America and ~$15/BTU in Europe and the Middle East, which isn’t sustainable. When our consumption binge comes to an end, people will still need heat, etc. Based on yields and earnings projections, I think that these sectors are cheap.
I bought a very small stake in Encana (NYSE:ECA), a Canadian-based natural gas and oil company. I think they’re well-positioned for a rise in the price of natural gas, and they have steady cash flow to support the 4% dividend while I wait.
Everything you’re saying sounds all well and good but to me it’s too hard to consistently predict the future. If anyone could do that, they would be doing quite well.
Out of all the thousands or tens of thousands of pro’s that do this for a living and manage funds, none of them can consistently beat the market’s average return. That tells me that the market does not always follow common sense and logic. I don’t mind guessing what will happen but I definitely am not going to invest knowing what I know.
Thanks so much for the mention Harry! Hope you enjoyed your holiday!
Best,
Cat
No problem, enjoy the holidays!
Thanks for the mention, Harry! I hope you had a great Christmas and are off to a great start in the new-fangled year of 2013! 🙂
It was awesome, thanks! I ate and then in turn exercised a lot, and the cycle repeated haha
Now that tax resolutions have mostly been reached, how should people adjust their savings and retirement plans to account for changing monthly tax expenses?
I didn’t read all the previous comments, so forgive me if someone already asked this.
Additionally,here’s a WSJ article discussing the situation
http://online.wsj.com/article/SB10001424127887324235104578242001811407798.html?mod=WSJ_article_comments#articleTabs%3Darticle
How did this happen? Doesn’t this increase taxes on the very people for whom taxes were supposed to remain relatively stable?
The WSJ article mentions a difference of $12000 dollars at retirement. While that is a chunk of money, it’s not enough to really change someone’s standard of living in retirement. Why is this something we should really be concerned about?
I don’t really read the WSJ too much but wow that article must have been written by a republican haha. There is one major assumption in the article that is completely false. The 2% payroll holiday tax break was just that, it was a holiday tax, or a temporary tax.
The payroll tax rate has always been 6.2%, Obama lowered it to 4.2% as part of a stimulus package that was designed to give average workers like you and I a boost in our paycheck, only temporarily though.
So even though the WSJ article states, “If you were caught off guard by this year’s payroll-tax hike and are forced to scale back your retirement-plan contributions” that is completely false. It is not a tax hike, it is the expiration of a tax break, which is different. And this statement would only apply if you took the 2% cut in taxes last year and contributed that to your retirement account instead of taking it as extra in your paycheck like I’m sure most people(including myself) did.
Interesting to read your predictions after the fiscal cliff was in fact averted before year end. It appears that they are going to revisit this area and new tax increases may occur this year.
Hi Steven, thanks for stopping by. I guess I was right?? haha But I think these government shut down, sequester, fiscal cliff talks are only going to escalate in the coming years. Our government is at odds and both sides have no motivation to work together. Seems like they’re all just trying to get re-elected instead of focusing on their constituents. Oh well, guess that’s the price you pay for living in a democracy.