August 31, 2012

Affluent Will Face Tax Hikes Next Year: Friedman of Washington Update

Under health care reform, investment income will face a new 3.8% tax for those earning more than $250,000

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What’s on tap for next year: “Plan for higher taxes, at least for more affluent clients—those earning north of $200,000,” Andy Friedman, political consultant with the Washington Update, told advisors Thursday.

On a conference call hosted by Sammons Retirement Solutions, Friedman, a political consultant who was on hand to discuss the election outlook, said that under health care reform, those with incomes greater than $250,000 will face a new 3.8% tax on investment income. “Health care reform doesn’t add to the deficit because there are two offsets in the law: next year investment income will be taxed higher and Medicare outlays will be reduced,” he said.

The other tax on wealthy Americans, Friedman said, will likely come from a compromise bill hammered out during “the mother of all lame-duck sessions” between President Obama and Congress regarding the Bush tax cuts, which expire at year-end. Obama wants the cuts to expire for those making more than $250,000, but Republicans want to extend the Bush tax cuts for everyone, including the wealthy.

“It’s going to be very difficult for everyone to simply extend the Bush tax cuts,” Friedman said. “I think it comes down to what the president wants: let them expire for those families with $250,000 in income. If Congress passes a bill that extends the Bush tax cuts for everyone—[Obama] will veto this because it includes the wealthy.” This means that "Republicans have a tough choice: either they say they won’t pass anything and taxes go up or they say ‘fine’ and let income taxes go down for the middle class.” Then, the compromise will likely be taxing those earning $1 million or more, he said. “I think Obama will accept that compromise.”

Given worries over the fiscal cliff—which Friedman says will likely be averted—as well as about taxes, the election and the European debt crisis, “markets will be very volatile” for the remainder of this year. “If clients are thinking about selling a business, let’s do that before the end of the year with the 15% capital gains rate still in place,” Friedman advised. And when helping clients who are rebalancing portfolios and “redeploying assets, think of municipal bonds and [putting the most toward] 401(k) plans and deferred annuities.”

Who will win the election—Obama or Mitt Romney? Friedman predicts it will be Obama. However, he stressed that the election will hinge on which way independent voters go. "The best key to this election is what independent voters are thinking."

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