The Importance of Tax Planning

Careful planning throughout the year can assist you in reducing the taxes you pay - as well as help you achieve your financial goals. This brief guide provides a basic overview of some of the tax rates, credits, deductions and related considerations that may apply to you.

Income tax planning should not be done in isolation, but instead should be driven by your overall financial goals and integrated with your total financial plan. By developing and implementing appropriate strategies to lessen or shift current and/or future tax liabilities, you can improve your prospects of meeting both long- and short-term objectives. For example, accurately projecting your income taxes can help you determine the cash flow available to you in the coming year.

Keep in mind that tax laws are often complex and frequently change. As a consequence, you should be sure to consult the appropriate professional before making investment and/or tax decisions.

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 2011 early, if it helps reduce adjusted gross income
• If the alternative minimum tax applies to you, take AMT-appropriate actions

2012 Income Tax Changes

Americans will not see rate changes on their taxes for 2012 due to the passage of the Tax Relief, Unemployment Insurance Reauthorization and Job Creation Act of 2010 on December 17, 2010. The bill extends the Bush-era tax cuts that were scheduled to expire after 2010 and would have affected virtually all aspects of tax code. The new law extends the cuts through 2012. Here are some key topics of which you should be aware:

However, be aware that many changes will occur if nothing is done to extend the cuts.

Estate Tax
The estate tax has been revived and is reunified with the gift taxes. The maximum tax rate is 35% with an applicable exclusion amount of $5,120,000 for 2011 and 2012.

The 2010 modified carryover basis rules are once again replaced with the step up in basis rules that had applied until 2010. For estates of decedents dying in 2010, there is an option to elect not to apply the step up basis rules (item A), but instead use the modified carryover basis rules (item B):

A. The estate tax based on the new 35% top rate and the $5,120,000 exemption with a stepped up basis, or

B. No estate tax and use the modified carryover basis rules which limit the step up to $1.3 million for the overall estate, plus $3 million for assets transferred to a surviving spouse.

Another new twist to the estate tax is the portability between spouses of the unused exclusion. With portability, a surviving spouse could elect to use the unused portion of the estate tax exclusion of his or her predeceased spouse if the election is made on a timely filed estate tax return.

* Converting a traditional IRA into a Roth IRA has tax implications. Investors should consult a tax advisor before deciding to do a conversion.

Income Tax Rates

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

Personal and Dependency Exemptions

The phase-out for personal exemptions and itemized deductions has been eliminated through 2012.

Standard Deductions*

Key Tax Rules

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.

Individual Dividend Rates

*"Qualified dividends" generally means dividends received during 2011 from domestic 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.

Capital Gains Tax Rates

*The gains are included in determining tax bracket.

Individual Retirement Accounts

Generally, contributions are fully deductible unless you or your spouse are covered by a workplace retirement plan, in which case the following deduction phase-outs apply.

*If neither individual or spouse is covered by a plan, you can deduct up to $5,000 each or MAGI, whichever is less.

**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.

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.

Trust and Estate Income Tax Rates

Education Planning

Education Credits

*Can be claimed for up to four years.

Student Loan Interest Deduction

Tax Credits

Annual Exclusion for Gifts