I’m not sure how everyone else feels, but the view from the fiscal cliff today isn’t quite as daunting as it could’ve been for retirees and anyone working toward retirement.
Let’s face it: As much as some of us suggested keeping calm while turmoil bubbled all around us, sometimes it was rather trying. Figuring out whether to pare down holdings to avoid increased taxation on dividends and capital gains was the biggest near-term nerve-wracker. And, of course, looming beyond that were changes to estate taxation and municipal bond tax rules.
But while we’re not totally on safer ground yet, Tuesday’s agreement on avoiding the fiscal cliff provided clarity on three of the key issues:
- Tax rates will rise for individuals with income levels above $400,000 and families above $450,000 to the Clinton-era level of 39.6%. President Obama ran on a $200,000/$250,000 threshold, so the increase will affect fewer individuals and households.
- Taxes on capital gains and dividends are now permanently set at 20% for those with income above the $400,000/$450,000 income threshold. For those below that level, the existing 15% rates remain. Remember, the Clinton-era rates were 20% for capital gains and at ordinary income rates for dividends.
- Estate taxes are now set at 40% for the $400,000/$450,000 threshold while keeping the $5 million (per individual) exemption. Here’s a nice bonus: The income threshold is indexed to inflation, so it should rise over your lifetime to the benefit of your heirs.
So what do we do with this information? How about yet another deep breath and sigh of relief.
Good. Now, let’s get back to our portfolios and make some decisions. Where are we on those dividend stocks like Procter & Gamble (NYSE:PG), ExxonMobil (NYSE:XOM), Clorox (NYSE:CLX), and Johnson & Johnson (NYSE:JNJ)? These guys were pretty much laggards to the S&P 500 stock index, and while some of that had to do with overall performance, investors’ fear of dividend tax hikes should be factored in, too.
Take a look at what you’re holding (or what you’re considering buying) in a new light today.
As for estate planning and taxes, always check in with your adviser about the best course, but at least you’ve now got a steady base to work from: a $5 million exemption.
Of course, Congress has lots of work left to do on debt reduction and entitlement reforms — and changes (or should I say “challenges”?) to the tax code are probably in store.
But for now we have a blueprint for moving forward on retirement planning, so get back to it with some confidence!
Marc Bastow is an Assistant Editor at InvestorPlace.com. As of this writing he is long XOM and JNJ.