Waiting for President Obama


November 09, 2008|By EILEEN AMBROSE | EILEEN AMBROSE,eileen.ambrose@baltsun.com

The U.S. economy has changed drastically since Sen. Barack Obama hit the campaign trail nearly two years ago.

Now, will the president-elect be able to keep all his promises, or will some of them have to be put on the shelf until the economy improves? And how will the Democrat-controlled Congress, with an even bigger majority, shape the new president's agenda?

Don't expect health care reform and a Social Security fix to be tackled right away. Right now, it's all about the economy.

Here are some financial changes you'll likely see between now and the end of President Obama's first year in office:

Stimulus package : Expect a $150 billion to $300 billion economic package that could pass even before Obama is inaugurated, says Stuart Hoffman, chief economist with PNC Financial Services Group.

Don't count on another round of stimulus checks like the ones earlier this year, though.

"It was not considered very effective," Hoffman says. "It was like a sugar high. People spent the money, but as soon as the tax [rebates] stopped coming in ... spending fell again."

A new package will target spending on things that will have a longer-term impact. That includes money to cash-strapped states and local governments to build infrastructure, such as roads and bridges, which would create jobs.

Congress also might increase food stamp benefits or extend unemployment benefits to 52 weeks.

Income taxes : Raising taxes on those earning more than $250,000 is a campaign promise Obama is likely to keep. Today's top tax bracket of 35 percent, for example, would return to 39.6 percent, the rate during the Clinton administration.

High-income investors also can expect to see an increase in the current 15 percent tax rate on capital gains and dividend income. The rate on long-term gains could go up to 20 percent. Dividend income might be taxed at that same rate or go back to being taxed as regular income, which means as high as 39.6 percent.

Kenneth Kies, managing director of the lobbying firm Federal Policy Group, expects major tax legislation in the first eight months of the new administration while Obama is still in the honeymoon phase. Tax increases could be retroactive to the start of the year, he says.

It's a myth in Washington that Congress won't raise taxes during a recession, Kies said during a Webcast last week sponsored by InvestmentNews.

"This is refuted by history," he said. Three of the last five major tax increases occurred in a recession or soft economy, Kies says.

Given the tax outlook, upper-income investors will seek investments whose gains aren't subject to federal tax, such as Roth IRAs, 529 college savings plans and municipal bonds, said James M. Delaplane Jr., a law partner with Davis & Harman, who participated in the Webcast.

Also, if you have appreciated securities - which some long-time investors still do - and you need to diversify your portfolio, now is a good time to do it, says Adrian Cronje, chief investment strategist for Wilmington Trust Investment Management.

By selling investments for a gain now, you still will be taxed at today's historically low capital gains tax rate, Cronje says. Even if you sell for a loss, you might be able to use some of those losses to offset future gains that otherwise would be taxed at a higher rate.

Plus, with so many depressed asset classes, from stocks to real estate, you can pick up lots of bargains while diversifying your portfolio, Cronje says.

Estate taxes : The estate tax is scheduled to disappear for one year only in 2010. Don't count on that. Neither Obama nor former rival John McCain favored letting the estate tax lapse.

Under Obama, the estate tax likely will be frozen at the 2009 level, says John Olivieri, a tax lawyer with White & Case in New York. Next year, you will be able to shelter up to $3.5 million from estate taxes, with the rest taxed at 45 percent.

"It would be hard for Republicans to even vote against it," Olivieri says.

Tax breaks that look iffy : A tax credit reduces your bottom-line tax bill, dollar for dollar. A refundable credit means you get the money even if you don't owe any taxes.

Candidate Obama proposed refundable credits - ranging from $500 to $4,000 - for higher education, mortgage interest for homeowners who don't file an itemized return and to partially offset Social Security taxes for low- to middle-income workers, Olivieri says.

These might not come about under a Congress that will be focused on raising revenue, he says.

For the same reason, there might be little support for Obama's plan to eliminate income taxes for those 65 and older making less than $50,000, Olivieri says.

Homeowner relief : Obama proposed last month an immediate 90-day moratorium on foreclosures. This could be part of a stimulus package this year, says PNC's Hoffman.

Inflation : "Prepare for higher inflation," Cronje says. Not only does inflation tend to be higher under Democratic rule, he says, but inflation will creep up as the government stimulates the economy.

You can protect your portfolio with inflation hedges, such as commodities, real estate investment trusts, Treasury Inflation Protected Securities and Series I Savings Bonds, Cronje says.

Some seek clues about what's in store for investments in the future by looking at the past.

The stock market historically performs better under Democratic presidents. But, then again, Democrats usually recapture the White House after the economy tanks and there are few places to go except up, says Jeffrey A. Hirsch, editor in chief of the Stock Trader's Almanac.

Whether a new president is a Republican or Democrat, the stock market's performance in the first half of the term lags well behind the second half, Hirsch says. New presidents use their first two years to tackle tough issues and push through their agenda, he says. They take the next two years to foster prosperity and a bull market to get re-elected.

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