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Not FDIC Insured

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Not FDIC Insured

May Lose Value

No Bank Guarantee

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Topics for today• New tax legislation avoids the fiscal cliff

• Health-care reform law introduces two new taxes beginning in 2013

• Longer-term outlook on taxes

• Tax-smart planning considerations and strategies

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Tax legislation avoids the fiscal cliff

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The American Taxpayer Relief Act of 2012

• Bush-era tax cuts extended permanently for most taxpayers

• Many popular tax provisions extended

• Benefit of tax deductions reduced for some

• Alternative minimum tax (AMT) permanently indexed for inflation

• Emergency unemployment benefits extended but payroll tax reverts to 6.2%

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Taxes increase for some taxpayersOrdinary income Taxpayers with taxable income above

$400K ($450K for couples) subject to a marginal tax rate of 39.6%

Dividends and capital gains

Taxpayers at same $400K/$450K income threshold subject to a 20% tax rate (0% rate still applies for lowest two brackets, 15% rate for others below the new threshold)

Itemized deductions and personal exemptions

Income phase-outs return for taxpayers with more than $250K in AGI ($300K for couples)

Alternative minimum tax (AMT)

Exemption amount for 2013 is $50,600 ($78,750 for couples)

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Clarity on the federal estate tax

Exemption amount

$5 million amount for estates and gifts is made permanent and indexed for inflation ($5.25M for 2013)

Maximum tax rate Increases from 35% in 2012 to 40%

Portability Provision that allows a surviving spouse to utilize a deceased spouse’s unused exemption is made permanent

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Many tax provisions extended at least through 2013

• Relief for families funding college education– American Opportunity Tax Credit, deduction for tuition

expense, student loan interest deduction all extended

– Contribution for Coverdell Savings Accounts set at $2,000

• Tax-free IRA distributions to a qualified charity returns

• Deduction for state & local sales taxes extended for 2013

• Permanent fix for the “marriage penalty”

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New taxes associated with health-care

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New health-care taxes take effect in 2013

• Affects taxpayers with more than $200,000 in income ($250,000 for couples)

• Increase in the individual portion of the Medicare payroll tax on wages from 1.45% to 2.35%

• New Medicare net investment income surtax of 3.8%

– Interest, dividends, capital gains, rental income, passive business income all subject to the new tax

– Interest from municipal bonds and distributions from retirement accounts are excluded

The threshold for the 3.8% net investment income surtax is based on modified adjusted gross income (MAGI), defined as adjusted gross income plus net foreign income exclusion amount. The extra .9% Medicare payroll tax is based on earned income only (salary, wages, etc.).

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$50KMuni income

Married couple with income over $250K: How does the new 3.8% surtax work?

$150KSalary

$50KIRA income

$100K

Cap gain

Not subject to 3.8% surtax

$250K income threshold (MAGI)

$50K cap gain subject to surtax

$50K cap gain not subject to surtax

Simplified, hypothetical example designed to illustrate how the new Medicare net investment income surtax is applied. Beginning in 2013, the surtax applies to individuals with MAGI over $200,000 and married couples filing joint tax returns with MAGI over $250,000. MAGI defined as Adjusted Gross Income (AGI) plus net foreign income exclusion amount.

Not subject to the surtax but is included in determining the $200K/$250K income threshold

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Longer-term outlook on the federal budget

deficit and taxes

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-1,500

-1,000

-500

0

500

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

Annual U.S. federal budget surplus/deficit, 2000–2012 ($B)

Source: Congressional Budget Office, Monthly Budget Review, September 2012.

($)

Federal budget deficit exceeds $1T for the fourth straight year

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Spending is high and taxes are low relative to historical averages

Source: Office of Management and Budget, 2012, historical figures are averages since 1970.

15%

20%

25%

Perc

en

tag

e o

f G

DP

Historical federal tax receipts and government spending (% of GDP), 1970–2012

1970

2012

Current spending: 24%

Current taxes: 15%

Historic spending: 21%

Historic taxes: 28%

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-500

0

500

2013 2014 2015 2016 2017 2018 2019 2020 2021 2022

Estimate of the Budgetary Effects the American Taxpayer Relief Act of 2012, 2013–2022FY ($B)

Source: Congressional Budget Office, January 2013. Estimate based on current law baseline assumption that the Bush era tax cuts would have fully expired after 2012.

$

New tax deal projected to increase the deficit

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Source: Source: Office of Management and Budget, September 2012. Mandatory spending types primarily include Social Security, Medicare, and Medicaid, as well as interest on existing debt. Discretionary spending includes defense and non-defense items.

The majority of governmentspending is on auto-pilotU.S. federal government spending by type, 2012 estimated

65%Mandatory

Social Security

$773B

Defense$709B 35

%

Discretionary

Non-Defense$610B

Medicare$478B

Medicaid$255B

Interest$223

Other$670B

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What would a longer-term debt solution look like?

• Everything on the table — increased revenues, cuts in discretionary spending, major entitlement reform

• Thoughts on reforming Social Security– Increase the wage base*

– Increase the retirement age for younger workers

– Utilize a different COLA formula for benefit increases

– Reduce benefits for higher-income recipients (i.e., means testing)

• Comprehensive tax reform?– Less brackets and lower marginal tax rates, coupled with the

elimination or significant reduction in tax preference items* Social Security wage base for 2013 is $113,700.

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Planning considerationsand strategies

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Five planning strategiesto consider in 2013

1. Invest in municipal bonds to generate tax-free income– Municipal bonds are more attractive for taxpayers who are either

subject to 3.8% surtax and potentially the high 39.6% marginal rate

2. Utilize strategies to reduce or avoid taxable income– Retirement plan contributions, flexible spending accounts (FSAs),

deferred compensation may prevent a taxpayer from reaching income thresholds that may result in a higher tax bill

– Be mindful of transactions that may drastically increase income

– Consider Roth accounts to create tax-free income in retirement

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Five planning strategiesto consider in 201

3. Avoid taxes on IRA distributions by using a charitable rollover if over the age of 70½– Distribution (maximum of $100,000 annually) must be sent

directly to a qualified charity– More tax efficient than writing a check to a charity and then

claiming a deduction on the tax return

4. Review estate planning strategies and documents– Even if estate taxes no longer a concern, it’s critical to plan for

orderly transfer of assets or unforeseen circumstances– Many states have separate estate or inheritance taxes– Trusts should be reviewed in light of permanent $5M exemption

amount

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Five planning strategiesto consider in 20125. Consult with an attorney to see if more complex

wealth transfer techniques may be appropriate– Families with significant wealth, especially in non-

liquid assets such as real estate or closely held businesses

– Potential strategies include grantor retained annuity trusts (GRATs), spousal lifetime access trusts (SLATs), family limited partnerships (FLPs), and dynasty trusts

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Closing thoughts • Though the Bush-era tax cuts were extended

“permanently” for most taxpayers, longer-term deficit pressures will prompt more discussion on taxes

• There will likely be uncertainty around tax policy as potential tax reform is addressed

• In this environment, tax diversification and tax-smart planning strategies and investment solutions will be at a premium

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A BALANCED APPROACH

A WORLD OF INVESTING

A COMMITMENT TO EXCELLENCE

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This information is not meant as tax or legal advice.Please consult your legal or tax advisor before making any decisions.

Investors should carefully consider the investment objectives, risks, charges, and expenses of a fund before investing. For a prospectus, or a summary prospectus if available, containing this and other information for any Putnam fund or product, call your financial representative or call Putnam at 1-800-225-1581. Please read the prospectus carefully before investing.

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