Law Firm Partnership &Benefits Report

Volume 18, Number 12 February 2013

Fine-Tune Your Goals This February

By Debra Forman January is a month when many individuals make resolutions intended to ensure their personal and professional success. In January, you may promise yourself that this year you will be more conscientious about growing your practice and developing your leadership skills. You may improve your billing practices and strive to bill as you go; and resolve not to leave the office until your days work has been recorded. To fit in more time during your billable day to focus on non-billable activities, such as writing articles or client lunches, you may vow to work longer hours during the week. You may challenge yourself to be the first lawyer in the office in the morning and the lawyer that turns off the lights at the end of the day. Then comes February, and your shiny hopes and declarations may lose some of their luster. They may seem overly ambitious, unrealistic or unattainable. You may ask yourself, What was I thinking? How did I ever think I could achieve so much? Resist the February blahs by taking a moment to focus your well-intentioned energies and reaffirm your goals. Believing and trusting in your strengths and abilities enables you to bring change and continue to grow. By implementing new practice continued on page 6

The 2012 American Taxpayer Relief Act Is Enacted

By Richard Stieglitz and Martin Arking

he President and Congress narrowly averted the fiscal cliff with the enactment of the 2012 American Taxpayer Relief Act (ATRA), which President Obama signed into law on Jan. 2, 2013. ATRA addresses the expiring Bush tax cuts as well as a number of other expiring tax provisions. The key elements of the tax legislation are an increase in individual tax rates for high income levels, a permanent patch for the alternative minimum tax, an extension of the gift and estate tax exemption, and extension of certain expiring provisions.

Individual Tax Rates

Starting in 2013 and beyond, ATRA introduces a top individual tax rate of 39.6% for attorneys with taxable incomes in excess of $450,000 for joint filers and $400,000 for single filers. All income below these thresholds will continue to be taxed at the Bush-era lower tax rates. This legislation represents a compromise between the President, who proposed a threshold of $250,000/$200,000 and the Republicans, who wanted to extend the Bush-era rates for all taxpayers. The Tax Act also ended the payroll tax holiday that was initially enacted in 2011 and extended until the end of 2012. The employee portion of the FICA tax reverts to the 6.2% rate from the reduced 4.2% rate of 2011 and 2012. Law firm employees will see a small decrease in their 2013 paychecks as result of this provision. Law firm payroll departments will need to make adjustments to employee withholdings due to the changes in income and payroll tax rates. The IRS has come out with new withholding tables to reflect the increased tax rates. The IRS has also instructed employers to start using the revised withholding tables and correct Social Security tax as soon as possible but no later than Feb. 15, 2013. For any Social Security tax under-withheld before that date, employers should make the appropriate adjustment as soon as possible, but not later than March 31, 2013.

Capital Gains/Dividends Rates

Under ATRA, the top rate for long term capital gains and qualified dividends increases from 15% to 20%. The 20% rate is applied to taxpayers in the 39.6% continued on page 2

In This Issue
The 2012 American Taxpayer Relief Act.... 1 Fine-Tune Your Goals..................... 1 Make the Most of Your Firms Lease Expiration................ 3

PERIODICALS

Taxpayer Relief
continued from page 1 tax bracket ($450,000 for joint and $400,000 for single). All taxpayers below that threshold will continue to enjoy the Bush-era 15% tax rate. Additionally, the 0% rate for taxpayers at lower income levels ($72,500 for joint and $36,250 for single) continues to apply, however with a slight change. Previously, if attorneys and their clients exceeded the 0% bracket threshold, the entire gain was subject to the 15% rate. Under the current legislation, it is possible to have the 0% rate apply to the capital gains/qualified dividends even if the taxpayer's income exceeds that level.

Itemized Deduction and Personal Exemption Limitations

The Act revives the pre-Bush phaseout of personal exemptions and limitation on itemized deductions. The phase-out and limitation begin at AGI levels of $300,000 for joint filers and $250,000 for single filers. The personal exemption is reduced by 2% for every $2,500 by which the taxpayers income exceeds the applicable threshold. The itemized deduction limitation otherwise known as the Pease limitation (named after the senator who originally sponsored this provision) reduces itemized deductions by 3% of the amount that AGI exceeds the aforementioned thresholds. However, itemized deductions cannot be reduced by more than 80%. Certain deductions such as medical expenses, investment interest, casualty and theft losses and gambling losses are not subject to the limitations. The effect of this phase-out is to add approximately 1% to attorneys and their clients overall tax rates.

Law Firm Partnership &Benefits Report

EDITORIAL DIRECTOR . . . . . . . Wendy Kaplan Stavinoha MARKETING DIRECTOR . . . . . . Jeannine Kennedy GRAPHIC DESIGNER . . . . . . . . Amy Martin BOARD OF EDITORS SHARON MEIT ABRAHAMS . . . . . . . . . . . . . . Foley & Lardner LLP Miami SHELDON I. BANOFF. . . . . . Katten Muchin Rosenman LLP Chicago PAULA CAMPBELL . . . . . . . . Paula Campbell Legal Technology Consultants Chicago WILLIAM C. COBB . . . . . . . . Cobb Consulting Houston LESLIE D. CORWIN . . . . . . . Greenberg Traurig, LLP New York SILVIA L. COULTER . . . . . . . LawVision Boston ROBERT W. DENNEY . . . . . . Robert Denney Associates, Inc. Wayne, PA DEBRA FORMAN . . . . . . . . . Pinstripe Coaching Toronto, Ont., Canada PHYLLIS WEISS HASEROT . . Practice Development Counsel New York LEONARD S. HIRSH . . . . . . . Ernst & Young New York WARREN KINGSLEY . . . . . . . Arnall Golden Gregory LLP Atlanta JONATHAN LINDSEY . . . . . . Major, Lindsey & Africa New York BRUCE W. MARCUS . . . . . . . The Marcus Letter Branford, CT KARL NELSON . . . . . . . . . . . Gibson, Dunn & Crutcher LLP Dallas WAYNE N. OUTTEN . . . . . . . Outten & Golden LLP New York KIMBERLY ALFORD RICE . . . KLA Marketing Associates Cherry Hill, NJ JOEL A. ROSE . . . . . . . . . . . . Joel A. Rose & Associates Inc. Cherry Hill, NJ LOUISE E. ROTHERY . . . . . . Association of Corporate Counsel (ACC) Northeast Region ERIC SEEGER . . . . . . . . . . . . Barley Snyder Lancaster, PA RICHARD H. STIEGLITZ . . . . Anchin, Block & Anchin LLP New York ROnald W. TAYLOR . . . . . . Venable LLP Baltimore MARCIA S. WAGNER . . . . . . . The Wagner Law Group Boston
Law Firm Partnership & Benefits Report (ISSN 1061-9410) is published by Law Journal Newsletters, a division of ALM. 2013 ALM Media, LLC. All rights reserved. No reproduction of any portion of this issue is allowed without written permission from the publisher. Telephone: (877) 256-2472, Editorial e-mail: wampolsk@alm.com Circulation e-mail: customercare@alm.com Reprints: www.almreprints.com Law Firm Partnership &Benefits Report 023147 Periodicals Postage Pending at Philadelphia, PA POSTMASTER: Send address changes to: ALM 120 Broadway, New York, NY 10271

Net Investment Income Tax

Although its not part of the fiscal cliff legislation, lawyers and clients should watch out for the new 3.8% Net Investment Income Tax (NIIT) that was effective beginning Jan. 1, 2013. This tax, which applies to taxpayers with Adjusted Gross Income (AGI) above $200,000 for single or $250,000 for joint filers, consists of a 3.8% tax on the lesser of all passive and investment income, or the excess of AGI over the relevant threshold. Note that there is no taxable income limitation, so in certain circumstances, attorneys and their clients could still be subject to this tax even with no taxable income. Generally, investment income is defined as interest, dividends and capital gains as well as passive income. In the coming year, attorneys and clients should pay close attention to intercompany loans and personal loans to businesses. In some cases, the interest from such loans may unnecessarily create net investment income subject to the 3.8% NIIT. To avoid an undue tax burden, please consult your tax adviser with regard to such loans. Richard H. Stieglitz, CPA, a member of this newsletters Board of Editors, is a Tax Partner and Martin Arking, CPA, is a Tax Manager in the New York accounting firm of Anchin, Block & Anchin LLP. They can be reached at 212-840-3456 or via e-mail at richard. stieglitz@anchin.com and martin.ark ing@anchin.com, respectively.
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Alternative Minimum Tax Relief

ATRA provides permanent relief for middle class income taxpayers who would have otherwise been subject to the Alternative Minimum Tax (AMT). For 2012 and all subsequent years, the Act provides for an increased exemption amount and allows certain nonrefundable tax credits to offset AMT. For 2012, the exemption amounts are $78,750 for joint filers and $50,600 for single filers. These amounts are indexed annually for inflation. Without the legislation, the exemption amounts would have been $45,000 and $33,750 for joint and single filers respectively. For attorneys and their clients in AMT, the effective tax rate has not changed from 28% for ordinary income. Capital gains and qualified dividends will continue to be taxed at favorable rates (15% or 20%). Also, the Pease limitation discussed above is not applied to attorneys and their clients in AMT. As such, attorneys and their clients in AMT may not see an increase in their tax rates unless they are subject to the 20% rate on capital gains and qualified dividends as well as the 3.8% NIIT. continued on page 3

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February 2013

Make the Most of Your Law Firms Lease Expiration

By Elizabeth Cooper and Tom Doughty Lease expirations and other anticipated firm moves represent milestones offering significant opportunity to boost productivity, drive cost and energy use reductions, and improve workforce morale. But as any veteran law firm partner will tell you, lease negotiations and the resulting renovations or moves also represent a highly sensitive management issue. To be successful, focus on drawing the most value from your firms lease expiration whether you decide to make a move, transform your existing space, or simply negotiate advantageously without major change. Elizabeth Cooper and Tom Doughty are International Directors and Co-chairs of Jones Lang LaSalles law firm practice, based in Washington, DC.

What Time Is

Good Time?

The next few years remain a good time to consider a move. It will come as no surprise that since the onset of the recession, law firms have been in the drivers seat when leasing office space. In fact, as the Jones Lang LaSalles Law Firm Office Perspective Report reveals, law firms have been able to take advantage of a historically tenant-favorable market with average rents discounted by 10% to 20% from the peak in 2007. See www.us.am.joneslanglasalle.com/ ResearchLevel1/2012Law_Firm_office_Perspective.pdf. However, the tide is turning. Jones Lang LaSalle (JLL) predicts that 2015 will be the first time in eight years that the majority of U.S. markets will move into landlord-favorable territory. In fact, in select markets such as Boston, New York City and Dallas, landlords already have the upper hand in lease negotiations. For quality space, there is even bleaker news for tenants: Law firm managing partners seeking impressive locations are currently grappling with a shortage a surviving spouse will be able to take advantage of up to $10.5 million of exemption, as indexed for inflation. Congresss gift of certainty in the transfer tax arena will be surely be a welcome one as attorneys and clients engage in estate planning in 2013. In addition, the annual exclusion for gifts increased to $14,000 per donee as of Jan. 1, 2013.

of prestigious space in prominent buildings. This year, trophy space in key markets continued to command a 20% premium over other Class A space, a premium expected to rise as the economy improves. Additionally, the large spaces required by many law firms are becoming harder to find: Twenty cities with a high concentration of law firms have fewer than five blocks of space greater than 100,000 square feet available.

Key Strategies
As negotiations proceed over the next few years, many law firm partners will find themselves faced with spearheading a lease renegotiation, a move, or a consideration of multiple options. Below are some strategies that will help you ensure that you are drawing the most value from your next move or renovation and that the agreed lease terms set your firm up for success. We recommend you explore the following questions, both inside your firm and with your real estate advisers, before your next lease negotiation: continued on page 4 Attorneys and staff who wish to adopt a child will be happy to know that the adoption expenses credit and employer-provided adoption assistance exclusion are now permanent under the Act. The adoption expenses credit allows taxpayers with adjusted gross income up to $229,710 (subject to a phaseout) to offset federal income tax and AMT by up to $12,650 of adoption fees, court costs, attorney fees, and other expenses paid or incurred to adopt a child. As a bonus, if a law firm chooses to pay some adoption expenses, employees with AGI less than $222,520 (subject to a phaseout) may exclude up to $12,170 of these payments from income. To benefit working parents who must pay for child or dependent care in order to maintain employment, the Act permanently extended the dependent care credit at Bush-era rates. Thus, for taxpayers with AGI above $45,000, the credit will permanently be available at a rate of 20% of continued on page 5
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Taxpayer Relief
continued from page 2

Gift

and

Estate Tax Relief

The most expensive tax break in the Act, to the tune of about $368 billion over 10 years, is the permanent extension of the $5 million gift and estate exemption ($5,250,000 for 2013, as indexed for inflation). In fact, the only change to the generous provisions enacted as part of Congresss 2010 taxpayer relief is an increase in the marginal estate tax rate to 40% from 35%. Because Congress averted the expected decrease of the exemption to $1 million in 2013, attorneys and their clients may rest assured that there will not be a clawback of taxes for gifts already made in 2011 or 2012. The new Act also permanently enshrines portability, the ability of a deceased to transfer his or her unused exemption amount to the surviving spouse. Thus, in the case of decedents who transfer all of their assets to a surviving spouse at death,
February 2013

Individual Tax Relief

The Act extended a host of exclusions, deductions, and credits that expired in 2012. Some of these provisions are permanent and some have been temporarily extended. Permanent Provisions Permanent provisions of the Act include the employer-provided educational assistance exclusion, which will benefit associates at law firms that pay for law school tuition. An employee may exclude up to $5,250 of education assistance per year from his or her gross income, even if the assistance is for graduate tuition. Unfortunately, this amount does not change with inflation.

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Taxpayer Relief
continued from page 3 the first $3,000 of care expenses for a single dependent, or the first $6,000 for two or more dependents. This translates into maximum tax savings of $600 to $1,200 for each year that the dependents qualify. As a revenue-raising provision that doubles as a useful retirement planning tool, the Act now allows all traditional 401(k) and 403(b) retirement plan participants (subject to employers amending their plans) to rollover all or some of their balance to a Roth 401(k) or 403(b) account within the same plan, and pay tax on the rolled-over funds. Previously, only participants who had already reached age 59 could make such in-plan Roth conversions. This could be advantageous for younger attorneys and staff who will now be able to pre-pay the tax on their retirement account balances and enjoy a greater share of tax-free retirement income in the future. Temporarily Extended Provisions To the relief of attorneys and their clients who continue to ride out an uncertain real estate market, Congress extended the exclusion of cancellation of indebtedness income for qualified principal residence indebtedness until the end of 2013. Taxpayers who acquired debt to buy, build or improve their primary home may exclude up to $2 million of income from debt discharged in foreclosure or forgiveness. Also extended through 2013 is the ability to include mortgage insurance premiums as part of the itemized deduction for qualified mortgage interest. Another temporarily extended itemized deduction provision is the state and local sales tax deduction. For 2012 and 2013, attorneys and staff in states without state income taxes or whose sales taxes are higher than income taxes for the year may choose to deduct sales taxes paid as an itemized deduction. In a boon for attorneys and their staff who take public transit to work, the Act restores parity for employer-provided transit and parking benefits for one year. Thus, for 2013, law firms may provide tax-free money to employees for transit passes
February 2013

on a monthly basis up to the same dollar limit as tax-free parking benefits (currently $245, as indexed for inflation). There are various rules for administering and substantiating transit and parking benefit plans, so law firms that wish to offer this benefit for the first time should consult an employee benefits expert. College tax breaks continue under the Act, including a five-year extension of the popular American Opportunity Tax Credit (AOTC) for college tuition. Although rarely used by higher-income families due to AGI limits, the return of the Personal Exemption Phaseout means that this credit deserves more attention in 2013. For attorneys with AGI over $250,000 single ($300,000 joint) who have limited benefit from personal exemptions, it may be more beneficial to simply forgo a dependency exemption and allow their college-enrolled children to take the credit against their own income tax instead (please note that the refundable part of the AOTC will still not be available as long as a dependent could be claimed). For some with AGI below $65,000 single ($130,000 joint), the above-the-line deduction for up to $4,000 of qualified tuition expenses may be a better deal. Congress extended the abovethe-line deduction, which decreases to $2,000 for taxpayers with AGI of up to $80,000 ($160,000 joint), through Dec. 31, 2013. To get the highest benefit from these tax breaks, please consult your tax adviser. Residential energy credits are back for a limited time, as well as a few other energy-efficiency and green energy credits. Through Dec. 31, 2013, attorneys and staff who purchase and install certain qualifying energy-efficient building components, water heaters, heat pumps or central air conditioners for a primary home can receive a credit for 10% of the amount paid, up to $500, or $200 for windows. The credit must be reduced by the amount of the credit from earlier years. Credits for twoor three-wheeled electric vehicles, the energy-efficient home credit for homebuilders, and credits for certain energy-efficient appliances are also available until Dec. 31, 2013. Charitably minded attorneys and their clients who own historically

or ecologically important real estate may benefit from the enhanced deduction for qualified conservation easements. For easements donated through Dec. 31, 2013, the carryforward period for donations in excess of 50% of AGI is 15 years, versus five years for other donations to charity. Contributions with shorter time limits come first, so attorneys and their clients may take advantage of both their usual charitable giving and the deduction for conservation easements (up to the 50% AGI limitation) each year until it is used up.

Business Tax Relief

ATRA also extends many popular business tax breaks. 2013 may be a good year for law firms to consider capital improvements or fixed asset purchases. The Act extends for 2012 and 2013 the enhanced Section 179 expensing rules. Law firms can expense up to $500,000 of fixed asset additions with a $2 million investment limit. The 50% bonus depreciation was also extended through the end of 2013 as well as a 15-year straight-line depreciation period for qualified leasehold, restaurant and retail improvement property. ATRA extends through 2013 the Work Opportunity Credit, which provides credits to employers that hire employees from certain targeted groups. The amount of the credit is generally 40% of the first year wages up to a maximum of $6,000. The credit for the hiring of a qualified veteran can be as much as $9,600. Law firms operating as S corporations that were formerly C corporations may want to consider selling certain assets in 2013. The waiting period for built-in gains tax (entity level tax on S corporations that sell appreciated assets) has been fixed at five years for assets sales occurring in 2012 and 2013. Therefore, S corporations that converted in 2007 or earlier will not be subject to builtin gains tax on 2013 asset sales. The Act also extended through 2013 the credit for Research and Development. This provision provides a credit for taxpayers who engage in qualified research activities.
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