American Taxpayer Relief Act of 2012 John Kilroy, CPA, CFP ® January 23, 2013

Estate, Gift and GST provisions Estate, Gift and GST provisions Individual Income Tax provisions Individual Income Tax provisions Trust and Estate Income Tax provisions Trust and Estate Income Tax provisions Business Income Tax provisions Business Income Tax provisions Other Tax Law Changes Taking Effect in 2013 Other Tax Law Changes Taking Effect in 2013 Are We Done With the Cliff? Are We Done With the Cliff? Agenda

Estate, Gift and GST provisions Sunset repeal Sunset repeal “Permanent” extension of exemption at $5 million (adjusted for inflation) – Estate and Gift; GST “Permanent” extension of exemption at $5 million (adjusted for inflation) – Estate and Gift; GST 2012 $5.12 million ($10.24 million per married couple) 2012 $5.12 million ($10.24 million per married couple) 2013 $5.25 million ($10.5 million per married couple) 2013 $5.25 million ($10.5 million per married couple) “Clawback” moot – yea!!! “Clawback” moot – yea!!! Tax rate above the exemption Tax rate above the exemption % % 2013 “permanent” change to 40% (this may be the only “change” in the law) 2013 “permanent” change to 40% (this may be the only “change” in the law) Portability between spouses extended (Estate and Gift) Portability between spouses extended (Estate and Gift) Deceased Spousal Unused Exclusion Amount (DSUEA) clarified Deceased Spousal Unused Exclusion Amount (DSUEA) clarified Election on timely filed return required Election on timely filed return required DSUEA used “first” DSUEA used “first” Only from last deceased spouse Only from last deceased spouse State Death Tax deduction continues State Death Tax deduction continues

Individual Income Tax provisions Sunset Repeal Sunset Repeal “Permanent” Rate Changes (Taxable Income) “Permanent” Rate Changes (Taxable Income) Rate2012 (MFJ)2013 (MFJ) estimate* 10%$0 - $17,400$0 - $17,850 15%$17,401 - $70,700$17,851 - $72,500 25%$70,701 - $142,700$72,501 - $146,400 28%$142,701 – 217,450$146,401 - $223,050 33%$217,451 - $388,350$223,051 - $398,350 35%$388,350 +$398,351 - $450, % N/A$450,001 + *Commerce Clearing House Marriage Penalty Relief Inflation Adjustment After 2013

Individual Income Tax provisions Qualified Dividend Income (QDI) Qualified Dividend Income (QDI) Long Term Capital Gain (Investment Assets) Long Term Capital Gain (Investment Assets) Marginal Tax Bracket %0% 15%0% 25%15% 28%15% 33%15% 35%15% 39.6% N/A20% Be careful: AMT Considerations may increase actual cost to possibly 22% Stealth features return Phaseout of Itemized Deductions Phaseout of Personal exemptions

Individual Income Tax provisions Return of Pease limitation Return of Pease limitation Itemized Deduction Phaseout Itemized Deduction Phaseout Excludes Medical Expenses; Investment Interest Expense; Casualty and Theft Losses; Gambling Losses Excludes Medical Expenses; Investment Interest Expense; Casualty and Theft Losses; Gambling Losses 3% of AGI above threshold, not to exceed 80% of itemized deductions 3% of AGI above threshold, not to exceed 80% of itemized deductions 2013 threshold (inflation adjustment after 2013) 2013 threshold (inflation adjustment after 2013) MFJ and QW $300,000 MFJ and QW $300,000 HH $275,000 HH $275,000 Single $250,000 Single $250,000 MFS $150,000 MFS $150,000 Not applicable to AMT Not applicable to AMT

Individual Income Tax provisions Return of Personal Exemption Phaseout (PEP) Return of Personal Exemption Phaseout (PEP) 2% of exemption phases out for each $2,500 of AGI ($1,250 for MFS) above threshold 2% of exemption phases out for each $2,500 of AGI ($1,250 for MFS) above threshold 2013 threshold (inflation adjustment after 2013) 2013 threshold (inflation adjustment after 2013) MFJ and QW $300,000 MFJ and QW $300,000 HH $275,000 HH $275,000 Single $250,000 Single $250,000 MFS $150,000 MFS $150,000 Remember - No personal exemption allowed for AMT Remember - No personal exemption allowed for AMT

Mr. and Mrs. Cliff MFJ – each 60 in 2012, 2 exemptions, PA residents MFJ – each 60 in 2012, 2 exemptions, PA residents Anderson has $200,000 wages and $200,000 pension Anderson has $200,000 wages and $200,000 pension Kathy has $100,000 wages Kathy has $100,000 wages $25,000 QDI and $5,000 Non-QDI $25,000 QDI and $5,000 Non-QDI $30,000 active rental real estate income $30,000 active rental real estate income $40,000 in cash charitable contributions $40,000 in cash charitable contributions Pay all PA state income tax in the current year Pay all PA state income tax in the current year $12,000 real estate tax on their home $12,000 real estate tax on their home

The Cliffs 2012 vs AGI$560,000 Itemized Deductions(63,052)(55,252) Personal Exemptions(7,600)0 Taxable Income489,348504,748 Regular Tax135,411142,626* AMT3,4390 Medicare Surtax02,730 Payroll Tax Holiday04,274 Total Tax138,850149,630 *Based on Commerce Clearing House projected 2013 tax rates

Individual Income Tax provisions – AMT Patch Marginal rates AMTRegular <$78,7500%0%–25% $78,751–$150,00026%25%–28% $150,001–$233, %28%–33% $233,001–$465,00035%33%-35% >$465,00028%35% 2012 married filing jointly taxpayers: Source: IRS,

Individual Income Tax provisions – AMT Patch Marginal rates AMTRegular <$80,750*0%0%–25% $80,751–$150,00026%25%–28% $150,001–$234,900**32.5%28%–33% $234,901**–$473,00035%33%-39.6% >$473,00028%39.6% 2013 married filing jointly taxpayers: Source: *Commerce Clearing House estimate ** estimate

Individual Income Tax provisions Extenders through 2013 Extenders through 2013 Above the line deductions: Above the line deductions: Up to $4,000 qualified tuition and expenses Up to $4,000 qualified tuition and expenses Up to $250 out of pocket teacher expenses Up to $250 out of pocket teacher expenses Below the line deductions: Below the line deductions: State and Local sales tax (in lieu of income tax) State and Local sales tax (in lieu of income tax) Qualified mortgage insurance premium Qualified mortgage insurance premium Exclusions: Exclusions: Transit and parking fringe benefit Transit and parking fringe benefit Principal residence debt forgiveness (reduces basis) Principal residence debt forgiveness (reduces basis) $500 lifetime Energy Credit $500 lifetime Energy Credit

Individual Income Tax provisions Qualified Charitable Distribution (QCD) from IRA Qualified Charitable Distribution (QCD) from IRA Extended through 2013 Extended through 2013 Same rules for qualification Same rules for qualification Options for 2012 QCD: Options for 2012 QCD: Actual QCD 1/1 – 11/30/12 Actual QCD 1/1 – 11/30/12 QCD from IRA in January 2013 QCD from IRA in January 2013 IRA distribution in December 2012 can be given to charity by 1/31/13 IRA distribution in December 2012 can be given to charity by 1/31/13 Presumably to be disclosed on Presumably to be disclosed on “QCD” on line 15 of 1040; No 1099R Code for QCD “QCD” on line 15 of 1040; No 1099R Code for QCD Payroll Tax Holiday expires – return to 6.2% employee portion of OASDI in 2013 Payroll Tax Holiday expires – return to 6.2% employee portion of OASDI in 2013 AMT Refundable Credit? AMT Refundable Credit?

Individual Income Tax provisions Extended through 2017: Extended through 2017: Earned Income Tax Credit Earned Income Tax Credit American Opportunity Tax Credit American Opportunity Tax Credit $2,500 maximum; 40% refundable $2,500 maximum; 40% refundable Enhanced Child Tax Credit Enhanced Child Tax Credit Lower earnings threshold ($3,000) increases opportunity for credit Lower earnings threshold ($3,000) increases opportunity for credit

Individual Income Tax provisions “Permanent” extensions: “Permanent” extensions: Child Tax Credit Child Tax Credit Adoption Credit/Exclusion for Reimbursed Adoption Expenses Adoption Credit/Exclusion for Reimbursed Adoption Expenses Child and Dependent Care Credit Child and Dependent Care Credit Student Loan Interest above the line deduction Student Loan Interest above the line deduction Coverdell ESA Coverdell ESA Employer Provided Education Assistance Employer Provided Education Assistance

Trust and Estate Income Tax Provisions Rates: Rates: %, 25%, 28%, 33%, 35% 15%, 25%, 28%, 33%, 35% 2013 “Permanent” 2013 “Permanent” 15%, 25%, 28%, 33%, 39.6% 15%, 25%, 28%, 33%, 39.6%

Business Tax Provisions Extension of a host of tax credits through 2013 Extension of a host of tax credits through 2013 Extension of immediate deduction opportunities for qualifying property through 2013 Extension of immediate deduction opportunities for qualifying property through % Bonus depreciation 50% Bonus depreciation $500,000 Section 179 expense $500,000 Section 179 expense Extension of shorter depreciation period (15 yrs.) for qualified leasehold/retail improvements; qualified restaurant property Extension of shorter depreciation period (15 yrs.) for qualified leasehold/retail improvements; qualified restaurant property Extends 100% exclusion for Qualified Small Business Stock acquired through 12/31/13 Extends 100% exclusion for Qualified Small Business Stock acquired through 12/31/13 C Corp held five years C Corp held five years

Business Tax Provisions Expansion of In Plan Roth Conversions Expansion of In Plan Roth Conversions Removes requirement to otherwise be eligible to take a distribution from a qualified plan Removes requirement to otherwise be eligible to take a distribution from a qualified plan Qualified Plan must have: Qualified Plan must have: Roth feature Roth feature In Plan Roth Conversion option In Plan Roth Conversion option Remember – In Plan Roth Conversion cannot be recharacterized Remember – In Plan Roth Conversion cannot be recharacterized

Other Tax Law Changes Taking Effect in 2013 Medicare Surtax Medicare Surtax 3.8% on Net Investment Income 3.8% on Net Investment Income Above MAGI threshold ($200,000/$250,000) Above MAGI threshold ($200,000/$250,000) 0.9% on Earned Income 0.9% on Earned Income Above Earned Income threshold ($200,000/250,000) Above Earned Income threshold ($200,000/250,000) Includes Self Employment Income Includes Self Employment Income No above the line deduction for 0.9% tax No above the line deduction for 0.9% tax Surtax is added to greater of regular tax or AMT Surtax is added to greater of regular tax or AMT FSA Health - $2,500 maximum FSA Health - $2,500 maximum Medical Expense AGI floor increased to 10% Medical Expense AGI floor increased to 10% 65 and older retain 7.5% floor until and older retain 7.5% floor until 2016

Are We Done With the Cliff? Politics aside: Politics aside: Debt Ceiling Debt Ceiling Sequestration Sequestration Budget Budget Other tax possibilities: Other tax possibilities: Itemized deductions (bucket; cap; rate) Itemized deductions (bucket; cap; rate) AMT reform AMT reform Carried Interest Carried Interest Corporate Income Tax - May see more C Corp Corporate Income Tax - May see more C Corp Estate and Gift Issues Estate and Gift Issues GRATs; Grantor Trusts; Discounts GRATs; Grantor Trusts; Discounts