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Avoiding Higher Taxes in 2013 | Year-End Estate & Tax Planning  - An Investors Perspective
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Avoiding Higher Taxes in 2013 | Year-End Estate & Tax Planning - An Investors Perspective

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In this presentation: …

In this presentation:

- A list of the scheduled income tax rate increases

- Using asset location to maximize after-tax investment returns

- Why you should not indiscriminately sell your dividend paying stocks

- A reason to consider re-balancing your portfolio

- Why certain investors should consider harvesting capital gains in 2012

- Who benefits the most from capital gain harvesting in 2012

- Ways to accelerate income in 2012

- Deferring certain personal expenses until 2013

PWM ADVISORY GROUP, LLC - a private wealth management firm

Visit our knowledge center for related articles: www.PWM-NJ.com/knowledge

Published in: Economy & Finance

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  • 1. Jim Ferrare CFA, CPA Year-End Estate and Tax PWM Advisory Group, LLC PWM-NJ.com Planning in an Uncertain Year Jferrare@PWM-NJ.com (732) 450-0147 An Investor’s Perspective A Wealth of IntelligenceCopyright © 2012 PWM Advisory Group, LLC
  • 2. Important Disclosure Information This presentation was designed for educational purposes only and is not intended for specific legal, accounting, investment, income tax or other professional advice. Please remember that past performance may not be indicative of future results. Different types of investments involve varying degrees of risk, and there can be no assurance that the future performance of any specific investment, investment strategy, or product (including the investments and/or investment strategies recommended or undertaken by PWM Advisory Group, LLC [“PWM”]), or any non-investment related content, made reference to directly or indirectly in the presented material(s) will be profitable, equal any corresponding indicated historical performance level(s), be suitable for your portfolio or individual situation, or prove successful. Due to various factors, including changing market conditions and/or applicable laws, the content may no longer be reflective of current opinions or positions. Moreover, you should not assume that any discussion or information contained in this presentation serves as the receipt of, or as a substitute for, personalized investment advice from PWM. To the extent that a reader has any questions regarding the applicability of any specific issue discussed above to his/her individual situation, he/she is encouraged to consult with the professional advisor of his/her choosing. PWM is neither a law firm nor a certified public accounting firm and no portion of the presented material(s) should be construed as legal, accounting or consulting advice. A copy of the PWM’s current written disclosure statement discussing our advisory services and fees is available for review upon request. To ensure compliance with U.S. Treasury rules, unless expressly stated otherwise, any U.S. tax advice contained in this communication (including attachments) is not intended or written to be used, and cannot be used, by the recipient for the purpose of avoiding penalties that may be imposed under the Internal Revenue Code. 2PWM Advisory Group, LLC Private Wealth Management PWM-NJ.comCopyright © 2012 PWM Advisory Group, LLC
  • 3. Income Tax Rates are Scheduled to Change Scheduled Income Tax Rate Increases 2013 TAX RATES WITH 3.8% SCHEDULE RATES MEDICARE SURTAX ON “NET DESCRIPTION CURRENT RATES FOR 2013 INVESTMENT INCOME” Individual Income 10%, 15%, 25%, 28%, 33%, 35% 15%, 28% 31%, 36%, 39.6% 34.8%, 39.8%, 43.4% Tax Rates Qualified Dividends 0%, 15% 15%, 28%, 31%, 36%, 39.6% 34.8%, 39.8%, 43.4% Long-Term Capital 0%, 15% 10%, 20% (18%*) 23.8% (21.8%) Gains *For property purchases after year 2000, held for a period of five years or longer. 3PWM Advisory Group, LLC Private Wealth Management PWM-NJ.com See Important Disclosure Information on page 2.Copyright © 2012 PWM Advisory Group, LLC
  • 4. Taxes Represent an Important and Growing Influence in Wealth Management Conventional Wisdom States, “Don’t Let Taxes Influence Investment Decisions” Hopefully you disagree. Changes in the Tax Code Should Prompt an Analysis of Asset Location and Other Tax Optimization Strategies. Asset Location is different than Asset Allocation Side Bar: Asset Allocation refers to the combination of Stocks, Bonds and Cash in one’s portfolio. The mix of holdings should be reviewed periodically and rebalanced when appropriate. Asset Location refers to whether these investments are located in taxable or tax deferred (or even tax exempt –Roth IRA) accounts. 4PWM Advisory Group, LLC Private Wealth Management PWM-NJ.com See Important Disclosure Information on page 2.Copyright © 2012 PWM Advisory Group, LLC
  • 5. Optimized Asset Location = “Next Level” Asset Allocation To extent possible, clients should look to optimize Asset Location as a means of maximizing after tax investment performance. Sample 2013 Asset Location Guide Taxable Account: Tax Deferred/Exempt Account: Municipal Bonds* Corporate Bonds, REITS Index Funds Tax-Inefficient Mutual Funds Growth Stocks Commodity Investments Buy and Hold Investments Short-Term / Trading Oriented Strategies Question: Where do dividend focused stocks/funds belong given proposed tax increases? General Rule of Thumb for Asset Location Decisions in 2013: Side Bar: Taxable Account = Tax-efficient investments (Low yield, low turnover investments) Tax Deferred/Exempt Account = Tax-inefficient investments (High yield, high turnover investments) *REMEMBER: Municipal bonds are not risk-free investments 5PWM Advisory Group, LLC Private Wealth Management PWM-NJ.com See Important Disclosure Information on page 2.Copyright © 2012 PWM Advisory Group, LLC
  • 6. Dividend Paying Stocks are not Created Equally Changes in Dividend Tax Rates An investors return on dividend paying stocks consist of two 15% to Ordinary Income ( ≤ 43.4% ) components, capital appreciation potential and dividend yield. The mix of 0% to Ordinary Income ( ≥ 15.0% ) these components can greatly effect the after-tax return of the investment. Dividend Paying Stocks in a Buy and Hold Strategy - 2013 Hypothetical Illustration Capital Appreciation Dividend Yield Pre-tax Return After-tax Return* Stock A 6% + 2% = 8% 7.1% Stock B 2% + 6% = 8% 5.4% *assumes 0% portfolio turnover rate with dividends taxed at maximum level of 43.4% Asset Location Matters: Taxable Appreciation- 2013 Potential Capital Side Bar: Consider locating dividend paying stocks with Account high potential capital appreciation and low yield Stock A in taxable accounts. Consider locating dividend paying stocks with Tax Deferred low potential capital appreciation and high yield Account in tax-deferred accounts. Stock B Dividend Yield - 2013 6PWM Advisory Group, LLC Private Wealth Management PWM-NJ.com See Important Disclosure Information on page 2.Copyright © 2012 PWM Advisory Group, LLC
  • 7. We are in a 3 ½ Year Bull Market Growth of $100,000 Over the Last 42 Months - Period Ending 09/30/12 Small-cap Stocks1 ↑ 127% Large-cap Stocks2 ↑ 94% Bonds3 ↑ 25% Give Consideration to Portfolio Re-Balancing *Bloomberg (10/15/2012). 1. Vangaurd Small-cap ETF (VB) 2. Spiders S&P 500 ETF Trust (SPY) 3. iShares Barclays Aggregate Bond Index (AGG) 7PWM Advisory Group, LLC Private Wealth Management PWM-NJ.com See Important Disclosure Information on page 2.Copyright © 2012 PWM Advisory Group, LLC
  • 8. Capital Gains Tax Rates are Scheduled to Increase Consider Capital Gain Harvesting Changes in Capital Gain Tax Rates ► Realizing capital gains in a given year that 2012 2013 Percentage Change might otherwise have been deferred into later 15% 23.8% (20 + 3.8) 59% years. 15% 20% 33% 0% 10% -- Why consider Capital Gain Harvesting? ► Stock prices are at multi-year highs allowing for substantial gains to be locked in at lower rates. ► Possible capital gain tax rates may go higher in years beyond 2013. ► The involved “Opportunity Cost” (the cost of money) is very low today. ► The position sold can be re-established immediately. Defer Capital Losses until 2013 Side Bar: To extent possible, the realization of Capital Losses should be deferred into the next calendar year. Capital Losses offset Capital Gains thus limiting the benefit of Capital Gain Harvesting 8PWM Advisory Group, LLC Private Wealth Management PWM-NJ.com See Important Disclosure Information on page 2.Copyright © 2012 PWM Advisory Group, LLC
  • 9. Analysis of Capital Gain Harvesting SCENARIO 1* No Gain Harvesting Gain Harvesting 2012 2013 2012 2013 Cost Basis (original stock price): $10,000 Year-end $110,000 $121,000 Year-end $110,000 $104,500 Stock Appreciation (growth): 10% per year Less Basis -- $ 10,000 Less Basis $ 10,000 $ 95,000 Holding Period: 1 Year Gain -- $111,000 Gain $100,000 $ 9,500 Capital Gain Tax: Tax -- $ 26,418 Tax $ 15,000 $ 2,261 2012: 15%, Future years: 23.8% Year-end Less Tax $110,000 $ 94,582 Year-end Less Tax $ 95,000 $102,239 Scenario 1: Profitable to Gain Harvest SCENARIO 2* No Gain Harvesting Gain Harvesting 2012 2027 2012 2027 Cost Basis (original stock price): $10,000 Year-end $110,000 $459,497 Year-end $110,000 $396,839 Stock Appreciation (growth): 10% per year Less Basis -- $ 10,000 Less Basis $ 10,000 $ 95,000 Holding Period: 15 Years Gain -- $449,497 Gain $100,000 $301,839 Capital Gain Tax: Tax -- $106,980 Tax $ 15,000 $ 71,838 2012: 15%, Future years: 23.8% Year-end Less Tax $110,000 $352,517 Year-end Less Tax $ 95,000 $325,001 *Calculations are for educational purposes only and may not be predictive of future results. Scenario 2: NOT Profitable to Gain Harvest The break even analysis for capital gain tax harvesting, based on anticipated 2013 tax rates, is predominately a function of time horizon and return expectations: Side Bar: Time Horizon ↑ = Benefit ↓ Return Expectations ↑ = Benefit ↓ 9PWM Advisory Group, LLC Private Wealth Management PWM-NJ.com See Important Disclosure Information on page 2.Copyright © 2012 PWM Advisory Group, LLC
  • 10. Capital Gain Tax Harvesting: Is It for Everyone? Capital Gain Harvesting MAY BE suitable for investors with: ► Short to intermediate cash needs ► Low or below market expectations on their investments ► Short investment time horizon ► A belief diversification outweighs possible higher taxes ► A belief their personal capital gains tax rate may go higher in years beyond 2013 Capital Gain Tax Harvesting MAY NOT be suitable for investors with: Large tax loss carry forwards Who are elderly or has a short life expectancy High or above market return expectations on their investments Who are comfortable holding a concentrated investment over a long time period A belief their personal capital gains tax rate may go lower in future years 10PWM Advisory Group, LLC Private Wealth Management PWM-NJ.com See Important Disclosure Information on page 2.Copyright © 2012 PWM Advisory Group, LLC
  • 11. Accelerating Income in 2012 in Anticipation of Rising Rates Consider: ► 2012 Roth Conversion ► Exercising in the money options, preferably if near expiration ► Receiving 2012 bonus in 2012 ► IRA owner turning 70 ½ in 2012 may want to take required minimum distribution before year-end ► Owners of a closely held business may want to issue a special dividend before year-end Defer Certain Personal Expenses (i.e. Real Estate Taxes and Mortgage Payments) Side Bar: Certain personal expenses may be more valuable if paid in 2013 due to proposed higher taxes on ordinary income. 11PWM Advisory Group, LLC Private Wealth Management PWM-NJ.com See Important Disclosure Information on page 2.Copyright © 2012 PWM Advisory Group, LLC
  • 12. Closing Thoughts: Revisit asset location Consider reducing short-term trading in taxable accounts Consider municipal bonds in taxable accounts Remember: municipal bonds are subject to credit risk Do not indiscriminately sell dividend paying stocks Remember: 78 million people are retiring over the next 20 years and will be looking to supplement portfolio income Consider re-balancing your portfolio - Stocks are up approximately 100% in 3 ½ years Consider diversifying appreciated concentrated positions in 2012 Consider capital gain harvesting in 2012 and tax-loss harvesting in 2013 Consider accelerating income in 2012 2012 is a Year to Consider Non-Traditional Tax Strategies conventional wisdom 12PWM Advisory Group, LLC Private Wealth Management PWM-NJ.com See Important Disclosure Information on page 2.Copyright © 2012 PWM Advisory Group, LLC
  • 13. For More on this Topic.. VISIT OUR KNOWLEDGE CENTER PWM-NJ.com/knowledge •New articles added every week •Professional insights on recent economic activity, tax codes, wealth planning, and more. Sign up for our Weekly Wire! Receive a convenient e-mail on Thursdays updating you on new articles.* *We will not spam your account. You can unsubscribe at any time. 13PWM Advisory Group, LLC Private Wealth Management PWM-NJ.com See Important Disclosure Information on page 2.Copyright © 2012 PWM Advisory Group, LLC