(Unfortunately this is one of those boring yet important posts…)
At this point I’m sure everyone has heard that Congress struck a deal. And boy did the stock markets around the world react positively. It’s crazy how quickly things can change with the stroke of a pen!
We’re not out of the woods yet though. The issue of automatic cuts to government spending was pushed off another two months to conveniently coincide with our next bout with the debt ceiling. We actually hit the debt ceiling two days ago but the Treasury department has a few tricks up its sleeve to delay any potential crisis until the end of February. Although striking a deal appears to be bullish for stocks, there is sure to be more volatility ahead as the political “negotiations” continue over the next few weeks.
The biggest victory for approximately 99% of Americans, which came at a BIG surprise, is an indefinite continuation of investment tax rates for anyone with an individual income under $400,000 or joint filers under $450,000. Both long-term capital gains tax and qualified dividend tax rates will remain at a top rate of 15%. Rates moved up to 20% for incomes over the threshold. I was all but certain that dividend tax rates were going to ordinary income rates (your income tax bracket). This is great news for retirees that have been venturing into dividend paying stocks as a source of income, and should put a floor underneath these stock prices again.
Two negative pieces were no change to the Obamacare tax rules and the expiration of the employee social security tax break of 2%. I’m not sure many people have realized that this happened yet – but they soon will once they get their first paycheck and their take-home-pay is now 2% less. While it was probably necessary since we haven’t found a way to adjust entitlement spending yet, this will almost certainly put a drag on consumer spending over the next few months as people adjust their budgets. As for the Obamacare tax (and surtax), this was not adjusted up to the $400,000/$450,000 income thresholds. For AGI’s over $200,000 for individuals and $250,000 for joint filers, a 3.8% surtax will apply to invest income, in addition to the 0.9% Medicare Tax on earnings. There are additional changes to things like limits on Flexible Spending Account contributions and Itemized Medical Deductions that will collect an estimated $32 billion for Medicare. Once people start to learn about and feel the effect of these changes, I’m sure this overhaul will be unpopular to say the least…
However, like all things you can’t control, you simply have to adapt to offset the impact it may have on your income. I’ve been doing a lot of research to find the best ways to profit from the Obamacare changes and will write a post in the near future discussing some of my favorite ideas.
Thanks for following!
Nick