paul@wellsfinancialpartners.com

Wells Financial Partners April 2013Estate Tax After the Fiscal Cliff

Understanding the New Medicare Tax onUnearned Income

Financial Tips for Obtaining a Mortgage Loan

I don't think I'll be able to file my tax return byApril 15. Is there any way to file my return at alater date?

Estate Tax After the Fiscal Cliff

See disclaimer on final page

Hello to All:

Welcome to spring!! Being tax time, thismonth's articles look at a few differentaspects of the latest tax law (estatetaxes and the new Medicaid tax onunearned income). As always, thank youfor your continued vote of confidence inus with your referrals of friends andfamily members. This is how we havechosen to build our business so we canspend more time servicing our clientsrather than putting on seminars everymonth.

Happy reading,Paul, Stan and Rick

Securities and advisory services offeredthrough Commonwealth FinancialNetwork, Member FINRA/SIPC, aregistered investment adviser. Fixedinsurance products and services offeredby Wells Financial Partners, LLC.

After threatening togo over the fiscalcliff, the gift tax,estate tax, andgeneration-skippingtransfer (GST) taxhave come in for asoft landing. TheAmerican TaxpayerRelief Act of 2012(ATRA 2012),

enacted on January 2, 2013, permanentlyextended the $5 million (as indexed) gift taxand estate tax applicable exclusion amount andGST tax exemption. It also permanentlyextended portability of the gift tax and estatetax applicable exclusion amount betweenspouses. However, it also increased the topgift, estate, and GST tax rate to 40% starting in2013. A number of other provisions were alsopermanently extended.

Top gift, estate, and GST tax rateIn 2012, there was a 35% top tax rate for gift,estate, and GST taxes. It was scheduled toincrease to 55% in 2013. ATRA 2012 providesa permanent 40% top rate, starting in 2013.

Applicable exclusion amountYou have an applicable exclusion amount thatcan protect a certain amount of property fromthe federal gift tax and estate tax. The basicexclusion amount was $5,120,000 in 2012 ($5million as indexed for inflation), but wasscheduled to drop to $1 million in 2013. ATRA2012 permanently extends the basic exclusionamount at $5 million as indexed for inflation.

Portability of exclusionThe estate of a person who died in 2011 or2012 could transfer the decedent's unusedapplicable exclusion amount to his or hersurviving spouse, who could use the unusedexclusion, along with his or her own basicexclusion amount, to shelter property from giftand estate tax (referred to as portability). Theprovision was scheduled to sunset in 2013.ATRA 2012 has permanently extended theportability provision.

GST tax exemptionYou have a GST tax exemption that can protecta certain amount of property from the GST tax.The GST tax exemption was $5,120,000 in2012 ($5 million as indexed for inflation), butwas scheduled to drop to $1 million (as indexedfor inflation) in 2013. ATRA 2012 permanentlyextends the GST tax exemption at $5 million asindexed for inflation (it is $5,250,000 in 2013).

State death taxesIn 2012, your estate could take an estate taxdeduction for death taxes (estate tax orinheritance tax) paid to a state. In 2013, it wasscheduled to change back into a credit for statedeath taxes, as available back in 2001.However, ATRA 2012 permanently extends thededuction for state death taxes.

Conservation easement exclusionAn estate tax exclusion is available for qualifiedconservation easements. In 2012, the exclusionwas generally available if the property waslocated anywhere in the United States. In 2013,the exclusion was scheduled to be available, asin 2001, only if the property was located withina limited number of miles from a NationalWilderness Preservation System or an UrbanNational Forest. ATRA 2012 permanentlyextends the provision that the property cangenerally be located anywhere in the UnitedStates and the mileage requirements do notapply.

Estate tax deferral for closely heldbusinessWhere the value of a closely held businessexceeds 35% of the value of the adjusted grossestate, payment of estate tax attributable to thebusiness can be deferred for up to 5 years andthen paid in installments over 10 years, all atfavorable interest rates. In 2012, a closely heldbusiness could have 45 partners orshareholders. In 2013, the permissible numberof partners or shareholders was scheduled todrop to 15, as in 2001. ATRA 2012 permanentlyextends the provision allowing up to 45 partnersor shareholders.

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Understanding the New Medicare Tax on Unearned IncomeHealth-care reform legislation enacted in 2010included a new 3.8% Medicare tax on theunearned income of certain high-incomeindividuals. The new tax, known as theunearned income Medicare contribution tax, orthe net investment income tax (NIIT), tookeffect on January 1, 2013.

Who must pay the new tax?The NIIT applies to individuals who have "netinvestment income," and who have modifiedadjusted gross income (MAGI) that exceedscertain levels (see the chart below). (Estatesand trusts are also subject to the new law,although slightly different rules apply). Ingeneral, nonresident aliens are not subject tothe new tax.

Filing Status MAGI over ...

Single/Head ofhousehold

$200,000

Married filing jointly/Qualifying widow(er)

$250,000

Married filingseparately

$125,000

What is MAGI?For most taxpayers, MAGI is simply adjustedgross income (AGI), increased by the amountof any foreign earned income exclusion.

AGI is your gross income (e.g., wages, salaries,tips, interest, dividends, business income orloss, capital gains or losses, IRA and retirementplan distributions, rental and royalty income,farm income and loss, unemploymentcompensation, alimony, taxable Social Securitybenefits), reduced by certain "above-the-line"deductions (see page one of IRS Form 1040 fora complete list of adjustments).

Note that AGI (and therefore MAGI) isdetermined before taking into account anystandard or itemized deductions or personalexemptions. Note also that deductiblecontributions to IRAs and pretax contributionsto employer retirement plans will lower yourMAGI.

What is investment income?In general, investment income includes interest,dividends, rental and royalty income, taxablenonqualified annuity income, certain passivebusiness income, and capital gains--forexample, gains (to the extent not otherwiseoffset by losses) from the sale of stocks, bonds,and mutual funds; capital gains distributionsfrom mutual funds; gains from the sale ofinterests in partnerships and S corporations (to

the extent you were a passive owner), andgains from the sale of investment real estate(including gains from the sale of a secondhome that's not a primary residence).

Gains from the sale of a primary residence mayalso be subject to the tax, but only to the extentthe gain exceeds the amount you can excludefrom gross income for regular income taxpurposes. For example, the first $250,000($500,000 in the case of a married couple) ofgain recognized on the sale of a principalresidence is generally excluded for regularincome tax purposes, and is therefore alsoexcluded from the NIIT.

Investment income does not include wages,unemployment compensation, operatingincome from a nonpassive business, interest ontax exempt bonds, veterans benefits, ordistributions from IRAs and most retirementplans (e.g., 401(k)s, profit-sharing plans,defined benefit plans, ESOPs, 403(b) plans,SIMPLE plans, SEPs, and 457(b) plans).

Net investment income is your investmentincome reduced by certain expenses properlyallocable to the income--for example,investment advisory and brokerage fees,investment interest expenses, expenses relatedto rental and royalty income, and state andlocal income taxes.

How is the tax calculated?The tax is equal to 3.8% of the lesser of (a)your net investment income, or (b) your MAGIin excess of the statutory dollar amount thatapplies to you based on your tax filing status.So, effectively, you'll be subject to the additional3.8% tax only if your MAGI exceeds the dollarthresholds listed in the chart above.

Example: Sybil, who is single, has wages of$180,000 and $15,000 of dividends and capitalgains. Sybil's MAGI is $195,000, which is lessthan the $200,000 statutory threshold. Sybil isnot subject to the NIIT.

Example: Mary and Matthew have $180,000 ofwages. They also received $90,000 from apassive partnership interest, which isconsidered net investment income. Their MAGIis $270,000, which exceeds the threshold formarried taxpayers filing jointly by $20,000. TheNIIT is based on the lesser of $20,000 (theamount by which their MAGI exceeds the$250,000 threshold) or $90,000 (their netinvestment income). Mary and Matthew oweNIIT of $760 ($20,000 x 3.8%).

Note: The NIIT is subject to the estimated taxrules. You may need to adjust your income taxwithholding or estimated payments to avoidunderpayment penalties.

Health-care reformlegislation passed in 2010included a new additional0.9% Medicare tax onwages, compensation, andself-employment incomeover certain thresholds. Thisnew tax also took effect onJanuary 1, 2013. The 0.9%tax does not apply toincome subject to the NIIT.So while you may besubject to both taxes, thetaxes do not apply to thesame types of income.

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Financial Tips for Obtaining a Mortgage LoanIn January 2013, the Consumer FinancialProtection Bureau released a new mortgageregulation, which sets forth stricter underwritingrequirements for mortgage lenders. Theregulation requires lenders to ensure aborrower's ability to repay a loan by taking avariety of underwriting precautions, includingverifying income and assets and increasingdebt-to-income ratios.

The regulation implements sections of the 2010Dodd-Frank Act, and is aimed at protectingconsumers by providing for a standardization ofthe mortgage loan underwriting process.However, some mortgage-industry experts fearthere's a chance that the regulation may end upmaking obtaining a mortgage loan more difficultthan it has been in the past. And while lendershave until January 2014 for final compliancewith the regulation, some have already begunto tighten up their mortgage lendingrequirements. As a result, you may want toconsider the following tips when applying for amortgage loan.

Clean up your credit reportA borrower's credit history is the cornerstone toany lender's underwriting process. As a result,it's important to make sure that your creditreport is in good shape before you apply for amortgage loan. Your credit report containsinformation about your past and present credittransactions and is used by mortgage lendersto evaluate your creditworthiness. A positivecredit history will not only make it easier toobtain a mortgage loan, but can also result in alender offering you a lower interest rate.

You should review your credit report and checkit for any inaccuracies. If necessary, you mayneed to take steps to improve your credithistory. To establish a good track record withcreditors, make sure you always pay yourmonthly bills on time. In addition, try to avoidhaving too many credit inquiries on your report,which are made every time you apply for newcredit.

Improve your debt-to-income ratioIn the past, lenders looked for borrowers tohave a debt-to-income ratio of no greater than36%. The new mortgage regulation suggeststhat borrowers have a debt-to-income ratio thatis less than or equal to 43%. That means youshould be spending no more than 43% of yourgross monthly income on longer-term debtpayments. If you find that your debt-to-incomeratio is too high, there are a couple of steps youcan take to lower it.

Your first step should be to look at yourlong-term debt payments. These include

student loans, credit cards, and carpayments--any loans that won't be repaid withina year. Try to make it a priority to pay downyour long-term debts as quickly as possible.This may require you to review your budget andmake adjustments. If you are having troublecoming up with the extra money, take a look atyour discretionary spending. By cutting back ondiscretionary expenses (e.g., going out to eat orto the movies), you may be surprised at howquickly you can free up money to put towardspaying down your debt.

Another way to improve your debt-to-incomeratio is to increase your income. Perhaps youcan earn extra income by taking a second jobor performing part-time consulting work in yourchosen profession or field of expertise. If youare married and either you or your spouse iscurrently not working, you or your spouse maywant to consider the possibility of reentering theworkforce.

Increase the size of your down paymentWhile it is possible to obtain a mortgage with aminimal down payment--for example, FederalHousing Administration (FHA) mortgagesrequire down payments of as little as 3.5% ofthe home's purchase price--a larger downpayment will usually assure you a moreattractive mortgage loan. In addition to requiringprivate mortgage insurance (PMI), lendersgenerally offer lower loan limits and higherinterest rates to borrowers who have a downpayment of less than 20% of a home'spurchase price.

If you find that you don't have enough for adown payment, you may want to considerholding off on purchasing a home to give youtime to increase your down payment fund. Inthe meantime, you can invest your downpayment in a low-risk, interest-bearing accountsuch as a money market deposit account.

Or, consider looking into alternative ways tofund your down payment, such as:

• Converting/liquidating assets to cash.• Using gifts.• Borrowing from a cash value life insurance

policy or employer-sponsored retirementplan. (Keep in mind, however, that if you takea loan against your cash value, the deathbenefit available to your survivors will bereduced by the amount of the loan. Inaddition, policy loans may reduce availablecash value and can cause your policy tolapse. Finally, you could face taxconsequences if you surrender the policy withan outstanding loan against it.)

You're entitled to a freecopy of your credit reportonce a year from each ofthe three major creditreporting agencies. Visitwww.annualcreditreport.comfor more information.

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paul@wellsfinancialpartners.com

Prepared by Broadridge Investor Communication Solutions, Inc. Copyright 2013

The accompanying pages havebeen developed by an independentthird party. CommonwealthFinancial Network is notresponsible for their content anddoes not guarantee their accuracyor completeness, and they shouldnot be relied upon as such. Thesematerials are general in nature anddo not address your specificsituation. For your specificinvestment needs, please discussyour individual circumstances withyour representative.Commonwealth does not providetax or legal advice, and nothing inthe accompanying pages should beconstrued as specific tax or legaladvice.

After filing my tax return, I found out that I'll be getting alarge refund this year. What should I do with it?It's easy to get excited at taxtime when you find out you'llbe getting a refund from theIRS--especially if it's a large

sum of money. The prospect of taking yourfamily on a dream vacation, purchasing that60-inch LCD television you've had your eye on,or going on a shopping spree at the mall allseem like great ways to spend the money. Butwhat about doing something a bit morepractical with your refund, such as putting ittowards improving your overall financialpicture?

While it may not seem as exciting as a vacationto a tropical island, consider putting your refundin a tax savings vehicle such as a retirement oreducation savings plan. To make it even easierfor you, the IRS allows direct deposit of refundsinto a variety of accounts, including IRAs andCoverdell education savings accounts.

Another option is to pay down any existing debtyou may have, especially if it is in the form ofcredit card balances that carry high interestrates. Paying off any outstanding balances willreduce the interest you pay each month inaddition to the total interest you'd pay over the

long term--freeing up money to work for you inmore beneficial ways, such as saving andinvesting.

You may also consider putting your refundtowards increasing your cash reserve. It's agood idea to have at least three to six months'worth of living expenses in your cash reserve.Without adequate savings, a period ofunemployment or an unexpected illness couldbe financially devastating.

Keep in mind that a refund is essentially aninterest-free loan from you to the IRS. If youfind that you always end up receiving anincome tax refund, it may be time to adjust yourwithholding. When determining the correctwithholding amount, your objective should be tohave just enough withheld to prevent you fromincurring penalties when your tax return is due.

Finally, to avoid any surprises at tax time (eitherin the form of a refund or tax bill due), it's agood idea to periodically check yourwithholding, especially when your lifestyle oremployment circumstances change. Visitwww.irs.gov for more information.

I don't think I'll be able to file my tax return by April 15.Is there any way to file my return at a later date?If you don't file your federalincome tax return on time, youcould be subject to afailure-to-file penalty.

Fortunately, you can file for and obtain anautomatic six-month extension by usingIRS Form 4868.

You must file for an extension by the originaldue date for your return. Individuals whose duedate for filing a return is April 15 would thenhave until October 15 to file their return.

It is important to note, however, that in mostcases this six-month extension is an extensionto file your tax return and not an extension topay any federal income tax that is due.

You should estimate and pay any federalincome tax that is due by the original due dateof the return without regard to the extension.Any taxes that are not paid by the regular duedate will be subject to interest, and possiblypenalties.

There are a couple of instances, however,where the IRS allows both an extension to file atax return and an extension to pay any federalincome tax due:

• If you are a U.S. citizen or resident and, onthe due date of your federal income taxreturn, you either: (1) live outside the U.S. orPuerto Rico (with your main place of businessor post of duty outside the U.S. or PuertoRico as well), or (2) are in the military ornaval service outside the U.S. or Puerto Rico,you may be allowed an automatic two-monthextension of time to both file your federalincome tax return and pay any federal incometax due. Interest will be assessed on anyunpaid taxes due as of the regular due date.

• If you serve in a combat zone (or qualifiedhazardous duty area), your due date for bothfiling a federal income tax return and payingfederal income tax is automatically extendedby at least 180 days from the last day you arein a combat zone or the last day of qualifiedhospitalization for injury related to service in acombat zone. No penalties or interest will beassessed for failing to file a return or to payfederal income tax during this extensionperiod.

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