What the New Tax Laws Mean to You

What the New Tax Laws Mean to You The American Taxpayer Relief Act of 2012 and other 2013 tax provisions January 2013 White Paper

AN OVERVIEW OF THE AMERICAN TAXPAYER RELIEF ACT OF 2012 AND OTHER 2013 TAX PROVISIONS: Part 1: The good news: How you ll benefit from the new tax laws The tax law changes: Extended the current income, long-term capital gains and qualified dividend tax rates for most taxpayers Permanently extended the inflation-adjusted $5 million exclusion amount for the federal estate, gift and generation-skipping transfer tax, as well as the spousetransfer portability provision Extended the IRA Charitable Rollover provision for this year Extended the enhanced college education tax breaks Granted one-year extensions for popular business tax breaks Patched the AMT by retroactively increasing the exemption amount for last year and indexing for inflation the amounts going forward Part 2: What you need to know about the new tax laws if you re a higher-income taxpayer The tax law changes: Added a maximum 39.6% marginal income tax rate for singles with taxable income above $400,000 and married couples with income above $450,000 Increased the tax rate on long-term capital gains and qualified dividends to 20% for singles with taxable income above $400,000 and married couples with income above $450,000 For estates over the $5.25 million exclusion amount, increased the current 35% maximum estate and gift tax rate to 40% Reinstated the itemized deduction limitation and personal exemption phase-outs for singles with adjusted gross income above $250,000 and married couples with income above $300,000 Established a 3.8% Unearned Income Medicare Contribution Tax and added a 0.9% Medicare tax on earned income for singles with income above $200,000 and married couples with income above $250,000 Copyright 2013 Mercer Advisors Inc. All rights reserved. 2

TABLE OF CONTENTS Part 1: The good news: How you ll benefit from the new tax laws 1A: Regardless of how much you earn, you ll benefit from the extension of the relatively low federal income tax rates... 4 1B: Plan for less take-home pay with the end of the payroll tax holiday... 4 1C: If your income is below the $400,000/$450,000 thresholds, capital gains & dividends will continue to be taxed at 15%... 5 1D: The new laws bring some certainty to your gift & estate planning by permanently extending the $5M exclusion... 5 1E: If you re married, the new tax law extends the spouse-transfer portability provision... 6 1F: If you re saving for retirement, you can save even more with the increased 2013 cost-of-living increases... 6 1G: If you re an age 70½+ philanthropist, you can make a tax-free gift from your IRA to a qualifying charity in 2013... 7 1H: If you have a child in college and meet the income limits, you can claim the AOTC for up to $2,500... 7 1I: If you have a child in college and meet the income limits, you can take the Higher Education Tuition Deduction... 7 1J: If you re saving for your child s education and meet the income limits, you can accumulate tax-free earnings... 8 1K: If you have a child under age 17 and meet the income limits, you can take the $1,000 Child Tax Credit... 8 1L: If you re a business owner, you ll still benefit from the one-year extension of popular business tax provisions... 8 1M: If you were getting caught by the AMT, the Taxpayer Relief Act patches the tax for 2012 and subsequent years... 8 Part 2: What you need to know about the new tax laws if you re a higher-income taxpayer 2A: If you re a high-income earner, prepare for the new top marginal 39.6% federal income tax rate... 9 2B: If you re a high-income earner, get the facts about the reinstated deduction limitation and exemption phase-outs... 9 2C: If you re a higher-income taxpayer, assess the impact of the new maximum capital gains and dividend rates...10 2D: If you re a high-income earner, get the details about the 3.8% Medicare tax on unearned net investment income...10 2E: If you re a higher-income earner, also get the details about the 0.9% increase in the Medicare tax...10 Copyright 2013 Mercer Advisors Inc. All rights reserved. 3

PART 1: THE GOOD NEWS: HOW YOU LL BENEFIT FROM THE NEW TAX LAWS 1A: Regardless of how much you earn, you ll benefit from the extension of the relatively low federal income tax rates. The American Taxpayer Relief Act of 2012 extends the current income tax rates for most taxpayers. That means that most earners will continue to pay marginal tax rates in one of the same six brackets they have over the past decade. If you re single with taxable income above $400,000, or married filing jointly with income above $450,000, the new law added an additional top 39.6% rate. However, since the rate is marginal and only assessed on additional income above the bracket thresholds, you ll still benefit from the extension of all the lower rates. Also favorably, tax brackets are based on your taxable income. So the amount of your income subject to tax isn t your adjusted gross income it s the lower amount calculated after your allowable deductions. Filing status 2013 Taxable income Marginal income tax If you re single (and not a surviving spouse or head of household) $0 to $8,925 10% $8,925 to $36,250 $892.50 plus 15% of excess over $8,925 $36,250 to $87,850 $4,991.25 plus 25% of excess over $36,250 $87,850 to $183,250 $17,891.25 plus 28% of excess over $87,850 $183,250 to $398,350 $44,603.25 plus 33% of excess over $183,250 $398,350 to $400,000 $115,586.25 plus 35% of excess over $398,350 Over $400,000 $116,163.75 plus 39.6% of excess over $400,000 Filing status 2013 Taxable income Marginal income tax If you re married and file a joint tax return $0 to $17,850 10% $17,850 to $72,500 $1,785 plus 15% of excess over $17,850 $72,500 to $146,400 $9,982.50 plus 25% of excess over $72,500 $146,400 to $223,050 $28,457.50 plus 28% of excess over $146,400 $223,050 to $398,350 $49,919.50 plus 33% of excess over $223,050 $398,350 to $450,000 $107,768.50 plus 35% of excess over $398,350 Over $450,000 $125,846 plus 39.6% of excess over $450,000 1B: Plan for less take-home pay with the end of the payroll tax holiday If you re working, in contrast to the favorable new tax law for most taxpayers, your paycheck will shrink this year with the scheduled expiration of the so-called payroll tax holiday. The recession-induced payroll tax holiday gave wage earners and the self-employed a temporary two-year 2% reduction in the employee portion of the Social Security tax. In 2012 the Social Security tax was levied on earned income up to $110,100. So if you earned this maximum, you saved $2,202 in taxes last year. Check your W-4: Use this as an opportunity to review your withholding allowances to make sure that you re not having too much or too little withheld from your paycheck. Copyright 2013 Mercer Advisors Inc. All rights reserved. 4

1C: If your income is below the $400,000/$450,000 thresholds, capital gains & dividends will continue to be taxed at 15% If you re single and earn less than $400,000, or married and earn less than $450,000, you ll continue to benefit from the extension of the preferential 15% tax rate* for long-term capital gains and qualified dividend income. If your income exceeds these thresholds, you ll be subject to the new 20% top rate.** *If you, or members of your family, have taxable income below the top of the 15% tax bracket in 2013, $72,500 for joint filers and $36,250 for singles capital gains and qualified dividends continue to escape taxation. ** Qualified dividends, typically distributed by stocks and stock mutual funds, are a special type of ordinary dividend that receives preferential tax treatment. As defined by the IRS, qualified dividends are ordinary dividends that are paid by a U.S. corporation or qualified foreign corporation and meet the specified holding period. Note that qualified dividends do not include interest paid on deposits in mutual savings banks, savings and loans, and credit unions. Those distributions, even if they are commonly called dividends, are correctly reported as interest income. Filing status 2013 Taxable income LT capital gains & qualified dividends tax rate If you re single (and not a surviving spouse or head of household) $0 to $8,925 0% $8,925 to $36,250 0% $36,250 to $87,850 15% $87,850 to $183,250 15% $183,250 to $398,350 15% $398,350 to $400,000 15% Over $400,000 20% Filing status 2013 Taxable income LT capital gains & qualified dividends tax rate If you re married and file a joint tax return $0 to $17,850 0% $17,850 to $72,500 0% $72,500 to $146,400 15% $146,400 to $223,050 15% $223,050 to $398,350 15% $398,350 to $450,000 15% Over $450,000 20% 1D: The new laws bring some certainty to your gift & estate planning by permanently extending the $5M exclusion Thanks to the Taxpayer Relief Act of 2012, for the first time there is a permanent, relatively high, inflation-adjusted portable exemption amount that excludes most Americans from federal estate and gift taxes. The new tax law permanently extends the inflation-indexed $5 million exclusion amounts for the federal estate, gift, and generation-skipping transfer taxes. If your estate will exceed the exclusion amount, the legislation increased the current 35% maximum rate to 40%. The estate and gift taxes remained unified, offering you the opportunity to either use up to your entire exclusion amount to make gifts during your lifetime, or through bequests upon your death. Gift and estate planning 2013 estate and gift tax exclusion amount $5.25 million Maximum estate and gift tax rate 40% 2013 gift tax annual exclusion $14,000 Copyright 2013 Mercer Advisors Inc. All rights reserved. 5

No sunsetting: The estate and gift tax amounts and rates are not scheduled to sunset, as with recent past legislation. So except for inflation adjustments, the amounts won t change until Congress passes new tax law. 1E: If you re married, the new tax law extends the spouse-transfer portability provision The Taxpayer Relief Act also makes permanent the two-year-old portability provision, which allows surviving spouses to apply their deceased spouses unused exclusion to their own transfers. This means you can benefit from the full $10 million exclusion even without creating complex trusts. (Remember though, you may still need these vehicles for asset protection and other critical estate planning needs.) High priority update your estate plans: Even if the estate tax is no longer a worry for you, it s as important as ever to review and update your estate plans and documents given your personal and financial needs and all the related changes. 1F: If you re saving for retirement, you can save even more with the increased 2013 cost-of-living increases Unrelated to the new tax law, the scheduled cost-of-living adjustments kicked in on January 1st of this year. So if you re saving for retirement, you can sock away even more. The limits on contributions to IRAs and employer-sponsored retirement plans increased by $500. If you previously haven t qualified to contribute to a Roth IRA to benefit from the tax-free earnings, check out the new limits to see if you now make the cut off. 2013 IRA rules Maximum contributions Roth and traditional IRA maximum contribution $5,500 Roth and traditional IRA maximum contribution if you re 50+ $6,500 MAGI* phase-out ranges for Roth IRA contributions: Married filing jointly Single and heads of households $178,000 to $188,000 $112,000 to $127,000 2013 Retirement plans rules Maximum contributions 401(k), 403(b), certain 457 plans Catch-up contribution if you re age 50+ $17,500 $5,500 SEP-IRA $51,000 SIMPLE IRA Catch-up contribution if you re age 50+ Defined contribution plan overall deferral limit Employer + employee combined *Modified adjusted gross income $12,000 $2,500 $51,000 Copyright 2013 Mercer Advisors Inc. All rights reserved. 6

1G: If you re an age 70½+ philanthropist, you can make a tax-free gift from your IRA to a qualifying charity in 2013 The popular IRA Charitable Rollover provision is back for this year only. As part of the new tax law, this provision allows you to make a tax-free distribution from your traditional or Roth IRA directly to a qualifying charity if you re age 70½ or older. Since the law didn t pass in time for your 2012 planning, it included two special rules: You may elect to treat a qualified charitable distribution you make in January of this year as having been made on December 31, 2012. Likewise, if you took a required minimum distribution in December 2012, you can treat it as a charitable distribution if you transfer it to a charity by January 31st of this year. Act now to gift up to $100,000 this year: Unless the charitable rollover provision is extended, you only have this year to use this opportunity to exclude up to $100,000 of your IRA distribution from your gross income. You can t take a deduction for the gift, but since the gift isn t included in your taxable income, it can reduce your adjusted gross income to minimize Medicare premiums and taxes on Social Security benefits. At the same time, you can count the gift as part of your annual IRA required minimum distribution. 1H: If you have a child in college and meet the income limits, you can claim the AOTC for up to $2,500 The Taxpayer Relief Act extends the maximum $2,500 per student American Opportunity Tax Credit (AOTC) for another five years. The AOTC is an enhanced temporary version of the Hope Education Tax Credit. The AOTC is more generous than the Hope Credit, offering a tax credit for qualified tuition and related expenses during a student s first four years of postsecondary education. American Opportunity Tax Credit income eligibility If your child is in college Modified adjusted gross income phase-outs Single taxpayer Between $80,000 and $90,000 Married filing jointly Between $160,000 and $180,000 1I: If you have a child in college and meet the income limits, you can take the Higher Education Tuition Deduction The new tax law also extends for this year, and retroactively to last year, the Higher Education Tuition Deduction, an above-the-line deduction for qualified tuition and related expenses. If you meet the income limits, you can claim this deduction only if you don t claim the American Opportunity Tax Credit in the same year. Higher Education Tuition Deduction income eligibility If your child is in college Modified adjusted gross income phase-outs for full $4,000 deduction Single taxpayer Below $65,000 Below $80,000 Married filing jointly Below $130,000 Below $160,000 Modified adjusted gross income phase-outs for partial $2,000 deduction Copyright 2013 Mercer Advisors Inc. All rights reserved. 7

1J: If you re saving for your child s education and meet the income limits, you can accumulate tax-free earnings The Taxpayer Relief Act permanently extends the enhancements to Coverdell Education Savings Accounts, including the $2,000 maximum contribution, as well as continues to allow elementary, secondary, and post-secondary school expenses as qualified expenditures. Coverdell Education Savings Account income eligibility If your child is under age 18 Modified adjusted gross income phase-outs for full $2,000 deduction Single taxpayer Below $95,000 Below $110,000 Married filing jointly Below $190,000 Below $220,000 Modified adjusted gross income phase-outs for partial deduction 1K: If you have a child under age 17 and meet the income limits, you can take the $1,000 Child Tax Credit The new tax law extends permanently the $1,000 Child Tax Credit and its recent enhancements. So if you have a qualifying child and meet the income caps, you can continue to claim the credit of $1,000 per child. Child Tax Credit income eligibility If your child is under age 17 Modified adjusted gross income* Single taxpayer Less than $75,000 Married filing jointly Less than $110,000 *The credit is reduced by $50 for each $1,000, or fraction thereof, of modified adjusted gross income above these threshold amounts 1L: If you re a business owner, you ll still benefit from the one-year extension of popular business tax provisions Lawmakers extended through 2013 the temporary first-use bonus depreciation rules, which allow businesses to write off 50% of the cost of qualifying asset purchases. The new tax legislation also extended the popular enhanced Code Section 179 small business expensing provision through this year. As a viable alternative to the bonus depreciation provision, especially for small businesses, the Code Section 179 expensing provision qualifies property that is either new or used. 1M: If you were getting caught by the AMT, the Taxpayer Relief Act patches the tax for 2012 and subsequent years The Taxpayer Relief Act extended Alternative Minimum Tax (AMT) relief, retroactively increasing the exemption amounts for last year and indexing for inflation the amounts going forward. The new law also allows nonrefundable personal credits to the full amount of your regular tax and AMT. The AMT is a separate method of determining income tax designed to ensure that taxpayers don t completely avoid income tax through the use of deductions, exemptions, losses, and credits. 2012 AMT exemption amounts 2013 AMT exemption amounts Single taxpayer $50,600 Single taxpayer $51,900 Married filing jointly $78,750 Married filing jointly $80,800 Copyright 2013 Mercer Advisors Inc. All rights reserved. 8

PART 2: WHAT YOU NEED TO KNOW ABOUT THE NEW TAX LAWS IF YOU RE A HIGHER-INCOME TAXPAYER 2A: If you re a high-income earner, prepare for the new top marginal 39.6% federal income tax rate The Taxpayer Relief Act added an additional top 39.6% income tax rate if you re single with income that exceeds $400,000, or married filing jointly with income above $450,000. However, since the rate is marginal and only assessed on additional income above the bracket thresholds, you ll still benefit from the extension of all the lower rates. Moreover, these threshold amounts will be indexed for inflation each year. When your income reaches the 39.6% bracket, any additional income will be taxed at that higher rate. However, the income below that level is still taxed at the lower rates and any incremental income won t affect the tax you pay on all your other income. For example, a single person with 2013 taxable income of $401,000 will owe $46 more due to the 4.6% hike to the 39.6% tax bracket. The new law retains taxable income for threshold amounts. So the amount of your income subject to tax isn t your adjusted gross income it s the lower amount calculated after your allowable deductions. 2B: If you re a high-income earner, get the facts about the reinstated deduction limitation and exemption phase-outs The itemized deduction limitation reduces, by up to 80%, the total amount of your otherwise allowable deductions by 3% of the amount your adjusted gross income exceeds the threshold. However, medical expenses, investment interest, and other specified items are excluded. Itemized deduction limitations If you re single (and not a surviving spouse or head of household) $250,000 If you re married and file a joint tax return $300,000 2013 gift tax annual exclusion $14,000 Adjusted gross income Under the personal exemption phase-out provisions, the total amount of exemptions you can claim is reduced by 2% for each $2,500 (or portion thereof) that exceeds the threshold level. For taxable years beginning in 2013, the personal exemption amount is $3,900. Personal exemption provisions AGI* beginning of phase-out AGI* completed phase-out If you re single (and not a surviving spouse or head of household) If you re married and file a joint tax return *Adjusted gross income $250,000 $372,500 $300,000 $422,500 Copyright 2013 Mercer Advisors Inc. All rights reserved. 9

2C: If you re a higher-income taxpayer, assess the impact of the new maximum capital gains and dividend rates If you re single and earn more than $400,000, or married and earn more than $450,000, the new tax law increases the maximum tax rates for long-term capital gains and qualified dividend income to 20%. 2D: If you re a high-income earner, get the details about the 3.8% Medicare tax on unearned net investment income If you re single with income exceeding $200,000, or married filing jointly with income above $250,000, the new 3.8% Unearned Income Medicare Contribution Tax is figured on either your modified adjusted gross income above the threshold, or your net investment income whichever is less. Interest, dividends, and capital gains both short- and long-term count as net investment income. Interest from tax-exempt municipal bonds and distributions from IRAs and qualified retirement plans don t count as net investment income. If your income exceeds the thresholds, the effective top rate for net capital gains is therefore 23.8% for long-term gains and 43.4% for short-term gains. The bottom line be a tax-efficient investor: Since the threshold amounts for the Medicare Contribution Tax aren t indexed for inflation and the tax is assessed on all earnings with no cap, it s more important than ever to be a tax-efficient investor. 2E: If you re a higher-income earner, also get the details about the 0.9% increase in the Medicare tax If you re single with income exceeding $200,000, or married filing jointly with income above $250,000, 2013 also brings an additional 0.9% Medicare tax on earned income, which starts above the same thresholds for the Medicare Contribution Tax. Note however, that the tax is graduated. So if your income exceeds the threshold, you ll owe the standard 1.45% on wages up to that level, and only be assessed the extra 0.9% to total 2.35% on the additional income. Sources: Internal Revenue Service, The CCH Group. Mercer Global Advisors Inc. is registered with the Securities and Exchange Commission and delivers all investment-related services. Mercer Advisors Inc. is the parent company of Mercer Global Advisors Inc. and is not involved with investment services. Copyright 2013 Mercer Advisors Inc. All rights reserved. 10