Capital Gains Taxes Set To Rise, Crimping Investment, Savings

Bull markets always have to climb a wall of worry. This one also will have to climb a stairway of tax hikes.

Democrats' health care overhaul (including the still-pending reconciliation bill) nearing the finish line would apply a 3.8% Medicare tax on investment gains earned by upper-income households starting in 2013. Along with a partial expiration of 2003 tax cuts at year-end, rates on long-term capital gains and dividends are due to jump in two steps from 15% to 23.8%.

The big shift in tax policy is one that could raise the barrier to saving and investment in a savings-short economy and make capital harder to come by. Near-term, it also could affect portfolio decisions as investors weigh higher taxes.

Although the 2013 tax hikes are nearly three years from taking effect, Luskin notes that they would impact most meaningful investments under consideration today.

"The chilling effect on the economy will start to be felt immediately," he said.

Don’t worry, working abroad IS very appealing, profitable, and rather relaxing. Cost of living is WAY down in much of the world, meaning a $40,000/yr income allows you to live like you were making 8-10 times that amount in the US.

And keeps you under the magical $80K/yr limit where the IRS decides that even if you pay taxes overseas, you still have to pay taxes in the US on the same income...

Talked about on Kudlow the other night...

The wonks noted many may sell, lock in their long term gains, an get out in August before the rush to the door in 12/31/2010 to get the lower cap gains rates.

I wonder how many with "street" money (i.e. non-qualified brokerage accounts) will now just get out of the markets. It has been too many rocky years and those that are awaking are sick of the Kenyan Socialist and may not want to risk their capital with him at the helm.

No, you can defer US taxes on the first $80K based upon income taxes paid in the foreign company; above that amount you get the “pleasure” of paying that extra.

Actually, now that I look at the latest pubs, it’s basically the first $91K exclusion, but for every dollar beyond you pay income tax. And at the rate of your actual income. So if you made $100,000 overseas, and had your $91K exclusion, you have tax on $9000. But that tax is at the, what, 23% tax rate for the $100,000 bracket?

And if you’re in a country that has a stiff income tax, you get the distinct pleasure of paying that extra tax to both the IRS and your foreign country. Some “progressive” countries may have a 30% income tax, and then add the 20%+ you pay the IRS and you can see 50%+ of your income gone in income taxes, not including SS/FICA or other taxes.

So defer your income as much as you can, keep it below the threshold, or figure out a way to eliminate taxation in the foreign country (for example, in China only income/payroll is taxed; bonuses are not, so take all your income in bonuses).

And take advantage of the lower cost of living. Really, $2500 per month is a VERY high-level of income in most of Asia - China, Thailand, Vietnam, Cambodia, and the Philippines. And they’re all very nice places to live, actually! At least people who earn money and are successful are welcomed and emulated, rather than heaped with scorn like in the US...

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