Permanent Value

New Year, New Possibilities

Bruce Doole
January 13th, 2011


2011 is here and the elections are over.  We last talked about how the elections were a referendum on how the new administration is guiding our economy and judging by the huge Republican shift in Congress, the voters expressed that they want the government to go in a different direction.    Congress will be trying to enact those changes that will take the government in a different direction but will have to work with the administration to do so.  As a result, there has already been a significant tax deal which we will detail below. 


On December 17, 2010, President Obama signed the Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010.   The Bush tax cuts are thus extended for all income levels through year-end 2012.   As a result, the dividend and capital gains tax rates remain at 15% through 2012.   The AMT is “patched” through 2011, mitigating its consequences for middle-income taxpayers in the same manner as in prior years.  The employee’s share of Social Security tax is reduced by two percentage points in 2011.  As a result, working taxpayers will pay Social Security tax in 2011 at a 4.2% rate (rather than the prevailing 6.2% rate). A worker with compensation in excess of the Social Security wage base maximum of $106,000 will save $2,120 in Social Security tax in 2011.    Most expired or expiring tax provisions are extended through 2011.   Of particular note, investors may move up to $100,000 from an IRA to a charity in each of 2010 and 2011 to satisfy their RMD requirement without incurring tax.  To provide investors with additional time to arrange this transfer, the legislation treats transfers from IRAs to charities made during January 2011 as if they were made in 2010.   Perhaps most surprising was that the compromise included estate and gift tax provisions more generous than any past estate tax change. These new rules remain in effect through year-end 2012:  a $5 million estate tax exemption and a 35% estate tax rate and reinstatement of stepped-up basis at death.  One thing is clear: eventually, taxes must go up. Whether higher taxes occur through further stratification of upper-income tax rates or through tax reform that eliminates many of the deductions we’ve come to expect, mathematically the budget deficit simply demands greater revenues. We have a two-year reprieve, but we are likely to be paying back our tax refunds with interest. *(source The Washington Update Jan 2011)    Now you might be thinking, “How do you stay up on all these changes and make the best recommendations for me?”  The same answer applies to executing the strategy as it does to designing it.   We know how to identify the issues that need addressing and then we rely on tax and legal experts to help us analyze your situation and make recommendations that best fit your financial situation.


In our last letter we discussed how to design a strong financial game plan.  As you may have seen or heard while watching the college bowl season or the NFL playoffs, executing the game plan is even more important than designing it.   Every coach knows that without proper execution and adjustments, the best plan is useless.   That is why open communication between you and your advisor to discuss implementation of action items and ongoing changes is so important.  We are the offensive and defensive coordinator that helps design how to grow and how to protect.   You are the head coach who helps set the strategy and then we make sure it gets executed properly.  Luckily we have unlimited timeouts to discuss strategy but the clock is ticking and we want to have a sense of urgency.    As always, we are continuing to work on your investment and financial game plan on a regular basis and look forward to our “huddle” with you to discuss it.  

Have a Happy New Year from all of us.