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Welcome to the July 2011 issue of the Brighton Bulletin
Hope everyone had a Happy 4th!
Quite the roller-coaster in the second quarter! We entered the quarter with the S&P at 1,332 and see-sawed to a low of 1,268 on June 24th below the 1,271 at which we began 2011. Apparently sensing a need to send everyone into the Fourth of July holiday in a good mood, the market rallied last week from 1,268 to 1,339 (5.6%). According to news reports it was the best one week period in two years! Economic data matched the market volatility during the quarter with plenty of good and bad news to move markets. Housing continues to struggle, consumers continue to spend but not enough and business continues to avoid spending. The federal government is still spending but local and state governments are offsetting it almost entirely. So the economic news remains mixed. We've consistently stated we believe the equity markets will be in a historical range by year end - roughly 8 to 10%.
Our portfolios held their own during the six week downturn that ended on June 24 and participated in the upside performance of the past week. Year to date our best performing equity strategies have been our global value strategies followed by our hedged "global macro" strategy. All of the equity strategies are positive year-to-date. On the fixed income side, our strongest performers have been the preferred securities strategies. Many of you have had these positions in your portfolio for a number of years and weathered a very difficult period in late 2008. Your perseverance has been rewarded as these funds have performed very well over past 18 months. Our core global bond fund and our emerging markets fund have also performed well year-to-date.
While we remain cautious about equity market strength over the remainder of the year, we are optimistic that economic recovery has enough strength to continue moving forward, albeit slowly. We believe portfolios are well positioned to participate in good markets while maintaining the hedged equity exposure in tough markets. Please let us know if your circumstances change or if there is anything we can do for you.
John P. Middleton, CFA, CAIA
Brighton Financial Planning
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The Income Tax Planning Landscape: 2011
At this time last year, income tax planning was particularly challenging. Several tax deductions had already expired, and significant changes, including new, higher income tax rates, were scheduled to take effect at the end of the year. Legislation passed in mid-December, however, hit the "reset" button, reinstituting already-expired deductions, and extending major tax provisions--including lower rates--for an additional one to two years.
As a result of the December legislation, 2011 tax planning takes place in an environment characterized by something that was missing last year--a relative degree of certainty. That being said, here are some things to keep in mind as you consider your current tax situation.
Tax rates/calculation
- Federal income tax rates --The same six federal income tax rates that applied in 2010 will continue to apply in 2011 and 2012. So, depending on your taxable income, you'll fall into either the 10%, 15%, 25%, 28%, 33%, or 35% rate bracket. Remember, though, that all of your taxable income is not necessarily taxed at that rate--instead, the rate at which you pay tax generally increases as your income increases. For example, if you're a single individual with 2011 taxable income of $100,000, you fall into the 28% tax bracket. However, your first $8,500 of taxable income is taxed at 10%, your next $26,000 of taxable income is taxed at 15%, and your next $49,100 in taxable income is taxed at 25%. Only $16,400 of your taxable income is actually taxed at 28%.
- Rates for long-term capital gains and qualifying dividends --As in 2010, long-term capital gains and qualifying dividends continue to be taxed at a maximum rate of 15% through 2012; if your income (including any long-term capital gains and qualifying dividends) puts you in the 10% or 15% income tax brackets in 2011 and 2012, a special 0% rate will generally continue to apply.
- Alternative minimum tax (AMT) --While regular income tax rates and the maximum rates that apply to long-term capital gains and qualifying dividends were extended through 2012, the latest AMT "fix" (in the form of increased AMT exemption amounts) is effective only through 2011. So, if you think you may be subject to the AMT this year, the good news is that you know ahead of time what the relevant exemption amounts are ($74,450 for married individuals filing jointly, $48,450 for unmarried individuals, $37,225 for married individuals filing separately); the bad news is that the AMT situation for 2012 remains up in the air. You can probably expect another AMT fix later this year, but as it stands now, AMT exemption amounts will drop significantly in 2012, dramatically increasing the number of taxpayers ensnared by this parallel tax system.
Temporary payroll tax reduction
Available for 2009 and 2010, the Making Work Pay tax credit was a refundable tax credit equal to the lesser of 6.2% of earned income or $400 ($800 for married couples filing joint returns); the credit was phased out for those with higher incomes. The tax credit was not extended to 2011, but the December legislation created a new one-year 2% reduction in employee Social Security payroll taxes (the 2% reduction also applies to the self-employment tax paid by self-employed individuals).
So, if you're an employee, 4.2% of your 2011 wages (up to the 2011 taxable wage base of $106,800) is being withheld for your portion of the Social Security retirement component of FICA employment tax instead of the 6.2% that would normally be withheld. If you're self-employed, the 12.4% you would normally pay for the Social Security portion of your 2011 self-employment tax is reduced to 10.4%. So, if you earn $100,000 in wages, you'll have an extra $2,000 in take-home pay for 2011. Consider opportunities to take advantage of this extra income by, for example, increasing your retirement savings; applying the extra money toward a long-term goal could extend the benefit of this temporary tax reduction beyond 2011.
Other considerations
- IRA qualified charitable distributions --Unless Congress passes additional legislation, 2011 will be the last opportunity for individuals age 70½ or older to make qualified charitable distributions (QCDs) of up to $100,000 from an IRA directly to a qualified charity. These charitable distributions can be excluded from your income, and count toward satisfying any required minimum distributions (RMDs) that you would otherwise have to take from your IRA for 2011.
- Depreciation and IRC Section 179 expensing --If you're a business owner or self-employed individual, you're allowed a first-year depreciation deduction of 100% of the cost of qualifying property acquired and placed in service during 2011. The "bonus" first-year depreciation deduction drops to 50% for property acquired and placed in service during 2012. Additionally, the maximum amount that can be expensed under Internal Revenue Code (IRC) Section 179 for 2011 is $500,000; in 2012, the limit is currently scheduled to drop to $125,000.
- Small business stock --Generally, you can exclude 50% of any capital gain from the sale or exchange of qualified small business stock provided that you meet certain requirements, including a five-year holding period. For qualified small business stock issued and acquired in 2011, however, you'll be able to exclude 100% of any capital gain from income if the qualified stock is held for at least five years and all other requirements are met.
- Energy efficient improvements--Though not as generous as it has been the last two years, a credit is still available to individuals who make energy-efficient improvements to their homes. You may be entitled to a 10% credit for the purchase of qualified energy-efficient improvements, including a qualifying roof, windows, skylights, exterior doors, and insulation materials. Specific credit amounts may also be available for the purchase of specified energy-efficient property: $50 for an advanced main air circulating fan; $150 for a qualified furnace or hot water boiler; and $300 for other items, including qualified electric heat pump water heaters and central air conditioning units. There's a lifetime credit cap of $500 ($200 for windows), however. So, if you've claimed the credit in the past--in one or more tax years after 2005--you're only entitled to the difference between the current cap and the total amount that you've claimed in the past. That includes any credit that you claimed in 2009 and 2010, when the aggregate limit on the credit was $1,500.
Copyright 2006-2011 Broadridge Investor Communication Solutions, Inc. All rights reserved | |
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The applicable exclusion amount is the amount that can be sheltered from federal gift and estate tax by the unified credit. Prior to 2011, the applicable exclusion amount was not portable between spouses. If the first spouse to die left everything to the surviving spouse, the applicable exclusion amount of the first spouse to die would not be used and might be wasted.
To avoid this, the first spouse to die would sometimes transfer an amount equal to the applicable exclusion amount to a "B" or credit shelter bypass trust (with the balance transferred to the surviving spouse or to an "A" marital trust for the surviving spouse). The B trust could benefit the surviving spouse and their children, but the trust would be designed to bypass the surviving spouse's estate. The A trust would qualify for the marital deduction in the first spouse's estate, but would be included in the surviving spouse's estate. The A/B trust arrangement insured that neither spouse's applicable exclusion amount was wasted.
In 2011 and 2012, the applicable exclusion amount is redefined to equal the sum of the basic exclusion amount of the surviving spouse and the unused basic exclusion amount of the last deceased spouse. This new temporary portability provision allows a surviving spouse to use the unused basic exclusion amount of a deceased spouse for gift and estate tax purposes. In 2011 and 2012, the basic exclusion amount is equal to $5 million (the $5 million amount will be indexed for inflation in 2012).
The fact that the unused basic exclusion amount of a deceased spouse is portable may make it easier for you and your spouse to take full advantage of the applicable exclusion amount in 2011 and 2012.
Caution: Unless extended by Congress, portability of the unused basic exclusion amount between spouses expires in 2013 and the applicable exclusion amount is reduced to $1 million in 2013.
Technical Note: The Internal Revenue Code refers to the unused basic exclusion amount of a deceased spouse as the deceased spousal unused exclusion amount (DSUEA).
How does portability work?
In 2011 and 2012, a surviving spouse can use the unused basic exclusion amount of a deceased spouse. To accomplish this, the estate of the first spouse to die must elect to pass the unused exclusion to the surviving spouse. The deceased spouse with the unused basic exclusion amount must have died after 2010 and before 2013. In 2011 and 2012, the applicable exclusion amount of the surviving spouse is equal to the sum of the basic exclusion amount of the surviving spouse and the unused basic exclusion amount of the last deceased spouse. Given the temporary nature of the portability provision (currently the provision expires after 2012), portability is currently effective only in cases where the first spouse dies in 2011 or 2012 and the surviving spouse then makes gifts or dies before 2013. While it's possible the provision will be extended beyond 2012, there are currently no guarantees it will be.
Example(s): Bob and Carol are married. Assume a basic exclusion amount of $5 million. Bob dies in 2011 with a taxable estate equal to $2 million. Bob's estate elects to pass Bob's $3 million unused exclusion to Carol. Carol dies in 2012. Carol has an applicable exclusion amount equal to $8 million (Carol's $5 million basic exclusion amount plus Bob's $3 million unused exclusion). No federal estate tax would generally be due unless Carol's taxable estate exceeds $8 million.
How can you and your spouse take full advantage of the applicable exclusion amount?
The fact that the unused basic exclusion amount of a deceased spouse is portable may make it easier for you and your spouse to take full advantage of the applicable exclusion amount in 2011 and 2012. Planning for the exclusion may depend on the size of your estates relative to the applicable exclusion amount and whether your property is expected to increase or decrease in value after the death of the first spouse to die. Without portability, it may take additional planning to ensure that you and your spouse take full advantage of the applicable exclusion amount. Given the uncertain nature of the gift tax and the estate tax beginning in 2013, it makes sense to plan for multiple possibilities.
For more information on Portablility or other Estate Planning issues please contact us.
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Copyright 2006-2011 Broadridge Investor Communication Solutions, Inc. All rights reserved |
Dividends and Total Return
Income is important to consider when choosing an investment. Especially important for investors approaching retirement, income can add meaningfully to one's total return, which comprises income and price return (capital appreciation). Investors can pursue income returns in many ways including bonds, real estate investment trusts, and stocks.
Stock income is typically paid in the form of a monthly, quarterly, annual, or special cash dividend, which can be used to finance current consumption or to reinvest. Dividends are typically expressed in terms of yield. Like an interest rate, yield is represented as a percentage rate and is calculated by taking the annual cash dividend divided by a stock's current price. For example, a stock trading at $20 with a future annual cash dividend of $1 would have a dividend yield of 5%.
Keep in mind, though, that there is no guarantee a dividend will be paid, even if a certain company has a consistent dividend-paying track record. A company can increase, decrease, and even eliminate dividends altogether, depending on its financial situation. Furthermore, if a dividend is declared, the company has to pay dividends for preferred shares first, before any common share dividends can be paid.
Although stocks can be a source of income return, not all stocks are created equal in this regard. Some companies distribute significantly more of their profits in the form of dividends than others, and some don't distribute dividends at all. Historically, dividend-earning stocks-represented by Morningstar's Dividend Composite Index-have had compound annual returns of 6.9%, while large stocks have had compound annual returns of 5.0%. Additionally, higher-yielding companies-represented by Morningstar's Dividend Leaders Index-have outperformed large stocks: Dividend Leaders Index components had a compound annual return of 9.0% compared with 5.0% for large stocks during the period studied. For investors looking both for income and total returns, dividend-paying stocks can be a reasonable place to invest.
Although higher-yielding stocks have demonstrated an ability to outperform large stocks, all that glitters is not gold. Dividends are paid at a company's discretion, and exceptionally high yields can indicate a potential dividend cut. For example, had investors been lured to many high-yielding bank stocks in late 2008, they would have been sorely disappointed when many banks subsequently cut their dividends as profitability declined during the credit crisis. When looking at dividend-paying stocks, investors should focus on reasonable dividend yields with companies that have the earnings power to increase their dividend distributions over time. Many large companies with recognizable brand names have demonstrated an ability to offer this slow and steady income distribution to shareholders.
copyright Morningstar Inc. 2011 | |
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2011 Income Tax Key Numbers
are posted on our website.
Please check out the link below for Tax Planning
KEY NUMBERS 2011
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Disclosures
The views expressed herein represent the opinion(s) of Brighton Financial Professionals as of the date of this posting, and may change at any time without prior notification. |
The links to other websites provides a path to other entities' websites that are not affiliate with BFP. BFP is not responsible for the content or information practices by websites linked to Brighton. Often we provide links to other sites solely as pointers to information or topics that may be of interest to users of our website. Such links do not imply BFP's endorsement of any information or material on any other site and BFP disclaims all liability with regard to your access to and use of such linked websites.
Brighton Financial Planning utilizes information from third party sources. Brighton Financial Planning is not responsible for verifying the accuracy of any information sourced by such third-party information providers.
Any mention of products or securities does not constitute a recommendation, investment, legal or tax advice, as BFP is not holding itself out as providing such advice.
Any mention of securities does not represent an offer or a solicitation of an offer to buy or sell such securities, particularly in those jurisdictions where such solicitation or offer is prohibited by law.
As with all investments, there are inherent risks to investing that may not be able to be mitigate through responsible investing. You should consult with a qualified investment adviser prior to investing. |
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