1. This commentary is not intended as investment advice or an investment recommendation. It is solely the opinion or our investment managers
at the time of writing. Nothing in the commentary should be construed as a solicitation to buy or sell securities. Past performance is no
indication of future performance. Liquid securities, such as those held within DIAS portfolios, can fall in value. Global Financial Private
Capital is an SEC Registered Investment Adviser.
Thought for the Week (235):
The Fiscal Cliff
Following numerous requests, this week’s Thought summarizes the tax related measures which resulted from the eleventh hour Fiscal Cliff agreement. These new laws are detailed in Senate Amendment to H.R. 8 and are collectively called The American Taxpayer Relief Act of 2012.
For those unfamiliar with the Fiscal Cliff, Thought for the Week # 229 may provide valuable background information.
We now await the political brinkmanship associated with the negotiations to raise the U.S. Debt Ceiling.
Two New Taxes for 2013
Two new taxes go into effect starting January 1, 2013:
1. A 3.8% Net Investment Income Tax (NIIT) applies to individuals, estates and trusts that have unearned investment income above certain threshold amounts. Net Investment Income for the purpose of calculating this tax includes interest, dividends, capital gains, rental and royalty income, non-qualified annuities, income from businesses involved in trading of financial instruments or commodities and pass-through income from a passive business. The NIIT does not apply to municipal bond income.
For an individual, the NIIT is equal to 3.8% of the lesser of two amounts:
i. An individual’s net investment income or
ii. The excess of the individual’s modified adjusted gross income (MAGI) over the threshold amount ($200,000 for individual taxpayers and $250,000 for married couples filing jointly).
2. A 0.9% additional Medicare Tax applies to individual’s wages and self-employment income that exceeds the threshold amount based on the individual’s filing status.
Ordinary Income Tax
There will be no change in Federal income tax rates for taxpayers earning less than $400,000 ($450,000 for joint filers). Individuals earning above this threshold, will now pay 39.6% on marginal income above $400,000 ($450,000 for joint filers).
Capital Gains and Qualified Dividends Tax
Effective January 1, 2013, the top tax rate on long term capital gains and qualified dividends reverts back to 20% on gains for taxpayers above the $400,000 ($450,000 joint) income threshold. For taxpayers below these thresholds, the 15% rate remains. This tax rate increase, along with the Medicare tax, will result in a top effective tax rate of 23.8% for long term capital gains and dividends. Similarly, short term capital gains will be taxed at ordinary rates plus the 3.8% NIIT, for an effective top rate of 43.4%.

2. This commentary is not intended as investment advice or an investment recommendation. It is solely the opinion or our investment managers
at the time of writing. Nothing in the commentary should be construed as a solicitation to buy or sell securities. Past performance is no
indication of future performance. Liquid securities, such as those held within DIAS portfolios, can fall in value. Global Financial Private
Capital is an SEC Registered Investment Adviser.
Estate, Gift and Generation Skipping Transfer Tax
The credit amount remains at $5 million per individual donor and continues to be inflation-indexed from 2010 (rounded in $10,000 increments). The inflation adjusted credit was $5.12 million in 2012 and is expected to be $5.25 million in 2013. An important component of the new legislation is the reunification of the gift and estate tax credit amount. In other words, the $5.25 million credit is available for use with lifetime gifts or estate transfers at death. The top transfer tax rate on gifts exceeding the credit amount has increased from 35% to 40%.
Phase Limitation on Itemized Deductions
Before 2010 itemized deductions for taxpayers above a certain income level were partially phased out, thus increasing income taxes as a consequence of reduced deductions. In 2013, if a taxpayer’s Adjusted Gross Income (“AGI”) is above a threshold amount ($250,000 for individual taxpayers, $275,000 for head of households and $300,000 for joint filers), itemized deductions will be reduced by an amount equal to the lesser of 3% of the excess over the threshold or 80% of allowable deductions. Taxpayers apply 80% to the total of their itemized deductions other than the deductions for medical expenses, investment interest, casualty losses and thefts, and gambling losses.
As a result of the phase-out of deduction for high income taxpayers, marginal effective tax rates are higher than marginal statutory rates for such taxpayers. Roughly speaking, the 3% reduction of a deduction against income taxed at 43.4% raises the tax rate on marginal income by 1.3 percentage points.
Alternative Minimum Tax (AMT)
The new bill increases the AMT exemption amounts from $33,750 to $50,500 for individual filers and from $45,000 to $78,750 for joint filers, indexed for inflation from 2013.
IRAs
The Pension Protection Act of 2006 allowed a taxpayer to exclude from income, distributions of up to $100,000 to a qualified tax-exempt organization (i.e., a public charity but not a supporting organization or a donor advised fund) from a traditional IRA. This provision has been extended for 2012 through December 31, 2013. The distribution must be made directly to the public charity and the IRA owner must have attained age 70½. The distribution will be counted for purposes of the required minimum distributions from an IRA but will be ignored for purposes of computing the limitations on charitable deductions in the year of the gift.
Notably, the $100,000 exclusion is per taxpayer so married taxpayers (with their own IRAs) may each take advantage of the provision. Moreover, this provision contains a transition rule, which allows a distribution made in January 2013 to qualify as a 2012 distribution and allows an IRA distribution made December 2012 to qualify if subsequently paid to a qualifying charity in January 2013 (and meeting all other requirements).

3. This commentary is not intended as investment advice or an investment recommendation. It is solely the opinion or our investment managers
at the time of writing. Nothing in the commentary should be construed as a solicitation to buy or sell securities. Past performance is no
indication of future performance. Liquid securities, such as those held within DIAS portfolios, can fall in value. Global Financial Private
Capital is an SEC Registered Investment Adviser.
Roth Conversions
In 2012, only the distributable amount (i.e. IRA balances or 401(k) s where the owner has either separated from employment or is over 59½) in pre-tax retirement plans could be converted to Roth accounts. The new bill allows any amount in a non-Roth account to be converted to a Roth account in the same plan, whether or not the amount is distributable. The conversion from a pre- tax retirement plan to a Roth plan results in the recognition of taxable income on all the gains and income in the plan.
Retroactive Extension of 100% Exclusion of Small Business Capital Gains
Generally, non-corporate taxpayers may exclude 50% of the gain from the sale of small business stock acquired at original issue and held for more than five years. For stock acquired after February 17, 2009 but by September 27, 2010, the exclusion was increased to 75 percent. For stock acquired after September 27, 2010 and before January 1, 2011, the excluded amount was increased to 100%. The 2010 Tax Relief Act further extended the 100% exclusion through December 31, 2011. The new legislation retroactively extends the exclusion of 100% of the gain from Qualified Small Business Stock to stock acquired after September 27, 2010 and before January 1, 2014.
Qualifying Small Business Stock is from a C-corporation whose gross assets do not exceed $50 million (including the proceeds received from the issuance of the stock) and who meets a specific active business requirement. The amount of gain eligible for the exclusion is limited to the greater of ten times the taxpayer’s basis in the stock or $10 million of gain from stock in that corporation.
Other
The personal exemption phase-out has been reinstated, which means that high income taxpayers will have to reduce the total of their personal exemptions by 2% for every $2,500 by which their annual gross income exceeds the threshold amount for their filing status ($250,000 for individual filers, $275,000 for head of households and $300,000 for joint filers), indexed for inflation from 2013.