Taxes-Estate and Gift

We at Paragon Financial Advisors are not accountants and urge you to verify any items we discuss with your tax professional to determine its implications in your particular situation. We also do not believe you should “let the tax tail wag the investment dog.” That is, your investing should not be dependent solely on tax considerations. However, tax consequences certainly should be considered when all other things are equal. Taxes can have a significant impact on your total economic well- being. It is in that spirit that we discuss the Congressional resolution (enacted at the last minute) to the fiscal cliff.

One of the more favorable (relatively) aspects of the American Taxpayer Relief Act of 2012 was the impact on estate and gift taxes. Prior to this act, estate tax rates were scheduled to rise to a maximum tax rate of 55% and the exclusion amount from this tax was to fall from $5.1 million per person to $1 million per person. With the 2012 Act, the exclusion amount was made permanent at $5 million indexed for inflation (the current amount for 2013 is $5.25 million). The tax rate, however, was raised from 35% to 40%.

Another permanent aspect of the ’12 Act was the provision of “portability.” Portability simply allows the surviving spouse to utilize the deceased spouse’s unused portion of the exclusion amount without the necessity of utilizing trust arrangements. This concept appeared in 2011, but was made permanent in 2012. It is important to note that this portability applies only to the last deceased spouse so, for multiple marriages, some planning pitfalls appear.

While the exemption amount remained higher and the tax rate lower than many had expected, there are other estate planning techniques that are still “at risk.” Some trust planning techniques ( such as grantor retained annuity trusts—GRAT’s) and the discount valuations for family limited partnerships (FLP’s) may be in danger; hence, there is some urgency in implementing those types of plans if appropriate.

As usual, we here at Paragon Financial Advisors remain available to assist you in working with your legal professional as you complete your estate planning. Please do not hesitate to call on us.

Paragon Perspectives

In this month’s edition of Paragon Perspectives advisor, Jene Tebeaux, commentates on three articles concerning risk.  The first is risk in relation to natural disaster planning, followed by risk in the current market conditions, and lastly how to evaluate your portfolio’s risk from two points of view.

 

June is the beginning of hurricane season along the Gulf Coast. In light of last year’s events (Hurricane Sandy, et al, and tornadoes in Oklahoma), we thought a discussion on disaster planning as it relates to your financial affairs would be appropriate.   The underlying theme for our second quarter newsletter is how our investment portfolios can be affected by unforeseen events and what we might do to mitigate those risks. The time to plan for natural disaster events is before the execution of such a plan is necessary. 

 

When planning for the unexpected in turbulent markets, the risk of sudden change is something that investors need to be aware of. Our current economic climate certainly has the potential for major change: Is the stock market overpriced? Will the Fed reduce QE (quantitate easing)? All factors are in place for an “interesting” time in the financial markets.  This edition of Paragon Perspectives discusses some of the things to keep in mind during such times.

 

Lastly we discusses “risk” and suggest that an investor needs to evaluate portfolio risk from two points of view: 1) the investor’s capacity (ability) to assume risk (i.e. level of assets vs. desired goals), and 2) the investor’s tolerance (willingness) to assume risk. Sometimes these two points of view do not agree for a specific investor. In such cases, the investor needs to reconcile these differences.

 

If you would like to read the newest edition of Paragon Perspectives but did not receive a copy, please email info@paragon-adv.com to request the newest edition of our newsletter.

 

Taxes-Health Care

We at Paragon Financial Advisors are not accountants and urge you to verify any items we discuss with your tax professional to determine its implications in your particular situation. We also do not believe you should “let the tax tail wag the investment dog.” That is, your investing should not be dependent solely on tax considerations. However, tax consequences certainly should be considered when all other things are equal. Taxes can have a significant impact on your total economic well-being. It is in that spirit that we discuss the Congressional resolution that provided the Health Care Act (sometimes called “Obamacare.”).

One of the Congressional leaders advised that “…we should pass the bill so we can see what’s in it…” and she was absolutely right—it has some tax implications on investments that are worth noting. In our third quarter of 2012 newsletter, we mentioned some of the provisions of this law. We will summarize some of the more investment related impacts again here:

• There is a 3.8% Medicare surtax on “net investment income” beginning in 2013. This surtax affects taxpayers with a modified adjusted gross income of $200K for singles or $250K for couples.
• It affects interest, dividends, capital gains, annuity income, rental income, and royalties. Business income from “passive” activities is also affected.
• Interest income from municipal bonds is excluded.
• Retirement plan distributions are not subject to the surtax; however, such retirement plan distributions can increase a taxpayer’s income over the threshold levels.
• There is an additional payroll tax of 0.9% on workers earning more than $200K for singles or $250K for couples.

So what happened with all these changes? The top tax bracket went from 35% to over 43.4% (39.6% + 3.8% for health care + the phase out of deductions—see our previous blog). Capital gains tax rates went from 15% to 23.8% (20% for capital gains + 3.8% for health care –a whopping 59% increase in the tax rate). Oh, and by the way, not all of the health care costs are being included yet—some don’t become effective until 2014!!

As always, please feel free to contact us here at Paragon Financial Advisors if you have questions about providing for your long term financial security.

 

“We have to pass it to know what’s in it.”

That quote is well remembered in conjunction with the passage of the Affordable Health Care Act (“Obamacare”).  Well, we are finding out what is in it—and the associated (increasing) costs. Our purpose here is not to debate the passage of the bill; it’s the law of the land. What we do try to do is see how we can help our clients preserve their financial status in light of the political realities that face us. What do we know so far?

• The law is not fully implemented—it won’t be until 2014.
• Costs (even by the administration’s estimates) are increasing above original projections.
• The cost of the Act (taxes) won’t be fully implemented until 2014.
• Employers will be subject to “fines” if they don’t provide “appropriate” health care coverage.

Proponents and opponents have their own points of view concerning the impact the Act will have on businesses. We are not going to rehash those here. However, one thing we have noticed is that business does not act in a vacuum. Entities revise their plans in accordance with what will be in the best interest of business continuation. In that light, we cannot help but compare the health care plan with the retirement plans that business provide.

Decades ago, many employers provided defined benefit plans for their employees. The employer guaranteed a certain benefit for the employee at retirement. The employer bore the contribution and investment risk of the plan to ensure that the retiree’s benefit would be available at retirement. Because of the inherent risk on the investment performance side, defined benefit plans are being replaced by defined contribution plans (401(k)). Under such plans, the employer is providing contributions only and shifting the investment performance risk to the employee. Employers know their retirement plan costs—the contributions only. It’s up to the employee and their investment acumen to determine the benefit provided at retirement.

Will we see a similar shift in focus with employer health care plans? Increases in plan costs are rampant and now the employer is bearing both the costs of benefits for the employee as well as the probability of health care incidents. Will employers start providing employees a dollar amount for health insurance and tell the employee to provide their own insurance coverage? We may find out something else is in the health care act after it was passed.

Should you have any questions, please contact us at Paragon Financial Advisors. We will be happy to assist you as you plan for your financial future.