BetterInvesting Portfolio Manager Improving Investment Tax Decisions

1. BetterInvesting Portfolio ManagerImproving Investment Tax Decisions Created by: QUANT IX SOFTWARE, Inc. We suggest you print the matching PDF file for this presentation to follow the notes discussion for this slide show. Revised: July 2007

2. Improving Investment Tax Decisions with BI Portfolio Manager Topics : Importance of accurate records What determines cost basis What determines holding period Lot-by-lot accounting Tax reports Effective tax decisions 2

3. Accurate record keeping is essential IRS finds many taxpayers do not properly report their capital gains and losses • In 2001, 38% of taxpayer misreported capital gains and losses: • 2/3rds under reported gains • 1/3 over reported gains • Main reasons for errors: • lack of accurate record keeping • due to miscalculation of adjusted cost basis * Based on 2001 Government Accountability Office report to Congress 3

4. Improving Investment Tax Decisions with BI Portfolio Manager Topics : Importance of accurate recordsWhat determines cost basis What determines holding period Lot-by-lot accounting Tax reports Effective tax decisions 4

5. What determines a security’s cost basis? Common determinants of cost basis: • Amount paid of each purchase of the security • Any dividends reinvested into the security • Any non-taxable distributions (i.e., return of capital) • Stock splits, spin-offs or mergers • Any sales • Any transfers • As the result of inheritance 5

6. Cost basis example • What would the cost basis be of a security with the following history – • purchased on several different occasions • dividends reinvested • later split its stock • sold part of the stock position • And finally part of the security gifted to a charity? 6

7. Portfolio Manager handles this with ease… 7

8. dollar cost averaging 8

9. Improving Investment Tax Decisions with BI Portfolio Manager Topics : Importance of accurate records What determines cost basisWhat determines holding period Lot-by-lot accounting Tax reports Effective tax decisions 9

10. What determines a security’s holding period? • When a security is sold, the taxpayer must identify the holding period for the property. • Holding period is the amount of time that the security was owned by the investor, beginning on the day after the property was acquired and including the day the property was disposed of by the taxpayer. • Holding periods of one year or less are considered short-term. • Holding periods of more than one year are considered long-term. 10

11. What determines a security’s holding period? Why is knowing the holding period so important to investors? Capital gains tax rates are lower for long-term gains than they are for short-term gains: • The current Federal LTCG rate is usually 15%. • STCG are taxed at regular income - Federal income tax rates (vary between 10% to 35%). • The goal is to defer the capital gain tax as long as possible, so the money can continue to grow. 11

12. Improving Investment Tax Decisions with BI Portfolio Manager Topics : Importance of accurate records What determines cost basis What determines holding periodLot-by-lot accounting Tax reports Effective tax decisions 12

13. What is meant by lot-by-lot accounting and why does this type of record keeping matter? • One of the many benefits of an accurate and up-to-date record keeping system is the ability to access the raw data in an useable format. • This is particularly important when considering the tax consequences of your investment decisions. • Portfolio Manager helps by providing: • Lot-by-lot assignment when making partial sales - • FIFO (First In, First Out) • Specific ID • Average Cost Methods for mutual funds – both single and double category methods • Minimum or Maximum gain 13

14. Making effective tax decisions with Portfolio Manager • Definitions: • Lot-by-lot accounting: One of the more useful features provided by BetterInvesting Portfolio Manager is the ability to track each purchase record (i.e., specific transaction lot) separately. Each lot’s purchase date, quantity, cost, etc. are all tracked as individual records in Portfolio Manager. This provides you with a very useful tax advantage when applying sales. 14

15. Example of lot-by-lot accounting... Lot by lot accounting 15

16. Making effective tax decisions with Portfolio Manager • Definitions – methods of sale application: FIFO (First In, First Out): when shares were acquired at different times or different prices, BI Portfolio Manager allows you to identify the basis of the shares you acquired first as the basis of the shares sold first. When a sale transaction uses the First-In First-Out method, the program automatically reduces the current holding starting with the oldest lot held, then the next oldest, and so on, until the sale is totally applied. This method usually results in a higher capital gain since the oldest lots often have the lowest cost. It is also the method the IRS assumes unless otherwise noted. 16

17. First-In First-out… Multiple lots listed for easy review and application. These can be sorted by holding period and/or unit cost. Using the IRS default method, your realized gain: $658.18 17

18. Making effective tax decisions with Portfolio Manager • Definitions – methods of sale application: Specific ID: when shares were acquired at different times or prices, BI Portfolio Manager allows specific identification of which shares were sold based, on acquisition date and cost basis. The Specific Identification Method allows the greatest flexibility when managing capital gains and losses. 18

19. Specific ID lot selection in partial sales can allow the user to manually select which lots are sold for specific purposes... Multiple lots listed for easy review and application. These can be sorted by holding period and/or unit cost. Using Specific ID method, your realized gain: $661.40 19

20. Making effective tax decisions with Portfolio Manager • Definitions – methods of sale application: • Minimum or Maximum gain - When minimum gain selection is chosen, BIPM automatically allocates the sale to result in the lowest realized capital gain considering the lots held. Alternatively, when maximum gain is selected, BIPM will apply the sale to result in the maximum realized gain. This flexibility helps you make better tax decisions when considering past realized gains or losses – i.e. to offset prior activity. 20

21. Automatic Minimum Gain lot selection with partial sales can help to balance gains/losses with previous sale activity... Multiple lots listed for easy review and application. These can be sorted by holding period and/or unit cost. Here we’ve selected lots for lowest gain 21

22. Automatic Maximum Gain lot selection with partial sales can help to balance gains/losses with previous sale activity... Multiple lots listed for easy review and application. These can be sorted by holding period and/or unit cost. Maximum gain selected, to offset other previously realized losses 22

23. Making effective tax decisions with Portfolio Manager • Definitions – methods of sale application: • Mutual Fund Average Cost Method - A holder of mutual fund shares may choose to use an average basis to determine the gain or loss when all or part of the shares held have been sold, provided the shares were acquired at various times and prices. The average basis is determined by using either the single-category method or the double-category method. 23

24. Lot selection in partial sales of mutual funds can be applied on either single or double category to determine gains/losses... Portfolio Manager handles special average cost rules that apply to mutual funds with ease... 24

25. Improving Investment Tax Decisions with BI Portfolio Manager Topics : Importance of accurate records What determines cost basis What determines holding period Lot-by-lot accountingTax reports Effective tax decisions 25

26. Tax Planning Reports • Income Received: The Income Received Report tracks the investment income and capital gain distributions received by securities in your portfolio. • Users can customize Portfolio Manager reports for a specific date range, which portfolios to include, asset types to include, for portfolio or for single security! 26

27. Ideal for tax filing! All the information you (or your CPA) needs. 27

28. Tax Planning Reports • Sold Securities: The Sold Securities Report compiles important information regarding the sales of securities for a given portfolio. Users can customize the information listed on this report for reporting period, portfolios to include, asset types to include, and filtering activity by portfolio or individual asset. Sales activity is separated based on Short Term Activity or Long Term Activity. 28

29. Ideal for tax filing! All the information you (or your CPA) needs. 29

30. Portfolio Manager provides several other reports to help investors better manage taxes for their portfolios... Many useful tax planning reports are provided in Portfolio Manager 30

31. Improving Investment Tax Decisions with BI Portfolio Manager Topics : Importance of accurate records What determines cost basis What determines holding period Lot-by-lot accounting Tax reportsEffective tax decisions 31

32. Putting it all together for more effective tax decisions Organized accurate record keeping: • allows you to effectively manage the tax implications of your investment decisions; • with lot-by-lot purchase detail, investors can not take advantage of several IRS approved methods to reduce capital gain taxes. • weeding and feeding your investment portfolio for long term successful results! 32

33. Putting it all together for more effective tax decisions Additional Tax Management Tools: Taxable vs. Tax deferred Accounts • Since BIPM provides for multiple portfolio management, it’s the ideal tool for segregating your various accounts, while still allowing for the combination of any or all of your portfolios on the various reports. This is particularly useful when managing your portfolios to hold investments in the most tax preferred account. • For instance, it may be wise to hold stocks providing qualified dividends (i.e. qualified dividends are currently taxed at a 15% tax rate) in your currently taxable account, while holding stocks that do not provide qualified dividends (many Real Estate Investment Trusts) inside your tax deferred retirement accounts. 33

34. Putting it all together for more effective tax decisions Additional Tax Management Tools:Optimize gift and estate planning strategies • BIPM’s lot-by-lot cost basis accounting provides an essential element for optimizing gift and estate planning strategies. For instance, you may determine that you wish to donate a security to a charity. Since investors often have multiple purchase lots of the same security, it would be quite advantageous to donate those purchases with the lowest cost. Without detailed purchase records, this would be impossible to do. 34

35. Putting it all together for more effective tax decisions Optimize gift and estate planning strategies • When gifting to a qualified charity, your gift value is usually based on the market value at the time of the gift including the unrealized capital gain, and not the cost of the gift. In other words, you will be giving away a larger capital gain that otherwise would have been taxed if you sold the securities and then gifted the proceeds. BetterInvesting Portfolio Manager provides the tools you need for improved investment decision making, leading you to better investing results! 35

36. Thank you for your interest in Portfolio Manager To learn more, please visit :www.biportfoliomanager.com(free 45 day demo available)www.betterinvesting.orgQUANT IX SOFTWARE, Inc.1035 West Glen Oaks LaneMequon, WI 53092 262-241-3990 36