Tax and Financial Planning

Planning that will minimize your taxes is an important part of your overall financial plan. Tax strategies work best as a part of ongoing portfolio monitoring that leads to a reduced tax bill in April every year. Astute investors don't leave this for a few hurried weeks at the end of the year.

Keys to knowledgeable tax planning include knowing your different types of income and how each is taxed. Harvesting tax losses by selling underperforming investments, investing in tax-exempt securities, maximizing tax-advantaged retirement savings plans and making the right choices for your charitable donations can also be important factors.

This section on tax and financial planning is a very handy reference guide both during the tax season and when you're planning for it. The guide contains tax brackets, updated Social Security information, tax equivalent yields, historical returns of various investment classes and much more.

Year-End Considerations

While year-round tax planning is important, you may find extra benefits by gathering all your tax-related facts as the year ends. You may, for example, have a clearer picture of your capital gains and losses, as many mutual fund companies issue distribution estimates by mid-December. The end of the year is a fine time to:

• Examine your portfolio's asset allocation
• Rebalance your portfolio, if warranted
• Assess holdings (Are they performing as expected?)
• Add up tax-loss harvesting possibilities
• Max out contributions to 401(k)s or other tax-advantaged retirement accounts
• Make last-minute charitable donations
• Pay deductible taxes for 2010 early, if it helps reduce adjusted gross income
• If the alternative minimum tax applies to you, take AMT-appropriate actions

Income Tax Rates

Taxable income is income after all deductions, including either itemized deductions or the standard deduction, and exemptions.

Note: For 2009 and 2010, the Making Work Pay provision of the American Recovery and Reinvestment Act will provide a refundable tax credit of up to $400 for working individuals and $800 for married taxpayers filing joint returns. This tax credit will be calculated at a rate of 6.2% of earned income and will phase out for taxpayers with adjusted gross incomes in excess of $75,000 or $150,000 for married couples filing jointly.

Personal and Dependency Exemptions

Exemptions per person:

$3,650

Standard Deductions*

Single Head of Household Joint *Extra Deduction if Blind or over 65 Single Head of Household

$5,700 8,350 11,400 1,400 1,100

Personal Exemption Phase-Out

Single	$166,800 – 289,300
Head of Household	208,500 – 331,000
Joint	250,200 – 372,700

Child Tax Credit: $1,000 Per Eligible Child
This exemption is phased out for individuals with income in excess of $75,000, married couples with income in excess of $110,000 and married individuals filing separately with income in excess of $55,000.

Kiddie Tax Rules
The Kiddie Tax rules require the unearned income of a child or young adult be taxed at the greater of the child's or parents' marginal tax bracket once the unearned income exceeds $1,900. Under the Kiddie Tax rules, the first $950 in unearned income is not subject to tax. The next $950 of unearned income is taxed at the child's rate (typically 10%). Then, any unearned income of more than $1,900 is taxed at the parents' marginal rate. The Kiddie Tax rules apply to unearned income of the following:

• A child under age 18,
• An 18-year-old whose unearned income does not exceed one-half of his or her support, and
• A 19- to 23-year-old full-time student whose income does not exceed one-half of his or her support.

Corporate Dividend Exclusion
Corporations are eligible for a 70% dividend exclusion on dividends received from domestic corporations whose stock was held for more than 45 days.

*"Qualified dividends" generally means dividends received during 2009 from domestic corporations and qualified foreign corporations. The investor must own the stock for more than 60 days during the 120-day period beginning 60 days before the ex-dividend date. These periods are doubled for preferred securities.

*"Qualified capital gains" refers to gains realized after May 5, 2003.
**The maximum rate on qualified five-year gains has effectively been eliminated for capital gains realized after May 5, 2003.

Individual Retirement Accounts

*Applies to individuals whose spouses are covered by a workplace plan but are not covered themselves.

Roth IRA: Eligibility of Contributions
Contributions made to a Roth IRA are not deductible, unlike contributions made to a traditional IRA, and there is no age restriction on making contributions. An individual may contribute up to $5,000 to the Roth IRA, subject to income phase-out limits.

A traditional IRA may be rolled over (or simply converted) into a Roth IRA if adjusted gross income is not more than $100,000. (This applies to both single and joint filers.) In 2010, there will be no income limit for conversions.

Catch-Up Contributions
If you have either a traditional or a Roth IRA and attain age 50 or older during the tax year, an additional $1,000 may be contributed.

Social Security, Medicare and Self-Employment Taxes

For 2009, you will pay Social Security and/or self-employment tax on your wages up to $106,800. For wages more than $106,800, you will pay only the Medicare portion of the tax. Self-employed individuals are allowed an income tax deduction for 50% of the self-employment tax.

Income above the $14,160 limit is lost at the rate of $1 for every $2 earned. $1 is lost for every $3 above the $37,680 limit.

Monthly Social Security Benefits at Full Retirement Age
To receive an estimate of your Social Security benefits, contact the Social Security Administration at 800-772-1213.

Trust and Estate Income Tax Rates

Estate Tax Credit
In 2002, the applicable credit amount began to gradually increase and will continue until estate taxes are totally repealed in 2010. In 2009, the applicable exclusion amount is $3,500,000.

Lifetime Gift Tax Credit

2009 and Later

$1,000,000 (Not Indexed)

Annual Exclusion for Gifts

2009

$13,000

Financial Planning Tables

Uniform Lifetime Table
For the majority of IRA participants, the following table is used for determining a participant's required minimum distributions (RMDs). There is an exception when a spousal beneficiary is more than 10 years younger than the participant and is the sole beneficiary on January 1. In this case, a different table is used. To calculate your RMD, first find the age you will turn in 2009 and the corresponding applicable divisor. Then divide the prior year-end balance of your IRA account by the divisor. The resulting number is the dollar figure you will need to remove from your IRA to meet your RMD for the current year.

For example, if you are now 82, your applicable divisor is 17.1. If the balance in your IRA as of December 31 of last year was $235,000, divide that amount by 17.1. The result is $13,742.69. This is the amount of your RMD for the current year.

Note: RMDs have been suspended for the tax year 2009 for participants and beneficiaries.

Present Value of a Lump Sum
What if you know you will need $10,000 accumulated 10 years from now? How much money do you need to invest today at an average interest rate of 8% to obtain your goal? Looking at the table below, go to 10 years and then across to 8%. You see that $0.463 invested today at 8% should yield $1 in 10 years. Since you want $10,000, multiply $0.463 by $10,000 to arrive at $4,630.

Future Value of a Lump Sum
If you invest $10,000 at an interest rate of 8%, how much will your investment be worth in 10 years? By referring to the table, you find that $1 invested today at 8% would grow to $2.159 in 10 years. Since you invested $10,000, multiply $2.159 by $10,000, giving you $21,590.