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The views and opinions expressed in this presentation are those of the author and presenter and do not necessarily reflect the views and opinions of the sponsoring companies or their affiliates.
Disclosure Neither Andrew Friedman, nor any law firm with which he may be associated, is providing legal or tax advice as to the matters discussed herein. The discussion herein is general in nature and is provided for informational purposes only. There is no guarantee as to its accuracy or completeness. It is not intended and may not be regarded as legal or tax advice, and financial advisors and other recipients of this information may not rely upon it (including for purposes of avoiding tax penalties imposed by the IRS or state and local tax authorities). Advisors should consult with their firm’s legal and tax counsel as to matters discussed herein. Clients should consult their own legal and tax counsel before entering into any investment, annuity, estate planning, or trust arrangement, and financial advisors should advise their clients to do so. Copyright Andrew H. Friedman 2014. Printed by permission. All rights reserved.
U.S. Debt “The amount of debt relative to the size of the economy is now very high by historical standards. Such large and growing federal debt could have serious negative consequences, including restraining economic growth in the long term, giving policymakers less flexibility to respond to unexpected challenges, and eventually increasing the risk of a fiscal crisis (in which investors would demand high interest rates to buy the government’s debt).” Congressional Budget Office February 2014
Foreign Reaction “Any reduction in Chinese purchases [of U.S. Treasuries] could destabilize the U.S. bond market and send [interest] rates higher. China buying may be helping to keep bond yields lower than they should be ahead of the Fed moving closer to raising rates. The market could wake up and get quite a shock if China changes course.” Wall Street Journal July 16, 2014
Obama is likely to continue a middle path, offering some military support but short of full scale military involvement. -50% of the sequestration cuts are cuts to defense. Those cuts continue for many more years. -The public is of two minds regarding U.S, response to global conflicts. Atrocities prompt a strong desire for responsive action. Yet people are wary of entangling troops in unwinnable local conflicts. Events that compel a strong response: terrorist attack on U.S. soil or an invasion of Israel or a NATO country. Fiscal effects: additional borrowing or reallocation of domestic expenditures. Geopolitical Issues – U.S. Involvement
A number of tax provisions expired at the end of 2013. Congress is considering legislation to renew them. -Example: IRA / charitable contribution provision permits tax free contribution of up to $100K from IRA to charity. Remaining Open Item - Extenders
State legislatures reset House districts in wake of 2010 census. -Republicans controlled most state legislatures after 2010 election. Most House incumbents worry more about primaries than general election. Primary reason for polarization in Washington. 2014 Elections – House Redistricting
Democrats need to pick up 17 seats for majority. Potential pick-ups (based on 2012 election): 17 Republicans hold seats in districts Obama won 9 Democrats hold seats in districts Romney won Only 14 races are considered toss ups. President’s party has never gained as many as 17 seats in a mid-term election. Wall Street Journal (July 28, 2013) 2014 Elections - House
Republicans must gain six seats for majority. Up for election: -21 Democrats (5 committee chairs retiring) -14 Republicans 2014 Elections - Senate
Likely Republican pick-ups: 3 (Montana, South Dakota, West Virginia) Toss-ups (Democratic incumbent): 7 (Alaska, Arkansas, Colorado, Iowa, Louisiana, Michigan, North Carolina) Toss-up (Republican incumbent): 1 (Kansas) Possible but unlikely Republican pick-up: 1 (N.H.) Possible but unlikely Democrat pick-ups: 2 (Georgia, Kentucky) 2014 Elections - Senate
2014 Elections “Republicans have not missed an opportunity to miss an opportunity.” Sen. Michael Bennett (D-Co.)
Compromisers are willing to moderate – particularly on social issues – to win Independent and minority votes. Ideologues would rather nominate a “true conservative” who will fight rather than someone who will compromise core beliefs on moral issues, even if it means holding only the House to block legislation. 2014 Elections – Republican Split: Ideologues vs. Moderates (Compromisers)
2014 Elections “We ought to be focusing on economic security for the future, not divisive social issues. That’s how we lost several key Senate races last cycle. It plays into the Democrats’ hand.” Brian Walsh, Former Communications Director, National Republican Senatorial Committee May 2014 “Conservatives ought not to delude themselves that if Republicans win the Senate majority, it will somehow be a conservative majority. We should have no expectation whatsoever that they will listen. That’s why we’re fighting.” L. Brent Bozell III, President, Media Research Center. May 2014
Republicans keep House. Obama finishes out term. Republican ability to take over Senate depends on candidates who win nominations. Neither party gets 67 votes in Senate to overcome presidential veto, or 60 votes to overcome filibuster. 2014 Elections – Split Government Continues
Increasingly, U.S. based multi-national companies are considering merging with smaller offshore entities as a means of moving their parent company out of the U.S. -These “inversions” permit the combined company to avoid tax when foreign earnings are repatriated to the new offshore parent. (The U.S. tax law imposes tax when offshore earnings are repatriated to a U.S. parent.) -Thus, the inversion gives the parent access to cash to pay dividends, buy back stock, or redeploy in operations elsewhere. Corporate Inversions
President Obama has criticized inversions and has vowed to take action to stop them. But the administrative options appear to be limited, as Congress has provided a bright line test when an inversion will be recognized as such for tax purposes. -The Administration might be able to stop some of the add-on transactions (such as “earnings stripping”) that enhance the tax savings of inversions. Congress could change the tax law to stop inversions, but there appears to be little agreement on how to do so. Corporate Inversions – Washington Reaction
Lower corporate tax enhances company earnings. Freeing up cash for parent could lead to increased dividends and stock buy-backs. But recent study found that half of inverted companies lagged the market. Shareholders of the U.S. company typically must recognize taxable gain when they exchange existing shares for shares in the new offshore parent. Evaluate inversion from business perspective first. When Companies Flee U.S. Tax System Investors Often Do Not Realize Big Returns, Reuters (August 18, 2014). Corporate Inversions – Investor Consequences
Reduce tax rates Eliminate “loopholes” Simplify the tax code Eliminate the alternative minimum tax Tax Reform
Revenue neutral or generate new revenue Favorable to the middle class rather than the wealthy -Eliminate lower rates for dividends and capital gains? - Eliminate or cap deductions and exemptions Tax Reform – Stumbling Blocks
25% tax rate, plus 10% surtax on income > $450K -Tax-exempt bond interest and employer-provided health insurance premiums included in surtax. No deductions (other than charitable contributions) allowed in computing surtax. Mortgage interest deduction limited to $500K of debt No deduction for state and local taxes Charitable contributions deductible only to extent greater than 2% of AGI Half of 401k contributions treated as Roth (non-deductible) AMT repealed Camp Tax Reform Proposal (Individual)
25% tax rate Modified accelerated depreciation and LIFO accounting repealed Repatriation of future offshore earnings taxed at 5% Offshore earnings from intangibles taxed currently at 15% rate Deemed repatriation of prior offshore earnings at 8.75% tax rate 70% of earnings of participating owners of pass-through entities subject to employment taxes Asset-based tax on large financial institutions Camp Tax Reform Proposal (Business)
Tax Rates – Investment Income Family income Ordinary Investment Cap gain / Dividend Income Tax Rate Tax Rate < $250K 35% max 15% max (no change) $250K – $300K 38.8% 18.8% (3.8% surtax) $300K - $450K 39.8% 19.8% (Pease phase-out) > $450K 44.6% 25% (Bush tax cuts expire)
Investment Planning Give increased attention to “tax drag” on investments. Harvesting losses Buy-and-hold strategies Municipal bonds, master limited partnerships, REITs Tax-efficient mutual funds Other professionally managed tax-advantaged strategies Consider investments that provide tax deferral and retirement income.