Michael Hanger m ichael.hanger@dhgllp 804.282.7636

1. Federal and Virginia Tax UpdatePresented ToTheCommonwealth Association of Financial ProfessionalsFebruary 21, 2013 Michael Hanger michael.hanger@dhgllp.com 804.282.7636

2. IRS Compliance Any tax advice contained in this communication (including any attachments) is not intended or written to be used, and cannot be used, for the purpose of (i) avoiding penalties imposed under the Internal Revenue Code or applicable state or local tax law or (ii) promoting, marketing, or recommending to another party any transaction or matter addressed herein.

3. Agenda • American Taxpayer Relief Act of 2012 • Individual • Business • Patient Protection of 2010 • Increased Medicare Tax • Tax on Net Investment Income • Insurance Mandate • Virginia Legislative Update • Credits To Consider • Hill Watch

4. American Taxpayer Relief Act of 2012 Fiscal Cliff Crisis Averted

5. Key Provisions • Permanentlyextends the Bush tax cuts for individual filers with AGI of $400,000 or less and MFJ filers with AGI of $450,000 or less. • Phase out of personal exemptions and itemized deductions is reinstated for single filers with AGI of $250,000 or more and MFJ filers with AGI of $300,000 or more. • Permanently Increases the Alternative Minimum Tax exemption and indexes for inflation.

6. Individual Marginal Tax Rates

7. Capital Gains / Dividends *** Medicare tax applies to AGI above $250,000

8. Other Individual Changes • Extends through 2013 the election to claim an itemized deduction for state and local general sales tax in lieu of income taxes. • Extends permanently the $1,000 child tax credit. • Phase out begins at $110,000 • Extends permanently the Bush-era enhancements including 35% credit rate with $3,000 cap on expenses. • Extends through 2017 the American Opportunity Tax Credit (100% of first $2,000 / 25% of next $2,000). • Max $2,500 on student loan interest deduction and permanently suspends 60-month rule.

9. Other Individual, Cont. • Permanently extends all existing marries penalty relief for taxable years beginning after 2012. • Above the line educator deduction ($250). • Extends for 2012 and 2013 the 50% and 100% limitations and 15-year carryover period for Qualified Conservation Contributions. • Nontaxable IRA transfers to eligible charities

10. Changes to Depreciation

11. Energy Incentives • Individual • Credits for Energy Efficient Improvements to taxpayers existing residence. • $500 lifetime limit • Business • Alternative fuel refueling credit • Energy efficient new homes credit • Energy efficient commercial building deduction

12. Key Business Changes • 100% exclusion on gain on sale of small business stock • Extended through 2013 • Qualified small business stock is stock of a C Corporation with aggregate gross receipts not exceeding $50 million at any time. • Reduced recognition period for S Corporation built-in gains tax. • 5 year recognition period if S election made at least five years prior to 2012 or 2013

13. Federal Estate Tax • Permanently provides for a maximum federal estate tax rate of 40 percent with an annually inflation-adjusted $5 million exclusion. • Portability of unused exemption between spouses made permanent.

14. Estate and Gift Tax Exclusion

15. Estate and Gift Tax Max Rates

16. Patient Protection Act

17. Patient Protection Act • 2013 • Increased Medicare tax • Tax on Net Investment Income • 2014 • Individual insurance mandate • Shared responsibility payments

18. Increased Medicare Tax • 0.9% of wages (employee portion) • Applies to self-employed taxpayers • Threshold • MFJ $250,000 • MFS $125,000 • Other $200,000 • What is the employer responsibility for the increased withholding? The employer is not required to verify other sources of income.

19. Tax on Net Investment Income • Beginning January 1, 2012, imposes tax of 3.8% on the lesser of • An individuals • Net investment income and, • Modified AGI in excess of threshold amount • An estate’s or trust’s • Undistributed Net Investment Income • AGI in excess of threshold amount • Threshold • S $200,000 • MFJ $250,000

20. Net Investment Income (NII) • Sum of the following three items, less allowed deductions: • Gross income from interest, dividends, annuities, royalties, and rents, other than such income derived in the ordinary course of a trade or business • Gross income from a passive trade or business or from the trade of business of trading financial instruments or commodities • Net Gain from the disposition of property

21. Background for the NII • SECA tax applies to “net earnings from self-employment” • SECA Tax Exclusions • Rentals from real estate • Dividends and interest • Certain gains and losses from the disposition of property • Partnership retirement benefits • Distributive share of a limited partner

22. NII Exclusions • Wages • Self-employment income • Income derived from a partnership and S-corporations where the taxpayer materially participates. • Investment income if the income is derived in the ordinary course of the trade or business and the taxpayer materially participates.

23. Planning for the NII • May need to increase quarterly estimated tax payments beginning in April 2013. • Review partnership tax distribution provisions. • Consider requiring making trust distributions to avoid NII tax at the trust level. • A new spin on some old planning opportunities… • Direct IRA distribution to Charity • Like-kind exchange • Donate LTCG property directly to Charity

24. Additional Planning • New Grouping Election? • Review passive versus material participation for all entities and consider making new grouping elections. Regulations allow a fresh start. • Possible conversion to C Corporation? • NII does not apply to C Corporations. Highest marginal tax rate for C Corporations in now lower than highest marginal individual rate. Consider conversion to C for lower marginal rate and to avoid NII.

25. Shared Responsibility • Law of the Land • Decisions, Decisions - Play or Pay • Employers with 50 or more Full-Time Equivalents (FTE’s) • 12 month look-back for large employer determination • Companies should be evaluating cost/benefit of required coverage versus penalties. • Review FT/PT classifications • IRS Notice 2012-58 Safe Harbor • Adjust employer contributions based on income • Employee must pay less than 9.5% of W-2 • Coverage for spouse is not required • Required for eligible children under age 26

26. Virginia Legislative Update

27. VA Update • Federal Conformity • Exceptions – bonus depreciation and 100% DPAD • Income from Rehab Credits • Subtraction to the extent of any income recognized • Single factor apportionment for retail companies

28. Credits to Consider

29. Federal • Research and Development • Work Opportunity Tax Credit • New Markets Tax Credit • Energy Credits – Buildings

30. Virginia • Livable Home Tax Credit • Neighborhood Assistance Tax Credit • Research and Development • Telework Expense Tax Credit

31. Hill Watch

32. Gazing Into the Crystal Ball • Individual Tax Reform • Buffett Rule • Itemized Deduction Limitations • Corporate Tax Reform • Loopholes • Earnings Repatriation • Carried Interest • Lower Corporate Rates

33. Corporate Tax Rate Comparison

34. Michael Hanger Dixon Hughes Goodman, LLP 4510 Cox Road, Suite 200 Glen Allen, VA 23060 michael.hanger@dhgllp.com 840.282.7636