Fiscal Cliff Investment Strategies

An Impending Tax Storm Ahead

In December 2010, President Obama signed the Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010, extending until 2012 the provisions of the Economic Growth and Tax Relief Reconciliation Act of 2001, commonly known as the Bush Tax Cuts. Under the current provisions, all tax cuts are scheduled to expire on December 31, 2012, potentially creating serious consequences for American taxpayers and threatening the fragile economic recovery.

If nothing is done to extend or modify the tax cuts by year’s end, millions of Americans will see their tax burdens rise significantly; workers will lose out on a payroll tax holiday, doctors treating Medicare patients will take a 27% pay cut, middle class taxpayers will face an alternative minimum tax meant for the rich, and automatic federal spending cuts will kick in, eliminating unemployment benefits and social programs for the out of work¹.

Already, business spending is down and executives say that uncertainty over the outcome of the fiscal cliff debate is causing them to hold back on large capital expenditures².

Currently, with the 2012 elections over, Democrats and Republicans are actively debating the issue. However, solutions will be politically painful, and it is uncertain that a compromise will be achieved before the New Year.

Will the Fiscal Cliff Derail the Economic Recovery?

The expiration of the Bush Tax Cuts could affect more than just tax burdens. According to the Congressional Budget Office, the fiscal cliff could push the U.S. economy into recession beginning in the first-quarter of 2013. The effect of removing billions of dollars from consumers’ pockets could shave as much as four percentage points from first-quarter GDP growth³.

Additionally, the programmed expiration of emergency unemployment benefits and federal spending cuts triggered by the federal debt ceiling could further harm the recovery by cutting social programs. While it is critical that lawmakers rein in federal spending, most analysts agree this needs to be done gradually in order to avoid threatening economic growth.

The fiscal cliff debate: Potential Actions That Could Be Taken

Note: Since the fiscal cliff debate represents breaking news, the situation is continuously evolving. The information contained below was correct at the time of writing.
With the 2012 presidential and congressional elections behind us, lawmakers are settling down to the work of hammering out a compromise to avoid sending the economy over the cliff. While President Obama won a second term with a solid mandate for the future, Congress is split, with Republicans retaining a majority in the House and Democrats controlling the Senate. A split Congress means that all sides may believe that they have voter support, making a compromise difficult to achieve. Deep divisions between both parties remain and lawmakers are still hewing to the party line.

Both parties actually have a lot of common ground in the fiscal cliff debate. Neither side favors a sequester – federal spending cuts, an un-patched AMT, or Medicare cuts for doctors.  Both sides want to address American’s debt by raising revenue and reducing expenditures. The major point on which the parties disagree is a familiar one: taxes. Democrats have called for increasing taxes on upper-income earners, a move which Republicans have opposed. However, newly chastened Republican lawmakers appear to be willing to allow higher tax revenues in the form of eliminated deductions for high-income earners, but no tax increases. Democrats appear to be willing to consider a compromise that would limit or eliminate deductions as well as set the top income tax rate above the current 35% level, but below 39.6%⁴.

It is possible that no compromise will be reached by December 31st. If the Republicans do not give ground on the income tax issue, Democrats have indicated that they are willing to allow the Bush Tax Cuts to expire in order to gain bargaining power in the New Year. A more positive (but less likely) scenario would bring Republicans to the negotiating table for a bi-partisan deal.  Such a deal could extend certain tax cuts and repeal the automatic federal spending cuts while reducing long-term deficits by raising revenue and overhauling certain entitlement programs like Medicare and Medicaid whose rising costs are unsustainable⁵.

This would set the stage for meaningful tax and budget reform over the next few years and reassure deficit-watchers that the U.S. is managing its debt.

Overview of Major Tax Provisions Due to Expire

The Bush Tax Cuts were fairly extensive and covered a wide range of tax provisions. In general, here are the changes that are scheduled to occur in January:

• Marriage penalty elimination breaks will expire:
  • The standard deduction for married couples will be lower – no longer double the single filer deduction.
  • The ceiling of the 15% tax bracket will be lower – also no longer double that of single filers.
• The tax rate on qualified dividends earned by middle and upper-income earners will balloon from 15% to the taxpayer’s ordinary income tax rate; as high as 39.6% for the highest tax bracket.
• The 10% tax bracket for lower-income earners will revert to a 15% tax bracket.
• The child tax credit will drop from $1,000 to $500.
• The Earned Income Credit will be eliminated for lower-income taxpayers.
• The tax rate on long-term capital gains earned by middle and upper-income taxpayers will rise from 15% to 20%.
• Ordinary income tax rates will jump. See chart.
• The AMT will revert to the higher 2001 levels, which have not been adjusted for inflation, meaning that many middle-class earners will fall into AMT territory.
• The Personal Exemption Phase-Out (PEP) and Pease itemized deduction phase-out will be restored, removing the value of some exemptions and deductions (like charitable contributions) from high-income earners.
• The Lifetime Estate Tax Exemption will drop back to the 2001 level of $1 million (from the current $5.12M for 2012); any amount over the exemption will be taxed at 55%.
• The Lifetime Gift Tax Exemption and Lifetime Generation Skipping Tax (GST) will revert from a $5.12M to a $1 million exclusion.

How Will the Tax Cut Expiration Affect Businesses?

In the wake of the financial crisis, President Obama and Congress enacted a stimulus bill designed to spur economic activity. From 2008-2010, businesses were allowed to write off 50% of the cost of capital expenditures in the first year (lowering their tax bill) and depreciate the remaining 50% using normal schedules. In 2010, the tax breaks were extended to allow capital investment made before the end of 2011 to be entirely written off in the first year; currently, 50% of the cost of capital invested in 2012 can be written off in the first year. All these tax breaks are scheduled to expire on January 1, 2013, potentially significantly increasing the tax bill of many businesses. For more information about business tax issues, please contact us.

Prospective Fiscal Cliff Investment Strategies for 2012

Regardless of what lawmakers do to address expiring tax cut provisions, it is important to think ahead and plan for a less favorable tax situation. There is still time left in 2012 to take a few steps to organize your personal fiscal cliff investment strategies and mitigate your potential tax burden next year. That being said, taxation issues are not the only factor that needs to be addressed during the investment planning process – which is why we always strive to take a holistic view of your specific situation and recommend a personalized strategy.

Lower income taxes by repositioning investment assets

A relatively straightforward way to lower your income tax (since capital gains and dividends would be taxed at your ordinary income tax rate) is to shift assets between taxable and tax-deferred accounts. By moving dividend-paying stocks into a qualified retirement account (such as an IRA or 401(k)/403(b)) and replacing taxable investments with tax-favored investments, you can retain the same portfolio while limiting your tax burden. For example, if you currently hold a stock paying a 3.5% dividend in your taxable account and a municipal bond paying 3%, the after-tax yield is about the same. However, next year a taxpayer in the top income tax bracket would see the after-tax yield of the stock drop to 1.98% (since the dividend will be taxed at 39.6%) versus the 3% tax-free muni bond yield.

Lower income taxes by realizing capital gains

Since the capital gains rate may increase next year, a simple solution is to realize capital gains at the current, lower 15% rate. This can be done by selling select securities, realizing the gain this year, and thus paying capital gains tax at the lower rate. Of course, this strategy is somewhat of a gamble, because if the cuts get extended and the investment appreciates, you could miss out on some growth. Again, we stress the need for personalized planning accompanied by the guidance of an expert.

Reduce estate taxes by using the $5.12M exclusion

High net worth investors still have the ability to reduce the potential burden of future estate taxes by making gifts during 2012. The first $5.12M of assets transferred (per donor) during 2012 is not subject to taxation, with any overage taxed at 35%. Next year, the exemption will drop to $1M and overages will be taxed at a maximum of 55%. Taxpayers should also remember that they can transfer up to an additional $13,000 annually per donor/per non-spouse recipient under the Annual Gift Exclusion. For example, a couple could gift a total of $26,000 annually to each of their children ($13,000 per parent) without adding to the lifetime exclusion amount.

Reduce estate taxes with a credit bypass

The current $5.12M estate tax exclusion can be effectively doubled to $10.24M by using a family trust and a marital trust, a scenario known as an “A-B Trust.” In this arrangement, $5.12M would be placed in a family or bypass trust (the B trust), and the rest distributed to the spouse or marital trust (the A trust) in order to exploit the maximum marital deduction. Using this example, under next year’s $1M cap and a 55% tax rate, a couple would save $550,000 in estate taxes by using two credit bypass trusts.

Conclusion and Steps to Take

The impending fiscal cliff of 2013 could have a significant impact on individuals, businesses, and the U.S. economy. While we hope that lawmakers will get to the negotiating table and resolve this serious issue, we believe it is imperative for investors to develop fiscal cliff investment strategies that will minimize their tax burden. If the tax cuts expire, individuals have a very narrow window of opportunity in which to take advantage of the current $5.12M estate tax exclusion, the GST exemptions, and other favorable tax provisions.

If you haven’t begun to make plans for a larger tax bill in 2013, it’s time to start now. By starting the process early, you can take advantage of this year’s more favorable tax climate and make strategic financial decisions before the end of 2012.

We firmly believe that successful tax planning requires combining the skills of financial, legal, and tax experts who can look at your whole financial picture and help you develop a strategy that’s right for your long-term financial needs. If you have any questions about how the expiration of the Bush Tax Cuts could affect your financial wellbeing, or what we can do to assist you, please let us know.

1 All tax data referenced in this document is from IRS.gov and taxfoundation.org
2 New York Times DealB%k: The Election Won’t Solve All Puzzles
3 Economic Effects of Reducing the Fiscal Restraint That Is Scheduled to Occur in 2013
4 Can Congress Raise Taxes on the Rich without Raising Their Rates? Maybe
5 A search for ‘common ground’: ‘Fiscal cliff’ negotiations begin

Opinions, estimates, forecasts and statements of financial market trends that are based on current market conditions constitute our judgment and are subject to change without notice.
This material is for information purposes only and is not intended as an offer or solicitation with respect to the purchase or sale of any security.
Investing involves risk including the potential loss of principal. No investment strategy can guarantee a profit or protect against loss in periods of declining values.
Opinions expressed are not intended as investment advice or to predict future performance.
Past performance does not guarantee future results.
Consult your financial professional before making any investment decision.
Opinions expressed are subject to change without notice and are not intended as investment advice or to predict future performance.
All information is believed to be from reliable sources; however, we make no representation as to its completeness or accuracy. Please consult your financial advisor for further information.
These are the views of Platinum Advisor Marketing Strategies, LLC, and not necessarily those of the named representative or named Broker dealer, and should not be construed as investment advice.

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You can! A great secret to shedding the fluff – eat to lose weight! Pick healthy filling snacks vs. empty calorie carbs and processed protein to give your body the nutrients it need to fight the fat on it’s own.

In the May 2012 issue of Reader’s Digest, the Features Editor for Health author Lauren Gelman offers the following tips for stay trim while chowing down:

Instead of: cheesy crackers
Try: Ricotta Boats.  Cut a bell pepper into quarters, top each with two tablespoons of fat-free ricotta cheese and some black pepper.
Fat Releasers: vitamin C, calcium, spices

Instead of: energy bars
Try: Peanut Butter and Crackers.  Two teaspoons of natural peanut butter and two whole-grain crackers; serve with ½ cup of fat-free milk.
Fat Releasers: fiber, resveratrol, healthy fats, protein

Instead of: beef jerky
Try: Cheesy Roll-Up.  One reduced-fat mozzarella stick rolled up in two large, crunchy romaine lettuce leaves.
Fat Releasers: fiber, calcium, vitamin C

Instead of: potato chips or trail mix
Try: Mixed Munchies – one mini cheese, 10 baby carrots, and eight almonds.
Fat Releasers: calcium, protein, fiber, healthy fats, vitamin C

The post Eat to lose weight? Go for it! | Physical BALC #76 appeared first on John Navin.

In a recent publication, three researchers from Texas Tech University examined William Bengen’s well-known 4% safe spending rule and found that some retirees, perhaps many, can live a lot bigger.  By emphasizing a portfolio’s ability to withstand a 30- or 40-year retirement, we ignore the fact that at age 65 the probability of either spouse being alive at age 95 is only 18%.  Researchers stressed that excessive caution means that we buy long-term security at the expense of giving up things we’d like to do today. (

The researchers put the investment results in the framework of our life expectancy: “If you withdrew at a greater rate, how soon would you be broke after age 65?”  At a 4% withdrawal rate, a 65 year old couple is virtually certain to avoid going broke with a portfolio that ranges from 30% equities to 60% equities.
At a 6% withdrawal rate, the risk of going broke increased, but a typical balanced portfolio of 60% equities and 40% fixed income securities only reduced the percentage of years without wealth to 7.5% of expectancy.  In other words, the couple could spend 50% more money for 92.5% of their remaining lives by accepting the risk of living in reduced circumstances for the remaining 7.5%.

The joint life expectancy of a 65 year old couple is about 25 years.  At an 8% withdrawal rate, for example, the couple could enjoy 20 years of doubled spending at the expense of five years of being broke, starting at age 85.  Since we tend to reduce spending as we age, the loss of wealth and income could be less of a hardship than it may seem.

The researchers caution that since women live longer than men, more of the risk burden would fall on women.  But what if… we planned for that?  The sky’s the limit,

You can read the full report of the study at the  Journal of Financial Planning.

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For some reason, this week there have been quite a few articles about depression and the treatment of depression in the news.  One article involved a study being conducted in Hong Kong whereby boosting the effect of acupuncture needles with small electric currents may be effective in treating those suffering from depression.

Being done at the University of Hong Kong in the School of Chinese Medicine, the researchers used electroacupuncture to stimulate seven spots on the heads of 73 participants, all of whom suffered several bouts of depression in the last seven years.  The electroacupuncture was given in addition to medication that the patients were already taking and meant to augment their treatment.

Half the patients received electroacupuncture nine times over three weeks, while the other half – the placebo group – only had needles inserted superficially into their heads.  They were later assessed by experts for their depression levels and the group that received genuine electroacupuncture was found to be a lot happier.

When the acupoints are stimulated, some brain centers responsible for producing serotonin are stimulated.  An imbalance in serotonin levels is believed to be linked to depression.  Depression affects about 20 % of people at some point in their lives.  Further, the World Health Organization predicts that by 2020, depression will rival heart disease as the health disorder with the highest disease burden in the world.

(See the original article on Yahoo! News)

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Online commerce is a $200 billion industry, and 70% of consumer spending is influenced by Web and mobile research. But, over 90% of actual transactions are still conducted in the physical world. Can you picture a credit card app? Visualize this… getting rid of all your paper statements, printed Groupon deals, store loyalty cards, and individual gift cards. In their place we’ll find a new, simplified credit/payment/reward/loyalty/promotions process – all electronic and able to store unbelievable amounts of data.

The promotional offers and advertisements we receive today via the Web and mobile are mostly blind to how we’re actually spending money in the physical world. As all these databases are more intelligently connected, the offers we receive will become significantly more relevant because they will be based on where we spend our time and money.

Our new “cloud-connected” credit card will also deliver a stream of valuable intelligence based on our purchasing behavior. How much fast food do we eat? How many times do we visit the gym? How caffeinated are we? Perhaps our new card can also deliver informed insights on our spending activities so that we can make decisions to be our best self. We’ll see…

A note to innovators: it’s critical that these programs are introduced in a way that protects consumer privacy and retains consumer trust. Upon initial review of what’s to come, it seems our privacy is moving further afield as all of our behaviors will be tracked for the world to see.

(Check out the entire original article on Forbes.com)

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• The location of your investments – If you’re like most of us, you’ve probably made investment decisions about each of your accounts independently. Keep in mind that not all investments are taxed alike. Don’t let the size of your accounts – and accompanying taxes – set your asset allocation. Determine appropriate asset allocation based on your time horizon and risk tolerance.
• Company stock in a 401 (k)? If you take the stock out of the account as an “in-kind distribution” instead of selling it first, you will be allowed to pay the lower capital gains rate. Basically, this involves moving it directly into a brokerage account. You forfeit this option if you roll the fund into an IRA.
• How young are you? If you retire in the year you turn 55 or later, you can take withdrawals immediately from your 401 (k) without penalty, but you must be age 59 ½ to make penalty-free withdrawals from your IRAs. You can always withdraw from your taxable accounts and the contributions from your Roth IRAs without penalty. Call me for rules about HSA accounts.
• Are your tax rates going up or down? If you think the lower capital gains rate will expire at the end of 2012, it could be a good time to take some gains out of your taxable accounts. If you’re more worried about higher income tax rates, take withdrawals from your pre-tax accounts or consider converting them into Roths.

(See the original article in its entirety on Forbes.com)

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The “Young-Old”: age between 65 and 74
The “Old”: age between 75 and 84
The “Old-Old”: age 85 and older

It has been said that faces of the Young-Old adorn the covers of active retiree magazines, and pictures of the Old-Old are pictured on pamphlets in the doctors’ office.  Statistically, in terms of disabilities, the Young-Old have few, the Old have a rising level, and the Old-Old are living with them.

Many new retirees have told me that they have lists of things they would like to do before Old and Old-Old come into play.  But the things on their list require spending more than they safely can.  We can plan for this: Budget an additional amount in the early years of retirement and spend less later on.  There are several tools that help us determine the cost of fulfilling your wish list, balanced with the amount of spending that will need to be cut when you’re ready to slow down.

One example – a 65 year-old couple have $46,000 in income per year after income taxes, Medicare premiums and shelter expenses.  A basic consumption smoothing program tells us that if they choose to spend $6000 more per year for 10 years, their living standard should be reduced to $43,400, a 5.7 percent cut.  If they would like to spend $12,000 more per year for 10 years, their living standard should be reduced to $40,800, an 11.3 percent cut.

Needless to say, these figures will vary with the amount of Social Security income, retirement savings, pension, mortgage, debt, etc.  If you’re trying to get a handle on spending during retirement, give me a call.  I’m always available to help.

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AGE 21: Employees can generally enroll in a 401 (k) plan at age 21.  Plan sponsors are allowed to exclude employees younger than 21, and many companies do.  A recent IRS survey of 1200 plan sponsors found that 64 percent require the employee to be 21 before they can participate.

AGE 50: Beginning at age 50, you can defer paying income tax on more of your retirement savings in a 401 (k) or IRA.  The contribution limit for 401 (k)s, 403 (b)s, and the federal government’s Thrift Savings Plan is $22,500 for people age 50 and older in 2012, $5500 more than younger people can deposit in these accounts.

AGE 55: Retirees who leave their jobs during the calendar year they turn 55 or later can take a 401 (k) lump-sum withdrawal  without having to pay the 10 percent early withdrawal penalty.  This does not apply to IRAs.

AGE 59 ½: The 10 percent early withdrawal penalty in IRA withdrawals ends at this age.  However, you are not required to take distributions until after you reach age 70 ½.

AGE 62: Workers become eligible to sign up for Social Security benefits at age 62, however, your payout will be reduced if you begin payments at this age.

AGE 65: Medicare eligibility begins at age 65.  The initial enrollment period starts three months before the month you turn 65 and ends three months after your birthday.  Enroll immediately because Medicare Part B premiums will increase by 10 percent for each 12-month period you were eligible for benefits but did not enroll.

AGE 66: Those born between 1943 and 1954 qualify for the full amount of Social Security they have earned at age 66.  For those born between 1955 and 1959, the full retirement age gradually increases from 66 and two months to 66 and 10 months.

AGE 67: Eligibility for unreduced Social Security payments for workers born in 1960 or later begins at age 67.

AGE 70: Social Security payments continue to grow by 8 percent per year for each year you delay claiming up until age 70.

AGE 70 ½: Withdrawals from 401 (k)s and IRAs become required after this age.  If you don’t withdraw the correct amount, you will be required to pay a 50 percent excise tax on the amount that should have been taken out.

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AEROBICS – medium intensity aerobic workout is good for helping to manage blood pressure, blood sugar and cholesterol.  Further, some studies have shown that this type of exercise lessens the risk of memory loss-related diseases.  Plus, your heart and lungs work better if you do this for 30 minutes a day, five times a week.

STRENGTH TRAINING – prevents muscle mass loss and should be done twice per week.  Training with weights and using resistance bands alleviates arthritis symptoms and toughens bones.  Those over age 65 may consider this type of exercise up to three times a week.

STRETCHING – at least two times per week is advised to keep your body flexible and active.  Stretching before and after exercising can enhance balance and coordination.

CARDIO EXERCISES – are intended to strengthen your heart, and include swimming, running, jogging, and walking.

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What I was surprised to learn, however, is that certain disorders – as well as milder “sub-clinical” symptoms – are often linked to qualities we value as a society.

If you exhibit signs of:
OBSESSIVE-COMPULSIVE BEHAVIOR you’re more likely to be hardworking and diligent. People with OCD tend to excel at jobs with strict rules or guidelines that require a high level of conscientiousness.

ANXIETY you’re more likely to be compassionate. Highly anxious people are known for the sensitivity and attentiveness to others. They also tend to be hyper vigilant, so they make good surgeons, doctors, dentists, and bankers.

MID BIPOLAR DISORDER you’re more likely to be creative. Many people prone to mood swings are writers, artists, musicians, and performers.

ASPERGER SYNDROME you’re more likely to be a problem solver. Although people with this condition are socially awkward, their intensity of focus steers them toward technology, science, and engineering.

DEPRESSION you’re more likely to be insightful. Depressives tend to be more in touch with the deeper truths about themselves, life, and the human experience.

(View the full article at Yahoo! Health)

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