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R ALLIS * S EGUNDO , P. A.

R ALLIS * S EGUNDO , P. A. Tax Management. PLANNING FOR 2013- Quick Update Income Tax - Medicare Surtax 3.8% on Net Investment Income > $ Estate & Gift Tax Unified Credit: 2,045,800  effectively exempts a total of $ % tax rate above Portability GSTT

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R ALLIS * S EGUNDO , P. A.

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  1. RALLIS * SEGUNDO, P. A. Tax Management

  2. PLANNING FOR 2013- Quick Update Income Tax - Medicare Surtax 3.8% on Net Investment Income > $ Estate & Gift Tax • Unified Credit: 2,045,800  effectively exempts a total of $ • % tax rate above • Portability GSTT $ exemption / 40% tax rate above Exemption (IS / IS NOT?) Portable

  3. PLANNING FOR 2013- Quick Update Income Tax - Medicare Surtax 3.8% on Net Investment Income > $250,000 Estate & Gift Tax • Unified Credit: 2,045,800  effectively exempts a total of $ 5.25M • 40 % tax rate above • Portability GSTT $ 5.25M exemption / 40% tax rate above Exemption IS NOTPortable

  4. PLANNING FOR 2013- Quick Update New Medicare Surtax: • 3.8% on Net Investment Income • Lesser of: $ MFJ $ MFS $ Other $ Trusts / Estates Kind of income taxed: • interest, dividends, annuities, royalties, and • gross income derived from any trade or business to which the tax applies • net gain attributable to the disposition of property other than trade or business property Investment income does not include distributions from a or amounts subject to

  5. PLANNING FOR 2013- Quick Update New Medicare Surtax: • 3.8% on Net Investment Income • Lesser of: $ 250,000 MFJ $ 125,000 MFS $ 200,000 Other $ 11,950 Trusts / Estates Kind of income taxed: • interest, dividends, annuities, royalties, and rents • gross income derived from any trade or business to which the tax applies • net gain attributable to the disposition of property other than trade or business property Investment income does not include distributions from a qualified plan or amounts subject to self-employment tax

  6. PLANNING FOR 2013- Quick Update New Medicare Surtax: • 3.8% on Net Investment Income • Lesser of: $ 250,000 MFJ $ 125,000 MFS $ 200,000 Other $11,950 Trusts / Estates Kind of income taxed: • interest, dividends, annuities, royalties, and rents • gross income derived from any trade or business to which the tax applies • net gain attributable to the disposition of property other than trade or business property Investment income does not include distributions from a qualified plan or amounts subject to self-employment tax

  7. PLANNING FOR 2013- Quick Update New Medicare Surtax Example: Single Taxpayer $100,000 of Salary $ 50,000 net investment income [so, MAGI is $150,000] 3.8% Surtax would NOT apply MAGI is less than threshold of $200,000

  8. PLANNING FOR 2013- Quick Update New Medicare Surtax Example: Estate or Trust $0 Salary $250,000 net investment income 3.8% Surtax would apply to $238,050 (=$250K- 11,950) MAGI > than threshold of $11,950

  9. PLANNING FOR 2013- Quick Update New Medicare Surtax Example: Estate or Trust $10,950 Salary $50,000 net investment income 3.8% Surtax would apply to the $49,000** MAGI > than threshold of $11,950 ** 50,000 + 10,950 = 60,950 – 11,950 = $49,000

  10. PLANNING FOR 2013- Quick Update New Medicare Surtax Example: Estate or Trust $100,000 Pension $ 25,000 tax exempt interest 3.8% Surtax would NOT apply

  11. PLANNING FOR 2013- Quick Update New Medicare Surtax Example: Estate or Trust $200,000 investment income Trust distributed the income to beneficiaries 3.8% Surtax would NOT apply (to the Estate or Trust)

  12. PLANNING FOR 2013- Quick Update Effect on Asset Allocation • Tax Exempt Bonds • Annuities (deferred vs. immediate) • Permanent Life Insurance • Rental Real Estate • Oil / Gas (IDCs reduce MAGI) • Charitable Remainder Trusts (CRATs and CRUTs) • Installment Sales • Roth Conversions to Minimize RMDs in future years

  13. PLANNING FOR 2013- Quick Update Good News in 2013 • Home Office Deduction – “deemed substantiated” $5 multiplied by the square footage of the home used for business purposes (up to 300 s.f.) • Dividends, Capital Gains still 0% / 15% for most taxpayers • Debt forgiveness on primary residence reinstated through end of 2013 • AMT exemption made permanent • IRA direct contributions to Charity extended through December 2013

  14. INCOME TAX UPDATE- 2012 Extended: • Educator expenses (line 23) • Tuition and fees deduction (line 34) • Credit for nonbusiness energy property (line 52) (big freakin’ deal) • Election to deduct sales taxes (Schedule A) • Deduction for mortgage insurance premiums (Schedule A) • Exclusion from income of qualified charitable distributions Expired: • First-time homebuyer credit - cannot be claimed in 2012.

  15. ESTATE PLANNING– REFRESHER 2013 Estate Tax Calculation: $12M estate, Single Person, No Prior Taxable Gifts $ 4.8M tentative estate tax (~40%) - 2,045,800 unified credit (i.e., tax on $5.25M exemption) = 2.7M actual estate tax due

  16. ESTATE PLANNING– REFRESHER 2013 Estate Tax Calculation: $ 6M estate (left after making 2012 gifts of $6M) $ 4.8M tentative estate tax (~40% x all $12M) • 2.1M unified credit • 1.9M gift tax paid / deemed paid  It makes a difference WHEN gifts were made = 0.8M actual estate tax due

  17. ESTATE PLANNING– REFRESHER 2013 Estate Tax Calculation: $ 0M estate (left after making 2012 gifts of $12M) $ 4.8M tentative estate tax (~40%) • 2.1M unified credit • 2.4M gift tax paid = 0.3M actual estate tax due

  18. ESTATE PLANNING– REFRESHER GST Tax • A “penalty” tax to discourage • Assessed at highest estate tax rate (in 2013: 40%) • Applies when transfers made to “skip persons” • TRUST can be a skip person in some cases • Only applies when transfer is ALSO subject to either gift or estate tax • WHY DO WE CARE? • Most clients are not going to be liable for GSTT…are they?

  19. ESTATE PLANNING– SOME ESSENTIAL STRATEGIES Lifetime Planning • Gifts • Annual Exclusion is $ per donee in 2013 (noncitizen spouse: ) • Gift Splitting – don’t take it for-granted • WHY GIFT? • Remove appreciating property out of the donor’s estate • Protect from unknown, unknowable creditors • Avoid probate • Shift income that goes with the property • WHY NOT GIFT? • Generally lose control • Deplete assets too soon • No step-up in basis for gifts • May have plenty of unified credit

  20. ESTATE PLANNING– SOME ESSENTIAL STRATEGIES Lifetime Planning • Gifts • Annual Exclusion is $ 14,000 per donee in 2013 (noncitizen spouse: $143K ) • Gift Splitting – don’t take it for-granted • WHY GIFT? • Remove appreciating property out of the donor’s estate • Protect from unknown, unknowable creditors • Avoid probate • Shift income that goes with the property • WHY NOT GIFT? • Generally lose control • Deplete assets too soon • No step-up in basis for gifts • May have plenty of unified credit

  21. ESTATE PLANNING– SOME ESSENTIAL STRATEGIES Favorite Planning Tools • Installment Sale / SCIN (pay income tax to save estate & gift tax) • consideration received by the seller must = FMV of property • 3 keys: • likely the seller will survive the term of the note, • reasonable interest rate, and • proper valuation of the property being sold Note should not extend beyond the actuarial life expectancy of the seller. • Cancellation feature must be part of the note, NOT a provision in the seller's will • Must include “risk premium” to compensate seller for assuming risk of death before note paid • Higher-than-normal interest rate or a higher sales price (or both) • Obtain a written medical opinion that the client is in good health

  22. ESTATE PLANNING– SOME ESSENTIAL STRATEGIES Favorite Planning Tools • ILIT (create wealth, income, gift, and estate tax free, no probate) • Greater flexibility in handling distributions of the proceeds and income • Possible elimination of the inconvenience and expense of guardians for minor beneficiaries. • Elimination of a second estate tax on the deaths of life insurance beneficiaries. • Broad investment discretion on the trustee’s part / centralized control • Asset protection • Use Crummey powers  Annual Exclusion Gifts of Premiums • Most Crummey trusts do not qualify for the GST tax annual exclusion • Second to die policy = biggest bang for the buck

  23. Required Disclosure Under Circular 230 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.

  24. RALLIS * SEGUNDO, P. A. w ww . r a l l i s c p a . c o m

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