TribLIVE

| Home


Weather Forecast
 
Larger text Larger text Smaller text Smaller text | Order Photo Reprints

Fiscal cliff may obscure long view

About The Tribune-Review
The Tribune-Review can be reached via e-mail or at 412-321-6460.
Contact Us | Video | Photo Reprints

Daily Photo Galleries


By The Associated Press

Published: Saturday, Nov. 3, 2012, 12:01 a.m.

BOSTON — A frightful scenario could play out in a couple of months unless a lame-duck Congress and the White House are able to resolve their differences on taxes and spending.

If they don't, Bush-era tax cuts will expire Jan. 1, and automatic federal spending cuts will be phased in. Such a combination could doom the fragile economic recovery and send the stock market into a tailspin.

What's more, tax rates on investment income would rise, a particularly scary prospect for investors in the upper tax brackets.

Investors may be inclined to sell some investments to take advantage of today's historically low rates. While acknowledging that could be sensible, John Sweeney of Fidelity Investments urges investors to heed the adage, “Don't let the tax tail wag the investment dog.” In other words, consider whether you're becoming preoccupied with tax issues at the expense of long-term investing objectives.

“Building a well-constructed portfolio will give you the confidence to weather any number of geopolitical or economic crises,” says Sweeney, an executive vice president with Boston-based Fidelity.

In an interview this week, Sweeney discussed how to take a big-picture approach to the short-term risks from any fall over the fiscal cliff.

But first, here's a look at the tax consequences if that happens. The maximum rate of 15 percent on long-term capital gains — the profits from selling such investments as stocks or mutual funds held for at least a year — would increase to 20 percent.

The tax on dividend income that now tops out at a 15 percent rate could rise more sharply. For those in the top income bracket, the rate would rise to more than 43 percent, with smaller increases for those making less.

Those rates may not take effect if Congress delays or otherwise averts tax increases. But it could be just a matter of time before rates rise, given the extent of the nation's debt problem.

There are relatively simple steps investors can take to minimize tax bills. For example, keep investments that are likely to generate a tax bill in tax-sheltered accounts where only withdrawals are taxed.

Here are excerpts from the interview with Sweeney:

Q: What are you advising clients to do with the fiscal cliff looming?

A: It's the same advice we would offer in any given situation. Remember, presidential elections occur every four years. There are always economic cycles, debt crises, and various crises in other parts of the globe. We try to help folks come back to a place of confidence and comfort, where they understand the importance of constructing their portfolio to meet their specific objectives. We emphasize finding the right balance between stocks, bonds and short-term cash investments.

When folks say, “I'm planning for a retirement that's 20 years away,” we want to make sure they have enough exposure to stocks so they can continue to grow their portfolio over that time frame. We remind them that historically stocks have outperformed bonds, and that bonds have outperformed cash investments. Recognizing how long it will be before an investor needs to draw from savings is very important.

Q: Does the potential for higher taxes on investment income affect how to allocate between different investment accounts?

A: Many investors have a 401(k) or IRA, so taxes are deferred until you begin to draw down from savings. So the main impact from any short-term rise in tax rates would involve taxable accounts, and those who are in the high tax brackets. But you'll have to pay taxes at some point.

Q: For investors with taxable accounts, what steps are worth considering now?

A: You want to make the right investment decision first. But it might make sense to sell a particular stock if it has appreciated in value, and your portfolio might be out of balance as result. Stocks are up about 13 percent this year, so your stocks might have appreciated to the point that they're a bigger component of the portfolio than you want. Finding an appropriate balance is the first thing to think about. If you decide you should reduce exposure to stocks, look at holdings you may want to sell or cut back. Then think about the tax consequences.

 

 
 


Show commenting policy

Most-Read Stories

  1. East Allegheny counselors receive national recognition
  2. Patience pays off as starting pitcher Volquez gets 1st win for Pirates
  3. Undersized rookie Gibbons is blur on ice for Penguins
  4. Murrysville woman sues Giant Eagle over burns
  5. Work on tournament-class dek hockey rink in Bloomfield to begin
  6. Officials in North Versailles fed up littering
  7. Kovacevic: Panic over Pirates? In April?
  8. Penn State has hand in discovery of most Earth-like planet yet
  9. Pens insider: Penalty killing a concern in Stanley Cup playoffs
  10. UPMC: As many as 27,000 employees affected in data breach
  11. Bullied South Fayette student’s case prompts wiretap overhaul legislation
Subscribe today! Click here for our subscription offers.