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- 1. December 31 ACCOUNTABLE ADVICE J a n u a r y / F e b r u a r y + 2 0 1 5 Ask a trust officer + PG2 QE3 ends + PG3 IRS offers guidance on retirement distributions + PG4 F i n a n c i a l P l a n n i n g I n v e s t m e n t M a n a g e m e n t Tr u s t & E s t a t e S e r v i c e s P r i v a t e B a n k i n g R e t i re m e n t P l a n S e r v i c e s Final tax tips for 2014 With limited exceptions, a taxpayers opportunity for controlling income tax liabilities for 2014 expire on December 31. Here are a few ideas to consider before the year closes: Accelerate deductions, defer income. You may be able to pay real estate taxes early and delay a bonus, for example. Bunch deductions. Push deductions into the tax year in which you expect to be able to itemize them, if you will take the standard deduction in other years. Some expenses, such as medical costs, have floors on deductibility10% of AGI for most taxpayers, 7.5% for those 65 and older. Bunching those expenses into a single year may create a deduc- tion that otherwise would not be large enough to exceed the floor. Contribute to charity. Make your final charitable gifts early, so as to avoid ambi- guity about which tax year they belong in. Maximize retirement plan contribu- tions. For 2014, up to $17,500 may be deferred to a 401(k) or 403(b) plan. An additional catch-up contribution of $5,500 is permitted for those 50 and older. Check for AMT exposure. Upper- income taxpayers have to calculate their income tax liability in two ways. The regular way has a top marginal rate in 2014 of 39.6% and lots of allowable deductions. The Alternative Minimum Tax (AMT) has two brackets, 26% and 28%, and it provides for far fewer deduc- tions. Taxpayers pay the higher of the two tax figures. Family gifting. The annual exclusion from federal gift taxes in 2014 in $14,000 per donee. The exclusion expires at the end of the year, and it cant be carried forward if it is unused. Portfolio check. Tally your gains and losses for the year to see where you stand. Tax consequences shouldnt drive portfolio management decisions, but they do need to be taken into account. Tax efficiency matters. Capital gains and losses for the entire tax year are netted against each other, according to these rules: 1. Short-term losses are netted against short-term gains. 2. Long-term losses are netted against long-term gains. 3. If one of these is a gain and the other is a loss, they are netted. 4. Any resulting short-term gains are taxed as ordinary income. Any result- ing long-term gains from securi- ties sales are taxed at 15%. At some income levels, the rate is boosted to Continued on page 3
- 2. A S K A T R U S T O F F I C E R : D I V I D E D G O V E R N M E N T DEAR GROWTH: Its certainly true that, anecdotally, there is a widespread belief that the gridlock of divided government reduces legisla- tive interference in the markets and lets businesses attend to business, which, in turn, is good for stocks. Recent history reinforces the perception, as the stock market has gained over 11% annually since the Republicans took over the House in January 2010. However, a longer-term statistical review pokes holes in the theory. A study commissioned by The New York Times found that from 1901 to the present, divided governments produced annual returns of just 4.06% in the DJIA compared to 6.27% for the entire period. The years of one-party control of the Presidency and both houses of Congress provided 7.88% returns. The fundamental performance of the economy and atti- tudes of investors are likely more important indicators of stock market performance than shifts in the political winds. In 2009, as the economy was just coming out of recession, stocks were undervalued, with a long-term price/earnings ratio for the SP 500 at 14.12, according to the data of economist Robert Shiller. After several years of steady, if slow, growth, investors have become more confident, and thus have bid stock prices up to the point that the P/E ratio is at 26.51, where it was in 2006. That suggests that future stock market gains will have to be powered more by profit growth, and less by investor optimism. Do you have a question concerning wealth management or trusts? Send your inquiry to wealthmanagement@fnni.com. 息 2014 M.A. Co. All rights reserved. DEAR TRUST OFFICER: Ive heard it said that investors prefer divided government. What does the Republican takeover of the Senate portend for the stock market? GROWTH INVESTOR 2
- 3. In late October, the Fed announced the end of the third installment of Quantitative Easing, a program of buying government bonds begun in September 2012. Initially set at purchases of $40 billion per month of mortgage-backed secu- rities to bolster the housing market, by December 2012 the program expanded to include an additional $45 billion monthly of Treasury bonds. The purchases were intended to shrink the supply of Treasury debt, which would be expected to increase its price, keeping a lid on longer-term interest rates. would have been far more dire, and the recovery might well have collapsed back into recession. That debate will go on for years. Twice before, when the Fed has indi- cated that the bond-buying program would be ending, a reversal of policy was needed when the economy began to sag. The early stock market reaction this time was more positive. Indeed, the day following the announcement the Dow Jones Industrial Average set an intraday record high. In the near term, inflation in the U.S. looks to be held in check by lower energy prices, a development that will ripple through the economy, leaving prosperity in its wake. Around the globe, economies continue to perform below expectations. In contrast, the Commerce Department announced in late October that the U.S. economy had grown at a healthy 3.5% annual rate in the third quarter of the year. Although the Fed has stopped adding to its balance sheet, it will continue to buy bonds to replace those that mature in its portfolio. At some unknown future date, the Feds holdings gradually will be reduced, when it stops replacing bonds as they mature. By that time, we can hope, our economy will be growing strongly and sustainably. (November 2014) 息 2014 M.A. Co. All rights reserved. Final tax tips for 2014 continued from page 1 20%, and at still higher levels a 3.8% sur- tax applies, for a maximum capital gains tax rate of 23.8%. 5. Up to $3,000 of net capital losses may be deducted from ordinary income. Short-term losses are used up first, then long-term losses. 6. Unused capital losses may be carried to future years until death. The conventional wisdom resulting from these rules is that long-term gains are better than short-term, because they have a lower tax rate. Short-term losses are better than long-term losses, because they shelter income at a higher tax rate. Consult with your tax advisors to learn more. (December 2014) 息 2014 M.A. Co. All rights reserved. QE3 ends Before the financial crisis hit, the Feds balance sheet was about $1 trillion, and now it has grown to about $4.5 trillion. About $1.5 trillion is attributable to this third installment of quantitative easing. Critics warned that the Feds action could spark renewed inflation. That has not happened. They also feared that the dollar would be devalued, but instead it has increased in value. In its announcement, the Fed stated that short-term interest rates would be kept near zero for a considerable time. Most observers interpret that to mean until mid-2015. However, this time the Fed leavened the intention with the observation that improvement in the labor markets or an uptick in infla- tion could bring higher interest rates sooner. Similarly, should deflation set in or labor markets deteriorate, an interest rate hike likely would be deferred. QE3 did not stimulate rapid economic growth, as this recovery has been among the slowest on record. The Feds defenders suggest that without QE3, economic conditions 3
- 4. Newsletter Opt Out: We hope that you find this information helpful as you make financial decisions. However, should you decide that you would rather not receive the newsletter, please contact us at 800.495.1293 or wealthmanagement@fnni.com. Deposit and Lending Products are: First National Wealth Management is a division of First National Bank of Omaha. IRS offers guidance on retirement distributions In October, the IRS provided helpful guidance for taxpayers who have both pre-tax and after-tax balances in their employ- er-provided retirement plans (Notice 2014-54). In most cases, the taxpayer will have the flexibility to achieve an optimum tax result. The IRS provided the following fact pattern. Taxpayers 401(k) account consists of $200,000 of pre-tax money and $50,000 of after-tax contributions. Upon a separation from ser- vice, Taxpayer has requested a distribution of $100,000. Those funds must come proportionately from each pot, so that the distribution will be $80,000 pre-tax, $20,000 after-tax. From this set-up, the IRS explores several scenarios for the Taxpayer. First, he may order that the money be paid directly to IRAs, the pre-tax money to a traditional IRA and the balance to a Roth IRA. That approach preserves all the favorable tax attributes of the distribution for the future. Next, the Service posits that Taxpayer wants to roll $70,000 of his distribution into a successor employer plan. Because that amount is less than the pre-tax portion of the distribution, the entire amount will be assumed to be pre-tax money. If the new employer plan allows for separate accounting of after-tax contri- butions, Taxpayer has the option of so designating a portion of the rollover. However, Taxpayer does not have that choice if the new plan does not provide a separate accounting, the IRS warned. Retirement distributions can be a very tricky area of tax law, with a lot at stake when distributions are large. Accordingly, it is important to seek professional tax advice before making any final decisions. (December 2014) 息 2014 M.A. Co. All rights reserved. (January, 2015) 息 2014 M.A. Co. All rights reserved. The general information in this publication is not intended to be nor should it be treated as tax, legal or accounting advice. Additional issues could exist that would affect the tax treatment of a specific transaction and, therefore, taxpayers should seek advice from an independent tax advisor based on their particular circumstances before acting on any information presented. WWW.FIRSTNATIONALWEALTH.COM Investment Products are: Not FDIC Insured May Go Down in Value Not a Deposit Not Guaranteed By The Bank Not Insured By Any Federal Government Agency 4 IRS announces 2015 retirement plan limits To make it possible for voluntary retirement savings to keep up with inflation, the various numerical limits embedded within qualified retirement plans are indexed for inflation. In October, the IRS announced the numbers that will apply in 2015, as shown in the following table. Item 2015 limit 401(k) and 403(b) employee deferral limit $18,000 457 employee deferral limit (most plans) $18,000 Catch-up contribution limit $6,000 Defined contribution dollar limit $53,000 Defined benefit dollar limit $210,000 Compensation limit $265,000 Highly compensated employee income limit $120,000 Key employee in a top-heavy plan $170,000 Catch-up contributions are permitted by those employ- ees who are 50 years of age or older during the calendar year. Personal saving for retirement has never been more important. These tax benefits make saving a bit less painful. (November 2014) 息 2014 M.A. Co. All rights reserved.