2012/2013 Tax Update & Year End Planning

1. Darren J Szendre, CPA Tri-Cities CPA PLLC 8511 W Clearwater, Suite C Kennewick, WA 99336 Phone: (509) 582-2000 E-mail: darren@tctaxcpa.com 2012/2013 Tax Update & Year End Planning

2. 2012 TAX UPDATE Health Care Reform… • Health Care Reform • (ruled constitutional by the Supreme Court) • In effect now: • Children can’t be denied coverage because of pre-existing conditions • Coverage required under parent’s plan for dependent children under age 26 • Insurers can’t impose lifetime caps on coverage and can’t cancel or deny coverage if you are sick • Key provisions effective January 1, 2013: • Medical expense deduction threshold increases to 10% of adjusted gross income for those under age 65 (from 7.5%) • Increasing the self-employment tax rate by 0.9% on higher-income individuals (MAGI of $200K single, $250K married) • New 3.8% tax on some or all of the net investment income of these higher-income individuals • Interest, dividends, capital gains, royalties, rents, annuities, passive income from partnership/S corporation • Distributions from qualified retirement plans and IRAs would NOT count • Note: The above list of items is not intended to be all inclusive.

3. 2012 TAX UPDATE Health Care Reform… • Health Care Reform • (ruled constitutional by the Supreme Court) • Key provisions effective January 1, 2014: • All Americans must carry health insurance or face a penalty of up to 2.5% of household income • Employers with more than 50 employees must offer health insurance or be fined per employee • States must establish an exchange that facilitates the purchase of qualified health plans • Adults with pre-existing conditions can’t be denied coverage or have their insurance cancelled • Tax credits will be available to qualifying families • Doctors and hospitals will receive less compensation from government sources • Taxes or fees imposed on health insurance providers and drug companies • Note: The above list of items is not intended to be all inclusive.

4. 2012 TAX UPDATE Expiring Tax Provisions… • Federal income, dividend, & capital gains tax rates (2013) • Itemized deductions & personal exemption phase-outs (2013) • AMT exemption amounts (already expired) • Social Security payroll tax reduction for employees (2013) • Qualified charitable IRA distribution exclusion -- age 70 ½ (expired) • State and local sales tax deduction (already expired). • Education credits & deductions eliminated or reduced • Earned income and child tax credits reduced • Estate & gift tax exemption amounts ($5,120,000/35% in 12 versus ($1M/55% in 13) • Portability of estate tax exemption for surviving spousal • Note: The above list of items is not intended to be all inclusive.

5. 2012 TAX UPDATE Scheduled Changes for 2013… • The following are changes set to occur without further congressional action… • Tax Bracket Changes set to sunset January 1, 2013 • 10% and 15% set to adjust to 15% • 25% set to go back up to 28% • 28% set to go back up to 31% • 33% set to go back up to 36% • 35% set to go back up to 39.6% • Long term capital gain rate set to go back to 20% (or 10% depending on income) on January 1, 2013 • “Qualified” dividend rate will rise to match standard income tax rates on January 1, 2013 • Estate & Gift tax exemption amounts sunset on January 1, 2013 • Top rate scheduled to increase to 55% • Exemption amount scheduled to shrink to $1 million • Note: The above list of items is not intended to be all inclusive.

6. 2012 TAX UPDATE Income Tax Brackets… TAX PLANNING 2012 Individual Tax Brackets

7. 2012 vs. 2013 Tax Rates Comparison of 2012 vs. 2013 Tax Rates Long-Term Capital Gains Ordinary Income

8. 3.8% Medicare Surtax • Imposed on individuals, trusts and estates for tax years beginning on and after January 31, 2013 • Applies to the lesser of: • Net investment income (NII), or • MAGI over an applicable threshold amount (ATA)

9. Net Investment Income • Items specifically excluded • Self-employment income • Non-resident aliens • Active Trade or business income • Gain on the sale of an active interest in partnership or S corporation • IRA or qualified plan distributions • Trusts for charity (except Charitable lead trusts)

10. Net Investment Income • Included items • Interest • Dividends • Rents • Annuities • Capital gains • Royalties • Passive activity income

11. Accelerating Income to 2012 • Certain types of ordinary income can be accelerated into 2012: • Bond interest • Annuity income • Traditional IRA income • Compensation income • Stock options • Roth Conversions

12. MAGI • Amount reported at bottom of page 1, Form 1040 (AGI) • + net amount excluded as foreign earned income under section 911(a)(1) • For most taxpayers it is the same as AGI

13. 3.8% Surtax -Example • Warren, a single taxpayer, has $170,000 of investment income and received a $65,000 required minimum distribution (RMD) from his traditional IRA in 2013. • The RMD is not NII, but it is included in MAGI, increasing it to $235,000 • The surtax applies to the lesser of NII ($170,000) or the excess of MAGI over the $200,000 threshold amount for single taxpayers ($35,000). • Thus, $35,000 is subject to the surtax and the amount payable is $1,330 (.038 x $35,000).

14. 2012 TAX UPDATE Tax Changes Discussed… • The following are changes that have been discussed… • Obama/Boehner Items Likely to be Discussed Further • Tax Rate Hike? (Those with MAGI > $250,000, $500,000, $1,000,000?) • Limitations for those above 28% Tax Bracket? (ie., up to 11.6% decrease in benefit) • Limitation on itemized deductions • Tax exemption on municipal bond interest • Tax exemption on employer provided health insurance • Limitation on deductibility of retirement account contributions • Joint Committee on Taxation Study Items • Taxation of state and local bonds • Elimination of certain itemized deductions • Mortgage Interest Expense • Charitable Contributions • Medical Expense • State and local income and property taxes • Cutback in personal exemptions • Repeal of alternative minimum tax (AMT) • Elimination of exclusion for retirement plan contributions • Elimination of exclusion of employer provided health insurance • Note: The above list of items is not intended to be all inclusive.

15. YEAR END PLANNING Retirement & Gifting Limits… • Don’t miss the opportunity to invest for retirement while minimizing taxes.

16. YEAR END PLANNING Other Considerations… Required Minimum Distributions (RMD’s) • Federal government requires minimum distribution for IRA participant upon age 70½ Capital Gains (or losses) • Sales of stock or mutual funds • Capital loss carryovers; allowable net loss of $3,000 per year • Capital gain distributions • Internal fund carryovers • Cost Basis Reporting to IRS • Stocks transactions posted on or after January 1, 2011 • Mutual Funds and dividend reinvestment plans on or after January 1, 2012 • Debt securities, options on or after January 1, 2013(now postponed until January 1, 2014) • Cost Basis Reporting Alternatives • Default will be FIFO (First-in, First-out) • Other Options – Average Cost, Specific Identification, High-Cost First-out (HIFO)

17. YEAR END PLANNING Final Thoughts… TOP TEN LIST • 10) Make any last minute itemized deductions or other deductible payments. • 9) Contribute to Health Savings Account • 8) Consider donation of appreciated securities for charitable desires. • 7) Consider Roth IRA conversions in effort of maximizing tax exemption on earnings. • 6) Estate planning considerations including annual gifting ($13,000 annual exclusion). • 5) Consider municipal bonds for tax exempt income. • 4) Explore tax-loss AND/OR tax-gain harvesting. • 3) Max out retirement plan contributions and contribute early for 2013. • 2) Review, rebalance, and reallocate portfolio holdings. • 1) Work with your financial advisor and tax professional.

18. BUSINESS TAX PLANNING 2012/2013 DEPRECIATION

19. Expiring Tax Provisions • Bonus Depreciation of 100% in 2011 and 50% in 2012 – current tax law does not extend bonus depreciation past 2012. • Section 179 – after 2012 the deduction reverts back to $25,000 and the $2 million investment ceiling gets reduced to $560,000. • Qualified Leasehold Property – A 15 year straight line recovery and eligibility for Sec 179 expensing was allowed for QLP, qualified restaurant property and retail improvements. In 2012 these categories revert back to 39 year straight line. • Research and Development Tax Credit – expired at the end of 2011. • Work Opportunity Tax Credit – credit for employers who hire members of certain targeted groups (40% of qualifying 1st year wages up to $6,000 per employee). Expired at end of 2011 and 2012 credit works only for employers who hire qualified veterans. • Credit for plug-in electric vehicles, credit for energy-efficient homes credit. • Repealed –Expansion of Form 1099 Reporting requirements and Information reporting for Rental property expense payments.

20. Other Recent Business Developments • Increased Information Returns Penalty – First tier penalty is $30 (max of $250,000). Second tier penalty is $60 per (max of $500K). Third tier penalty of $100 per statement (max of $1.5 million. • Why higher penalties? Increased focus of IRS and reporting questions are now included on all S corp, C corp, LLC, Partnership, and Schedule C returns. • Severance Payments not subject to FICA – the sixth circuit held that the severance payments were exempt from FICA. Statute is only 3 years and this case will most likely head to Supreme Court – file a protective claim. What if employer won’t do this? Employee can file a claim on Form 843 Claim for Refund and Request Abatement.

21. QUESTIONS ? THANK YOU FOR ATTENDING! Tri-Cities CPA PLLC 8511 W Clearwater Suite C Kennewick, WA 99336 509-582-2000