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Yoshikami: Invest Assuming Higher Taxes

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Debates, rhetoric, promises, etc. etc. It's the season for politics and words are flying around with little accountability. Each party accuses the other of misstatements and statistics are being interpreted by both parties for their best interests, it's a difficult deciphering process for voters.

Of critical importance to investors everywhere is the subject of taxation. With the Bush tax cuts set to expire at year-end and with staggering deficits continuing to mount, tax reform and tax proposals are front and center in the current political debate.

You should be aware of a verbal loophole that is being used by politicians. Understanding the nuance of the words will help you better decipher the information being cast towards you in current political ads and speeches.

Taxation is essentially designed to provide revenue to the government. The tax structure in the United States is based on marginal tax rates as well as allowed deductions. It's really that simple. Your average taxable rate is the rate you pay on your net income. Net income is your taxable income minus your deductions.

Much of the discussion during this election cycle has focused on marginal tax rates. In other words, what is the highest level tax rate you will pay on your income? Currently, federal tax rates max out at a 35% marginal tax rate. This marginal tax rate is what politicians are focusing on. I'm sure you have heard the promise "I will not raise tax rates". The tax rates being referenced are the marginal tax rates.

(Read More: Wall Street Gaming Romney Win: 'Trillions at Stake')

But here's the problem; if economic growth is tepid and no one wants to cut their benefits, how do you raise revenue to reduce the deficit using the tax code? The answer is simple. All you need to do is start eliminating deductions. Eliminating deductions will result in a greater net tax due while fulfilling the promise of not raising tax rates (marginal tax rates). In this way, one can increase government revenue while at the same time tout their commitment to holding tax rates steady.

It's been done before and it can be done again. Mortgage interest used to be deductible on an unlimited basis but no longer. Many other deductions have been eliminated or curtailed and let's not forget the Alternative Minimum Tax (AMT) as well. By eliminating deductions, tax revenues rise. This careful usage of words masks what we believe to be a virtual certainty going forward. We believe that future taxes will increase as it is highly unlikely that net income tax will remain the same.

This reality should be a consideration in your portfolio strategy and in your financial planning as you make adjustments to your strategy and continue to refine your long-term financial goals. So what action should you consider given the perspective that taxes are likely to increase regardless of the outcome of the presidential election?

Here are a few thoughts:

• Convert as much interest income as possible to dividend income. This means buying qualified preferred stocks whose income streams have been deemed to be capital gains. Additionally, invest in securities whose main focus is to distribution income to shareholders. Recognize that a change in tax treatment on dividends will impact this strategy. Johnson and Johnson is paying a dividend north of 3%. Chevron is paying 3%.

• This might be a year to take gains given how low income and capital gains taxes are at present. If taxes go up or exemptions are decreased, this could conceivably be the year with the lowest possible tax cost.

• If you do not need income, consider capital appreciation assets with lower dividend streams to reduce your overall tax burden. There is no sense paying tax on income you don't currently need. Companies like Apple and Qualcomm are low dividend stocks with growth potential.

• Remember that capital gains taxation applies not only to equities but the tangible assets as well as real estate. This might be the year to unload a problem real estate asset to capture the loss.

In the last 30 years there have been half a dozen tax reform acts. The tax code has been adjusted and tweaked based on political persuasion and economic conditions. There is no reason to believe this will not continue in the future.

It is critically important to establish clear goals for your portfolio strategy and what you are trying to accomplish. Getting to your objectives not only takes the right investment strategy but the right planning strategy as well. Tax reduction is an important part of a prudent plan.

We will have to wait and see what proposals and rhetoric actually become law. But from our perspective as a wealth manager, the overall net tax to be paid by individuals is likely to rise. If you agree with this conclusion, you have 60 days to take action and capture lower tax rates. The tax hike clock is ticking.

Michael Yoshikami, Ph.D., CFP®, is CEO, Founder and Chairman of the DWM Investment Committee at Destination Wealth Management. Michael is a CNBC Contributor and appears regularly on the network. DWM is a San Francisco Bay Area-based independent money management firm that provides fee-based wealth management services to institutions and individuals around the world. Michael was named by Barron's as one of the Top 100 Independent Financial Advisors for 2009, 2010 and 2011.