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Packing Your Parachute for the Fiscal Cliff

Whether you’re pleased or disappointed with the outcome of the Presidential election, the question to ask now is, “What does this mean to me?” It’s an especially important question if you own a business or are investing for retirement.

If you have wealth, the implications are not good. Keeping the current tax code would take some type of lame duck session compromise in Congress, which Speaker Boehner has said is improbable. It’s wise to expect a reversion to the old tax code on January 1, 2013, which means higher taxes on income, capital gains, and dividends.

Even if Congress revises the tax code, the changes will probably not include lowering taxes for “the rich.” This is the first Presidential election I remember where both candidates promised not to taxes on “the rich,” defined by the current administration as individuals with an adjusted gross income of over $200,000 and couples with $250,000.

If you are a small business person with retained earnings held in a C corporation, you need to move now to take dividends in 2012 and pay the 15% tax. Waiting until next year may mean you pay up to triple that amount, based on comments made by the President. You also need to consider accelerating profit-taking into 2012 to take advantage of the 15% capital gains rate that is sure to increase in 2013 and will possibly double. The large market drop right after Election Day was probably a result of investors harvesting gains.

The fact that a sitting President overcame so many negative economic issues to win reelection is almost unprecedented. It’s a sign of a fundamental change in this country. There is a growing disdain for people who have wealth and a notion that they “owe” society for their success. If you have wealth, you don’t want to appear as if you do. Now is a good time to get serious about good asset protection planning to provide a firewall against those who feel they deserve your wealth more than you do.

We can also expect the President and Congress to continue on the path of creating more regulations for all business owners. Not only does this make it harder for those wanting to pursue the old American dream of starting new businesses, it will drive up costs on everything while it drives productivity down.

More regulations will affect your pocketbook in many ways. For example, while investors and their independent financial advisors need a healthier, more business-friendly regulatory environment, they are not going to get it anytime soon. One study suggests that proposed legislation aimed at independent advisors would raise our costs over $50,000 a year to comply with a plethora of new regulations. Some of those restrictions would even make it illegal for me to publish a blog.

When it comes to investments, it’s time to rely on the fundamentals we’ve preached forever: you must be globally diversifiedin many asset classes. You do not want a majority of your assets to be invested disproportionately in any one country, including the US. If more than half of your assets are in US securities, you need to consider better diversification sooner rather than later.

This election makes it very clear that our movement toward a more government controlled economy will not abate anytime soon. Rather than bemoaning this new economic climate, free-market proponents and capitalists will be wiser to focus on working within it. This includes taking appropriate action to protect themselves, their families, and their investments. As always, wise investors will avoid knee-jerk responses to political and economic shifts, remembering to focus on the long term.

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3 Responses to Packing Your Parachute for the Fiscal Cliff

  1. Alan Moore November 12, 2012 at 8:01 am #

    I am very interested to see what the new regulations will mean for independent financial advisors. If the $50,000 is anywhere close, it will drive us to consolidate with other smaller firms. This may not be a bad thing for consumers, but it will be disappointing for the small business owners.

  2. Pati November 12, 2012 at 6:55 pm #

    I honestly don’t believe there is a growing disdain for people with wealth, but more for compaines with high-paid CEOs. Fairly recent events with the bailouts for auto and financial industry have definitely made people more cynical about how companies run.

    I, myself have looked at getting a financial advisor to see how to increase my own wealth, But it feels like a Catch-22 as most finanical advisors don’t see me as wealthy enough to be worth their time.

    Keep in mind, in 2016, it could be a very wide open race. Depending on how well Obama’s and Congress’ policies work out, we may very well get a very conservative President (be it Republican or Democrat) or a rollback of policies before the next election.

    I don’t see the current situation as hopeless or irreversible for business large or small.

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