TAX PLANNING GUIDE. Life Insurance Sales Material

2014 TAX PLANNING GUIDE MKTG-OC-1054C Life Insurance Sales Material

2014 TAX PLANNING GUIDE INDIVIDUAL Income Taxes 3 Assessing Your Tax Picture...3 Benefiting from Tax Deferral...8 Finding Tax Savings at Home...11 Tips for Investors...13 Considering the Alternative Minimum Tax...18 Tracking Down Deductions...19 Making Retirement Less Taxing...22 Tax Planning for YOUR BUSINESS 24 Maximizing Deductions and Credits...24 Employee Benefit Strategies...27 Choosing the Right Business Entity...28 Strategies for the Self-employed...30 YOUR NEXT STEP 32 This publication is an advertisement prepared by NPI for the use of the publication s provider. The provider and NPI are unrelated companies. The content is not written or produced by the provider. Copyright 2013 by NPI 1

With so many other things to spend your money on, the prospect of paying a large amount of income taxes probably doesn t appeal to you. By being proactive and doing some tax planning, you may be able to trim your tax bill substantially. The earlier you begin your 2014 tax planning, the more opportunities you may have to reduce your taxes. This 2014 Tax Planning Guide alerts you to key provisions of the current federal tax law that could affect your planning. Beyond that, it offers a variety of helpful strategies for reducing individual and business income taxes. Be sure to obtain professional advice relevant to your specific tax situation before acting on any of the planning ideas presented in the guide. They are general in nature and may or may not be appropriate for you. Developing and implementing a plan for your 2014 income taxes may be well worth the effort if it lowers the amount you have to pay the IRS. INDIVIDUAL Income Taxes Assessing Your Tax Picture To begin your tax planning, consider whether any recent or upcoming changes in your personal or financial situation could affect your 2014 tax situation. CHANGE IN MARITAL STATUS. If you marry or divorce, your tax-filing status will change. Your filing status (single, head of household, married filing jointly, or married filing separately) determines the tax rate schedule that must be used to figure your income taxes, as well as your standard deduction if you don t itemize your deductions. The tax rate schedules appear on page 4. If you plan to marry in 2014, estimate your joint tax liability and determine whether you and your future spouse are making the appropriate estimated tax payments and/or having enough income taxes withheld from your pay. The tax brackets for the head-of-household filing status are more favorable than the single brackets. In general, you can qualify to file your return as a head of household if you are unmarried (or treated as unmarried) and you maintain a home for your qualifying child or a dependent relative. A newly widowed individual who maintains a household for a dependent child and hasn t remarried may file as a surviving spouse for two years after his or her spouse s death. A surviving spouse uses the same tax rate schedule as a married couple filing jointly, which may save taxes. 2 3

INDIVIDUAL TAX RATE SCHEDULES FILING STATUS RATE (%) Single Head of Household Married Filing Jointly (and surviving spouses) Married Filing Separately TAXABLE INCOME ($) BRACKETS* 10 0 9,075 15 9,076 36,900 25 36,901 89,350 28 89,351 186,350 33 186,351 405,100 35 405,101 406,750 39.6 Over 406,750 10 0 12,950 15 12,951 49,400 25 49,401 127,550 28 127,551 206,600 33 206,601 405,100 35 405,101 432,200 39.6 Over 432,200 10 0 18,150 15 18,151 73,800 25 73,801 148,850 28 148,851 226,850 33 226,851 405,100 35 405,101 457,600 39.6 Over 457,600 10 0 9,075 15 9,076 36,900 25 36,901 74,425 28 74,426 113,425 33 113,426 202,550 35 202,551 228,800 39.6 Over 228,800 * These taxable income brackets are the estimated brackets for 2014. As we go to press, the IRS has not yet announced the official 2014 inflation adjustments. YOUR MARGINAL TAX RATE. Refer to the appropriate rate schedule for your filing status to project your marginal tax rate. It s the rate that will apply to your last dollar of taxable income (the highest rate). Use your marginal rate to estimate how a particular planning strategy will affect your taxes. For example, if you expect your marginal rate to be 28%, an additional $1,000 deduction would result in $280 ($1,000 28%) of tax savings. If you are a higher income taxpayer, you may have a marginal tax rate that s greater than the 39.6% top rate listed on the rate schedules. The impact of limitations on itemized deductions (see page 21) and personal exemptions (discussed next) may boost your rate well above 40%. GROWING FAMILY. You can generally start claiming a dependency exemption for your child in the year he or she is born. Your child may continue to qualify as your dependent until the year he or she reaches age 19 or to age 24 if your child is enrolled as a full-time student for some part of five calendar months during the year. 4 5

Each full exemption you can claim on your return will reduce your taxable income by an estimated $3,950 in 2014. However, once adjusted gross income (AGI) exceeds a specified level (see table), the deduction for exemptions begins to be reduced. The IRS adjusts both the exemption amount and the income phaseout ranges for inflation annually. EXEMPTION PHASEOUT* FILING STATUS PHASEOUT BEGINS AT AGI OF* Single $254,200 Head of Household $279,650 Married Filing Jointly $305,050 Married Filing Separately $152,525 * The amounts shown are for the 2014 tax year and reflect estimated inflation adjustments. At press time, the official 2014 figures are not available. CHILD TAX CREDIT. Every year until your child turns age 17, you may be able to claim a child tax credit on your return. The maximum credit is $1,000 per qualified child in your family. Like the deduction for personal exemptions, the child tax credit is phased out for higher income taxpayers. The credit phaseout begins once AGI exceeds $110,000 for joint filers, $75,000 for unmarried individuals, and $55,000 for married-separate filers. DEPENDENT CARE CREDIT. As a working parent of a young child, you ll want to look into claiming a tax credit for a portion of your employment-related child care costs. The dependent care credit is available until the year your child turns 13. The credit is calculated by multiplying a credit rate generally 20% by your annual child care expenses (no more than $3,000 of expenses for the care of one child or $6,000 of expenses for the care of two or more children). Example: Kevin and Diana pay a day care provider more than $10,000 during 2014 for the care of their two young children while they are at work. They are entitled to a tax credit of $1,200 ($6,000 annual expense limit 20% credit rate) on their joint tax return, which trims $1,200 from their tax liability. Depending on your marginal tax rate, you may save more tax by paying dependent care expenses from your employer s flexible spending account (FSA) instead of claiming the credit for the expenses. COLLEGE CREDITS. If you re helping a child pay for college or taking some college courses yourself see if you can qualify for a tax credit. The American Opportunity Tax Credit is available for the first four years of post-secondary education. The credit is 100% of the first $2,000 of tuition and related expenses plus 25% of the next $2,000 of expenses, up to a maximum credit of $2,500 per eligible student. In 2014, the credit phases out with modified AGI between $80,000 and $90,000 (between $160,000 and $180,000 on a joint return). (These are estimated inflationadjusted amounts for 2014.) In addition to covering undergraduate courses, the Lifetime Learning Credit may be used for expenses related to graduate school or job training. Various eligibility requirements apply. The maximum credit is $2,000 per taxpayer return, and it phases out in 2014 with modified AGI between $54,000 and $64,000 or between $109,000 and $129,000 on a joint return. (These phaseout levels are estimated. The official IRS figures are not available at press time.) If you pay tuition for your child but find that you can t claim an education credit because of the income limitations, consider having your child take the credit instead. You ll have to forgo the dependency exemption for your child. However, assuming your child has enough taxable income to take advantage of the credit, the credit may save your family more tax than the exemption would. 6 7

no income taxes taken out, you have more money available for investment. Taxes won t be due on pretax contributions or tax-deferred earnings until your plan benefits are distributed to you. CONSIDER A ROTH. Some 401(k) and similar plans offer a Roth contribution feature. Roth contributions are made after tax, so there is no up-front tax benefit to making them. You are not, however, taxed on any investment earnings your Roth contributions generate while your money stays in the plan the earnings are tax deferred. Even better, after you ve had your plan Roth account for five tax years and reached age 59½, any distributions you receive from the account including earnings will not be taxable. CARING FOR A LOVED ONE. Providing care to an elderly parent or another relative whether it s hands-on care or financial assistance may qualify you for certain tax breaks. For example, you might be able to claim the person you re caring for as your dependent, file your taxes as a head of household instead of as a single taxpayer if you re not married, and include any medical expenses you pay for the person with your own expenses for deduction purposes. It s worth checking into the rules if you re a caregiver. Benefiting from Tax Deferral Deferring tax on your income earning it now and paying tax on it later is an attractive tax-saving strategy. Several deferral opportunities are available. TAX-DEFERRED SAVINGS PLANS. Participating in an employer-sponsored 401(k) plan or a similar retirement plan can be a tax-efficient way to put money aside for your future. Pretax plan contributions deducted from your paycheck are not included in your taxable wages for federal income-tax purposes, and all earnings on your plan investments accumulate tax deferred. With PLAN DISTRIBUTIONS. Take care if you are going to receive a taxable distribution from your 401(k) plan (or another qualified plan) in 2014. The plan administrator generally must withhold 20% of any eligible rollover distribution paid to you for federal income taxes. (Most non-annuity taxable distributions are eligible rollover distributions.) You can roll over an eligible distribution into an individual retirement account (IRA) or a new employer s plan. The distribution won t be subject to tax if all tax law rules are met. Usually, the best way to accomplish a tax-free rollover is to arrange for your plan to transfer the funds directly to the new plan or IRA. No withholding is required on direct rollovers. Early distributions may be subject to a 10% early distribution penalty in addition to income taxes. Several exceptions apply, so look at all your options if you are faced with receiving an early distribution. IRAs. You generally may make a deductible (or nondeductible) contribution of up to $5,500 annually to an IRA (plus an additional $1,000 catch-up contribution if you re 50 or older), as long as you earn at least that much taxable compensation. Married couples may contribute as much as $11,000 ($5,500 for 8 9

each spouse) plus any catch-up contribution(s), even if one spouse does not have earnings, as long as joint compensation is at least as much as the contributed amount. The IRS adjusts the IRA contribution limit periodically for inflation. Annual contributions to a Roth IRA are restricted for high earners and for married taxpayers filing separately. The 2014 Roth IRA contribution phaseout starts with modified AGI of more than $114,000 (unmarried filers) or $181,000 (married filing jointly). (These income levels reflect estimated inflation adjustments for 2014; official figures are not available at press time.) COMPARING IRA TAX FEATURES Deductible contributions? Tax-deferred earnings? Tax-free withdrawals? TRADITIONAL Yes, but there are income-based limits* for plan participants and their spouses Yes No** ROTH No Yes Yes, if you meet tax law rules * For active plan participants, the 2014 IRA deduction begins to phase out with modified AGI in excess of: $60,000 (unmarried), $96,000 (married filing jointly), or $0 (married filing separately). Where one spouse participates in a plan but the other doesn t, the IRA deduction for the nonparticipant spouse begins to phase out with joint modified AGI in excess of $181,000. (These are estimated inflation-adjusted amounts.) ** No tax is due on the amount attributable to nondeductible contributions. You may convert a traditional IRA to a Roth IRA regardless of income. Similarly, some employer plans allow participants to transfer funds from their pretax accounts into designated Roth accounts within the plan. Since a Roth conversion triggers current income taxes, the decision to convert should be made carefully. The tax law provides a limited period for unwinding a Roth IRA conversion (called recharacterization ). This allows the Roth IRA to be treated as a traditional IRA again and avoids the conversion tax. If you are considering taking money from your IRA before age 59½, be sure to ask about exceptions to the 10% early withdrawal penalty. Finding Tax Savings at Home Itemized deductions for qualified home mortgage interest and property taxes can make home ownership a good move from a tax standpoint. Homeowners may qualify for additional tax breaks when they sell their homes. WHAT S DEDUCTIBLE? As a homeowner, you may include your property taxes with your itemized deduction for taxes. You also may deduct interest on up to $1 million of debt incurred to buy, build, or substantially improve your principal residence ($500,000 if married filing separately) and one other personal residence. Interest on another $100,000 of home equity debt ($50,000 if married filing separately) incurred for any purpose is also deductible, with one caveat: Only interest on amounts you spend for home improvements is deductible for purposes of the alternative minimum tax (AMT). You can read more about the AMT on page 18. CAPITAL GAIN EXCLUSION. As often as every two years, all or part of any capital gain you realize on the sale of your home may be tax free, assuming you owned and used the home as your principal residence for at least two of the five years before the sale. The maximum gain exclusion is $250,000 (or $500,000 on a joint return). Example: Jeff and Melissa, a married couple, bought their first home in 2011 and are using it as their principal residence. If they decide to sell the residence in 2014, they won t have to include any gain they realize on the sale (up to $500,000) in their income for tax purposes because they ll have met the tax law s ownership and use requirements. 10 11

If you have to sell your home before you meet the requirements because of a change in place of employment, health, or certain other unforeseen circumstances, such as divorce or job loss, you may still qualify to exclude gain, but the ceiling on how much gain you may exclude will be lower than $250,000 (or $500,000). your family) during the year exceeds the greater of (1) 10% of the days the home is rented or (2) 14 days. With less personal use of the home, any loss generated by your home rental is potentially deductible, subject to the tax law s passive loss restrictions. MOVING COSTS. If you move to another area because of a job change or to pursue self-employment, you may be able to deduct certain unreimbursed move-related expenses on your tax return. Potentially deductible expenses include the reasonable costs of moving household goods and personal effects, the cost of travel from your old home to your new home (though meals are not included), and lodging. The moving expense deduction is taken above the line. Certain requirements apply. CONVERTING A HOME TO A RENTAL PROPERTY. When a former residence is converted into a rental property, certain tax issues come into play. As you d expect, rental income must be reported on your tax return, and the related rental expenses are generally deductible. If rental expenses exceed rental income you have a loss for the year the passive activity rules may restrict the deductible amount. Any gain you realize on selling the rental property generally will be taxable. SECOND HOMES. Do you own a vacation home that you rent out? When you rent your home for no more than 14 days during the year, the rental income is tax free, and you still may deduct your property taxes and qualified mortgage interest as itemized deductions. However, other expenses connected with the rental maintenance, utilities, etc. are not tax deductible. All rental income becomes taxable once you rent out your vacation home for more than 14 days. But you may deduct various rental expenses. Generally, your deduction for rental expenses may not exceed your rental income if personal use of the home (by you or Tips for Investors It s important not to let tax considerations drive your investment decisions, but that doesn t mean you should forget about taxes when you are investing. Paying attention to the tax consequences of your investment transactions can help you keep more of any money you earn. CAPITAL GAIN VS. ORDINARY INCOME. Profits from selling investments, capital gains, are potentially taxed at lower rates than your ordinary income. The lower rates apply to net capital gain the excess of net long-term capital gain over net short-term capital loss. Long-term is defined as more than one year. So, if you hold an investment longer than a year before you sell it, your capital gain or loss on the sale will fall into the long-term category. The table on page 14 shows the various capital gains tax rates that may apply to your investment sale transactions. 12 13

What happens when you have more capital losses than capital gains? The excess capital loss is deductible up to a maximum of $3,000 annually ($1,500 if married filing separately). You may carry forward an unused capital loss for deduction in later tax years, subject to the same limits. NO TAX ON CERTAIN CAPITAL GAIN. A 0% rate applies to net capital gain that otherwise would be taxed at 10% or 15% if it were ordinary income. Even if your tax bracket is higher than 15%, consider ways your family might benefit from the 0% rate. If you plan to sell securities that have risen in value to help your son or daughter pay for graduate school or start a business, consider giving your child the securities to sell. The tax law s kiddie tax rules won t apply as long as your child is over age 23 or is married and files a joint return. As a result, assuming your child is in the 10% or 15% tax bracket, no tax will be due on the capital gain. (Note that parents of young children to whom the kiddie tax rules apply can t use this income-shifting strategy because their child s capital gain would be taxed at their own higher rate.) TAX RATES ON CAPITAL GAINS HOLDING PERIOD More than 1 year* YOUR TAX BRACKET 10% - 15% 25% - 35% 39.6% CAPITAL GAIN RATE 0% 15% 20% stock s ex-dividend date (the date the stock begins trading without rights to the dividend). A longer holding period may be required for preferred stock dividends. Dividend income won t qualify for a lower tax rate if you elect to treat the dividend as investment income to support an itemized deduction for investment interest expense. (The deduction for investment interest expense is limited to net investment income.) INVESTING FOR COLLEGE. Section 529 prepaid tuition and college savings plans allow you to invest for future educational expenses in a tax-advantaged manner. You can invest in your state s 529 plan or in a 529 plan sponsored by another state. Although plan contributions are not deductible for federal tax purposes, state deductions may be available. Also, earnings accumulate tax deferred and plan distributions for the account beneficiary s qualified higher education expenses are tax free. Before in vesting in a 529 plan, consider the investment objectives, risks, and expenses associated with municipal fund securities. The issuer s official statement contains more information about municipal securities, and you should read it carefully before investing. Certain plan benefits may not be available unless you meet state residency or other requirements. 1 year or less 10% - 39.6% Same as your ordinary tax rate * Long-term capital gain on the sale of collectibles or depreciable real estate is taxed differently. A maximum rate of 28% applies to collectibles gain and a maximum rate of 25% applies to real estate gain to the extent of prior allowable depreciation. LOW DIVIDEND RATE. The favorable tax rates that apply to net capital gain also apply to qualified dividend income. Generally, dividend income is considered qualified if the stock has been held for more than 60 days during the 121-day period beginning 60 days before the 14 15

Coverdell education savings accounts (ESAs), available at many financial institutions, also provide tax-deferred earnings and tax-free withdrawals for eligible expenses. Contributions for a beneficiary may not exceed $2,000 annually and generally may not be made after the beneficiary turns 18. In addition to qualified higher education expenses, ESA funds may be used income-tax free for elementary and secondary public, private, or religious school tuition and expenses. ASSET LOCATION. How you divide your investments among taxable and tax-deferred accounts can be important. As discussed, employer-sponsored retirement plans and IRAs offer significant tax deferral advantages. However, when tax-deferred contributions and earnings are distributed to you, they re taxed at ordinary income-tax rates, even if the earnings consist of dividends or long-term capital gains. (Tax-free qualified Roth distributions are an exception.) Investing in a taxable account means you have to pay taxes on any dividends, taxable interest, and net capital gains your investments earn each year. The upside: Qualifying dividends and net capital gains are taxed at relatively low rates, as discussed earlier. When investing in a taxable account, consider ways to manage your tax exposure. Holding an appreciated stock instead of selling it defers taxes on the capital gain. Of course, by holding the stock, you risk a price decline. Owning municipal bonds allows you to avoid federal (and often state) income taxes on your bond interest. However, interest on certain municipal bonds must be included in income for purposes of the AMT. Assess your potential AMT exposure before investing in private activity bonds. If you are comparing municipals with taxable securities, you can use your tax bracket to figure taxable equivalent yield the interest rate you d have to earn on a taxable bond to match the rate on a tax-exempt bond. Example: Jackie is in the 39.6% federal income-tax bracket. She wants to know how much a corporate bond would have to yield to match the 5% yield on a tax-exempt municipal bond investment she is considering. The calculation is done in two steps. First, she subtracts.396 from one (1 -.396 =.604). Next, she divides the result into 5% (5%.604 = 8.28%). On an after-tax basis, a taxable bond yield of 8.28% is equivalent to a 5% tax-exempt yield. (Only federal taxes are considered in this example.) INVESTMENT INCOME SURTAX. Depending on your AGI, you may owe an additional 3.8% Medicare surtax on your taxable investment income. The 3.8% surtax applies to the lesser of (1) your net investment income or (2) your modified AGI in excess of $200,000 (unmarried), $250,000 (married filing jointly), or $125,000 (married filing separately). Investment income includes taxable interest, dividends, annuities, royalties, rents, net capital gain, and income earned from passive trade or business activities. If your income is high enough for the investment income surtax to apply, you ll want to take steps to minimize your exposure. Various timing strategies may be effective, especially if your modified AGI is close to the threshold that triggers the surtax. Also consider these other tactics to limit your surtax exposure: Investing in municipal bonds, since tax-exempt interest is not included in net investment income or modified AGI for surtax purposes Maximizing pretax contributions to retirement plans Increasing involvement in trade or business activities so they won t be considered passive activities Strategically taking capital losses to offset capital gains 16 17

Considering the Alternative Minimum Tax As part of your tax planning, review your alternative minimum tax (AMT) situation. The AMT becomes an issue when the exemption amount for your filing status (see table below) is less than your alternative minimum taxable income (AMTI). Some items that you are not required to include in your income for purposes of regular tax must be included in AMTI. And certain items that you may deduct for regular tax purposes are not allowed. Individuals are more likely to be subject to the AMT if they: Pay high state and local taxes Claim several dependents Have a large deduction for miscellaneous and unreimbursed employee business expenses Exercise incentive stock options Pay high home equity loan interest for funds borrowed for a reason other than to buy, build, or substantially improve their home or second residence AMT RATES AND EXEMPTION AMOUNTS TAXABLE AMT INCOME* RATE $1 to $182,500 26% Over $182,500 28% AMT EXEMPTION AMOUNTS* $52,800 Unmarried $82,100 Married Filing Jointly $41,050 Married Filing Separately The exemptions are phased out for higher income taxpayers. * These income brackets and exemption amounts reflect estimated inflation adjustments for 2014. Tracking Down Deductions As you plan for the year, be alert to potentially deductible expenses. ABOVE-THE-LINE DEDUCTIONS. Certain expenses, such as qualified student loan interest of up to $2,500 and alimony paid, are deductible from your gross income in arriving at your AGI. This means you can claim the deduction even if you don t itemize your deductions (you claim the standard deduction instead). Abovethe-line deductions are especially valuable because they reduce your AGI, potentially allowing you to qualify for tax benefits you wouldn t be eligible for if your AGI were higher. Within limits, health savings account (HSA) contributions are deductible above the line. For 2014, deductible HSA contributions can be as much as $3,300 with self-only coverage under an eligible high-deductible health plan or $6,550 with family coverage. CHARITABLE GIVING. The rules permitting an itemized deduction for contributions to qualified organizations have not changed for 2014. Be sure you keep all the required supporting documentation for your contributions in case the IRS audits your return. Do you volunteer? Keep track of the out-of-pocket expenses you incur while volunteering. Your unreimbursed expenses might be deductible as a charitable contribution. For example, you may deduct your actual charitable driving expenses or 14 a mile plus parking and tolls. 18 19

Instead of donating cash, consider giving your chosen charity appreciated stock you ve held more than one year. You ll avoid realizing a capital gain on the stock, and, as a tax-exempt entity, the charity can sell the stock if desired without incurring a tax liability. The stock s full value at the time you donate it will be tax deductible (subject to the percentage-of-agi limitations that generally apply to the deduction for charitable contributions and the overall limit on itemized deductions discussed on page 21). Avoiding capital gains with a donation of appreciated securities instead of cash also may help minimize your exposure to the 3.8% investment income surtax. TAXES. Here are some strategies to maximize your itemized deduction for state and local taxes. Pay your last quarterly state income-tax estimate before the end of the year. You could also increase the state income-tax withholding from your pay during the last few months of the year especially if you expect to owe more tax than your projected withholding would cover. Be care ful, however, if you will be hit with the itemized deduction limitation. Taxes are one of the deductions that can be reduced. The AMT is something else to consider. State and local taxes are not deductible in computing the AMT. As a result, accelerating tax payments into 2014 likely won t make sense if you think the AMT will be a problem. It might be better to save the expense for 2015 when the AMT may not apply to you. But be sure you ve paid enough tax to avoid underpayment penalties. MEDICAL. Potentially deductible expenses include unreimbursed amounts paid for hospital care, doctors and dentists visits, prescription medications, eyeglasses, hearing aids, health insurance premiums, and qualified long-term care insurance premiums (up to a specified dollar amount). Itemized medical expenses generally are deductible only to the extent they, in aggregate, exceed 10% of your AGI (called the floor ). (In other words, your expenses will be deductible to the extent they surpass 10% of your AGI.) However, if you or your spouse has reached age 65 before the end of the year, the floor on your medical expense deduction is 7.5% of your AGI. MISCELLANEOUS EXPENSES. This broad category encompasses items such as investment management fees, certain job search expenses, and unreimbursed employee business expenses, including union and professional dues and employee home office expenses. As with the medical expense deduction, there is a percentage-of-agi floor over which aggregate miscellaneous expenses become deductible. The hurdle is somewhat lower for miscellaneous expenses, however only 2% of your AGI. Since medical and miscellaneous expenses are subject to deduction floors, be strategic about when you pay those expenses. To the extent possible, bunching medical or miscellaneous expenses in a single tax year may help you exceed the applicable floor that year and secure a deduction for a portion of your expenses. ITEMIZED DEDUCTION LIMITATION. Another factor to consider in your deduction strategies is the limitation on itemized deductions. The limitation applies if your AGI exceeds a threshold amount: $254,200 (single), $305,050 (married filing jointly), $279,650 (head of 20 21

household), or $152,525 (married filing separately). (These figures reflect estimated inflation adjustments for 2014.) Some deductions are not affected by the limitation, and you can t lose more than 80% of the deductions that are affected. Making Retirement Less Taxing If you expect to retire in 2014 or are already retired, some of the strategies discussed in this section may be helpful. LIFETIME PAYMENTS OR LUMP SUM? Traditional pension plans may offer a choice between receiving a monthly benefit or a lump-sum payment. Take care if you decide to take your benefit as a lump sum, since it could trigger a large tax bill unless you properly roll the payout (or, preferably, have the funds transferred directly) to an IRA or another qualified plan. A lump-sum payout that includes appreciated employer stock merits particular attention, since it is sometimes advisable to take the shares instead of rolling them over in order to secure certain tax advantages. TAX-SMART WITHDRAWAL STRATEGIES. When you are ready to begin making withdrawals from your retirement savings, you ll need to know whether tapping into taxable or tax-deferred accounts first will benefit you more. If you aren t yet required to take annual minimum distributions from your retirement accounts (see RMDs, below), you re probably better off taxwise withdrawing from your taxable savings and investment accounts first. Since you ve already paid taxes on that money, you won t have to pay taxes again when you make withdrawals (except if you sell investments at a profit). Withdrawing from already-taxed accounts first will provide an opportunity for your tax-deferred accounts to continue growing tax deferred. RMDs. After you reach age 70½, you generally must begin taking annual required minimum distributions (RMDs) from traditional IRAs and employer retirement plans and RMDs represent taxable income. (Your plan may allow you to delay RMDs until retirement if you are still working for the company sponsoring the plan and you are not a 5% owner.) Your first RMD generally will be due by April 1 of the year after the year you reach age 70½. Another RMD will be due by December 31 of that same year and each subsequent year. No minimum distributions have to be taken from a Roth IRA during the account owner s lifetime. SOCIAL SECURITY. You probably know that Social Security benefits are available as early as age 62. But are you aware that depending on your income up to 85% of your benefits could be taxable? TAXATION OF SOCIAL SECURITY % OF TOTAL BENEFITS TAXABLE 0% Up to 50% Up to 85% MARRIED Less than $32,000 $32,000 - $44,000 More than $44,000 INCOME LEVEL* UNMARRIED Less than $25,000 $25,000 - $34,000 More than $34,000 * For this purpose, income is defined as your modified AGI plus half your Social Security benefits and any tax-exempt interest. The income levels shown are not adjusted for annual inflation. If it looks like you ll owe taxes on your Social Security benefits, consider ways to minimize (or avoid) those taxes. For example, paying off debt with invested funds that are earning interest or dividend income could help bring your income below the applicable threshold. Along similar lines, you might consider shifting assets you won t need in the short term to growth-oriented stocks that don t pay dividends. 22 23

partially recovered over time through depreciation deductions. Depreciation is a key tax benefit, especially for capital-intensive businesses. Properly segregating your company s fixed asset costs is essential, since the available depreciation period and the amount deductible each year vary by asset category. Tax Planning for YOUR BUSINESS Maximizing Deductions and Credits As part of your business planning, focus on the tax deductions and credits available to your business and strategies for making the most of certain key deductions. BAD DEBTS. If a customer or client owes your business money you can t collect, see if you can claim a bad debt deduction on your business return. You must be able to show that the debt is partially or totally worthless. This may be the case if you have taken reasonable steps to collect a debt and there is no longer any possibility you will receive payment. Business bad debts typically arise from credit sales to customers, and deductions generally are not available to businesses that use the cash method of accounting (since the related income hasn t been collected and taxed). BUSINESS AUTOS. Deductions for business-related driving may be based on actual expenses incurred or a standard mileage rate (56.5 per mile; subject to change for 2014). When using the standard mileage rate, parking and tolls are separately deductible. DEPRECIATION. Amounts your business spends on purchases of equipment and other fixed assets can be Timing also plays a critical role. Your business generally may claim a full half-year s depreciation for most of its non-real estate asset purchases, regardless of when you place the assets in service. However, a mid-quarter depreciation convention must be used where the last quarter s purchases total more than 40% of the year s purchases. Compared to the half-year convention, use of the mid-quarter convention can produce a larger deduction for assets acquired early in the year but a smaller deduction for those acquired later. Example: Company buys and places in service $500,000 of machinery and equipment in 2014. Company may claim a full half year of depreciation for all the assets since the fourth quarter s purchases of $150,000 represent just 30% of the $500,000 total. SECTION 179 EXPENSING. In lieu of depreciation, your business may elect to expense the cost of qualifying assets in the year of purchase. Unless lawmakers enact higher limits, the maximum amount that may be expensed in 2014 is $25,000. The $25,000 limit is reduced dollar for dollar as a taxpayer s overall investment in Section 179 property rises above $200,000 (no Section 179 deduction when the total investment reaches $225,000). The deduction is further limited to income from active trades or businesses. DOMESTIC PRODUCTION ACTIVITIES. Up to 9% of income from manufacturing and certain other domestic production activities (or, if less, 9% of taxable income determined without regard to the deduction) is potentially tax deductible by eligible businesses. 24 25

The deduction cannot be more than 50% of your company s W-2 wages allocable to domestic production gross receipts. MEAL AND ENTERTAINMENT EXPENSES. Properly substantiated business meal and entertainment expenses are deductible to the extent of 50% of the cost. Your company s expense records must be quite detailed, so be sure you have procedures designed to capture all the required elements for each expense. NET OPERATING LOSSES (NOLs). An NOL results when the year s business deductions exceed gross income. An NOL sustained during one tax year may be used to reduce another year s taxable income. In general, an NOL may be carried back two years and forward 20 years. Carrying back an NOL to a previous tax year may generate a refund of taxes paid for that earlier year. ENERGY CREDITS. Tax credits in varying percentages are available for eligible energy property (e.g., fuel cell, solar, small wind energy, etc.) placed in service during the tax year. The property must meet official quality and performance standards in effect at the time of acquisition. SMALL EMPLOYER HEALTH INSURANCE CREDIT. In 2014, a credit for up to 50% of the cost of employee health insurance coverage purchased through the SHOP marketplace is available to an eligible small business with no more than 25 full-time equivalent employees and average annual wages of no more than $50,000 per employee. To qualify, your small business must contribute at least 50% of the total premium cost. Employee Benefit Strategies There are several tax-favored employee benefit opportunities your business may consider. TAX-FREE FRINGE BENEFITS. In addition to health insurance, businesses can provide other valuable fringe benefits that are tax free to employees and tax deductible by the firm. For example, you can supply up to $245 a month of free or reduced-cost parking (figure to be adjusted for inflation). Other tax-free fringe benefits include: educational assistance of up to $5,250, qualified employee discounts, occasional meals because of overtime work, and on-premises athletic facilities. RETIREMENT PLANS. Sponsoring a retirement plan for your employees can be very helpful in attracting and retaining talented workers while also allowing you to set money aside for your own retirement in a taxadvantaged manner. Within limits, contributions to qualified plans are tax deductible. Plan participants are not taxed on contributions or investment earnings until they receive benefits from the plan. Profit sharing plans are very flexible, since decisions about whether to contribute for a given year and the contribution amount can be left to your company s discretion. If desired, a profit sharing plan can have a 401(k) salary deferral feature. 401(k) plan salary deferrals for the 2013 tax year are capped at $17,500. A plan may allow employees who have reached age 50 to make additional catch-up contributions of up to $5,500. (The inflation-adjusted deferral limits for 2014 are not available at press time.) Many employers make matching contributions to their 401(k) plans. Those with solo 401(k) plans may make additional tax-deferred contributions as employers. 26 27

A corporation with significant profits that already pays its owner-employees well should weigh setting up a profit sharing plan and making plan contributions for the benefit of the owner-employees and other eligible employees. This strategy would reduce corporate taxes and pass corporate income to the participating employees on a taxfavored basis. Waiting to make a deductible profit sharing contribution until the extended due date of the corporation s tax return allows the company to use the money for other purposes in the interim. Simplified employee pension (SEP) plans are relatively easy to establish and maintain. The sponsoring employer s contributions go into IRAs for plan participants. No employee contributions are allowed to SEP plans established after 1996. SIMPLE plans allow eligible employees to make pretax payroll contributions. The SIMPLE deferral limits are somewhat lower than the 401(k) limits for 2013, $12,000 plus $2,500 of catch-up contributions where applicable (subject to potential inflation adjustment for 2014). The employer is required to contribute to the plan annually. Choosing the Right Business Entity As a current business owner or someone planning to start a business in 2014, you ll want to review the various forms of business as part of a comprehensive tax plan. Though nontax considerations play a major role in choosing a form of business, tax matters also come into play. SHOULD YOU INCORPORATE? In addition to the creditor protection it provides owners, doing business as a corporation can carry certain other advantages. A regular (C) corporation can fund qualified retirement plans on a tax-favored basis and provide fringe benefits, such as health insurance and group life insurance (within limits), without adverse tax consequences to the owner(s). On the downside, operating as a C corporation potentially involves paying taxes twice on corporate earnings once at the corporate level and again when those earnings are distributed to the owners. Paying owners who work in the business reasonable salaries can lessen the impact of double taxation. Many small business owners choose to elect S status for their corporations. As a pass-through entity, an S corporation generally pays no tax on its earnings. Instead, the owners report their share of corporate earnings on their individual returns. If there s a loss, the owners may deduct their proportionate share of the loss individually (to the extent of their adjusted basis in stock and loans they ve made to the corporation). If you expect your S corporation to show a loss for the year, check to make sure you will be able to deduct it. If not, consider advancing money to the company to increase your basis and allow you to deduct the loss. Converting from a C corporation to an S corporation has tax consequences. As a result, any decision to make an S election should be carefully weighed. LIMITED LIABILITY COMPANY (LLC). An LLC offers its owners corporate-like protection from creditors and can be structured as a pass-through entity for tax purposes to avoid double taxation. An LLC that is taxable as a partnership may make special allocations of tax benefits to specific partners something an S corporation isn t allowed to do. 28 29

CORPORATE TAX RATES TAXABLE INCOME RATE Up to $50,000 15% $50,001 - $75,000 25% $75,001 - $100,000 34% $100,001 - $335,000 39% $335,001 - $10 million 34% Over $10 million - $15 million 35% Over $15 million - $18,333,333 38% Over $18,333,333 35% ALTERNATIVE MINIMUM TAX* 20% * The corporate AMT exemption of $40,000 is phased out with alternative minimum taxable income between $150,000 and $310,000. Strategies for the Self-employed Being in business for yourself can be rewarding and it also can have tax implications. As a self-employed individual, you have an assortment of tax-reducing steps you can consider. HEALTH INSURANCE. When certain requirements are met, you ll be able to deduct your health insurance premiums as a business expense instead of as an itemized medical expense deduction. This can be a tax saver, since the itemized deduction for medical expenses is limited. HOME OFFICE. If you work from home, you may be entitled to claim a home office deduction for a portion of your utilities, maintenance, insurance, and other home-related expenses. Instead of basing your deduction on your actual expenses (prorated to reflect the portion of your home devoted to the home office), you may deduct a standard rate of $5 per square foot for your home office, up to a maximum square footage of 300. There are strict requirements for the home office deduction and some drawbacks to claiming it so get up-front tax advice. RETIREMENT PLAN. As a self-employed person, you may contribute to a retirement plan for yourself and any eligible employees on a tax-deductible basis. There are several types of tax-favored plans that may meet your needs. Get good professional advice in choosing a suitable plan. ESTIMATED TAX. Since your earnings aren t subject to tax withholding, you ll probably need to make quarterly payments of estimated tax. Pay at least as much estimated tax as the tax law requires so you won t owe an underpayment penalty. Your payments should cover both income tax and self-employment tax (for Social Security and Medicare). You will be able to deduct a portion (generally, 50%) of your self-employment tax. 30 31

YOUR NEXT STEP You ve read this Tax Planning Guide. We hope the information it contains is helpful to you in your tax planning efforts. Please call on us if you would like planning assistance or more information. We re here to help. 32 The general information in this publication is not intended to be nor should it be treated as tax, legal, or accounting advice. Additional issues could exist that would affect the tax treatment of a specific transaction and, therefore, taxpayers should seek advice from an independent tax advisor based on their particular circumstances before acting on any information presented. This information is not intended to be nor can it be used by any taxpayer for the purpose of avoiding tax penalties. FR2013-0924-0117/E TP14 10/13

This material is not intended to be used, nor can it be used by any taxpayer, for the purpose of avoiding U.S. federal, state or local tax penalties. This material is written to support the promotion or marketing of the transaction(s) or matter(s) addressed by this material. Pacific Life, its distributors and their respective representatives do not provide tax, accounting or legal advice. Any taxpayer should seek advice based on the taxpayer s particular circumstances from an independent tax advisor. Pacific Life Insurance Company Newport Beach, California (800) 800-7681 www.pacificlife.com Pacific Life & Annuity Company Newport Beach, California (888) 595-6996 www.pacificlife.com Pacific Life refers to Pacific Life Insurance Company and its affiliates, including Pacific Life & Annuity Company. Insurance products are issued by Pacific Life Insurance Company in all states except New York and in New York by Pacific Life & Annuity Company. Product availability and features may vary by state. Each insurance company is solely responsible for the financial obligations accruing under the products it issues. Insurance products and their guarantees, including optional benefits and any fixed subaccount crediting rates, are backed by the financial strength and claims-paying ability of the issuing insurance company. Look to the strength of the life insurance company with regard to such guarantees as these guarantees are not backed by the broker-dealer, insurance agency or their affiliates from which products are purchased. Neither these entities nor their representatives make any representation or assurance regarding the claims-paying ability of the life insurance company. Investment and Insurance Products: Not a Deposit Not Insured by any Federal Government Agency Not FDIC Insured Not Bank Guarantee May Lose Value MKTG-OC-1054C 15-31102-03 1/14 TP14