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Financial Planning Newsletter• August 17, 2010 

Thinking Retirement?

Financial Planning Newsletter
September 2010

Tax Law Changes?

This Fall promises to be full of political fireworks as we head toward the midterm elections and then the impending taxation changes of 2011.

In this issue of the newsletter we will detail the potential changes in income, dividend and capital gain tax rates along with thoughts on where they will go and what you can do about it.

The Rates:

Early in the decade tax rates were reduced across the board to spur investing / economic growth after the tech bubble collapse. Here is a table of the current rates:

Tax Bracket Dividend Tax LT Cap Gain Tax
10% 0% 0%
15% 0% 0%
25% 15% 15%
28% 15% 15%
33% 15% 15%
35% 15% 15%

The one catch to these rate reductions was that they had a temporary life span, and are set to expire at the end of this year. At that time the rates are expected to revert back to the following:

Tax Bracket Dividend Tax LT Cap Gain Tax
15% 15% 15%
28% 28% 20%
31% 31% 20%
36% 36% 20%
39.6% 39.6% 20%

Potential Scenarios:

As we move into the elections the heat will be turned up on Congress to enact some type of tax reform or extension to avoid their angry constituents at home. There are basically a couple of scenarios that could play out prior to the end of the year:

  • A one year extension on the current tax rates to allow Washington time to work on meaningful tax reform.
  • A bandaid approach that keeps the existing rates for all but the high income earners.
  • A do nothing approach and let the rates go up. (this can happen as it did with estate taxes this year)*

* Not many thought that Congress would actually let the estate tax actually go to 0% for this year but they did. If they don't enact estate tax reform then the level will revert back to $1M exemption for 2011 with a 55% tax on anything above that.


As a general rule if it doesn't appear that Congress will take action this year - then taking income and capital gains in 2010, instead of the usual advice about deferring may be the best bet.

As an example: If Client A had a long term capital gain of $50,000 in a stock and is in the 25% tax bracket, by selling in 2010 he will pay 5% (or $2500) less in taxes than if he waits until 2011 to take the gain.

On the income side if you have the ability to take bonuses this year instead of deferring to next year you might consider doing it. The same holds true for those that receive nonqualified stock options that may want to exercise prior to the end of the year.

(Of course this is all speculative and Congress can enact legislation in 2011 and make it retroactive if they wanted)

NOTE: This isn't advice - just ideas. Make sure you discuss the pros/cons with your advisor or cpa before doing anything!

Longer term strategies:

It is probably safe to say that eventually taxes will rise across the board, even if band-aids are applied for short term relief. Going forward it will be important to take advantage of your 401k's to defer taxes along with some of the other options such as:

  • growth investing
  • municipal bonds (be careful!)
  • deferred vehicles such as no-load annuities

Everything of course depends on each person's personal situation. The only way to approach it is to build a strategy based on your specific needs.

Taxes are going to be a moving target for the next few years so it will require flexibility when developing your investment strategy. There is no harm in tax planning as it relates to your investments, but be careful not to do anything that will ultimately harm your investments just to try and save a few dollars on taxes.

My advice? Find yourself a good Financial Planner and Accountant!!!

James A. Daniel,

This newsletter if for informational purposes only. The information contained within should not be considered as financial advice nor soliciation for financial services. Consult with your financial professional if you have any questions.

The Advisory Firm, LLC is a fee-only financial planning company and registered investment advisor.

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