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Investors, Brace Yourselves for Tax Hikes

As if battered investors needed more abuse, they are in for a rude awakening at the end of the year.

By William Ehart of InvestorPlace

As if battered investors needed more abuse, they are in for a rude awakening at the end of the year.

That's when the Bush tax cuts, enacted in 2001 and 2003, are scheduled to expire. While many in Congress favor extending some or all of the cuts, President Obama has come out prior to this fall's congressional election strongly against the Bush tax breaks. However, a number of key Democrats including former presidential candidate Sen. John Kerry (D, Mass.) are working to extend the cuts that pertain to the middle class.

But without action by Congress and the assent of the president, those investor-friendly tax breaks simply will vanish in the night as the ball drops on Times Square. Action before the election is seen as highly unlikely, even though Obama and party leaders wanted to make an election issue out of the matter. Republicans are expected to gain seats in Congress in the election and such a result might change the equation.

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While the tax change mainly will hurt the "wealthy" -- high earners with incomes above $200,000 -- any investor large or small will take a serious hair cut on next year's tax bill.

The most dramatic change will be in the taxation of dividends. Who doesn't love big, stable dividend-paying companies in these uncertain times? Well, you may have to adjust your portfolio as the tax on dividends will rise from the current Bush-era maximum capital gains rate of 15% to a Clinton-era maximum income-tax rate of 39.6%. While Obama had proposed a 20% tax on dividends as an alternative, that now appears unlikely given budget rules enacted by Congress.

Speaking of capital gains, that attractive 15% maximum rate will rise to 20%, so if you have big gains, you may want to sell your high-dividend stocks this year and buy different stocks with less tax impact.

The story is the same for income tax rates. The Bush brackets of 10%, 15%, 25%, 28%, 33% and 35% will revert back to a schedule of 15%, 28%, 31%, 36% and 39.6%.

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The so-called marriage penalty and the phase-outs for itemized deductions and personal exemptions for wealthy taxpayers will also return.

If it's not one thing it's another for shell-shocked investors.

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--Written by William Ehart.

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