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The importance of prudent investment and tax planning

Taxes are complicated. It is sometimes said that the only tax that anyone doesn’t complain about is a tax someone else pays.

This past tax season, individuals and businesses alike had to deal with a number of tax-related events, such as the so-called “fiscal cliff” and the recently enacted American Taxpayer Relief Act of 2012. While these created changes in tax rates for high-net-worth individuals, the same fundamentals for investment are as true today as they were last December and five years ago: Solid companies with good dividends and growth potential are still the way to proceed. Tax policy is important, but the key is prudent investment and staying the course.

Good investments require good planning, which is important for every individual. On April 15, we were all scurrying to pay our taxes, if we had not done so already. But the planning should have been done long before the end of 2012 to have any effective impact on what tax we pay. Tax policy changes require that we plan ahead. We must take advantage of those things that are there for our advantage. And we should be aware of those things that can cost us in the end merely from not being cognizant of the issues.

Current California tax policy (including Proposition 30) affects business growth and retention in the state. That means many business leaders are exploring moving their companies elsewhere due to California’s heavy tax burden. We are seeing businesses concerned about the effective tax rate on themselves and their employees. They are looking seriously at states where the fiscal impact is not so great. Similarly, we are finding both active business people and individuals coming to California are discovering that spendable income is adversely impacted by the state’s tax rates -- especially when you add the high income and sales tax rates, plus the excise taxes on certain services.

However, on the positive side, it is often forgotten that California homeowners and businesses have the benefits of Proposition 13. This means that in some of those other states people are looking at, income taxes may be lower in the short term, but they may be paying just as much or more in the long term when they factor in the impact of property taxes.

Taxpayers also need to consider the implications of the Affordable Care Act which impacts both earned income and investment income. A great deal of misinformation and confusing information is often heard about the healthcare tax and the Medicare tax and whom they will affect. What we may see is that when the dust settles, a lot of the tax burden will be shifted to consumers. So in the end, businesses are not necessarily going to see net profits deteriorate.

As for the impact on society as a whole, it is difficult to predict, but presumably, a healthier population means less expenses for medical needs and the opportunity to grow as an economy. But it is clear that high-net-worth individuals and those with investment income will pay more taxes than they did last year.

The best advice, as always, is to plan ahead.

-Submitted by David Dorne, senior partner at Seltzer Caplan McMahon Vitek.

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