Wealth and Taxes: Planning for Uncertain Times

Following the re-election of Barack Obama as the President of the United States, Morgan Stanley's Government Relations Group has released a new report, Post-2012 Election Look at Lame-Duck Session and 2013 pdf, which discusses the group's views on the priorities and challenges for the President and Congress during the final weeks of 2012 and in the year ahead.

Unless Congress and the President can agree on a compromise before the year ends, the Bush-era tax cuts will expire on January 1, 2013—potentially exposing millions of individuals and families to higher tax rates. If this happens, most taxpayers will face some combination of higher tax rates on their incomes, dividends and capital gains next year—plus high earners will be subject to an additional 0.9% increase in the Medicare tax and a 3.8% tax on their investment income to help finance the health care reform law.

We believe it is important to grasp both the potential implications for and the options available to investors in the event that the tax code changes. Smart tax planning is practical in any environment and it's even more prudent when there is the potential for significant tax increases.

Here are some strategies to consider now:

  • With an eye to future performance, use current capital gains, as well as current and past losses, to help minimize tax exposure.
  • Consider a Roth conversion, or contribute to a Roth IRA or Roth 401(k) (if offered), which can provide tax-free income in retirement.
  • Max out contributions to tax-deferred accounts like 401(k)s or Traditional IRAs—subject to certain limitations, contributions can be made on a pretax basis and you do not pay income taxes on any earnings on your investments until you withdraw funds.
  • Diversify your portfolio with taxable, tax-deferred and/or tax-free investments to help you strategically manage your tax exposure.
  • Explore the options for gifting assets to loved ones now, while gift taxes are at an all-time low and the lifetime exemption is at an all-time high. (View the video to the right for more information.)
  • When it's time to pay your tax bill, consider a securities based loan to create the liquidity you need without liquidating assets, diminishing cash reserves or disrupting your investment strategy.
Family, Gifting and Taxes Video
Family, Gifting and Taxes Video

Refer to the Tax Planning Checklist pdffor more details on some of these strategies.
To view the PDF Document you need the free Adobe® Reader®. (Download)

Contact a Financial Advisor who can work with you and your tax professional to help determine which strategies may be best for you to help you meet your financial objectives.

This material does not provide individually tailored investment advice. It has been prepared without regard to the individual financial circumstances and objectives of persons who receive it. The strategies and/or investments discussed in this material may not be suitable for all investors. Morgan Stanley Smith Barney LLC recommends that investors independently evaluate particular investments and strategies, and encourages investors to seek the advice of a Financial Advisor. The appropriateness of a particular investment or strategy will depend on an investor's individual circumstances and objectives.

Tax Laws are complex and subject to change. Morgan Stanley Smith Barney LLC ("Morgan Stanley"), its affiliates and Morgan Stanley Financial Advisors and Private Wealth Advisors do not provide tax or legal advice, are not "fiduciaries" (under ERISA, the Internal Revenue Code or otherwise) with respect to the services or activities described herein, and this material was not intended or written to be used, and it cannot be used, for the purpose of avoiding tax penalties that may be imposed on the taxpayer. Individuals are urged to consult their tax or legal advisor before establishing a retirement plan or to understand the tax, ERISA and related consequences of any investments made under such plan and to understand the tax and legal consequences of any actions, including implementation of any estate planning strategies, or investments described herein.

Asset allocation and diversification do not assure a profit or protect against loss in declining financial markets.

Borrowing against securities may not be suitable for everyone. You should be aware that securities-based loans involve a high degree of risk and that market conditions can magnify any potential for loss. Most importantly, you need to understand that:

  • The loan can be called at any time and for any reason.
  • Sufficient collateral must be maintained to support your loan(s) and to take future advances.
  • You may have to deposit additional eligible securities or funds for investment on short notice.
  • Some or all of your securities may be sold without prior notice in order to maintain account equity at required maintenance levels. You will not be entitled to choose the securities that will be sold. These actions may interrupt your long-term investment strategy and may result in adverse tax consequences or in additional fees being assessed.
  • Morgan Stanley or its affiliates (the Firm) reserves the right not to fund any advance request due to insufficient collateral or for any other reason.
  • Your collateral maintenance requirements can be increased at any time without notice.
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