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Tax Decisions 2011-2012

Strategic Analysis


The uncertain political and fiscal landscape is forcing many wealthy US taxpayers to face the difficult decision of whether to sell (and potentially repurchase) appreciated assets prior to year end.

While the high probability of a general tax hike would make the simple mathematics of accelerating long term capital gains appear favorable, such analysis would only focus on the context of tax rates.  In fact, such approach would dismiss many less easily quantifiable variables that could adversely impact the result.

These variables include: future holding periods, prospect of future appreciation or depreciation, liquidity needed for taxes, opportunity cost on taxes paid, state tax costs, the prospect of future favorable tax rate changes, existing capital loss or net operating loss carry forwards, trading costs or transaction fees, estate planning objectives, owner’s life expectancy (and potential tax basis step-up), and near and longer term charitable planning objectives.

While no formula can clearly and accurately answer this question for everyone, a thoughtful and collaborative conversation with your tax expert and financial advisor is probably a good starting point.

Acceleration of tax very well might be the right thing to do, but careful consideration should be given to the premature and permanent depletion of capital. The following list is meant to highlight the major elements to be analyzed.  Before pursuing these or any other tax planning ideas, you should discuss your unique situation with your financial advisory team and your tax professionals.


2012 Income Acceleration Strategy


• Consider accelerating diversification plans for large stock concentrations

• Consider the sale and repurchase of appreciated securities held for over 1 year to lock in favorable long-term capital gains rates (assuming no large capital loss or other loss carry forwards)

• Accelerate salary, bonus, director’s fees or other compensation income otherwise expected to be paid in early 2013

• Evaluate exercise of employer stock options

• Revisit converting traditional IRAs to Roth IRAs

• Explore the sale of real estate or business assets, otherwise held for future sale


2012 Deduction Deferral Strategy


• Defer taking capital losses until 2013, so as not to conflict with capital gain acceleration

• Since certain tax deductions may become more valuable as tax rates increase, consider bunching charitable contributions, state tax payments etc… into 2013 (assuming not adversely impacted by AMT or 2013 phase outs)

• Evaluate and coordinate any loss carry forwards which also become more valuable in a higher rate environment


2013 Asset Allocation Strategy


• Evaluate overall investment allocation for opportunities to enhance after-tax returns

-- Municipal Bonds vs. Taxable Bonds

-- Index Based Exposures vs. Active Managers

-- Partnership vs. mutual funds vs. ETF

-- MLPs, strategic capital loss harvesting strategies, bond loss swaps, etc.

• As part of overall portfolio review and rebalancing, re-evaluate asset location opportunities to hold less tax efficient investments through tax deferred or tax favored accounts


2013 Tax Deferral Strategies


• Take full advantage of tax-deferral opportunities through retirement accounts

• If charitably inclined, consider capital gain deferral opportunities using Charitable Remainder Trusts

• Revisit tax-free 529 plans for accumulating college savings


Source: Genspring