ETF Trends
ETF Trends

Tax rates for exchange traded funds (ETFs) and other investments are expected to rise in a couple of years. So, it’s probably a good idea to have some kind of game plan before Uncle Sam’s arms become longer.

When the tax legislation set by the Bush administration expires at the end of next year, capital gains and dividend-tax rates will inevitably be higher no matter what tax-reduction laws Congress enacts in the coming months, comments John Kimelman for Barron’s. Long-term capital-gains tax rates will jump to 20% for high-income investors – it used to be 15% – and dividends will return to ordinary tax rates. (Capital gains and ETFs).

Robert Willens, a respected tax consultant for both wealthy individuals and corporations, has shared his thoughts about lessening the blows of higher-tax rates:

  • Willens first suggests practicing “accelerating income,” or to realize income in the years during which it is taxed at its lowest, and cash in capital gains. Corporations really control your dividend-income balance and they might cater to investor needs by providing a new type of “special dividends.” (How dividend ETFs help you in tough times).
  • Special dividends issuers will likely be companies that have substantial liquid-asset balances, mature and tend to have insider ownership. Companies that don’t have lots of cash on hand but have the capacity to borrow large sums may also be candidates for paying a special dividend.
  • Congress may phase out alternative minimum taxes when capital-gains and dividend-tax rates increase.
  • Wealthy investors, those with incomes of $100,000 or more, should start to convert their traditional IRA and other retirement assets into a Roth IRA, which aren’t taxed when withdrawn at retirement. Next year, high-income individuals are allowed to convert a traditional IRA to a Roth. (More on retirement).

For more information on taxes, visit our taxes category.

Max Chen contributed to this article.

The opinions and forecasts expressed herein are solely those of Tom Lydon, and may not actually come to pass. Information on this site should not be used or construed as an offer to sell, a solicitation of an offer to buy, or a recommendation for any product.