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Missed Fortune – No More Reasons to Kick Yourself

Posted on | July 29, 2012

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Paying Now vs. Paying Later

A popular television ad for Fram & Autolite used to feature a mechanic who would hold up an oil filter and say, “You can either pay me now by changing your oil filter or you can pay me later when I’m replacing your engine.” He makes a great point of the wisdom in taking care of minor things today rather than having to pay through the nose later.

People who put things off for too long will have reason to kick themselves later.

There’s a great lesson in there for anyone who is concerned about the prospect of rising taxes associated with the expiration of the Bush tax cuts and the implementation of Obama Care. The Obama health care law actually contains at least 20 new or higher taxes on the American people.

These taxes are to be phased over the years 2010 to 2018. In January 2013, there are five major Obama Care taxes that will come into force that will definitely hit your wallet.

These five new taxes include the following:

  • Medical Device Manufacturing tax
  • High Medical Bills tax
  • Flexible Spending Account cap
  • Surtax on Investment Income
  • Medicare Payroll tax increase

The writing is on the wall for much higher taxes, as evidenced by Fox News recently reporting that officials have already drafted 13,000 pages of new regulations for the new Obama Care law. It’s a dream come true for lawyers, but something very different for the taxpayers.

It’s better to pay the applicable taxes now and move your serious cash into a tax-free vehicle than to defer those taxes until later when they’ll almost certainly be higher. This message is especially important for those who have highly appreciating assets or are accumulating their retirement nest egg in an IRA or 401(k).

If you wait until the figurative oil light comes on, you’ll have waited too long.

Keeping More of Your Capital Gains

Among the more dramatic tax increases, are the ones that will be faced by those with highly appreciating assets.

Under the current law, the capital gains tax rate for all Americans rises from 15% to 20% in 2013 while the top dividend rate rises from 15% to 39.6%. The new surtax raises the top capital gains rate to 23.8% and the top dividend rate to 43.4%. This means that those of you who will have capital gains and dividends from your investments will be coughing up $123 billion dollars in tax revenue over then next 10 years.

So what can you do to better your position?

Say for instance that you have some rental real estate that has appreciated. If you sell it, you’ll have to pay a capital gain. You could simply hang onto it and continue with the pains of being a landlord. Or you could do a 1031 exchange that still simply swaps one headache for another.

But there’s a third option you may wish to consider.

You could just flat out sell it and pay the capital gain at 15%. This means that for every $1 million in capital gains, you’ll pay $150,000. But if you wait around for another year or two, it’s likely you’ll be paying $250,000 or $300,000 or more in capital gains. Waiting also puts you at risk of selling that rental property when there’s a glut of properties on the market that force the prices down.

There’s never been a better time to get your serious cash set aside where it enjoys liquidity, safety and a predictable rate of return. This is how the super wealthy have accumulated their wealth. But those who wait too long will pay for taking their time.

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*Life insurance policies are not investments and, accordingly, should not be purchased as an investment

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