Income tax rates will go up for all Americans next month if lawmakers in Washington cannot come to a resolution on the so-called fiscal cliff. Even a deal will likely boost rates on capital gains and dividends, affecting investors in all asset classes.
Capital gains taxes — the tax one pays when selling an investment — are expected to increase to at least 23.8% from the current top rate of 15%. The higher rate includes the 5% tax increase and a new 3.8% tax on investment income (applicable to high-income earners only) to pay for provisions in the president's Affordable Care Act. The proposed new rate is still historically low; long-term capital gains were taxed at nearly 30% from 1986 through 1997, according to the Tax Policy Center. New York City has the highest capital gains taxes in the country. President Obama would like to raise the dividend tax rate to 39.6% on wealthy Americans (the same rate during the Clinton administration) from 15% -- essentially taxing dividend gains as ordinary income.
Bill Gross, founder and co-chief investment officer of bond giant PIMCO, has devised four ways individuals can beat the "wealth tax" – i.e. higher dividends and capital gains. In an interview with The Daily Ticker he outlines his proposals:
Tip #1: Invest in intermediate securities and roll down the yield curve. This includes buying 5-to-10-year TIPS in the U.S. and U.K. as central bank inflation targets rise. Gross believes negative real interest rates will continue for some time as policymakers around the world try to inflate their economies.
Tip #2: Buy real assets. Gross also recommends holding real assets, such as gold and oil, that keep pace with an inflationary global environment. The recent decline in the price of gold should not affect this thesis, he notes.
Tip #3: Buy stocks that offer steady cash flow and dividends in an unstable economy. Gross says examples of these stocks include Coca-Cola (KO), Procter & Gamble (PG), Johnson & Johnson (JNJ) and Pepsico (PEP). In general investors should buy stocks that have consistent records of growth and can withstand a downturn.
Tip #4: Invest in developing economies with attractive balance sheets. Gross specifically names Brazil and Mexico as the best examples here. It's time for investors to recognize this new era of growth, he says, and these economies are "excellent" buying opportunities.
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