What the Tax Compromise Means to You
The biggest impact of the new law is that tax rates will remain the same as they have been since the 2001 and 2003 tax acts. This includes households with more than $250,000 of income per year. Additionally:

• Capital gains tax rates will remain at current levels – including the 0% on longterm gains for filers in the 10% and 15% tax brackets – through 2012. (See chart below.)
   
• Business owners will be able to fully write off “productive capital improvements” in 2011 rather than depreciating their cost over a period of years.
   
• Estates smaller than $5 million will be exempt from the federal estate tax, while the maximum tax for those above that cutoff point will be 35% through 2012.
   
• The Social Security tax on the first $106,000 of every worker’s earned income will be reduced from 6.2% to 4.2% for 2011.

Think Longer Term

While 2011 and 2012 should be kinder tax years for investors, many economists and lawmakers agree that to address the massive federal deficit, some difficult and potentially unpopular tax decisions may lay ahead. Meanwhile, the performance of specific investments over the past two years may have been influenced by some of the broader issues at play, such as the momentum of the overall economic recovery, the impact of federal stimulus and the uncertainty over the Bush tax cuts. All of these time-specific conditions make a longer view essential to making wise choices for the future. 

• Making or holding an investment under the assumption that recent performance will continue can be unreliable. The goal should not be to find an investment that has already performed well, but one with the greatest prospects for future success.
   
• Look closely at greatly appreciated or concentrated positions this year to determine if selling or reallocating those positions makes more sense in the current tax environment than under anticipated future conditions.
   
• If you haven’t reviewed your estate plan in some time, you should look at it in light of any personal life changes and the recently extended estate tax laws.

Plan What You Can

As recent years have shown, some things that can influence your investments can’t necessarily be planned for. However, in addition to taxes, there are many events you can account for ahead of time. For example:

• Some managed investments are required to distribute gains during the year. If you buy before the “ex-dividend” date, you will receive and have to pay tax on that distribution, regardless of how long you actually owned the investment. Be aware of that date when purchasing such an investment in a taxable account.
   
• If there is a major personal event coming up in 2011, such as a wedding, a birth or the start of school for a child or grandchild, you may want to factor that event and its anticipated cost into any significant portfolio decisions you make during the year.
   
• If you are in or approaching retirement, think about how things like Social Security benefits and required distributions from retirement plans will impact your financial picture this year.

Armed with your most recent account statements, an understanding of what lies ahead and the advice of your tax professional, talk to your Financial Advisor about any adjustments that should be made to your asset allocation, financial plans and portfolio in 2011 to help keep you on track toward your long-term goals.