From a macro perspective “follow the money” is a pretty good way to predict human behavior and an excellent way to explain human behavior. Right now market moves depend on which elected official, from which party, framed by which commentator, from which media outlet has just hit the air waves. Hence, last week we saw large gyrations in the stock market within minutes of comments from either the President or Speaker of the House. In most cases, the market began to retrace the initial move once commentary/context from financial/political aficionados, as well as media outlets, began to appear. In short, market moves reflected the confusion over the fiscal cliff.
As we are aware, not knowing the rules of the game makes it hard to play any game or, in this case, for business leaders to plan effectively. Corporate managements are being forced to react based on the certainty of the tax code through 12/31, 27 days from now, not for the longer-term. The lack of certainty also makes it difficult for the 53% of US citizens that pay federal income taxes to plan effectively. However, one thing appears to be crystal clear: One way or another tax rates are going up in 2013. It is just a matter of which ones and by how much.
Corporations have been proactive. The most obvious display of this activity is the number special dividends declared for payment prior to 12/31. Odds are pretty good that the income from these special dividends will likely be taxed at a significantly lower rate in 2012 than in 2013 and beyond. (To, perhaps, state the obvious, we note all of the special dividends being announced by corporations will cause dividend income over the next twelve months to be front end loaded into this quarter as funds that would have otherwise been paid out as regular dividends in 2013 are being replaced with one extra dividend in 2012.)
As we have met with clients of late we have encouraged them to be proactive and to speak with their accountants to plan as best as possible for a higher tax environment in 2013 and beyond. While there are only a few weeks left in the year, individuals and business owners in particular, may still have the opportunity to bring income forward into 2012 from 2013. Similarly, there may be opportunities to delay last minute expenses or charitable gifts into the 2013 tax year. We do not hold ourselves out as tax consultants or tax experts so the details of what can be done or should be done in concert is best handled with advice from a tax professional.
As always, we welcome your comments.
Denise M. Farkas, CFA