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Re: Best asset classes when income tax rates rise?

Not sure what specific assets would meet the need; however, anything held in a Roth IRA or HSA might do the trick. 

Edit to add - the real problem is that when rates rise Congress also tinkers with the rules. It's hard to make a plan when the rules are yet to be written.

Capital
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Re: Best asset classes when income tax rates rise?


@Capital wrote:

Not sure what specific assets would meet the need; however, anything held in a Roth IRA or HSA might do the trick. 

Edit to add - the real problem is that when rates rise Congress also tinkers with the rules. It's hard to make a plan when the rules are yet to be written.


Do you really believe that if Joe Biden, a populist, is elected President with the support of the middle class. that he will turn around and raise taxes on the bottom 98% of taxpayers who elected him? Why would any president raise taxes on the bottom 98% of taxpayers in a recessionwhich will reduce consumer spending, when the treasury can borrow $Ts from the federal reserve at an interest rate less than the 1.3% rate of inflation? 

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Re: Best asset classes when income tax rates rise?


@FraggyTex wrote:

I recently reviewed Biden's tax plan, and it looks like he wants to implement some sweeping tax increases.  Ordinary income rates will go up, he will eliminate LTCG rates and dividends will be taxed at OI rates (along with other tax increases).   Assuming he wins and moves forward with the increases, what asset classes fair best when rates are increased?  I found a bunch of research on asset class performance when interest rates go up, but I couldn't find research on the tax issue.  Thanks


To answer your question directly re "best asset classes when income tax rates rise"...

First, corporate tax rates will clearly go up under Biden/Dem controls.  That means as an asset class, stocks are less valuable.

Next, if individual income taxes go up, bonds/bond funds become less attractive, especially at current low interest rates.

This leaves "Rental Real Estate Properties" as an asset class that is not impacted.  RE should have unaffected returns.  And for many owners, considering you can deduct "depreciation" (when typically the property is appreciating), is a huge tax advantage.  Disclosure...I own a residential real estate rental property in Florida (for which huge demand for same is underway since COVID.)

Similarly, if you buy gold/silver and take physical possession, you elim these tax concerns.

Lastly, if you are concerned re cap gains taxes rising...and income tax rates rising, then the asset class is Small Cap (or Growth stocks) paying little in dividends now, and held in the wrapper of an Exchange Traded Fund.  Such ETFs have special IRS tax advantage such that they pay minimal cap gains out annually to ETF shareholders.  Thus minimizing the problem you cite.  (Open ended Mutual Funds do not have such an advantage).

Taxing "unrealized" cap gains is another matter.

BTW I love intruder's posts, but I am 180 degrees the opposite when it comes to his taxes outlook.  I see gvts instituting many, many various taxes in future, even if a burden to administer.  And the score is R48...1; Intruder 0.  As intruder stated a couple years ago IRAs would never have tax increase changes; then we got the elimination of "stretch" in inherited IRA changes.

Consider this: for years Florida had an annual wealth tax, (intangible property tax) on a small percentage of all the stocks/bonds you owned.  It came to a couple hundred dollars a year for meaningful wealth individual residents.  Trouble was, people were paying accountants $1000 a year to prepare and file this tax return.  And it required a listing/accounting as of 31 Dec each year, of what you owned.  A real pain in the rear.  It was finally abolished, but shows it can be done.

If you can imagine a tax, it will come!

R48

 

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Re: Best asset classes when income tax rates rise?

@retiredat48 “Such ETFs have special IRS tax advantage such that they pay minimal cap gains out annually to ETF shareholders.  Thus minimizing the problem you cite.  (Open ended Mutual Funds do not have such an advantage).”

Please elaborate. What is the difference (re CG taxes) between an ETF and an index OEF? Take for example VUG vs VIGAX, which are actually the same fund (same turnover)... how can there be any difference? Are not all funds (OEFs, CEFs, ETFs) required by law to distribute realized capital gains?

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Re: Best asset classes when income tax rates rise?


@chang wrote:

@retiredat48 “Such ETFs have special IRS tax advantage such that they pay minimal cap gains out annually to ETF shareholders.  Thus minimizing the problem you cite.  (Open ended Mutual Funds do not have such an advantage).”

Please elaborate. What is the difference (re CG taxes) between an ETF and an index OEF? Take for example VUG vs VIGAX, which are actually the same fund (same turnover)... how can there be any difference? Are not all funds (OEFs, CEFs, ETFs) required by law to distribute realized capital gains?


Wow, you have a real ahha moment coming.

Yes, the funds are required to distribute the cap gains.  But the structure of ETFs are such that the IRS says their frequent buying/selling of underlying companies/stocks is not a capital gain.  I will have to dig up my library of posts on this.  

Investors need to be aware of this tax benefit.  ETFs pay out only minimal cap gains each year.  And BTW Vanguard has some patents on doing this stuff, that helps even further...both their ETFs and oefs.  Yogi I think has some detail rules, as well.

You really only pay meaningful capital gains on ETFs when you sell them; or have a stepped up basis upon death.

R48

 

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Re: Best asset classes when income tax rates rise?

@retiredat48 OK so I’ll take it as granted that there is something different between ETFs and OEFs in how realized CGs are taxed. But a cap-weighted fund (ETF or OEF) shouldn’t have any significant CGs anyway, right? The only selling occurs when the underlying index changes (rare) or when outflows / redemptions force selling. So I’m guessing CGs are not really a major issue for either ETFs or indexed OEFs.....?

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Re: Best asset classes when income tax rates rise?

Depends on where you live. LA county is starting "qualify" owners by how much income they need. I know this because my cousin is dealing with inherited apartments her parents bought 50 years ago.


@retiredat48 wrote:

@FraggyTex wrote:

I recently reviewed Biden's tax plan, and it looks like he wants to implement some sweeping tax increases.  Ordinary income rates will go up, he will eliminate LTCG rates and dividends will be taxed at OI rates (along with other tax increases).   Assuming he wins and moves forward with the increases, what asset classes fair best when rates are increased?  I found a bunch of research on asset class performance when interest rates go up, but I couldn't find research on the tax issue.  Thanks


To answer your question directly re "best asset classes when income tax rates rise"...

First, corporate tax rates will clearly go up under Biden/Dem controls.  That means as an asset class, stocks are less valuable.

Next, if individual income taxes go up, bonds/bond funds become less attractive, especially at current low interest rates.

This leaves "Rental Real Estate Properties" as an asset class that is not impacted.  RE should have unaffected returns.  And for many owners, considering you can deduct "depreciation" (when typically the property is appreciating), is a huge tax advantage.  Disclosure...I own a residential real estate rental property in Florida (for which huge demand for same is underway since COVID.)

Similarly, if you buy gold/silver and take physical possession, you elim these tax concerns.

Lastly, if you are concerned re cap gains taxes rising...and income tax rates rising, then the asset class is Small Cap (or Growth stocks) paying little in dividends now, and held in the wrapper of an Exchange Traded Fund.  Such ETFs have special IRS tax advantage such that they pay minimal cap gains out annually to ETF shareholders.  Thus minimizing the problem you cite.  (Open ended Mutual Funds do not have such an advantage).

Taxing "unrealized" cap gains is another matter.

BTW I love intruder's posts, but I am 180 degrees the opposite when it comes to his taxes outlook.  I see gvts instituting many, many various taxes in future, even if a burden to administer.  And the score is R48...1; Intruder 0.  As intruder stated a couple years ago IRAs would never have tax increase changes; then we got the elimination of "stretch" in inherited IRA changes.

Consider this: for years Florida had an annual wealth tax, (intangible property tax) on a small percentage of all the stocks/bonds you owned.  It came to a couple hundred dollars a year for meaningful wealth individual residents.  Trouble was, people were paying accountants $1000 a year to prepare and file this tax return.  And it required a listing/accounting as of 31 Dec each year, of what you owned.  A real pain in the rear.  It was finally abolished, but shows it can be done.

If you can imagine a tax, it will come!

R48

 


 

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Re: Best asset classes when income tax rates rise?

@chang , ETF structure has tax benefits for the sponsor. It is not taxed on in-kind transactions which creation/redemption are via authorized participants. So, the ETF kicks out the lowest priced lots first and raises its cost-basis with such transactions [investors tend to do the opposite]. However, if there are heavy redemption, or cash transactions, then this tax advantage it lost. ETF structure reduces, but not eliminates, realized CG distributions.

Vanguard has a patent on ETFs as classes of its index funds and it has not licensed it to anyone. This gives Vanguard a slight additional advantage. Overseas, Vanguard has ETFs that are self-standing.

YBB
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Re: Best asset classes when income tax rates rise?


@CarlosDS wrote:

Last Sunday during a Fox interview Trump said that within 10 days he will sign a Health Care Law replacing Obamacare. Does anybody know anything about the new law? 


What does this have to do with the topic here???

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Re: Best asset classes when income tax rates rise?


@Intruder wrote:

@ctyankee wrote:

@Intruder wrote:

@Bizman wrote:

@FraggyTex wrote:

Thanks, Win.  I appreciate the response to my question.  Munis were the only asset class I could come up with, but I'm curious why you mentioned the second and third asset classes.   If all income (including LTCG) is taxed at OI rates, why does turnover or holding for >1 year help?

 


This is because long term compounded returns taxed once after 15 or 30 years of tax-deferred growth will be much higher than gains realized with taxes paid every year or so.  

Charlie Munger said it much better than me: 

"Another very simple effect I very seldom see discussed either by investment managers or anybody else is the effect of taxes. If you’re going to buy something which compounds for 30 years at 15% per annum and you pay one 35% tax at the very end, the way that works out is that after taxes, you keep 13.3% per annum. In contrast, if you bought the same investment, but had to pay taxes every year of 35% out of the 15% that you earned, then your return would be 15% minus 35% of 15% or only 9.75% per year compounded. So the difference there is over 3.5%. And what 3.5% does to the numbers over long holding periods like 30 years is truly eye-opening. If you sit back for long, long stretches in great companies, you can get a huge edge from nothing but the way that income taxes work."

Of course, if the Dems tax unrealized capital gains yearly, as Dan Clifton of Strategas indicated in his recent Barron's interview there is a lot of interest in doing behind the scenes, all of this becomes moot.

"Anyting being discussed that could become law?

If I had to say, then it would be taxing unrealized capital gains. There’s a lot of work behind the scenes to do that, because it gets you a lot more revenue, and it’s essentially a wealth tax without being a formal wealth tax, which would run into constitutional issues."

 


And how are unrealized cap gains going to be calculated? Except for stocks purchased since 2011 most cap gains are unknown because the basis And costs are unknown, e.g,, basis in a home or a business, a coin collection, stocks and other assets passed on at death outside of brokerage accounts. And who is going to do the all the calculating? Congress tried to tax accumulated gains in 1976 when it eliminated stepped up basis of capital assets on estates. 4 years later stepped up basis was retroactively restored back to 1976 because Carry over basis was impossible to calculate. 

And as we all know stocks can go down as well as up. Would taxpayers be allowed to obtain a tax refund if the capital appreciation on a stock holding declines from the previous year?


On your main points, we agree.  I also agree with your earlier post that puts this whole thread as 'cart before the horse' stuff.  

Certainly, the IRS is not staffed to pull off many of these possibilities.  As it is now, taxes on large estates can take several/many months to be approved (without additional complications).   

Certainly, asset classes like art, coins, etc. will only be reviewed if the size of the estate deems it worthwhile.  

I think your statement of "Except for stocks purchased since 2011 most cap gains are unknown because the basis and costs are unknown" goes too far.  Major brokerages were providing cost basis information before 2011 (a quick check of Google points to as early as 1992).   The responsibility of knowing the cost basis (and documentation) still falls on the individual.  The brokerage sent individual transaction statements  - if you didn't keep them - that's on you.  

Additionally, inherited stock assets got the step-up value, with the individual stock positions listed on the Federal 706 form.  If you wanted to profess complete ignorance as to the stock basis of individual holdings inherited ... the IRS is willing to assume that the basis was 0.   That generally gets people to at least make best-guess estimates.   And in an audit, the IRS is going to want to know what happened to those inherited assets for large estates.  My folks kept all their transactions in binders.      

Therefore, for the individuals that matter, the basis for the vast majority of stock assets are (largely) known.  If you're a big fish and think that the Feds or the State won't be taking a hard look at possible shenanigans ... you may be wrong.     

Overall, I'm in favor of doing away with the capital gains tax and replace it with the individual's tax rate.  It would significantly add to my costs, but it seems fair to me.  However, I'm completely against a tax on unrealized gains and I'm completely against a wealth tax. 

ctyankee  

 


@Intruder 

Most taxpayers don’t keep Investment records beyond the 3-6 year period for IRS tax audits which is why they don’t keep confirmations. And in the days when only taxpayers with a net worth of $11.5 M file estate tax returns There will be few heirs who will receive Step up basis information from a 706.

This is a distinction without a difference.  All step-up basis is flowing to the heir on their brokerage statement either from a 706 or not.  So ... what's you point?

In All of the brokerage statements I have seen brokerages  automatically use step up basis at death when the securities are retitled in the heirs account. No records are kept of what the cost basis was to the decedent or prior owner.

Exactly.  The step-up basis IS THE NEW COST BASIS ... so again ... what's your point?

Because my point is that cost basis has been in place at most brokerages for MANY YEARS, so specifically for stocks, the suggestion that clients don't (largely) know their cost basis is baloney. 

ctyankee 

 


 

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Re: Best asset classes when income tax rates rise?


@Gary1952 wrote:

Depends on where you live. LA county is starting "qualify" owners by how much income they need. I know this because my cousin is dealing with inherited apartments her parents bought 50 years ago.


@retiredat48 wrote:

@FraggyTex wrote:

I recently reviewed Biden's tax plan, and it looks like he wants to implement some sweeping tax increases.  Ordinary income rates will go up, he will eliminate LTCG rates and dividends will be taxed at OI rates (along with other tax increases).   Assuming he wins and moves forward with the increases, what asset classes fair best when rates are increased?  I found a bunch of research on asset class performance when interest rates go up, but I couldn't find research on the tax issue.  Thanks


To answer your question directly re "best asset classes when income tax rates rise"...

First, corporate tax rates will clearly go up under Biden/Dem controls.  That means as an asset class, stocks are less valuable.

Next, if individual income taxes go up, bonds/bond funds become less attractive, especially at current low interest rates.

This leaves "Rental Real Estate Properties" as an asset class that is not impacted.  RE should have unaffected returns.  And for many owners, considering you can deduct "depreciation" (when typically the property is appreciating), is a huge tax advantage.  Disclosure...I own a residential real estate rental property in Florida (for which huge demand for same is underway since COVID.)

Similarly, if you buy gold/silver and take physical possession, you elim these tax concerns.

Lastly, if you are concerned re cap gains taxes rising...and income tax rates rising, then the asset class is Small Cap (or Growth stocks) paying little in dividends now, and held in the wrapper of an Exchange Traded Fund.  Such ETFs have special IRS tax advantage such that they pay minimal cap gains out annually to ETF shareholders.  Thus minimizing the problem you cite.  (Open ended Mutual Funds do not have such an advantage).

Taxing "unrealized" cap gains is another matter.

BTW I love intruder's posts, but I am 180 degrees the opposite when it comes to his taxes outlook.  I see gvts instituting many, many various taxes in future, even if a burden to administer.  And the score is R48...1; Intruder 0.  As intruder stated a couple years ago IRAs would never have tax increase changes; then we got the elimination of "stretch" in inherited IRA changes.

Consider this: for years Florida had an annual wealth tax, (intangible property tax) on a small percentage of all the stocks/bonds you owned.  It came to a couple hundred dollars a year for meaningful wealth individual residents.  Trouble was, people were paying accountants $1000 a year to prepare and file this tax return.  And it required a listing/accounting as of 31 Dec each year, of what you owned.  A real pain in the rear.  It was finally abolished, but shows it can be done.

If you can imagine a tax, it will come!

R48

 


 


OK Gary...but I was referring to the USA! :-)

R48

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Re: Best asset classes when income tax rates rise?

LA = Los Angeles, USA. Beginnings of socialism...


@retiredat48 wrote:

@Gary1952 wrote:

Depends on where you live. LA county is starting "qualify" owners by how much income they need. I know this because my cousin is dealing with inherited apartments her parents bought 50 years ago.


@retiredat48 wrote:

@FraggyTex wrote:

I recently reviewed Biden's tax plan, and it looks like he wants to implement some sweeping tax increases.  Ordinary income rates will go up, he will eliminate LTCG rates and dividends will be taxed at OI rates (along with other tax increases).   Assuming he wins and moves forward with the increases, what asset classes fair best when rates are increased?  I found a bunch of research on asset class performance when interest rates go up, but I couldn't find research on the tax issue.  Thanks


To answer your question directly re "best asset classes when income tax rates rise"...

First, corporate tax rates will clearly go up under Biden/Dem controls.  That means as an asset class, stocks are less valuable.

Next, if individual income taxes go up, bonds/bond funds become less attractive, especially at current low interest rates.

This leaves "Rental Real Estate Properties" as an asset class that is not impacted.  RE should have unaffected returns.  And for many owners, considering you can deduct "depreciation" (when typically the property is appreciating), is a huge tax advantage.  Disclosure...I own a residential real estate rental property in Florida (for which huge demand for same is underway since COVID.)

Similarly, if you buy gold/silver and take physical possession, you elim these tax concerns.

Lastly, if you are concerned re cap gains taxes rising...and income tax rates rising, then the asset class is Small Cap (or Growth stocks) paying little in dividends now, and held in the wrapper of an Exchange Traded Fund.  Such ETFs have special IRS tax advantage such that they pay minimal cap gains out annually to ETF shareholders.  Thus minimizing the problem you cite.  (Open ended Mutual Funds do not have such an advantage).

Taxing "unrealized" cap gains is another matter.

BTW I love intruder's posts, but I am 180 degrees the opposite when it comes to his taxes outlook.  I see gvts instituting many, many various taxes in future, even if a burden to administer.  And the score is R48...1; Intruder 0.  As intruder stated a couple years ago IRAs would never have tax increase changes; then we got the elimination of "stretch" in inherited IRA changes.

Consider this: for years Florida had an annual wealth tax, (intangible property tax) on a small percentage of all the stocks/bonds you owned.  It came to a couple hundred dollars a year for meaningful wealth individual residents.  Trouble was, people were paying accountants $1000 a year to prepare and file this tax return.  And it required a listing/accounting as of 31 Dec each year, of what you owned.  A real pain in the rear.  It was finally abolished, but shows it can be done.

If you can imagine a tax, it will come!

R48

 


 


OK Gary...but I was referring to the USA! :-)

R48


 

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Re: Best asset classes when income tax rates rise?

If income taxes rise, (regardless of who the president is), will it benefit treasuries and Munis?

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Re: Best asset classes when income tax rates rise?

Thanks @yogibearbull @retiredat48, I read a few web pages and understand the advantage that ETFs have. Though, as noted below, I don’t expect CGs to be a major issue from cap weighted index funds (OEFs).

 Non-market cap weighted indexes, however, might throw off more CGs. As it happens, by sheer luck, I own two non-market cap weighted ETFs (SCHD and XBI) where I might easily have selected similar OEFs—so I guess it’s just as well that I own the ETFs.

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Re: Best asset classes when income tax rates rise?

Making investment decisions on what might or could happen is a fools game.  You being the fool.  Instead invest on what is, 98 percent of the media is all hype, all talk, no action.

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Re: Best asset classes when income tax rates rise?

Clearly the best strategy will be to convert as much as possible of any RO / IRAs , Reg. IRAs, 401-k, $403-b and any other tax. sheltered assets to ROTH this year and next.  This can have adverse results on your future Medicare taxes from Your SS going up sharply for a year or two but in the long term it will bedworth paying not just for your assets but for what's left in your estate. 

The $400K is just a smokescreen.  "THEY" will be reaching down into the middle class with incomes of less than $100K AGI.  There are just not enough retired baby boomers as nearly 80% of them have less than $1500 of any savings and even less in any retirement vehicles.  "THEY" will be also restoring theTax breaks to those residing in the High SALT states and also be crafting bailouts for the State and city pension plans that have pursued the most profligate fantasy actuarials. 

There are some double long Gold and Silver ETNs as well as such as JJN and PALL.  Also the JJN and JJC.  Leveraged ETN-Fs of Palladium an copper do exist but outside the US markets and are often hard to buy through a US retail service broker.   The Dems will capitalize on the profligacy of the Republican NEO-Cons and spend "money" on their social agendas like has never been seen.  Biden probably will not I've another 4 years, So Harris will be easily defeated in 2024.   The Dems may even lose control of the Senate in the 2022 midterms.   So finding places to lock up appreciating assets for 4-5 years should be prioritized. 

The NEW ever GREENER economy will need a lot more nickel for all types and sizes of storage battery technology, the Alt energy wind and solar Farms will put lots of pressure on copper as to the need to gang together each individual generating cell and turbines.   Silver is undervalued as to it's traditional ratio to Gold.  In the ST gold will head for $2400 and surpass $3000 by early 2022.   AS the socio0-economic disaster of the C-19 subsides, global Lt truck and Car productions will ramp back up.  Because of the nitrous oxide issues oil based fueled Diesel engines will continue to decline and platinum will stall but Palladium will still be in strong demand for gasoline engines and industrial scrubbing technology.  Electric cars will continue as replacing fossil fueled and that again benefits silver and nickel as more in demand industrial materials.  

Biden from DEL has traditionally been a friend of the TBTF Wall Street Banks who have for years used DEL as a base for their credit card businesses.  As long as he lives into his 4 years the bias from the White House should be to reign in Treasury Sec Liz, on pushing the banks into insolvency.  BANK shares will be one of the few asset classes that benefit from continuing to expand fiscal AND monetary policy profligacy.  I will be a longer lasting repeat of the 2018 4th Quarter for the banks. Keats was not up on his Siglo del ORO, so he mistakenly named CORTEZ as the person discovering the Pacific Ocean so close to the Atlantic  in Panama which was Columbia. The Squad is lurking and Biden will have a devil of a time reigning them in, drunk with victory.  Congress is already quite hostile to the ability of the Banks to pay any dividends at all. 

Trump is in exactly the same situation as Hillary in 2016.  It's never over until it's over. ...Even if he loses despite his own age limitations, he could be the next Grover Cleveland in 2024.  By the mid-terms most of the people who have to work for a living, especially those in the private sector , will find they do not like "THE REFORMs" and "PROGRESS".  Most of that progress benefiting those who work in the burgeoning public sector where wage AND BENFIT de-compressions will continue on down the roads to SALT fiscal disasters. 

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Re: Best asset classes when income tax rates rise?

 

Thanks, NomasDOZ 

R48

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