Key Income Tax Planning Ideas for 2012

1. Key Income Tax Planning Ideas for 2012 Robert S. Keebler, CPA, MST, AEP Keebler & Associates, LLP 420 S. Washington St. Green Bay, WI 54301 Phone: (920) 593-1701 E-mail: robert.keebler@keeblerandassociates.com Circular 230 Disclosure: To ensure compliance with requirements imposed by the IRS, we inform you that any U.S. federal tax advice contained in this communication, including attachments, was not written to be used and cannot be used for the purpose of (i) avoiding tax-related penalties under the Internal Revenue Code or (ii) promoting, marketing or recommending to another party any tax-related matters addressed herein.  If you would like a written opinion upon which you can rely for the purpose of avoiding penalties, please contact us.

2. Course Outline • 2012 Income Tax Overview • Income Tax Planning Opportunities in 2012

3. 2012 Income Tax Overview

4. 2012 Income Tax Overview • 2012 income tax brackets • Comparison of 2012 vs. 2013 tax rates • Impact of “Super Committee” failure

5. 2012 Income Tax Overview 2012 Income Tax Brackets • Capital Gain • 0% rate if you are in the 10% or 15% bracket • 15% rate if you are in the 25%, 28%, 33% or 35% bracket

6. 2012 Income Tax Overview Comparison of 2012 vs. 2013 Tax Rates Long-Term Capital Gains Ordinary Income *NOTE: 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 be purchased after December 31, 2000.

7. 2012 Income Tax Overview • Impact of “Super Committee” Failure on Income Taxes • Sunset of current tax law to pre-2001 tax law • Increase in ordinary income tax rates & capital gains tax rates • Increase in Social Security taxes • Conversion of qualified dividends from long-term capital gains to ordinary income • Decrease in deductible business expenditures (e.g. bonus depreciation, IRC Section 179 deduction) • Decrease in popular middle-class tax credits (e.g. education credits, child tax credit) • Phase-outs of itemized deductions and personal/dependency exemptions reinstated

8. Income Tax Planning Opportunities in 2012

9. Income Tax Planning Opportunities in 2012 • Planning Opportunities • Gain harvesting • Other income tax planning ideas

10. Income Tax Planning Opportunities in 2012 • Gain Harvesting • Sell assets with long-term capital gains in 2012 to take advantage of low 2012 rates • Repurchase same or similar assets • Sell assets whenever you would have sold them otherwise

11. Income Tax Planning Opportunities in 2012 • Gain Harvesting – Tradeoffs • On the surface, it appears that taxpayers should always harvest gains • However, harvesting gains introduces a tradeoff between lower tax rates versus the loss of tax deferral • Tax is paid at a lower rate, but it is paid sooner • Need to determine a crossover point at which selling sooner makes more sense • A way to conceptualize this would be to use a return on investment (ROI) approach

12. Income Tax Planning Opportunities in 2012 • Gain Harvesting – Example • Facts • Taxpayer owns XYZ stock that he has held for several years with a basis of $50,000 and FMV of $100,000 • Taxpayer’s tax rate on long-term capital gains is 15% in 2012 and 23.8% in 2013 • Taxpayer sells the stock in 2012, recognizing a long-term capital gain of $50,000 and paying tax of $7,500 • Taxpayer repurchases the stock the following day • The stock grows at 5% per year • Taxpayer sells the repurchased stock at some future date

13. Income Tax Planning Opportunities in 2012 • Gain Harvesting – Example • The following chart shows how the taxpayer’s ROI on the $7,500 investment varies depending on the year of the second sale:

14. Income Tax Planning Opportunities in 2012 • Gain Harvesting – When Should Gains Be Harvested? • Very short time horizon • Loss harvesting will almost always be favorable because the benefit of tax deferral is small • Very long time horizon • Loss harvesting will almost always be unfavorable because the benefit of tax deferral is large • Taxpayer in the 0% long-term capital gains bracket in 2012 • Gain harvesting will always be favorable from a tax perspective because it gives you a free basis step-up

15. Income Tax Planning Opportunities in 2012 • Gain Harvesting – When Should Gains Be Harvested? • Taxpayer plans to die with assets and pass them on to heirs with a stepped-up basis • Gain harvesting unfavorable because any gain would have been wiped out at death • Taxpayer has realized loss carryovers from prior years • Losses would be better used to offset gains in later years when long-term capital gains rates are higher

16. Income Tax Planning Opportunities in 2012 • Other Income Tax Planning Ideas • Acceleration of income into 2011 & 2012 • Sale of bonds with accrued interest • Sale/repurchase of bonds trading at a premium • Alternative investments • Oil & gas investments • Gold investments • Foreign currency investments • Index options

17. Income Tax Planning Opportunities in 2012 • Other Income Tax Planning Ideas – Acceleration of Income • Beginning 1/1/2013, ordinary income tax rates will increase to their pre-2001 levels • Consequently, taxpayers should consider accelerating certain types of ordinary income (e.g. bond interest, annuity income, traditional IRA income, compensation income) into 2011 and 2012 to the extent that they expect to be in the same tax bracket or higher in future tax years

18. Income Tax Planning Opportunities in 2012 • Other Income Tax Planning Ideas – Acceleration of Income • Example – Sale of bonds with accrued interest • As of 12/21/2012, Mark has $100,000 of accrued bond interest that will be paid on 1/3/2013. At the advice of his accountant, Mark is considering selling his bonds (at par) before the end of the 2012 tax year to take advantage of the lower income tax rates. • Assuming that Mark is currently in the 35% tax bracket for 2012 (39.6% in 2013), below is a summary of the tax savings Mark would realize by selling his bonds in 2012 and recognizing the accrued interest income.

19. Income Tax Planning Opportunities in 2012 • Other Income Tax Planning Ideas – Acceleration of Income • Example – Sale/repurchase of bonds trading at a premium • In 1993, John purchased $1,000,000 worth of ABC Corp. 11% bonds at par value (which mature on December 31, 2013). On December 31, 2012, John sold his ABC Corp. bonds at 1.05 (i.e. $1,050,000). • On the next trading day (January 2, 2013) John repurchased the same ABC Corp. bonds for $1,050,000. Under tax law, this $50,000 premium can be used to offset John’s interest income over the remaining life of the bond (i.e. one year). • Below is the net income tax savings by selling the bonds in 2012 and repurchasing them in 2013:

20. Income Tax Planning Opportunities in 2012 • Other Income Tax Planning Ideas – Alternative Investments • Oil & gas investments • Intangible drilling costs (IDCs) provide a large immediate income tax deduction (up to 85% of the initial investment) • Losses, if any, created as a result of IDCs will be ordinary (thus lowering a taxpayer’s AGI) • Must be a general partner in the first year • Possible AMT add-back issues if IDCs exceed 40% of AMTI • Depletion and other depreciation (including Section 179 expensing) provide for additional deductions during the term of the investment • Additional tax credits may be available for certain oil & gas ventures

21. Income Tax Planning Opportunities in 2012 Other Income Tax Planning Ideas – Alternative Investments • Gold investments • Generally when gold is held as coins or bullion, long-term gains are treated as “collectibles” and taxed at a 28% capital gains tax rate • However, this rule does not generally apply to gold held in mutual funds • Also, this rule does not generally apply to non-exchange-traded (i.e. OTC) options on gold • Short-term gains are treated as ordinary income • Thus, if a taxpayer is in a lower tax bracket (i.e. 10%, 15%, 25%), he/she would be better off triggering short-term gain (instead of long-term gain) • Gold futures are treated as “Section 1256 contracts”, not as “collectibles” • Accordingly, gold futures must be “marked-to-market” (i.e. the unrealized gains/loss must be recognized each tax year) • However, gains are subject to special tax treatment (i.e. 60% long-term capital gain / 40% short-term capital gain) • “Wash sale” rule does not apply to “collectibles” losses

22. Income Tax Planning Opportunities in 2012 • Other Income Tax Planning Ideas – Alternative Investments • Foreign currency transactions • Recognize ordinary income in 2010 and push ordinary losses to 2011 and later years • Avoids Section 1256 treatment • Choose currencies that do not have futures contracts • Index options • Special gains treatment on certain broad-based listed options (i.e. 60% long-term / 40% short-term) • Thus, for taxpayers in the highest marginal income tax bracket in 2011 this would result in a blended capital gains tax rate of 27.84% ([20% x 60%] + [39.6% x 40%])

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24. Circular 230 Disclosure 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.