This document provides an overview of scheduled tax changes for 2012 and 2013, including increases to income, capital gains, and Medicare tax rates. It discusses opportunities for tax planning for individuals and businesses before year-end, and notes some decisions that may be best to wait until after the election due to ongoing presidential tax proposals.

1. 2012
Year-End Tax Planning
Tegan Long, Tax Senior Manager &
Michelle VanDellen, Tax Senior
Manager
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2. The material appearing in this presentation is for informational purposes
only and is not legal or accounting advice. Communication of this
information is not intended to create, and receipt does not constitute, a
legal relationship, including, but not limited to, an accountant-client
relationship. Although these materials may have been prepared by
professionals, they should not be used as a substitute for professional
services. If legal, accounting, or other professional advice is required, the
services of a professional should be sought.
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3. WELCOME AND AGENDA
• Scheduled Tax Changes
• Tax planning opportunities for remainder of
2012 and into 2013:
 for you and your family
 for your business
• Health Care Update
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4. SCHEDULED
TAX
CHANGES
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5. SCHEDULED CHANGED TO TOP RATES
AND EXEMPTIONS
2012 2013 and Beyond
Gift tax rate 35% 55%
Estate tax rate 35% 55%
Estate tax and lifetime gift $5.12 million $1 million
exemption
Generation-skipping tax $5.12 million $1 million
exemption
Portability of estate tax Yes No
exemptions between spouses?
5

6. SCHEDULED CHANGED TO TOP RATES
AND EXEMPTIONS (CONT.)
2012 2013 and Beyond
Ordinary income 35% 43.4%*
Long-term capital gains 15% 23.8%*
Qualified dividends 15% 43.4%*
AMT exemption $74,450 for married $45,000 for married
filing jointly filing jointly
• *As currently scheduled based on the sunset of Bush tax cuts. **Top marginal rate with 3.8%
healthcare tax on net investment income with AGI over $200K (single filers) or $250K (joint filers).
Net investment income does not include certain defined income or gains attributable to qualified
business holdings in flow-through entities such as S Corporations or partnerships.
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7. MEDICARE TAX ON UNEARNED INCOME
• 3.8% Medicare contribution tax will be
assessed to individuals, trusts, and estates on
lesser of net investment income or excess MAGI
over $250,000 (MFJ) or $200,000 (single)
• Interest, dividends, annuities, royalties, capital
gains, gains from the disposal of non-business
property and passive income earned from a
business
• Tax is non-deductible by the taxpayer
• Tax years beginning after December 31, 2012
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8. MEDICARE TAX ON UNEARNED INCOME
(CONT.)
• 0.9% increase in employee portion of Medicare
Hospital Insurance (HI) FICA Tax on wages and
self-employment income
 Affects same taxpayers as 3.8% Medicare Tax
 Employers are required to withhold this tax on
wages exceeding $200,000 in a calendar year
 No change to employer portion
 Tax years beginning after December 31, 2012
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9. INCREASE IN MEDICARE TAX EXAMPLE
• Single taxpayer with:
 Net investment income of $100,000,
 Wages of $300,000, and
 MAGI of $375,000.
• HI tax = $900 ($300k - $200k = $100k * .09% = $900)
• Medicare tax = $3,800 (Lesser of $375k less $200k
= $175k or $100k. Thus, $100k * 3.8% =$3,800)
• Total additional Medicare taxes = $4,700
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10. WHAT DOES IT MEAN?
• Higher taxes… obviously
• Can be hit with both Medicare and HI tax increases
• Reasonable compensation studies will become
prevalent – less wages/SE income…
• More documentation requirements of “lesser
involved” owners to document active participation in
enterprise
• Sweet spot – active participant with reasonable
wages.
• No indexing for inflation on either taxes
10

11. OTHER SCHEDULED TAX CHANGES
• Effective January 1, 2013
 Employee portion of Social Security tax withholding
increases from 4.2% to 6.2%
 Limitation on itemized deductions and personal
exemptions
 Medical expenses limited to 10% of AGI, raised from
7.5%
 Taxpayer 65 or older remains at 7.5% (2013 – 2016)
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12. DEPRECIATION CHANGES
• Expansion and contraction of 179 expensing
 Starting in 2012, qualifying real property no longer eligible
 Section 179 property in excluded from midquater calculation
 Subject to taxable income limitation
Expense
For Tax Years beginning in… Limitation Asset Limitation
2008-2009 $250,000 $800,000
2010-2011 $500,000 $2,000,000
2012 $139,000 $560,000
2013 $25,000* $200,000*
*to be adjusted for inflation
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13. DEPRECIATION CHANGES (CONT.)
• Snapshot of bonus depreciation
 Applies to new assets only
 Includes qualifies leasehold improvements (excludes
related party leases)
 Will not cause AMT adjustment
Placed in Service Dates Bonus Percentage
January 1, 2008 – September 8, 2010 50%
September 9, 2010 – December 31, 2011 100%
January 1, 2012 – December 31, 2012 50%
January 1, 2013 and later 0%
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14. DEPRECIATION EXAMPLE - INCOME
ABC Corp has taxable income of $350,000.
Total 2012 asset purchases $150,000
Less: IRC 179 expense 139,000
Remaining basis 11,000
Less: 50% bonus depreciation 5,500
Remaining depreciable basis 5,500
MACRS: first year of 5-year property 1,100
Total tax depreciation for 2012 additions 145,600
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15. DEPRECIATION EXAMPLE - LOSS
XYZ Corp has tax loss of $100,000.
Total 2012 asset purchases $150,000
Less: IRC 179 expensing 0
Remaining basis 150,000
Less: 50% bonus depreciation 75,000
Remaining depreciable basis 75,000
MACRS: first year of 5-year property 15,000
Total tax depreciation for 2012 additions 90,000
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16. FLOW-THROUGH ENTITY PLANNING
• Entity basis
• Buy-sell agreements
• Ownership transition
• C Corp to S Corp election
• Qualified dividends
16

17. BUSINESS CREDITS
• Credit for employee health insurance expenses of
small employers
• Research and development credit
• Energy Credits
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18. PRESIDENTIAL
PROPOSALS
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19. INCOME TAX RATE PROPOSALS
Married Filing Jointly
Current Law
Income Obama Romney
(2013)
Up to $17,400 15% 10% 8%
$17,400-$60,350 15% 15% 12%
$60,351-$72,300 28% 15% 12%
$72,301-$145,900 28% 25% 20%
$145,901-$222,300 31% 28% 22.4%
$222,301-$266,100 36% 33% 26.4%
$266,101-$397,000 36% 36% 26.4%
$397,000 and above 39.6% 39.6% 28%
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20. INCOME TAX RATE PROPOSALS (CONT.)
Current Law
Obama Romney
(2013)
Dividends 39.6% 39.6% 15%
(taxed at ordinary income (no tax if AGI
rates for AGI greater than less than
$250,000) $200,000)
Long-term 20% 20% 15%, or none
capital gains
AMT Reverts to lower Permanently extend 2011 Repeal AMT
exemptions AMT exemptions, rates,
absent AMT and thresholds and index
patch for inflation
Corporations 35% 35% 25%
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21. TRANSFER TAX PROPOSAL
Current Law
Obama Romney
(2013)
Estate tax rate 55% 45% No estate tax
Estate tax exemption $1 million $3.5 million None
Gift tax exemption $1 million $1 million None
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22. WHAT TAX DECISIONS SHOULD WAIT
UNTIL AFTER THE ELECTION?
• With so much tax uncertainty, you may want to consider waiting
until after the election to make timing-related decisions about
certain income and deductible expenses:
 Taking bonuses
 Recognizing consulting or other self-employment income
 Taking retirement plan distributions (to the extent not required)
 Paying 2012 state and local income and property tax bills that
aren’t due until 2013
 Making charitable contributions
• But don’t put off your planning: by projecting your year-to-date
income and deductible expenses now, you’ll be in a better position
to act quickly whenever the tax outlook becomes more certain.
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23. ENTITY
SELECTION
PLANNING
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24. COMMON ENTITY TYPES - BENEFITS
• LLC
• Single member LLC
• “Check-the-Box” Election
• S-Corp
• C-Corp
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25. HEALTH CARE
UPDATE
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26. WHAT WE’LL COVER
• Supreme Court decision
• Insurance Exchanges
• Employer Mandate
• The Future of Employer-Provided Insurance
• Questions
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27. THE SUPREME COURT DECISION
• The Individual Mandate
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28. INDIVIDUAL MANDATE
• Legal residents must maintain minimum coverage
• Annual penalty if not insured, greater of:
 2014 - $95 or 1% of taxpayer household income
 2015 - $325 or 2% of taxpayer household income
 2016 - $695 of 2.5% of taxpayer household income
 Limited to 3 times annual flat penalty amount
• Penalty is assessed monthly for first three months and in full after that
• Household income includes income of all individuals on the taxpayers
return
• Penalty for uninsured dependent under age 18 is 50% of statutory
defined flat dollar amount
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29. COMMERCE CLAUSE
• Commerce Clause regulates activities
conducted in interstate commerce.
• Opponents of the ACA argued that the
individual mandate is an attempt by Congress
to regulate inactivity and to uphold this
provision of the ACA would grant Congress vast
new powers.
• Supreme Court agreed.
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30. IT’S NOT A TAX . . . IT IS A TAX . . .???
• The individual mandate is constitutional under
the government’s power to tax.
• But wait . . . . “For us to say that you’ve got to
take a responsibility to get health insurance is
absolutely not a tax increase.”
Barack Obama
September 20, 2009
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31. IT IS A TAX . . .
“The Affordable Care Act’s requirement that certain
individuals pay a financial penalty for not
obtaining health insurance may reasonably be
characterized as a tax. Because the Constitution
permits such a tax, it is not our role to forbid it or
to pass upon its wisdom or fairness.”
Chief Justice John Roberts
June 28, 2012
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32. THE SUPREME COURT DECISION
• The Individual Mandate
• Severability clause
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33. THE SUPREME COURT DECISION
• The Individual Mandate
• Severability Clause
• Medicaid Expansion
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34. WHAT HAPPENS NEXT?
The Majority of employers who have not evaluated
their options and run the numbers……
Were waiting for the Supreme Court….
And then they were waiting for the
election results……
….that ship has sailed!
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35. INSURANCE EXCHANGES
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36. WHAT ARE THE EXCHANGES?
SOURCE: KAISER FAMILY FOUNDATION
• State-regulated and standardized plans
• Serve primarily individuals and small businesses
(up to 100 employees)
 States may choose to include larger employers in the
future
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37. WHAT IS THE PURPOSE OF THE
EXCHANGES?
• Offer a choice of health plans
• Focus competition on price
• Provide standardized, transparent information
• Create mechanism for enrollment
• Administer subsidies
• Portability of coverage
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38. WHAT ARE THE EXCHANGES?
• States may run their own exchange or
• Run multiple exchanges or
 Each exchange covers a geographic area
• Join together to run multi-state exchanges or
• Opt out completely
 Federal government will step in to create an exchange
• WA State has created its exchange
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39. EMPLOYER SHARED RESPONSIBILITY
FEE
AKA ‘PAY OR PLAY’ PENALTY
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40. EMPLOYER PAY OR PLAY
• Applies to business with ≥ 50 full time employees)
Penalty applies if employer
 Does not offer “minimum essential coverage”
 Offers unaffordable “minimum essential coverage”
 Premium charged to employee > 9.5% of household income
 Employer pays less than 60% of premium
• Penalty applies when employee purchases a
qualified health plan (QHP) through an exchange
and is entitled to premium tax credit or cost-sharing
subsidy
40

41. EMPLOYER PAY OR PLAY
• Who qualifies?
 4 times FPL ($88,000 for family of four)
• Two situations:
 Coverage NOT offered and ONE employee obtains subsidy
in the Exchange
 Penalty of $2,000 for every FTE/year (less first 30 employees)
 Coverage offered and employee obtains a subsidy in the
Exchange
 Penalty lesser of $3,000/employee receiving subsidy or $2,000
for every FTE/year (less first 30 employees)
• Penalty is not deductible
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42. PAY OR PLAY – PENALTY FOR FAILURE TO
PROVIDE MINIMUM ESSENTIAL COVERAGE
Example 1
• In 2014, Employer A fails to offer minimum
essential coverage:
 100 FT employees
 10 receive a tax credit
• Total annual penalty
 $140,000
 (100-30) 70 employees * $2,000
• Penalty calculated on a monthly basis
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43. PAY OR PLAY – PENALTY FOR FAILURE TO
PROVIDE MINIMUM ESSENTIAL COVERAGE
Example 2
• In 2014, Employer A offers minimum essential
coverage:
 100 FT employees
 20 receive a tax credit
• Total annual penalty
 Lessor of:
 $60,000 ($3,000*20)
 $140,000 (100-30) 70 employees * $2,000
• Penalty calculated on a monthly basis
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44. PAY OR PLAY – DEFINITION OF FTE
Do you have 50 or more FTEs?
• FTE = 30 or more hours per week (130 per
month)
• Does not include full-time seasonal employees
who work less than 120 days during the year
• Employees working less than 30 hours per
week – FTE = monthly work hours / 120
44

45. PAY OR PLAY – DEFINITION OF FTE
(CONT)
• “Hours” include hours of paid time off
(vacation, holiday, sick leave, etc.)
• The following are aggregated in determining
the size of the employer:
 All employees of a “controlled group”
 All employees of any “affiliated service group”
• Leased employees are not included
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46. EMPLOYEE RAMIFICATIONS
• Significant changes to the traditional U.S.
employer-employee relationship.
 More part-time employment
 More contract and self-employment
 Low-income, low-skilled workers will be the most
affected.
46

47. EFFECT ON EMPLOYER-
PROVIDED INSURANCE
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48. ASK YOURSELF THE QUESTION?
If you could:
• stop providing employee health benefits
• give employees the money
And your employees could:
• buy their own health insurance
• with equal or better benefits
• for equal or lower premiums,
Would you do that?
48

49. WILL EMPLOYERS KEEP HEALTH PLANS?
• Initially a coin flip
• But of those saying they will
keep their plans, their top three
reasons are…
 To retain current employees
 To attract future talent
 To maintain employee satisfaction
and loyalty
What if the paradigm
shifts?
International Foundation of Employee Benefits “2012 Employer Action Survey” 49

50. QUESTIONS?
Tegan Long, CPA
Tax Senior Manager
(360) 676-1920
Tegan.Long@mossadams.com
Michelle VanDellen, CPA
Tax Senior Manager
(360) 676-1920
Michelle.vandellen@mossadams.com
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51. THANK YOU
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