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CMA Client Update: Lower Investment Income Taxation for Client Portfolios



January 14, 2013 – Comments (0) | RELATED TICKERS: DRE , PCL.DL , LHO

January 12, 2013 

CMA Client Update: Lower Investment Income Taxation for Client Portfolios 

Dear CMA Client, 

This Update: Congress has revised and made permanent federal income tax changes for individuals. These tax revisions affect your investment portfolios. CMA’s investing strategies and securities selections will achieve benefits to you in lowering taxation on your investment income.


Late last year, Democrats and Republicans debated tax law proposals for stimulating more growth in the economy, more tax-fairness, and to potentially create more tax revenues to balance the huge U.S. government budget deficits. Democrats wanted no increased tax burdens on the middle class, but higher tax rates for the wealthy. Republicans were against any increase in personal tax rates, and supported aggressive government spending cuts.


The outcome was an avoidance of any tax rate increases to single taxpayers with incomes less than $400,000 and joint filers with less than $450,000. Filers with income above these levels are subject to a new 39.6% tax rate. Special “Bush Era” tax reductions on corporate dividends earned by individuals are being made permanent, rather than expiring at end-2012.


Prior to this new tax code, passed December 31, 2012, no one had an accurate idea of what taxation would in 2013 and beyond. The tax reductions that President Bush enacted in 2003 were set to expire at end of 2012, thus raising taxes on everyone, invaliding tax reduction benefits many tax payers were enjoying on certain types of investment income within certain defined tax brackets.


With the new tax code now in place, CMA can revise and enhance its investing strategies for your portfolios to achieve “tax-elimination” and “tax rate reductions” by utilizing more tax-preferenced security types within 4 of the asset classes we traditionally use: High dividend common stocks, REITs, MLPs, Qualifying Preferred stocks. Each of the 4 has annual investment income at about 7%.


Common Stocks: Under the tax code, we can use high dividend common stocks more advantageously where dividend income is “tax-free” to all filers in the 10% and 15% tax brackets, and dividend income is taxed at no higher than 15% in any brackets up through the 35% bracket.


REITs: We will utilize more Real Estate Investment Trust (REIT) stocks now, as a portion of their income distributions are tax-free as “return of capital”, via the depreciation accounting benefits that REITS have. Further, certain REITs that are in “land and timber” distribute all their income as “capital gain income”, thus making it tax-free to clients in the 10 & 15% brackets, and taxed at only 15% in the upper brackets. For clients having “realized capital loss carry forwards”, this REIT income can be fully offset against capital loss carry forwards…hence, making it tax-free.


MLPs: The new tax code did not affect the tax status of Master Limited Partnership (MLP) companies, nor their income distributions to shareholders. MLP energy and natural resource companies we have been using pay out an average of about 7% distributions, which are tax-free return of capital…under both state and federal tax code. We will be utilizing more MLP investment weighting across client taxable accounts. Clients should be adding new funds to their MLP tax-free holdings to enjoy the double-barreled tax elimination benefit.


Qualifying Preferreds: Further, under the tax code, there are specific “preferred stocks” of corporate issuers (banks, insurance, utilities, and industrials) that are being given the tax-advantaged status of having “Qualifying Dividends”. This fixed dividend income, in a range of 5.5% to 8% (based upon the issuer), will be tax-free to account holders in the 10-15% brackets and taxed at only 15% for holders in all the other tax brackets up through 35%. We will be replacing non-qualifying preferreds we have been using that do not have this “Qualifying Dividend” status with preferreds that do in taxable accounts. This will lower the filer’s tax rate to Zero from 10-15%, and to just 15% for filers in the 25 to 35% brackets.


ROTH IRAs: We are greatly encouraging all clients to take advantage of using ROTH IRA accounts that are fully tax-free on all income and capital gains earned within ROTHs for the account holder’s life, the spouse beneficiary’s life, and ROTHs give tax-free distributions to children beneficiaries. ROTH IRAs do not have “required minimum distributions” at age 70.5 years like regular IRAs do. So, ROTHs have tremendous power to create very long term compounded wealth for beneficiaries and estate heirs…all tax-free, state and federal. Example: $100,000 in a ROTH compounding at 7% for 20 years grows to almost $400,000, with distributions tax-free to the account owner and beneficiaries.


In summary, we look to accomplish greater usage of tax-free and tax-reduced high dividend common stock, REIT, MLP, and qualifying preferreds across client non-IRA accounts and gain significant tax reduction/elimination benefits. This leaves more after-tax income to retirees on account distributions, and more net after-tax income in accounts to accelerate compounded reinvestment growth for clients in the “wealth-building” mode of saving.


I invite you to call me to discuss any of the aspects of tax reduction strategy explained above. If you know someone who you think could benefit from a review of their investment tax condition, please give me their name and phone number and I’ll call them.


CMA High Income Portfolios…Don’t retire without one!


Thank you.

Chuck D

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