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Obama's 2013 Budget Plan and Your Portfolio

By Justin Krane

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Published: 18Mar2012
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What Obama's 2013 Budget Could Mean for Your Portfolio

Here is a summary of what Barack Obama is proposing for his fiscal 2013 budget:

1. Dividends received by high wage earners (singles over 200k and married couples over $250k) would be taxed at 39.6%, from 15%.

2. The top rate for capital gains would go from 15% to 20%.

3. The minimum tax rate for individuals with income of at least $1 million would be 30%. (This is what Buffett proposed.)

4. Obama wants the interest from municipal bonds which is currently federal tax free (and state tax free if you buy a bond from the state you live in) to be taxed! Yes taxed! The max rate would be 28%. I don't think this will happen (see below).

In the 2013 budget, there also would be a 3.80% tax on unearned income for married couples making over $250k and singles making over $200k.

So how should you invest based on Obama's 2013 budget proposals if they're passed?

- In most cases, the tax rate you pay on dividends could be more than the rate you would pay on capital gains. So buying dividend stocks becomes less important.

- If you plan on selling an investment (apple stock?) that has appreciated, take the gain in tax year 2012 rather than 2013. This is only assuming that you plan on selling the stock.

Caveat #1: If you plan on leaving highly appreciated stock to your heirs, you probably don't want to sell and pay the capital gains taxes because when your heirs inherit the stock, they will automatically get a step up in basis. For example, if you bought Apple at $20 and you plan on giving it to your nephew while you are alive, your nephew's basis is $20. But if you give your stock to your nephew after you pass away and Apple is at $500 the day you die, your nephew's basis is $500, not $20.

- Invest in a Roth IRA, or consider converting your IRA to a Roth IRA. The tax rate on the conversion may be lower today than it will be in 2013 and beyond.

- I think municipal bonds will continue to be tax free. If they were to become taxable, the borrowing costs of municipalities would go up. The interest investors would get would need to be higher because it would then be taxable.

Bottom line? With Obama's 2013 budget plan (and even in the future,) tax rates are going up. Consider taking some gains now if it fits your objectives. The Roth IRA is the easiest way to hedge against tax rates going up in the future.

Please consult with your tax professional.

Justin Krane is a certified financial planner who has helped countless entrepreneurs create a bigger vision for their businesses by showing them how to identify and meet goals for increasing revenue. Go now to http://kranefinancialsolutions.com to get your free financial planning toolkit and you'll also receive a free audio CD on increasing your business revenue.

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