Year End Strategies For Tax and Wealth Planning

1. Year End Strategies For Tax and Wealth Planning Porter Keadle Moore, LLC and Monterey Wealth Follow us on Twitter: @PKMAdvisors Reference the Event: #YETAWP

2. Tax Landscape: January 1, 2013 Presented by: Robert Schwarzmann and Adam Polakov Follow us on Twitter: @PKMAdvisors Reference the Event: #YETAWP

3. Tax Landscape • What is the Fiscal Cliff? • Expiration of Bush Tax Cuts and Extenders ($500 billion of new taxes in 2013) • Automatic cuts in government spending ($120 billion in 2013, $1.2 Trillion over 10 yrs) • Patient Protection and Affordable Care Act (PPACA)

4. Bush Tax Cuts Sunset – 12/31/2012 • Marginal income tax rates return to pre-2001 levels

5. Bush Tax Cuts Sunset – 12/31/2012 • Capital Gains tax rates will return to pre-2001 levels • Capital gains currently taxed 0% for taxpayers in the 10 and 15% brackets and at 15 % for all others. • Increases to 10% for taxpayers in 10 and 15% brackets and 20% for all others. (If MAGI is in excess of $250,000 MFJ ($200,000 Single), then additional 3.8% Medicare Investment Tax applies) • Qualified Dividends will be taxed at ordinary income rates • Qualified Dividends are currently taxed at the same rates as capital gains • Tax rate increases to 43.4% with addition of 3.8% investment income tax • The estate tax will be restored with an exemption level of $1 million and a top tax rate of 55% • Child care credit decreases to $500 from $1,000

6. Bush Tax Cuts Sunset – 12/31/2012 • Return of the “marriage penalty” on jointly filed taxpayers • Joint filer’s standard deduction returns to 167% of individual standard deduction • Phase-out of personal exemptions • $3,900 personal exemption phased out by 2% for each $2,500 by which a joint filer’s exceeds $261,650 ($174,450 for single filers) completely phasing out at $384,150 ($296,950 for single filers) • Limitations on the deductibility of itemized deductions • Subject to a phase-out of 3% of the amount by which the taxpayer’s AGI exceeds a certain threshold (estimated to be 174,450 for all taxpayers) • Increase to marginal tax rate of 1.2 – 1.5% for higher income taxpayers • Reduction in maximum Coverdell Savings account contribution from $2,000 to $500

7. Expiring Extenders – 12/31/2012 • End of accelerated “50% bonus” depreciation deductions • Section 179 expense limitation reverts back to $25,000 on $200,000 asset additions (currently $139,000; $560,000) • New tangible property regulations become effective January 1, 2014 • Provides new guidance on repairs and maintenance, capitalization policies, and building components

8. Expiring Extenders – 12/31/2012 • Alternative Minimum Tax (AMT) patch expires • Exemption for joint filers falls to $45,000 from $74,450 • Common AMT adjustments: State taxes, medical expenses, etc. • Households subject to AMT will increase from 4.5 million in 2011 to over 30 million in 2012 • The 2% FICA payroll tax cut is expiring • Employee social security reverts back to 6.2% from 4.2%

9. Fiscal Cliff Proposals • President Obama’s December 2012 Fiscal Cliff Tax Proposal • Increase long term capital gains rate to 20% • Reinstate the top tax rate to 39.6%, but maintain Bush era rates for lower income taxpayers • Tax dividends at ordinary income tax rates • Limit benefits of itemized deductions for higher income earners • Supports Federal Estate Tax of 45% with an exemption of $3.5 million • Repeal the Alternative Minimum Tax; Enact the “Buffett Rule” which would impose a minimum 30% tax on taxpayers with an AGI > $1 million • Reduce the corporate tax rate from 35% to 28% while removing deductions/loopholes • Is the tax-exempt status of municipal interest on the chopping block? • High income earners could see limitations on contributions to deferred compensation plans (401-K’s and SEPs)

10. Your new Health Care System

11. Affordable Care Act – New Taxes • Investment Income Tax • 3.8% Medicare Tax on Investment Income • Impacts individual taxpayers with AGI > $200,000 and joint filers with AGI > $250,000 • How does the Act define Investment Income • Dividend Income • Interest Income • Rental Income • Royalties • Short and Long Term Capital Gains • Passive Income from K-1’s where the taxpayer doesn’t materially participate • Gain from the sale of a primary residence (exceeding exclusions) • Gain from the sale of a 2nd home

12. Affordable Care Act – New Taxes • Certain Income is exempt from the Act • Tax-exempt Income on municipal bonds and securities • Payouts from Regular or Roth IRAs • Payouts from 401(k) or pension • Social Security Income • Life Insurance Proceeds • Pass-through business income where the taxpayer is a material participant

13. Affordable Care Act – New Taxes • Computation • The new Medicare tax is computed as 3.8% on the lesser of • 1) Investment Income or • 2) the excess of AGI over the income threshold • Example 1 • A joint filer has $400,000 of AGI including $240,000 of W-2 wages and $160,000 of investment income • Because the excess of AGI over the income threshold ($400,000 -$250,000) of $150,000 is less than investment income of $160,000, the tax is based on excess AGI. • Additional Medicare tax is $5,700 ($150,000 x 3.8%)

14. Affordable Care Act – New Taxes • Example 2 • A single filer has W-2 wages of $260,000 and dividend income of $100,000. AGI equals $360,000. • Because the excess of AGI over the income threshold ($360,000 - $200,000) of $160,000 is greater than investment income of $100,000, the tax is based on investment income. • Additional Medicare tax is $3,800 ($100,000 x 3.8%)

15. Affordable Care Act – New Taxes • Example 3 • A joint filer purchased a home 30 years ago in New York City for $250,000 and sells it in 2013 for $2 million. The joint filer also has W-2 wages of $100,000. • Investment Income is $1,250,000 ($2 million less $250,000 cost basis less $500,000 exclusion) • Because the excess of AGI over the income threshold ($1,350,000 - $250,000) of $1,100,000 is less than investment income of $1,250,000, the tax is based on AGI • Additional Medicare tax is $41,800 ($1,100,000 x 3.8%)

16. Affordable Care Act – New Taxes • Payroll Taxes • .9% Medicare Hospital Insurance Tax on Ordinary Income • Impacts individual taxpayers with Ordinary Income > $200,000 and joint filers with Ordinary Income > $250,000 • Assessed on the employee portion of Medicare • How does the Act define Ordinary Income? • W-2 wages • Pass-through business income on which taxpayer is remitting self employment taxes (Partnership Schedule K-1, Schedule C business income)

17. Affordable Care Act – New Taxes • Withholding • Employers are required to withhold additional Medicare Tax • Employers are not required to consider a spouse’s wages or whether the employee earns wages at a second job • Because tax on “employee portion” of Medicare, self employed persons will not be able to deduct one half of this tax from AGI

18. Affordable Care Act – New Taxes • Example • A joint filer earns $375,000 in W-2 wages and $150,000 of pass-through income from a business that is subject to self employment taxes • Ordinary Income subject to the .9% Medicare tax is $275,000 ($525,000 ordinary income less $250,000 exclusion) • Additional Medicare tax is $2,475 ($275,000 x .9%)

19. Affordable Care Act – New Taxes • Medical Expenses • Itemized Deduction • The medical expense “floor” increases from 7.5% to 10% of AGI • The 7.5% floor is retained for taxpayers over the age of 65 until December 31, 2016 • Healthcare Flexible Spending Account contributions limited to $2,500 (pre-tax) • Penalty for nonqualified distributions from Health Savings Accounts increases from 10% to 20%

20. Affordable Care Act – New Taxes • Requires employer W-2 reporting of value of health benefits provided to employees • Employers filing less than 250 W-2’s are exempt from this requirement • Effective for the 2012 tax year (W-2s issued in January 2013)

21. Ron Swanson on taxes…

22. Employer Shared Responsibility Mandate • Employers will not be required to provide health insurance • Effective January 1, 2014, penalties will be assessed on large corporations if health coverage is not offered to all full-time employees • An employer has 75 full time employees (FTE’s) • One or more employees are not covered by the group policy and the employee(s) receive health coverage assistance • The tax would be based on 45 employees (the first 30 FTE’s are exempted) • For each month the employee is not covered, the tax is computed as follows: • 1/12 x $2,000 or $167/month per employee • 45 employees x $167 = $7,500 tax per month • Annual excise tax of $90,000 (not deductible)

23. Employer Shared Responsibility Mandate • An Employer may incur a penalty if they offer health care coverage to all FTE’s, but the coverage is not affordable • Failure to provide “minimum essential coverage” • The employee contribution (premium) is > 9.5% of the employee’s household income or • The large employer covers less than 60% of the total cost of benefits • One Tier II FTE has been certified as purchasing health insurance through a state sponsored exchange and qualifies for a premium tax credit • State Exchanges will offer 4 levels of health insurance plans - Bronze, Silver, Gold, and Platinum

24. Employer Shared Responsibility Mandate • What is a Tier II Employee? • Taxpayers with household income between 138% and 400% of Federal Poverty Level (FPL) • FPL: Single Family income between $15,900 and $46,100 • FPL: Four member family income between $32,800 and $95,200 • The penalty is computed monthly on non-covered employees: • 1/12 x $3,000 or $250/month per employee receiving a premium credit • Penalty is capped at the penalty the employer would have owed had no health care been provided • Tax is only on the # of employees who purchased insurance from a State Exchange and received a tax credit, not on all FTE’s • Premium tax credits are refundable for individuals with household income between 138% and 400% of FPL (Tier II)

25. Employer Shared Responsibility Mandate • Tier II employees offered “minimum essential coverage” will NOT be eligible for premium tax credits for insurance purchased through an exchange • Household Income is defined as the total adjusted gross income of all members of the household plus tax-exempt interest income • How will an employer know the household income of its employees?

26. Employer Shared Responsibility Mandate • Failure to offer affordable coverage to Tier I employees will not trigger a penalty • Tier I provides automatic Medicaid eligibility to individuals who have an adjusted FPL of 138% or lower • Single member household income less than $15,900 • Four member household income less than $32,800 • Failure to offer affordable coverage to Tier III employees will not trigger a penalty • Tier III reflects households above 400% FPL • Single member household income greater than $46,100 • Four member household income greater than $95,200 • Tier III employees are not eligible for premium tax credits

27. Employer Shared Responsibility Mandate • What are your options as an employer? • PPACA primarily impacts companies employing low-wage workers earning 138% to 400% of FPL • Drop health care coverage and remit penalties to IRS, however, it is very likely that penalties will increase in the future • Re-structure workforce and limit future growth of business to get under the 50 FTE threshold and avoid penalties • Watch out for the rules on part-time employees (total # of part-time hours / 120 = full-time equivalent employees) • Again, no penalties on part-time workers (< 30 hrs per week) • Consider a high-deductible plan with affordable premiums (should be able to avoid penalties)

28. Mandatory Health Care Coverage • Status of State Sponsored Insurance Exchanges • Less than 20 states have made “active” progress • Georgia has formally declined to create an exchange • Blueprint to HHS by December 14, 2012 (3rd extension) • Must be operational by January 1, 2014 • Role of the State Sponsored Exchanges • Regulate insurers, enforce price controls, verify eligibility for premium tax credit • Penalize businesses that don’t insure employees • Police compliance with the individual mandate • HHS can impose a federally run exchange on states that fail to meet certain thresholds by January 1, 2013

29. Mandatory Health Care Coverage • Provide information to each employee regarding their rights, benefits, and health care coverage • Effective March 1, 2013, all employers must provide the following information to employees: • Written notice concerning the existence of an exchange including information on services and contact info • The employee’s potential eligibility for premium credits and cost sharing subsidies if the employer does not provide “minimum essential coverage” • Certification of information provided to HHS on each employee

30. Mandatory Health Care Coverage • Effective January 1, 2014, all employers will be required to report the following to HHS: • Certification whether “minimum essential coverage” was provided to all full-time employees under an employer sponsored plan • Information on monthly premiums, dates of coverage, waiting period, employer’s share of covered expenses, and information on enrollment categories • Number of full-time employees including name, address, and social security # on all FTE’s • IRS working in coordination with HHS

31. Premium Tax Credits and Federal Exchanges • Penalties for not maintaining “minimum essential coverage” are contingent upon premium tax credits received in conjunction with health coverage purchased in a State Sponsored Exchange • The Act is unambiguous that Premium Tax Credits are only available in a State-sponsored exchange • “…the taxpayer is covered by a qualified health plan and…enrolled in an Exchange established by the State under Section 1311 of the Patient Protection and Affordable Care Act…” • Can a State block penalties by refusing to create a health exchange? • Could millions of Americans be forced to buy insurance (or pay a penalty) but not be eligible for a tax credit?

32. Premium Tax Credits and Federal Exchanges • Recent IRS ruling (May 2012) expands legislative language to allow subsidies (tax credits) for health coverage purchased in federal exchanges • Is this rule contrary to congressional intent? Is the IRS writing laws? • The Act does not provide for premium tax credits issued in conjunction with the purchase of health insurance from a federal exchange • Likely to be challenged in court as unconstitutional • Supporters of the Act claim this is simply a “drafting error”

33. Individual Mandate • Effective January 1, 2014, all U.S. residents are required to maintain minimum essential coverage unless they meet one of the following exceptions: • Incarcerated individuals • Undocumented aliens • Individuals who meet certain hardship conditions and are unable to afford coverage • Individuals below the tax filing threshold • Members of Indian tribes • The penalty will be paid as a federal tax liability on income tax returns

34. Individual Mandate • Annual penalty for not having minimum essential coverage will be the greater of • A flat dollar amount or • $95 in 2014, $325 in 2015, and $695 in 2016 • A percentage of the individual’s taxable income over a certain threshold • Phased in at 1% in 2015, 2% in 2015, and 2.5% in 2016

35. Other Provisions in the Act • $500,000 compensation deduction limit for health insurance insurers • No tax deduction allowed on total compensation remitted to an individual employed by a health insurance company in excess of $500,000 • Small Business Health Care Credit • Credit is available up to 35% of health insurance premiums through 2013 • 50% credit for 2014-2015 (if the small business purchases health care through an exchange) • Maximum eligibility for the credit is for employers with 10 or fewer workers with average wages of $25,000 or less

36. Other Provisions in the Act • Excise Tax on Medical Device Manufacturers • For sales after December 31, 2012, a 2.3% excise tax will be applied to gross revenues of taxable medical devices • Why? • Excise tax is applicable regardless of whether Company generates a profit • Significant increase in effective tax rate of medical device manufacturers • Layoffs already announced for 2013 and forward • Manufacturers scaling back plans to expand operations • Acceleration of estimated payments for “large” corporations

37. Questions?

38. Contact Information Robert Schwarzmann Tax Partner 404-420-5795 rschwarzmann@pkm.com Adam Polakov Tax Principal 404-420-5974 apolakov@pkm.com