It’s hard to believe there are just two full weeks left in 2012. The year end tends to be a busy time for us financial types and with the uncertainty surrounding future tax rates, this year will be busier than most. The first article below covers some of the high points of year-end tax planning – when it’s necessary, when it’s not and choices that are available to some taxpayers that allow them to accelerate or defer their tax burdens.

In the financial planning tip, we take a look at ways to save on energy costs and incentives that exist for consumers to increase energy efficiency. Finally, in the question of the month, we provide some insight into determining how much long term disability coverage one might need.

As always, if you have any questions or comments, please let us know. Enjoy the holidays, and we wish you a prosperous New Year!

Best regards,

Micah Porter, CFA, CFP®


Tax Planning and Income Shifting
Micah Porter, CFA, CFP®

There are a number of different aspects to tax planning, and particularly year end tax planning. However, the two most common facets of planning are estate and income tax planning. The former is generally limited to the wealthier – particularly in recent years given the higher estate tax exemptions – but income tax planning is relevant to a much broader swath of the population.

One key to income tax planning is making choices that impact your taxable income. Some taxpayers may have more latitude in doing this than others, but in general, the ways one can do this are as follows:

Receipt of income – for those who work for an employer, this is likely not an option. However, the self-employed may have the option of choosing when to begin projects and by extension, when they will get paid. If the goal is to accelerate income into the current financial year, it might be possible to pull income into this year. However, given the complexity of accounting rules regarding when revenue should be recognized, be sure to check with your accountant to confirm any strategies you might have for timing of income recognition are acceptable.

Exercise of options – many employers, particularly in the tech sector, grant options to their employee. Typically, employees have some discretion regarding when to exercise those options. How the income is treated depends upon the type of option, but from a tax perspective (and not necessarily from an investment perspective), it may make sense to defer exercise of the option in a year in which one’s taxable income is particularly high.

Recognition of capital gains – although capital gains are taxed differently than income, capital gains can push a taxpayer into a higher tax bracket. Further, in a few instances, taxpayers in a low tax bracket may find that their capital gains rate is zero. Finally, tax loss harvesting – selling positions with a loss and replacing them with placeholder investments – is one particularly effective way to minimize gains and taxes and something we consider for our clients when appropriate.

Acceleration of expenses – for taxpayers filing individual returns, increasing deductions can lead to reduced taxable income. One way to increase deductions is to pay some common deductible expenses – a mortgage payment or property taxes for example – a few days early. By paying the mortgage payment on December 31st as opposed to January 1st, the mortgage interest can be shifted into this taxable year. The same type of approach can be used by business owners, and for those owners even capital investments can, in certain circumstances, be fully written off in a single year, often substantially reducing profit and by extension income tax.

How and when these tactics should be used depends on a number of different factors, and the fiscal cliff only makes the calculus more complex. However, in general, you’re better off either deferring taxes or – if you have uneven income – trying to maintain the lowest marginal tax rate over an extended period. Deferring taxes is straightforward, and decreasing income or increasing deductible expenses in the current year both accomplish this.

For those with uneven income who want to maintain the lowest marginal tax rate over several years, tactics differ. For example, if a business owner expects much higher income next year to push her into the next higher tax bracket, she might be better off maximizing her recognized income this year and minimizing her expense so that she has less taxable income subject to the higher tax bracket next year.

Suffice it to say, year end tax planning is a complex topic, but given the opportunity it offers to minimize taxes, it’s worth exploring particularly if your taxable income varies widely year-to-year.


Financial Planning Tip – Saving on your utility bill
Micah Porter, CFA, CFP®

Occasionally, a client will ask a question regarding their budget and how they might spend less. I’ve written in the past about how to live without cable as we’ve done for going on two years, and recently I’ve begun to look into lowering our energy bill. We live in a condo, so our options are limited, but one change we were able to make was installing what is essentially a smart thermostat.

The thermostat is called the Nest, and it claims it can lower your heating and cooling bill by up to 20%. We don’t have enough experience to determine whether or not this is the case, but some of the improvements – like automatically detecting when we’re away and adjusting the temperature accordingly – certainly can’t hurt. The point isn’t to recommend the Nest but to point out that programmable thermostats should save on energy bills over time. As an added bonus, Georgia Power offers rebates on programmable thermostats plus other home energy improvements.

If you’re interested in doing something even more impactful, there are no shortage of options and these options are often accompanied by rebates from the power companies plus tax credits . A friend recently installed a solar system in his home. A combination of tax credits and rebates defrayed over half the cost, and the the end result is that he should save enough on his utility bills to achieve payback for the system in less than 2 years.

If you’re not sure where to start, check with your local utility. Georgia Power, for example, offers a free in-home energy audit and from that audit, they can generate suggestions regarding improvements you could make. Once you’ve identified potential improvements, determine how quickly the improvement would pay for itself by identifying the net cost to you (after any applicable rebates and tax credits) and the savings on your utility bill you should expect. Once you understand how quickly the improvement will pay for itself, you can decide whether it makes financial sense.

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<strong>Client Question of the Month</strong>

<em>Micah Porter, CFA, CFP®</em

How much disability insurance do I need?

There are really two levels of coverage one can hope to attain with long term disability insurance as follows:

1) Enough to cover ongoing expenses – bear in mind that if the insurance is funded with after-tax dollars, the benefits aren’t taxable.

2) Enough to cover ongoing expenses and to continue to save per your financial plan. Thus, a disability wouldn’t derail a planned financial goal such as retirement, as the savings for the goal would continue.

It’s often tough to find a carrier or carriers that will underwrite enough for #1 and #2, as their concern is that the insured would have a greater likelihood of claiming disability. Not being able to cover both #1 and #2 won’t necessarily derail a plan completely though, as many disabilities persist for a discrete amount of time before the insured is able to return to earning something in he neighborhood of what they had previously earned.