the glass is half full!

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Terrence D. Wittman, MBA | LPL Financial Services 236 W. Lake St., S-100 Bloomingdale, IL 60108 Is The Glass Half Empty or Half Full ECONOMIC RECOVERY 2011: TAX LAW EDITION Helping Investors Cope with Slow Growth and Continued Uncertainty Advisor Logo Ph: 630-307-6933 Fax: 630-622-0416 [email protected] om Licensed in : IL, IN, GA, OH, PA & SC

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Please take the opportunity to view this presentation on why there are positives out there in the market, while looking at those that still concern us!

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Page 1: The Glass IS Half Full!

Terrence D. Wittman, MBA | LPL Financial Services

236 W. Lake St., S-100

Bloomingdale, IL 60108

Is The Glass Half Empty or Half Full

ECONOMIC RECOVERY 2011: TAX LAW EDITION

Helping Investors Cope with Slow Growth and Continued Uncertainty

Advisor Logo

Ph: 630-307-6933Fax: [email protected] in : IL, IN, GA, OH, PA & SC

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• Terrence D. Wittman, MBA – Financial Advisor since 2000

Michigan State University, BA Business– 1988

Loyola University Chicago, MBA Finance – 1995

FINRA Licenses – Series 7, 24 & 66

Independent Advisor with LPL Financial since 2003

President Roselle Chamber of Commerce 2010-2011

• My office is here to provide Independent, Wealth Management advice based upon the needs and desires of the client. We build a Financial Roadmap to their future together.

Viewing the Glass Half Full | About Us

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Viewing the Glass Half Full | Presentation’s Agenda

• Economic update – is the glass half full or half empty?

• Reasons for optimism

• Reasons for caution

• Tax Law Certainty: Impact of continued Bush-era tax cuts

• What conclusions can we draw from the data?

• What does it mean for investors?

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Viewing the Glass Half Full | Economic Update

Longest U.S. recessions (months)Start Date

Recession ends June 2009

Recession ends June 2009

Recession is over!

Source: National Bureau of Economic Research

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Gross Domestic Product – 1981-3Q 2010

Source: Bureau of Economic Analysis

Economy is growing -- slowly

Viewing the Glass Half Full | Reasons for Optimism

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Viewing the Glass Half Full | Reasons for Optimism

• Investor confidence in economic growth and corporate profitability propelled global developed markets higher in the quarter

• Weakness in European debt markets in the fourth quarter combined with improving global growth prospects put price pressure on global government bonds, pushing yields higher

• For the year, markets were led by high return asset classes such as emerging market equity, emerging market debt and high yield bonds

Source: SEI, in USD, Large Cap = Russell 1000, Small Cap = Russell 2000, Real Estate = DJ Wilshire RESI Index, Developed International Equity Markets = MSCI EAFE, Emerging Markets Equity = MSCI EME, World Equities = MSCI World Index, Global Bonds = Barclay’s Capital Aggregate Global Bond Index, US Investment Grade Bonds = Barclay’s Capital US Aggregate, High Yield = Merrill Lynch US HY Master II Constrained, Emerging Markets Debt = JP Morgan EMBIGD, Treasury = Treasury component of the Barclay’s US Aggregate, Inflation Linked = Barclays Capital 1-10Yr US TIPS to 6/30/2009 and Barclays Capital 1-5 Year US TIPS Index from 7/01/2009, Cash = ML USD LIBOR 3M

Sorted by 4Q 2010

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Viewing the Glass Half Full | Reasons for Optimism

Purchasing Managers Index

Source: Institute of Supply Management

Growth in manufacturing

50 and above equals manufacturing growth

50 and above equals manufacturing growth

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Viewing the Glass Half Full | Reasons for Optimism

Source: Yale School of Management

Attractive price-to-earnings (PE) ratios

PE Ratio S&P500 -- 1881-2010

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Viewing the Glass Half Full | Reasons for Optimism

American productivity – a steady climb to

greatness

Source: Nick Murray Interactive, U.S. Department of Commerce; BLS; The Economist

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U.S. Unemployment Rate (%) December 2009 to December 2010

Source: U.S. Bureau of Statistics

Viewing the Glass Half Full | Reasons for Caution

Stubborn unemployment

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Leading Economic Indicators –November 2009 to November 2010

Source: The Conference Board

Viewing the Glass Half Full | Reasons for Caution

Slow expansion

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Viewing the Glass Half Full | Reasons for Caution

Existing Home Prices – 2006 to November 2010 ($ thousands)

Source: National Association of Home Builders

Flat housing market

Page 13: The Glass IS Half Full!

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Federal Debt 2000 to 2015 -- $Trillions

Source: U.S. Office of Management and Budget

Viewing the Glass Half Full | Reasons for Caution

Mushrooming Federal Deficit

0

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20002001

20022003

20042005

20062007

20082009

2010*

2011*

2012*

2013*

2014*

2015*

Gross federal debt * Estimate

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Federal Debt 2000 to 2015 -- $Trillions

Viewing the Glass Half Full | Reasons for Caution

Rising cost of energy

Page 15: The Glass IS Half Full!

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Viewing the Glass Half Full | Tax Clarity

• Congress passes “Tax Relief, Unemployment Insurance Reauthorization and Job Creation Act of 2010”

• Two-year extension of favorable capital gains and dividend tax rates

• One-year cut in employee payroll taxes

• Multiple incentives for business

• Extension of many business tax benefits

• A “patch” to the alternative minimum tax (AMT) benefitting middle-income tax payers

• Repeal of limitations on itemized deductions

• Multiple extensions on credits and benefits for individual taxpayers

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Individual Tax Rates

Tax rate brackets and AMT

Capital gains and dividends

Tax rates extended across the board

Maximum capital gains rate 15%

What this means:•2003 Bush tax cuts extended through 2012.•Tax rate brackets are: 10, 15, 25, 28 33 and 35%.•Top rate would have increased to 39% had cuts been allowed to expire.•A temporary “patch” to AMT. Ensures 21 million households will not face tax increase.

What this means:•Qualified capital gains and dividends for 2010-2012 will be taxed at a maximum rate of 15%.•Zero percent for taxpayers in 10 and 15% brackets.•Rate would have reverted to 20% had cuts expired.

Source: “Tax Cut Extension Bill Winds Its Way to White House,” Accounting Today, Dec. 17, 2010

Viewing the Glass Half Full | Tax Clarity

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Individual Taxes

Improvement of reductions

Credits and benefits

Overall limitation on itemized deductions repealed

Multiple extended credits and benefits

What this means:•Two-year repeal of “personal exemption phase-out” (PEP) effectively lowers taxes for high-income taxpayers.•$1,000 child tax credit extended through 2012.•Charitable incentives extended, including tax-free distribution from IRA.

What this means:•Marriage Penalty relief extended through 2012•Education incentives extended through 2012.•Adoption credit•Dependent Care Credit•Employer-Provided Child Care

Source: “Tax Cut Extension Bill Wends Its Way to White House,” Accounting Today, Dec. 17, 2010

Viewing the Glass Half Full | Tax Clarity

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Social Security Taxes

Employee share Employer share

One-year reduction in FICA payroll tax

Employer share of FICA remains unchanged.

What this means:•Normal employee rate of 6.2% reduced to 4.2% for wages earned in 2011.•$2,136 savings for employee with $106,800 salary.•No changes in Medicare portion of Social Security tax (2.9%)

What this means:•The employer’s share of the tax remains at 6.2%.•Rate for self-employed individuals reduced from 12.4% to 10.4%. •Cost of measure estimated at $111 billion.

Source: “Tax Cut Extension Bill Wends Its Way to White House,” Accounting Today, Dec. 17, 2010

Viewing the Glass Half Full | Tax Clarity

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Business taxes

Business incentives Business tax benefits

Multiple incentives for businesses of all sizes

Extends through 2011 multiple business tax extenders

What this means:•50% bonus depreciation increased temporarily to 100%.•Taxpayers can monetize accumulated AMT credits in lieu of taking bonus depreciation.•Write-off under Section 179 is limited to $125,000, and $500,000 investment limit for tax years beginning in 2012.

What this means:•Extension of business energy incentives, including credit for biodiesel and renewable diesel fuel.•Multiple extensions of tax benefits that had expired in 2009.

Source: “Tax Cut Compromise Summary,” Jamie Dupree’s Washington Insider, December 9, 2010.

Viewing the Glass Half Full | Tax Clarity

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Estate and gift taxes

Estate Taxes Gift taxes

Compromise results in higher exclusions

Set to match estate taxes

What this means:•Maximum estate tax rate of 35%•Tax free amount of $5 million and $10 million for married couples.

What this means:•Top tax rate on gifts 35%•Maximum applicable exclusion of $5 million

Source: “Tax Cut Extension Bill Wends Its Way to White House,” Accounting Today, Dec. 17, 2010

Viewing the Glass Half Full | Tax Clarity

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Impact on families

Married couple with one child in middle school

Married couple with two children in high school

Income from wife’s job: $75,000 Income from husband’s job, capital gains, dividend income, interest: $300,000

What this means:•2011 tax under old law -- $12,558•2011 tax under new law -- $9,663•22% savings

What this means:•2011 tax under old law -- $71,182•2011 tax under new law -- $58,719•18% savings

Source: “In the Balance,” Wall Street Journal, Dec. 17, 2010.

Viewing the Glass Half Full | Tax Clarity

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Impact on families

Married couple with two children in college

Retired couple

Income combined from husband and wife’s jobs: $150,000

Income from dividends, Social Security, pension and taxable interest: $100,000

What this means:•2011 tax under old law -- $34,753•2011 tax under new law -- $23,170•33% savings

What this means:•2011 tax under old law -- $13,672•2011 tax under new law -- $8,590•37% savings

Source: “In the Balance,” Wall Street Journal, Dec. 17, 2010.

Viewing the Glass Half Full | Tax Clarity

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Viewing the Glass Half Full | Regulatory Update

• Impact of financial reform (Dodd-Frank Bill)• Establishes Consumer Financial Protection Bureau

• Ends “too big to fail” bailouts

• Improves transparency and accountability

• Controls executive compensation and corporate governance

• Protects investors

• Impact of Patient Protection and Affordable Care Act • Broadens Medicare tax base for higher income taxpayers

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Viewing the Glass Half Full | Tax Management Tools

Source: Parametric Portfolio Associates: 60% Russell 3000; 40% Barclays Capital Aggregate; No Liquidation. Interest income and dividends are taxed annually at historical top marginal tax rates; capital gains are realized at 50% per year and are taxed at the historical long-term capital gains tax rate. Past performance is no guarantee of future results.

*A hypothetical tax-free $100,000 portfolio (invested 60% in stocks and 40% in bonds) held for 29 years would have grown to about $2.2 million. If the portfolio was taxed like an average mutual fund, it would have lost 50% of its value, due to taxes paid and earnings lost on that money, Tax-managed investment strategies are designed to minimize capital gains distributions and maximize after-tax returns.

50% Lost toTaxes

50% Lost toTaxes

Designed to produce higher after-tax returns• Tax Lot Accounting• Loss Harvesting• Wider Rebalancing

Ranges• Tax-Aware Trading• Gain/Loss offset• Transition of Low-

Cost-Basis stocks

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Viewing the Glass Half Full | Tax Management Tools

Defined• Selling securities at a loss to

offset realized capital gains. Harvesting losses helps to limit the recognition of short-term capital gains, which are normally taxed at higher rates than long-

term gains. 

The benefits• Loss harvesting is an important tool for

reducing current and future income.• It can save you taxes and help you

diversify your portfolio. • Taxpayers can take up to $3,000 of

excess losses against ordinary income.

Tax loss harvesting

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Viewing the Glass Half Full | Tax Management Tools

Defined• The CRT is a tax-efficient vehicle that

provides the donor with a steady income stream, a tax deduction, deferral of capital gains, and a gift to one or more charities.

The benefits• Funding the trust with appreciated

assets allows the donor to sell the assets without incurring a capital gain.

• Efficient way to transfer appreciated property, benefit from charitable income tax deduction and reduce estate taxes.

• Donor retains the benefits of underlying assets for income purposes. 

Charitable Remainder Trusts (CRT)

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Viewing the Glass Half Full | Tax Management Tools

Defined• A Roth IRA is similar to a traditional

IRA, but contributions are not tax deductible and qualified distributions are tax free. 

• Like other retirement plan accounts, non-qualified distributions from a Roth IRA may be subject to a penalty upon withdrawal

The Benefits• Investor can avoid Required

Minimum Distributions (RMD) from qualified plans during his or her lifetime.

• Help to minimize future tax bracket creep

• Investor can vary distributions based on cash flow needs and tax situation.

Roth IRAs

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Viewing the Glass Half Full | Tax Management Tools

Limitation 2010 (and 2011)

Maximum annual contribution to qualified plan $49,000

401(k), 403(b), 457 maximum elective deferral limit $16,500

SIMPLE plan elective deferral limit $11,500

Traditional IRA / Roth IRA contribution limit $5,000

Catch-up contribution limit – (401(k), 403(b), 457 (over age 50)

$5,500

Catch-up contribution limit – SIMPLE (over age 50) $2,500

Catch-up contribution limit – traditional/Roth IRA (over age 50)

$1,000

Maximize contributions to your qualified plans

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Viewing the Glass Half Full | Conclusions

What does it all mean?

• Recession is over

• Double-dip recession highly unlikely

• There are reasons for optimism and reasons for caution

• We expect slow growth in 2011

• Significant improvement in job market not likely until

second half of 2011 or 2012

• Investors can still realize additional tax savings through

active tax management

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Viewing the Glass Half Full | Message for Investors

Follow the “Three Rs”1. Review your financial goals

2. Reexamine you investment strategy

3. Remain invested

Source: SEI, FactSet. Past performance does not guarantee future results. An investor cannot invest directly in an index or average and they do not include sales charges or operating expenses associated with an investment in a mutual fund,which would reduce total returns.

It’s about you, not the markets

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Benefits of working with a financial advisor:

• Identify and reconfirm short-term and long-term goals

• Maintain customized investment strategy that supports individual objectives

• Guidance through fluctuating markets, avoiding emotion-driven mistakes

• Access to broad selection of diversified mutual funds and other securities

• Advise during market crisis, upcoming bull market and the next market dip (they will all happen again!)

• Educate so you can understand and make the right investment decisions

• Uncertainty over tax law: Need to consider implications and scenarios resulting from tax law changes

Viewing the Glass Half Full | Role of Advisor

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Disclosure

This material represents an assessment of the market environment at a specific point in time and is not intended to be a forecast of future events, or a guarantee of future results.

 SEI Investments Management Corporation (SIMC) is the adviser to the SEI Funds, which are distributed by SEI Investments Distribution Co. (SIDCo.) SIMC and SIDCo are wholly owned subsidiaries of SEI Investments Company. Neither SEI nor its subsidiaries are affiliated with your advisor

 Carefully consider the investment objectives, risk factors and charges and expenses before investing. This and other information can be found in the Funds’ prospectuses, which may be obtained by calling 1-800-DIAL-SEI. Read it carefully before investing.

There are risks involved with investing, including loss of principal. Current and future portfolio holdings are subject to risks as well. Diversification may not protect against market risk. There is no assurance the objectives discussed will be met. Past performance does not guarantee future results

 Index returns are for illustrative purposes only and do not represent actual portfolio performance. Index returns do not reflect any management fees, transaction costs or expenses. One cannot invest directly in an index.

Neither SEI nor its affiliates provide tax advice. Please note that (i) any discussion of U.S. tax matters contained in this communication cannot be used by you for the purpose of avoiding tax penalties; (ii) this communication was written to support the promotion or marketing of the matters addressed herein: and (iii) you should seek advice based on your particular circumstances from an independent tax advisor.