Taxes and Other Things That Have Grown – Q1 2015

Taxes and Other Things That Have Grown – Q1 2015

“What is the difference between a taxidermist and a tax collector? The taxidermist takes only your skin.”

Mark Twain


Most of us should have filed our taxes by now. And I’m afraid for many that 2014 was even more taxing than previous years. Including the Obamacare surcharge tax and California state income tax, top marginal income tax rates for investors now total over 50%! That is, at this level, for every additional investment dollar Omega realizes for you, more goes to the government than to you.

What’s it like in other parts of the world? In case you’re thinking of a move, here is a quick summary of income tax rates around the globe. You could live like a professional tennis player by relocating to beautiful Monaco, as many do. My wife Caroline and daughter Julia just visited there this past year while I was stuck home teaching an MBA class. Living in a place as beautiful as Santa Barbara with no income taxes sounds pretty nice—though we’re not anticipating a move anytime soon, as I’ve just committed to being a professor at Harvard Business School this next year.

Now if you don’t care as much about the climate and safety of where you live, you could move to Afghanistan where tax rates top out at only 20% and are not as consistently enforced as they are here in the states. Meanwhile, Greece currently tops out at a better-than-the-US rate of 42%. Although, a fascinating country, there are some fiscal issues going on there right now that you might want to avoid. So perhaps instead you’d like North Korea, which reports that their top income tax rate is only 20%. However, I’m not sure you’d want to move there and I’m not sure 20% is the true figure anyhow. Similarly, China says their top income rate is even lower than ours at 45%. Instead, I’d recommend say Switzerland at about 15% or the British Islands at 0%, depending on your preference for mountains and lakes versus the sea.

But my hunch is that you’re probably going to stay in the states. As such, we continue to search out ways to help our clients keep more of what they make. Our tax harvesting strategies (within and across investments) and avoidance of various capital gain distributions have certainly helped out in this area over the years. In addition, we have just recently implemented a proprietary tax optimizing process to further maximize the net value of withdrawals after-tax.

Of course, in the end, we do not want to have the tax tail wag the dog. Indeed, there are times when paying more taxes means still having more money, even after paying more taxes. So we must always be mindful of your overall financial picture. And different financial pictures can call for very different optimal strategies. This is why we strive to integrate all of the various parts of your financial life with your investment strategies through our proprietary Ωptimized Wealth Integration® process.

So do we have to worry about taxes based on the first quarter of this year? Well, it turns out that this first quarter provides us with modest but broad gains in the financial markets. The SP500 was just shy of a 1% gain. Small, midcap, and international stocks garnered returns of 2% to 5%, depending on the market. Meanwhile, despite fears of rising interest rates, bonds were up 1.6%, as measured by Barclays US Aggregate bond index, besting the SP500. Our top asset class for the quarter was managed futures, as our funds averaged some 9% for the quarter and are up a whopping 25% over the past 12 months. Considering a typical overall mix of assets, Morningstar’s moderate target risk benchmark yielded a 1.4% return for the quarter.

In short, if the next few quarters are like this one, it looks like 2015 will be another taxing year. Let us then hope for some losses in the coming months. In all seriousness, the best investment environment is to have a reasonable overall portfolio return that is generated by some assets having returns while some have losses. This allows us to harvest losses to generate relatively tax efficient returns. In contrast, when all assets are up, gains are usually the least tax efficient. This is also why we target a broad swath of asset classes for different States of the World, hoping to have gains that can be sheltered by some losses. So what might make money this year? And what might lose money this year? I would be curious to hear your views! Let your Omega advisor know, and then stay tuned!

Omega Financial Group is a Registered Investment Adviser. Advisory services are only offered to clients or prospective clients where Omega Financial Group and its representatives are properly licensed or exempt from licensure. The material presented is solely for informational purposes. Past performance is no guarantee of future returns. Investing involves risk and possible loss of principal capital. No advice may be rendered by Omega Financial Group unless a client service agreement is in place.