FOR IMMEDIATE RELEASE
Tyler Ozanne, Certified Financial Planner™, and Christopher Sorrow, Chartered Financial Analyst® Share Tax Season Tips and Advice
DALLAS, TX, March 15, 2012 – Given that it’s tax season, Tyler Ozanne, Certified Financial Planner™, and Chris Sorrow, Chartered Financial Analyst®, share guidance regarding how Probity Advisors, Inc.® is advising clients with respect to tax planning.
Tax Season Q&A with Probity Advisors, Inc.
1. Do you have any advice for individuals preparing their tax returns this tax season?
Tyler: First, make sure you have received your Form W-2, Form 1098 or Form 1099 and confirm your information is correct. You’d be surprised to find that errors do occur from time to time. Second, be sure to take advantage of any tax deferral mechanism that may be available to you by investing in your 401(K), 403(B), SEP, SIMPLE or IRA. The degree and amount you should utilize these vehicles can be highly specific to each individual’s financial situation. For example, many folks simply assume they should funnel their discretionary saving into both their 401K and IRA, but that isn’t always the most optimal decision. If you contribute to your company’s 401(K), then you may be limited in taking the full deduction for your IRA contribution. Furthermore, given that gains in IRAs ultimately get taxed at ordinary income, you are essentially trading capital gains rates for ordinary tax rates, which have historically been higher than capital gains rates. Of course all of this is highly specific to the individual and depends on what rate you expect to be taxed at in the future relative to where you are today.
2. Where do you see tax rates headed and what impact is this having on the advice you are providing your clients?
Tyler: It’s an election year, so the rhetoric is already deafening. I think it is fair to assume, however, that over the next several years we will see tax increases for everyone across the board – starting with the estate tax, followed by the marginal income tax rates, and ending with long-term capital gains and dividend income tax rates. Based on a client’s objectives, there are a variety of techniques available to take advantage of the window we’ve got. One rather benign technique is to delay present deductions that would benefit you at today’s rates in order to use them against future anticipated gains, like a sale of a business, when we think rates will be higher. An even more interesting technique is to go ahead use the full lifetime exemption (up to $5 million) to gift assets to other, inter-generational family members. The logic is that, if the estate exemption gets reduced, the assets will already be out of the estate. If, on the other hand, the exemption goes up, then you would still have more that you could gift in the future. By going ahead and gifting the assets, we are removing some of the uncertainty surrounding tax policy for our clients.
Chris: I couldn’t agree more. I take the position that you delay taxes as long as possible. The only exception is if doing so means you ultimately pay more taxes in the future. With tax rates likely to go up, in some cases we are more willing to raise capital gains today at 15%, resetting the basis, rather than holding and paying 20% in the future as has been proposed. Conversely, just like Tyler was talking about with delaying deductions, client loss carryforwards will be more valuable in the future, so we may be willing to take some losses on some of the positions that we are still enthusiastic about long term in order to go ahead and bank the loss.
Tyler: Taxes are a fact of life, but if you are proactive and diligent there are a variety of things that can be done to help mitigate their impact. This cannot be done retroactively, however, so you have to have plan and you have to implement the plan. There is nothing worse than seeing someone pay taxes that they had every right to avoid had they just structured a few things differently.
3. You’ve mentioned that your investment advice is based on investor objectives. Isn’t the objective in investing always to achieve as much return as possible?
Tyler: As a planner, my job is to help clients understand the impact various factors and decisions have on their ability to reach their goals. One of these factors is the amount of risk and return they assume within their portfolios, but other factors include how long they plan to work, how much they plan to spend, and how long we expect them to live – to name just a few. The point is there are a variety of items that bear on one’s ability to meet their financial objectives. Return typically comes at a cost, and that cost is risk. So we take the position that we should pursue risk and return within our investment portfolios only to the degree that it is consistent with the client’s overall objective. No more, no less.
Probity Advisors, Inc. is a financial services firm based in Dallas, Texas. For more than 60 years, Probity has helped individuals, families and businesses manage their financial assets and resources in order to achieve financial independence and security. With expertise in customized portfolio management, financial and estate planning, retirement benefits consulting, risk management solutions and tax planning, Probity provides a comprehensive and integrated approach to managing and building wealth. Probity’s team of Certified Financial Planners®, Chartered Financial Analysts®, and Chartered Financial Consultants® is committed to providing sound and unbiased advice to help clients optimize their complete financial picture with a coordinated estate, investment and tax strategy.