The views and opinions expressed in this presentation are those of the author and presenter and do not necessarily reflect the views and opinions of the

sponsoring companies or their affiliates.

Disclosure

Neither Andrew Friedman, nor any law firm with which he may be associated, is providing legal or tax advice as to the matters discussed herein. The discussion herein is general in nature and is provided for informational purposes only. There is no guarantee as to its accuracy or completeness. It is not intended and may not be regarded as legal or tax advice, and financial advisors and other recipients of this information may not rely upon it (including for purposes of avoiding tax penalties imposed by the IRS or state and local tax authorities). Advisors should consult with their firm’s legal and tax counsel as to matters discussed herein. Clients should consult their own legal and tax counsel before entering into any investment, annuity, estate planning, or trust arrangement, and financial advisors should advise their clients to do so.

Copyright Andrew H. Friedman 2014. Printed by permission. All rights reserved.

Tax Rates – Investment IncomeFamily income Ordinary Investment Cap gain / Dividend Income Tax Rate Tax Rate

< $250K 35% max 15% max (no change)

$250K – $300K 38.8% 18.8% (3.8% surtax)

$300K - $450K 39.8% 19.8%(Pease phase-out)

> $450K 44.6% 25%

(Bush tax cuts expire)

• Many investors will feel the higher taxes on investment income for the first time on April 15, when they file their return or request and extension.

- Taxpayers already felt the effects of the tax increase on compensation and business income through higher employer withholding or estimated tax payments during 2013.

• Combine the higher tax rates with greater investment income earned in 2013 due to strong market performance, and many taxpayers will be facing severe sticker shock.

Tax Rates

• Government hits debt limit (February 7)

• Obamacare individual mandate penalties apply (March 31)

• Mid-term elections (November 4)

• Post-election – tax reform

2014 – Key Dates

• Government operations funded through September 30, 2015

• Government borrowing authority extended through March 15, 2015

Fiscal Compromise (Oct 2013-Feb 2014)

• Change the growth of entitlement spending

• Bring in additional tax revenue or close tax loopholes

• Meaningfully reduce the deficit

• Change the trajectory or amount of outstanding federal debt

• Replace the bulk of the sequester cuts

What the Compromise Does Not Do

Chart Title

Mandatory Programs(Entitlements) $2,032 (59%)

Interest$221 (6%)

Defense$625 (18%)

Domestic$576 (17%)

Source: The Budget and Economic Outlook: Fiscal Years 2014 to 2024, Congressional Budget Office (Feb 2014)

2013 Federal Spending ($3.45T)(in billions of dollars)

Federal Debt Projections

Federal Debt Projections

• A number of tax provisions expire at the end of every year or two unless Congress renews them. 

- Example: IRA / charitable contribution provision permits tax free contribution of up to $100K from IRA to charity.

• “Extenders” bill would extend these provisions retroactively to January 1, 2014. Possible “pay for” provisions:

- Stretch IRAs- Sophisticated estate planning techniques- Extension of sequestration cuts

Remaining Open Item - Extenders

• Over 1/2 of Americans believe health care reform includes a government-run health plan. False

• Over 1/3 of Americans believe health care reform allows the government to decide whether Medicare recipients get life-saving treatment. False

True: The Affordable Care Act seeks to ensure that every American has health insurance.

Sources: Washington Post (November 30, 2011); Washington Post (August 29, 2013)

Health Care Reform (Affordable Care Act)

• Employer mandate: Employers must provide health insurance to employees or pay a penalty for failing to do so (“pay or play”).

- Mandate does not require employer to provide family coverage.

- Employer can require employee to contribute to cost of insurance up to 9.5% of income.

- Administration has announced that IRS will not impose penalty on large businesses before January 2015 and on medium businesses (50-99 employees) before January 2016.

Sources: Affordable Care Act (2009); U.S. Treasury Department Fact Sheet, Final Regulations Implementing Employer Shared Responsibility Under the Affordable Care Act (ACA) for 2015 (Feb 2014)

Health Care Reform - Elements

• Individual mandate: Every individual must have health insurance. Individuals who don’t have health insurance are subject to a penalty.

- Individuals have until March 31, 2014 to acquire insurance before penalty applies.

• Pre-existing conditions: Insurers may not deny coverage or charge higher premiums based on pre-existing medical conditions.

Health Care Reform - Elements

• Subsidies: Families with income between $24K and $94K receive a subsidy to help pay for insurance they purchase on the exchange.

- If employer provides insurance, employee cannot receive subsidies to buy insurance on the exchanges, including for family coverage.

- Families with income < $24K will get free insurance under Medicaid if their state chooses to expand Medicaid coverage. Families with < 24K income receive no subsidy to buy insurance in states that do not expand Medicaid.

Health Care Reform - Elements

• Exception for businesses with fewer than 50 employees.

• Exception for employees who work fewer than 30 hours per week.

• Penalty for failure to provide insurance is only about $2000 per year per employee. Applies to large businesses beginning January 2015 and to businesses with 50-99 employees beginning January 2016.

Health Care Reform –Avoiding the Employer Mandate

• Healthy individuals may decide to pay penalty rather than purchase insurance.

- Penalty is $2085 per family or 2.5% of taxable income, whichever is greater.

- Penalty can be collected only by a reduction in a tax refund. So no penalty for people who pay no income tax.

.

Health Care Reform –Avoiding the Individual Mandate

• ACA projected to shrink number of uninsureds over ten years from 57M to 31M.

• If employers don’t provide insurance and healthy individuals choose not to purchase insurance, people who have insurance are those more likely to be sick, resulting in higher premiums overall.

• Individuals who do not receive coverage through employers, Medicare, or Medicaid, must decide whether to purchase coverage on the exchanges by March 2014.

Sources: The Budget and Economic Outlook: Fiscal Years 2014 to 2024, Congressional Budget Office (Feb 2014), Consultant Says Employer Mandate Delay Could Mean Sicker Enrollees in Exchanges, Bloomberg BNA (July 3, 2013).

Health Care Reform – Results

2014 Midterm Elections

• State legislatures reset House districts in wake of 2010 census.

- Republicans controlled most state legislatures after 2010 election.

• Most House incumbents worry more about primaries than general election. Primary reason for polarization in Washington.

2014 Elections – House Redistricting

• Democrats need to pick up 17 seats for majority.

• Potential pick-ups (based on 2012 election):

17 Republicans hold seats in districts Obama won

9 Democrats hold seats in districts Romney won

• Only 9 races are considered toss ups.

• President’s party has never gained as many as 17 seats in a mid-term election.

Wall Street Journal (July 28, 2013)

2014 Elections - House

• Republicans must gain six seats for majority.

• Up for election:

- 21 Democrats (5 committee chairs retiring)

- 14 Republicans

2014 Elections - Senate

• Good chance of Republican pick-ups: 3 (Montana, South Dakota, West Virginia)

• Possible Republican pick-ups (Romney won in ‘12): 4 (Alaska, Arkansas, Louisiana, North Carolina)

• Outside chance of Republican pick-ups: 3 (Iowa, Michigan, Minnesota)

• Possible but unlikely Democrat pick-ups: 2 (Kentucky, Georgia)

2014 Elections - Senate

2014 Elections

“Republicans have not missed an opportunity to miss an opportunity.”

Sen. Michael Bennett (D-Co.)

• Compromisers are willing to moderate – particularly on social issues – to win Independent and minority votes.

• Ideologues would rather nominate a “true conservative” who will fight rather than someone who will compromise core beliefs on moral issues, even if it means holding only the House to block legislation.

2014 Elections – Republican Split:Ideologues vs. Moderates (Compromisers)

• Republicans keep House. Obama finishes out term.

• Republican ability to take over Senate depends on candidates who win nominations.

• Neither party gets 67 votes in Senate to overcome presidential veto, or 60 votes to overcome filibuster.

2014 Elections – Split Government Continues

• Reduce tax rates

• Eliminate “loopholes”

• Simplify the tax code

• Eliminate the alternative minimum tax

Tax Reform

• Revenue neutral or generate new revenue

• Favorable to the middle class rather than the wealthy

- Eliminate lower rates for dividends and capital gains?

- Eliminate or cap deductions and exemptions

Tax Reform – Stumbling Blocks

• Employer-provided health insurance

• Tax-exempt interest on bonds

• Life insurance and annuity inside build-up

• Pension plan contributions

• Charitable contributions

• Mortgage interest deduction

Tax Reform – Tax Expenditures

Government Funding and Debt Limit

Investment Planning

• Markets likely to be volatile as deadlines approach, perhaps a buying opportunity.

• Give increased attention to “tax drag” on investments.

- Harvesting losses

- Buy-and-hold strategies

- Municipal bonds, master limited partnerships, REITs

- Tax-efficient mutual funds

- Other professionally managed tax-advantaged strategies

• Consider investments that provide tax deferral and retirement income.

To stay current:

TheWashingtonUpdate.com

-- from Andy Friedman

@TheWashUpdate

The views and opinions expressed in this presentation are those of the author and presenter and do not necessarily reflect the views and opinions of the

sponsoring companies or their affiliates.