LIFE INSURANCE DIVISION

TAX LAW SUMMARY American Taxpayer Relief Act MKTG-OC-1053A LIFE INSURANCE DIVISION

TAX LAW SUMMARY American Taxpayer Relief Act INDIVIDUAL TAX PROVISIONS...3 Individual Tax Rates...3 Marriage Penalty Relief...4 Capital Gains Tax Rates...5 Tax Rates for Qualified Dividends...6 Alternative Minimum Tax (AMT)...7 Personal Exemption Phaseout and Limitation of Itemized Deductions...8 Plan Transfers to Designated Roth Accounts...9 Extenders of Expired Provisions...9 ESTATE AND GIFT TAX PROVISIONS...12 BUSINESS TAX PROVISIONS...13 Section 179 Expensing Limit...13 Bonus Depreciation...14 Work Opportunity Tax Credit...14 Research Tax Credit...14 Other Business Tax Extenders...15 CAN WE HELP?...16 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

The negotiations over ways to avoid the socalled fiscal cliff were highly contentious. But Congress eventually passed legislation that skirted the fiscal cliff (at least for the short term) by preventing scheduled federal tax rate hikes from going into effect for most taxpayers in 2013 while raising taxes on America s highest earners. The new law called the American Taxpayer Relief Act of 2012 ( ATRA for short) also retains many expiring income-tax breaks and revives some tax increases that had expired over the past several years. Among the specific changes: The lower Bush-era income-tax rates applicable for 2012 and earlier become permanent for most individual taxpayers. For higher earners, a new 39.6% income-tax rate applies to taxable income greater than $450,000 for married joint filers ($400,000 for single filers). The maximum long-term capital gain and dividend tax rate generally remains 15% for most individual taxpayers, with a higher 20% maximum rate to become effective for higher income taxpayers. The resurrected personal exemption phaseout and limitation on itemized deductions become effective for joint filers with adjusted gross income over $300,000 ($250,000 for single filers). Permanent alternative minimum tax relief is available to millions of middle-income taxpayers who, starting in 2012, would have been subject to this tax. Higher dollar limits on the Section 179 election to expense the cost of business assets instead of claiming depreciation deductions over time are available in 2012 and 2013. The 50% bonus depreciation provision is extended through 2013 for most qualified property. However, the new law does not salvage all of the prior law s tax benefits. For instance, Congress allowed the temporary two-percentage-point reduction in the employee s portion of the Social Security payroll tax to expire after 2012. Following is a summary of the key provisions of the new law. While ATRA retains many of the favorable tax rules that applied in prior years, new provisions might have a dramatic impact on your tax bill for 2013 and beyond, especially if you are a high earner. We urge you to seek professional guidance before acting on anything you see in these highlights. INDIVIDUAL TAX PROVISIONS Individual Tax Rates For tax years beginning after 2012, the American Taxpayer Relief Act makes permanent the federal income-tax rates introduced by a 2001 tax law. Those rates had been scheduled to increase in 2013. For high-income taxpayers, a new top tax rate 39.6%, as opposed to the previous 35% applies, beginning for tax years after 2012. The chart on the next page shows the 2012 rates, the previously scheduled 2013 rates, and ATRA s rates. 2 3

2012 Tax Rates The new 39.6% rate applies to taxable income above a specified threshold: Filing Status Scheduled Increases in Tax Rates for 2013 and After ATRA Tax Rates for 2013 and After 10% N/A 10% 15% 15% 15% 25% 28% 25% 28% 31% 28% 33% 36% 33% 35% 39.6% 35% 39.6% Threshold* Married Joint/Surviving Spouse $450,000 Head of Household $425,000 Single $400,000 Married Separate $225,000 * Subject to future inflation adjustments Because the rate schedule is graduated, taxpayers whose income falls within the 39.6% rate bracket still benefit from the extension of the Bush-era rates in the lower rate brackets. Marriage Penalty Relief A marriage penalty exists when the income tax on a couple s joint return is more than the combined taxes they would pay if they were unmarried and each filed a single return. The tax legislation of the early 2000s helped reduce the marriage penalty by increasing the size of the 15% tax bracket for joint filers and, for those who don t itemize deductions, increasing the size of joint filers standard deduction. Those provisions were scheduled to end after 2012. ATRA retains these marriage penalty relief measures. Capital Gains Tax Rates When a taxpayer sells or otherwise disposes of an appreciated capital asset an investment, for example the difference between the sale price and the tax basis (essentially, the cost) of the asset is generally considered capital gain. Gains on most assets held longer than one year are considered long-term capital gains. Gains on assets held for one year or less are short-term capital gains (taxed as ordinary income). For several years, individual and other noncorporate taxpayers have benefited from a maximum rate of 15% on net capital gains (very generally, net long-term capital gains minus net short-term capital losses). To the extent the net capital gains would have been taxed at the 10% or 15% tax rate if they had been ordinary income like wages, the net capital gains tax rate has been zero percent. The maximum 0% and 15% net capital gains rates for noncorporate taxpayers were scheduled to be replaced after 2012 by rates ranging as high as 20%. ATRA extends the 2012 net capital gains rates of 0% and 15% permanently for most taxpayers. A new 20% maximum net capital gains rate applies to taxpayers whose income exceeds the levels ($450,000 for joint filers, $400,000 for single filers, etc.) discussed above regarding the 39.6% income-tax rate. 4 5

NOTE: For many higher income taxpayers, the new 20% net capital gains rate isn t the only federal tax on capital gains. Starting in 2013, a 3.8% surtax on investment-related income (including capital gains) applies to certain higher income individuals as part of the health care reform legislation of 2010. So, for those individuals subject to the 20% rate, the tax rate on net capital gains could be as high as 23.8%. Other long-term capital gains tax rates (such as the special rate on gains from sales of collectibles) remain unchanged from the rates in effect in 2012. Tax Rates for Qualified Dividends Qualified dividends are those received from domestic corporations and qualified foreign corporations, subject to certain requirements. Qualified dividends were subject to the same maximum rates as net capital gains in 2012 (15% for most taxpayers, 0% if the income would otherwise be taxed in the 10% or 15% income-tax brackets). Prior to ATRA, dividends were to be taxed as ordinary income starting in 2013. Thus, dividends could have been taxed at rates up to 39.6% (43.4%, if the 3.8% surtax applied). However, the new law retains the 2012 dividend rates of 15% and 0% for most taxpayers. As with capital gains, higher income taxpayers whose income exceeds the thresholds set for the 39.6% income-tax rate ($450,000 for joint filers, $400,000 for single filers, etc.) now have a maximum rate of 20% on qualified dividends (plus the 3.8% investment income surtax discussed earlier). Alternative Minimum Tax (AMT) The AMT is an alternate tax originally intended to ensure that high-income individuals pay at least a minimum amount of tax. Originally, the AMT contained exemptions that ensured the tax applied only to higher earners. But the exemption amounts were not indexed for inflation so, over time, an increasing number of individuals have been caught in the AMT net. That said, Congress has for years passed temporary patches to the AMT, raising the exemption amounts to prevent the tax from applying to even more taxpayers. However, Congress did not pass a patch for 2012, so millions of middle-income taxpayers were set to owe AMT on returns to be filed in 2013. The new law not only applies a 2012 patch to the AMT exemptions, but it also makes that patch permanent and inflation adjusted. The exemption amounts for 2012 and estimated inflation-adjusted amounts for 2013 are: Filing Status 2012 AMT Exemption 2013 AMT Exemption Married Joint/ Surviving Spouse Single/Head of Household $78,750 $80,800 $50,600 $51,900 Married Separate $39,375 $40,400 Without the AMT patch, the 2012 exemption amounts would have been $45,000 for joint filers, $33,750 for unmarried filers, and $22,500 for married-separate filers. 6 7

Personal Exemption Phaseout and Limitation of Itemized Deductions Before 2010, the personal exemptions of higher income taxpayers were gradually reduced when their adjusted gross income (AGI) exceeded a specific threshold amount. Similarly, higher income individuals with AGI that exceeded certain amounts had their allowable itemized tax deductions (like home mortgage interest and state income taxes) for the year reduced by up to 80%. A 2001 law gradually reduced the personal exemption phaseout and itemized deduction limitation until they were fully eliminated in 2010. However, under prior law, these two provisions were to return again starting in 2013. ATRA allows the revival of the phaseout and limitation but applies them at threshold levels somewhat higher than they were in the past: Filing Status Threshold* Married Joint/Surviving Spouse $300,000 Head of Household $275,000 Single $250,000 Married Separate $150,000 * To be adjusted for inflation in future years These threshold levels mean that the personal exemption phaseout and itemized deduction limitation will likely affect many more people than the new 39.6% top tax bracket. Plan Transfers to Designated Roth Accounts A 401(k) plan (or other applicable retirement plan ) may offer plan participants a qualified Roth contribution option. Under this option, a plan participant can elect to make currently taxable contributions to a designated Roth account within the plan and eventually, if certain requirements are met, take tax-free distributions from the Roth account. For many participants, this option provides a favorable alternative to traditional pretax contributions, where taxes are due when money is taken from the plan. Under prior law, if a plan participant wanted to take tax-deferred money and transfer it to a designated Roth account within the plan, the participant had to be eligible to receive a distribution from the plan that could be rolled over. This kept many participants who wanted to transfer 401(k) money within the plan to a Roth account from being able to do so (for instance, because they hadn t reached age 59½). For transfers made after 2012, the new law allows a 401(k) or other plan offering designated Roth accounts to allow participants to roll over money to an in-plan Roth account without meeting the usual rollover qualification requirements. As previously, the participant will have to pay income taxes on the taxable amount transferred to the Roth account but will owe no tax upon ultimate distribution of the Roth money if applicable requirements are met. Extenders of Expired Provisions ATRA provides extensions of several individual tax benefits that expired at the end of 2011 or 8 9

were due to expire at the end of 2012. Among them: Child Tax Credit. The new law permanently extends the maximum $1,000 child tax credit for each qualifying child under age 17. Without the new law, the maximum credit would have shrunk to $500 per child for 2013 and beyond. Bush-era and other enhancements to the credit were also made permanent. Dependent Care Credit. A taxpayer may claim a dependent care credit for a portion of qualifying child or dependent care expenses paid for allowing the taxpayer to work. Over the years, several changes were made to the credit regarding items such as the maximum credit amount. The new law permanently extends these changes. State and Local Sales Tax Deduction. Prior law allowed taxpayers to elect to claim an itemized deduction for state and local sales taxes instead of deducting state and local income taxes. This election was to expire after 2011. ATRA extends this provision through 2013. Earned Income Credit. The new law makes permanent or extends through 2017 certain enhancements to the earned income credit available to low-income individuals. American Opportunity Tax Credit. ATRA extends through 2017 this credit for qualified post-secondary education tuition and related expenses. Deduction for Qualified Tuition. This abovethe-line tax deduction, which expired at the end of 2011, is extended through 2013. Student Loan Interest Deduction. The new law permanently extends certain enhancements to the student loan interest deduction that were to expire after 2012. Coverdell Education Savings Accounts. Enhancements to these education accounts, including allowing a maximum contribution amount of $2,000 per beneficiary a year and treating elementary and secondary education costs as qualifying expenses, are permanently extended. Employer-provided Education Assistance. ATRA permanently extends the tax exclusion for up to $5,250 of employer-provided educational assistance. Classroom Expense Deduction. The $250 deduction for a K-12 teacher s (or other eligible educator s) unreimbursed classroom expenses, which expired after 2011, has been extended through 2013. IRA Distributions to Charities. The new law extends through 2013 the provision allowing persons age 70½ or older to make taxfree distributions from an individual retirement account (IRA) to public charities, up to a total of $100,000 a year. This provision had expired after 2011. Special rules allow certain distributions taken in December 2012 to qualify if contributed to charities before February 1, 2013, and permit certain distributions directly transferred to charities in January 2013 to be treated as being made at the end of 2012. Energy Credit. ATRA extends the credit for energy-efficient improvements to existing homes through 2013. 10 11

ESTATE AND GIFT TAX PROVISIONS One of the most contentious issues during negotiations regarding the new law was federal estate taxes. For 2012, the maximum estatetax rate was 35% with an exclusion amount of $5.12 million ($5 million indexed for inflation) that shelters an aggregate amount of transfers at death and lifetime gifts from estate and gift tax. The top rate and exclusion amount were set to expire after 2012, so that for decedents dying after 2012 (or lifetime gifts made after 2012), the highest tax rate was to rise to 55% and the exclusion amount was to drop to $1 million (not indexed for inflation). ATRA permanently sets the top federal estateand gift-tax rate at 40% with an exclusion of $5 million (inflation adjusted) for decedents dying and gifts made after 2012. The new law also makes permanent a prior law provision that allows portability of a decedent s unused exclusion. So, the estate of a decedent who is survived by a spouse will continue to be able to elect to allow the surviving spouse to use the decedent s unused exclusion for the spouse s own lifetime and death-time transfers. The new law also extends: The estate-tax deduction for state estate taxes. Provisions affecting qualified conservation easements. Provisions related to the installment payment of estate tax on closely held businesses. Repeal of the 5% surtax on estates larger than $10 million. The generation-skipping transfer (GST) tax is imposed on certain transfers of property to grandchildren or other people more than a generation younger than the person making the transfer. Where applicable, the GST tax is paid in addition to gift or estate tax. Under ATRA, the GST tax rate is equal to the top federal estate- and gift-tax rate of 40% and the GST tax exemption equals the $5 million (inflation adjusted) basic exclusion amount that applies for estate- and gift-tax purposes. BUSINESS TAX PROVISIONS ATRA extends and/or modifies many temporary tax provisions applicable to business taxpayers. Section 179 Expensing Limit Under the new law, the Section 179 small business expensing election has been enhanced. Previously, for tax years beginning in 2012, the dollar limit for writing off the cost of otherwise depreciable business assets was $139,000, with that limit phased out dollar for dollar as the cost of Section 179-eligible property placed in service during the 2012 tax year exceeded $560,000. For tax years beginning after 2012, the expensing limit was scheduled to decline to $25,000, with the phaseout threshold dropping to $200,000. ATRA extends the higher Section 179 expensing dollar limit that was in effect for 2010 and 2011 to tax years 2012 and 2013. As a result, Section 179 expensing may be elected for up to $500,000 of qualified assets each year, with a $2 million phaseout threshold. After 2013, these numbers are scheduled to revert to the previously scheduled $25,000/$200,000 levels. 12 13

Certain other Section 179 expensing rules are also extended by the new law. For example, businesses will continue to have the ability to expense off-the-shelf computer software placed in service before 2014. Bonus Depreciation To provide a measure of economic stimulus, the tax law has, over the years, allowed business taxpayers to claim bonus first-year depreciation for certain asset purchases. The new law extends for an additional year the 50% first-year bonus depreciation rule that generally applied to qualified property acquired through 2012. As a result, 50% bonus depreciation extends to qualified property acquired and placed in service through 2013. (The provision is extended through 2014 for certain aircraft and longproduction-period property.) Work Opportunity Tax Credit Prior law allowed businesses to claim a credit generally equal to 40% of the first $6,000 of wages paid to new hires who belonged to one of nine targeted groups. The credit expired at the end of 2011, except for the Work Opportunity Tax Credit for hiring qualified veterans, which was set to expire at the end of 2012. ATRA extends the Work Opportunity Tax Credit for members of all the targeted groups who begin work after 2011 and before 2014. Research Tax Credit The research credit expired at the end of 2011. The credit generally was available for incremental increases in qualified research expenditures. The new law extends the credit for amounts paid or incurred after 2011 and on or before December 31, 2013. ATRA also modifies the credit rules. Other Business Tax Extenders Among many other business-related provisions extended through 2013 are the following: Temporary minimum low-income housing tax credit rates for newly constructed non-federally subsidized buildings. Employer wage credit for payments to employees called to active duty. The acquisition period for qualified small business stock that can qualify for a 100% exclusion of gain at the time of sale. The reduced recognition period for S corporation built-in gains tax. Tax incentives for empowerment zones. Treatment of charitable donations by S corporations. 15-year straight-line cost recovery for qualified leasehold improvements, qualified restaurant buildings/improvements, and qualified retail improvements. Enhanced business charitable deduction for contributions of food inventory. Various energy tax incentives, including, among others, credits for qualified alternative fuel vehicle refueling property and biodiesel and renewable diesel fuels. 14 15

CAN WE HELP? The American Taxpayer Relief Act enables most taxpayers to avoid the harsh tax increases that would have resulted from the implementation of the fiscal cliff. But not all taxpayers will avoid tax increases. In fact, many individuals (including small business owners) could find themselves paying higher taxes in 2013 and beyond. The highlights presented here are intended to make you aware of the new law s changes so you can plan for them with the guidance of your professional advisor. We can help you with your planning. Let our professionals be of service to you. This publication is designed to provide accurate and authoritative information in regard to the subject matter covered. However, the general information herein 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 purposes of avoiding tax penalties. 16 FX2013-0111-0055/E TL13

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 this product is purchased. Neither these entities nor their representatives make any representation or assurance regarding the claims-paying ability of the life insurance company. Pacific Life s individual life insurance products are marketed exclusively through independent third-party life insurance producers, which may include bank affiliated entities. Some selling entities may limit availability of some optional riders based on their client s age and other factors. Your broker-dealer can help you determine which optional riders are available and appropriate for your clients. Life Insurance Producer Name Life Insurance Producer State Insurance License Number (or affix your business card) Investment and Insurance Products: Not a Deposit Not FDIC Insured Not Insured by any Federal Government Agency No Bank Guarantee May Lose Value MKTG-OC-1053A 15-31101-01 2/13 TL13