avoiding higher taxes in 2013 | year-end estate & tax planning - an investors perspective

Year-End Estate and Tax Planning in an Uncertain

YearAn Investor’s Perspective

Jim Ferrare CFA, CPAPWM Advisory Group, LLC

PWM-NJ.com

[email protected](732) 450-0147

A Wealth of Intelligence

Copyright © 2012 PWM Advisory Group, LLC

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.

Important Disclosure Information

2PWM Advisory Group, LLC ▪ Private Wealth Management PWM-NJ.comCopyright © 2012 PWM Advisory Group, LLC

http://www.pwm-nj.com/

Income Tax Rates are Scheduled to Change

3PWM Advisory Group, LLC ▪ Private Wealth ManagementPWM-NJ.com

Scheduled Income Tax Rate Increases

DESCRIPTION CURRENT RATESSCHEDULE RATES

FOR 2013

2013 TAX RATES WITH 3.8% MEDICARE SURTAX ON “NET

INVESTMENT INCOME”

Individual Income Tax Rates 10%, 15%, 25%, 28%, 33%, 35% 15%, 28% 31%, 36%, 39.6% 34.8%, 39.8%, 43.4%

Qualified Dividends 0%, 15% 15%, 28%, 31%, 36%, 39.6% 34.8%, 39.8%, 43.4%

Long-Term Capital Gains 0%, 15% 10%, 20% (18%*) 23.8% (21.8%)

See Important Disclosure Information on page 2.

*For property purchases after year 2000, held for a period of five years or longer.



Taxes Represent an Important and Growing Influence in Wealth Management

4

Conventional Wisdom States, “Don’t Let Taxes Influence Investment Decisions”

Hopefully you disagree.

Changes in the Tax Code Should Prompt an Analysis of Asset Locationand Other Tax Optimization Strategies.

Asset Location is different than Asset Allocation

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.

Side Bar:

4PWM Advisory Group, LLC ▪ Private Wealth ManagementPWM-NJ.com See Important Disclosure Information on page 2.



Optimized Asset Location = “Next Level” Asset Allocation

5

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: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

Side Bar:




Dividend Paying Stocks are not Created Equally

*assumes 0% portfolio turnover rate with dividends taxed at maximum level of 43.4%

Dividend Paying Stocks in a Buy and Hold Strategy - 2013

Side Bar:

Capital Appreciation

Dividend Yield

Pre-tax Return

After-tax Return*

Stock A 6% + 2% = 8% 7.1%

Stock B 2% + 6% = 8% 5.4%

Hypothetical Illustration

Changes in Dividend Tax Rates► 15% to Ordinary Income ( ≤ 43.4% )

► 0% to Ordinary Income ( ≥ 15.0% )

Pote

nti

al

Cap

ital

Ap

pre

cia

tion

- 2

01

3Dividend Yield - 2013

Tax Deferred Account

Taxable Account

Stock A

Stock B

Asset Location Matters:

An investors return on dividend paying stocks consist of two components, capital appreciation potential and dividend yield. The mix of these components can greatly effect the after-tax return of the investment.

Consider locating dividend paying stocks with high potential capital appreciation and low yield in taxable accounts.

Consider locating dividend paying stocks with low potential capital appreciation and high yield in tax-deferred accounts.




Small-cap Stocks1 ↑ 127%Large-cap Stocks2 ↑ 94%Bonds3 ↑ 25%

We are in a 3 ½ Year Bull Market

Growth of $100,000 Over the Last 42 Months - Period Ending 09/30/12

► 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)




Capital Gains Tax Rates are Scheduled to Increase

Defer Capital Losses until 2013

►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

Side Bar:

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.

Changes in Capital Gain Tax Rates

2012 2013 Percentage Change

15% 23.8% (20 + 3.8) 59%

15% 20% 33%

0% 10% --

Consider Capital Gain Harvesting

► Realizing capital gains in a given year that might otherwise have been deferred into later years.




Analysis of Capital Gain Harvesting

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 ↓

No Gain Harvesting

2012 2013

Year-end $110,000 $121,000

Less Basis -- $ 10,000

Gain -- $111,000

Tax -- $ 26,418

Year-end Less Tax $110,000 $ 94,582

SCENARIO 1*

Cost Basis (original stock price): $10,000

Stock Appreciation (growth): 10% per year

Holding Period: 1 Year

Capital Gain Tax:

2012: 15%, Future years: 23.8%

SCENARIO 2*

Cost Basis (original stock price): $10,000

Stock Appreciation (growth): 10% per year

Holding Period: 15 Years

Capital Gain Tax:

2012: 15%, Future years: 23.8%

*Calculations are for educational purposes only and may not be predictive of future results.


Gain Harvesting

2012 2013

Year-end $110,000 $104,500

Less Basis $ 10,000 $ 95,000

Gain $100,000 $ 9,500

Tax $ 15,000 $ 2,261

Year-end Less Tax $ 95,000 $102,239

No Gain Harvesting

2012 2027

Year-end $110,000 $459,497

Less Basis -- $ 10,000

Gain -- $449,497

Tax -- $106,980

Year-end Less Tax $110,000 $352,517

Gain Harvesting

2012 2027

Year-end $110,000 $396,839

Less Basis $ 10,000 $ 95,000

Gain $100,000 $301,839

Tax $ 15,000 $ 71,838

Year-end Less Tax $ 95,000 $325,001

Scenario 1: Profitable to Gain Harvest

Scenario 2: NOT Profitable to Gain Harvest



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




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)

Certain personal expenses may be more valuable if paid in 2013 due to proposed higher taxes on ordinary income.

Side Bar:




Closing Thoughts:

conventional wisdom ► 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




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