A look at some financial changes & the opportunities they may present.

Every year brings some financial change, so here are some relevant changes relating to investment, tax and estate planning for 2012.

Retirement plans. 401(k), 403(b) and 457 plan annual contribution limits rise slightly to $17,000, and you can contribute an additional $5,500 to these accounts if you are 50 or older this year. IRA contribution levels are unchanged from 2011: the ceiling is $5,000, $6,000 if you will be 50 or older in 2012.¹

As you strive to contribute as much as you comfortably can to these accounts this year, you will probably notice some changes with the retirement plan at your workplace. In 2012, retirement plan sponsors (i.e., employers) will have to note all of the fees and expenses linked to the funds in the plan to plan participants. So if you have a 401(k) or 403(b), you may notice some differences in the disclosures on your statements and you will probably notice more information coming your way about fees. There is also a push in Washington, D.C. to have financial companies provide lifetime income illustrations on retirement plan account statements, projections of your expected monthly benefit at retirement age.²

Income taxes. Wealthy Americans are set to face greater income tax burdens in 2013, so 2012 may be the last year to take advantage of certain factors. For example, the top tax bracket in 2013 is slated to be at 39.6% instead of the current 35%. This year, capital gains and dividends will be taxed at 15% or less for everyone, 0% for those in the 10% and 15% tax brackets. In 2013, the qualified capital gains tax rate is scheduled to rise to 20% and qualified dividends will be taxed as ordinary income. So taking a little more income in 2012 could be smart.³

In 2013, the wealthiest Americans are supposed to be hit with new Medicare taxes: a new 3.8% levy on unearned income (such as capital gains, income from real estate, dividends and interest) and a new 0.9% tax or earned income. So next year, the truly wealthy could effectively face in the neighborhood of 45% federal taxes.³

Additionally, the IRS is planning to limit itemized deductions for upper-income taxpayers in 2013. A phase-out will also apply for the personal exemption deduction.³

Estate & gift taxes. At the end of 2012, some very nice estate tax breaks could sunset. Barring action by Congress, 2013 could see a 20% leap in the federal estate tax rate from 35% to 55%. The individual estate tax exclusion (currently $5.12 million) is scheduled to be reduced to $1 million.³

As we have unified gift and estate tax rates, those numbers and percentages also apply to gift taxes. That is, from 2012 to 2013 top federal gift tax rate is set to go from 35% to 55% and the lifetime gift tax exemption amount is scheduled to fall $4,120,000 per individual to $1 million. The annual gift tax exemption is $13,000 per recipient in 2012; there is an exemption limit for qualifying educational and medical payments. If you want to gift relatives or friends, you may want to avoid procrastinating for another very good reason: when you make such a gift early in a year, the recipient will gain both the principal and any appreciation tied to the gifted asset in that year.^3,4

Speaking of gifts, we said goodbye to charitable IRA gifts in 2011. The IRA charitable rollover, a boon to non-profits and a handy tax deduction option for taxpayers older than age 70½, was not extended into 2012, not even temporarily as a sweetener to the payroll tax extension bill. There is hope it will be back. Two bills have been introduced in Congress with that goal, one sponsored by Sen. Olympia Snowe (R-ME) and Sen. Charles Schumer (D-NY) and another by Rep. Wally Herger (R-CA) and Rep. Earl Blumenauer (D-OR). The proposed legislation would let IRA owners start making charitable IRA gifts at age 59½ and remove the $100,000 limit on the rollovers.⁵

The limits on the generation-skipping transfer tax could change, too: assuming the Bush-era tax cuts do sunset, the GSTT rate would jump from 35% this year to 55% in 2013, with the GSTT exemption falling from $5,120,000 per person this year to roughly $1.3 million per person next year.³

So given all these changes, it might be wise to meet with the financial professional you know and trust early in 2012 as you strive to start the year off on the right foot. You have until April 17 to file your federal return, but you can plan now.

Citations.

1. www.irs.gov/retirement/article/0,,id=96461,00.html [10/20/11]
2. www.marketwatch.com/story/retirement-plan-changes-coming-in-2012-2011-12-29 [12/29/11]
3. www.sbnonline.com/2012/01/how-to-approach-tax-and-estate-planning-opportunities-for-2012/?full=1 [1/3/12]
4. advisorone.com/2012/01/06/10-tax-tips-for-advisors-in-2012 [1/6/12]
5. www.northjersey.com/news/business/business_opinion/136217658_Payroll_tax_cut_benefits_charities.html [12/25/11]

Debt crises held stocks in check in 2011.

A tumultuous year for stocks. As 2011 winds up, many investors are more concerned with return of capital than return on capital. That is understandable; Wall Street faced some powerful headwinds this year. With little policy momentum to foster or aid any available economic momentum, U.S. and global indices were poised to finish the year with flat to poor annual returns.
The debt crisis in Greece boiled over to Italy and touched Spain and France, scaring the world economy. Key heads of state from the European Union reaffirmed their countries’ commitments to the euro and sought to reassure investors; many observers saw as much rhetoric as action in their efforts and were skeptical that the EU could effectively address its debt crises in the coming years.

At home, our economy expanded, but not as much as would be hoped for in the typical recession recovery. Unimpressive job creation and high unemployment thwarted any housing rebound, despite record-low mortgage interest rates. Many consumers perceived the economy as bad and Congress as even worse, but consumer spending and retail purchases showed improvement in an economy where inflation hovered around 3.5% and growth hovered around 2%. A super committee of 12 Capitol Hill legislators could not agree on where to make cuts to the federal deficit, only months after a drawn-out fight to raise the debt ceiling prompted Moody’s to issue a historic downgrade of the U.S. credit rating to AA+.¹

Stocks. As the holiday season started, the Dow was more or less flat for 2011: down 0.7% YTD at the close on November 22. Year over year, it was +2.8%. The S&P 500 was down 5.5% YTD on November 22 and its 1-year change was -0.8%; the NASDAQ had lost 0.4% over the previous 365 days and YTD it was at -5.0%. Looking at the small caps, the Russell 2000 was down 11.2% YTD and 4.3% YOY.^2,3,4,5

How about the S&P 500 sectors? Approaching Thanksgiving, the YTD numbers looked like this (again, this snapshot was taken at the close on November 22): utilities, +7.0%; consumer staples, +3.8%; health care, +2.2%; consumer discretionary, -0.5%; info tech, -1.4%; energy, -2.8%; telecom services, -6.3%; industrials, -9.1%; materials, -15.0%; financials, -24.5%. That’s three out of ten in the black. The S&P 500’s total return was -3.78% at that point.⁶

Other global benchmarks suffered from the anxiety generated by years of fiscal mismanagement on the part of sovereign governments. Morningstar data (measured in U.S. dollar terms) showed the following YTD losses among important world indices on November 22: Sensex, -20.2%; CAC 40, -24.6%; DAX, -23.5%; FTSE 100, -11.8%; Hang Seng, -21.0%; Nikkei 225, -18.7%; Australian All Ordinaries, -13.3%; TSX Composite, -12.3%; Shanghai Composite, -14.1%; MSCI Emerging Market Index, -21.0%; MSCI Word Index (ex-USA), -15.5%.⁷

Commodities. Gold and silver had definite allure. Looking at the handy charts from IndexMundi.com gold was up 22.8% YTD and silver 12.3% YTD on November 22; copper, on the other hand, was at -22.4%. In energy, crude oil had advanced 7.8% on the year; natural gas had fallen 20.7%; RBOB Gasoline futures were up 20.5% YTD. In crop futures, wheat was at -11.5%, cocoa -15.3%, oranges +40.6%, barley +7.0%, coffee -5.5%, sugar -11.6%, cotton -38.2%, rubber -26.4% and soybeans -12.7. The U.S. Dollar Index approached Thanksgiving down 0.8% on the year.^8,9

Real estate. The annualized numbers mean most in this sector, and these were the latest available by late November. The pace of existing home sales as measured by the National Association of Realtors was 13.5% better in October 2011 than in October 2010, although the month-to-month data had shown basically a plateau since February. NAR’s pending home sales index (September edition) showed 6.4% annual improvement; the National Association of Home Builders/Wells Fargo Opportunity index showed housing affordability at its highest in more than 20 years. The 20-city S&P/Case-Shiller Home Price Index showed an overall 3.8% year-over-year decline in prices in the September edition.^10,11,12

Total housing permits hit their highest level in seasonally adjusted terms in October since spring 2010 (when the home buyer tax credit expired). New home sales, however, were down 0.9% from a year before in October.^10,13

All in all, it was a year for patience. 2011 required it, and 2012 may require much more. Years of deficit spending have come to haunt key economies. What would have been stunning volatility during most of the 1990s or 2000s seems par for the course today as we have to hang on, stay diversified and ride out the turbulence – hoping that our stock market can manage at least a bit of “decoupling” from the debt troubles plaguing continental Europe.

This material was prepared by MarketingLibrary.Net Inc., and does not necessarily represent the views of the presenting party, nor their affiliates. Marketing Library.Net Inc. is not affiliated with any broker or brokerage firm that may be providing this information to you. This information should not be construed as investment, tax or legal advice and may not be relied on for the purpose of avoiding any Federal tax penalty. This is not a solicitation or recommendation to purchase or sell any investment or insurance product or service, and should not be relied upon as such. The Dow Jones Industrial Average is a price-weighted index of 30 actively traded blue-chip stocks. The NASDAQ Composite Index is an unmanaged, market-weighted index of all over-the-counter common stocks traded on the National Association of Securities Dealers Automated Quotation System. The Standard & Poor’s 500 (S&P 500) is an unmanaged group of securities considered to be representative of the stock market in general. It is not possible to invest directly in an index. NYSE Group, Inc. (NYSE:NYX) operates two securities exchanges: the New York Stock Exchange (the “NYSE”) and NYSE Arca (formerly known as the Archipelago Exchange, or ArcaEx®, and the Pacific Exchange). NYSE Group is a leading provider of securities listing, trading and market data products and services. The New York Mercantile Exchange, Inc. (NYMEX) is the world’s largest physical commodity futures exchange and the preeminent trading forum for energy and precious metals, with trading conducted through two divisions – the NYMEX Division, home to the energy, platinum, and palladium markets, and the COMEX Division, on which all other metals trade. BSE Sensex or Bombay Stock Exchange Sensitivity Index is a value-weighted index composed of 30 stocks that started January 1, 1986. The CAC-40 Index is a narrow-based, modified capitalization-weighted index of 40 companies listed on the Paris Bourse. The DAX 30 is a Blue Chip stock market index consisting of the 30 major German companies trading on the Frankfurt Stock Exchange. The FTSE 100 Index is a share index of the 100 most highly capitalized companies listed on the London Stock Exchange. The Hang Seng Index is a freefloat-adjusted market capitalization-weighted stock market index that is the main indicator of the overall market performance in Hong Kong. Nikkei 225 (Ticker: ^N225) is a stock market index for the Tokyo Stock Exchange (TSE). The Nikkei average is the most watched index of Asian stocks. The S&P/ASX All Ordinaries Index represents the 500 largest companies in the Australian equities market. The S&P/TSX Composite Index is an index of the stock (equity) prices of the largest companies on the Toronto Stock Exchange (TSX) as measured by market capitalization. The SSE Composite Index is an index of all stocks (A shares and B shares) that are traded at the Shanghai Stock Exchange. The MSCI World Index is a free-float weighted equity index that includes developed world markets, and does not include emerging markets. The MSCI Emerging Markets Index is a float-adjusted market capitalization index consisting of indices in more than 25 emerging economies. The US Dollar Index measures the performance of the U.S. dollar against a basket of six currencies. Additional risks are associated with international investing, such as currency fluctuations, political and economic instability and differences in accounting standards. All information is believed to be from reliable sources; however we make no representation as to its completeness or accuracy. All economic and performance data is historical and not indicative of future results. All indices are unmanaged and are not illustrative of any particular investment. Please note – investing involves risk, and past performance is no guarantee of future results. The publisher is not engaged in rendering legal, accounting or other professional services. If assistance is needed, the reader is advised to engage the services of a competent professional. The publisher is not engaged in rendering legal, accounting or other professional services. If assistance is needed, the reader is advised to engage the services of a competent professional.

Citations.

1. nytimes.com/2011/08/06/business/us-debt-downgraded-by-sp.html [8/5/11]
2. money.cnn.com/data/markets/dow/?iid=H_MKT_Data [11/22/11]
3. money.cnn.com/data/markets/sandp/ [11/22/11]
4. money.cnn.com/data/markets/nasdaq/ [11/22/11]
5. money.cnn.com/data/markets/russell/ [11/22/11]
6. www.standardandpoors.com/indices/sp-500/en/us/?indexId=spusa-500-usduf–p-us-l– [11/22/11]
7. news.morningstar.com/index/indexreturn.html [11/22/11]
8. www.indexmundi.com/commodities/ [11/22/11]
9. online.wsj.com/mdc/public/npage/2_3051.html?mod=mdc_curr_dtabnk&symb=DXY [11/22/11]
10. eyeonhousing.wordpress.com/ [11/22/11]
11. www.realtor.org/press_room/news_releases/2011/10/phs_sept [10/27/11]
12. seekingalpha.com/article/303829-updated-case-shiller-housing-numbers [10/31/11]
13. www.census.gov/const/www/newressalesindex.html [10/26/11]