Fiscal Cliff Comments From Andy Friedman
Content
From the Hill to the Street:
An insider’s perspective
Eaton Vance on Washington
Not FDIC Insured • Not Bank Guaranteed • May Lose Value
Disclosure
Neither Andrew Friedman, nor any law firm with which he may be associated, is providing legal or tax advice as to the matters discussed herein. The discussion herein is general in nature and is provided for informational purposes only. There is no guarantee as to its accuracy or completeness. It is not intended and may not be regarded as legal or tax advice, and financial advisors and other recipients of this information may not rely upon it (including for purposes of avoiding tax penalties imposed by the IRS or state and local tax authorities). Advisors should consult with their firm’s legal and tax counsel as to matters discussed herein. Clients should consult their own legal and tax counsel before entering into any investment, annuity, estate planning, or trust arrangement, and financial advisors should advise their clients to do so.
Andrew Friedman is not an employee of Eaton Vance and his commentary is based on independent research.
© Copyright Andrew H. Friedman 2013. Printed by permission. All rights reserved.
2
Eaton Vance on Washington
Fiscal Cliff Compromise
– Permanently extends the existing tax rates for families with income under $450K ($400K for individuals).
– Permanently extends the current $5.12M estate, gift, and generation skipping tax exemptions (indexed for inflation). Increases the estate tax rate to 40% (from 35%). – Permanently “patches” the alternative minimum tax to keep it from affecting more taxpayers in later years.
3
Eaton Vance on Washington
Fiscal Cliff Compromise
– Delays for two months the implementation of the “sequester” government spending cuts.
– Extends unemployment benefits through 2013.
– Permits payroll tax rate to revert to 6.2% (from 4.2%).
– Leaves intact the 3.8% surtax on investment income for families with income over $250K ($200K for individuals).
4
Eaton Vance on Washington
Fiscal Cliff Compromise
– Extends through 2013 tax-free distributions of up to $100K from an IRA to a charity.
• An individual may make a tax-free charitable distribution during January 2013 and have it count as a 2012 rollover. Individuals who took a distribution in December 2012 may contribute that amount to a charity and treat it as an eligible charitable rollover.
•
5
Eaton Vance on Washington
Tax Rates – Investment Income
Family income Ordinary income Tax Rate 35% max 38.8% 43.4% Cap gain/Dividend Tax Rate 15% max 18.8% 23.8%
< $250K $250K – $450K > $450K
6
Eaton Vance on Washington
Imminent 2013 Legislative Items
– Government borrowing limit (reached December 31)
• If not increased, U.S. defaults on its debt
– Sequestration spending cuts take effect (March 1) – Government 2013 appropriations (March 27)
• If not passed, U.S. government shuts down
7
Eaton Vance on Washington
Imminent 2013 Legislative Items
– Republicans will demand spending cuts (which were almost entirely absent in the fiscal cliff compromise). It is no longer possible to meet that demand by cutting discretionary spending. – Democrats will demand that the spending cuts be balanced with additional tax increases. It is no longer possible to meet that demand by raising tax rates.
– That means we are heading for a debate over entitlement and additional tax changes.
8
Eaton Vance on Washington
Deficit Outlook (in billions of dollars)
2008 budget deficit
2009 budget deficit 2010 budget deficit
$
455
$ 1,400 $ 1,300
2011 budget deficit
2012 budget deficit (est)
$ 1,300
$ 1,100
Total debt outstanding is now 100% of GDP for only the second time in history (other was during WWII)
9
Source: Budget of the U.S. Government, Mid-Session Review, Fiscal Year 2012, Office of Management & Budget (Aug. 2011); An Update to the Budget and Economic Outlook: Fiscal Years 2012-2022, Congressional Budget Office (Aug. 2012)
Eaton Vance on Washington
2011 Federal Spending ($3.6T) (in billions of
dollars)
Domestic $477 (13%)
Defense $835 (23%)
Mandatory Programs (Entitlements) $2,102 (58%)
Interest $216 (6%)
10
Source: Budget of the U.S. Government, Mid-Session Review, Fiscal Year 2012, Office of Management & Budget (Aug. 2011)
Eaton Vance on Washington
Deficit Reduction Plan
– Social Security changes – Medicare changes – Tax changes
11
Eaton Vance on Washington
Possible Social Security Changes
– Increase retirement age – Reduce CPI increases in Social Security benefits – Means test benefits – Increase wage cap subject to Social Security taxes – No changes for individuals currently 55 or older
12
Eaton Vance on Washington
Possible Medicare Changes
– Increase eligibility age – Increase co-payments – Require affluent recipients pay for coverage – No changes for individuals currently 55 or older
13
Eaton Vance on Washington
Possible Tax Changes
– Cap on exemptions and itemized deductions
• • • • • Employer-provided health insurance Tax-exempt interest on bonds Pension plan contributions Charitable contributions Mortgage interest deduction
14
Eaton Vance on Washington
Possible Tax Changes
– Potential “loophole” closers:
• Master limited partnerships • S-corporation distributions • Carried interests • Wealth transfer techniques
• Changes unlikely to be retroactive. Could apply from date of enactment or beginning in 2014.
15
Eaton Vance on Washington
Other 2013 Legislative Items
– Immigration – Gun control – Domestic manufacturing – Energy – Fannie Mae / Freddie Mac (housing) – Comprehensive tax reform
16
Eaton Vance on Washington
Possible Investment Planning
– Markets likely to be volatile for first quarter
– Prepay charitable contributions
– Pay down mortgage debt
– Keep an eye on municipal bonds
– Take advantage of sophisticated gifting techniques
– Consider investments that provide retirement income guarantees
Prospective investors should consult with a tax or legal advisor before making any investment decision.
17
Eaton Vance on Washington
Disclosure
Investing in mutual funds is subject to stock market volatility. Income from investments in municipal funds may be subject to federal, state and local tax; a portion may be subject to federal alternative minimum tax. The ability to use certain tax-management techniques may be curtailed or eliminated in the future by tax legislation, regulations, administrative interpretations, or court decisions.
Before investing, prospective investors should consider carefully a Fund's investment objectives, risks, charges, and expenses. A Fund's current prospectus and summary prospectus, contains this and other information about a Fund and is available through your financial advisor. Read the prospectus carefully before investing or sending money. Eaton Vance does not provide tax or legal advice. Prospective investors should consult with a tax or legal advisor before making any investment decision.
Copyright Andrew H. Friedman 2013. Printed by permission. All rights reserved.
18
Eaton Vance on Washington
From the Hill to the Street:
An insider’s perspective
For more information please contact us at: Eaton Vance Distributors, Inc. Member FINRA/SIPC Two International Place Boston, MA 02110 800.225.6265 www.eatonvance.com/washington
5576-1/13 FTHIPCLPPT
Eaton Vance on Washington
An insider’s perspective
Eaton Vance on Washington
Not FDIC Insured • Not Bank Guaranteed • May Lose Value
Disclosure
Neither Andrew Friedman, nor any law firm with which he may be associated, is providing legal or tax advice as to the matters discussed herein. The discussion herein is general in nature and is provided for informational purposes only. There is no guarantee as to its accuracy or completeness. It is not intended and may not be regarded as legal or tax advice, and financial advisors and other recipients of this information may not rely upon it (including for purposes of avoiding tax penalties imposed by the IRS or state and local tax authorities). Advisors should consult with their firm’s legal and tax counsel as to matters discussed herein. Clients should consult their own legal and tax counsel before entering into any investment, annuity, estate planning, or trust arrangement, and financial advisors should advise their clients to do so.
Andrew Friedman is not an employee of Eaton Vance and his commentary is based on independent research.
© Copyright Andrew H. Friedman 2013. Printed by permission. All rights reserved.
2
Eaton Vance on Washington
Fiscal Cliff Compromise
– Permanently extends the existing tax rates for families with income under $450K ($400K for individuals).
– Permanently extends the current $5.12M estate, gift, and generation skipping tax exemptions (indexed for inflation). Increases the estate tax rate to 40% (from 35%). – Permanently “patches” the alternative minimum tax to keep it from affecting more taxpayers in later years.
3
Eaton Vance on Washington
Fiscal Cliff Compromise
– Delays for two months the implementation of the “sequester” government spending cuts.
– Extends unemployment benefits through 2013.
– Permits payroll tax rate to revert to 6.2% (from 4.2%).
– Leaves intact the 3.8% surtax on investment income for families with income over $250K ($200K for individuals).
4
Eaton Vance on Washington
Fiscal Cliff Compromise
– Extends through 2013 tax-free distributions of up to $100K from an IRA to a charity.
• An individual may make a tax-free charitable distribution during January 2013 and have it count as a 2012 rollover. Individuals who took a distribution in December 2012 may contribute that amount to a charity and treat it as an eligible charitable rollover.
•
5
Eaton Vance on Washington
Tax Rates – Investment Income
Family income Ordinary income Tax Rate 35% max 38.8% 43.4% Cap gain/Dividend Tax Rate 15% max 18.8% 23.8%
< $250K $250K – $450K > $450K
6
Eaton Vance on Washington
Imminent 2013 Legislative Items
– Government borrowing limit (reached December 31)
• If not increased, U.S. defaults on its debt
– Sequestration spending cuts take effect (March 1) – Government 2013 appropriations (March 27)
• If not passed, U.S. government shuts down
7
Eaton Vance on Washington
Imminent 2013 Legislative Items
– Republicans will demand spending cuts (which were almost entirely absent in the fiscal cliff compromise). It is no longer possible to meet that demand by cutting discretionary spending. – Democrats will demand that the spending cuts be balanced with additional tax increases. It is no longer possible to meet that demand by raising tax rates.
– That means we are heading for a debate over entitlement and additional tax changes.
8
Eaton Vance on Washington
Deficit Outlook (in billions of dollars)
2008 budget deficit
2009 budget deficit 2010 budget deficit
$
455
$ 1,400 $ 1,300
2011 budget deficit
2012 budget deficit (est)
$ 1,300
$ 1,100
Total debt outstanding is now 100% of GDP for only the second time in history (other was during WWII)
9
Source: Budget of the U.S. Government, Mid-Session Review, Fiscal Year 2012, Office of Management & Budget (Aug. 2011); An Update to the Budget and Economic Outlook: Fiscal Years 2012-2022, Congressional Budget Office (Aug. 2012)
Eaton Vance on Washington
2011 Federal Spending ($3.6T) (in billions of
dollars)
Domestic $477 (13%)
Defense $835 (23%)
Mandatory Programs (Entitlements) $2,102 (58%)
Interest $216 (6%)
10
Source: Budget of the U.S. Government, Mid-Session Review, Fiscal Year 2012, Office of Management & Budget (Aug. 2011)
Eaton Vance on Washington
Deficit Reduction Plan
– Social Security changes – Medicare changes – Tax changes
11
Eaton Vance on Washington
Possible Social Security Changes
– Increase retirement age – Reduce CPI increases in Social Security benefits – Means test benefits – Increase wage cap subject to Social Security taxes – No changes for individuals currently 55 or older
12
Eaton Vance on Washington
Possible Medicare Changes
– Increase eligibility age – Increase co-payments – Require affluent recipients pay for coverage – No changes for individuals currently 55 or older
13
Eaton Vance on Washington
Possible Tax Changes
– Cap on exemptions and itemized deductions
• • • • • Employer-provided health insurance Tax-exempt interest on bonds Pension plan contributions Charitable contributions Mortgage interest deduction
14
Eaton Vance on Washington
Possible Tax Changes
– Potential “loophole” closers:
• Master limited partnerships • S-corporation distributions • Carried interests • Wealth transfer techniques
• Changes unlikely to be retroactive. Could apply from date of enactment or beginning in 2014.
15
Eaton Vance on Washington
Other 2013 Legislative Items
– Immigration – Gun control – Domestic manufacturing – Energy – Fannie Mae / Freddie Mac (housing) – Comprehensive tax reform
16
Eaton Vance on Washington
Possible Investment Planning
– Markets likely to be volatile for first quarter
– Prepay charitable contributions
– Pay down mortgage debt
– Keep an eye on municipal bonds
– Take advantage of sophisticated gifting techniques
– Consider investments that provide retirement income guarantees
Prospective investors should consult with a tax or legal advisor before making any investment decision.
17
Eaton Vance on Washington
Disclosure
Investing in mutual funds is subject to stock market volatility. Income from investments in municipal funds may be subject to federal, state and local tax; a portion may be subject to federal alternative minimum tax. The ability to use certain tax-management techniques may be curtailed or eliminated in the future by tax legislation, regulations, administrative interpretations, or court decisions.
Before investing, prospective investors should consider carefully a Fund's investment objectives, risks, charges, and expenses. A Fund's current prospectus and summary prospectus, contains this and other information about a Fund and is available through your financial advisor. Read the prospectus carefully before investing or sending money. Eaton Vance does not provide tax or legal advice. Prospective investors should consult with a tax or legal advisor before making any investment decision.
Copyright Andrew H. Friedman 2013. Printed by permission. All rights reserved.
18
Eaton Vance on Washington
From the Hill to the Street:
An insider’s perspective
For more information please contact us at: Eaton Vance Distributors, Inc. Member FINRA/SIPC Two International Place Boston, MA 02110 800.225.6265 www.eatonvance.com/washington
5576-1/13 FTHIPCLPPT
Eaton Vance on Washington
