Tax Increases Expected, Deflected

Most investors expect their taxes to increase significantly in 2012 and are taking steps to protect their portfolios from Uncle Sam’s bite, according to a new survey by Millionaire Corner.

More than half of the 1,336 investors participating in our December  survey expect a significant increase in taxes, though investors at lower wealth levels appear to be more concerned about taxes than their more affluent peers. More than 60 percent of investors with a net worth of less than $100,000 expect their taxes to go up significantly in 2012, compared to about 48 percent of investors with a net worth of $500,000 or more. Millionaire Corner defines net worth as assets, not including primary residence.

Taxes are also of particular concern to business owners, nearly 62 percent of who anticipate tax increases, and investors younger than 40.

Investors with $1 million or more are among the least likely to expect significant tax increases next year, but they are the most likely to take steps to protect themselves from taxes. More than 20 percent of millionaires plan to invest in municipal bonds to reduce their tax burden. The interest paid by municipal bonds is traditionally lower than corporate bond yields, but the income is exempt from federal taxes and, in some cases, exempt from state taxes, as well.  Only about 4 percent of investors with less than $100,000 plan to invest in municipal bonds.

Millionaires also express greater interest in tax-free bonds in general. Nearly 30 percent of millionaires plan to invest in tax-free bonds next year in an effort to protect themselves from taxes, compared to about 6 percent of investors with less than $100,000.

About one-fourth of millionaires plan to create a trust as a means to shelter assets from taxes, compared to less than 4 percent of investors with $100,000. More than 20 percent of millionaires plan to increase charitable giving, compared to about 17 percent of investors with less than $100,000. The IRS allows taxpayers to deduct contributions to qualified charities from their taxable income.

Less affluent investors are much more likely than millionaire investors to increase their contributions to employer-sponsored retirement plans, such as 401(k) and 403(b) plans. More than 30 percent of investors with a net worth of $100,000 up to $1 million place to increase contributions to these defined-contribution plans.  401(k) and 403(b) plans enjoy a tax-deferred status that allows investment  gains to grow tax free until they are withdrawn.  Many employers provide matching contributions, giving a significant boost to employees’ ability to save for retirement.

More than 11 percent of investors with $500,000 to $1 million plan to establish or increase contributions to a 529 college savings plans. The plans grow tax free and are not subject to taxes when they are used for qualified educational purposes.