31
Mar 11

Four Tips for Tax Smart Investing

Four Tips for Tax Smart Investing

At times, you may be able to use losses in your investment portfolio to help offset
 realized gains.

Savvy investors have long realized that what their investments earn after taxes is what really counts. After factoring in federal income and capital gains taxes, the alternative minimum tax (AMT), and potential state and local taxes, your investment returns in any given year may be reduced by 40% or more. Luckily, there are tools and tactics to help you manage taxes and your investments. Here are four tips to help you become a more tax-savvy investor.

Tip #1: Invest in Tax-Deferred and Tax-Free Accounts

Tax-deferred investments include company-sponsored retirement savings accounts such as traditional 401(k) and 403(b) plans and traditional individual retirement accounts (IRAs). In some cases, contributions to these accounts may be made on a pre-tax basis or may be tax deductible. More important, investment earnings compound tax-deferred until withdrawal, typically in retirement, when you may be in a lower tax bracket.

Contributions to Roth IRAs and Roth 401(k) savings plans are not deductible. Earnings that accumulate in Roth accounts can be withdrawn tax free if you are over age 59 1/2, have held the account for at least five years, and meet the requirements for a qualified distribution.

Tip #2: Manage Investments for Tax Efficiency

Tax-managed investment accounts are managed in ways that can help reduce their taxable distributions. Your investment professional can employ a combination of tactics, such as minimizing portfolio turnover, investing in stocks that do not pay dividends, and selectively selling stocks that have become less attractive at a loss to counterbalance taxable gains elsewhere in the portfolio. In years when returns on the broader market are flat or negative, investors tend to become more aware of capital gains generated by portfolio turnover, since the resulting tax liability can offset any gain or exacerbate a negative return on the investment.

Tip #3: Put Losses to Work

At times, you may be able to use losses in your investment portfolio to help offset realized gains. It's a good idea to evaluate your holdings periodically to assess whether an investment still offers the long-term potential you anticipated when you purchased it. Your realized losses in a given tax year must first be used to offset realized capital gains. If you have "leftover" losses, you can offset up to $3,000 against ordinary income. Any remainder can be carried forward to offset gains or income in future years.

Tip #4: Keep Good Records

Keep records of purchases, sales, distributions, and dividend reinvestments so that you can properly calculate the basis of shares you own and choose the most preferential tax treatment for shares you sell.

Keeping an eye on how taxes can affect your investments is one of the easiest ways to help enhance your returns over time. For more information about the tax aspects of investing, consult your tax professional.

The information in this article is not intended to be tax advice and should not be treated as such. You should consult with your tax advisor to discuss your personal situation before making any decisions.

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© 2011 McGraw-Hill Financial Communications. All rights reserved.

March 2011 — This column is provided through the Financial Planning Association, the membership organization for the financial planning community, and is brought to you by Ronald J. VanSurksum CFP® , a local member of FPA.

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29
Mar 11

Washington Hotline - March - Week 4 - 2011

Bipartisan Senators Propose Deficit Summit
In a letter to President Obama this week, 32 Republican and 32 Democratic Senators proposed a budget summit to implement "comprehensive deficit reduction measures." Senators Michael Bennet (D-CO) and Mike Johanns (R-NE) were the leaders of the bipartisan group.

The letter noted that the Presidential Fiscal Commission had provided "an important foundation to achieve meaningful progress" on deficit reduction. Six senators (three Democratic and three Republican) have been working to develop an actual bill that would implement the recommendations of the Fiscal Commission.

The group of 64 senators now recommends that the President develop a comprehensive package that will attack the budget deficit. The comprehensive bill would include "discretionary spending cuts, entitlement changes and tax reform."

In the view of the bipartisan group of senators, a joint effort "would send a powerful message to Americans that Washington can work together" on deficit reduction.

President Maya MacGuineas of the Committee for a Responsible Federal Budget praised the bipartisan effort by the 64 senators. She noted that the Fiscal Commission prompted action by the bipartisan group of six senators and now the call for reform by the larger group of 64 senators. She stated, "I'm not usually an optimist on budget issues, but something big is happening and those who don't confront our fiscal situation head on are going to be left behind."

Majority Leader Calls for 25% Tax Rate

In a speech on March 21, Majority Leader Eric Cantor (R-VA) proposed both a reduction in the corporate tax rates and repatriation of corporate overseas funds at favorable rates.

Leader Cantor notes that the American corporate tax rates are "50% higher than even those in Europe." In his view, the international competition by multi-national companies has encouraged most European countries to reduce their corporate tax rates below those of the U.S. He suggests that, "We must make America competitive again by lowering the corporate tax rate to at least 25%."

The proposed corporate tax rate would be accompanied by comprehensive tax reform. In addition, Leader Cantor notes that there is "almost $1.2 trillion in overseas profits" that American companies are not returning to America due to the tax rate. He proposes that these funds be allowed to return to America at a lower tax rate.

Treasury Assistant Secretary for Tax Policy Michael Mundaca responded to the proposal on behalf of the White House. He noted that the American Jobs Creation Act of 2004 included a tax holiday to allow corporations to return overseas funds to America. In his view this act "did little to generate new jobs and investment and resulted in billions in lost revenue." He suggested that the U.S. companies have "ready access to cash" that has been accumulated overseas. He doubts that a favorable tax rate for returning funds to America "will unlock new investment and job creation."

Editor's Note: Both the Senate Finance Committee and the House Ways and Means Committee are holding hearings on major tax reform. It is possible that there will be a comprehensive deficit reduction package with a tax reform component. While it is quite challenging for Congress to tackle both issues at the same time, several commentators suggest that major changes in taxes and spending can only occur in a combined package.

White House Estate Tax Proposals

Each January the White House submits its proposed budget for the fiscal year that starts the following October 1. The White House budget for fiscal year 2012 includes five specific proposals that impact estate taxation and estate planning.

With a $5 million applicable exclusion amount per person for 2011, an estimated 3,600 estates will owe tax. More than 99.8% of 2011 decedents will not be subject to the estate tax with an exemption of $5 million. If the exemption had been lowered to $3.5 million (the rate in 2009), 5,500 estates would be taxable. With an exemption of $1 million (plus indexed increases), Treasury estimates that 40,000 estates would be subject to tax.

The White House budget proposes estate tax changes in the following five areas.

1. Marital Portability – In 2011 and 2012, a spouse may have an increased exemption from $5 million to as high as $10 million. The deceased spouse unused exclusion amount (DSUEA) could increase the available applicable exclusion to double the single person amount. However, because the current law applies for two years, the one spouse would need to pass away in 2011 and the second in 2012 to qualify. The White House budget proposes making the marital portability provision permanent.

2. Consistent Basis – The assets transferred through an estate in most cases will receive a step-up in basis. The proposal creates additional documentation requirements that will insure recipients who later sell assets value the basis in a manner consistent with the claimed estate value.

3. Valuation Discounts – For transfers of real estate, limited partnership interests, family business stock and limited liability company interests, there frequently are valuation discounts that may range from 20% to 40% or more. The White House proposes that these discounts be reduced or eliminated for family transactions.

4. Grantor Retained Annuity Trusts – The GRAT will be limited to a minimum of ten years. In addition, the annuity will not be permitted to decrease during that term. Finally, a remainder value greater than zero must be utilized.

5. Dynasty Trusts – Several states have repealed the statue of limitations. A "dynasty" trust that in theory can be perpetual is therefore possible in these states. The White House proposes that there would be a limit on the duration of dynasty trusts.

Applicable Federal Rate of 3.0% for April – Rev. Rul. 2011-10; 2011-14 IRB 1 (17 Mar 2011)

The IRS has announced the Applicable Federal Rate (AFR) for April of 2011. The AFR under Sec. 7520 for the month of April will be 3.0%. The rates for March of 3.0% or February of 2.8% also may be used. The highest AFR is beneficial for charitable deductions of remainder interests. The lowest AFR is best for lead trusts and life estate reserved agreements. With a gift annuity, if the annuitant desires greater tax-free payments the lowest AFR is preferable. During 2011, pooled income funds in existence less than three tax years must use a 2.8% deemed rate of return. Federal rates are available by clicking here.

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28
Mar 11

AAM Weekly Market Wrap - March 28 - 2011

March 27, 2011

Weekly Market Wrap:  The equity markets bounced back this week as the S&P 500 index posted a gain of 2.7% to close back above the 1,300 at 1,313.80.  Oil surged higher once again to push well over $100per barrel and closed the week up 4.28% to $105.40.  Gold moved modestly higher by 0.63% to $1,428 per oz and the dollar rose against other major world currencies closing up 0.26% to $76.24.

Year-To-Date the major indexes are at: The S&P index 4.47%, The Dow Jones Index +5.55%, The NASDAQ +3.40%, The Russell 2000 Small cap Index + 5.13%, EAFE International +2.33%.  In the Bond market the 10 year treasury is currently yielding 3.44% and the 30 year yielding 4.41%.  Both rates are up for the week and year-to-date.

On Monday the S&P 500 surged 19 points as overseas concerns eased, AT&T made a bid to purchase T-Mobile and Citigroup reinstated its dividend.  The Dow Jones average moved back above the 12,000 mark for the first time in two weeks.  The market moved significantly higher despite lower than expected existing home sales and higher oil prices.

Tuesday’s market dropped 5 points as Middle East tensions pushed oil prices higher, European debt concerns re-emerged and South-East US manufacturing was lower than expected.

On Wednesday stocks moved slightly higher adding 4 points as higher commodity prices moved stocks higher.  Other news included new home sales hitting a record low and the Federal Reserve objected to Bank of America’s proposed dividend increase.

Stocks moved higher again on Thursday as optimistic corporate earnings guidance and lower initial jobless claims gave the market reasons to buy despite a lower than expected durable goods orders.

On Friday stocks extended their gains by an additional 4 points as the 4th Quarter GDP number was revised upward and Oracle’s quarterly numbers beat market expectations.  On the negative side consumer sentiment was down more than expected.  The Dow index has now risen 6 of the last 7 trading days.

The markets moved higher this week as much of the overseas concerns subsided and traders continued to look mainly at the positive signs of continued US economic recovery.  Positive earnings have also contributed to the recent rebound in the markets.

Volatility was only on the upside this week as the S&P 500 was up 4 of the 5 trading days.  I am continuing to watch the possible impact of higher oil prices and other inflationary pressures on the market and consumers.  I am hopeful that events in the Middle East will eventually settle down and oil prices will once again ease below the $100 per barrel mark.

Mortgage rates moved slightly higher this week.  The Schwab Bank 15-year rate is now at 4.28% and the 30-year rate is at 4.96%. These rates are as of 03/25/2011 and assume no points, no origination fee and a $250,000 conforming rate mortgage.

The Week at AAM (to highlight what I do for clients and how I am different than most advisors):

Some of the highlights of my last two weeks include:

  • Had lunch with an attorney to keep up-to-date on anything new in estate planning.
  • Met with many existing clients to review and help them work towards their financial goals.
  • Had lunch with Michelle at GlenHaven Manor.  I learned about their facility and how they provide independent and assisted living at a pretty reasonable cost.  What a great facility!
  • Attended a Grandville Jenison Chamber luncheon event to improve my sales skills.  I also attended another Chamber luncheon to improve my “Twitter” skills as well.
  • Continued to help clients prepare for tax completion and work with their tax preparer to make sure the taxes are done right.
  • Attended the Hudsonville Little League coaches meeting to prepare for the 2011 season.  I am looking forward to coaching in the “Machine Pitch” division this year!

I hope you had a great few weeks as well.  Please let me know if there is ever anything I can do for you or if something has changed in your financial situation to warrant a meeting or a change of investment policy.

Ronald J. VanSurksum, CFP®

Advanced Asset Management, LLC

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