Year-End Tax Planning (in Uncertain Times) Updated Oct. 31, 2012

Overview 2 Where Are We Now? What Is Scheduled to Expire? Year-End Planning Tips

Where Are We Now?

What We Do Know … 4 If Congress does nothing -Bush tax cuts will expire -Estate tax extenders will expire Super Committee -Debt ceiling debate -Required legislation to avoid automatic cuts -Temporary measure but deficit debate continues -New debt ceiling looming, possibly by November 2012 Supreme Court validated PPACA -Health care reform is here to stay -Changes to tax code started in 2010 and continue to Tax return compliance is expanding in scope

Super Committee and Taxes Tax reform/revenue raisers -11/23/11 and 12/23/11 deadlines -Tasked with finding $1.5 trillion savings over 10 years -Result: automatic $1.2 trillion in equal defense and non-defense spending cuts What was in play -Corporate reform -Bush tax cuts -Taxing large partnerships -International repatriation -Millionaire surtax New debt ceiling by November

Supreme Court Upheld Health Care Reform 6 Significant tax implications as court upheld action to require all individuals to buy health insurance Several new tax provisions to pay for new law now in effect Additional provisions are scheduled to kick in every year Impacts businesses, small and large, and individuals

Schedule of New Health Care Provisions YearProvision 2013 Flexible spending arrangement the maximum drops to $2,500 per plan year New HI (hospital insurance tax) on high-income taxpayers New 3.8% Medicare tax on investment income Medical care itemized deduction threshold increases to 10% of AGI starting in 2013 (except from 2015–2016) 2014 States will be required to provide federally approved insurance plans Premium assistance credit Excise tax on uninsured individuals Excise tax on applicable large employers Insurer reporting requirements Eligible premiums included in cafeteria plans 2017Increase in medical deduction threshold for taxpayers age 65 and over 2018Excise tax on high-cost employer plans 7

What is Scheduled to Expire?

Key Provisions That Expired in 2011 Alternative Minimum Tax (AMT) Exemption State/local sales tax deduction Bonus Depreciation (for 2012) dropped to 50% Mortgage insurance premiums deduction Student loan interest deductions School teacher expenses Charitable distributions from IRAs Research tax credit Section 179 limit dropped to $139,000 for

Provisions That Expire in 2012 Income tax brackets (10% goes away, 39.6% returns) Long-term capital gains (15% goes to 20%) Qualified dividends – 0% / 15% eliminated Phase-out of personal exemptions Phase-out of itemized deductions Marriage penalty $1,000 child credit resets to $500 Section 168 Bonus Depreciation expires 10 some may not Likely that some of the expiring provisions may not be extended

Estate Tax Expiring Provisions Estate Taxes -$1 million exemption? -55% maximum estate tax rate? -No portability of exemption? Gift Taxes -$1 million lifetime exemption? -55% maximum rate? GST Technical Issues relief -Default GST allocation for certain trusts 11

3.8% Medicare Tax Starts Jan. 1 The rules What is subject to the new tax? What is not subject to the new tax? 12

Impact of New Tax on Planning Applies only if modified AGI exceeds $200K for single and $250K for MFJ Dont forget to consider new tax when calculating 2013 estimated tax payments Tax exempt interest is not subject to the tax, so consider if more tax-exempt investments make sense Consider income included in AGI that is not subject to the tax 13

Start Now! 14 Dont wait Have a Plan A and a Plan B Use multiple scenarios

Why Projections? Better handle on cash flow Lower risk of overpaying estimated taxes Improved income tax planning 15

Multiple Scenarios – Multiple Years What if Romney gets elected? What if Obama stays in office? Also, consider the possibility that Congress waits until next year to do something Possibility for a 60- or 90-day extension on everything Why it is important to consider multiple years? 16

Year-End Planning Tips

Investments Are you diversified? -What is held in a taxable account vs. retirement account? -Consider Muni bonds (to avoid new Medicare tax in 2013) Triggering long-term capital gains/losses? -Some may consider triggering gains if they plan on selling in the near future -Others will not trigger losses like they normally do at the end of the year Accelerating income? -Not limited to investments, also consider ordinary income 18

Other Considerations Look at stock options that will expire in 2013 or Should you exercise them now? -Consider other factors (i.e., blackout periods, current FMV, etc.) -Consider ISOs as well Understand how real estate will be treated under new Medicare tax Transfers to younger generation (assuming you avoid Kiddie Tax rules) 19

Defer Deductions? Many factors in making this type of decision -Alternative Minimum Tax (or AMT) -Return of phase-in and phase-out rules -Possible increase in rates Not prepaying state income taxes? 20

Charitable Contributions Phase out of itemized deductions is scheduled to return in 2013! A 100% charitable contribution this year (with a maximum rate of 35%) is better than a 20% deduction next year (even if the rate is 39.6% or higher) 21

Education Incentives American Opportunity Tax Credit expires at end of 2012 Should students prepay student deduction if they have not maximized the deduction for 2012? The 529 plan still is around and is a great option! 22

Flexible Spending Accounts Health care FSA contribution will be capped at $2,500 Be sure to use the 2012 amount in full It is a use it or lose it account Consider other FSAs 23

Retirement Plans Qualified Charitable Distributions from IRAs -Popular provision -Should you wait until late in the year … just in case? -Consider getting the form from your broker and follow the right steps in case they make the rule retroactive Maximize 401(k) contribution (always a good bet!) Conversions to Roth IRAs -Know what factors to consider before converting -Important to consider the right time – is this the year to convert? 24

Business Entity Considerations Consider paying/declaring dividends for C Corporations or previous C Corporations before the end of 2012 Bonus Depreciation/Section 179 Other business-related issues 25

Conclusions - Best Tips of All! Dont get caught off guard -Plan now instead of waiting until the last minute Engage your CPA year-round -Better to ask about tax consequences before engaging in a particular transaction 26

Trust and Estate Issues 27 Change in rules Annual gifting Direct payments for medical, education, etc. Other year-end planning moves

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