Market to Take 'One Hell of a Hit' in Mid-December if Bush Tax Cuts Expire

November 11th, 2010 9:57 PM

Call it the law of unintended consequences, but supposing the Bush tax cuts are allowed to expire by President Barack Obama, people might react in ways that are detrimental to the overall economy.

On CNBC’s Nov. 11 “Squawk on the Street,” Rial Moulton, co-founder of Retirement & Tax Planning Specialists, explained why it’s important for those who invest for the long-term, specifically retirement, to be abreast of what happens with the Obama administration and tax policy in the next month and a half.

“Well, it's a very troubling year as you pointed out, because we're not sure what’s going to happen – whether they will extend the tax cuts or not,” Moulton said. “But assuming they don't extend the tax cuts, then if you have long-term gains this may be the last year that you'll be able to take advantage of the 15 percent long-term gains tax. Starting next year if they don't extend those cuts, the capital gains rate will go to 20 percent and in 2013 if you're married and make over $250,000, they’re going to slap 3.8-percent surtax on that under the health care bill. So if you do have stocks, mutual funds, real estate, and you think you want to sell in the next few years, you should sell them now and take advantage of the 15 percent rate.”

Moulton explained it would be wise to apportion income should the tax cuts lapse at the end of 2010 to avoid higher rates.

“Well, next year again, again if they don't extend the tax cuts, all the rates are going up next year, not only the capital gains rate – the capital gains rate is going up to 20 percent, but all of your individual rates are going up also,” Moulton said. “In fact, the maximum rate's going to go from 35 percent all the way to 39.6 percent. So, in that case, you may want to actually move income into this year. You may want to -- if you take money out of annuities or IRAs and if you’re going to need it to live on the next few years, you might want to take a little extra out this year. If you have a bonus coming up, you maybe talk to your boss about getting it in December instead of January. If you're interested in a Roth IRA, this may be the great opportunity to move some money into a Roth IRA before the rates go up next year.”

However, if mid-December comes and Congress and the White House are unable to find common ground in the lame-duck session on taxes, then he would advise his clients to act appropriately.

“What we're doing we're meeting with each of our financial clients and getting a game plan together, but we're not pulling the trigger until the middle of December,” Moulton said. “As you know, President Obama said he's going to sit down with the Republicans and try to see if they can compromise. So, we're hoping before the end of December we'll have some direction on whether they'll be extended or not. And based on that, we’ll make some moves.”

“Squawk on the Street” co-host Simon Hobbs pointed out that if this is the prevailing wisdom among investors – to liquidate some assets to cash, it would potentially trigger “one hell of a hit to the market in mid-December.” Moulton explained if that’s indeed the case, it might be wise to sell the stock off, allow it to drop and then re-buy it, assuming it is one you really like.

“If you want to take advantage of the 15-percent rate, you do need to do it before the end of this year, assuming the tax cuts aren't extended,” Moulton said. “Also keep in mind if it's a stock you really like, you can re-buy it that very day. There's no wash-sale rule when there's gains, only when there's losses.”