With the election season in full swing, exchange traded fund investors may want to lock in the current favorable tax treatment on capital gains, instead of gambling on what Congress and the winner of the Presidential election may decide on Bush-era tax cuts.
Specifically, taxes on dividends are currently capped at 15%, but this tax break will expire at the end of the year. If the tax cut is allowed to expire, dividends will be taxed as regular income – the highest income bracket could see a maximum rate of 39.6%, plus a 3.8% tax to pay for the healthcare reform, or a total 43% tax rate. [ETFs and the Presidential Election]
The Obama administration also intends to increase long-term capital gains from 15% to 20%, diminish the amount of itemized deductions and reduce the amount that can be deducted fro IRA and retirement plans in 2013, according to a Pioneer Investments research note.
Additionally, Congressman Keith Ellison also recently proposed a 0.5% tax on the sale of stocks, 0.1% tax on bonds and a 0.005% tax on derivatives or other investments – a form of “Robin Hood tax,” writes Frank Holmes, CEO and Chief Investment Officer at U.S. Global Investors. [Tax-Loss Harvesting with ETFs]
Proponents have claimed the transaction tax would cut back speculative, short-term trades, with little effect on long-term investors. Meanwhile, critics argue that the tax would diminish liquidity, hurt market quality and distort prices.
“Whereas incentives act as a dose of Lipitor to today’s weak monetary system, unnecessary taxes add cholesterol, delaying a smooth economic recovery, or worse, causing the economic equivalent of a heart attack,” according to Holmes.
“Taxing financial transactions would just be foolish revenge, generating regrettable outcomes,” Tulane Law Review Professor Richard T. Page wrote in a paper, contending that taxes should be used to curtail undesirable behavior instead.
For more information on tax consequences in ETFs, visit our taxes category.
Max Chen contributed to this article.