quarterly update

According to the book “Chasing the American Dream” by Mark Robert Rank, Thomas A. Hirschl, and Kirk A. Foster, one in five Americans are in the top 2% of income earners at some point in their lives, and one in eight spend at least one year in the top 1%. Many Americans fluidly move in and out of the income tax brackets throughout their lives, and sometimes even during a tax year. If you are like these taxpayers, you may benefit now from taking a look at your current income tax situation so that you have time to make corrections, or take advantage of opportunities before January 1, 2016, rolls around, especially if you have a dynamic income flow throughout the year. Here are some tips to get you started:

> Work on your accountant’s tax organizer: Start completing the tax organizer that your accountant provides you prior to year-end. Doing so may take the stress out of completing the organizer when time is pressing. The organizer also may help you make critical year-end decisions, such as whether to accelerate itemized deductions (e.g., charitable gifts) into this tax year or delay them until 2016.

> Make annual exclusion gifts: If you have children and are blessed with excess cash flow, consider making a 2015 annual federal gift tax exclusion transfer to each child. The annual exclusion permits you to gift up to $14,000 per person per year (twice for a married couple) without incurring federal gift tax consequences. Many high income taxpayers do not take advantage of this powerful gift tax planning tool, believing it is too small to have a real impact. However, a married couple with three children could gift up to $1,680,000 over a 20 year time period. If you invested the annual gifts into an account earning a 6% total return, the total after 20 years could grow to over $3.2 million, all transferred to your children free of gift tax or estate tax. Instead of making these annual gifts outright to your children, you could make the annual gifts to a trust created for their benefit. If that trust were a form of trust known as a “defective grantor trust,” you could pay the trust’s income and capital gains taxes, which amounts to an additional gift tax free transfer, ultimately increasing the net remainder to your children.

> Maximize retirement plan contributions: Have you maximized your contributions to your defined contribution plan at work? If not, you still have time to catch up by increasing your W-2 percentage contribution.

> Establish an IRA to Roth IRA conversion strategy: High income taxpayers who have little or no assets in a traditional IRA may want to consider establishing an IRA to Roth IRA conversion strategy. Although taxpayers are permitted to contribute to a traditional IRA, they are not permitted to deduct those contributions if their income is too high ($71,000 for single taxpayers, $118,000 for married taxpayers filing jointly, and $10,000 for married taxpayers filing separately). Also, taxpayers are not even permitted to contribute to a Roth IRA if their income is too high ($131,000 for single taxpayers, $193,000 for married taxpayers filing jointly, and $10,000 for married taxpayers filing separately). An often overlooked strategy is to make annual non-deductible contributions to a traditional IRA and then to convert the assets of the traditional IRA to a Roth IRA. Assuming a $6,500 annual contribution for 10 years with 6% total investment returns, a taxpayer making this an annual practice could set aside an additional $90,000 for retirement, all of which can be taken out without income taxes and without being subject to required minimum distributions.

> Medicare surcharge withholding: Married taxpayers jointly earning more than $250,000 must consider the effects of the 0.9% Medicare surcharge imposed as part of the 2010 health care law. For example, if one spouse earns $190,000 and the other earns $100,000, it is possible that the HR departments at both companies are under-withholding for income taxes. You may need to increase your withholding to cover this additional 0.9% federal income tax before it is too late to catch up.

Many year-end tax savings techniques take time to consider and implement, so the last quarter of 2015 is the time to act. Making well-reasoned decisions now might save you time, money, and stress in just a few months.

City National Rochdale, as a matter of policy, does not give tax, accounting, regulatory, or legal advice. The effectiveness of the strate-gies presented in this article will depend on the unique characteristics of your situation and a number of complex factors. Rules in the areas of law, tax, and accounting are subject to change and open to varying inter-pretations. The strategies presented in this article were not intended to be used, and cannot be used, for purposes of avoiding any tax penalties that may be imposed. The strategies were not written to support the promotion or marketing to another person of any transaction or matter addressed. Before implementation, you should consult with your other advisors on the tax, accounting, and legal implications of the proposed strategies based on your particular circumstances.

 

Investment and Insurance Products: 
• Are Not insured by the FDIC or any other federal government agency 
• Are Not deposits of or guaranteed by a Bank or any Bank Affiliate 
• May Lose Value

 

Important Disclosures 

The information presented does not involve the rendering of personalized investment, financial, legal, or tax advice. This presentation is not an offer to buy or sell, or a solicitation of any offer to buy or sell, any of the securities mentioned herein.

Certain statements contained herein may constitute projections, forecasts, and other forward-looking statements, which do not reflect actual results and are based primarily upon a hypothetical set of assumptions applied to certain historical financial information. Certain information has been provided by third-party sources and, although believed to be reliable, it has not been independently verified, and its accuracy or completeness cannot be guaranteed.

Any opinions, projections, forecasts, and forward-looking statements presented herein are valid as on the date of this document and are subject to change.

There are inherent risks with equity investing. These risks include, but are not limited to, stock market, manager, or investment style. Stock markets tend to move in cycles, with periods of rising prices and periods of falling prices. Investing in international markets carries risks such as currency fluctuation, regulatory risks, economic and political instability. Emerging markets involve heightened risks related to the same factors as well as increased volatility, lower trading volume, and less liquidity.  Emerging markets can have greater custodial and operational risks, and less developed legal and accounting systems than developed markets.

There are inherent risks with fixed income investing. These risks may include interest rate, call, credit, market, inflation, government policy, liquidity, or junk bond. When interest rates rise, bond prices fall. The yields and market values of municipal securities may be more affected by changes in tax rates and policies than similar income-bearing taxable securities. Certain investors’ incomes may be subject to the Federal Alternative Minimum Tax (AMT) and taxable gains are also possible. Investments in below-investment-grade debt securities and unrated securities of similar credit quality, commonly known as “junk bonds” or “high-yield securities,” may be subject to increased interest, credit, and liquidity risks.

Investments in emerging markets bonds may be substantially more volatile, and substantially less liquid, than the bonds of governments, government agencies, and government-owned corporations located in more developed foreign markets.  Emerging markets bonds can have greater custodial and operational risks, and less developed legal and accounting systems than developed markets.

Investments in Master Limited Partnerships (MLP) are susceptible to concentration risk, illiquidity, exposure to potential volatility, tax reporting complexity, fiscal policy and market risk. Investors of MLPs are subject to increased tax reporting requirements. MLP investors typically receive a complicated Schedule K-1 form rather than Form 1099. MLPs may not be appropriate investments for tax-advantaged accounts because of potential negative tax consequences (Unrelated Business Tax Income).

As with any investment strategy, there is no guarantee that investment objectives will be met, and investors may lose money.

Returns include the reinvestment of interest and dividends.

Investing involves risk, including the loss of principal. Diversification may not protect against market loss or risk.

Past performance is no guarantee of future performance.

Index Definitions

The Standard and Poor’s 500 Index (S&P 500) is a market capitalization-weighted index of 500 common stocks chosen for market size, liquidity, and industry group representation to represent U.S. equity performance.

The Dow Jones Industrial Average Index is a price-weighted average of 30 significant stocks traded on the New York Stock Exchange and the Nasdaq.

The MSCI EAFE Index is an equity index which captures large and mid-cap representation across developed markets countries around the world, excluding the U.S. and Canada. Developed markets countries in the MSCI EAFE Index include: Australia, Austria, Belgium, Denmark, Finland, France, Germany, Hong Kong, Ireland, Israel, Italy, Japan, the Netherlands, New Zealand, Norway, Portugal, Singapore, Spain, Sweden, Switzerland and the UK.

MSCI Emerging Markets Index is a free float-adjusted market capitalization index that is designed to measure equity market performance in the global emerging markets.

The Barclays Aggregate Bond Index is comprised of U.S. government, mortgage-backed, asset-backed, and corporate fixed income securities with maturities of one year or more.

Producer Price Index measures the average changes in prices received by domestic producers for their output.

Barclays U.S. High Yield Index covers the universe of fixed rate, non-investment grade debt. Eurobonds and debt issues from countries designated as emerging markets (sovereign rating of Baa1/BBB+/BBB+ and below using the middle of Moody’s, S&P, and Fitch) are excluded, but Canadian and global bonds (SEC registered) of issuers in non-EMG countries are included. Original issue zeroes, step-up coupon structures, 144-As and pay-in-kind bonds (PIKs, as of October 1, 2009) are also included.

J.P. Morgan’s Corporate Emerging Markets Bond Index Broad Diversified High Yield (CEMBI BD HY) is a market capitalization weighted index consisting of US-dollar-denominated emerging market non-investment grade rated corporate bonds. According to J.P. Morgan, this index limits the weights of those index countries with larger corporate debt stocks by only including a specified portion of these countries’ eligible current face amounts of debt outstanding.

Alerian MLP Index is the leading gauge of large- and mid-cap energy Master Limited Partnerships (MLPs).

Barclays U.S. Corporate BBB OAS Index is the Baa component of the U.S. Corporate Investment Grade index. The U.S. Corporate Investment Grade Index is publicly issued U.S. corporate and specified foreign debentures and secured notes that meet the specified maturity, liquidity, and quality requirements. To qualify, bonds must be SEC-registered.

Indices are unmanaged, and one cannot invest directly in an index. Index returns do not reflect a deduction for fees or expenses.