Biggest Tax Hike in History Looms!

We’re LESS than six months away from the largest wave of tax increases in American history — set to take effect beginning Jan. 1, 2011!¹

If Congress doesn’t take action before this date, a series of tax cuts enacted in 2001 and 2003 will vanish … leaving millions of American families and businesses facing sharply higher tax burdens almost overnight.²

Worse, this massive, across-the-board increase in tax liabilities might not end there either. US taxpayers are likely to face several waves of higher taxes over the next few years that will impact virtually EVERY tax bracket, hitting higher income earners and small business owners particularly hard.

Right now, marginal tax rates are near historic lows, as the graph above clearly shows. But soaring federal budget deficits, record US debt levels, and widening budget shortfalls at the state and municipal level, make much higher taxes almost inevitable.

Nowhere to Go But Up …

I covered these looming tax hikes in detail in Weiss Advice Issue #73, so I’ll just summarize them here. This isn’t meant to be a comprehensive list — and you should talk to your own tax advisor to find out how you will be personally impacted — but you might be surprised to learn how many of the categories below may apply to you starting next year.

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It’s easy to do the math and add up the increase in your potential tax bill. Beginning just a few months from now …

Top income tax rates climb to almost 40 percent from 35 percent today. It’s not just wealthy individuals; two-thirds of US small business income is taxed at this rate …

The LOWEST bracket also climbs … by 50 PERCENT. All tax brackets in between will also rise as itemized deductions and personal exemptions phase out, depending on your income level. We’re talking across-the-board tax hikes here on nearly EVERY American. Not just the wealthiest …

The “marriage penalty” comes back as punitive tax rates for married couples (compared to those filing separately) return and the standard deduction for couples is reduced …

The child tax credit will be cut in HALF, while dependent care tax credits also disappear …

The “death tax” took a holiday the past few years, but now returns with a 55 percent tax bite on estates over $1 million. Again, many small family-owned businesses will fall into the death tax trap …

Capital gains tax rates surge by one-third to 20 percent on Jan. 1, up from 15 percent now …

Tax rates on qualified dividend income nearly TRIPLE to 39.6 percent from 15 percent now!³

As if this weren’t bad enough for taxpayers, the dreaded Alternative Minimum Tax (AMT) could apply to an additional 24 million American families beginning next year — that’s a sevenfold increase over last year. Also, the recently passed health care reform will result in a 3.8 percent surtax on investment income starting in 2013 for higher income Americans.⁴

Clearly, the trend is toward higher tax rates. There’s just nowhere to go but up! And it’s likely that tax rates at the state and local level will move higher too, as local lawmakers struggle to close state and municipal budget gaps.

No one is suggesting taxes will soon return to the ultra-high levels of the 1960s and ‘70s — when the top marginal tax rate was a punitive 70 percent — but that’s certainly the direction we’re heading!⁵

Of course, there’s still hope Congress could act before the New Year to extend some tax relief, but don’t hold your breath.

We’re in the midst of a contentious midterm election year, which probably means political gridlock up until the November elections and perhaps beyond.

Normally, a do-nothing Congress might be considered a positive, since political gridlock means less chance of controversial legislation with unintended consequences for markets. But in this case, doing nothing guarantees higher across-the-board tax rates will take effect in less than six months … tick-tock!

So what can you do to help protect yourself from the high probability of higher taxes coming soon?

First, one of the few tax loopholes still available that may help you cut your tax bill is to consider converting your traditional IRA into a Roth IRA — a Roth conversion. And if you do it before Dec. 31, 2010, you’ll get to spread out any taxes that are due on conversion over the next two years!

My colleague Lance Millar and I detailed the Roth conversion option in Weiss Advice Issue #73: This Temporary ‘Loophole’ Could Cut Your Taxes! With a few simple steps, you can potentially reduce future tax liabilities — while letting your retirement savings grow tax-free indefinitely.

Second, another option worth considering is our new Weiss Managed Annuity Program. An annuity may not be the first thing you think of when it comes to tax relief. But with across-the-board tax increases looming next year — and perhaps more to come in the years ahead — a tax-deferred variable annuity can offer you some very powerful advantages to help you shelter your investment gains from the IRS.

This may be especially true if you’re in a higher tax bracket and you typically generate a lot of your income from dividends, interest, and capital gains.

As I’ve detailed above, dividend tax rates are scheduled to almost triple next year alone and will be taxed next year at ordinary income rates as high as 39.6 percent. Interest from bonds and fixed-income mutual funds are already taxed at these much higher rates.

Capital gains are still the best game in town, but the tax rate still rises to 20 percent for long-term gains next year. Short-term capital gains are already taxed at higher rates, in most cases.

So if you’re in a high tax bracket or if you generate a significant portion of your earned income from your investment portfolio — AND you have already maxed out your IRA, 401(k) or other tax-advantaged investment options — you may be able to benefit in a very big way from the tax-deferred growth potential offered by a variable annuity like the one we offer in our Weiss Managed Annuity Program.

Here’s an interesting fact you may not know: If you were to purchase the exact SAME investment within a low-cost, tax-deferred annuity instead of a taxable account … you may be able to BOOST your after-tax investment return by 23.6 percent or more!

For more details about this potentially powerful tax reduction tool, you can read more here.

Bottom line: While investors still hold out some hope that Washington will come to its senses before it’s too late and pass some form of tax relief, you may not want to count on this happening in a turbulent, midterm election year.

More than ever, it’s up to YOU to find innovative ways to reduce your tax bill! Talk to your financial advisor and be sure to explore these and other potential tax savings options that are available today.

Some of these options could help bring you tax relief in the years ahead.

Good investing,

Mike Burnick
Director of Research & Client Communications
Weiss Capital Management, Inc.

P.S. Right now you can join the Weiss Managed Annuity Program at just the program investment minimum, but ONLY through the end of this week. You should at least consider this potential tax advantaged option and see if it’s right for you, before it’s too late, by going here to learn more.

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¹ Americans for Tax Reform: Six Months to Go Until The Largest Tax Hikes in History, 7/1/10
² Ibid.
³ Ibid.
⁴ Ibid.
⁵ Jefferson National: The Tax Efficient Frontier, June 2010