Investment & Tax Strategies for an Obama Administration

What’s the best way to take advantage of the sea-change that will begin in January 2009? Obama has promised to increase taxes for families making over $250,000 (single tax filers making over $200,000) while reducing the taxes on everyone else. Clearly, on the surface, this appealed to a majority of voters but its implementation may prove more challenging. First, families making over $250,000 represent approximately the top 2% of income earners. The actual tax dollars above that limit will likely be wholly insufficient to fund the tax cuts for everyone else plus the programs Obama intends to initiate including a new healthcare plan, expanded educational opportunities, a rebuilding plan for roads, bridges and schools, and increased spending on renewable energy. Second, wealthy Americans have always used the many loopholes in our tax system to minimize the impact of new income tax policy and this time will be no different. You can count on financial advisors, tax accountants and attorneys to develop tax avoidance strategies for their wealthy clients. Consider these strategies for starters:

  1. Take long-term capital gains before the end of the year. The current federal tax rate on long-term capital gains is 15%. Obama has promised to repeal all of the Bush tax cuts including this one. At this point, it’s impossible to know whether Obama will allow it to revert back to the old rate of 20% as indicated in his official campaign web site or opt for an even higher rate. Many people still hold stocks with very low tax basis. Between now and the end of this year may be your last opportunity to sell and pay taxes at what will soon be remembered as a very low tax rate.   
  2. Buy municipal bonds. Assuming higher income tax rates for those making over $250,000 beginning in 2009, buying tax-free bonds now makes a lot of sense. If we assume the top marginal tax rate goes to 39.6% (and it could very well be much higher), a 5% municipal bond has a tax equivalent yield of nearly 7%…not bad for a bond.
  3. Plan charitable donations carefully. If you expect to be one of those whose taxes will go up significantly next year, postpone major charitable gifts until 2009 so as to capture more tax benefits. If you expect to be the beneficiary of lower taxes in 2009, consider making charitable gifts this year.
  4. Reconsider stocks. There will be winners and losers under an Obama administration. Likely winners would be well capitalized businesses associated with infrastructure rebuilding such as Caterpillar (CAT) or locally, Vulcan Materials (VMC). Pharmaceutical companies focused on generic drug manufacturing may also be beneficiaries as Obama seeks to drive the costs of healthcare down.   Examples include Novartis (NVR) and Teva Pharmaceutical (TEVA). Obama favors natural gas for energy so producers such as Energen (EGN) and Kinder Morgan Energy Partners (KMP) are worth considering. As you make your stock selections, look for companies trading in the bottom quarter of their 52-week lows in order to give you the most up-side potential. Even though Obama intends to raise the tax on corporate dividends, I still prefer companies with a long history of paying and raising their dividends. Dividends provide investors an added margin of safety and tend to reduce stock volatility over the long term.