Federal Tax and Capital Gains: Rates Over Time

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1 Preparing for a World of Higher Taxes Are You Ready? Presented by: Matt Sommer, CFP, CPWA, AIF Director and Senior Retirement Specialist, Retirement Strategy Group C Federal Tax and Capital Gains: Rates Over Time Source: Citizens for Tax Justice; May

2 Federal Budget: Deficit Over Time Source: Office of Management and Budget, February 2, What May Happen in 2011: Income Taxes Ordinary income tax rates increase The 10% bracket is eliminated The 15% bracket remains 25% to 28% 28% to 31% 33% to 36% 35% to 39.6% Reinstate phase-out of personal exemptions and itemized deductions Long-term capital gains tax increased 15% to 20% (18% for assets held over five years) Qualified dividend tax increased 15% to ordinary income tax rates Note: It is possible that not all of these changes will happen pending current proposals, but all indications are that at least some of these will occur. This presentation is for information purposes only and should not be relied upon as investment advice. 3

3 A Further Look Ahead Effects of the new Health Care Reform legislation in 2013: Higher Taxes Imposing an additional 0.9% on earned income in excess of $200,000 for individuals and $250,000 for families Imposing an unearned income Medicare contribution of 3.8% on investment income for individuals with AGI above $200,000 and joint filers with AGI above $250,000 Increasing the threshold for the itemized medical expense deduction from 7.5% of AGI to 10% of AGI Less Savings Opportunities Capping Flexible Spending Accounts $2,500 per year vs. $5,000 currently Increasing non-qualified distributions from Health Savings Accounts and Medical Savings Accounts from 10% to 20% 4 Ten Strategies to Consider These potential tax changes offer you the opportunity to get much-needed clarity and guidance from your advisor. The following ten strategies are designed to walk you through the potential implications of these tax changes and map out a strategy for 2010 and beyond. The sale of an investment for the purpose of rebalancing may be subject to taxes. A IRA should be considered a long-term investment. IRAs generally have expenses and account fees, which may impact the value of the account. Non-qualified withdrawals may be subject to taxes and penalties. Maximum contributions are subject to eligibility requirements. Depending on your eligibility, you may not be able to contribute the maximum amount. For more detailed information about taxes, consult IRS Publication 590 or your tax advisor regarding your personal circumstance. 5

4 1. Sell Assets in 2010 Review your assets that have appreciated in value, and consider locking in profits while taking advantage of the current 15% tax rate on long-term capital gains. You own a stock worth $100 per share that you bought previously for $20 If you were to sell 100 shares of your stock in 2010, you would owe a capital gains tax of $1,200 (15% x $8,000 gain) Alternatively, if you sold the stock in 2011 at the same price, you would owe a capital gains tax of $1,600 (20% x $8,000 gain) You are planning to sell a real estate investment for a before-tax profit of $150,000. Selling the investment in 2010, rather than 2011, will yield an additional $7,500 after-tax profit. The sale of an investment for the purpose of rebalancing may be subject to taxes. Tax information contained herein is not intended or written to be used, and it cannot be used by taxpayers for the purposes of avoiding penalties that may be imposed on taxpayers. Such tax information and any estate planning information is general in nature, is provided for informational and educational purposes only, and should not be construed as legal or tax advice. The hypothetical example does not represent the returns of any particular investment. Past performance is no guarantee of future results. 6 Investment results and principal value will fluctuate so that, when redeemed, they may be worth more or less than their original or current cost. Due to market volatility, future performance may be higher or lower than the performance shown. 2. Receive Income Now Review your potential sources of income to identify what you might receive in early 2011 that you could take now. If you turn age 70 ½ in 2010 your first required minimum distribution from your IRA is due April 1, 2011 Rather than waiting until next year, you may want to satisfy the required distribution in 2010 Your employer has granted you a non-qualified employee stock option to purchase company stock at $20 The stock is currently worth $50 Because the spread at exercise is subject to ordinary income taxes, consider cashing in the option in 2010 The rates of return are hypothetical and do not represent the returns of any particular investment. An IRA should be considered a long-term investment. IRAs generally have expenses and account fees, which may impact the value of the account. For more detailed information about taxes, consult IRS Publication 590 or your tax advisor regarding your personal circumstance. Investment results and principal value will fluctuate so that shares, when redeemed, may be worth more or less than their original or current cost. Due to market volatility, current or future performance may be higher or lower than the performance shown. 7

5 3. Defer Certain Deductions Consider deferring certain discretionary deductions to 2011 when they may be much more valuable due to the higher rates. Every December you make a donation to your favorite charity. This year, consider making the donation in early In prior years, you paid January s mortgage payment in December, thus taking a current year deduction on the interest portion of the payment. This year, consider making the payment in January Contribute to Employer Retirement Plans Take full advantage of your employer s retirement plan. Your employer offers you a salary deferral retirement plan such as a 401(k), 403(b) or 457(b) plan. In 2010, you are allowed to contribute up to $16,500 on a pre-tax basis. If you are age 50 or older, you are able to contribute an additional $5,500. If you are self-employed, you are eligible to contribute 20% of your net earnings, up to $49,000 to a SEP IRA. A retirement account should be considered a long-term investment. Retirement accounts generally have expenses and account fees, which may impact the value of the account. Non-qualified withdrawals may be subject to taxes and penalties. For more detailed information about taxes, consult your tax attorney or accountant for advice. 9

6 5. Review Current Goals and Saving Strategies In a world of higher taxes, increased attention should be given to the use of tax-advantaged vehicles, giving you the potential to save more than a comparable savings account. You are currently contributing to a Uniform Gift to Minors Account (UGMA) for your ten-year old daughter s college education. Investment earnings in excess of $1,900 are taxed at the parent s tax bracket. Alternatively, earnings in a 529 College Saving program grow tax-deferred and are distributed taxfree for qualifying expenses (tuition, room and board, fees, etc.) Each year, you incur approximately $1,000 of out-of-pocket medical costs. Consider enrolling into your employer s Flexible Spending Account (FSA), allowing you pay these costs with pre-tax dollars. Please consider the investment objectives, risks, charges and expenses associated with municipal fund securities before investing. More information about municipal fund securities is available in the issuer s official statement. The official statement should be read carefully before investing. Investors should consider, before investing, whether the investor s or designated beneficiary s home state offers any state tax or other benefits that are only available for investments in such state s qualified tuition program Review Current Portfolios and Asset Location Consider giving increased attention to municipal bond investments, growth orientated equities, tax-efficient mutual funds and separately managed accounts. Depending on your situation, you may want to hold certain types of investments in specific types of accounts to maximize current and future after-tax returns. Example: Generally, appreciation in a stock is taxed as a long-term capital gain when sold. Gains on stocks sold inside of a retirement account, however, are deferred, but future distributions are taxed as ordinary income. Consider making your equity investments in taxable accounts, where you may be able to capture more favorable long-term capital gain rates while making fixed-income investments in tax-deferred retirement accounts. Municipal bonds are subject to interest rate, inflation and credit risks as well as legislative, liquidity and call risks. There is no guarantee that a municipal bond issuer will not default and will be able to pay the interest, principal or both. High-Yield, High-Risk bonds involve a greater risk of default and price volatility than U.S. government and high-quality bonds. High-Yield, High- Risk bonds can experience sudden and sharp price swings. Income may be subject to state or local taxes and to a limited extent certain federal tax. Capital gains are subject to federal, state and local taxes. Stock represents ownership interest in a company. Stock investments have the potential to deliver high returns. However, with that potential there are also some risks. The value of equity securities fluctuates in response to issuer, political, market, and economic developments. In the short term, equity prices can fluctuate dramatically in response to these developments which can also affect a single issuer, issuers within an industry or economic sector or geographic region, or the market as a whole. Their performance has historically been more volatile than other asset classes. Tax information contained herein is not intended or written to be used, and it cannot be used by taxpayers for the purposes of avoiding penalties that may be imposed on taxpayers. Such tax information and any estate planning information is general in nature, is provided for informational and educational purposes only, and should not be construed as legal or tax advice. 11

7 7. Consider Roth IRA Conversions Generally, Roth IRA conversions are appropriate for individuals who: Have a long time horizon before they will need access to the account Have the ability to pay the tax upfront resulting from the conversion Anticipate being in the same or higher future tax bracket in the future If you convert a $100,000 traditional IRA in 2010 and the Roth IRA grows to $200,000 by 2020, distributions are federal and state tax-free assuming you are age 59 ½ or older. If you convert a $100,000 traditional IRA in 2010 and your children inherit the Roth in 2030 when it is worth $300,000, distributions to your children are federal and state tax-free. The rates of return are hypothetical and do not represent the returns of any particular investment. A IRA should be considered a long-term investment. IRAs generally have expenses and account fees, which may impact the value of the account. Non-qualified withdrawals may be subject to taxes and penalties. Maximum contributions are subject to eligibility requirements. Depending on your eligibility, you may not be able to contribute the maximum amount. For more detailed information about taxes, consult IRS Publication 590 or your tax advisor regarding your personal circumstance. Tax information contained herein is not intended or written to be used, and it cannot be used by taxpayers for the purposes of avoiding penalties that may be imposed on taxpayers. Such tax information and any estate planning information is general in nature, is provided for informational and educational purposes only, and should not be construed as legal or tax advice Explore Non-Qualified Deferred Compensation Plans Many individuals might wish to take a second look at any non-qualified deferred compensation options they may have through their employer. In 2010, your employer gives you the option to contribute to a non-qualified plan. Contributions are made on a pre-tax basis and earnings grow taxdeferred. These plans can be helpful if you anticipate being in a higher tax bracket when distributions are made, such as at retirement. A retirement account should be considered a long-term investment. Retirement accounts generally have expenses and account fees, which may impact the value of the account. Non-qualified withdrawals may be subject to taxes and penalties. For more detailed information about taxes, consult your tax attorney or accountant for advice. Tax information contained herein is not intended or written to be used, and it cannot be used by taxpayers for the purposes of avoiding penalties that may be imposed on taxpayers. Such tax information and any estate planning information is general in nature, is provided for informational and educational purposes only, and should not be construed as legal or tax advice. 13

8 9. Understand State Taxes Many boomers are interested in moving to a more tax-friendly state at retirement. Remember that income taxes are only one way states raise revenue from their residents. Other forms of taxation include: Sales Property Excise License Intangibles Estate and Gift Additionally, states vary in their treatment of retirement account distributions, Social Security benefits and military pensions. Example: You move to a state with no income taxes. Although you contributed to your employer s 401(k) in a state with high income taxes, distributions taken while you are a resident of your new state are not subject to state taxes. Tax information contained herein is not intended or written to be used, and it cannot be used by taxpayers for the purposes of avoiding penalties that may be imposed on taxpayers. Such tax information and any estate planning information is general in nature, is provided for informational and educational purposes only, and should not be construed as legal or tax advice Maximize Flexible Spending Accounts Due to the $2,500 cap effective 2013; you may want to maximize your FSA in the next few years to cover expenses not covered by traditional health or dental insurance if you can use it all. Remember, if you don t use the full amount, it does not carry forward, you lose it. Example: If you are considering laser-eye surgery, which is not covered by your existing benefit plans, you may want to take advantage of today s more generous Flexible Spending Account contribution limits. 15

9 Getting Started Talk with your financial and tax advisors to discuss your long-term goals, the potential implication of higher taxes on you and to determine the best plan of action to keep your financial plan on track. TAKE ACTION TODAY! Please consider the charges, risks, expenses and investment objectives carefully before investing. For a prospectus containing this and other information, please call Janus at JANUS (52687) or download the file from janus.com/reports. Read it carefully before you invest or send money. Past performance is no guarantee of future results. Janus Distributors LLC (08/10) C