More On Tax Planningfrom The Advisor's Professional Library
- IRAs: In General Individual Retirement Accounts are highly popular tools for contributing funds that grow on a tax deferred basis. Depending on the type of IRA, the accumulation can be tax free.
- Annuities: Estate Tax The value of certain types of annuities may be included in an estate’s value. Understanding the intricacies of these inclusions is a critically important aspect of estate planning.
How secure are streams of dividend income? The question arouses anxiety throughout the year, and especially during the holidays. Throw in talk of a coming “fiscal cliff,” and it increases exponentially.
Fred Taylor says to relax—sort of.
“We’ve been talking about this literally since January,” says Taylor, president of and co-founder of Denver-based NorthStar Investment Advisors. “So our clients are probably immune to it.” Taylor, whose firm specializes in building dividend portfolios for income, adds that much of the country has been talking about it as well, at least since the debt ceiling debate in Washington during the summer of 2011.
“It’s one of the reasons we’re not seeing a massive correction in the market,” he explains. “Believe me, if we saw a 20% downward swing, our clients would be calling, but that’s not happening.”
Volatility is light, with the VIX at 16, and there hasn’t been much economic news to cause it to spike. “The market has already baked in the fiscal cliff headlines,” Taylor argues. “And from what we’re seeing, it believes we’ll get a deal done.”
The deal, he says, will involve higher tax rates on the wealthy coupled with some type of entitlement cuts. “My personal belief is that dividends and capital gains are not what really matter to Obama,” he says. “If we can get income tax rates back to where they were under Clinton at 39.6% then that’s what he’s really after. He’ll let the other stuff go.”
That isn’t to say something drastic will not happen if a deal isn’t reached, Taylor emphasizes.
“But what investors are listening to is the market, rather that Congress,” he notes. “Congress is listening to the market as well. Believe me, if there was a 20% correction, suddenly we would see a lot of forward progress on the fiscal cliff front.”
If Congress does raise taxes on top earners while enacting some sort of entitlement reform, it will buy time to get into the mechanics of the budget, and at that point, Taylor says, “we’ll probably muddle through.”
“The question we always get, not so much from our clients but from other people, is ‘Will we change our strategy?’” Taylor says. “I always say, ‘No.’ We’d rather get paid on our money and then pay some taxes on it than not. Where else will investors get income currently? Not from money markets.”
As a firm, NorthStar's strategy throughout the year in the run-up to the cliff has been to look through their portfolios, take capital gains, offset those capital gains with loss harvesting, and then re-diversify the portfolio.
“We’re not at all surprised by the fiscal cliff,” he concludes. “We are surprised that the market hasn’t reacted. We really thought it would punish investors. It hasn’t yet, but that isn’t to say it won’t.”