Smart Investing


July 13, 2012

January 31, 2014

How tax cut extensions could affect your investments

Last week, President Obama announced a compromise on extending the Bush tax cuts — he proposes extending them for those making less than $250,000 per year.

Congress will have to approve this, but if they do, it will help many investors, and I think many senior investors, as well.

Before you think this is starting to sound like I’m getting too political, my choice for president has not changed. But I also believe that no matter who is in office, Congress should do what is best for the country and economy — not what is best for either party to get someone elected.

Let me also explain that while I think this will benefit 90 percent of my clients, personally, it will mean I pay more taxes. So, why do I think this would be so good overall?

Based on 2012 tax brackets, if your taxable income, which is your income minus deductions and exemptions, is less than $70,700, you’re in the 15 percent tax bracket. If you’re single and your taxable income is less than $35,350 you also are in the 15 percent tax bracket.

What this means is that on investments such as stocks, if you sell after one year, you pay zero tax on that long-term capital gain. If your advisor is smart enough to put some good quality companies in your portfolio that pay a dividend, you also pay no tax on those dividends.

Many companies are currently paying dividends in a 2 to 4 percent range that is tax-free income to most investors. Based on a report from WM Financial Strategies out of St Louis, the average yield on an AA rate muni bond with a 20-year maturity is just over 3.75 percent.

I can’t tell you when, but I know that interest rates will go up in the future. They can’t stay at these low levels forever, and when that happens, bond investors will lose principle.

Nevertheless, if you buy good quality companies at reasonable prices that grow their sales and earnings over the years, a smart investor will enjoy tax-free dividends and tax-free appreciation for years to come.

What if you’re married and make more than $70,700 per year? Or single, and above the $35,350 per year range?

For married individuals the next top taxable income bracket is $142,700 for married people and $86,650 for single taxpayers, in which case your tax bracket will be 25 percent. These folks will have to pay some taxes on their capital gains and dividends; however it will still be at a lower rate of 15 percent.

This is still a great deal — if an investor in this tax bracket is getting a 3 percent dividend from a high quality company, they will net a 2.55 percent after tax return at the 15 percent federal tax rate. Compare that to your current taxable CD rate around 1 percent, if you’re lucky, providing an after-tax return of 0.75 percent.

Looking at the top rate for those earning $250,000 and less, the highest bracket is $217,451 to $388,350, with a tax rate of 33 percent. If someone in this bracket has taxable income of $240,000 they will still only pay 15 percent on their long-term capital gains and 15 percent on their dividends from those high-quality companies.

This investor would still net a 2.55 percent return on that 3 percent dividend, compared to a lower return of 0.67 percent on that hoped-for 1 percent taxable CD.

A couple other side notes for you: there are two other tax brackets, one of which is in the middle, with a taxable income range of $142,701 to $217,450 and a 28 percent tax rate. There is also the highest tax rate of 35 percent for those couples with taxable income over $388,350.

Investors also need to be careful on where they invest. If you own collectables or antiques, the rate is always 28 percent and if there is "Unrecaptured 1250 depreciation," the taxable rate is 25 percent. A 1250 Unrecaptured gain is, generally, when a depreciable asset is sold, the deprecation that has been allowed or allowable is subject to recapture.

If congress were to do the right thing and approve the tax cuts at this level going forward we should have a nice gain in the stock market and investors should really look at what they want out of their investments. If they are looking down the road 3-5 years, they are missing one of the greatest after-tax investment opportunities in perhaps their lifetime.

Be sure to have a conversation with your own tax professional about your taxable situation to get a full understanding of how taxes affect your investments.

Have a question or a company you'd like me to take a look at? Email me at

Wilsey is president of Wilsey Asset Management and can be heard every Saturday at 8 a.m. on KFMB AM760. Information is provided by Reuters.


July 13, 2012

January 31, 2014

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