Sunday, June 1, 2008

How will the Presidential Election affect your Tax Bill?

Taxes are going up sooner or later--sooner if you're well-off and Democrats take the White House. Here's the canadiates positions and what actions you can take.

As president, Senator John McCain (R-Ariz.) aims to balance the budget while extending the Bush-era income tax cuts, doubling the personal exemption and eliminating the alternative minimum tax. The Democratic candidates say they'll raise taxes only on the well-off-those making over $200,000 for Senator Barack Obama (D-Ill) while showering tax breaks and health insurance on working families.

What about income taxes? A Democratic President is likely to return the top stated rate on ordinary income-salary and interest- to the 39.6% that Bill Clinton's presidency ended with.

That would put the real salary tax bite at around 50% if, as Obama has suggested, the 6.2% Social Security tax is applied to wages above the current $102,000 cap and two sneaky provisions make a comeback- the phaseout of personal exemptions and a haircut to itemized deductions. Under a Democrat, the top capital gains tax rate, now a historically low 15%, will likely rise to 28% or higher whereas McCain would keep taxes where they are and fight to reduce rates. Given the budget gap, even Republican McCain may well resort to closing loopholes and curbing deductions.

John McCain


Tax Proposals

Reduce top corporate tax rate from 35% to 25%

Allow First-Year Deduction, Or "Expensing", Of Equipment And Technology Investments for businesses

Calling for congress to suspend the federal gas tax (18.4 cents per gallon) from this Memorial day until Labor Day

Raise the personal exemption for each dependent from $3,500 to $7,000

Keep capital gains and dividend rates at 10/15%

Make the Bush income and investment tax cuts permanent

Ban internet and cell phone taxes

Permanently repeal the Alternative Minimum Tax.

Barack Obama

Tax Proposals

Universal Mortgage Credit - 10% credit, refundable

American Opportunity Tax Credit: create universal and refundable credit for first $4,000 of a college education, tax credit available at time of enrollment

Increase capital gains to 10/20 or 10/28%

Crack down on offshore tax havens, create an International Tax Evasion Watch List;

Eliminate special interest loopholes and deductions, limit the ability of large multi-national corporations to use tax havens to hide income overseas

Repeal tax cuts those making over $200,000 or $250,000, restore PEP and Pease phaseouts for households making more than $250,000, restore 36 and 39.6% statutory income tax rates

Social Security/payroll taxes: increase the maximum amount of earnings covered by Social Security

Tax-Planning Ideas

None of this is cause for panic, but with higher taxes on the horizon it does make sense to prepare now.
1) Contribute to a Roth. A Roth Individual Retirement Account or Roth 401(k) can be a great hedge against higher rates. You put in aftertax dollars, the money grows untaxed and all withdrawals in retirement are tax free.
2) Do a Roth conversion. This strategy involves taking money out of a traditional IRA, declaring the taxable income and depositing it in a Roth, where all future growth is tax free. Only taxpayers with gross income below $100,000 are eligible, but that limit will end in 2010-unless Congress reneges.
3) Relocate assets. Investors may have been lulled into complacency over capital gains taxes in the three years through 2005 as their mutual funds used losses booked over the previous couple of years to offset gains. The holiday's over. Last year funds distributed $393 billion in long- and short-term gains to taxable shareholders, up 270% from 2005, estimates Thomas Roseen, a senior analyst at Lipper.
4) Buy munis. If you're in a high tax bracket, tax-exempt municipal bonds are a buy, says Robert Gordon, president of Twenty-First Securities. While off their peak of this year, muni yields are still high relative to Treasurys, even at current tax rates (see story). Avoid private purpose bonds-the kind whose income is taxable in the AMT. Vanguard, which offers some of the lowest-cost funds around, eliminated most of these bonds from its muni funds last year.