Plan Now For Future Tax Changes


Fired up for Bam? Love the pants suit off Hill? Ready to go to war for Mac? Great, but this election season you also need to rally around your wallet. No matter who wins the White House in November, tax rates are going to change and more than likely, they’ll go up.

Democrats Hillary Clinton and Barack Obama say they plan to eliminate Bush tax breaks on the top income brackets, increasing the rate for those earning more than $250,000. Obama wants to raise the Social Security wage cap, meaning anyone making over the current level—$102,000—would get hit with higher payroll taxes.

Republican John McCain says he will leave the Bush tax cuts in place, but even conservatives are skeptical. McCain twice voted against the cuts, saying they favored the wealthy, and what’s more, his power would be limited if Congress remains in the Democrats’ control. It sounds dire, but there’s no need to spend 2008 as a financial lame duck. Experts say you can make moves now to minimize your tax burden in the fill-in-the-blank administration. Here are some steps to take to make sure you are not giving too much back to Uncle Sam.

Step #1—Grass-roots organize your money.
Now is the best time to rebalance your portfolio of stocks and bonds. Many people put off this type of spring cleaning because they fear getting hit with capital gains taxes, says William Suplee IV, a certified financial planner in Paoli, Pa. But the current capital gains rate, 15%, is going to look like a dream in a few years. It stands to increase sharply in coming years with some predicting it will rise to 28% in two years. “The rates are really attractive right now," says Suplee. "It’s the lowest in most people’s lifetime."

Step #2—All the way with 401(k)
 If every personal finance book ever written, your HR department and the Suze Orman show haven’t convinced you to take advantage of the "free" money that comes with investing in a 401(k), then maybe higher tax rates will. Socking earnings in these accounts lowers your taxable income. Yes, some day you’ll have to settle up with the government, but by then, your money should have compounded at such a terrific rate you won’t mind paying the difference. “Anytime you can defer tax it’s always a winning formula. That’s just the power of compound interest,” says Owen Malcolm, a certified financial planner in Atlanta. He advises contributing up to the amount your employer matches and then putting whatever else you can spare for retirement in an IRA.

Step #4—Make peace with the IRA
Roth IRAs are the flipside of 401(k)s. The retirement money you put into these accounts is taxed now so you withdraw it later tax-free. Individuals making up to $116,000, and married investors earning $169,000, can contribute to Roths. Contribute this year and you won’t care who the president is when you are 59 ½ years old – the age at which you can collect your IRA earnings. You’ll still be living in the sunshine tax times of George W. “If we anticipate taxes are going to increase next year, it makes sense to find all potential after-tax vehicles right now realizing that if taxes go up, we’ve already paid,” says Tom Foster, a retirement planning expert at The Hartford.

Step #5—Stay on message.
No one is proposing 100% taxation. So the bottom line when it comes to your bottom line is that if you make more money you’ll have more money.



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