Last Updated: November 3, 2008
This is the first in a series of occasional articles that will examine President-elect Barack Obama's tax proposals and your money.
The presidential election may be over, but questions about pocketbook issues still remain. What will President-elect Barack Obama really mean to you and your money? What will happen to ordinary income tax rates and when? What sort of tax breaks are coming and when? What sort of fiscal, monetary and tax policies are in store for Americans?
Hard questions, none of which are possible to answer with absolute certainty. Still, financial planners have their observations. "The near-term is going to be dominated by the ongoing bailout program already in place," said FPA member David B. Yeske, CFP®, of Yeske Buie in San Francisco. Others agree. FPA member Deena B. Katz, CFP®, and associate professor at Texas Tech University, said, "taking on $700 billion in debt has tied the President's hands for at least the next year."
President-elect Obama has already laid out his plan for Americans and their money, including his plan to raise taxes for the 5 percent of households earning more than $250,000 per year. The new Administration, according to its Web site, will:
- Create a new "Making Work Pay" tax credit of up to $500 per person, or $1,000 per working family. The "Making Work Pay" tax credit will completely eliminate income taxes for 10 million Americans.
- Eliminate income taxes for seniors making less than $50,000: This proposal will eliminate income taxes for 7 million seniors and provide these seniors with an average savings of $1,400 each year.
- Eliminate all capital gains taxes on startup and small businesses to encourage innovation and job creation.
Pundits, of course, have issued their own proclamations, telling investors and taxpayers what to do with their money. One publication, for instance, noted that investors might consider tax swaps and booking unrealized losses. And another newspaper told those bracing for higher taxes to buy municipal bonds, increase contributions to 401(k) plans, use — if available — HSAs and flexible spending accounts, purchase a low-cost variable annuity, invest in your home, open a 529 savings plan, set up and fund solo 401(k) plans if self-employed and harvest tax losses.
But financial planners are taking a more practical approach, telling clients to wait and see which promises of the campaign trail actually become a reality. "I believe the new President will have less flexibility over the next year to make any substantive tax changes while he focuses on making our economy healthy," said Katz.
Yeske also believes that President-elect Obama will be searching for ways to jump-start the economy during the early part of his presidency and that Americans need not rush into making mistakes with their money out of fear. "You can count on another fiscal stimulus package to be thrown into the mix sooner rather than later," he said. "But even with the bailout and another stimulus package, the economy will come back slowly as consumers and businesses prove cautious about overextending themselves."
So what advice does Yeske offer to those who want to do something, anything with their money? "Individuals should focus on the basics: Make yourself indispensible at work, beef up your emergency fund and don't stop contributing to your 401(k) plan, no matter how disheartened you feel when you look at the year's losses."