Fiscal Cliff Comments From Andy Friedman

7/29/2019 Fiscal Cliff Comments From Andy Friedman

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Not FDIC Insured Not Bank Guaranteed May Lose Value

Eaton Vance on Washington

From the Hill to the Street:An insiders perspective


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Copyright Andrew H. Friedman 2013. Printed by permission. All rights reserved.

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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 firms 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.

Andrew Friedman is not an employee of Eaton Vance and his commentary is based on

independent research.

Disclosure


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Fiscal Cliff Compromise

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Permanently extends the existing tax rates for families withincome under $450K ($400K for individuals).

Permanently extends the current $5.12M estate, gift, andgeneration skipping tax exemptions (indexed for inflation).

Increases the estate tax rate to 40% (from 35%).

Permanently patches the alternative minimum tax to keep

it from affecting more taxpayers in later years.


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Delays for two months the implementation of thesequester government spending cuts.

Extends unemployment benefits through 2013.

Permits payroll tax rate to revert to 6.2% (from 4.2%).

Leaves intact the 3.8% surtax on investment income forfamilies with income over $250K ($200K for individuals).


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Extends through 2013 tax-free distributions of up to $100Kfrom an IRA to a charity.

An individual may make a tax-free charitable distributionduring January 2013 and have it count as a 2012 rollover.

Individuals who took a distribution in December 2012 maycontribute that amount to a charity and treat it as an eligiblecharitable rollover.


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Income

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Family income Ordinary income Cap gain/DividendTax Rate Tax Rate

< $250K 35% max 15% max

$250K $450K 38.8% 18.8%

> $450K 43.4% 23.8%


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Items

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Government borrowing limit (reached December 31)

If not increased, U.S. defaults on its debt

Sequestration spending cuts take effect (March 1)

Government 2013 appropriations (March 27)

If not passed, U.S. government shuts down


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Items

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Republicans will demand spending cuts (which werealmost entirely absent in the fiscal cliff compromise). It isno longer possible to meet that demand by cuttingdiscretionary spending.

Democrats will demand that the spending cuts be balancedwith additional tax increases. It is no longer possible tomeet that demand by raising tax rates.

That means we are heading for a debate over entitlement

and additional tax changes.


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Deficit Outlook (in billions of dollars)

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2008 budget deficit $ 4552009 budget deficit $ 1,400

2010 budget deficit $ 1,300

2011 budget deficit $ 1,300

2012 budget deficit (est) $ 1,100

Source: Budget of the U.S. Government, Mid-Session Review, Fiscal Year 2012, Office of

Management & Budget (Aug. 2011); An Update to the Budget and Economic Outlook: FiscalYears 2012-2022, Congressional Budget Office (Aug. 2012)

Total debt outstanding is now 100% of GDP for only thesecond time in history (other was during WWII)

2011 F d l S di ($3 6T)


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2011 Federal Spending ($3.6T) (in billions ofdollars)

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Source: Budget of the U.S. Government, Mid-Session Review, Fiscal Year 2012, Office ofManagement & Budget (Aug. 2011)

Mandatory Programs(Entitlements)$2,102 (58%)

Interest$216 (6%)

Defense$835 (23%)

Domestic

$477 (13%)


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Deficit Reduction Plan

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Social Security changes

Medicare changes

Tax changes


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Changes

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Increase retirement age

Reduce CPI increases in Social Security benefits

Means test benefits

Increase wage cap subject to Social Security taxes

No changes for individuals currently 55 or older


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Possible Medicare Changes

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Increase eligibility age

Increase co-payments

Require affluent recipients pay for coverage

No changes for individuals currently 55 or older


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Possible Tax Changes

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Cap on exemptions and itemized deductions

Employer-provided health insurance

Tax-exempt interest on bonds

Pension plan contributions

Charitable contributions

Mortgage interest deduction


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Possible Tax Changes

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Potential loophole closers:

Master limited partnerships

S-corporation distributions

Carried interests

Wealth transfer techniques

Changes unlikely to be retroactive. Could apply from dateof enactment or beginning in 2014.


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Other 2013 Legislative Items

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Immigration

Gun control

Domestic manufacturing

Energy

Fannie Mae / Freddie Mac (housing)

Comprehensive tax reform


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Possible Investment Planning

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Markets likely to be volatile for first quarter

Prepay charitable contributions

Pay down mortgage debt

Keep an eye on municipal bonds

Take advantage of sophisticated gifting techniques

Consider investments that provide retirement income

guarantees

Prospective investors should consult with a tax or legal advisor before making any investment decision.


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Eaton Vance on Washington18

Investing in mutual funds is subject to stock market volatility. Income from investments in

municipal funds may be subject to federal, state and local tax; a portion may be subject tofederal alternative minimum tax. The ability to use certain tax-management techniquesmay be curtailed or eliminated in the future by tax legislation, regulations, administrativeinterpretations, or court decisions.

Before investing, prospective investors should consider carefully a Fund's

investment objectives, risks, charges, and expenses. A Fund's current prospectusand summary prospectus, contains this and other information about a Fund and isavailable through your financial advisor. Read the prospectus carefully beforeinvesting or sending money.

Eaton Vance does not provide tax or legal advice. Prospective investors should consult with

a tax or legal advisor before making any investment decision.

Copyright Andrew H. Friedman 2013. Printed by permission. All rights reserved.

Disclosure


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For more information please contact us at:Eaton Vance Distributors, Inc. Member FINRA/SIPCTwo International PlaceBoston, MA 02110800.225.6265

www.eatonvance.com/washington


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Fiscal Cliff Comments From Andy Friedman