2018 Year-End Tax Reminders

Transcription

1 2018 Year-End Tax Reminders Family Office Resources Income Tax Beginning in 2018, the standard deduction for single filers is $12,000 (up from $6,500 in 2017) and $24,000 for married taxpayers who file jointly (up from $13,000 in 2017). The personal exemption has been eliminated. In 2018, the maximum child tax credit is $2,000 per child (up from $1,000 in 2017). As much as $1,400 (indexed for inflation in subsequent years) may be refundable. Single Filers Ordinary Income IF INCOME IS TAX DUE $0 - $9,525 10% 10% $9,525 $38,700 12% $ % of amount over $9,525 $38,701 - $82,500 22% $4, % of amount over $38,700 $82,501 - $157,500 24% $14, % of amount over $82,500 Long Term Capital Gains IF INCOME IS $0 - $38,600 0% $38,601 - $425,800 15% $425, % Married Filing Jointly Ordinary Income IF INCOME IS $0 - $19,050 10% 10% $19,051 - $77,400 $77,401 - $165,000 $165,001 $315,000 $315,001 - $400,000 $400,001 - $600,000 12% 22% 24% 32% 35% $600, % Long Term Capital Gains IF INCOME IS $0 - $77,200 0% TAX DUE $1, % of amount over $19,050 $8, % of amount over $77,400 $28, % of amount over $165,000 $64, % of amount over $315,000 $91, % of amount over $400,000 $161, % of amount over $600,000 Wealth and Estate Planning Specialists $157,501 $200,000 $200,001 - $500,000 32% $32, % of amount over $157,500 35% $45, % of amount over $200,000 $77,201-15% $479,000 $479, % $500, % $150, % of amount over $500, Morgan Stanley Smith Barney LLC. Member SIPC 2018 Morgan Stanley Smith Barney LLC. Member SIPC CRC /2018 1

2 Miscellaneous Itemized Deductions Beginning in 2018, miscellaneous itemized deductions, which were subject to the 2% floor, will no longer be deductible. Miscellaneous itemized deductions include investment management fees, expenses related to tax preparation fees, unreimbursed employee expenses, job search expenses, and home office operating expenses. State and Local Taxes Deductions for state and local taxes are now limited to $10,000 per return ($5,000 for married taxpayers who file separately). State and local taxes include real property taxes, personal property taxes and state and local income taxes. Mortgage Interest Deduction Interest paid on mortgage debt incurred after December 15, 2017 to acquire, build, or substantially improve a primary or secondary residence (new debt) is deductible for loans up to $750,000. For debt incurred prior to December 15, 2017, interest is deductible for loans up to $1 million (as under prior law). Interest on a home equity loan is no longer deductible. Alimony In previous years, alimony (also referred to as spousal maintenance ) was deductible to the payor spouse and includible in the payee s taxable income. For alimony paid pursuant to a divorce or separation agreement executed or modified after December 31, 2018, alimony payments will not be deductible to the payor and will not be included in the payee s taxable income. Pease Limitation The Pease limitation on itemized deductions is suspended until In previous years, application of the Pease limitation capped the amount of itemized deductions certain high income earners could claim. Cost Basis of Gifted Property Generally, gifted property receives a carry over basis (subject to an upward adjustment if a gift tax is paid). An exception applies if the fair market value on the date of the gift is less than the donor s basis. In that case, on a subsequent sale of gifted property, gain is determined with reference to the donor s basis at the time of the gift and loss is determined with reference to the fair market value at the time of the gift. Example 1: X makes a gift of appreciated stock to Y. The stock has a FMV of $3,000 at the time of the gift and X s basis is $1,000. If Y immediately sells the stock, she will recognize a gain of $2,000. Example 2: X makes a gift of depreciated stock to Y. The stock has a FMV of $3,000 at the time of the gift and X s basis is $5,000. If Y immediately sells the stock, she will have no gain or loss (i.e., Y will not be permitted to recognize a loss of $2,000). Example 3: X makes a gift of stock to Y. The stock has a FMV of $3,000 at the time of the gift and X s basis is $4,000. If Y later sells the stock when the FMV is $2,000, she will have a $1,000 loss. If Y sells the stock when the FMV is $5,000, she will have a $1,000 gain. If gifted loss property is later sold at a price between the fair market value at the time of the gift and the donee s cost basis, there will be no gain or loss recognized. Exchange Traded Funds (ETFs) ETFs that hold physical gold are considered to hold collectibles for capital gains purposes. The long term capital gains rate for collectibles is 28% (plus an additional 3.8% Medicare surtax) Morgan Stanley Smith Barney LLC. Member SIPC 2018 Morgan Stanley Smith Barney LLC. Member SIPC CRC /2018 2

3 Inverse ETFs focused on metals generally own futures and so are not considered collectibles. Appreciation of ETFs that are invested in futures is generally treated as 60% long-term capital gain and 40% short-term capital gain. Not necessarily so with inverse Exchange Traded Notes (ETNs) depending on the structure of the note. Sometimes all ETN appreciation is treated as long term capital gain (taxed at a maximum 20% rate plus the 3.8% Medicare surtax). Tax Lot Selling When a stock is purchased over time in different lots, they are generally deemed later sold on a FIFO (first in, first out) basis. However, a seller may elect other treatment. For example, taxpayers who are subject to a 20% capital gains tax might wish to sell high basis lots in order to defer all or part of their gains. Alternatively, taxpayers who are subject to a 15% capital gains tax might consider accelerating gains to take advantage of the lower rate. Harvesting Losses and the Wash Sale Rule If a security is sold at a loss and a substantially identical security is acquired within the 61-day period beginning 30 days before the sale date and ending 30 days after the sale date, under the wash sale rule, the loss will be disallowed and will be added to the basis of the new stock. Alternative Minimum Tax (AMT) In 2018, the Alternative Minimum Tax exemption is $109,400 for married couples filing jointly, $70,300 for singles, and $54,700 for married filing separately. The phase out of the AMT exemption begins at 25 percent of excess AMT income over $1 million for married filing jointly and surviving spouses and $500,000 for others. Exemptions and phase out levels are increased for cost of living in 2019 and subsequent years. Section 199A Beginning in 2018, partners/members of certain pass through entities (generally partnerships, LLCs, and S- corporations) may be eligible for a deduction of up to 20% on qualified business income. The rules are complex and clients should discuss with their tax professionals whether and to what extent they may benefit from the new rule. Qualified Dividends Qualified dividends are taxed at a preferential rate of 20% (plus the 3.8% Medicare surtax). To qualify, generally shareholders must hold the common stock for more than 60 days during the 121-day period beginning 60 days prior to the ex-dividend date and ending 60 days after the exdividend date. Certain preferred shares can also qualify, subject to an extended holding period: the stock must be held at least 91 days during the 181-day period beginning 90 days prior to the ex-dividend date and ending 90 days after the ex-dividend date. Note that the taxpayer s holding period may be suspended for a period of time under certain circumstances. Incentive Stock Options (ISOs) There are no ordinary income tax consequences when an employee exercises an ISO, however the spread between the FMV of the stock at the time of exercise and the strike price is an adjustment item for AMT purposes. A taxpayer may wish to make a taxable sale of an ISO stock if the stock value has depreciated significantly in Doing so will recast the ISO as a nonqualified stock option, avoid the AMT impact of the original exercise, and limit the compensation income recognized to the difference between the sale price of the stock at the exercise price of the option. Such a disqualifying disposition must take place in 2018 Morgan Stanley Smith Barney LLC. Member SIPC CRC /2018 3

4 the same taxable year as the exercise. A Hedging Reminder A short against the box entered into in 2018 as a short-term hedge under the safe harbor of IRC Section 1259 must be closed out by January 30, 2019 and the position must be held unhedged for 60 days following the close of the short transaction. IRAs Traditional IRAs are generally funded with pre-tax dollars and grow tax-deferred until distributions are made. Distributions are taxed as ordinary income. In contrast, Roth IRAs are funded with aftertax dollars and provide tax-free distributions if certain conditions are met (generally, the account must have been open for more than 5 years and the owner must have reached age 59 ½ or become disabled). In 2018 the maximum aggregate contribution to a taxpayer s Traditional and/or Roth IRA(s) is the lesser of (1) $5,500 and (2) the taxpayer s total earned income. Taxpayers who are aged 50 and older may make an additional $1,000 catch-up contribution annually. Contributions to a Traditional IRA are generally income tax deductible. In 2018, the deduction is phased out for single filers with a Modified Adjusted Gross Income (MAGI) between $63,000 and $73,000 ($101,000 and $121,000 for married taxpayers filing jointly). In 2018, the amount a taxpayer may contribute to a Roth IRA is phased out for single taxpayers with a MAGI between $120,000 and $135,000 ($189,000 and $199,000 for married taxpayers filing jointly). The last day for making 2018 contribution to Traditional and/or Roth IRAs is the tax return filing deadline without regard to extensions April 15, Required Minimum Distributions A Traditional IRA owner must take his/her first required minimum distribution ( RMD ) by April 1st of the year following the year in which he/she turns age 70 ½. Subsequent RMDs must be taken annually by December 31st. Therefore, a Traditional IRA owner generally must take two RMDs in the first year (the first RMD must be taken by April 1st of the year after he/she turns age 70 ½ and the second by December 31st). An RMD may be satisfied from a single IRA or in the aggregate from two or more IRAs. An excise tax of 50% may be imposed on the amount of an RMD not taken in a particular year. Roth IRAs are not subject to the RMD rules during the life of the Roth IRA owner. However, a taxpayer who inherits a Roth IRA must begin taking RMDs no later than December 31st of the year following the year of the owner s death. Qualified Charitable Distribution ( QCD ) An IRA owner may exclude up to $100,000 of his/her RMDs from income each year for amounts paid directly from the IRA to a qualifying public charity (note that a Donor Advised Fund is NOT a qualifying public charity for QCD purposes). Roth Conversions If a taxpayer converts his/her Traditional IRA to a Roth IRA, all pre-tax contributions and gains will be treated as ordinary income in the year of conversion. Prior to passage of the Tax Cuts and Jobs Act, taxpayers could recharacterize or undo a Roth conversion until the income tax return filing due date including extensions (generally October 15th) for the year in which the conversion was made. Under the Act, however, taxpayers no longer have the ability to recharacterize Roth conversions Morgan Stanley Smith Barney LLC. Member SIPC CRC /2018 4

5 Taxpayers may continue to recharacterize a portion/all of their Roth contributions made in a particular year when later it becomes clear that their income for the year would exceed the eligibility threshold. 401(k) Plan Contribution Limitations In 2018 the maximum salary deferral to an employee s 401(k) plan account(s) is $18,500 ($24,000 for employees who are aged 50 and older). Employers who match a portion of salary deferrals into a 401(k) plan may apply their matching formula on a maximum of $275,000 of the employee s salary for the year. Total contributions made by an employee and his/her employer(s) may not exceed the lesser of (1) $55,000 and (2) the employee s compensation. Estate and Gift and Generation-Skipping Transfer ( GST ) taxes In 2018 the gift tax annual exclusion amount is $15,000 per donor ($30,000 for a married couple who split gifts for the year) per donee. The annual gift tax exclusion amount for transfers made to a non U.S. citizen spouse is $152,000. Contributions to a donee s 529 plan may be front-loaded with five years worth of donor s gift tax annual exclusions $75,000 in 2018 ($150,000 for a married couple who split gifts for the year). A Gift Tax Return must be filed to allocate the gift to the annual exclusion. Amounts paid on behalf of an individual for qualifying educational or medical expenses are not subject to gift tax if the payments are made directly from the donor to the institution/provider. In 2018, the lifetime federal estate and gift tax exemption and the GST tax exemption are each $11.18 million per person and will be indexed for inflation in subsequent years. In 2026 the exemptions are set to revert to $5 million per person, indexed for inflation after The top federal estate and gift tax rate and GST tax rate are each 40%. Charitable Deductions The maximum value of a charitable deduction is limited to the cost basis or fair market value of gifted property and is based on a percentage of the donor s adjusted gross income (AGI). See below: GIFT TYPE Cash MAXIMUM DEDUCTION ALLOWED FOR GIFTS TO PUBLIC CHARITY Fair market value ( FMV ) AGI LIMITATION: GIFTS TO A PUBLIC CHARITY MAXIMUM DEDUCTION ALLOWED FOR GIFTS TO PRIVATE FOUNDATIONS 60% FMV 30% AGI LIMITATION: GIFTS TO A PRIVATE FOUNDATION Short term capital gain property Lesser of basis and FMV 50% Lesser of basis and FMV 30% Long term capital gain property FMV 30% Lesser of basis and FMV* 20% 2018 Morgan Stanley Smith Barney LLC. Member SIPC CRC /2018 5

6 *A special exception provides that the deduction for gifts of appreciated publicly traded stock made to a private nonoperating foundation is based on the stock s fair market value (rather than cost basis), subject to a 20% AGI limitations. Deductions for gifted amounts in excess of the AGI limitations may be carried forward five years with deductions for gifts made in the current year applied first. Therefore, it may be beneficial to put off making additional charitable gifts until all carried over amounts have been fully deducted. Private Foundations Generally a private foundation must distribute at least 5% of the aggregate fair market value of its assets each year in the form of grants and certain administrative expenses. Distributions made in excess of 5% may be applied against the required distributions in any of the following 5 years. The failure to make the annual minimum distribution will result in an excise tax (i.e. 30% of the shortfall). Private foundations are subject to a 2% excise on net investment income (which can be reduced to 1% if sufficient distributions are made). Capital losses may only be utilized the year in which they are realized and so may not be carried forward for use in future years or carried back to prior years (i.e., use them or lose them). Kiddie Tax Beginning in 2018, unearned income of a child in excess of $2,100 will be taxed at special rates generally applicable to estates and trusts (set forth below), rather than at the parents tax rates. This kiddie tax only applies to children under age 19 or 23 if the child is a full-time student whose earned income does not exceed half of the annual expenses for his or her support. A child who turns 20 (or 24) by the end of the tax year is not subject to the kiddie tax. The kiddie tax applies only to unearned income a child receives from income-producing property (or investment property), such as cash, stocks, bonds, mutual funds, and real estate. Any salary or wages that a child earns through full-or part-time employment are not subject to the kiddie tax rules that income is taxed at the child's regular income tax rate. KIDDIE TAXABLE UNEARNED INCOME up to $2,550 10% $2,551 to $9,150 24% $9,151 to $12,500 35% all over $12,501 37% Important Disclosure This material has been prepared for informational purposes only and is subject to change at any time without further notice. Information contained herein is based on data from multiple sources and Morgan Stanley Smith Barney LLC ( Morgan Stanley ) makes no representation as to the accuracy or completeness of data from sources outside of Morgan Stanley. It does not provide individually tailored investment advice. The appropriateness of a particular investment or strategy will depend on an investor s individual circumstances and objectives. Tax laws are complex and subject to change. Morgan Stanley Smith Barney LLC ( Morgan Stanley ), its affiliates and Morgan Stanley Financial Advisors and Private Wealth Advisors do not provide tax or legal advice, are not fiduciaries (under ERISA, the Internal Revenue Code or otherwise) with respect to the services or activities described herein except as otherwise provided in writing by Morgan Stanley and/or as described at Individuals are encouraged to consult their tax or legal advisors (a) before establishing a retirement plan or account, and (b) regarding any potential tax, ERISA and related consequences of any investments made under such plan or account, and (c) to understand the tax and legal consequences of any actions, including implementation of any estate planning strategies, or investments described herein Morgan Stanley Smith Barney LLC. Member SIPC CRC /2018 6