Open any newspaper or turn on any television news program and you’ll see how the oil from a blown well in the Gulf of Mexico is drifting towards beaches and marshlands. The mile-deep well is leaking 200,000 barrels per day, and even the most optimistic experts predict it will be at least a week before capping the outflow. If the wellhead fails completely, the well could gush millions of gallons per day.
Gulf residents feel helpless in the face of the growing slick. Federal authorities have spread miles of booms to contain it, dropped “surfactants” to break it up, and even lit portions on fire to disperse it in the atmosphere. But beaches and fisheries have already closed, and some economists estimate the disaster’s cost will total billions.
Tax increases can be like oil slicks too. Why? Because they feel like thousands of gallons of sticky sludge? Well, sure . . . But tax increases are also like oil spills because you can see them drifting towards you from miles away!
We already know that taxes are rising on January 1, 2011. That’s because tax cuts passed during the Bush administration automatically expire unless Washington renews them. The top rate on ordinary income will return from 35% to 39.6%, and the top rates on qualified corporate dividends and log-term capital gains will return from 15% to 20%.
Now comes word that last month, the Congressional Budget Committee passed a fiscal 2011 budget resolution calling for elimination of the preferential rate on dividends. That would raise the rate from 15% to 39.6%. Plus, the recently-passed health care reform act adds a new “unearned income Medicare contribution” of 3.8% on “investment income” for families earning over $250,000 per year. That would mean nearly tripling the top rate on dividends to 43.4%. (And don’t forget state and local taxes, too!)
Fortunately, like federal authorities fighting the oil slick, you have your own tax “booms” and “surfactants” to head off the tax creep. For example, you can hold dividend-paying stocks in tax-sheltered umbrellas like IRAs and qualified plans.
Proactive planning is the key to minimizing damage when oil wells leak. Right now, we’re seeing the results of poor planning. And it may already be too late for miles of threatened coastland. But proactive planning is also the key to minimizing damage from tax cuts. And it’s far from “too late” to protect yourself from coming tax hikes. So call us when you’re ready for a tax “disaster” plan of your own!