PAM Fall Newsletter

Fall 2012

A Thelma & Louise Moment?

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he 1991 Oscar winning film Thelma & Louise (Starring Geena Davis, Susan Sarandon, and Brad Pitt) ends powerfully when Thelma and Louise choose to drive their 1966 Thunderbird convertible off a cliff into the Grand Canyon rather than surrender to law officers. Their bleak alternative was life in prison for the murders they had committed during their wild road trip across the Mountain states. Today the iconic image of that car going over the cliff seems applicable to the imminent fiscal consequences arriving this January thanks to the feckless Washington establishment. Financial commentators call the consequences the “fiscal cliff ”.

We will outline some of the key facets of the fiscal cliff in the following paragraphs. Then the articles by Rachel Ayres, John Eubanks, and Bobby Futch will address some specific tax planning strategies which might prove useful to our readers.

The Fiscal Cliff Fed Chairman Ben Bernanke coined the phrase “fiscal cliff ” in his testimony to Congress in February 2012. He was referring to the large Federal spending cuts (about $110 billion) and even more massive tax increases ($399 billion) mandated by the Budget Control Act of 2011.

That Federal statute ended the so-called “debt ceiling crisis” which had brought the U.S. Treasury to the brink of default in the summer of 2011. A critical provision of that statute was the creation of the Joint Select Committee on Deficit Reduction which was supposed to produce a deficit reduction plan by November 2011. It failed to do so thereby triggering automatic tax and spending provisions as of January 1, 2013.

The Act requires across-the-board spending cuts (“sequestration”) split 50-50 between defense spending and discretionary nondefense spending. Not surprisingly, Social Security, Federal pensions, and veterans’ benefits will be exempted from the cuts.

On the tax side the Bush tax cuts will expire ($221 billion) as will the 2% payroll tax cut on Social Security contributions ($95 billion). In addition Obamacare taxes will kick in ($18 billion) bringing the estimated tax increases to $399 billion in 2013.

Although the top income brackets will bear the brunt of the tax increases, the White House acknowledges that a family of four earning between $50,000 and $85,000 will University of Tennessee pay an additional $2,200 in – Chattanooga. He and Federal taxes. his wife, Angie, are both Many economists from Chattanooga and we predict the combination welcome them to the Patton of higher taxes and lower government spending will Albertson & Miller family. crash the economy next

Welcome Ricky Supan!

We are pleased to announce that Ricky Supan will join our firm on November 1, 2012 and be located in our new Chattanooga office.

Ricky has been a portfolio manager and investment strategist with SunTrust Bank in Chattanooga, Tennessee for the past 12 years. His experience in providing customized investment strategies and solutions to high net worth clients will be a valuable addition to our firm and we are proud to have him on our team. Ricky received his undergraduate degree and his Master’s degree of Business Administration from The

3540 Clemmons Rd., Suite 106 Clemmons, NC 27012

Bill Miller

Patton Albertson & Miller, LLC

year.

The Congressional Budget Office estimates that real domestic product (GDP) will contract ½% and that the unemployment rate could climb back over 9%. On a positive note, the CBO sees the annual Federal deficit declining from $1.1 trillion to about $600 billion in 2013.

Our Perspective First, we think sequestering $110 billion is a step in the right direction.

Spending cuts will release resources back to the private sector which presumably does a better job allocating resources to the most urgent consumer needs than does government. Behavioral finance supports the assertion that people are much more thoughtful spending their own money than they are spending other people’s money. Unfortunately the sequestration mandates acrossthe-board spending cuts rather than targeted cuts to the least essential spending. Some Defense Department officials believe sequestration will be especially disruptive to key defense programs.

Second, the impending increases in marginal tax rates on wages, investment Thelma continues on page 4

2013 Healthcare Taxes – How to Prepare

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ongress passed President Obama’s Patient Protection and Affordable Care Act in March 2010, but many of the tax provisions do not kick in until January 2013. While the healthcare related changes in this plan are far-reaching and complex, the tax consequences of the new plan are fairly straightforward.

The new healthcare tax provisions for 2013 place a 3.8% tax on certain individual and John Eubanks married taxpayers as well as Patton Albertson & Miller, LLC on trusts and estates. The new tax will be based on taxpayers’ Modified Adjusted Gross Income (“MAGI”) as follows: Married Filing Jointly

$250,000

Individuals

$200,000

Married Filing Separate

$125,000

Trusts & Estates

$12,000

MAGI for this purpose is simply a taxpayer’s Adjusted Gross Income plus any foreign income. Taxpayers with incomes below these thresholds will not be affected by the new tax, but taxpayers earning above these thresholds will owe an additional 3.8% tax on investment income. Just being over the threshold, however, does not mean a taxpayer’s entire income will then be subject to the tax. Instead, the tax will apply to the lesser of (1) net-investment income or (2) the amount of MAGI exceeding the threshold amount.

For purposes of the new tax, investment income is defined as: 1) Taxable interest, dividends, and capital gains (short and long-term) 2) Annuities (but not those held in IRAs or employer sponsored plans) 3) Royalty income 4) Passive rental income 5) Other passive activity income In addition, a 0.9% Medicare surtax will apply to wages and self-employed income over $200,000 for single taxpayers and over $250,000 for married couples.

Given these taxes will take effect on January 1, 2013, what can taxpayers who are subject to these provisions do? Historically, it has often made sense to defer gains into future years but take losses in the current year in order to reduce taxes. This year many people should consider doing the reverse: selling positions with gains to pay the capital gains tax while it is still at 15%, as opposed to 18.8% or higher next year.

Taxpayers should review their bond portfolios to determine if more tax exempt bonds make sense in light of the exemption of tax free interest from the calculation of MAGI. Roth conversions will likely be another tax planning opportunity to take advantage of in 2012. By converting a traditional IRA to a Roth IRA this year, taxpayers will pay income taxes on the IRA while tax rates are still low, so taxes will not be owed again on those funds at any point in the future.

After the elections in early November, we may have a clearer sense of direction. The November to December window will be the last opportunity to take advantage of some of these tax planning strategies. Since everyone’s situation is different, it is always a good idea to talk with your CPA or tax advisor about the opportunities that may be beneficial to you.

John Eubanks, CFP®

Reducing Georgia Income Taxes through Tax Credits

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any tax authorities make a variety of tax credits available to taxpayers.

While our readers may already be aware of some federal tax credits such as the Child Tax Credit, the Earned Income Tax Credit as well as others, the state of Georgia offers income tax credits of its own. Three major state tax credits are worthy of consideration.

Education Expense Credit Bobby Futch In 2008, Georgia passed the Education Expense Credit Patton Albertson & Miller, LLC Act, creating Georgia GOAL Scholarship Program, Inc. This program allows Georgia taxpayers (individual, corporate or other business entities) to fund a scholarship program at one of 119 participating Pre K–12 schools across the state (a list of the participating schools can be located on-line at http://www. goalscholarship.org/participating_schools).

The taxpayer receives a dollar-for-dollar state tax credit. For example, a $500 GOAL credit will put $500 into the chosen scholarship fund and reduce the state income tax liability by $500. Single filers are permitted to purchase up to $1,000 worth

of tax credits while joint filers are allowed up to $2,500. Georgia only sells $51.5 million worth of these credits per year on a “first come, first serve” basis, and there is no transaction cost for their purchase. As of today, the state has already sold all credits for the 2012 tax year; however, GOAL will begin taking applications for the 2013 tax year on January 1. Additionally, the money spent purchasing GOAL tax credits can be used as a charitable deduction on the taxpayer’s federal return.

Entertainment Industry Investment Credit Many of our middle Georgia clients may have noticed a flurry of local activity in the movie industry recently. Due to Georgia’s Entertainment Industry Investment Act, many production crews are coming to Georgia to film and produce their motion pictures. The Act allows up to 30% in state tax credits for companies that spend more than $500,000 in the production or post-production of their films. Broderick Johnson, producer of “The Blind Side,” noted, “The magnitude of Georgia’s tax break is one of the best, if not the best in the country.”

Why is this good news for individual tax payers? If a film company has little or no Georgia tax liability, it can sell these tax credits to the public. Filers with a Georgia tax liability can purchase $1.00 of income tax credit for $0.87, a savings of 13%. Please note the 13 cent difference between the credit purchase price and the credit value against the state income tax liability is treated as a capital gain. If the credit is held for more than one year, the Reducing continues on page 3

3540 Clemmons Rd., Suite 106 Clemmons, NC 27012

2012 Gifting Opportunities: What Action Should You Take?

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he Federal estate tax can inflict the most significant reduction of wealth transferred to your heirs, yet it remains one of the least understood taxes on the books. Currently, you can transfer up to $5,120,000 tax free either during life or at death. Any amount over that limit is taxed at 35%. Unless Congress acts before yearend, the $5,120,000 “unified credit” will revert to $1,000,000 per person at a maximum rate of 55%. This will affect far more taxable estates and in a sharply more punitive way. This article will help you think through what action you may need to take before year-end.

Keep in mind two key points about the estate tax. 1) There is an unlimited marital deduction. This means at your death, anything that is left to your spouse is not subject to estate tax. This does not, however, exempt the assets from being included in your spouse’s estate at his/her death. 2) A beneficiary is not taxed at the federal level for receiving an inheritance.

“What can people do to reduce the size of their estate tax?” The simple answer is to give assets away, and this year is a great time to do that. In addition to the lifetime gift limit of $5,120,000, tax law currently permits you an annual gift tax exclusion of $13,000 per person. This means you can give $13,000 tax free to as many people as you choose, and it will not reduce your unified credit.

Important Considerations 1) Deciding how much to gift. The first place to start is assessing your own financial needs before you give assets away. Be conservative in your assumptions about income requirements and do not let estate tax minimization trump a realistic evaluation of your overall financial condition.

2) Picking the best assets to gift. Cash and marketable securities are easy to gift, but that does not always make them the best assets to give away. Non-liquid assets can make great gifts for tax purposes. With real estate values depressed, gifting away such assets now removes any future appreciation from your estate. Similarly, it might make sense to gift a portion of a closely held business, although operating control issues must certainly be addressed.

3) Assessing the impact on recipients. From an estate tax perspective, gifting now may be a great strategy, but Reducing continued from page 2 difference will be treated as a long-term capital gain when the credit is ultimately used to offset the income tax liability. If you have current capital losses (or a loss carry-forward) the gain will be offset by the loss. In addition, this is a tax preference item for clients with AMT issues as the credits are “add backs” in the AMT calculation.

Currently there is no limit to the number of credits you can purchase and there is no transaction cost for their purchase.

Taxpayers are able to purchase these credits at any time, and “bank” them for future use up to five years. The purchase process, however, generally takes up to two months because you are required to purchase these credits through a broker.

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when assets are transferred so is the responsibility. “If you give away real estate, will the beneficiary be able to afford property taxes, insurance, and other upkeep? If you give away liquid assets, will the beneficiaries use and manage those funds responsibly?” If you are unsure about the KeithAyres Jaworsk Rachel answers to these questions then Patton Albertson Miller, LL Patton Albertson & Miller,&LLC making a gift to a trust may be a more effective strategy.

4) Gifting in light of legislative uncertainty. No amount of tax savings is worth the stress or regret of making the wrong decision.

Congressional action is difficult to predict but particularly in an election year. So with all of this uncertainty you may not be comfortable gifting assets. We do recommend, however, that you talk to your trusted family members and financial advisors who can help you make an informed decision. All of us at Patton Albertson & Miller stand ready to help you develop a plan that will achieve your goals and provide peace of mind.

Rachel Ayres, CRPC®

New Office in Tennessee!

From the very first day we opened, Patton Albertson & Miller has been committed to the idea that our first obligation is to our clients. One part of putting our clients first is building a company that is sustainable long after the founding partners have retired. Our goal has always been to create a firm that will deliver the very best wealth management services across many generations. With that goal in mind, we are pleased to announce the opening of a new office in Chattanooga, Tennessee in November.

Over the years we have considered several other cities for a new office but have never found the right combination of both people and market opportunity. We are pleased to report that we have found that “just right” combination of circumstances in Chattanooga. In addition to Ricky Supan, Chattanooga will be staffed by Jimmy Patton and Rachel Ayres. Jimmy and his family will be moving to Chattanooga after the school year is over. He will continue his role as the managing principal of the firm and will continue to have an office in Macon. Rachel will be transitioning to Chattanooga over the next several months.

We are excited about this new chapter in the life of our company and look forward to serving clients in the Chattanooga area.

Please remember Bill’s wife, Lamar, in your thoughts and prayers as she continues to battle her late stage colon cancer.

3540 Clemmons Rd., Suite 106 Clemmons, NC 27012

231 Riverside Drive, Suite 105 Macon, Ga 31201 Phone: 478.742.5554 Fax: 478.742.5542 E-mail: mycfo@pamwealth.com

We’re On The Web: www.pattonalbertsonmiller.com Insight & Outlook is published quarterly by Patton Albertson & Miller, LLC. The statements expressed in this newsletter are the opinions of Patton Albertson & Miller, LLC and do not represent specific investment recommendations or results.

Thelma continued from page 1 income, and capital gains will create strong disincentives in the private sector. In particular the negative impact on small businesses (most of which are partnerships or Subchapter S corporations which are taxed at the owners’ individual tax level) will be substantial. The marginal tax rate on successful small business owners will exceed 40% when state income taxes are included. We doubt that higher tax rates will promote job creation or economic growth.

Investment Implications Sequestration will negatively impact some businesses (such as defense contractors, road builders, consultants, etc.) which are heavily dependent on Federal spending. The net economic impact, however, should be moderately positive as resources move to more efficient areas of the private sector. The massive tax increases, on the other hand, will be a significant drag on the already weak

economy. We think economic growth will decelerate in 2013 putting earnings pressure on economically sensitive sectors such as consumer discretionary, basic materials, and financials. More defensive sectors such as consumer staples and healthcare should hold up better, at least on a relative basis.

Conclusion Will the U.S. economy actually endure a Thelma and Louise moment? Yes, unless Congress slams on the brakes before year end and reaches some sort of bipartisan compromise on spending and taxes. Given the characters up in Washington, we are anticipating intense drama to unfold over the next few months.

Look away or cover your eyes, whatever happens probably won’t be pretty!

Bill Miller, CFA

Reducing continued from page 3 Georgia Land Conservation Program Credits Another program that may appeal to taxpayers looking for a break on their Georgia state income tax bill is the Georgia Land Conservation Program. It has been in existence for many years, allowing land owners to place conservation easements on their real property that effectively limit the property’s future use. In exchange for conserving the land for future generations, land owners are given tax credits to use against their Georgia income tax bill. In 2011, legislation granted land owners the ability to sell or transfer these credits to others. These credits can be purchased

for $0.85 on the dollar and are used just like the film credits discussed earlier. Unlike the film credits, however, these credits can be “banked” for 10 years.

As with any tax strategy, we suggest you contact your tax advisor before making any decisions. We would be happy to work with you and your CPA to find the most tax efficient strategy for you. Please contact us if you would like more information on these credits.

3540 Clemmons Rd., Suite 106 Clemmons, NC 27012

Bobby Futch