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Topics for today

Topics for today. The current tax landscape A longer-term outlook on taxes Planning considerations. The current tax landscape. It’ s important to determine your tax bracket. 2014 IRS tax brackets and rates. Income phaseouts can increase your tax bill.

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Topics for today

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  1. Topics for today • The current tax landscape • A longer-term outlook on taxes • Planning considerations

  2. The current tax landscape

  3. It’s important to determine your tax bracket 2014 IRS tax brackets and rates.

  4. Income phaseouts can increase your tax bill • Above higher income levels ($254,200 for individuals, $305,050 for couples), the benefit from itemized deductions and personal exemptions is limited Income phase-outs based on 2014 IRS figures.

  5. New health-care taxes took 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.).

  6. Married couple with income over $250K: How does the new 3.8% surtax work? $50K Muni income Not subject to 3.8% surtax $50K cap gain subject to surtax $100K Cap gain $250K income threshold (MAGI) $50K cap gain not subject to surtax Not subject to the surtax but is included in determining the $200K/$250K income threshold $50K IRA income $150K Salary 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.

  7. Key income thresholds to consider Highest income, capital gain, and dividend rates $406K $457K Phaseoutof deductions and exemptions $254K $305K New health-care taxes $200K $250K Individuals Couples

  8. Will you owe AMT? Urban-Brookings Tax Policy Center, September 2012.

  9. Understanding the AMT * Urban-Brookings Tax Policy Center, August 2013.

  10. Federal estate and gift taxes — key figures

  11. Estate planning is more than just the taxes

  12. Longer-term outlook on taxes

  13. Total debt remains high based on historical norms Federal debt held by the public (% of GDP), 1940–2013 Percentage of GDP 2013 Source: Congressional Budget Office, Updated Budget Projections: Fiscal Years 2013 to 2023, May 2013; does not include intra-governmental debt.

  14. Annual deficits have improved but will worsen in a few years Historical federal government revenues and outlays (% of GDP), 1973–2023 (%) Spending22.6% Projected Percentage of GDP Revenue19.1% 1973 2013 2023 Source: Congressional Budget Office, Updated Budget Projections: Fiscal Years 2013 to 2023, May 2013.

  15. Most government spending is on auto-pilot U.S. federal government spending by type, 2013FY Discretionary Social Security$809B Defense$631B 35% Non-Defense$582B Mandatory 65% Medicare$496B Medicaid$265B Other$450B Interest$223B Source: Congressional Budget Office, May 2013 projections; 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. “Other” mandatory items include certain veteran’s benefits, retirement benefits for federal employees, Supplemental Nutrition Assistance Program (SNAP), unemployment, and other government benefits less offsetting receipts.

  16. What would a longer-term debt solution look like? • Tax reform to simplify the system • Less brackets and lower marginal tax rates, elimination or significant reduction in tax preference items (popular deductions, tax credits, etc.) • Steps to improve the solvency of major entitlement programs • Potential changes to 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) * Social Security wage base for 2014 is $117,000.

  17. Planning considerationsand strategies

  18. Five income tax planning strategies to consider Invest in municipal bonds to generate tax-free income Municipal bonds are more attractive for taxpayers in high tax brackets and also subject to the 3.8% Medicare surtax Utilize strategies to reduce or avoid taxable income Retirement plan contributions, college savings plans, flexible spending accounts (FSAs), deferred compensation, maximizing tax deductions Be mindful of transactions that may drastically increase income

  19. Five income tax planning strategies to consider Consider Roth strategies Contributions or conversions to create a source of tax-free income in retirement Asset “location” – allocate investments by tax status Hold a larger percentage of fixed-income assets within tax-deferred accounts while owning equities in taxable accounts to benefit from lower capital gains and dividend tax rates Make tax-smart withdrawals in retirement Draw from tax-deferred accounts while in lower tax brackets, and from taxable and tax-free accounts when tax bracket is higher

  20. Estate planning — are federal estate taxes a concern? • Make sure fundamental documents are in place • Plan for state death or inheritance taxes if necessary $5.34M exemption amount

  21. Closing thoughts • With mounting federal deficits and pressures around entitlement programs, there’s likely to be uncertainty around taxes • Work with professionals to assess your personal income and estate tax situation and identify potential strategies

  22. A BALANCED APPROACH A WORLD OF INVESTING A COMMITMENT TO EXCELLENCE | 23

  23. 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. Putnam Retail Management putnam.com

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