Planning opportunities
in 2012: Capitalizing on
the changing tax landscape
Chris Hennessey
Lawyer and CPA
Member of Putnam’s Business Advisory Group
Professor Babson College
Not FDIC
Insured
May Lose
Value
No Bank
Guarantee
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Topics for today
• A closer look at the nation’s debt crisis
• The outlook for taxes
• Planning considerations and strategies
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The debt crisis was front-page
news in 2011
April 8
Government shutdown narrowly averted with passage of last
minute budget deal
August 2
Debt ceiling crisis resolved through passage of the Budget
Control Act of 2011, which cut discretionary spending by
$900B over 10 years and called for establishment of a
bipartisan committee to identify an additional $1.2T in longterm deficit reduction
September 19
The Obama administration announces a deficit reduction
proposal calling for $3T in deficit reduction including $1.5T
in tax increases
November 21
Co-chairs of Joint Select Committee on Deficit Reduction
release statement announcing inability to reach an agreement
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Annual budget deficits have increased
significantly since 2008…
Annual U.S. federal budget surplus/deficit, 2000–2011 ($B)
($) 500
0
-500
$1.3
Trillion
-1,000
-1,500
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011
Source: Congressional Budget Office, Monthly Budget Review, November 2011.
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…and have driven federal debt
to historically high levels
Gross federal debt as a % of GDP, 1940–2010
(%)120
Current level of
93% is the highest
since WWII
90
60
30
0
1940
1975
2010
Source: Office of Management and Budget, Historical Tables, 2011. Total gross federal debt includes debt held by the public as well as intragovernmental debt such as amounts owed to Social Security and federal employee retirement programs.
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Entitlement program spending
will drive longer-term deficits
Social Security, Medicare, and Medicaid spending
as a percent of GDP, 1971–2081
(%)25
20
Tax revenues historically average 18% of GDP
15
10
Entitlement spending alone
is projected to surpass tax
revenues in 2047
5
0
1971
2026
2081
Source: Congressional Budget Office, Long-term Budget Outlook, June 2011. Projections based on CBO Alternative Fiscal Scenario.
Tax revenues based on historical average of roughly 18% of GDP.
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The majority of government
spending is on auto-pilot
U.S. federal government spending by type, 2011 estimated
Discretionary
37%
Mandatory
63%
Source: Congressional Budget Office, Reducing the Deficit, Spending and Revenue Options, March 2011. Mandatory spending types primarily
include Social Security, Medicare, and Medicaid, as well as interest on existing debt. Discretionary spending includes defense and non-defense items.
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Tax rates are at historic lows
U.S. federal income tax rates, 1960–2012 (%)
Kennedy
tax cuts
(%)100
Tax rate
75
Bush/Clinton
tax hikes
50
Bush
tax cuts
Tax Reform
Act of ’86
25
0
1960
2012
This chart reflects the maximum federal income tax rate at each year-end.
Source: Internal Revenue Service, 2011.
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Estates currently benefit from
historically low levels also
U.S. federal estate tax figures, 1990–2012
$ 6,000,000
60(%)
4,000,000
40
Exemption amount
Top tax rate
2,000,000
0
19
90
19
91
19
92
19
93
19
94
19
95
19
96
19
97
19
98
19
99
20
00
20
0
20 1
02
20
03
20
04
20
05
20
06
20
07
20
08
20
09
20
10
20
11
20
12
0
20
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The outlook for taxes:
Preparing for a rising
tax environment
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What to watch for in 2012
• Proposed legislation to delay, reduce, or eliminate $1.2T in
automatic spending cuts scheduled to begin in 2013 due to
super-committee failure
• U.S. Supreme Court ruling on the health-care reform law —
is the individual mandate to purchase health insurance
constitutional?
• Debate around extension of the Bush-era tax cuts, potential
tax reform, and changes to major entitlement programs
culminating in increased rhetoric leading up to November
elections
• Major tax changes before November elections unlikely
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Taxes are poised to increase in 2013
Tax item
2012
2013
Ordinary income
35.0%
43.4%
Dividends
15.0%
43.4%
Capital gains
15.0%
23.8%
4.2%
7.1%
Estate and gift taxes
35.0%
55.0%
Estate and gift tax
exemption amounts
$5.12M
$1M
Payroll tax
Tax rates reflect highest marginal rate and incorporate additional taxes related to the health-care reform law. Health-care-related taxes include a
surtax of 3.8% on net investment income and additional 0.9% payroll tax affecting single filers with income in excess of $200,000, and joint filers with
income in excess of $250,000. Assumes employee payroll tax rate of 4.2% is extended into 2012.
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New health-care taxes
take effect in 2013
• Increase in the individual portion of the Medicare
payroll tax on wages from 1.45% to 2.35%
• New Medicare investment income tax of 3.8%
• Will affect interest, dividends, capital gains,
rental income
• Distributions from retirement accounts are excluded
• Interest from municipal bonds not affected
• Targeted at individuals with more than $200K
income (couples with $250K income)
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Other tax-related changes
on tap for 2013
• Income phaseouts on itemized deductions and personal
exemptions return
• Marriage tax penalty returns
• Certain tax brackets eliminated
• 10% income tax bracket and 0% long-term capital gains/dividends
tax bracket for example
• Educational tax-related benefits reduced
• Deduction for student loan interest ends
• American Opportunity education tax credit expires
• Coverdell IRA contribution limit reverts to $500
(from $2,000 currently)
• Child tax credit reverts to $500 (from $1,000 currently)
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Planning considerations
and strategies
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Five planning strategies
to consider in 2012
1. Accelerate income in 2012
• Take advantage of low rates now and avoid new health-care
related taxes beginning in 2013
• Consider Roth IRA conversions, IRA distributions, realizing more
income if self-employed, taking deferred compensation, etc.
• Realize capital gains to take advantage of 15% rate
• Consult with your tax professional on your personal situation
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Five planning strategies
to consider in 2012
2. Accelerate tax deductions if feasible
• For 2012, tax benefit of itemized deductions is not phased out
at higher income levels
• Many debt reduction proposals have been proposed recently
that would eliminate or reduce tax deductions
• Examples of ways to accelerate deductions:
– Prepay mortgage interest or property taxes
– Make charitable contributions
– Schedule elective medical procedures if likely to result in
significant out-of-pocket expenses
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Five planning strategies
to consider in 2012
3. Review estate plan strategies and documents
• With the estate tax exemption of $5 million, it makes sense
to review trust documents
• Don’t forget that some states will have their own death and/or
inheritance taxes
• Consult with an estate planning attorney to explore options such as a life
insurance trust to create liquidity at death
4. Consider making lifetime gifts in 2012
• Individuals can gift up to $5 million currently without being subject to
federal gift tax
• Gifting now removes those funds plus any future appreciation out of
your estate
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Five planning strategies
to consider in 2012
5. Hedge against the uncertainty of future tax rates by being
“tax diversified”
• Having exposure across taxable, tax-deferred, and tax-free
accounts can help retirees better manage their tax bill
in retirement
• Create tax-free sources of income through Roth IRAs and
municipal bonds
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Closing thoughts
• The historically low tax environment is potentially
ending after 2012
• There is a risk of a rising tax environment over the
longer term as the nation deals with budget deficits
• Consult with your financial advisor and tax
professional to discuss potential short-term
opportunities while planning for the risk of higher
taxes in the future
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A BALANCED APPROACH
A WORLD OF INVESTING
A COMMITMENT TO EXCELLENCE
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This information is not meant as tax or legal advice.
Please consult your legal or tax advisor before making any decisions.
Investors should carefully consider the investment objectives, risks, charges, and expenses of a
fund before investing. For a prospectus, or a summary prospectus if available, containing this
and other information for any Putnam fund or product, call your financial representative or call
Putnam at 1-800-225-1581. Please read the prospectus carefully before investing.
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