1. The views and opinions expressed in this presentation are those of the author and presenter and do not necessarily reflect the views and opinions of the sponsoring companies or their affiliates.

2. Disclosure Neither Andrew Friedman, nor any law firm with which he may be associated, is providing legal or tax advice as to the matters discussed herein. The discussion herein is general in nature and is provided for informational purposes only. There is no guarantee as to its accuracy or completeness. It is not intended and may not be regarded as legal or tax advice, and financial advisors and other recipients of this information may not rely upon it (including for purposes of avoiding tax penalties imposed by the IRS or state and local tax authorities). Advisors should consult with their firm’s legal and tax counsel as to matters discussed herein. Clients should consult their own legal and tax counsel before entering into any investment, annuity, estate planning, or trust arrangement, and financial advisors should advise their clients to do so. Copyright Andrew H. Friedman 2012. Printed by permission. All rights reserved.

3. Permanently extends the existing tax rates for families with taxable income under $450K ($400K for individuals). Bush tax cuts expire for higher income taxpayers. Reinstates the “Pease” phase-out of itemized deductions for families with adjusted gross income over $300K ($250K for individuals).  Total itemized deductions are reduced by 3% of adjusted gross income above the specified income thresholds, but cannot be reduced by more than 80%.  Phase-out adds about one percentage point to the tax rate. Fiscal Cliff Compromise

4. In addition, beginning in 2013 the health care reform law imposes a new 3.8% surtax on investment income for families with adjusted gross income over $250K ($200K for individuals).  Surtax does not apply to non-taxable investment income or to distributions from qualified retirement plans and IRAs. Fiscal Cliff Compromise

5. Tax Rates – Investment Income Family income Ordinary Investment Cap gain / Dividend Income Tax Rate Tax Rate < $250K 35% max 15% max (no change) $250K – $300K 38.8% 18.8% (3.8% surtax) $300K - $450K 39.8% 19.8% (Pease phase-out) > $450K 44.6% 25% (Bush tax cuts expire)

6. Permanently extends the estate, gift, and generation skipping tax exemptions and indexes them for inflation.  For 2013, the exemptions are set at $5.25 million.  Increases the estate tax rate to 40% (from 35%). Permanently “patches” the alternative minimum tax to keep it from affecting more taxpayers in later years. Extends through 2013 the ability of individuals over age 70-1/2 to make tax-free distributions of up to $100K from an IRA to a charity. Fiscal Cliff Compromise

7. Extend the lower payroll tax rate in effect in 2011 and 2012. The payroll tax rate reverts to 6.2% (from 4.2%). Reduce government spending. The compromise delays for two months the implementation of the “sequester” government spending cuts. Reduce the percentage of American families who pay no federal income tax (currently close to 50%). Simplify the tax code. Reduce uncertainty or the need for Congressional action. What the Fiscal Cliff Compromise Does Not Do

8. Sequestration spending cuts take effect (March 1) Government 2013 appropriations (March 27)  If not passed, U.S. government shuts down Government borrowing limit (extended to May 18)  If not increased, U.S. defaults on its debt Imminent 2013 Legislative Items

9. Republicans will demand spending cuts (which were almost entirely absent in the fiscal cliff compromise). It is no longer possible to meet that demand by cutting discretionary spending. Democrats will demand that the spending cuts be balanced with additional tax increases.  It is no longer possible to meet that demand by raising tax rates. Imminent 2013 Legislative Items

10. Deficit Outlook (in billions of dollars) 2008 budget deficit $ 455 2009 budget deficit$ 1,400 2010 budget deficit$ 1,300 2011 budget deficit$ 1,300 2012 budget deficit $ 1,100 Total debt outstanding is 100% of GDP for only the second time in history (other was during WWII) Sources: Budget of the U.S. Government, Mid-Session Review, Fiscal Year 2012, Office of Management & Budget (Aug. 2011); An Update to the Budget and Economic Outlook: Fiscal Years 2012-2022, Congressional Budget Office (Aug 2012)

11. Health care reform Interest rate increases Additional Threats to the Deficit

12. Mandatory Programs (Entitlements) $2,031 (58%) Interest $223 (6%) Defense $817 (23%) Domestic $467 (13%) Source: The Budget and Economic Outlook: Fiscal Years 2013 to 2023, Congressional Budget Office (Feb 2013) 2012 Federal Spending ($3.5T) (in billions of dollars)

13. We are heading for a debate over spending on entitlements – Social Security and Medicare -- and additional tax changes. Deficit Reduction Plan

14. Increase retirement age Reduce CPI increases in Social Security benefits Means test benefits Increase wage cap subject to Social Security taxes No changes for individuals currently 55 or older Possible Social Security Changes

15. Increase eligibility age Increase co-payments Require affluent recipients pay for coverage No changes for individuals currently 55 or older Possible Medicare Changes

16. Cap tax exemptions and deductions claimed by affluent families  Employer-paid health insurance premiums  Tax-exempt interest on bonds  Pension plan contributions  Charitable contributions  Mortgage interest deduction  State tax deduction Possible Tax Changes

17. Potential “loophole” closers:  Carried interests  Oil and gas subsidies  Deductions for outsourcing business operations  S corporation payroll tax avoidance  Wealth transfer techniques Changes unlikely to be retroactive, but could apply from date of enactment. Possible Tax Changes

18. Comprehensive tax reform Immigration reform Gun control Energy Fannie Mae / Freddie Mac (housing) Other 2013 Legislative Items

19. Deficit Reduction Plan “In terms of additional revenue, that issue is closed.” Senior GOP leadership aide January 2013 “Congressional [Democrats] remain strongly opposed to any cuts to Medicare, Medicaid, and Social Security. [We] will do everything in our power to oppose these cuts.” Rep. Jan Schakowsky (D-Ill.) January 2013

20. Deficit Reduction Plan “It is almost a false argument to say that we have a spending problem.” House Minority Leader Nancy Pelosi (D-Calif.) February 2013 “I want to disagree with those who say we have a spending problem.” Sen. Tom Harkin (D-Iowa) February 2013

21. Investment Planning Markets likely to be volatile for first quarter, perhaps providing a buying opportunity. Give increased attention to “tax drag” on investments  Harvesting losses  Buy-and-hold strategies  Tax-efficient mutual funds  Other professionally managed tax-advantaged strategies Keep an eye on municipal bonds.

22. Investment Planning Consider prepaying charitable contributions. Consider paying down mortgage debt. Take advantage of sophisticated gifting techniques. Consider investments that provide tax deferral and retirement income.

23. To stay current: TheWashingtonUpdate.com -- from Andy Friedman @TheWashUpdate

24. The views and opinions expressed in this presentation are those of the author and presenter and do not necessarily reflect the views and opinions of the sponsoring companies or their affiliates.