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Another tax increase on investment income that hits in January:
Bottom Line: Over the past week I’ve been sharing information for you to consider with regard to your investments, tax changes, fiscal cliff – etc. For example regardless of the outcome of the election, all income earners will fact a 2% tax increase on Social Security. Here is another one that will occur regardless of the outcome of the fiscal cliff…
Since the advent of the Affordable Care Act there have been many myths regarding the 3.8% tax included in some provisions of the law. So what is the truth?
If you are an individual making $200,000 per year or part of a household earning $250,000 or more you will get hit with the tax on investment income. Here’s how it breaks down:
Those increases will happen along with the 2% Social Security tax increase. Those increases will occur regardless of the outcome of the fiscal cliff. Any wonder why you’re seeing many reallocate investment dollars?
Stock market outcomes:
Bottom Line: Prior to the election I correctly predicted that the stock market would sell-off with an Obama re-election. After the initial sell-off I mentioned the pressure would likely hang over the market as a lack of a positive catalyst (except for satisfactory fiscal cliff resolution) existed short term. So now what?
You have plenty of investors that think we could go substantially lower in the market before year end. A minority (but they are out there) are suggesting that worst case for taxes and the fiscal cliff are already priced in. So what’s the reality?
Keep in mind that we create our own realities and emotional reactions can impact even the most pragmatic money managers (if investors do react to events by deciding to sell or buy unexpectedly). For the ease of conversation I’ll use the
The stock market had priced in a 66% chance of President Obama winning re-election on Election Day. That would mean most of the negativity associated with his proposed tax increases would also be accounted for in the market but certainly not all.
So let me demonstrate an example. The average tax increase on investment appears as though it will be at least 33% (capitol gains taxes increasing from 15 to at least 20% - taxes on dividends increasing from 15% to ordinary income).
If the market had priced in this outcome by 66% what is the actual downside based upon the Election outcome and downward revaluing of the stock market?
Here’s a formula:
33% of 33% is 10.9%. So what’s 10.9% of 13,200? 1437. So all things being equal the value of the market factoring in what we know now would be: 11,762. We’re currently 12,750. Meaning that we could easily see another 1000+ points come off the market before the end of year. Now if more positive outcomes occur maybe it won’t happen. Likewise if increases are even more severe – the outcome could be worse.
Hopefully that helps you further evaluate the current situation.
Mortgage DQ’s hit 3yr low:
Bottom Line: Now for some better news… Housing continues to work, rebound and it’s even showing signs of strengthening. Mortgage delinquencies for the most recent period reported period dropped to just over 5% for the most recent quarter. It’s still an elevated level of people who are 60 days late but it’s the lowest level in three years. It’s a clear indication that there will be fewer foreclosures going forward. So let’s put together some of the housing pieces…
Then let’s look at a couple of additional catalysts:
Real-Estate has traditionally been a place we turn to with our money when we don’t know where to turn. This most recently played out in 2001-2002. The dot com bubble burst led to money putting money into housing (even in the face of a recession). This laid the ground floor of what eventually became the housing boom. Don’t be surprised to see a repeat (though minus the boom / bust outcome in housing).
Where do you turn for yield now?:
This is a common question over the last week. We can’t earn meaningful income in fixed income assets because interest rates are so low. We can’t earn a good return in bonds without taking on a high level of risk. We had turned to dividend producing stocks but now we’re facing dramatic tax increases on dividend income from those investments… So is there anything left?
Before you make this move consult you’re financial advisor but… Yes there may be one channel left to consider. High yielding Real-estate investment trusts and Limited Partnerships. These asset classes weren’t taxed at the qualified 15% tax rate to begin with. LP tax rates can vary and REIT’s are taxed as ordinary income to you already (they don’t qualify for the current 15% dividend tax rate). Therefore they are less likely to be negatively impacted by the tax increases on investment that will occur.
Internet Explorer 10 for Windows 7 is available to download:
Bottom Line: IE 10 is now here for Windows 7 (it’s a staple of Windows 8). It brings three potential benefits along with it…:
It’s worth upgrading your browser. Here is more info: