Throughout the year, all the uncertainty about what would happen
next year has made it next to impossible to plan a reasonable
investing strategy for the future. But if early reports actually
result in anything more than just trial balloons, then there will
be some definite winners from a proposed compromise between
congressional Republicans and the Obama administration.
Where we've been
For years, everyone knew that the day would come when the 2001 and
2003 tax cuts would end. Although sunset provisions aren't terribly
uncommon, it would be hard to find a more substantial and abrupt
reversal of policy than what would happen if old tax laws were
reinstated. Here are some examples:
- A host of tax brackets would go up, including everything from
10% rates on low-income taxpayers returning to 15%, to the 35%
maximum rate reverting to 39.6%.
- Preferential tax treatment on dividends would disappear
completely, while similar provisions for long-term capital gains
would lose part of their value, as rates went from 15% to
, which applied to estates above $3.5 million in 2009 and then
disappeared entirely this year, would come back to apply at far
lower levels near $1 million.
Proposals on what to do in 2011 and beyond have been front and
center within political debates since before the 2008 elections.
The administration originally sought to let tax cuts lapse on
high-income taxpayers while retaining the new low rates and other
tax breaks for those in the low- and middle-income brackets.
But according to The Associated Press, President Obama and
Republican leaders in Congress have now come to a compromise on
what to do about the looming expiration of the Bush tax cuts. Under
the proposal, the tax cuts would be extended for two years. Estate
taxes would be reinstated, but at the lower rate of 35%, and would
apply only for estates of $5 million or more. In addition, a new
payroll tax reduction would cut two percentage points off Social
Security taxes. Finally, popular breaks like the Earned Income Tax
Credit and child tax credits would be extended along with the
current tax brackets.
So who would benefit the most from the proposed law changes?
Let's do a quick rundown:
The same old same-old for taxpayers
Taxpayers again get big benefits, with any resulting pain from
higher debt to come down the road. Lots of people of all economic
levels get some pretty serious breaks under this plan.
Low-income taxpayers see the status quo continue, letting them
keep collecting credits that often give them refunds without paying
much if any tax. Middle-income taxpayers benefit, since the break
on payroll taxes can be worth more than $2,000 per individual,
depending on your wage level. And high-income taxpayers reap the
windfall of somewhat unexpected continuation of lower brackets.
No backlash for stocks
For stock investors, the news is equally good. Some believed that
would suddenly lose favor if the taxes on their dividends increased
substantially, with top-yielding S&P stocks
) , and
) at the epicenter of any collapse in dividend-investor
But with dividend tax rates staying at 15% at least through
2012, investors should stay attracted to the certainty of
getting money back
from their stocks. So you don't need to worry about a collapse in
dividend stocks just yet, and
SPDR S&P Dividend
) and other dividend ETFs should continue to stay popular.
In addition to big tax breaks from lower overall tax rates, small
businesses will get some extra provisions. One will extend
provisions letting them deduct certain capital expenses
immediately. That's a victory for them, but it will also benefit
) , and
) , which cater to small-business capital spending on office
equipment and furniture.
At least in the immediate term, you'll find a big group of
winners from the proposed tax law changes, which is one reason why
it's likely to pass. Instead of the upheaval many feared, keeping
things largely as they are could help stocks keep moving up as they
have for the past couple of years. Of course, we might be back in
the same boat when 2013 rolls around, but for now, keep your
fingers crossed that the proposed deal won't fall apart.