12.11.13

Wealth Management Group Newsletter – Winter 2013
Adam J. Pechin

Sign of the Times
Members of the Sandwich Generation Face Unique Circumstances
Adam Pechin, CPA

John and Tina are married and have four children.  When John’s father was diagnosed with a serious illness that required long-term care, the couple joined an increasingly large group called the “Sandwich Generation.”

If you find yourself in a situation where you are raising children and funding their education, saving for your own retirement and helping to care for or support aging parents, consider yourself a member. Although it may be personally gratifying to be able to help your parents, it can be stressful and financially burdensome.  The good news is that careful planning and tax breaks may help.

Ease Anxiety with Planning

While most people in the Sandwich Generation welcome the chance to help care for their parents, they may feel stressed, and often overwhelmed, by the added demands and:

  • Fear that the burden of caring for both parents and children will consume your energy as well as your finances;
  • Be frustrated that your efforts to save for retirement have been stalled by the financial demands of both college-bound children and parents who need a higher level of assistance in their daily lives; and
  • Agonize over tough choices — whether to take extended leave from work, scale back your ambitions and expectations, or abandon your career altogether so you can devote more time to family.

The best way to reduce anxiety — and increase your odds of providing financial stability for yourself and your family — is with careful planning, preferably in collaboration with parents and siblings.  A good plan addresses three kinds of issues: legal, financial and emotional.

Ease Financial Burden with a Tax Exemption

To ease the financial burden, the dependent tax exemption allows qualifying taxpayers to deduct up to $3,900 in 2013 for each adult dependent claimed.  So how do you qualify?

First, for your parent to be considered a dependent, his or her income must be less than $3,900 in 2013.  Social Security generally does not count toward this amount, though any income from sources such as dividends, interest and retirement plan or IRA withdrawals does.

Second, you must contribute more than 50% of your parent’s financial support.  If two or more individuals combine to provide more than half the support, such as two children supporting a parent, they can agree that one of them will claim the exemption.

Here, Social Security is a factor.  For example, your parent may receive less than $3,900 in income, but if he or she is using Social Security to pay for medications or other items, you may not be providing enough support to claim the exemption.

Additionally, if your parent lives in your home, you can factor the fair market rental value of a portion of your residence into how much financial support you are providing. However, your parent does not have to live with you for you to claim the exemption.  If he or she stays in a separate residence, or lives in a nursing home or assisted living facility, you can still factor your financial support into the 50% test.

Beginning in 2013, the deduction for exemptions phases out if your income exceeds certain levels, so beware that, even if you qualify, you may not fully benefit. If you are subject to the alternative minimum tax (AMT), you may also not get full benefit for exemptions. If you do not qualify for the exemption because your parent has too much income, you may still be able to deduct combined medical costs that you pay for a parent and your own family in excess of 7.5% of your adjusted gross income.

Review Your Planning Options

When confronted with the emotional and financial burden of providing for your children’s educations, funding your retirement and supporting an aging parent, it is easy to become overwhelmed by the responsibilities.  If you are now, or soon will be, a member of the Sandwich Generation, discuss your planning options with your financial advisor.

If you have questions about whether you qualify for tax exemptions or need planning assistance, please contact Adam Pechin at apechin@orba.com or 312.670.7444.


Tax-Efficient Ways to Manage Capital Gains
Matthew Cook, CPA

If the net worth of your investment portfolio is rising, congratulations! However, your happy glow can quickly fade when it is time to calculate your annual tax bill. Why? Three words: Capital gains tax.

A capital gain occurs when you sell an investment at a price that is higher than what you originally paid. When that happens, the IRS takes its cut via the capital gains tax. That is the bad news. However, the good news is that there are strategies you can use to help minimize the tax impact of capital gains.

Holding Periods and Tax Rates

Capital gains taxes apply only to gains that occur in taxable accounts. Therefore, you can enjoy worry-free capital gains on assets held in a tax-deferred 401(k), IRA or Roth IRA, among other retirement savings vehicles.

Realized capital gains on assets held in taxable accounts will be taxed at either the short- or long-term capital gains rate, depending on how long you owned the assets before you sold them. If you held an investment for one year or less, your gains will be taxed at your marginal income tax rates. For the 2013 tax year, these rates range from 10% to 39.6%.

Capital gains on assets held longer than one year are taxed at the long-term capital gains rate. Thanks to the American Taxpayer Relief Act of 2012 (ATRA), investors whose annual income puts them in the 10% or 15% ordinary income tax bracket do not have to pay any taxes on long-term capital gains.

However, investors whose income puts them in the 25%, 28%, 33% or 35% federal income tax brackets pay 15% tax. In addition, ATRA has created a new 20% tax rate for those whose income places them in the new 39.6% federal income tax bracket. This bracket applies to married couples who earn more than $450,000 or single filers who earn more than $400,000.

Reducing Your Tax Bill

If you expect to get hit with a substantial capital gains tax bill this year, there are ways to reduce your potential liability, including:

Monitoring Your Holding Periods
Given the fact that short-term gains are taxed more heavily than long-term gains, the first step in managing your tax liability is to pay close attention to your holding periods. Before you sell a security, check to see if you are close to the point of qualifying for long-term status. If so, it may make sense to delay the sale.

Harvesting Tax Losses
You can use capital losses to offset capital gains as well as ordinary earned income. For example, if you incurred a long-term capital gain of $5,000 and a long-term capital loss of $10,000, your net would be a long-term loss of $5,000. You can apply up to $3,000 of this loss each year against your ordinary income, which reduces your income tax liability. The remaining $2,000 can be carried forward to offset future long-term capital gains and/or income. If in this example, your gains and losses were short-term in nature, any excess losses could be applied against future short-term gains and/or income.

Donating Appreciated Securities
If you have unrealized capital gains in a stock or other security and you wish to make charitable contributions, consider donating the stock directly to the charity. This lets you avoid the capital gain completely and deduct the stock’s fair market value as a charitable gift.

Use Caution with Year-End Fund Purchases
Many mutual funds distribute annual capital gains (and dividends) in December. Shareholders are taxed on these distributions, so you can reduce your tax exposure by waiting until after the capital gains and dividends have been distributed to invest in a fund.

Keep Good Records

Maintain records of purchases, sales, distributions and dividend reinvestments so that you can properly calculate how much you paid for the shares you own and choose the most preferential tax treatment for shares you sell.

Taxes are just one consideration when managing your investment portfolio. While capital gains taxes alone should not dictate your investment decisions, it is often beneficial to time purchases and sales to reduce your tax burden.

Keeping an eye on how taxes can affect your investments is one of the easiest ways you can enhance your returns over time.

If you have questions about how best to manage your capital gains, contact Matthew Cook at 312.670.7444.

Sidebar: Do Not Try to Wash Your Gains Away

To discourage investors from selling securities at a loss simply to offset capital gains, the IRS imposes the “wash sale” rule. A wash sale occurs when you sell shares of a security at a loss and within a 61-day window beginning 30 days before and ending 30 days after the sale, purchase shares of the same or a “substantially identical” security.

For example, if you sold shares of a company on Dec. 1 and bought the stock back on Dec. 15, any capital loss from the sale would be disallowed for tax purposes. The amount of the loss would then be added to the cost basis of the newly purchased shares, which would delay your ability to claim the loss until you sold the newly-purchased shares.

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