As a wealth management consultant and professor for over a decade, it is that time again to file our taxes. With tax filings, we must document our income, expenses, deductions, exemptions, retirement contributions and so forth. Some of us must file our taxes for partnerships or corporations.

Wealth management comprises various subjects including: Economics, Banking, Investments, Risk Management, Investment/Asset Management, Estate Succession, Taxation, and Trust Planning and Retirement Planning.

Many of us simply receive W-2 and employment income and traditional company benefits primarily, but others who are self-employed or contractors are doing their best to utilize the system to declare income, pay for insurance, take mortgage deduction and so forth.

The good news is that that the tax code has become more amicable to the self employed over the last decade. Self employed individuals are able to write off or deduct more of their health care expenses while also setting aside more money pre-tax into their self directed retirement accounts.

Here are some thoughts related to Wealth Management 2012

Investments: While we are not sure what will happen with taxes going forward, several of today’s tax rates on income such as dividends and long-term capital gains are reasonable. If they go up, many people may sell out of dividend stocks or other related holdings. Dividend stocks have been particularly popular for retirees and those who don’t want CDs with the rates so low.

Thus, dividend stocks have been the alternative for income producing investments because the tax rates are at 15%. Overall, if income taxes go up on dividend stocks at this time, the hardest hit may be seniors and those who live on a fixed income.

Retirement and Education: In light of the present situation, we hope you are able to maximize your contributions to your retirement before April 15th each year. Also, setting aside money in a 529 plan is a good way to fund a child or grandchild’s education for the future. The annual gifting rules and estate and gift tax rules allow you to gift cash to others during life or at death. Therefore, now may be a good time to consider large gifts due to the generous estate & gift tax exemption for 2012.

Estates and Succession: As for estate taxes, those rates right now are the most generous ever. However, the large exemption may be reduced again to the Clinton era rates if nothing is done by Congress before 2013.

The other major estate management issues are succession documents. Do you have a valid will? Do you have health care directives? Have you considered limited powers of attorney for your financial affairs or health care affairs? Have you arranged for the guardianship of your children if something happens to you? All of these issues can be dynamic and very important?

Insurance: Other topics are risk management related. Do you have proper life, health, and home insurance? Have you considered an umbrella policy or disability policy? Again, protecting yourself and your family in this way is imperative. However, you must remember that insurance contracts have beneficiaries and that each policy can have primary beneficiaries or secondary beneficiaries. Further, these assets are not controlled by your will and the beneficiary receives regardless of what your will says. Providing the policy numbers and information to your loved ones may also be a good exercise.

Banking and Investment Accounts: Additionally, if you have bank or brokerage accounts, you should consider listing your spouse or loved one as person who receives the account upon death. TOD “Transfer on Death” and POD “Payable on Death” accounts are typical choices for your accounts and this allows a loved one to have access to cash immediately if something happens to you. Sometimes, rolling over or consolidating accounts is a great exercise so as to help create a better view of the totality of your investments.

Taxation: The IRS has a tax tips section which is interesting and resourceful. Moreover, there are many great tax software programs out there to chose from that you can use privately on your computer. Thus, with good information coming from the Treasury Department and quality software, all of us have a fair opportunity to get our tax paperwork done on time.

Economics: Keep in mind that there has been a number of economic cycles in the last 20 years in the USA and Internationally. That means that we should all keep an eye on our risk tolerance and our investing time horizon. When you are getting closer to retirement, you should be moving out of riskier investments and into more stable investments or stocks with less volatility if possible. Other related problems such as an election year and global debt crisis issues domestically and abroad are also now part of the macro-economic effects.

In the end, most people are concerned with financial security. During our earning years, all of us want to work in a labor of love, earn what we can, protect our children and retirement, and worry about taxes later. In the end, the key is doing what you want to do, and have the experts handle your legal, tax and wealth management for you.

*No investment, legal or tax advice is intended to be given herein. Please see a licensed professional before making any important decision.

Author: Jesse Mackey

Today’s blogticle concludes our 3 part series on tax efficient investment opportunities. Please see the two previous days coverage for the full story.

Tax Loss Harvesting- A fundamental technique for tax-efficient investment portfolio management that can be used with mutual funds, individual securities, or any other asset that can generate capital gains, is Tax Loss Harvesting – the active realization of capital losses for tax purposes, without incurring an actual loss for the investor’s portfolio. In its simplest form this is accomplished by selling a security that has experienced a loss, waiting thirty days (to avoid the IRS’s “Wash Sale Rule”), and purchasing the same security back in order to regain exposure. The tax loss that is generated as a result can be applied on the investor’s tax return to offset any gains created elsewhere and to claim a loss up to a maximum of $3000 per year, with the balance of the loss to be carried forward for use in future years. In addition to this most basic use of the method, more sophisticated techniques may be used with both mutual funds and individual securities to further minimize/offset taxation and maintain constant market exposure, permitting appreciation that may occur during the 30 days that the investor would otherwise be un-invested.

Mixed Account Type Portfolio Construction – One common technique utilized amongst comprehensive financial planners and investment planners for their clients is appropriate if the investor has multiple accounts with different registration types that are meant for the same investment objective. An example is when an investor has a joint taxable account and an IRA that are both intended to accumulate assets for retirement. In this instance, a single fully diversified portfolio may be constructed with the assets from both of the two accounts. Since some of the assets in this diversified portfolio will be more tax-efficient than others, the planner will purchase the assets that generate the greatest tax liabilities in the tax-deferred IRA account, and the assets that generate the least tax liabilities in the currently taxable joint account. The overall tax bill to the investor will thus be minimized every year.

Tax Transitioning- Tax transitioning is a technique best used when implementing a new portfolio by transferring existing securities holdings from an old portfolio manager to a new portfolio manager. The objective of the technique is to minimize the capital gains tax burden in a single year that might result from the liquidation of low cost basis stock holdings. When an investor owns stock that was originally purchased at a low price and has experienced significant appreciation, the capital gains tax liability associated with selling the entire holding at once may be too much to come up with in that year, especially if the investor has other significant tax liabilities. Therefore, when transferring assets to a new portfolio manager, the investor, in discussion with his/her new manager may decide that it is better to sell only a portion of the highly appreciated stock in the first year, using the proceeds to begin construction of the new portfolio, and then sell the remaining portion in the second tax year (or maybe even again in the third). While this is not optimal from the standpoint of initial portfolio diversification and volatility minimization, it will allow the investor to spread out his/her tax bill for the sale over the course of two or even three years. This technique is most useful if the new portfolio will be initially implemented at the end of the fiscal year, because by waiting only a few weeks until January for the second sale, the second tax bill will not be due until more than a year later, and the entire portfolio may be implemented very quickly.

For additional information contact our panel of experts or the author of this series.

Jesse Mackey is a partner and Investment Officer of 4Thought Financial Group Inc. 4Thought was created with the base vision of advancing individual freedoms and the human quality of life through economic means. This vision is pursued by applying the firm’s four specialties – Economic Theory and Research; Multi-Contingency Investment Management; Financial Planning for Business Owners and Individuals; and Support for Partner Firms and Advisors.

Contact:

Jesse Mackey

4Thought Financial Group Inc.

www.4TFG.com

jmackey@4TFG.com

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