5 Likely Effects of Obama’s 4 More Years on Your Pocket
Obama’s America is firing salvos to cut debt and your personal finance is right in the firing range
As the election fever winds down, Americans buckle up for a mad rush to a finish line that is nowhere in sight to tame the trillion-dollar debt. The debate is reduced to a simple question: who will pay for it?
The really wealthy say they need the tax breaks to create more jobs; the low-bracket earners want to keep their social services. Meantime, the middle-class is being stretched out even thinner.
It will be a balanced act, says Obama, as his second term scours for the common ground where the only thing shared apparently is the fear of uncertainty.
So what’s installed for your personal finance in Obama’s second term?
Watch your paycheck shrinks one way or another. Obama is asking for the wealthiest “to pay a little more in taxes.”
If you are earning more than $250,000 as a family or $200,000 as an individual, your income is likely to be subjected to new tax rates. The President made this clear in a congressional call right after the election, while House Speaker John Boehner (R-Ohio) cites that new taxes will be part of the debt plan.
Even if your income is below Obama’s tax radar, you are not off the hook. The fiscal cliff—when spending cuts and tax raises are introduced abruptly that the economy loses $500 billion in the loop—will subject everybody’s income to the Alternative Minimum Tax (read: higher tax for you) if nothing is done to avert this congressional-made doomsday in January.
AMT does not allow the deductions you enjoy from the current Bush-era tax cuts. Your best hope is that the Congressional Budget Office extends the tax breaks.
Of course, if corporate America is to be believed, taxing the rich will result in many businesses closing down and, heaven forbid, your company along with it.
Tip: Plan for a 20-30% personal spending cuts on your own to cushion the new tax shock.
Capital gains and dividends are likewise to be taxed more in Obama’s second term.
In a November 1 report, Goldman Sachs projected the tax raise around 25% from the current 15%. New investment tax revenues will be funneled into the Obamacare, an issue that is brewing into a class war.
Likewise, gift and estate tax is also expected to rise by 10% and tax breaks caps placed for charity giving and mortgage interest. Obama is planning to lower the $5 million gift tax to $3.5 million, with those exceeding the cap subject to the new rates.
Tip: Planning to sell assets? Sandra Bragar of the wealth advisory firm, Aspirant, was quoted in a Reuters article that a year-end investment sale may be better than waiting for new revenue stream next year to counter higher taxes. Also, make gift giving, including estate transfer, a priority before the year ends to avoid the new tax cap.
3. Health care
Obama is planning to funnel $318 billion into Medicare from new investment taxes. If you cannot afford decent health care, you can be one of the new 28.3 million Americans to be covered by Obamacare.
It is a touchy issue. Republicans have painted Obamacare as a Robin Hood hounding the rich; but with the President’s new mandate, many more are willing to hope that social services will bring the poor to the middle class-fold and strengthen the consumer base to the delight of businesses.
The new mandate also means Obamacare will continue to allow more women to get pre- and post-natal coverage. Likewise, insurance companies are now prohibited to turn down applicants with pre-existing conditions from diabetes and heart condition to pregnancy.
But there is a caveat to holders of employer-subsidized insurance. The administration plans to cut tax credits of business owners that pay for half of their employee’s health coverage. This means less employers being excited to pay for their people’s insurance.
Tip: Bargain with your boss for continued health coverage instead of a raise, which will only bring you up the tax bracket.
Obama’s second term means a second wind for the Making Home Affordable Program and good news for house buyers.
In its website, the U.S. Treasury Department—which runs the program with the U.S. Department of Housing and Urban Development—says that “nearly 1.3 million homeowner assistance actions have taken place… while the Federal Housing Administration has offered more than 1.5 million loss mitigation and early delinquency interventions.” In English it means, if you are hard-pressed to keep up with mortgage, the government can back you up (generous terms apply).
The Treasury Department further states, “payment relief offered to many struggling families… is a strong indicator of their ability to sustain the payment over time.” It is a telling sign to the house buyer as well as to the house seller, who, with the real estate stabilizing, can hang on for a little while and realize better capital gains off their houses.
Tip: Think hard and choose when to sell. Housing prices in the high- and mid-brackets are likely to continue to stabilize, that is, until the uncertainty of the fiscal cliff in January. Keep a tab on Congressional Budget Office’s (CBO) plan to avoid the fiscal cliff any moment now, if any.
5. Stock options
The Dow Jones Industrial Average plunged to its lowest this year at 300 points right after Obama was proclaimed a winner. It is too early to mean something other than a hiccup that is wary of a non-shift in the White House, but it can reflect on things to fall off the fiscal cliff come early next year.
But Jon Markman, an investment adviser, money-management consultant and best-selling author, points out that the stock market has had a honeymoon with Obama’s first term, unheard of in any other presidents’ first terms in the last century: S&P 500 gained 76% and Nasdaq 100 is at 128% since January 2009. The romance, he says, is expected to linger through Obama’s second term barring the cliff.
Some of the sectors with good options include healthcare because of more people will access it. Home construction, he says, are also good picks because the industry will remain robust with the jobs staying in the U.S. and more people without a college education filling them up.
Real estate, as pointed above, is also expected to improve with Obama policies providing stimulus to more residential and commercial construction.
Mobile communications, Markman adds, has jumped to 114% during Obama’s first term, and the trend appears stable as no presidential policies are directed against this industry.
As for green technologies, well, let’s not even talk about it. Not yet, at least while this administration struggles to pump life back to this industry in the aftermath of Sandy.
Tip: Same with number 4, keep a tab on CBO’s plan to avoid the fiscal cliff any moment now, if any; it will have a direct impact on the options.
Years ago, subprime mortgages seemed subtle thunderclaps of economic fallout in the distant mountains that nobody paid attention to (except, perhaps, the lenders who kept their silence). Today, the war for the economy stares us all in the face. It will be fought not in distant places, but, in the words of Benjamin Martin—the Southerner farmer in The Patriot—“amongst us, among our homes.” The solutions are likely to impact on your personal finance at a magnitude you may have never felt before, hopefully, for a better America for your children.
Do you have tips or advice on fortifying your personal finance that others may find helpful in these uncertain times? Perhaps a story of hurdling a financial obstacle that may inspire the desperate in us? Share the wisdom!