Investment Taxation Uncertainty

  • August 1, 2017

    Pensive Business Man making Investment Choicesby Donald R Chambers

    President Trump has proposed numerous tax changes that could affect investment income and investment decisions. Proposed tax changes that relate directly to investment income taxation include elimination of the estate tax, elimination of the 3.8% Obamacare tax on investment income, and the possibility that some or all tax payers will be unable to pass on “stepped-up” bases to their heirs. Proposed tax changes that would likely affect investment values through indirect affects include reduction of corporate income tax rates, and reduced overall income taxation. But other major changes cannot be ruled out.

    Investors should focus much of their investment analysis on taxation when making investment decisions. Good decision-making with regard to income taxation of investments can exert much higher effects on long-term investment success than other factors such as lowering transactions costs and investment fees. Good tax-related investment decisions are very likely to generate long-term success. The success of attempts to buy underpriced securities are usually based mostly on luck.

    The general idea is to make investment decisions based on the most likely scenarios in terms of changes in future tax rates and other tax changes. But the risk remains that actual tax rates may differ from those anticipated. Unexpected tax changes create risk. And as with many other risks, the key is diversification. Simply put, investors should diversify their portfolio with respect to various potential risks of adverse tax rulings:

    1. Make investment decisions based on the most likely tax scenarios, but
    2. Diversify your portfolio with regard to major tax uncertainties such that each potential tax rate uncertainty has modest implications for your long term financial health.

    For example, if your investment plan relies heavily on retention of the basis step-up in estate planning, perhaps it would be better to harvest some long-term capital gains over the next few years so that your exposure to elimination of that tax break is lessened. Another risk is that the Obamacare 3.8% investment income surcharge will not be repealed. An investor can reduce that risk by investing in municipals.

    So they key is to spread out your investment taxation risk so that your portfolio is moderately exposed to each potential tax change rather than highly exposed to some and unexposed to others. Diversification against tax risk changes means spreading out a portfolio’s exposure to various risks such as good asset allocation means spreading out a portfolio’s exposure to equity risk, interest rate risk, credit risk, and so forth.

Leave a Reply

Your email address will not be published. Required fields are marked *

You may use these HTML tags and attributes: <a href="" title=""> <abbr title=""> <acronym title=""> <b> <blockquote cite=""> <cite> <code> <del datetime=""> <em> <i> <q cite=""> <strike> <strong>



1256 contracts, 2010, 401K, adp report, Advisors, Alexandra Twin, alternative investments, annuity, asset allocation, asset classes, asset management, Associated Press, away, banks, Barrons Top 100, BCA, BCA. Biltmore Capital, Ben Bernanke, Best Week, bias, Biltmore, Biltmore Capital, Biltmore Capital Advisors, bond market, Brand, Brand Recognition, Business, Call, CFP Princeton, changes in market price, Chief Investment Officer, closed end funds, CNBC, CNBC Halftime Report, CNN, CNN Money, CNNMoney,, collar stock, college grads, Consumer Confidence Report, correlations, Covered, Covered Call Options, credit ratings, customized investment strategies, Dean, donald chambers, Dow Jones, dr don chambers, drop, Early, easy trading, economic policy, economy, Edge, efficiency, election, end, equilibrium, equity trading, etf, etf trading, ETFs, euro, Europe, Europe debt, European debt crisis, family office approach, federal income tax, federal investment income tax, Financial, financial advisor, financial crises, financial distress, financial management, financial security, financial strategies, Ford, Fox, Fox Business, fund manager, futures contracts, Gains, General Motors, Global, global market, Global stocks, groupon, halftime report, Herbert Lash, high income tax, home country, Home Sales, housing market, IDEAS, income tax, income taxes, initial public offering, Instant View, investment bias, investment income, investment returns, investment risk, investment strategies, Investors, IPOs, IRA, Jilian Mincer, Jonathan Cheng, KANA INAGAKI, key, large losses, long risk exposure, Los Angeles Times, make money, making investment money, making money last, Manufacture, Manufacturing, Market, market news, market price, market volatility, Markets, marketwatch, MICHELE MAATOUK, Mike Miliard, Molly Vernon, money, Money Manager, money managers, money strategy, municipal bond interest, municipal bonds, nassau club, New Jersey Advisors, New York Times, NJ, NJ advisors, NJ financial advisors, NJ money manager, NJ wealth advisor, NJ Wealth Advisors, obamacare, oil slide, Options, options strategies, Outlook, outperformance, Pending, personal financial services, personal risk analysis, Play, portfolio manager, Potfolio Manager, Princeton, Princeton Advisors, Princeton asset management, princeton financial advisors, Princeton Money Managers, Princeton wealth advisor, private wealth management, rally, recession, Recognition, registered investment advisor, Registered Investment Advisory Firm, retirement, retirement strategy, return, returns, Reuters, reward, RIA, RIA Princeton, Risk, risk exposure, riskier, rmd, Roth IRA, safer, saving taxes, savings, SEC-registered, Seeking Alpha, short risk exposure, Shudder, signals, skype, social security, social security benefits rules, star ledger, state income tax, Stephen Bernard, Stock, stock market, stock market returns, stock market winners, stock option strategies, stock price, stock prices, stock research, stock strategy, Stock Volatility, Stocks, structured notes, Stuart Day School, swine flu, tail risk, Tax Advantaged Investments, tax free investments, tax savings, tax strategy, taxes, taxes for social security, taxes on investment income, The Dean, The Wall Street Journal, Thomson, Thomson Reuters, Tick, Tim Ralph, Timothy Ralph, Today, Tony Roth, Trading, tricks, Tyler, tyler vernon, U.S., U.S. dollar gains, U.S. Stock, unemployment, USA, USA Today, VIX, volatility, Wall Street, wealth management, wealth manager, wells fargo, world market, worth, Yahoo, Yahoo Financial,