Election 2008: what impact on your taxes?

SG writes:

I've been following with interest the tax proposals of both presidential candidates - I have a feeling investors will be paying a lot more in taxes if Obama is elected. With that in mind, I'm looking for ways to make my portfolio more tax-efficient and minimize the amount I have to pay to the tax man each year. Any suggestions? We are already maxing out our 401k and have the majority of our taxable investments in relatively tax-efficient index funds.

Investing in tax-efficient index funds is a very smart move. I would also encourage you to consider Exchange Traded Funds (ETFs) and Exchange Traded Notes (ETNs) which are about as tax efficient as you can get. To learn more about ETFs, I recommend reading Rick Ferri's "The ETF Book: All You Need to Know About Exchange Traded Funds."

You should also be aggressively harvesting losses in your portfolio now that the market is doing so poorly. Any losses you capture now can be used to offset any capital gains you may have and up to $3,000 in net capital losses can be used against ordinary income. Any remaining losses that you can't take this year can be carried forward to future years.

I agree that some taxes will likely go higher if Obama is elected. Many experts expect today's 15% long term capital gains tax rate to go to 20% if he is elected, so it might be wise to take any gains that you may be considering sooner rather than later. This would be particularly true if you hold a lot of low basis stock in a publicly traded company that you need to diversify.

As far as income taxes are concerned, Obama has publicly stated that he would be in favor of higher taxes on the wealthier families (those earning more than $250,000) and lower taxes for lower and middle income families.

One other tax move that you might want to consider would be converting your traditional IRA to a Roth. With portfolio values down, this might be an excellent time to convert.