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Jim Hallisey – Financial Strategist$IMPLY $MART $OLUTIONS, LLC
Patrick W. Deakins, CPA
2013 FISCAL CLIFFPreparing for what’s ahead
This presentation is designed to provide general information on the subjects covered. Pursuant to IRS Circular 230, it is not, however, intended to provide specific legal or tax advice and cannot be used to avoid tax penalties or to promote, market, or recommend any tax plan or arrangement. Please note that each individual’s financial situation presents a unique set of circumstances and opportunities. We encourage everyone to pursue the services of a tax or investment professional. The information shared in this presentation is for educational purposes only, and should not be solely used as the basis for making any tax or investment decisions.
Before we begin
1) What is the “fiscal cliff”
a) What are the causes?
b) What are the changes?
2) Provide information
3) Strategies/Opportunities
Agenda
A description of the potential year-end 2012 U.S. fiscal changes
Expiration of Bush tax cuts and payroll tax cut at year end
New 2013 taxes (including
a 3.8% Medicare surtax)
Scheduled spending
cuts in 2013
Concerns of double-dip recession in 2013
What is the ‘Fiscal Cliff’?
If lawmakers cannot agree on how to address the pending “fiscal cliff,” $7 trillion of tax increases and spending cuts begin to go into effect in January 20131; with potential reduction of our GDP by 1.3% in first half of 20132.
Why is the “fiscal cliff” important?
1“Fiscal cliff: What’s really in it?” CNNMoney, August 6, 2012,2”Economic Effects of Reducing the Fiscal Restraint That Is Scheduled to Occur in 2013”, Congressional Budget Office, May, 2012
Gaining Perspective:This stack of money is $1 million
100 packets of $10,000
Gaining Perspective:This is $1 billion
Fits on 10 standard pallets
Gaining Perspective:This is $1 trillion
Notice the pallets are double stacked
2011 Total Federal
Government Revenue1
$2.4 TRILLION
2011 Total Federal
Government Net Cost (spending)1
$3.7 TRILLION
2011 Total Public
Debt in 2011(borrowed) 1
$1.3 TRILLION
Federal Government Budget Fiscal Year 2011
Problems of our national debt
1 A Citizen’s Guide to the 2011 Financial Report of the U.S. Government: http://www.gao.gov/financial/fy2011/11guide.pdf
Federal Government Budget Fiscal Year 2012
Total U.S. Public Debt outstanding 20
12
$16.24 TRILLION
Possible options: Decrease spending Increase taxes Print money (deflate the value of the
outstanding debt)
How to solve the national debt?
1 http://www. usdebtclock.org/
Problems of our national debt
(as of December 10, 2012)1
“Sequestration”
FISCAL CLIFFFISCAL CLIFF
Automatic spending cuts starting in 20131:
Defense – potential $55 billionNondefense – potential $55 billion
Total spending cuts of $2 trillion spread over 10 years1
Expiration of the Bush tax cuts
1) What is the Fiscal Cliff?
What all is in the Bush tax cuts?
EXPIRATION OF BUSH TAX CUTS
Income tax cuts
Capital gains cuts
Earned incometax credit
Child tax credit
Qualified dividend rates
Marriage penalty
reliefAmerican
opportunity tax credit
Estate tax exemption
Gift tax exemption decrease and rates increase
Tax Changes Taking Effect January 1, 2013Tax Change Tax Increase
(2013 over 2012)Expiration of the 2001-03 tax cuts (not including estate) $156 Billion
Expiration of the payroll tax holiday $125 Billion
Failure to patch the Alternative Minimum Tax $88 Billion
Expiration of business expensing $48 Billion
Expiration of other “tax extenders” $40 Billion
New PPACA (Obamacare) taxes $35 Billion
Expiration of the 2009 stimulus $11 Billion
Estate tax increases $10 Billion
Total tax increases $514 Billion
Source: Tax Foundation; Congressional Budget Office; Joint Committee on Taxation; Office of Management & Budget.
2011 & 2012
Proposed2013 & beyond
10% 15%
15% 15%
25% 28%
28% 31%
33% 36%
35% 39.6%
For taxpayers in:2011 and 2012
rates
Proposed 2013 & beyond1
A bracket < 15% 0% 10% / 8%
A bracket >15% 15% 20% / 18%
Tax bracketsordinary income
Long-term capital gains tax rates
1NOTE: In general, the 8% and 18% capital gains rates only apply to long-term capital gains on property that has been held more than five years at the time of sale.
For the 18% rate, the property must have been purchased after December 31, 2000.
Source: Internal Revenue Code Sec 1(i)
Taxation rates
Payroll Tax Holiday Impact on Payroll TaxesPayroll Tax Component 2010 2011 and 2012 2013 (unless
changed)*Employee Share
Social Security 6.20% 4.20% 6.20%
Medicare 1.45% 1.45% 1.45% Subtotal, Employee 7.65% 5.65% 7.65%
Employer Share
Social Security 6.20% 6.20% 6.20%
Medicare 1.45% 1.45% 1.45% Subtotal,
Employer 7.65% 7.65% 7.65%
Total Payroll Tax** 15.30% 13.30% 15.30%
Expiration of Payroll Tax Holiday
• Alternative minimum tax is another layer of the tax code that ensures higher income taxpayers pay a minimum of tax.
• The AMT exemptions are not indexed for inflation, and instead the must be “patched” by Congressional action.
• The last AMT patch expired December 31, 2011. This will have impact on 2012 taxes unless addressed in year-end legislation.
• According to the Congressional Budget Office, taxpayers with $50,000 to $200,000 in income will be the hardest hit in coming years.
Failure to patch the AMT
Gift and Estate Taxes
Gift and Estate Tax Exemptions and Rates2011-2012 2013
Gift Tax Exemption $5 million $1 million
Gift Tax Rate 35% 55%
Estate Tax Exemption $5 million $1 million
Estate Tax Rate 35% 55%
Generation Skipping Transfer Tax Exemption
$5 million $1 million
GST Tax Rate 35% 55%
Patient Protection & Affordable Care (PPACA)
• 3.8% surtax on portfolio income (threshold: $200,000 single; $250,000 married)
• 0.9% surtax on total income (threshold: $200,000 single; $250,000 married)
• Floor for itemized medical expenses moves up from 7.5% to 10%
Regardless of what Congress does or does not do, you need information about the opportunities today and possibilities for tomorrow.
Possible outcomes if Congress deals (or does not deal) with the “fiscal cliff”
1Congress acts today and
negotiates on spending cuts and tax changes so that such dramatic
year-end changes do not occur.
2Congress does not act and lets the
“fiscal cliff” occur. This would include the implementation of
sequestration, seeing automatic tax increases and deep government
spending cuts.
2) PROVIDE INFORMATION
Helping you deal with tax law changes: InformationCoordinationAction
Today’s opportunities may not be available tomorrow
Steps to take
Be proactive
REVIEW
Make changing tax rates or tax laws part of your planning
Schedule review appointments today
MONITOR Include topic
of taxes in planning for the future
Prepare for future changes
Remember estate and gift taxes
Ordinary income tax rates 10-35%
ROTH CONVERSIONS
CAPITAL GAINS/DIVIDENDS
Capital gains/dividends rates
0-15%
CHARITABLE CONTRIBUTIONS
No itemized deduction phase-outs
GIFTING
$5.12 million lifetime gift tax exemption.$13,000 annual gift
tax exclusion.
NONQUALIFIED ANNUITIES AND INDEXED UNIVERSAL
LIFE POLICIESUse nonqualified annuities
and IUL’s for income tax deferral of earnings and
retirement savings.
3) Opportunities and strategies at year end 2012
Purchasing an annuity within a retirement plan that provides tax deferral under sections of the Internal Revenue Code results in no additional tax benefit. An annuity should be used to fund a qualified plan based upon the annuity’s features other than tax deferral. All annuity features, risks, limitations and costs should be considered prior to purchasing an annuity within a tax-qualified retirement plan.
Roth Conversions
Ordinary Income tax rates 10-35%
Preparation
Understand and prepare for potential
change in 2013.
• The growing national debt has created a need to grow revenues through taxation
• Spending cuts alone will not be deep enough to decrease the national debt
• It is possible that we have seen the lowest tax rates for the foreseeable future
•TAXES ARE ON SALE
Take aways
• Contrary to the long held notion of accelerating deductions, deferring income– Accelerate bonuses into 2012– Exercise non-qualified stock options in 2012– Remove earnings and profits from S-Corps to take
advantage of the lower capital gains rate
• Research any tax deductible plans before year-end
• Consider making taxable contributions to retirement plans and stratgies (Roth IRA’s, IUL’s)
Planning tips
Questions?
Jim HalliseyFinancial Strategist
$imply $mart $olutions, LLC
609 SW 8th Street Suite 600Bentonville, AR 72712Phone: (479) 286-1101
Patrick W. Deakins, CPA
814-A West Emma Ave.Springdale, AR 72764
Phone: (479) [email protected]