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Series: From Tax Preparer to Financial Planner: The Road Best Traveled Part 2: The 1040 Diagnostician: Moving from Tax Compliance to Tax Planning for Individuals.

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Presentation on theme: "Series: From Tax Preparer to Financial Planner: The Road Best Traveled Part 2: The 1040 Diagnostician: Moving from Tax Compliance to Tax Planning for Individuals."— Presentation transcript:

1 Series: From Tax Preparer to Financial Planner: The Road Best Traveled Part 2: The 1040 Diagnostician: Moving from Tax Compliance to Tax Planning for Individuals Tax and Financial Planning for Individuals AICPA Presented by: Robert S. Keebler, CPA, MST, AEP (Distinguished) Lyle K. Benson, CPA/PFS Julie A. Welch (Runtz), CPA/PFS Circular 230 Disclosure: To ensure compliance with requirements imposed by the IRS, we inform you that any U.S. federal tax advice contained in this communication, including attachments, was not written to be used and cannot be used for the purpose of (i) avoiding tax-related penalties under the Internal Revenue Code or (ii) promoting, marketing or recommending to another party any tax-related matters addressed herein. If you would like a written opinion upon which you can rely for the purpose of avoiding penalties, please contact us.

2 Personal Financial Planning Section Introduction Robert S. Keebler, CPA, MST, AEP (Distinguished) Keebler & Associates, LLP 420 S. Washington St. Green Bay, WI Phone: (920) Julie A. Welch (Runtz), CPA/PFS Meara Welch Browne, PC Certified Public Accountants & Consultants 800 W. 47th St., Suite 430, Kansas City, MO | fax 2 Lyle Benson, CPA/PFS L. K. Benson & Company 1107 Kenilworth Dr, Suite 302 Baltimore, MD Phone: Fax: Featured Speakers Moderator

3 Personal Financial Planning Section Introduction About the PFP Section & PFS Credential The AICPA PFP Section provides information, resources, advocacy and guidance for CPAs who specialize in providing estate, tax, retirement, risk management and investment planning advice to individuals and their closely held entities The CPA/Personal Financial Specialist (PFS) credential distinguishes CPAs as subject-matter experts who have demonstrated their financial planning knowledge through experience, education and testing

4 Personal Financial Planning Section AICPA Web Seminar Series: From Tax Preparer to Financial Planner Part 1 Understanding the value of financial planning Part 2 Moving from tax compliance to tax planning for individuals Part 3 Moving from tax planner to holistic financial planner Part 4 Implementing a PFP practice Build your financial planning knowledge with this web seminar series and discover the necessary steps to transition from tax preparer to financial planner. Register today at CPA2Biz.com/Webcasts. Discounts available for PFP/PFS and Tax Section members.CPA2Biz.com/Webcasts

5 Personal Financial Planning Section The IRS Form 1040, when properly analyzed, reflects a wealth of information and planning opportunities: Current tax mitigation strategies Long-term tax reduction and retirement strategies Education funding Retirement funding Life insurance planning Long-term care (LTC) planning Estate planning 5 Overview

6 Personal Financial Planning Section Roth IRA Tax-free growth during lifetime No 70½ RMD Tax-free distributions out to beneficiaries life expectancy Life Insurance Tax-deferred growth Tax-exempt payout at death Interest Income - Taxable Capital Gain Income -Preferential Rate -Deferral until sale Roth IRA and Insurance - Tax Free Growth/ Benefits Real Estate, Oil & Gas and Tax Exempt Bonds - Tax Preferences Pension and IRA Income - Tax Deferred Money market Corporate bonds US Treasury bonds Attributes Annual income tax on interest Taxed at highest marginal rates Equity Securities Attributes Deferral until sale Reduced capital gains rate Step-up basis at death Real Estate Depreciation tax shield 1031 exchanges Deferral on growth until sale Oil & Gas Large up front IDC deductions Depletion allowances Pension plans Profit sharing plans Annuities Attributes Growth during lifetime RMD for IRA and qualified plans No step-up Tax Asset Classes SM Dividend Income Tax Exempt Interest Equity securities Attributes Qualified dividends at LTCG rate Return of capital dividend Capital gain dividends Bonds issued by State and local Governmental entities Attributes Federal tax exempt State tax exempt SM Tax Asset Classes is a service mark of Robert S. Keebler, CPA, MST, AEP and Keebler & Associates, LLP 6

7 Personal Financial Planning Section Address Top of Tax Return Move to a low-tax or no-tax state before you receive a large gain ̶ Consider what it takes to be a “resident” of the new state Consider state taxability of retirement income and Social Security 7

8 Personal Financial Planning Section Filing Status Boxes 1 – 5 Filing Status Consider filing separately ̶ One spouse with large medical or miscellaneous expenses Consider head of household Lives with you Qualifies as your dependent Qualifying childX Married child or grandchildXX ParentX Other relativeXX 8

9 Personal Financial Planning Section Dependents Basic facts Personal exemption $3,800 -No phase-out for 2012 but watch AMT may wipe out federal (but not state) benefit If divorced, custodial parent claims -Exception for IRS Form 8332 attached to return -Release/Revocation of Release of Claim to Exemption for Child by Custodial Parent 9

10 Personal Financial Planning Section Line 7 – Wages & Salaries Strategies to Reduce Wages Maximize 401(k) or Roth 401(k) type plan Evaluate Dependent Care contributions Evaluate Healthcare contributions Evaluate Deferred Compensation contributions, if available 401(k) contributions Fringe Benefits -Continuing education -Cell phones 10

11 Personal Financial Planning Section Line 8a – Interest Income Taxable Interest Reflects Interest from Investments, Taxable Bonds and Installments Sales Reflects the “Amortization” of Original Issue Discount Reflects the “Amortization” of Market Discount 11

12 Personal Financial Planning Section Interest actually paid is reported on the cash basis of accounting U.S. Savings Bonds –Defer income (either report annually or upon maturity) –Exclude income on educational savings bonds – higher education –Must be age 24 – individual, spouse, or dependent –Phase out for 2012 –Single 72,850 – 87,850 –MFJ 109,250 – 139, Line 8a – Interest Income

13 Personal Financial Planning Section Line 8b – Tax-Exempt Interest Tax-Exempt Interest Reflects Interest from Tax-Free Money Market and Tax-Free Bonds Reflects the Amortization of Original Issue Discount on Tax-Exempt Bonds Reflects the Amortization of Market Discount on Tax- Exempt Bonds Interest Actually Paid is Reported on the Cash Basis of Accounting Private Activity Interest is Subject to the Alternative Minimum Tax 13

14 Personal Financial Planning Section Line 9a – Ordinary Dividends Ordinary Dividends IRS Form 1099-DIV, Line 1a Reflects total dividends less qualified dividends Cash basis of accounting Foreign dividends are reported on a gross basis before withholding -A foreign income deduction or foreign tax credit is available 14

15 Personal Financial Planning Section 15 Line 9b – Qualified Dividends Qualified Dividends IRS Form 1099-DIV, Line 1b Need to meet certain requirements Treated like long-term capital gains (i.e. taxed at either 0% or 15% in 2012) CAVEAT: Treatment goes away in 2013 (unless Congress extends the law)

16 Personal Financial Planning Section 16 Line 9b – Qualified Dividends Capital Gain Distributions IRS Form 1099-DIV, Line 2a Represents certain dividends from mutual fund and/or REITs Always treated like long-term capital gains (i.e. taxed at either 0% or 15% in 2012) regardless of how long the taxpayer held the investment ̶ However, some capital gain distributions are classified as unrecaptured IRC §1250 gain, IRC §1202 gain or “collectibles” gain Reported on IRS Form 1040, Line 13 (via Schedule D)

17 Personal Financial Planning Section Overpayments of state and local income tax are includible in income in the year received to the extent they reduced tax payable in the year of overpayment Not includible in income if the taxpayer did not itemize in the earlier year Taxpayers who itemized in the year of the overpayment may not have received a deduction for the full amount of the overpayment The amount of the benefit is the lesser of the deduction for state taxes paid or the excess of itemized deductions for the year of the overpayment over the amount of the standard deduction for that year 17 Line 10 – Taxable Refunds, Credits or Offsets of State and Local Taxes

18 Personal Financial Planning Section 18 Line 10 – Taxable Refunds, Credits or Offsets of State and Local Taxes Facts Rick and his wife Ann filed a joint return in 2011 claiming a deduction of $8,000 for state and local taxes and a $5,000 charitable deduction In 2012, they received a $2,000 refund on the state and local taxes paid in 2011 The standard deduction for 2011 was $11,600 Tax Consequences The amount reported on line 10 is the lesser of the amount of the refund ($2,000) or the excess of itemized deductions over the standard deduction amount ($13,000 - $11,600 = $1,400) Only $1,400 is included in income because the last $600 did not reduce income in 2011 If AMT applied in 2011 and eliminated the entire benefit, then no amount is taxable in 2012

19 Personal Financial Planning Section 19 Alimony is amounts received from a spouse or former spouse under a divorce settlement or separation agreement Deductible by payor spouse Recipient can’t report amounts on a Form 1040A or 1040EZ Recipient must notify payor of recipient’s social security number Watch alimony recapture if payments are “front loaded” during the first three years Line 11 – Alimony Received

20 Personal Financial Planning Section Line 12 – Business Income or Loss Reap the benefits of Schedule C Retirement plans Business expenses not subject to AMT Independent contractor considerations Deduct the full cost of equipment, computers, and furniture Section 179 and/or bonus depreciation Write off 100% of health insurance premiums Hire children in the business 20

21 Personal Financial Planning Section If an activity is not engaged in for profit, a taxpayer cannot use losses from that activity to offset income from other activities (IRC §183) The activities most likely to be treated as lacking a profit motive are horse or dog racing, horse breeding, car racing and weekend farming or ranching Meeting the requirements of a safe harbor creates a presumption that there was a profit motive-- Profit in at least three years out of the five-year period ending with the current tax year Profit in at least two of the last seven years for horse breeding, showing and racing (Reg. § (c)) 21 Line 12 – Business Income or Loss Hobby Losses

22 Personal Financial Planning Section If a taxpayer doesn’t meet the safe harbor requirement, the profit motive determination is made by looking at all the relevant facts Factors indicating a profit motive Reasonable expectation of asset appreciation Taxpayer’s previous business success Past profits from the activity are substantial in relation to losses Factors indicating lack of a profit motive-- Failure to run the activity in a business like manner (e.g., not keeping accurate books and records Taxpayer’s lack of expertise and failure to consult experts in the field Failure to devote substantial time and effort to the activity or to hire competent managers Taxpayer has much more substantial income from other sources Activity generates substantial tax or recreational benefits (Reg. § (b)) 22 Line 12 – Business Income or Loss Hobby Losses

23 Personal Financial Planning Section Line 13 – Capital Gain or Loss Capital Gain or Loss This Line Reflects Gains or Losses on the Sale or Exchange of Capital Assets -Long-Term Gain or Loss -Short-Term Gain or Loss Capital Losses > Capital Gains are deductible up to $3,000 a year The balance is carried forward to future years 23

24 Personal Financial Planning Section ■In general, capital losses are more tax effective if they can be used to offset income taxed at higher tax rates (e.g. short-term capital gains and ordinary income) –Thus, long-term losses used against short-term gains are more tax-efficient than short-term losses being used against long-term capital gains Inefficiency of Capital Loss Offsetting Short-Term GainLong-Term Gain Short-Term Loss NEUTRALINEFFECTIVE Long-Term LossEFFECTIVENEUTRAL 24 Line 13 – Capital Gain or Loss

25 Personal Financial Planning Section Report gains or losses on sales of business property from Form 4797 Sales of business property generally receive very favorable tax treatment under IRC §1231 Gains and losses for the year are netted together -If there is a net gain, it is treated as capital gain -Exception for “nonrecaptured losses” during prior 5 years -If there is a net loss it is treated as an ordinary loss Exception where gains are treated as ordinary income because of recapture rules 25 Line 14 – Other Gains or Losses

26 Personal Financial Planning Section ■Line 15a – Gross IRA distributions ■Line 15b – Taxable amount of IRA distributions Need to complete IRS Form 8606 (if non-deductible contributions (i.e. basis) exists) 26 Line 15 – IRA Distributions

27 Personal Financial Planning Section When an IRA has non-deductible contributions, a portion of each IRA distribution will be a return of non-taxable “basis” to the IRA owner In determining the non-taxable portion of an IRA distribution, all IRAs and IRA distributions during the year (including outstanding rollovers) must be combined for apportioning “basis” See IRS Form Line 15 – IRA Distributions Taxation of IRA Distributions

28 Personal Financial Planning Section * NOTE: This is only applies for non-deductible contributions made during the current tax year (i.e. 1/1 – 12/31) 28 Line 15 – IRA Distributions Taxation of IRA Distributions

29 Personal Financial Planning Section 29 Taxation of IRA Distributions Line 15 – IRA Distributions

30 Personal Financial Planning Section ■Lowers overall taxable income long-term ■Tax-free compounding ■No RMDs at age 70½ ■Tax-free withdrawals for beneficiaries* ■More effective funding of the “bypass trust” ■New 3.8% Medicare “surtax” planning 30 Line 15 – IRA Distributions Roth IRA Conversions – Benefits

31 Personal Financial Planning Section 1)Taxpayers have special favorable tax attributes including charitable deduction carry-forwards, investment tax credits, net operating losses (NOLs), high basis non-deductible traditional IRAs, etc. 2)Suspension of the minimum distribution rules at age 70½ provides a considerable advantage to the Roth IRA holder. 3)Taxpayers benefit from paying income tax before estate tax (when a Roth IRA election is made) compared to the income tax deduction obtained when a traditional IRA is subject to estate tax. 31 Line 15 – IRA Distributions Reasons to Convert to Roth IRAs

32 Personal Financial Planning Section 32 Line 15 – IRA Distributions Reasons to Convert to Roth IRAs 4)Taxpayers who can pay the income tax on the IRA from non-IRA funds benefit greatly from the Roth IRA because of the ability to enjoy greater tax-free yields. 5)Taxpayers who need to use IRA assets to fund their Unified Credit bypass trust are well advised to consider making a Roth IRA election for that portion of their overall IRA funds. 6)Taxpayers making the Roth IRA election during their lifetime reduce their overall estate, thereby lowering the effect of higher estate tax rates.

33 Personal Financial Planning Section 33 Line 15 – IRA Distributions Reasons to Convert to Roth IRAs 7)Federal tax brackets are more favorable for married couples filing joint returns than for single individuals, Roth IRA distributions won’t cause an increase in tax rates for the surviving spouse when one spouse is deceased because the distributions are tax-free. 8)Post-death distributions to beneficiaries are tax-free. 9)Tax rates are expected to increase in the near future. 10) The new 3.8% Medicare surtax.

34 Personal Financial Planning Section Convertible accounts Traditional IRAs 401(k) plans Profit sharing plans 403(b) annuity plans 457 plans “Inherited” 401(k) plans (see Notice ) Non-convertible accounts “Inherited” IRAs Education IRAs 34 Line 15 – IRA Distributions Accounts Eligible for Conversion to Roth IRAs

35 Personal Financial Planning Section FOOTNOTES IRC Sec. 408A(d)(2)(A)(i) IRC Sec. 408A(d)(2)(B) IRC Sec. 408A(d)(2)(A)(ii)(iii)(iv) Death Disability First-time homebuyer expenses (up to $10,000) Does the taxpayer meet any of the other statutory exceptions? No Has the taxpayer met the five-year holding period test? 2 Yes No Is the taxpayer over age 59½? No Entire distribution is tax-free Yes Distribution subject to income tax (only to the extent of amounts not previously taxed) Yes 35 Line 15 – IRA Distributions Taxation of Non-Qualified Roth IRA Distributions (“Seasoning Rule”)

36 Personal Financial Planning Section Exceptions to 10% early withdrawal penalty : 1.Death 2.Disability 3.Series of substantially equal periodic payments 4.Medical expenses greater than 7.5% AGI 5.Health insurance premiums for unemployed individuals 6.Higher education expenses 7.First-time homebuyer expenses (up to $10K) 100% Conversion Commingled Is the taxpayer over age 59½? Is the Roth IRA: (1)100% contributory (2)100% conversion (3)Commingled Follow the “ordering rules” (see above chart) Did the distribution occur within five years of conversion? Is the distribution greater than prior contributions (i.e. “basis”)? No 100% Contributory No Yes Penalty applies to “earnings” (Unless exception applies) No Penalty Yes No Penalty applies to conversion and “earnings” (Unless exception applies) 36 Line 15 – IRA Distributions Taxation of Non-Qualified Roth IRA Distributions (“Penalty Box Rule”)

37 Personal Financial Planning Section Gross Distribution Net contributions 1 Conversion amounts > 5 years 2 (non-taxable portion) Conversion amounts > 5 years 2 (taxable portion) Conversion amounts <= 5 years 2 (taxable portion) Conversion amounts <= 5 years 2 (non-taxable portion) FOOTNOTES: 1.“Net contributions” is: (a) the sum of all prior Roth IRA contributions reduced by (b) the sum of all prior Roth IRA distributions (i.e. “basis first” rule) 2.Distributions attributable to prior conversion amounts are determined on a “first-in, first-out” (“FIFO”) basis (e.g conversions,1999 conversions, 2000 conversions, etc.) with the taxable portion of each prior year conversion coming out first followed by the non-taxable portion Step 1 Step 2 Step 3 Step 4 Step 5 Step 6 “Earnings” 10% early withdrawal penalty applies (Unless exception applies) 37 Line 15 – IRA Distributions Taxation of Non-Qualified Roth IRA Distributions (Ordering Rules)

38 Personal Financial Planning Section ■ The key to successful Roth IRA conversions is to keep as much of the conversion income as possible in the current marginal tax bracket However, there are times when it may make sense to convert more and go into higher tax brackets Need to take into consideration the new 3.8% Medicare “surtax” Need to take into consideration the impact of AMT 38 Line 15 – IRA Distributions Mathematics of Roth IRA Conversions

39 Personal Financial Planning Section 10% tax bracket 15% tax bracket 25% tax bracket 28% tax bracket 33% tax bracket 35% tax bracket Current taxable income Target Roth IRA conversion amount “Optimum“ Roth IRA conversion amount CAUTION: Make sure to analyze the impact of AMT on the conversion amount 39 Line 15 – IRA Distributions Mathematics of Roth IRA Conversions

40 Personal Financial Planning Section Taxpayers may “recharacterize” (i.e. undo) the Roth IRA conversion in current year or by the filing date of the current year’s tax return Recharacterization can take place as late as 10/15 in the year following the year of conversion Taxpayers may choose to “reconvert” their recharacterization Reconversion may only take place at the later of the following two dates: -The tax year following the original conversion OR -30 days after the recharacterization 40 Line 15 – IRA Distributions Recharacterizations

41 Personal Financial Planning Section Conversion PeriodRecharacterization Period 1/1/2012 First day conversion can take place /31/2012 Last day conversion can take place 4/15/2013 Normal filing date for 2012 tax return 10/15/2013– Latest filing date for 2012 tax return / last day to recharacterize 2012 Roth IRA conversion 12/31/ Line 15 – IRA Distributions Roth IRA Conversion/ Recharacterization Timeline

42 Personal Financial Planning Section ■Line 16a – Gross distributions ■Line 16b – Taxable amount of distributions Special considerations ̶ After-tax employee contributions ̶ Lump-sum distributions ̶ Net unrealized appreciation (NUA) ̶ 10-year income averaging (only available for taxpayers born before 1/2/1936) ̶ Special capital gains treatment on pre-1974 contributions (only available for taxpayers born before 1/2/1936) 42 Line 16 – Pensions and Annuities

43 Personal Financial Planning Section Ordinary income recognized on cost basis Difference between Fair Market Value (FMV) at rollout and basis is Net Unrealized Appreciation (NUA) NUA is taxed long-term capital gain tax rates (0% and/or 15%) 43 Line 16 – Pensions and Annuities Net Unrealized Appreciation (NUA)

44 Personal Financial Planning Section If under age 55, a 10% excise tax penalty is imposed on the basis of the securities 44 Line 16 – Pensions and Annuities Net Unrealized Appreciation (NUA)

45 Personal Financial Planning Section Fair Market Value (FMV) of stock $ 750,000 Employer basis $ 150,000 Net Unrealized Appreciation (NUA) $ 600,000 Amount taxable if stock is rolled out $ 150, Line 16 – Pensions and Annuities Net Unrealized Appreciation (NUA)

46 Personal Financial Planning Section The $600,000 of NUA is Deferred Until the Stock is Sold 46 Line 16 – Pensions and Annuities Net Unrealized Appreciation (NUA)

47 Personal Financial Planning Section ■15% rate (2012) ■20% rate (2013 and beyond) ■0% rate (2012) ■8%/10% rate (2013 and beyond) 47 Line 16 – Pensions and Annuities Net Unrealized Appreciation (NUA)

48 Personal Financial Planning Section 100% Rollout 100% Rollover to IRA Partial Rollout / Partial Rollover 48 Line 16 – Pensions and Annuities Net Unrealized Appreciation (NUA)

49 Personal Financial Planning Section Step One: Take a $200,000 lump sum distribution Step Two: Basis in employer stock is taxed at rollout Step Three: Transfer remaining $1,000,000 to an IRA Step Four: File proper tax elections Basis allocation election Taxation of employer basis election Retiree has $1,200,000 in his qualified plan The plan is 90 percent invested in employer stock 49 Line 16 – Pensions and Annuities Net Unrealized Appreciation (NUA)

50 Personal Financial Planning Section XYZ Corp. Profit Sharing Plan $1,200,000 IRA $1,000,000 In-Kind Distribution $200,000 “Open” Shares Hedged Shares 50 Line 16 – Pensions and Annuities Net Unrealized Appreciation (NUA)

51 Personal Financial Planning Section On account of employee’s death After the employee attains age 59½ On account of employee’s separation from service after the attainment of age 55 After the employee has become disabled (within the meaning of section 72(m)(7)) 51 Line 16 – Pensions and Annuities Net Unrealized Appreciation (NUA)

52 Personal Financial Planning Section If prior year distributions have been made after one triggering event, the taxpayer must wait until another triggering event to qualify for lump sum distribution “within one taxable year” rule 52 Line 16 – Pensions and Annuities Net Unrealized Appreciation (NUA)

53 Personal Financial Planning Section Flow-through from Schedule E Loss limitation rules –At-risk rules –Passive Loss rules 53 Line 17 – Rental Real Estate, Royalties, Partnerships, S Corporations, Trusts, Etc.

54 Personal Financial Planning Section Prevent taxpayers from using strategies like non-recourse financing to create losses that exceed the amount they can lose in the activity Loss deduction can be taken only for the amount at risk Loss is the excess of deductions over income from the activity (losses from the activity can be used to offset losses from the activity) Excess losses are carried forward and can be used when amount at risk is sufficient 54 Line 17 – Rental Real Estate, Royalties, Partnerships, S Corporations, Trusts, Etc. At-Risk Rules

55 Personal Financial Planning Section Amounts at risk (Individuals and Partnerships) Amount of money + basis of other property contributed by the taxpayer to the activity (IRC §465(b)(1)) -(Applies to S Corporations also) Amounts borrowed for use in the activity to the extent the taxpayer is personally liable or the debt is secured by other assets of the taxpayer (IRC §465(b)(2)) Taxpayer’s share of any qualified non-recourse financing (IRC §465(b)(6)) Amounts not at risk Amounts borrowed from another person who has an interest in the activity or from a person related to such a person (IRC §465(b)(3)) Amounts protected against loss through non-recourse financing a guarantee, stop-loss agreement or similar arrangement (IRC §465(b)(4)) 55 Line 17 – Rental Real Estate, Royalties, Partnerships, S Corporations, Trusts, Etc. At-Risk Rules

56 Personal Financial Planning Section Prevent taxpayers from using losses from tax shelters to offset salaries, professional fees, business income, dividends and interest A passive activity is generally an activity in which a taxpayer is not an active participant or a rental activity Passive losses can be used to offset passive income, but not active income Disallowed losses can be carried forward until the taxpayer has sufficient passive income to use them Disallowed losses can also be used when the investment activity is closed out 56 Line 17 – Rental Real Estate, Royalties, Partnerships, S Corporations, Trusts, Etc. Passive Activity Rules

57 Personal Financial Planning Section Generally, any activity in which the taxpayer doesn’t materially participate Tests for material participation-- Taxpayer participates more than 500 hours during the tax year Taxpayer does substantially all the work required for the activity Taxpayer has over 100 hours of participation and no one else has more hours Taxpayer doesn’t satisfy any of the tests for the current year but did satisfy one or more of them in at least five of the previous 10 years Taxpayer has over 100 hours of participation and activities were regular, continuous and substantial 57 Line 17 – Rental Real Estate, Royalties, Partnerships, S Corporations, Trusts, Etc. Passive Activity Rules

58 Personal Financial Planning Section Rental activities are generally treated as passive regardless of participation Exceptions Real estate professional -More than 750 hours of participation in real estate businesses, AND -More than 50% of the services performed by the individual during the tax year are in real estate businesses $25,000 rental real estate exception (IRC §469(i)) -First $25,000 of net passive losses from rental real estate can be deducted against non-passive income if the taxpayer significantly participates in the activity -Phased out as income rises above $100,000 (IRC §469(i)(3)) 58 Line 17 – Rental Real Estate, Royalties, Partnerships, S Corporations, Trusts, Etc. Passive Activity Rules

59 Personal Financial Planning Section Oil and gas investments Working interest not passive regardless of participation if liability for development and operating costs is not limited (IRC §469(c)(3)(A)) -General partnership interest not passive -Limited partnership interest is passive 59 Line 17 – Rental Real Estate, Royalties, Partnerships, S Corporations, Trusts, Etc. Oil and Gas Investments

60 Personal Financial Planning Section Intangible drilling costs (IDCs) provide a large immediate income tax deduction (up to 85% of the initial investment) Losses, if any, created as a result of IDCs will be ordinary thus lowering a taxpayer’s AGI) -Must be general partner in the first year -Possible AMT add-back issues if IDCs exceed 40% of AMTI Depletion and other depreciation (including Section 179 expensing) provide for additional deductions during the term of the investment Additional tax credits may be available to certain oil & gas ventures 60 Line 17 – Rental Real Estate, Royalties, Partnerships, S Corporations, Trusts, Etc. Oil and Gas Investments

61 Personal Financial Planning Section ■Financial leverage Relatively small down payment controls 100% of return Example –Buy $100,000 worth or property for $10,000 down –Rent covers mortgage payments and expenses –Property increases in value by 5% during the year –50% return on investment ■Caveat Leverage runs in both directions If value declined to $95,000, the investor would have a – 50% return on investment 61 Line 17 – Rental Real Estate, Royalties, Partnerships, S Corporations, Trusts, Etc. Real Estate Investments – Economic Benefits

62 Personal Financial Planning Section Depreciation benefits Deduct cost of residential rental property over 27.5 years Deduct cost of commercial property over 39 years Apportion as much of cost as possible to improvements rather than land Deduction with no cash outlay May be only paper losses (property may increase in value) Often shelters all income from investment Excess deduction may also shelter other income subject to limitations -Passive income -$25,000 exclusion -Real estate professionals (Material participation) Deductions reduce basis Recapture when property is sold, but timing advantage 62 Real Estate Investments – Tax Benefits Line 17 – Rental Real Estate, Royalties, Partnerships, S Corporations, Trusts, Etc.

63 Personal Financial Planning Section Farm Income or Loss From Schedule F Cash Basis of Accounting Sale of Animals is Capital Gain Hobby Loss Rules 63 Line 18 – Farm Income or Loss

64 Personal Financial Planning Section Unemployment Compensation 100% of Unemployment is Taxable -Generally there is no withholding so may want to consider estimated Federal and/or State estimates 64 Line 19 – Unemployment Compensation

65 Personal Financial Planning Section Start with amount from Form SSA-1099 Part of this amount may be subject to tax Taxable portion depends on amount of “provisional income” Provisional income = Modified Adjusted Gross Income (MAGI) + ½ of SS benefit MAGI = Adjusted Gross Income (AGI) before SS is included plus: Tax-exempt interest on Series EE U.S. Savings Bonds used to pay tuition Adoption assistance payments Foreign earned income Income from U.S. possessions Income from Puerto Rico Deductions claimed for student loan interest and qualified tuition 65 Line 20 – Social Security Benefits Social Security Taxation

66 Personal Financial Planning Section First determine if benefits are taxable at all No inclusion if provisional income does not exceed the following base amounts— $25,000 for single, head of household, qualifying widow, or married filing separately and not living with spouse $32,000 for married taxpayers filing a joint return (IRC §86(c)) 66 Line 20 – Social Security Benefits Social Security Taxation

67 Personal Financial Planning Section Tier I amounts (Up to 50% inclusion) If provisional income exceeds the base amounts listed on the previous slide, tax is payable on the lesser of: 50% of social security benefits received or ½ of provisional income in excess of the base amount 67 Line 20 – Social Security Benefits Social Security Taxation

68 Personal Financial Planning Section Up to 85% inclusion of amounts in excess of “adjusted base amounts” Applies to– single taxpayers with provisional income over $34,000 Married taxpayers filing jointly with provisional income over $44,000 Referred to as adjusted base amounts 68 Line 20 – Social Security Benefits Lesser of: Tier I amount + Tier II amount, or 85% of Social Security benefit received Social Security Taxation

69 Personal Financial Planning Section Facts John, a single taxpayer, has regular income of $25,000 and tax-exempt income of $5,000 John receives social security of $20,000 John’s provisional income is $25,000 + $5,000 + $10,000 (1/2 of SS) = $40,000 Because this exceeds John’s base amount of $25,000, a portion of the social security will be subject to tax 69 Line 20 – Social Security Benefits Social Security Taxation

70 Personal Financial Planning Section Provisional Income = $40,000 Tier I income –($34,000 - $25,000) x.5 = $4,500 Tier II income –($40,000 - $34,000) x.85 = $5,100 Total amount subject to tax Lesser of $9,600 ($4,500 + $5,100), or $17,000 (.85 x $20,000 of social security benefits) $9,600 is subject to tax 70 Line 20 – Social Security Benefits Social Security Taxation

71 Personal Financial Planning Section 0% $32,000 (married) $25,000 (single) 50% Safe Haven- No Taxation 85% Zone Modified Adjusted Gross Income (MAGI) $44,000 (married) $34,000 (single) 85% 50% Zone % Subject to Income Tax 71 Line 20 – Social Security Benefits Social Security Taxation Post 85% Zone

72 Personal Financial Planning Section Convert traditional IRA to Roth IRA Utilize tax-deferred annuities to defer income Utilize life insurance to turn taxable income into tax- free income IRA contributions (if “earned income” exists and taxpayer is under age 70½) 72 Line 20 – Social Security Benefits Ways to Reduce Taxation of Social Security Benefits

73 Personal Financial Planning Section Any taxable income not reported elsewhere on the return Examples-- Prizes and awards Jury duty pay Taxable distributions from a Coverdell Education Savings Account, qualified Tuition program, Health Savings Account or Archer MSA Gambling winnings Reimbursements from amounts deducted in a previous year Canceled debts Recapture of charitable contributions 73 Line 21 – Other Income

74 Personal Financial Planning Section Eligible taxpayers are those covered under a high deductible health plan (HDHP) HDHP requirements for 2011 and 2012 Annual deductible -Not less than $1,200 for individual coverage -Not less than $2,400 for family coverage Maximum out of pocket expense -$5,950 for 2011 / $6,050 for individual coverage -$11,900 for 2011 / $12,100 for family coverage Having other health care coverage generally disqualifies a taxpayer 74 Line 25 – Health Savings Account Deduction

75 Personal Financial Planning Section Deduction limits-- Individual only coverage-- $3,050 for 2011 / $3,100 in 2012 Family coverage-- $6,150 for 2011 / $6,250 for 2012 Catch up contributions up to $1,000/year for taxpayers age 55 or older and not on Medicare HSA contributions and deductions are reported on Form 8889 Excess contributions are subject to a six percent penalty (reported on Form 5329) 75 Line 25 – Health Savings Account Deduction

76 Personal Financial Planning Section Deductible contribution amounts for 2011 & $5,000 for single filers $10,000 for joint return Extra $1,000 for taxpayer 50 or over on single return and $1,000 for each spouse 50 or over on joint return No deduction for taxpayers who reached age 70½ by the end of the year to which the contribution applies 76 Line 32 – IRA Deduction

77 Personal Financial Planning Section Phase-out of deduction for taxpayers covered under employer’s retirement plan Phase-out ranges depend on filing status Single, head of household or married filing separately and living apart from spouse for all of –Phased out from MAGI of $58,000 to $68,000 Examples »At MAGI of $61,000 the deduction is $4,000 4,000($5,000 x [1 – ({$60,000 - $58,000}/{$68,000 - $58,000})] = $5,000 x.8 8= $4,000 »At MAGI of $63,000 the deduction is $2,500 (halfway through the phase-out) »At MAGI of $68,000 the deduction is $0 77 Line 32 – IRA Deduction

78 Personal Financial Planning Section Married filing joint return and both spouses are active participants in employer retirement plans or qualifying widow or widower IRA deduction for both spouses phased out for MAGI of $92,000 to $112,000 Married filing joint return with spouse and only one spouse was an active participant in an employer plan IRA deduction for non-participant spouse phased out for joint MAGI of $173,000 to $183,000 IRA deduction for participant spouse phased out for joint MAGI of $92,000 to $112,000 Married filing separate return and lived with spouse for at least part of 2010 IRA deduction for taxpayer phased out for MAGI of $0 to $10, Line 32 – IRA Deduction

79 Personal Financial Planning Section MAGI--Definition –Income reported on Form 1040 line 22, minus Deductions claimed to arrive at AGI, but Without taking into account the IRA deduction to avoid a circular calculation 79 Line 32 – IRA Deduction

80 Personal Financial Planning Section Phase-out—Special rules Phase-out amount can be rounded down to the next lowest $10 increment (IRC §219(g)(2)(c)) Until the phase-out is complete, it can never reduce the deduction below $200 Example: T, a single taxpayer participating in his employer’s retirement plan has MAGI of $67,900 –Without the $200 minimum deduction rule, T would have a deduction of $50 ($5,000 x [1 – ($9,900/$10,000)] –Because of the $200 floor, however, T has an IRA deduction of $ Line 32 – IRA Deduction

81 Personal Financial Planning Section Other Rules Individual and spouse must have earned income of at least the amount of the IRA contribution Can’t deduct more than amount of taxable income for the year No deduction for contributions to a Roth IRA IRA contribution limits apply to the sum of contributions to Roth IRAs and Traditional IRAs Allowable amount ($5,000 for 2012) can be split between the two in any way the taxpayer wishes Example: T, a single taxpayer under age 50, contributes $1,200 to a Roth IRA T can also contribute up to $3,800 ($5,000 - $1,200) to a traditional IRA and claim a deduction for this amount assuming she has sufficient taxable income 81 Line 32 – IRA Deduction

82 Personal Financial Planning Section Medical/Dental Expenses (Schedule A, Lines 1 – 4) Need to clear 7.5% of AGI Consider doubling-up expenses as much as possible Need to clear 10% floor for AMT purposes 82 Line 40 – Itemized Deductions

83 Personal Financial Planning Section Taxes (Schedule A, Lines 5 – 9) Add-back for AMT purposes Need to determine timing to maximize tax benefit Real estate taxes – need to take into consideration some states allow for credit for real estate taxes paid in current year 83 Line 40 – Itemized Deductions

84 Personal Financial Planning Section Interest Expense (Schedule A, Lines 10 – 15) $1.1M limitation on home mortgage interest Need to amortize points paid over term of mortgage (unless certain requirements are met) Investment interest expense deductible to the extent of “net investment income” (i.e. interest, dividends, short-term capital gains) -Reported on IRS Form Need to consider electing out of long-term capital gains treatment (on long-term capital gains) to allow for additional investment interest deduction 84 Line 40 – Itemized Deductions

85 Personal Financial Planning Section Charitable Contributions (Schedule A, Lines 16 – 19) AGI limitations on contributions -Cash gifts to “public charities” = 50% AGI limitation -Cash gifts to private foundations = 30% AGI limitation -Gifts of appreciated assets to “public charities” = 30% AGI limitation -Gifts of appreciated assets to private foundations = 20% AGI limitation Five-year carryover of excess charitable contributions Additional reporting requirements for non-cash gifts in excess of $500 Additional reporting requirements for gifts of cars, boats, airplanes, etc. 85 Line 40 – Itemized Deductions

86 Personal Financial Planning Section You may be eligible if you paid someone to care for any of the following persons— Your qualifying child under age five who you claim as a dependent Your disabled spouse who was unable to care for himself and lived with you more than half the year Any disabled person not able to care for himself who lived with you more than half the year and was a dependent unless-- -The person filed a joint return -The person had $3,800 or more of gross income -You (or your spouse if filing jointly) could be claimed as a dependent on someone else’s return 86 Line 48 – Credit for Child and Dependent Care Expenses

87 Personal Financial Planning Section Taxpayers with income below certain levels who are not disqualified taxpayers can claim a tax credit of up to $1,000 ($2,000 if married filing jointly) for an applicable percentage of contributions to— A traditional or Roth IRA (other than rollover contributions) A §401(k) §403(b) plans or §457 government plan A SEP or SIMPLE plan A qualified retirement plan if the contributions are voluntary after-tax employee contributions 87 Line 50 – Retirement Savings Contributions Credit (Saver’s Credit)

88 Personal Financial Planning Section Income limitations –No credit for the following taxpayers: Joint filers—AGI above $57,500 Heads of Household—AGI above $43,125 All other taxpayers—AGI above $28,750 Disqualified taxpayers –Taxpayers under age 18 by the end of 2012 –Taxpayers claimed as a dependent on someone else’s return –Students 88 Line 50 – Retirement Savings Contributions Credit (Saver’s Credit)

89 Personal Financial Planning Section Applicable percentage Married filing jointly -50% up to $34,500 of income -20% from $34,500 to $37, % from $37,500 to $57,500 Head of household -50% up to $25, % from $25,875 to $28, % from $28,125 to $43,125 Single, Married filing Separately or qualifying Widow or Widower -50% up to $17, % from $17,250 to $18, % from $18,750 to $28,750 Attach Form Line 50 – Retirement Savings Contributions Credit (Saver’s Credit)

90 Personal Financial Planning Section Non-refundable credit of up to $1,000 in 2012 For each qualifying child under age 17 the taxpayer can claim as a dependent Offsets both regular tax and AMT liability Subject to phase-outs above certain income levels 90 Line 51 – Child Tax Credit

91 Personal Financial Planning Section Phase-out –Reduced by $50 for each $1,000 of MAGI above the following levels— $110,000 for joint filers $75,000 for single taxpayers $55,000 for married taxpayers filing separately 91 Line 51 – Child Tax Credit

92 Personal Financial Planning Section Report special taxes on— Early distributions from an IRA, annuity or modified endowment contract not rolled over to another qualified vehicle Excess contributions to an IRA, Coverdell Educational Savings Account, Archer MSA or health savings account Taxable distributions from a Coverdell ESA or a qualified tuition program Compute the tax on Form 5329 Exception—If taxpayer only received an early distribution with distribution code 1 on Form simply multiply taxable amount of distribution by 10 percent and enter on Line Line 58 – Additional Tax on IRAs, Other Qualified Plans, Etc.

93 Personal Financial Planning Section Child tax credit is non-refundable Helps taxpayers who couldn’t claim the full amount of the child tax credit because they didn’t have enough income Additional (refundable) credit Amount is the greater of— 15 percent of earned income over $3,000, or For a taxpayer with three or more children, the excess of social security taxes paid for the year over the earned income credit for the year Attach Form Line 65 – Additional Child Tax Credit

94 Personal Financial Planning Section Line 66 – American Opportunity Credit Up to $2,500/year for qualified tuition 100% of first $2,000 25% of next $2,000 Applies to first four years of undergraduate education 40 percent refundable Example -T has $4,000 of qualified education expenses -T has no tax liability to apply against the credit -T can claim a refundable credit of $1,000 (.4 x $2,500) Attach Form

95 Personal Financial Planning Section Social security wage base = $110,100 for 2012 Payroll tax cut reduces employee’s rate from 6.2% to 4.2% Total tax paid on this amount is $4, (4.2% x $110,100) If a taxpayer worked for more than one employer during the tax year too much social security or RRTA tax may have been withheld If the total tax withheld exceeded $4,624.20, the taxpayer can claim a credit on Line 69 If the taxpayer had only one employer for the year, no credit is allowed on Line 69 Employer must adjust the tax instead 95 Line 69 – Excess Social Security and Tier 1 Tax Withheld

96 Personal Financial Planning Section Q&A 96

97 Personal Financial Planning Section AICPA PFP Section Resources Additional materials Roadmap to Developing and Managing a CPA Personal Financial Planning Practice (aicpa.org/PFP/pathway) Checklist: Analysis of a Tax Return for Personal Financial Planning (aicpa.org/PFP/pathway) PFP Practice Center (aicpa.org/PFP/practicecenter) Forefield Advisor (aicpa.org/PFP/forefield) Keebler Roth Materials (aicpa.org/PFP/Roth) AICPA Advanced Personal Financial Planning Conference (cpa2biz.com/PFP)cpa2biz.com/PFP 2-day sessions for those in earlier stages of PFP o Implementing PFP Services: Step by Step Plans for Success o CPA/PFS Review Class For the full calendar of upcoming PFP Section events, visit and click on CPE & Events 97

98 Personal Financial Planning Section AICPA CPA/PFS Program PFS exam review Self-study, web review and live review options available to purchase at cpa2biz.com PFS exam registration Learn more & register at aicpa.org/PFSexamaicpa.org/PFSexam Summer and winter exam window each year PFS education In-depth self-study courses available to purchase at cpa2biz.com 2012 PFS exam sponsorship program Summer deadline: June 18, 2012 Winter deadline: December 26, 2012 For more information, visit

99 Personal Financial Planning Section AICPA Web Seminar Series: From Tax Preparer to Financial Planner Part 1 Understanding the value of financial planning Part 2 Moving from tax compliance to tax planning for individuals Part 3 Moving from tax planner to holistic financial planner Part 4 Implementing a PFP practice Build your financial planning knowledge with this web seminar series and discover the necessary steps to transition from tax preparer to financial planner. Register today at CPA2Biz.com/Webcasts. Discounts available for PFP/PFS and Tax Section members.CPA2Biz.com/Webcasts

100 Personal Financial Planning Section Circular 230 Disclosure Pursuant to the rules of professional conduct set forth in Circular 230, as promulgated by the United States Department of the Treasury, nothing contained in this communication was intended or written to be used by any taxpayer for the purpose of avoiding penalties that may be imposed on the taxpayer by the Internal Revenue Service, and it cannot be used by any taxpayer for such purpose. No one, without our express prior written permission, may use or refer to any tax advice in this communication in promoting, marketing, or recommending a partnership or other entity, investment plan or arrangement to any other party. For discussion purposes only. This work is intended to provide general information about the tax and other laws applicable to retirement benefits. The author, his firm or anyone forwarding or reproducing this work shall have neither liability nor responsibility to any person or entity with respect to any loss or damage caused, or alleged to be caused, directly or indirectly by the information contained in this work. This work does not represent tax, accounting, or legal advice. The individual taxpayer is advised to and should rely on their own advisors. 100

101 Personal Financial Planning Section Analysis of a Tax Return for Personal Financial Planning 101

102 Personal Financial Planning Section Analysis of a Tax Return for Personal Financial Planning, page 2 102

103 Personal Financial Planning Section Analysis of a Tax Return for Personal Financial Planning, page 3 103

104 Will client die with a substantial charitable bequest? Does client need the IRA funds to meet annual living expenses? Does client plan to utilize their Unified Credit or GST exemption (if applicable) with IRA assets? Does client have favorable tax attributes that can help offset the majority of the conversion income? Does client anticipate being in a much lower marginal tax bracket in future? Does client have outside funds to pay tax on the conversion? Should a client convert to a Roth IRA? 1 A Roth conversio n could be beneficial – Run the numbers A Roth conversion will most likely be beneficial Run the numbers Will the client incur an estate tax upon death? Does client have a long time horizon to let the funds grow? 11 Reasons to Convert to a Roth IRA SM 1.Taxpayers have special favorable tax attributes, including a high basis ratio, charitable deduction carry-forwards, investment tax credits, net operating losses (NOLs), etc. This is because these attributes reduce the effective tax rate of the conversion. 2.Suspension of the minimum distribution rules at age 70½ provides a considerable advantage to the Roth IRA holder. This allows for additional tax-free deferral. 3.Taxpayers benefit from paying income tax before estate tax (when a Roth IRA election is made) compared to the income tax deduction obtained when a traditional IRA is subject to estate tax. This is because the IRC § 691(c) deduction is inefficient. 4.Taxpayers who can pay the income tax on the IRA from non IRA funds benefit greatly from the Roth IRA because of the ability to enjoy greater tax-free yields. This is because of the ability to move funds from a “taxable” to a “tax- free” tax asset class. 5.Taxpayers who need to use IRA assets to fund their Unified Credit bypass trust are well advised to consider making a Roth IRA election for that portion of their overall IRA funds. This is because the exemption is funded on an after-tax basis. 6.Taxpayers making the Roth IRA election during their lifetime reduce their overall estate, thereby lowering the effect of higher estate tax rates. 7.Because federal tax brackets are more favorable for married couples filing joint returns than for single individuals, Roth IRA distributions won’t cause an increase in tax rates for the surviving spouse when one spouse is deceased because the distributions are tax-free. (See chart on page two.) 8.Post-death distributions to beneficiaries are tax-free. This is possibly the most advantageous aspect of a Roth IRA conversion. 9.Tax rates are expected to increase in the very near future. Higher tax rates in the future means more tax will be paid on taxable IRA distributions than the tax that would be paid on a conversion at a lower rate. 10.The ability to recharacterize allows the taxpayer 20/20 “hindsight”, effectively allowing them to “undo” conversions that were not advantageous. This allows the client to create a powerful “heads you win, tails you tie” opportunity that protects against adverse market swings. Later recharacterized funds can be “reconverted” % Surtax. A conversion will be beneficial for taxpayers. Robert S. Keebler, CPA, MST: The Roth IRA Conversion Decision A Roth conversion likely not beneficial Run the numbers Yes Bob’s Roth Conversion Observations SM 1.After determining the “optimum” conversion amount, additional amounts converted may be detrimental in that they increase the effective tax rate on the conversion. 2.Always convert more than the initial numbers suggest and recharacterize if warranted. 3.Recharacterize depressed accounts in November of the year of conversion and reconvert in January. 4.The Roth IRA is the most powerful asset with which to fund a GST exempt trust. 5.There is no bright line rule or “optimum” conversion amount for all individuals, considering that each individual’s financial, income tax, and wealth situations are different. If several of the ten reasons are met, it is likely the individual is a good candidate for a Roth IRA conversion. 6.Partial conversions generally provide a better quantitative result than 100% conversions. © 2012 Keebler & Associates, LLP All Rights Reserved

105 Roth Conversion Before Death · If an individual who converts to a Roth in 2010 and chose the 2 year tax spread passes away before the income has been claimed on his/her tax return, the income will be claimed on his/her final 1040 (§408A(d)(3)(E)(ii)(I)). Exception: If a surviving spouse receives the 100% interest in the Roth IRA into which the 2010 conversions was made, that person has the ability to elect to continue the deferral of the two year spread (§408A(d)(3)(E)(ii)(II)). Important Tax Law Considerations Important Financial ConsiderationsImportant Estate Planning and Asset Protection Considerations CPA’s ChecklistFinancial Advisor’s ChecklistLawyer’s Checklist 2012 Single vs. Married Rates Single Married Filing Jointly 10%$8,700$17,400 15%$35,350$70,700 25%$85,650$142,700 28%$178,650$217,450 33%$388,350 35%> $388,350 CPA’s Checklist · Analyze Tax Rates · Consider Tax Attributes · Determine Amount to Convert · Convert by Asset Class · Determine Tax Estimates · Monitor Alternative Minimum Tax · Monitor Taxation of Social Security Benefits and Increases in Medicare Premiums · Monitor Recharacterization(s) · Monitor Reconversion(s) · 3.8% Surtax planning · Consider oil and gas investment Alternative Minimum Tax · If the taxpayer is close to being exposed to AMT prior to the implementation of a Roth conversion, the practitioner must be aware of the effects of state and local taxes. · Although federal income taxes may be offset by an applicable deduction, state and local taxes that typically tag along are not deductible for AMT purposes under §56(b)(1)(A)(ii). Death & Married Rates · If death of a married taxpayer is imminent, it may be more advantageous to convert to a Roth IRA while the taxpayer is still alive in order to utilize the preferential married filing jointly tax rates. · Post-death distributions are tax-free Pension Protection Act of 2006 · Non-spousal beneficiaries are permitted to roll over a qualified retirement plan (e.g. 401(k) plan), via trustee-to-trustee transfer, into an inherited IRA effective for tax years beginning after December 31, Work collaboratively with CPA to determine the value of the Roth Conversion including the surtax Ensure estate liquidity by considering purchasing life insurance in an ILIT Convert by Asset Class (i.e. Roth IRA Conversion Segregation Strategy) · Taxpayers cannot recharacterize a portion of a Roth conversion by “cherry picking” only those stocks that decline in value (IRS Notice ). · All gains and losses to the entire Roth IRA, regardless of the actual stock or fund re-characterized, must be pro-rated. Monitor Recharacterization(s) · Taxpayers may “recharacterize” (i.e. undo) the Roth IRA conversion in current year or by the filing date of the current year’s tax return. · Recharacterization can take place as late as 10/15 in the year following the year of conversion. Monitor Reconversion(s) · Taxpayers may choose to “reconvert” their recharacterization. · Reconversion may only take place at the later of the following two dates: (1)The tax year following the original conversion OR (2)30 days after the recharacterization January 1, 2012: First date in which a 2012 Roth conversion may take place. December 31, 2012: Last date in which a 2012 Roth conversion may take place. April 15, 2013: Due date for the 2012 income tax return and the last date in which the tax liability on a 2012 conversion may be paid timely. October 15, 2013: Last date in which a recharacterization of a 2012 conversion may be made. Estate Planning Considerations Ensure that beneficiary designation forms are updated to seamlessly integrate the Roth IRA into the overall estate plan. Consider that post-death qualified distributions are tax free. Consider utilizing a Roth IRA to fund unified credit trust and/or a generation skipping transfer tax exempt trust (if applicable). Ensure that appropriate tax apportionment clauses are addressed in planning documents. Estate taxes should generally be apportioned away from the Roth IRA asset thereby enabling the Roth IRA to continue to grow on an income tax-free basis. Consider utilizing a charitable split interest trust as a tool in minimizing income tax in the year of a Roth IRA conversion. Ensure that an individual’s durable power of attorney will provide the attorney-in-fact with the right to make any and all tax elections, including an election to recharacterize the Roth IRA. Because the ability to recharacterize extends beyond an individual’s death and is transferred to the individual’s personal representative following death, ensure that both an individual’s IRA trust and last will and testament provides for the recharacterization power. Asset Protection Considerations Consider implications on bankruptcy and creditor protection under federal and applicable state law before converting a qualified plan or traditional IRA to a Roth IRA. Consider utilizing a standalone IRA Trust to be beneficiary of the Roth IRA for asset protection purposes. © 2012 Keebler & Associates, LLP All Rights Reserved State Taxes · Roth conversions may be treated differently from state to state. · Consider local tax implications. DISTRIBUTIONS TO BENEFICIARY UNDER IRC § 401(a)(9) ROTH IRAS Beneficiary Spouse - Inherited IRA (No rollover) Spouse may defer required distributions until the year the owner would have reached age 70 1/2. In this year and for each succeeding year, the RMD is calculated based upon spouse's life expectancy by referencing her attained age for the year of distribution based on the Single Life Table. Designated Beneficiary Trust RMDs calculated using the oldest beneficiary's age in the year of the first distribution by reference to the Single Life Table. For succeeding years, this factor is reduced by one. If the trust is designed properly and the beneficiary designation form is filed properly, then each primary beneficiary may utilize his or her own age in calculating RMDs. Spouse - Rollover No RMDs required during spouse’s life. Non-Spouse Individual Designated Beneficiary RMDs calculated based upon corresponding life expectancy factor for the beneficiary’s age in the year of the first distribution by reference to the Single Life Table. For succeeding years, this factor is reduced by one. If multiple beneficiaries are named, as long as the account is segregated prior to December 31st of the year following death, each beneficiary may independently calculate RMDs. In the chart above, the conversion of four different asset classes (referred to as A through D) is analyzed. All four asset classes are converted to (4) Roth IRAs on January 1, In the case of asset class A, the account increases in value to $125,000 as of November 30, Due to the increase in value, there is no reason to recharacterize. The deadline for recharacterization of the January 1, 2012 conversion is October 15, 2013, and at that time the value of A is $135,000, meaning it will, of course, be held. Asset class B decreases in value to $95,000 as of April 15, 2013 and it is recharacterized. On May 16, 2013 (31 days after the recharacterization) the value of B is $80,000, and the account is reconverted to a Roth IRA (the reason for this is the advantage afforded by paying income tax on $80,000 instead of $100,000). Because the account increases in value after May 16 th, it will be held. Asset class C decreases in value to $75,000 as of November 30, It is recharacterized. On January 1, 2013 the value of the account is $80,000 and it is reconverted. Subsequently, the value increases and the account is held. Asset class D decreases in value to $75,000 as of November 30, 2012 and is recharacterized. When the value is $90,000 on January 1, 2013, the account is reconverted. On April 15 and October 15, 2013 the account is held; however, when the account decreases in value to $75,000 on November 30, 2013, it is recharacterized. (This is possible because the account was reconverted on January 1, Technically, the account could be recharacterized as late as October 15, 2014.) At a value of $80,000 the account is (again) reconverted on January 1, Conversion PeriodRecharacterization Period 1/1/2012–First day conversion can take place /31/2012–Last day conversion can take place 4/15/2013– Normal filing date for2012tax return 10/15/2013– Latest filing date for2012tax return/lastday to recharacterize 2012 RothIRA conversion 12/31/ No Recharacterization The Small Business Jobs and Credit Act of 2010 ·Allows the conversion of 401(k), 403(b) and governmental 457(b) plans to Roth accounts. Keeping the retirement funds in a Roth 401(k) rather than converting to a Roth IRA can be beneficial from an asset protection standpoint. However, the recharacterization option is not available under this provision as it would be if account were converted to a Roth IRA.

106 Accounts which need to be aggregated for basis recovery Roth IRAs – basis out first Traditional IRAs – basis pro-rated Accounts which do not need to be aggregated for basis recovery Life insurance – basis out first Qualified retirement plans (e.g. 401(k) plan) – basis pro-rated Non-qualified deferred annuities (annuitized) – basis pro- rated Non-qualified deferred annuities (not annuitized) – basis out last 2012 Income Tax Brackets Three Main Types of Retirement Investment Accounts Top Ten Tax-Efficient Retirement Portfolio Strategies Robert S. Keebler, CPA, MST: Tax-Efficient DrawDown TM Strategies 1.Capital loss harvesting 2.Tactical asset sales/specific identification method 3.Tax-exempt interest 4.Tax-deferred annuities 5.Life insurance 6.Oil & gas investments 7.Leveraged real estate investments 8.Net Unrealized Appreciation (NUA) 9.Tax-efficient DrawDown TM 10.Roth IRA conversions Single Married Filing Jointly Married Filing Separately Head of Household 10%$8,700$17,400$8,700$12,400 15%$35,350$70,700$35,350$47,350 25%$85,650$142,700$71,350$122,300 28%$178,650$217,450$108,725$198,050 33%$388,350 $194,175$388,350 35%> $388,350 > $194,175> $388,350 1.Taxable investment accounts – income generated within the account (i.e. interest, dividends, capital gains, etc.) is taxed each year to the account owner 2.Tax-deferred investment accounts (e.g. traditional IRAs, traditional qualified retirement plans, non- qualified annuities) – income generated within the account is not taxed until distributions are taken from the account 3.Tax-free investment accounts (e.g. Roth IRAs, life insurance) – income generated within the account is never taxed when distributions are made (provided certain qualifications are met) Tax- deferred Taxable Tax-free Future income taxed at same or lower tax rate Future income taxed at higher tax rate 1) Taxable account 2) Tax-deferred account 3) Tax-free account 1) Tax-deferred account 2) Taxable account 3) Tax-free account Tax Structure Overview Tax-Efficient DrawDown TM Decision Matrix Basis Recovery of Retirement Investment Accounts Key DrawDown TM Concepts 1.Tax structure – Determining the “optimum” mix of taxable investments, tax-deferred investments and tax-free investments (i.e. where should retirement savings be invested?) 2.Tax-sensitive asset allocation – Asset allocation done on an after-tax basis 3.Asset location – How investors distribute assets across taxable accounts, tax-deferred accounts and tax-exempt accounts to create tax advantages 4.Tax bracket management – Short-term timing of income and expenses on a year-by-year basis so as to minimize overall income taxes over the long-term 5.Tax Alpha TM – The improvement in portfolio returns produced by efficient income tax management Key factors impacting the tax structure Age Other sources of income (e.g. pension, Social Security, deferred compensation) Retirement cash flow needs Future tax rates © 2012 Keebler & Associates, LLP All Rights Reserved

107 Interest Income & Non-Qualified Dividends Short-Term Capital Gains Rents & Royalty Income Qualified Dividends Long-Term Capital Gains Qualified Retirement Plans (Taxable) Non-Qualified Deferred Annuities Tax-Exempt Interest IncomeLife Insurance Qualified Retirement Plans (Not Taxable) Examples Bank interest Money market interest Corporate bond interest Corporate dividends which do not meet specific qualifications Gains from investment assets which are held 1 year or less at the time of sale Rental real estate income Limited partnership income Royalties from patents, copyrights, etc. Oil & gas income Corporate (both domestic and foreign) which meet specific qualifications Gains from investment assets which are held more than 1 year from the time of sale Traditional 401(k) plans 403(b) annuities 457 plans Defined benefit plans Traditional IRAs Annuities which do not meet specific requirements Interest from state and local government bonds Interest from U.S. territory bonds (e.g. Puerto Rico, Guam, USVI) Whole life insurance Universal life insurance Term life insurance Designated Roth accounts within a qualified retirement plan Roth IRAs Losses offset other ordinary income NoYes, but only up to $3,000 losses (in excess of capital gains) Yes, but losses may be limited under the passive activity rules NoYes, but only up to $3,000 losses (in excess of capital gains) Yes, but losses are miscellaneous itemized deductions subject to the 2% AGI floor No Yes, but losses are miscellaneous itemized deductions subject to the 2% AGI floor Deferral of income taxation? NoYes, until the asset is sold No Yes, until the asset is sold Yes, until distributions are made NoYes Other considerations May include income imputed under IRC §7872 or the Original Issue Discount (OID) rules Reduced by short-term capital losses Excess long- term capital losses may offset short- term capital gains Depreciation Depletion Amortization Intangible drilling costs (IDCs) IRC §1031 exchanges Special long- term capital gains tax treatment is set to expire for tax years after 12/31/2012 Special tax rates apply to depreciation recapture, collectibles gains and qualified small business stock Required minimum distributions (RMDs) at age 70½ 10% early withdrawal penalty on pre- 59½ distributions If annuity is not annuitized, then taxable income comes out first before non- taxable basis Need to compare rate of return against after- tax rate of return on taxable bonds Gross income does not include proceeds paid Taxable income could occur if there is a “transfer for value” No required minimum distributions (RMDs) – Roth IRAs only Need to meet certain criteria to be tax-free Qualified Dividends Taxable Income Short-Term Capital Gains Rents & Royalty Income Long-Term Capital Gains Interest Income & Non- Qualified Dividends Qualified Retirement Plans (Taxable) Non- Qualified Deferred Annuities Tax- Exempt Interest Income Life Insurance Qualified Retirement Plans (Not Taxable) Tax-Deferred Income Tax-Free Income Taxable as ordinary income (i.e. 10%, 15%, 25%, 28%, 33%, 35%) Taxable as ordinary income (i.e. 10%, 15%, 25%, 28%, 33%, 35%) Robert S. Keebler, CPA, MST: Tax Asset Classes SM Taxable as long-term capital gains (i.e. 0%, 15%) NOT taxed © 2012 Keebler & Associates, LLP All Rights Reserved


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