As procrastinating taxpayers scramble to get their 2009 returns finished by the April 15 deadline on Thursday, it’s prime time for high-net-worth investors to look ahead—and take steps to avoid a potential tax bomb nine months hence.
“Investors have really got a great opportunity now while the sun is shining on the capital markets,” Niall Gannon, director of wealth management with the Gannon Group, told CNBC Friday. “Our message is clear: Do the math, learn the arithmetic.”
Gannon said that investors in New York, New Jersey, Oregon and California could take an especially big hit—they could lose up to 55 cents on the dollar on dividends, if they don’t take action now to protect their portfolios.
Taxes on hedge funds, taxable bonds and short-term capital gains will take a bite out of an investor’s wealth, he said.
So what’s the solution? High-grade municipal bonds and low-turnover investment strategies. “High-grade municipal bonds are impervious to the tax increase,” Gannon said, and added that an investor’s home-state bonds are unaffected by federal and state taxes and the Medicare surtax.
While investors may shun those investment strategies due to their historically lower net return, Gannon said the often-quoted 9 percent return on the S&P 500 is, in fact, about 6 ½ percent, once it’s adjusted for taxes.
And with governments strapped for cash, how secure is a municipal bond? Very, said Gannon. “If you’re a creditor, a senior bond holder, even in the event of a Jefferson County, Alabama, or a Vallejo, California,” he added, “you stand in line to be paid first.”