Compliance August 30, 2012

Janus Helps Advisers Plan for Tax Break Sunset

Janus Capital Group has come up with 10 ways advisers can help clients mitigate higher ordinary income tax and long-term capital gain rates.

Reported by

Lee Barney

“Beginning in 2013, many clients can expect their taxes to increase, and in some cases, the increase may be substantial,” Janus tells advisers in “Preparing Your Clients for a World of Higher Taxes,” a white paper by the firm’s retirement and tax experts. The breaks on ordinary income tax and long-term capital gains, originally scheduled to sunset on December 31, 2010, could very likely expire at the end of this year, unless a compromise is reached in Washington. Rates would then revert to the higher, previous levels of several years ago, Janus said.

“While it’s possible, maybe even likely, some kind of compromise will be reached in Washington, no one knows at all what it will look like,” said Matt Sommer, vice president and director of the retirement strategy group at Janus. “The earlier advisers and clients start to think through the possibilities, the more prepared they will be at year-end if action is required.”

If the sunset on the tax breaks is not extended, the current 10% income tax bracket will be eliminated, replaced by 15% as the new lowest bracket. The 25%, 28% and 33% tax brackets will each bump up by three percentage points to 28%, 31% and 36%, respectively, and the highest 35% rate will rise by 4.6 percentage points to 39.6%. Also, the 15% long-term capital gain rate will increase to 20%, and qualified dividends, currently taxed as long-term capital gain, will be taxed as ordinary income. Further, the $5 million exclusion amount and maximum 35% rate for gift, estate and generation skipping transfer purposes is scheduled to revert to $1 million and 55% in 2013.

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One of the strategies that Janus recommends advisers consider for clients who own a highly appreciated asset, such as a business or real estate, is to sell those assets in 2012. Advisers might also suggest that clients spread out year-end deductions across their 2012 and 2013 tax returns, because of higher ordinary income taxes. Another relief, for the same reason, could be to maximize employer retirement plan contributions.

Janus also notes that high-net-worth clients might want to take another look at investments that maximize after-tax returns. These include municipal bonds, whose interest payments are federally tax-free and often state tax-free. If a client holds a growth-oriented investment for at least one year, it will be taxed at the more favorable long-term capital gains rate, rather than the higher ordinary income rate. Investors might also want to consider tax-efficient mutual funds with low portfolio turnover and less frequent capital gain distributions, Janus said.

Advisers can obtain a copy of the detailed, 10-point “Preparing Your Clients for a World of Higher Taxes” report by calling 1-877-33-JANUS (52687) or visiting the Janus adviser website here.

Data & Research August 30, 2012

Industry Leaders Discuss Tax Treatment of Benefits

Workers value their employer-provided health and retirement benefits, but the tax incentives that support these benefits are being scrutinized.

Reported by

PLANADVISER staff

To examine the implications for private-sector health and retirement benefits, as well as the costs and consequences, and what the numbers are, the Employee Benefit Research Institute (EBRI) recently held a day-long policy forum in Washington, D.C. Approximately 100 experts, benefits professionals and policymakers attended to provide their perspectives and predictions.

An EBRI report about the forum notes that the reach and impact of these benefits is immense. Employment-based health benefits are the most common form of health insurance in the U.S., covering nearly 59% of all nonelderly Americans in 2010 and 69% of working adults. Assets in employment-based defined benefit (pension) and defined contribution (401(k)-type) plans account for more than one-third of all retirement assets held in the U.S., and a significant percentage of assets held today in individual retirement accounts (IRAs) originated as a rollover account from an employer-sponsored program.

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Workers routinely rank their employment-based health coverage as the most important benefit they receive, followed by a retirement plan.

Since private-sector health benefits alone rank as the largest single “tax expenditure” in the federal budget, various proposals have been made either to reduce or even to phase out the cost of that program to the government. For employers that sponsor these benefits – and the workers who receive them – the implications are enormous, the EBRI report points out.

“When you look at some of the recent proposals for reform, benefit plan tax incentives are an area of total and complete volatility, and neither employers nor workers can have any certainty of what lies ahead,” said Dallas Salisbury, president and chief executive of EBRI.

(Cont...)

The comments from industry professionals about tax treatment of benefits and suggestions for improving benefit plan outcomes included:

Retirement benefits are a tax deferral rather than an exclusion from income—meaning the federal government will eventually recoup the forgone revenue. This distinguishes retirement plan deferrals from other tax exclusions.
A big difference between tax-expenditure estimates and revenue estimates for scoring tax reform is that the latter incorporates taxpayer behavior whereas tax expenditure estimates do not.
Ten percent or fewer of those ages 55 to 60 are making withdrawals from their IRA, compared with 80% of those 71 and older.
On a historical basis, depending on the period measured, pre-retiree balances in defined contribution retirement plans double about every eight to nine years.
Employer match levels seemed to have a bigger impact on older workers, but automatic enrollment seems much more significant in terms of getting younger employees to participate in retirement plans.
Common challenges for underfunded retirement systems worldwide include the need to increase the state pension age and/or “normal” retirement age for full benefits; to promote higher labor-force participation at older ages; to encourage or require higher levels of private saving; to increase retirement coverage of employees and/or the self-employed; and to reduce savings “leakage” prior to retirement.

The full report is in the August 2012 EBRI Issue Brief, “ ‘After’ Math: The Impact and Influence of Incentives on Benefit Policy,” online here. Speaker presentations, a webcast recording of the event and other information are online at EBRI’s website.