What will taxes look like in 2013?

By Jim Brogan

Brogan Financial, Inc.

As many of you know, many of the tax cuts from the Bush administration are set to expire at the end of 2012. If they do expire, it would create one of the largest tax increases in U.S. history.

I get asked often what my opinion is regarding how our Congress and presidential administration will handle this looming question, and how we can plan for the potential consequences. It would be next to impossible to predict how this will play out. However, one thing I feel pretty sure of is that nothing will change prior to the election in November.

Many of you may agree with that assessment. While both sides of the political aisle, for the most part, believe changes need to be made to prevent this large tax increase, the politics of an election year make compromise unlikely prior to November.

So in effect, our leaders will face a very fast approaching deadline after the November election. How will they respond? And what if there is a lame-duck Congress?

If the recent past is any indication (e.g., the debt ceiling debate last summer), we could see a real threat that the current tax cuts will expire. Taxes across the board would go up: federal income taxes, capital gains and dividend taxes, and estate taxes. Many believe this would cause a major pullback in the current economic recovery.

While I prefer to believe that an agreement will be reached, I think we need to be aware of the threat this problem poses. Volatile market conditions would be sure to evolve as the end-of-the-year deadline gets closer with no new agreement in place.

This potential for volatility underscores the need to have an investment plan with a tremendous amount of diversification. If someone is holding asset classes that typically do not move in high correlation with the stock market, usually they can hold up better in a market decline (although, as we all know, there are never any guarantees with at-risk investments). And, safe-money accounts provide for stability when we have a lot of market uncertainty and turmoil.

The recurring theme, as I’ve been discussing since early last year, is the need for caution. Once someone enters the income/distribution phase of your life, preservation becomes much more important because of the ongoing need to pull income from their accounts. It therefore becomes critical that they not be exposed to big losses when we have the next bear market.