Expect changes in law no matter who wins in Nov.

PERSONAL FINANCE

July 13, 2008|By EILEEN AMBROSE

If you're voting your pocketbook, whether you choose John McCain or Barack Obama may depend on your income.

McCain's tax policies favor high-income households; Barack Obama's largely benefit low- to middle-income families.

And if you're above middle income, but not too rich? Well, for you, there's not much difference.

Of course, you don't want to rearrange your finances based on the proposals so far. Not all the details are in. More policies may roll out before the election. You don't know who will win. And even if your candidate does, Congress might not give the green light to all the tax cuts promised.

What you can count on is the new president signing some tax law in his first year, at the very least to fix the estate tax before it temporarily disappears in 2010.

Still, given what we know now, here's the outlook for taxes and a few strategies for dealing with them:

*Individual income tax rates: McCain would extend today's income tax rates that are scheduled to expire and go up in 2011.

Obama, too, would keep the four lowest brackets, but restore the 36 percent and 39.6 percent brackets for those earning more than $250,000.

If Obama is elected, you might want to exercise nonqualified stock options that are taxed as regular income before you're bumped up into the 36 or 39.6 percent bracket, says Michael Kitces, director of financial planning for Pinnacle Advisory Group in Columbia.

*Taxes on capital gains and dividends: McCain would stick with the status quo, where investors don't pay more than 15 percent on long-term capital gains and most dividends.

Obama would retain the current rates for everyone except those in the two highest tax brackets. For them, he would create a tax rate on gains and dividends ranging from 20 percent to 28 percent. He's leaning toward the lower end of the spectrum, his campaign says.

If you have a family business, consider extracting profits in the form of dividends before Obama's higher dividend tax rates kick in, Kitces says.

Or, if your portfolio is heavily weighted in a single, appreciated stock, consider selling shares before your capital gains tax rate rises, says Bob Cassel, director of tax services at Baltimore-Washington Financial Advisors in Columbia.

Don't sell off stocks paying generous dividends, even if dividends will be taxed at a higher rate, Cassel adds. In today's bearish market, you need dividends to boost your total return, he says.

*Estate tax: The estate tax is set to disappear in 2010 and return the next year under old rules. In 2011, you could shelter up to $1 million from estate taxes, and the excess would be taxed at a rate of up to 55 percent.

Both candidates would keep the estate tax but would allow you to shelter millions more from taxes.

Under McCain's plan, less than a quarter of 1 percent of all estates would be taxed, compared with less than one-half of 1 percent under Obama, says Clint Stretch, managing principal, tax policy at Deloitte.

*Alternative minimum tax: Neither candidate would do away with the alternative minimum tax, although they want to rein it in.

You're supposed to figure your taxes under the AMT and regular income tax and pay whichever is higher. The AMT was created decades ago to snag the wealthy who escaped taxes, but it ensnarls a growing number of middle- and upper-middle income families because the tax wasn't adjusted for inflation.

To protect these families, Congress periodically passes an AMT "patch" that raises the amount of income exempted from the AMT.

Obama wants to continue indexing the AMT patch for inflation. McCain would follow the same approach for five years, and then more aggressively raise the exemption until it reaches $143,000.

Ironically, McCain's proposal to double the exemption for dependents to $7,000 could cause more people to be hit with AMT, says Roberton Williams with the Tax Policy Center. "It lowers your regular tax but, because the AMT doesn't allow personal exemptions, it doesn't lower your AMT liability," he says.

*New tax breaks: Obama would create a few tax breaks, such as a $500 credit that could help workers offset payroll taxes for Social Security and a mortgage interest credit for millions of homeowners who don't file itemized tax returns.

He also would eliminate income taxes for seniors with incomes under $50,000. Some tax policy experts question the need for this, especially as waves of baby boomers will start turning 65 in a couple of years.

"The case has not been made that retirees are worse off than working people as a class," says Deloitte's Stretch.

McCain wants to make it harder to raise taxes. He would require that any tax increase be approved by a 3/5 majority in Congress.

While both candidates cut taxes, McCain's cuts reduce revenue significantly more than Obama's, reports the Tax Policy Center. But given the rising deficits, don't start counting your tax savings just yet.

"The odds are very low that either candidate will get all of what he is calling for on the campaign trail," Williams says.

eileen.ambrose@baltsun.com

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