FPA Philadelphia Tri State
John Kilroy CPA, CFP®
September 11, 2012

Agenda

Planning opportunities for 2012

2012 AMT “Sweet Spot” Example

2012-2013 Examples

Other Items of Interest

Now You See ‘Em, Now You Don’t

What may be Next

Planning Opportunities

One of the lowest marginal and capital gain rates in our history

How long will it last?

O% LTCG and QDI rate through 2012

Sunset – automatic tax increase in 2013?

AGI/MAGI is still catalyst for most tax features

Tax planning is very often not done

Planning Opportunities

Roth conversion

$100,000 MAGI limit/MFS exclusion gone

How much?

Perhaps up to current tax bracket or next tax bracket

At least eliminate any negative taxable income

Consider cash flow and ability to pay tax outside of conversion

Investigate Roth IRA/Roth 401(k)/Roth 403(b) eligibility

Planning Opportunities

Roth conversion

From IRA or qualified plan


Be careful


SIMPLE plan – only after 2 years
After-tax contributions in conversion


IRA – pro rata
Qualified plan - ? (IRS Notice 2009-75)
NEW – In Plan Roth Conversion (9/27/10)



If plan allows (Roth option; plan distribution rules)
No recharacterization
Creditor protection

Planning Opportunities


Taxable Annuity Distribution

Non periodic withdrawal

Earnings first if contract issued after 8/13/82

Tax efficiency of portfolio

May lower cost of asset

Watch for relationship between contract value and death benefit

Estate planning/IRD asset
Partial Exchange option (began 2011)

1035 exchange from Life Ins. or Annuity to
LTC (began 2010)

Planning Opportunities

Taxable/Tax-Exempt bonds/money markets

Coordination with tax bracket of investor

Often mismatched

Why would 35% MTB taxpayer have $200,000 + in taxable bond income?

Capital gain/loss of repositioning

Capital loss carryover or harvesting opportunity?

State taxation

State solvency?

Planning Opportunities

Zero percent LTCG/QDI

Layering of net ordinary income first

Wages, interest, non QDI, STCG, other income less itemized or standard deduction and personal exemptions

Then LTCG/QDI

Taxed at 0% up to top of 15% marginal tax bracket

Regular tax and AMT

Taxed at 15% beginning in 25% marginal tax bracket

Watch out for AMT effect

Planning Opportunities

Itemized deduction timing and location

Timing of expense

Deductible or not (regular or AMT)

Floors and phase outs

Control over when paid

Location

Can expense be moved “above the line”?


Home office
Rental or business activity

Added to cost basis

Planning Opportunities

AMT Planning



Begins with good tax planning (AGI)
Pay particular attention to AMT exemption

Phase out of exemption creates phantom income




AMT marginal rates will increase from 26% or 28% to 32.5% or 35% in phase out range
$1 of exemption phase out for every $4 of income
LTCG and/or QDI effective rate increases from 15% to up to 22% in phase out range
Get off the AMT phase out island if possible
Make AMT an Alternative Maximum Tax

Income space after exemption phase out – 28% AMT rate vs. 35% ordinary income rate

Filing Status
2011 (patch)
MFJ or QW
Single or HOH
MFS
2012 (no patch)?
MFJ or QW
Single or HOH
MFS
Planning Opportunities
AMT Exemption
$74,450
$48,450
$37,225
$45,000
$33,750
$22,500
AMTI phaseout of exemption
$150,000 - $447,800
$112,500 - $306,300
$75,000 - $223,900
$150,000 - $330,000
$112,500 - $247,500
$75,000 - $165,000

Planning Opportunities
Marginal Rates
2011 MFJ
<$74,450
$74,451 - $150,000
$150,001 - $229,560
$229,561 - $447,800
>$447,800
AMT
0%
26%
32.5%
35%
28%
Regular
0% - 25%
25% - 28%
28% - 33%
33% - 35%
35%

2012 AMT “Sweet Spot” Example
Summary
AGI
Deductions/
Exemptions
Taxable Income
Federal Tax
Marginal Rate
State Tax
Total Tax
No Roth
Conversion
$282,900
(64,344)
218,556
58,375
35% (AMT)
20,702
$79,077
$600,000 Roth
Conversion
$882,900
(105,386)
777,514
230,946
28% (AMT)
70,786
$301,732
Difference
$172,571
• MFJ 2 exemptions; $171,500 Wages; $200 Interest Income; $59,000 QDI;
$4,100 Non-QDI; $51,100 Pension; ($3,000) Capital loss;
$6,100 Real estate tax; $18,200 charity; 14,700 misc. itemized;
State income tax paid in 2012 ; no AMT patch

Planning Opportunities

Cancellation of Debt on Primary Residence


Up to $2 million ($1 million MFS) on Acquisition debt
Through 2012



Basis Reduction

Not below zero
Due to either


Value of residence decline
Financial condition of owner
Mortgage restructuring or foreclosure

2012-2013 Examples
Scenario 1 Summary
AGI
Deductions/
Exemptions
Taxable Income
Federal Tax
Surtax
Total Tax
2012
$106,000
(31,700)
2013
$106,000
(31,700)
74,300 74,300
12,370(AMT) 13,130(AMT)
0
$12,370
0
$13,130
Difference
• MFJ 4 exemptions; $100,000 wages; $5,000 QDI; $1,000 Interest Income;
$6,000 Real Estate Tax; $10,000 Mortgage Interest; $500 Charity;
No state income tax ; no AMT patch
$760

2012-2013 Examples
Scenario 2 Summary
AGI
Deductions/
Exemptions
Taxable Income
Federal Tax
Surtax
Total Tax
2012
$330,000
(33,100)
296,900
81,525(AMT)
0
$81,525
2013
$330,000
(24,153)
305,847
88,415
1,140
$88,415
Difference
$6,890
• MFJ 2 exemptions; $200,000 wages; $15,000 QDI; $7,000 Interest Income;
$8,000 passive income: $100,000 Roth conversion;
$10,000 Real Estate Tax; $15,000 Mortgage Interest; $500 Charity;
No state income tax ; no AMT patch

2012-2013 Examples
Scenario 3 Summary
AGI
Deductions/
Exemptions
Taxable Income
Federal Tax
Surtax
Total Tax
2012
$1,575,000
(9,750)
1,565,250
509,599
0
$509,599
2013
$1,575,000
(5,950)
1,569,050
591,266
2,850
$594,116
• Single 1 exemption; $75,000 QDI; $1,500,000 Roth conversion;
Standard deduction;
No state income tax ; no AMT patch
Difference
$84,517

Now You See ‘Em, Now You
Don’t?

Already Gone (12/31/11)

AMT Patch (recent history of annual extension)

QCD (Age 701/2 IRA owner or beneficiary)

State and Local Sales Tax Deduction

Above the Line Education Deductions

$4,000 higher education expenses (credits remain)

$250 teacher expense deduction

Lower Section 179 and Bonus Depreciation

50% Bonus (none in 2013)

$139,000 Section 179 ($25,000 in 2013)

Now You See ‘Em, Now You
Don’t?

Part of the “Fiscal Cliff”? (12/31/12)

Marginal Tax Rates

10%,15%,25%,28%,33% and 35% for 2012

15%,28%,31%,36% and 39.6% for 2013

AMT remains at 26% and 28% - what does that mean?

LTCG (Watch AMT!!!)

0%-15% for 2012

10%-20% or 8%-18% (5 yr. qualifying) for 2013

QDI (Watch AMT!!!)

0%-15% for 2012

Ordinary Income for 2013

Now You See ‘Em, Now You
Don’t?

Expiring 12/31/12:

Payroll Tax Holiday (2% OASDI)

No reduction in Itemized Deductions/Personal
Exemptions

Unlimited Student Loan Interest Deduction Life (60 month limit returns)

Certain more Generous Tax Credits Return to Prior
Limits (Child Tax Credit; American Opportunity
Credit, etc.)

Marriage Penalty Relief

Now You See ‘Em, Now You
Don’t?

Estate, Gift and Generation Skipping Tax:

2012:

$5,120,000 exemption

35% flat rate

2013:

$1,000,000 exemption (GST will have inflation adj.)

55% highest marginal rate

Clawback?

Portability?

Other Items of Interest


Medicare Surtax effective 1/1/13:

3.8% on Net Investment Income

0.9% on earned income

Lower of Net Investment Income or MAGI above threshold

MAGI threshold $250,000 MFJ; $200,000 Single
Cost Basis Reporting Rules

2011 – Stocks (including some DRIPs and ETFs)

2012 – Mutual Funds (most DRIPs and ETFs)

2014 – Bonds, Options, other securities





What May Be Next?
Budget Proposals – Individuals:
Over $250,000 ($200,000 single) MAGI


Reinstate the 36% and 39.6% marginal rates (2013)


Raise LTCG to 20%
Tax QDI as ordinary income
Maximize rate of certain deductions/exclusions to
28%


Municipal Interest
Above and below the line deductions
Make certain tax credits “permanent”
Extend Cancellation of Qualified Personal
Residence Debt to 2015

What May Be Next?






Budget Proposals – Business:
Extend 100% Bonus Depreciation through 2012
Automatic IRA (2014 – at least 10 employees)
Repeal LIFO (2014)
Tax carried interest as ordinary income
Repeal Oil and Gas tax breaks (2013)

What May Be Next?

Budget Proposals – Estate:

Return to 2009 (2013) “permanent”

$3.5 million Estate/GST exemption

$1 million gift exemption

45% rate

Continue Portability

10 Year GRAT

Grantor Trust coordination (income and estate)

What May Be Next?

Extenders Legislation?

Above the line tuition and related expenses deduction

Sales tax or income tax itemized deduction

AMT Patch

Age 701/2 and over IRA charitable contribution

Various other individual; business; foreign account changes