Not FDIC
Insured
May Lose
Value
No Bank
Guarantee
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Topics for today
• The current tax landscape
• A longer-term outlook on taxes
• Planning considerations
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The current tax landscape
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It’s important to determine
your tax bracket
Single
Married filing jointly
Income
Capital gains
and dividends
$0–$9,275
$0–$18,550
10%
0%
$9,276–$37,650
$18,551–$75,300
15
0
$37,651–$91,150
$75,301–$151,900
25
15
$91,151–$190,150
$151,901–$231,450
28
15
$190,151–$413,350
$231,451–$413,350
33
15
$413,351–$415,050
$413,351–$466,950
35
15
Over $415,050
Over $466,950
39.6%
20%
2016 IRS tax brackets and rates.
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Income phaseouts can increase
your tax bill
• Above higher income levels ($259,400 for individuals,
$311,300 for couples), the benefit from itemized
deductions and personal exemptions is limited
Itemized
deductions
Reduced by 3% of the amount above the income
threshold (maximum of 80% phaseout)
Personal
exemptions
Reduced by 2% for every $2,500 of income above
the threshold.
Income phase-outs based on 2016 IRS figures.
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New health-care taxes
took effect in 2013
• Affects taxpayers with more than $200,000 in
income ($250,000 for couples)
• Increase in the individual portion of the Medicare
payroll tax on wages from 1.45% to 2.35%
• New Medicare net investment income surtax of 3.8%
– Interest, dividends, capital gains, rental income, passive
business income all subject to the new tax
– Interest from municipal bonds and distributions from
retirement accounts are excluded
The threshold for the 3.8% net investment income surtax is based on modified adjusted gross income (MAGI), defined as adjusted gross income
plus net foreign income exclusion amount. The extra .9% Medicare payroll tax is based on earned income only (salary, wages, etc.).
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Married couple with income over $250K:
How does the new 3.8% surtax work?
$50K
Muni income
$250K income
threshold (MAGI)
$100K
Cap gain
$50K
IRA income
Not subject to 3.8% surtax
$50K cap gain subject to surtax
$50K cap gain not subject to surtax
Not subject to the surtax but is
included in determining the
$200K/$250K income threshold
$150K
Salary
Simplified, hypothetical example designed to illustrate how the new Medicare net investment income surtax is applied. Beginning in 2013, the
surtax applies to individuals with MAGI over $200,000 and married couples filing joint tax returns with MAGI over $250,000. MAGI defined as
Adjusted Gross Income (AGI) plus net foreign income exclusion amount.
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Key income thresholds
to consider
$415K
$259K
Highest income,
capital gain, and
dividend rates
Phaseout of deductions
and exemptions
$466K
$311K
New health-care taxes
$200K
$250K
Individuals
Couples
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Will you owe AMT?
Income level
$100K–$200K
Chance of owing AMT
2%
$200K–$500K
48
$500K–$1M
78
> $1M
36
Urban-Brookings Tax Policy Center, September 2012.
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Understanding the AMT
What is the alternative
minimum tax (AMT)?
A separate, parallel income tax system introduced in
1969 to make sure a small number of very wealth
taxpayers owed tax
How many taxpayers
are subject to AMT?
Since the system was not properly indexed for inflation,
more than 4 million taxpayers pay AMT now*
How many AMT tax
brackets are there?
Just two — 26% on first $186,300 of AMT income,
28% thereafter
What are some popular
tax breaks disallowed
for AMT?
Personal exemptions, standard deduction, state and
local income and property taxes, miscellaneous 2%
deductions, interest on second mortgages
* Urban-Brookings Tax Policy Center, August 2013.
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Federal estate and gift taxes —
key figures
18% to 40%
Range of marginal tax rates on estates
and gifts in excess of lifetime exemption
amount
$5.45 million
Lifetime gift and estate tax exemption
$14,000
Annual gifts to as many recipients
without resulting in a taxable gift and
reducing the lifetime exemption amount
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Estate planning is more than
just the taxes
Wills, beneficiary
designations
Critical to review and update periodically
Revocable living trust
Transfers property outside of the probate
system
Health-care proxy and
advanced medical directive
Facilitate decisions around medical
treatment or end-of life wishes
Power of attorney
Assigns decision-making responsibilities
in case of unforeseen circumstances
Guardianship
Planning for minors or other extended
family members
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Longer-term outlook
on taxes
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Total debt remains high based
on historical norms
Federal debt held by the public (% of GDP), 1940–2015
Percentage of GDP
100%
80%
60%
40%
20%
0%
1
21
41
61
2015
Source: Congressional Budget Office, Updated Budget Projections: June, 2015; does not include intra-governmental debt.
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Annual deficits have improved
but will worsen in a few years
Historical federal government revenues and outlays (% of GDP), 1973–2025
Percentage of GDP
(%)26
Spending
22%
Projected
20
14
1973
Revenue
18.3%
2015
2025
Source: Congressional Budget Office, Updated Budget Projections: August 2015.
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Most government spending
is on auto-pilot
U.S. federal government spending by type, 2015FY
Social Security
$882B
Defense
$583B
32%
Non-Defense
$579B
Mandatory
68%
Discretionary
Medicare
$541B
Medicaid
$396B
Interest
$218B
Other
$478B
Source: Congressional Budget Office, August 2015; 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. “Other” mandatory items include certain veteran’s benefits,
retirement benefits for federal employees, Supplemental Nutrition Assistance Program (SNAP), unemployment, and other government benefits less
offsetting receipts.
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What would a longer-term debt
solution look like?
• Tax reform to simplify the system
– Less brackets and lower marginal tax rates, elimination or significant
reduction in tax preference items (popular deductions, tax credits, etc.)
• Steps to improve the solvency of major entitlement programs
• Potential changes to Social Security
– Increase the wage base*
– Increase the retirement age for younger workers
– Utilize a different COLA formula for benefit increases
– Reduce benefits for higher-income recipients (i.e., means testing)
* Social Security wage base for 2015 is $118,500.
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Planning considerations
and strategies
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Five income tax planning
strategies to consider
1. Invest in municipal bonds to generate tax-free income
– Municipal bonds are more attractive for taxpayers in high tax
brackets and also subject to the 3.8% Medicare surtax
2. Utilize strategies to reduce or avoid taxable income
– Retirement plan contributions, college savings plans, flexible
spending accounts (FSAs), deferred compensation, maximizing
tax deductions
– Be mindful of transactions that may drastically increase income
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Five income tax planning
strategies to consider
3. Consider Roth strategies
– Contributions or conversions to create a source of tax-free income in
retirement
4. Asset “location” – allocate investments by tax status
– Hold a larger percentage of fixed-income assets within tax-deferred
accounts while owning equities in taxable accounts to benefit from
lower capital gains and dividend tax rates
5. Make tax-smart withdrawals in retirement
– Draw from tax-deferred accounts while in lower tax brackets, and from
taxable and tax-free accounts when tax bracket is higher
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Estate planning — Are federal
estate taxes a concern?
Gifting strategies to reduce estate
Life insurance to provide liquidity at death to pay taxes
Charitable planning
Advanced strategies such as FLPs to transfer illiquid assets
$5.45M exemption amount
• Make sure fundamental documents are in place
• Plan for state death or inheritance taxes if necessary
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Closing thoughts
• With mounting federal deficits and pressures
around entitlement programs, there’s likely to
be uncertainty around taxes
• Work with professionals to assess your personal
income and estate tax situation and identify
potential strategies
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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.
Putnam Retail Management
putnam.com
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