Looming Tax Bill?

Despite solid planning, changes in tax laws and the market can mean that when tax time arrives, you need to raise funds.

Upcoming tax obligations don’t have to disrupt your investment strategy or deplete your cash reserves. Borrowing to pay taxes may be a cost-effective way to make your tax payments while keeping your cash and investments intact for continued long-term growth.

What Matters to You

A securities-based line of credit may be a cost-effective and straightforward way to pay a large tax bill.
High net worth investors should work with legal, tax and financial advisors to determine the best solution for addressing their liquidity needs.

Options for Funding an Upcoming Tax Bill

Cash: Paying cash is easy and straightforward. But relying on cash to cover tax bills requires liquidating cash reserves, which means losing out on the interest or growth that money would otherwise earn, reducing future flexibility.
Liquidating assets: Liquidating securities is easy and relatively fast, but not immediate. A sale can also trigger unfavorable tax consequences, such as a capital gains tax, that add to your tax burden, and may disrupt your long-term investment strategy and returns.
A line of credit: With a securities-based line of credit, you may quickly pay your tax bills without disrupting your investment strategy, depleting your cash reserves or creating unnecessary tax events. You avoid selling your assets, and continue to hold your investments.

Using a line of credit to fund a tax bill “provides clients a lot of flexibility and keeps their investment strategy in place, which could save them money,” says Jonathan Kessler, Head of Credit and Cash Management Solutions.

It’s not a solution available for, or applicable to, everyone, but understanding more about how this line of credit works might demonstrate how it could work for you — and not just for tax purposes, but for other liquidity needs as well.

A securities-based line of credit has several advantages

Typically, investors won’t pay any fees for establishing a line of credit. Once approved, the client may draw-down against the line of credit; the funds will be deposited into their bank account for spending. Investors only pay interest on the amount of money they draw.

For example, as illustrated in Table 1, assume you have a $5 million investment account, and you have a $100,000 tax liability. You could sell some of your assets to pay that tax, but using a line of credit offers more flexibility and helps smooth out the financial impact. Additionally, a line of credit eliminates the possible need to sell into a declining market. For purposes of this discussion, assume that you repay the amount borrowed at the end of a 12 month period, paying only interest on the amount borrowed during that time. This would allow you to use recurring cash flow or liquidate securities over time in a more strategic manner. As illustrated using the assumptions in Table 1, including an average return on the investments in the portfolio of 6.50 percent, using this line of credit offers a $2,880 savings over liquidating assets to pay tax.

Table 1: 1-Year Projection - $100,000 Tax Liability

	PNC Client A	PNC Client B
	Funded from Portfolio	1 Yr. Interest-Only Line of Credit at 6.0%
Starting Portfolio Market Value	$5,000,000	$5,000,000
Liquidation Amount	$100,000	$0
Remaining Investment	$4,900,000	$5,000,000
Total Pre-Tax Portfolio Return^[1]	$318,500	$325,000
Realized Capital Gains Tax^[2]	($2,380)	$0
Portfolio Return After Tax on Asset Liquidation	$316,120	$325,000
Total Line of Credit Interest Cost^[3]	$0	($6,000)
Portfolio Return Net of Transaction Costs	$316,120	$319,000
Line of Credit Value Added	$0	$2,880

You can also take advantage of this strategy if you have a large, event-driven tax bill, such as from a large nonrecurring capital gain from the sale of a business. As illustrated in Table 2, assume in this case, you have a $5 million investment account, and you need $1 million to cover a looming tax bill. You could sell some of your assets to pay that tax, but that would shrink your investment portfolio to $4 million.

Instead, you could take an advance of $1 million against a securities-based line of credit. By borrowing, the full $5 million remains invested. Assuming a 6.50 percent return on your portfolio and taking into consideration the cost of the loan, using a line of credit provides a $4,668 advantage at the end of five years.

Table 2: 5-Year Projection - $1 Million Tax Liability

	PNC Client A	PNC Client B
	Funded from Portfolio	5 Yr. Interest-Only Line of Credit at 6.0%
Starting Portfolio Market Value	$5,000,000	$5,000,000
Liquidation Amount	$1,000,000	$0
Remaining Investment^[4]	$4,000,000	$5,000,000
Realized Capital Gains Tax^[5]	($23,800)	$0
Total Line of Credit Cost (Paid from Income Each Year)	$0	($300,000)
Total Portfolio Return After Tax/Loan Cost^[4,6]	$1,480,347	$1,508,815
Portfolio Value End of Year 5 Before Loan Repayment	$5,480,347	$6,508,815
Loan Repayment	-	($1,000,000)
Capital Gain Cost to Repay Loan^[5]	$0	($23,800)
Portfolio Value After All Transactions	$5,480,347	$5,485,015
Line of Credit Value Added	$0	$4,668

“Everyone’s needs and portfolio will be different, which is why we always recommend discussing options with your banking advisor,” Kessler says. “Our advisors can customize solutions with you and assist you in determining the best options for your needs and particular situation.”

Liquidity when you need it

Beyond tax time, establishing a securities-based line of credit can offer liquidity for a variety of needs, including:

Taking advantage of investment opportunities, e.g., private equity or other business investments
Funding a philanthropic or estate planning strategy
Buying a new home before selling your current home, i.e., bridge financing
New home construction/renovation
Financing the cost of continued care facilities for a loved one

You’ve been smart with your money, investing wisely for your future. Given the right circumstances, by tapping a securities-based line of credit, you have the flexibility to take advantage of that wealth, while preserving your investment strategy.

Speak with your PNC Private Bank advisor today to determine if a line of credit is the right solution for you.

Also, prior to implementing any of the strategies previously discussed, you should consult with your legal and tax advisors to discuss the impact on your specific situation.

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Important Legal Disclosures and Information

1. The hypothetical portfolio has a projected annual rate of return of 6.50% (consisting of 2.5% income and 4% capital appreciation). For ease of illustration, all returns on investment are pre-tax, only taxes on the liquidation of portfolio assets are considered for comparison purposes. Some values have been rounded.

2. Assumes a realized gain of 10% on the Liquidation Amount, a 20% capital gains tax rate and a tax on net investment income of 3.8%. Tax calculations have been simplified for illustrative purposes and do not take into account any tax attributes that may affect a taxpayer’s particular situation (for example state and local taxes, marital status, exemptions or withholdings). PNC does not provide tax advice. Consult with your tax and legal advisors regarding your individual situation.

3. Total Line of Credit Cost is 6.0% on a $100,000 line of credit. In this example, interest is paid monthly with a final payment of interest and principal at the end of 12 months. For ease of illustration, this example uses a fixed interest rate. This is not an offer to lend. Actual loan terms will differ from those illustrated. Actual interest charges may be based on a variable interest rate.

4. The hypothetical portfolio has a projected annual rate of return of 6.50% (consisting of 2.5% income and 4% capital appreciation). Returns are compounded annually. For ease of illustration, all returns on investment are pre-tax, only taxes on the liquidation of portfolio assets are considered for comparison purposes. Some values have been rounded.

5. Assumes a realized gain of 10% on the Liquidation Amount, a 20% capital gains tax rate and a tax on net investment income of 3.8%. Tax calculations have been simplified for illustrative purposes and do not take into account any tax attributes that may affect a taxpayer’s particular situation (for example state and local taxes, marital status, exemptions or withholdings). PNC does not provide tax advice. Consult with your tax and legal advisors regarding your individual situation.

6. Total Line of Credit Cost is 6.00% on $1,000,000 line of credit. In this example, interest is paid monthly with a final payment of interest and principal at the end of 60 months. For ease of illustration, this example uses a fixed interest rate. This is not an offer to lend. Actual loan terms will differ from those illustrated. Actual interest charges may be based on a variable interest rate.

These materials are furnished for the use of PNC and its clients and do not constitute the provision of investment, legal, or tax advice to any person. They are not prepared with respect to the specific investment objectives, financial situation, or particular needs of any person. Use of these materials is dependent upon the judgment and analysis applied by duly authorized investment personnel who consider a client’s individual account circumstances. Persons reading these materials should consult with their PNC account representative regarding the appropriateness of investing in any securities or adopting any investment strategies discussed or recommended herein and should understand that statements regarding future prospects may not be realized. The information contained herein was obtained from sources deemed reliable. Such information is not guaranteed as to its accuracy, timeliness, or completeness by PNC.

The information contained and the opinions expressed herein are subject to change without notice. Past performance is no guarantee of future results. Neither the information presented nor any opinion expressed herein constitutes an offer to buy or sell, nor a recommendation to buy or sell, any security or financial instrument. Accounts managed by PNC and its affiliates may take positions from time to time in securities recommended and followed by PNC affiliates. Securities are not bank deposits, nor are they backed or guaranteed by PNC or any of its affiliates, and are not issued by, insured by, guaranteed by, or obligations of the FDIC or the Federal Reserve Board. Securities involve investment risks, including possible loss of principal.

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