Keeping Trackof Expiring and New Tax Provisions

WHO PAYS FOR LONG-TERM CARE?

In 1994, 7.3 million Americans needed Long-Term Care services at an average cost of nearly $43,800 per year. By 2000, this number rose to 9 million Americans at nearly $55,750 per year. Average costs are currently near $75,000 per year. By 2030, those needing Long-Term Care will skyrocket to 23+ million Americans, with projected individual Long-Term Care costs reaching $300,000 annually per individual! Long-Term Care premiums are increasing as a result of the currently historic low interest rates and yields on fixed income investments. This challenging market has resulted in many insurance issuers making the decision to discontinue their sales of individual Long-Term Care policies. This dilemma has led to the introduction of hybrid products into the market. These products include life insurance policies and nonqualified annuities with Long-Term Care riders offered for an additional charge. Contact your CIC consultant or visit our website for more information.
Source: National Advisory Center for Long Term Care Insurance http://longtermcareinsurance.org/

A number of significant federal income tax provisions expired at the end of 2011, a fact that might be easily overlooked with so much attention being focused on the Bush tax cuts that are still in effect, but scheduled to expire at the end of 2012. Of course, new legislation could always extend some or all of these provisions. New Medicare-related taxes, effective in 2013, have received surprisingly little coverage. To view this entire article that includes provisions that have already expired and new taxes effective in 2013, visit our website at www.carolinasinvest.com.

Expiring at the end of 2012

Federal income tax rates— After December 31, 2012, we are scheduled to go from six federal tax brackets (10%, 15%, 25%, 28%, 33%, and 35%) to five (15%, 28%, 31%, 36%, and 39.6%).

Marriage penalty relief— Tax changes that were originally made to address a perceived “marriage penalty” expire at the end of 2012. If you are married and file a joint return with your spouse, you will see the effect in the form of a reduced 2013 standard deduction amount, as well as in lower 2013 tax bracket thresholds in the tax rate tables (i.e., couples move into higher rate brackets at lower levels of income).

Long-term capital gains rate— Starting in 2013, the maximum rate on long-term capital gains will generally increase to 20%, with a 10% rate applying to those in the lowest (15%) tax bracket (though slightly lower rates might apply to qualifying property held for five or more years). While the current lower long-term capital gain rates now apply to qualifying dividends, starting in 2013, dividends will be taxed at ordinary income tax rates.

2% payroll tax reduction— The recently extended 2% reduction in the Social Security portion of the Federal Insurance Contributions Act (FICA) payroll tax expires at the end of 2012.

Itemized deductions and personal exemptions— Beginning in 2013, itemized deductions and personal and dependency exemptions will once again be phased out for individuals with high adjusted gross incomes (AGIs).

Tax credits and deductions— The earned income tax credit, the child tax credit, and the American Opportunity (Hope) tax credit revert to the previous, lower limits and (less generous) rules of application. Also gone in 2013 is the ability to deduct interest on student loans after the first 60 months of repayment.

Source: Broadridge Investor Communication Solutions, Inc.

The New Estate Tax Rules and Your Estate Plan

The Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010 (the 2010 Tax Act) includes new gift, estate, and generation-skipping transfer (GST) tax provisions. New to estate tax law is gift and estate tax exemption portability: generally, any gift and estate tax exemption left unused by a deceased spouse can be transferred to the surviving spouse. The GST tax exemption, however, is not portable. These major changes are temporary and portability may be repealed. You should understand how these new and temporary rules may affect your estate plan.

Please visit our website www.carolinasinvest.com to view the full article.

Source: Broadridge Investor Communication Solutions, Inc.

Qualified Limits& Medicare Premiums

Source: The Kiplinger Tax Letter Vol. 86, No. 23 November 10, 2011

To download your own PDF copy of this newsletter, click here.

Resources

• Keeping Track of Expiring and New Tax Provisions (PDF)
• Medicare Premiums: Rules for Higher-Income Beneficiaries (PDF)
• The New Estate Tax Rules and Your Estate Plan (PDF)
• Long Term Care Annuities (PDF)

New Year’sResolutions + Investing

“No Thing in Moderation” = Bad Idea for Your Investments

Be Prepared
Create a Disciplined Approach

When asked about how to prepare for the next major crisis, Barry Ritholtz, the author of Bailout Nation and CEO of Fusion IQ, says the following:

“The time to look for the emergency aisles and where the exits are located is before takeoff, not after the wings fall off the plane. You must have a plan in place to deal with unanticipated events, a just-in-case things head south scenario.

Ideally, you put this plan together when you are objective and unemotional and calmly contemplative – not when things are figuratively and literally melting down.”⁵

There is nothing on the grocery store produce aisle more perishable than that most common of January traditions, the New Year’s Resolution. By the time you are reading this, yours have probably bit the dust, as have ours. In fact, only 8% of Americans are always successful in achieving their resolutions, while almost 75% are virtually never successful.¹ Why are we so notoriously bad at keeping our resolutions? Extremism and lack of discipline, plain and simple. Whether it’s losing weight, working out, or giving up a bad habit, we tend to make extreme resolutions and fail to create a disciplined approach to help keep us on track. Okay, so what does this great American tradition (for a small few) have to do with investing? Everything.

Let’s take a quick look at the two most recent extremist views on the markets and how they played out. In the spring of 2009 we all heard investment pundits as well as friends, neighbors, co-workers, etc. exclaim, “sell all of your stocks while you still can!” From the bottom of the market on 3/9/09, the S&P 500 was up 97.2% thru 12/31/11.² Over that same time period, most major international indexes were up between 60% and 160%.³ In late 2010 and most of 2011, we were warned that interest rates had nowhere to go but up, so we often heard “sell your bonds.” As of 12/31/10, the yield on 10-year U.S. Treasuries was 3.30%. To the surprise of virtually the entire investment world (most notably, Bill Gross at PIMCO), those same Treasuries were yielding 1.89% on 12/31/11 which resulted in a 17% return for the year.⁴

Both the run-up in the stock market following the Great Recession and the 2011 mini-bull market in bonds were seen as highly improbable events by many, yet they occurred. So, what did we learn from them? Investors seldom calculate the opportunity cost of being all in or all out of an asset class (otherwise known as “market timing”) until it is entirely too late. Creating a disciplined approach or strategy to avoid making extreme and irrational decisions at the worst possible time is critical to long-term investment success.

2012 will undoubtedly be full of surprises, but don’t let them derail your strategy. In the words of James O’Shaughnessy, author of What Works on Wall Street, “if you use even a mediocre strategy consistently, you’ll beat almost all investors who jump in and out of the market, change tactics in midstream and forever second-guess their decision.”⁶

1. Interesting New Year’s Resolution Statistics – http://www.steveshapiro.com/2008/12/11/interesting-new-years-resolution-statistics/
2. JPMorgan Guide to The Markets
3. Dshort Website – http://www.advisorperspectives.com/dshort/updates/World-Market-Snapshot.php
4. JPMorgan Guide to The Markets
5. The Big Picture Blog http://www.ritholtz.com/blog/2011/03/black-swans-100-year-floods/
6. “Getting the Most Out of Equities” – Investment News Dec 5-9, 2011 by James O’Shaughnessy

Volatility can lead to herd mentality and cause investors to rush for the exit

Sources: Standard & Poor’s and Strategic Insight. Net fund flows represent domestic and international equity mutual funds and exchange traded funds. The most recent data shown for S&P 500 Index values and net fund flows are through 11/30/11. Standard & Poor’s 500 Composite Index is a market capitalization weighted index based on the average weighted results of 500 widely held common stocks.

“You can have cheap equity prices or good news, but you can’t have both at the same time.”

- Joe Rosenberg, Chief Investment Strategist, Loews Corporation/Tisch Family (source: Barron’s, Dec. 3, 2011)

Market Trend Watch

• Up vs. Down

  The split between “up” and “down” days for the S&P 500 over the last 50 years (1962 – 2011) is 53% up and 47% down. The split for 2011 was 55/45, a surprising result considering the index was up only 2.1%.

• Missing the Beat

  If you had missed the best three days last year, your return from the S&P 500 would have fallen from +2.1% to -10.7%.

• Avoiding the Worst

  If you had avoided the three worst days last year, your return from the S&P 500 would have increased from +2.1% to +20.2%.

• In and Out

  The top performing stock in the S&P 500 in 2011 (+101%) was ranked #461 out of 500 in 2010 (-13%). The top-ranked stock in 2010 (+140%), was ranked #393 in 2011 (-20%).

• Few Stocks, Large Impact

  The 10 largest stocks in the S&P 500 (2% of the stocks) made up 20% of the value of the index because the S&P 500 is a market-cap weighted index.

• Better than the Rest

  U.S. equity markets fared better than 45 of 48 markets tracked by MSCI.

(sources: Direxion Funds, Leuthold Weeden Capital)


To download your own PDF copy of this newsletter, click here.

Consultants

George H. Edmiston, Jr.

Oliver R. Cross III

R. Christopher Gammon, CFA, CFP®

Christopher K. Grogan

Thomas E. (Ted) Highsmith

David A. Perkins, J.D., CPA, CFP®

Nothing contained in this material is intended to constitute legal, tax, securities, or investment advice, nor an opinion regarding the appropriateness of any investment, nor a solicitation of any type. The general information contained in this publication should not be acted upon without obtaining specific legal, tax, and investment advice from a licensed professional.



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