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Financial Planning > Tax Planning

4 key dates for investors to watch: Andy Friedman

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Four dates — Feb. 7, March 31, April 15 and Nov. 4 — should be on advisors’ radar as they are likely “pivot points” for events that could affect the markets, particular industries, and tax and financial planning, says Washington Update analyst Andy Friedman.

In his most recent white paper, Friedman lays out the importance of each of those four dates.

While Feb. 7 is the day when the federal government reaches its borrowing limit, March 31 is the deadline for those who don’t currently have health insurance through their employer or under Medicare or Medicaid to decide whether to purchase coverage or instead to incur the penalty meted out by Obamacare.

See also: Most Americans unaware of PPACA deadline

Then there’s tax day: April 15, which will be a bit more stressful this year for high-net-worth folks who will feel the effects of the higher tax rates on investment income. Nov. 4 brings midterm elections, when Americans will vote on all 435 members of the House of Representatives and more than a third of the 100 senators.

Also on lawmakers’ minds this year is cybersecurity, which political strategist Greg Valliere says is the “new hot issue” in Washington. Hearings on cybersecurity are planned in both chambers this year.

While Treasury Secretary Jacob Lew recently warned Congress that the government would most likely exhaust its ability to borrow in late February, Friedman notes in his commentary that although the compromise reached in September allows the government to spend money through September 2015, the government is authorized to borrow to meet those expenses only through Feb. 7.

After Feb. 7, the government will be required to sustain itself without borrowing, which it will do for a few months using tax receipts and other funds, Friedman explains, but “at some point this spring the need to borrow will become acute. At that point Congress will have to act to raise the nation’s borrowing limit. If Congress fails to do so, then the United States, unable to borrow to pay interest, will default on the national debt.”

See related: Life insurer portfolios safe from debt ceiling brinksmanship

Friedman notes the two dates, August 2011 and October 2013, when negotiations to raise the debt limit came down to the wire before Congress reached agreement to avoid a default. “The same phenomenon could occur this spring. The partisan rhetoric already has begun.”

While negotiations toward an agreement “can be harrowing, and the apparent lack of progress in the weeks leading up to the default date can rattle the markets,” Friedman notes that he correctly predicted prior to the debt ceiling negotiations in August 2011 and October 2013 that “the markets, concerned about congressional inaction, would suffer a temporary downturn as the deadline approached.”

Just as was the case then, Friedman says that investors should “look for similar buying opportunities this spring if Congress’ partisan bickering rattles the markets and leads to a downturn. Because I do not believe Congress will allow the U.S. to default, the markets should come back once an agreement is reached.”

As for the Affordable Care Act, or Obamacare, an uninsured individual must purchase insurance by March 31 to avoid the individual mandate penalty. Shortly after that date, Friedman says that it should be clear “the extent to which young, healthy people in fact purchased coverage.”

However, he says that “the early returns are not encouraging: Health insurer Humana has already announced that its enrollment mix in private plans sold through the federal website will be ‘more adverse than previously expected.’”

Related story: Humana is worried about risk

Friedman counsels that those individuals that decide to incur the penalty “might want to adjust their tax withholding or estimated payments to avoid receiving a refund in the current or future years from which the IRS can collect the penalty.”

April 15, when federal tax payments are due, will mean a bigger tax hit for some people. “The fiscal cliff compromise reached by Congress at year-end 2012, combined with the new Obamacare surtax on investment income, resulted in a significant increase in tax rates in 2013,” Friedman notes. “For many investors, this rate increase can be as much as ten percentage points.”

Taxpayers already have felt the effects of the tax increase on compensation and business income through higher employer withholding or estimated tax payments during 2013, Friedman continud. “But few taxpayers pre-pay taxes on their investment income. Instead, they will feel the effects of the higher tax rates on investment income on April 15, when they file their return or request an extension. Combine these higher tax rates with the greater investment income they earned in 2013 due to strong market performance, and many taxpayers will be facing severe sticker shock in a few months.”

Then there’s midterm elections on Nov. 4., which Friedman predicts will be a “spirited affair” marked by each party vying to hold onto one house of Congress and to win the other. While saving his predictions on the outcome for a later date, Friedman says that the results will indeed “affect Washington policymaking during the tail end of 2014 and the final two years of the Obama presidency.”


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