2017 Income Tax Developments

Transcription

1 2017 Income Tax Developments Presented To: Delaware Tax Institute Presented by: Karly A. Laughlin, CPA Manager Tax & Small Business Researched & Compiled by: Michael D. Kelly, CPA / mkelly@belfint.com Karly A. Laughlin, CPA / klaughlin@belfint.com

2 Topics Covered Today Expired Provisions What s New 2017 and 2018 Inflation Adjustments Tax Cuts and Jobs Act Summary

3 Expired Tax Provisions

4 Expired Tax Provisions Joint Committee on Taxation, List of Expiring Federal Tax Provisions (JCX-1-17), January 4, Federal Tax Provisions Expired 12/31/16 2 Federal Tax Provision Expiring in Federal Tax Provision Expiring 12/31/18

5 Expired Tax Provisions Cont. Joint Committee on Taxation, List of Expiring Federal Tax Provisions (JCX-1-17), January 4, 2017 Credits for Certain Nonbusiness Energy Property (sec. 25C(g)) and Residential Energy Property (sec. 25D(g)) Ages 65 and older: Medical expenses are deductible to the extent they exceed 7.5% of AGI in 2016; will increase to 10% of AGI in 2017 (sec. 213(f)) Discharge of indebtness on principal residence excluded from gross income of individuals (sec. 108(a)(1)(E)) Premiums for mortgage insurance deductible as interest that is qualified residence interest (sec. 163(h)(3))

6 Expired Provisions and Education Tax Breaks (For Now) JCT JCX-1-17 Above-the-line Tuition and Fees Deduction expired 12/31/16 (sec. 222(e)) so What education tax breaks are left now? See IRS Pub 970 for details o o o o Tax-free Scholarships and Fellowship Grants -> must be pursuing degree at educational institution and used for qualified educational expenses Student Loan Interest Deduction -> Form 1098-E; phased out at MAGI $65,000 - $85,000 ($130,000 - $160,000 MFJ) Coverdell Education Savings Account (ESA) -> eligible to contribute if MAGI < $110,000 ($220,000 MFJ); up to $2,000 per year for each beneficiary Qualified Tuition Program (QTP)

7 Education Tax Breaks Remaining (For Now) Modified AGI Single Phase-out Modified AGI MFJ Phase-out Credit Amount Expenses Related to Lifetime Learning Credit* $55,000 to $65,000 $111,000 to $131,000 Max $2,000 Post secondary education Pursuing a degree or to get or improve job skills American Opportunity Credit** $80,000 to $90,000 $160,000 to $180, % of first $2,000 50% of next $1,000 Max $2,500 First 4 years of post secondary education Must be at least ½ time student Must be pursuing a degree * LLC is NOT refundable ** 40% of AOC is refundable

8 Expired Tax Provisions Joint Committee on Taxation, List of Expiring Federal Tax Provisions (JCX-1-17), January 4, o Airport and Airway Trust Fund excise taxes as of 9/30/17 o 2018 o Oil Spill Liability Trust Fund financing rate as of 9/30/17 (sec. 4611(f)(2)) Black Lung Disability Trust Fund: increase in amount of excise tax on coal (sec. 4121(e)(2))

9 What s New This Year? (As of Today)

10 Filing Deadlines New Federal Filing Deadlines for tax years after 12/31/15: o Form 1065, Form 1120, Form 1041 o FinCEN Report 114 automatic extension to 1040 filing deadline State of Delaware no changes announced for 2017 tax returns yet o o Currently, C Corporation returns are due to DE before they are due to IRS DE Division of Revenue Director has authority to extend due dates for reasonable causes (as they did for 2016 C Corporate Income Tax Returns)

11 PATH Act W-2 and 1099-Misc new due dates beginning in 2017 (for 2016 forms) W-2 o o 1099-Misc: Due to both the employee and Social Security Administration by January 31, 2018 Many states, including Delaware and Pennsylvania, are enforcing this deadline as well o If reporting Nonemployee Compensation (box 7) then due January 31, 2018 to both the recipient and the IRS o Otherwise, still due to the recipient on January 31 and to the IRS on either February 28, 2018 (paper filed) or April 2, 2018 (electronically filed)

12 Inflation Adjustments 2018 Rates: Rev Proc Rates: Rev Proc

13 Tax Rates for Single Filing Status % on the first $9,275 $9,325 $9,525 Plus 15% up to 37,650 37,950 38,700 Plus 25% up to 91,150 91,900 93,700 Plus 28% up to 190, , ,450 Plus 33% up to 413, , ,950 Plus 35% up to 415, , ,700 Plus 39.6% thereafter

14 Tax Rates for Cont. Married Filing Joint % on the first $18,550 $18,650 $19,050 Plus 15% up to 75,300 75,900 77,400 Plus 25% up to 151, , ,150 Plus 28% up to 231, , ,950 Plus 33% up to 413, , ,950 Plus 35% up to 466, , ,050 Plus 39.6% thereafter

15 Standard Deduction for Married Joint $12,600 $12,700 $13,000 Head of Household 9,300 9,350 9,550 Single 6,300 6,350 6,500 Married Separate 6,300 6,350 6,500

16 Exemptions Personal $4,050 $4,050 $4,150 Kiddie Tax* $2,100 $2,100 $2,100 *Threshold when unearned income is taxed at child s parent s tax rates

17 Pease and Exemptions Phase-outs Personal Exemptions are reduced by 2% for each $2,500 in excess of AGI above the applicable threshold Thresholds begin at: Single 259,400 $261,500 $266,700 Married Joint 311, , ,000 Head of Household 285, , ,350 Married Separate 155, , ,000

18 AMT Exemptions Single Filing Status Exemption $53,900* $54,300* $55,400* Phase-out 119,700* 120,700* 123,100* 28% Rate 186,300* 187,800* 191,500* *Annually adjusted for inflation

19 AMT Exemptions Married Filing Joint Exemption $83,800* $84,500* $86,200* Phase-out 159,700* 160,900* 164,100* 28% Rate 186,300* 187,800* 191,500* *Annually adjusted for inflation

20 Other Individual Updates Social Security maximum taxable earnings subject to 6.20% Maximum Earnings $118,500 $127,200 $128,700 More than a 7% increase between 2016 & 2017 o o Social Security and SSI beneficiaries received a.3% COLA increase for 2017 Social Security and SSI beneficiaries will receive a 2% COLA increase for 2018 (average retiree will see an increase of $27/month)

21 2017 and 2018 Retirement Contribution Limits IRA/Roth IRA $5,500 ($6,500 if age 50+) $5,500 ($6,500 if age 50+) 401(k) $18,000 ($24,000 if age 50+) $18,500 ($24,500 if age 50+) PSP $54,000 25% of compensation up to $54,000 ($60,000 if combined with 401(k)) $55,000 25% of compensation up to $55,000 ($60,000 if combined with 401(k)) SEP 25% of compensation up to $54,000 25% of compensation up to $55,000 SIMPLE $12,500 ($15,500 if age 50+) $12,500 ($15,500 if age 50+)

22 2017 and 2018 HSA Contribution Limits Self Only $3,350 $3,400 Family $6,750 $6,750

23 Other Individual Updates Affordable Care Act: Individual mandate penalty is the higher of 2.5% of household AGI (limited to the cost of a bronze plan) or $695 per adult and $ per child to a maximum of $2,085 per family For Tax Year 2017, the IRS will not consider a return complete and accurate if the taxpayer does not report full-year coverage, claim a coverage exemption, or report a shared responsibility payment on the tax return. Most taxpayers have qualifying health coverage for all 12 months in the year, and will check the fullyear coverage" box on their tax return. Taxpayers who do not have full-year coverage will indicate whether they qualify for a coverage exemption or owe a shared responsibility payment. IRS Individual Shared Responsibility Provision

24 Federal Mileage Per Diem Rates Business Mileage Not Available Medical/Moving Not Available Charitable Mileage Not Available

25 Gift Annual Exclusion Increase in 2018 from $14,000 per donee (2014 through 2017) to $15,000 Unlimited marital gifting for U.S. citizens Noncitizen spouse: o 2016: $148,000 o 2017: $149,000 o 2018: $152,000

26 Gift Annual Exclusion Cont. Receipt of Gifts Reportable from Foreign Donors (Form 3520): o From nonresident alien or foreign estate: $100,000 o From foreign corporation or partnership: 2016: $15, : $15, : $16,111 Transfers from Foreign Donors: o Estate tax exclusion for foreign owners of U.S. property: $60,000 o Gifts: no lifetime exclusion, only annual exclusion

27 Problem Areas: Foreign Filing Requirements FinCEN Form 114: aggregate value of financial accounts exceed $10,000 at any time Form 8938: thresholds of ownership in foreign financial assets Form 5471: thresholds of ownership in foreign corporations Form 5472: 25% foreign-owned U.S. Corp or Foreign Corp doing business in U.S. Form 3520: trusts and foreign gifts Form 8621: thresholds of ownership in passive foreign investment companies

28 Problem Areas: Security Secure Secure Portal Virtual Private Network (VPN) Proper training for employees and clients Limit access to sensitive data IRS Publication 4557: Safeguarding Taxpayer Data

29 Tax Cuts and Jobs Act Summary of Important Points from the House and Senate

30 Enactment Dates In General House 1/1/2018 Senate 1/1/2019 (Sunsets after 12/31/2025 for most Individual items)

31 Individuals & Fiduciaries

32 Proposed Individual Tax Rates House Senate 12% 25% 35% 39.6% Single HOH Joint Trust $0 - $45,000 45, , , , ,000 $0 - $67,500 67, , , , ,000 $0 - $90,000 90, , ,000 1,000,000 1,000,000 $0 - $2,550 2,550 9,150 9,150 12,500 12,500 12% Rate phase-out after $1,000,000 AGI 10% 12%* 22% 24% 32% 35% 38.5% Single HOH Joint Trust $0 - $9,525 9,525 38,700 38,700 70,000 70, , , , , , ,000 $0 - $13,600 13,600 51,800 51,800 70,000 70, , , , , , ,000 $0 - $19,050 19,050 77,400 77, , , , , , ,000 1,000,000 1,000,000 $0 - $2,550 2,550-9,150 9,150-12,500 12,500

33 Illustration of Tax for Varying Amounts of Taxable Income $25,000 $100,000 $250,000 $500, ,826 16,543 57, ,666 House 3,000 13,300 50, ,300 Senate 2,619 13,879 49, ,479

34 Kiddie Tax Current Rule: A dependent s unearned income may be taxed at the parents rate. Both the House and Senate incorporate the trust s compressed rates to calculate tax for a dependent s unearned income.

35 Standard Deduction Single HOH Joint 2016 $6,300 $9,300 $12,600 House 12,200 18,300 24,400 Senate 12,000 18,000 24,000 Both plans eliminate the Personal Exemption

36 Exclusions of Income now Possibly Taxable House Senate Sale of Principal Residence Excluded if live and own for past 5 of 8 years. Excluded if live and own for past 5 of 8 years. U.S Bond Interest for Qualified Educational Expenses Repeal N/A Employee Achievement Awards Repeal N/A Employer Educational Assistance Repeal N/A Qualified Tuition Reduction Repeal N/A Employer Provided Dependent Care Payments Repeal N/A Employer Provided Adoption Expenses Repeal N/A Housing for Employees for Educational Institutions Limit Exclusion to 50,000 (J) or 25,000 (S) N/A Moving Expense Reimbursements Repeal (Except Military) Repeal (Except Military)

37 Above The Line Deductions No Longer Deductible House Senate Job Related Moving Deduction Repeal Repeal Student Loan Interest Repeal N/A Alimony Repeal N/A Teacher Educational Expenses Repeal Increase from $250 to $500

38 Schedule A Deductions House Senate Mortgage Interest Loans Above 500,000 limited Repeal $100,000 Home Equity Deduction State and Local Taxes Repeal except related to trade or business Repeal except related to trade or business Property Tax Limited to $10,000 Repeal except related to trade or business Pease Limitation Repeal Repeal Tax Preparation Repeal Repeal Miscellaneous Deductions N/A Repeal Casualty and Theft Repeal Repeal Medical Repeal N/A Employee Expenses Repeal N/A Charity AGI Limitation now 60% AGI Limitation now 60%

39 Other Provisions related to Charity House o o Senate o o There is currently a rule available that allows taxpayers to deduct 80% of donations to universities qualifying as a 501(c)(3) to reserve the right to purchase tickets to athletic events. This would be repealed. Charitable mileage would begin to be indexed for inflation. Repeal tax-exempt status for professional sports leagues. Transportation fringe benefits and employer-provided gyms for employees of exempt organization will be treated as UBIT.

40 Child Tax Credit Current Law House Senate Credit Per Child $1,000 $1,600 $2,000 Age Under 17 Assumed Under 17 Generally Under 18 Refundable Limited to $1,000 Limited to $1,000 (but will increase to $1,600) Limited to $1,000 Adult Dependents No $300 $500 Phase out Begins 75,000 (S) or 110,000 (J) $115,000 (S) or $230,000 (J) $250,000 (S) or $500,000 (J)

41 New Enhanced American Opportunity Credit (House Provisions) Hope Lifetime Learning Current AOC New AOC Maximum Credit Annual Credit $1,500 $2,000 $2,500 $2,500 Eligible Expenses Tuition and fees Tuition, fees and course materials Tuition, fees and course materials Tuition, fees and Course materials Refundable Portion None None $1,000 $1,000 Available Time-Frame for Credit Two years No Limit Phase-out $40,000 - $50,000 $80,000 - $100,000 $56,000 - $66,000 $112,000 - $132,000 First four years of college First five years of college $80,000 - $90,000 $160,000 - $180,000 Unclear

42 Businesses

43 Corporations Current House Senate Top Rate 35% 20% 20% Dividend Received Deduction 70% or 80% 50% or 65% 50% or 65% AMT Corporations with more than 7.5 million of average gross receipts exempt. Repeal Repeal

44 Personal Service Corporations Areas Current House Senate Flat Tax Rate 35% 25% Special Rate Eliminated

45 Section 179 Current House Senate Maximum Deduction $500,000 $5,000,000 $1,000,000 Phase-out $2,000,000 $20,000,000 $2,500,000 Expiration N/A 12/31/ /31/2022 Begins 1/1/2018 No End Date Tangible property associated with lodging No No Yes

46 Bonus Depreciation Current House Senate Rate 50% 100% 100% Original Use Requirement Yes No Not Mentioned Effective Dates Through 12/31/2019 9/27/ /31/2022 9/27/17 12/31/2022

47 Small Business Accounting Reform Mandatory accrual method of accounting for corporations or partnerships with C Corporation partners. Current House Senate Average gross receipts above the following: $5,000,000 $25,000,000 $15,000,000 Mandatory tracking and reporting of inventory. Businesses tracking inventory must also maintain records on an accrual basis. Businesses generally must follow UNICAP rules and capitalize direct and indirect costs. Average gross receipts above the following: Current House Senate $1,000,000 or $10,000,000 $25,000,000 $15,000,000

48 Business Interest Deduction New General Limitation House 30% of Adjusted Taxable Income Senate 30% of Adjusted Taxable Income plus Interest Income Disallowed Interest Carryforward 5 Years Indefinitely Exception $25,000,000 of Average Gross Receipts $15,000,000 of Average Gross Receipts Adjusted Taxable Income - Taxable income computed without regard to interest expense or income, net operating loss, depreciation, amortization and depletion.

49 Net Operating Losses Current House Senate Carryback 2 Years Limited situations Limited situations Forward 20 Years 20 Years Unlimited Taxable Income Limitation N/A 90% 80% Effective N/A 1/1/2018 1/1/2024

50 Pass-through Income (House) Generally, 30% of pass-through income is based on a capital tax of 25% while the other 70% is based on ordinary rates. Depending on facts and circumstances, owners could apply a separate formula to determine a different tax on capital. Capital gains and qualified dividend income maintain their preferential rate and would be excluded from owner capital percentage. First $75,000 is special ordinary rate of 9% on first $75,000 as long as married taxpayer has less than $150,000 of taxable income earned through pass-through businesses. 9% rate gets phased out as taxable income exceeds $225,000. (9% rate phased in over next 5 years beginning in 2018.) 100% of income from personal service businesses and other actively owned businesses (law, health, engineers) are subject to ordinary rates.

51 Pass-through Income and Schedule C (Senate) Deduction for 17.4% of domestic Qualified Income from a Partnership, S corporation, or sole proprietorship. Limited to 50% of allocable share of pass-through s wages paid. Wage calculation does not include compensation paid to shareholders of S corporations or guaranteed payments to partners. Wage limit does not apply to taxpayers with taxable income less than $500,000 (J) and $250,000 (S) and completely phased out $600,000 (J) or $300,000 (S). Deduction generally not allowed for service businesses (law, health, or engineer) unless taxpayers with taxable income less than $500,000 (J) and $250,000 (S) and completely phased out $600,000 (J) or $300,000 (S). Combined pass-through and Schedule C losses limited to $500,000 ($250,000) and carried forward to following year.

52 Compensation (House and Senate) Deductible compensation paid to covered employees for a publicly traded company is limited to $1,000,000. Currently does not include: o o o Commissions, Performance based compensation including stock options, Qualified retirement contributions, and amounts that are excludible from employees gross income. The first two exceptions will be repealed. Covered employees, CEO, CFO, and three other highest paid officers. Excise tax on covered employee for an exempt organization for compensation paid in excess of $1,000,000. Covered employee for exempt organization is one of five highest compensated employees.

53 Other Notable Items for Both Plans Allow tax-free rollovers between Able Accounts and 529 Plans. Repeal AMT. AMT credit carryovers would be completely recovered through 2021 (2022 under the House Plan). Repeal Domestic Activities Deduction. Repeal IRA recharacterizations. Like-kind exchange treatment would only be allowed for real property. Business deductions no longer available for entertainment, amusement, recreation, or related membership dues or facilities. Research and development costs would have to be capitalized and deducted over a 5-year period. Senate 2025 and House % excise tax on investment income on certain private colleges and universities. Excludes discharge from debt on student loans due to death or disability from taxable income

54 Notable Senate Provisions Introduces Form 1040SR, which would be similar to 1040 EZ. This form could be filed even if taxpayer has interest, capital gains, Social Security income or retirement income. 529 contributions for unborn children would qualify. Can normally contribute up to annual gift tax exclusion to Able accounts. Additional contributions would be allowed from beneficiary based on the lesser of the beneficiaries W-2 wages or the federal poverty level. Repeals the penalty for health care. No deduction for settlement, payout, or attorney fees related to sexual harassment or abuse if such payments are subject to a nondisclosure agreement. Businesses receive a 12.5% credit for payments to employees who are on FMLA if the rate of payment is at least 50% of the normal salary. Credit is increased.25% points for each percentage point above 50%. Expires at the end of 2019.

55 Notable House Items Prohibits contributions to Coverdell educational accounts. But now allows distributions from 529 plans to be used for high school and elementary expenses. If an employee has a loan related to his 401(k), he would have until the due date of his tax return to pay it if separated from employment. Repeals rules for technical termination. Repeals the work opportunity credit. Repeals credit for employers for qualified expenses for child care. Repeals credit for providing access to disabled individuals. Qualified solar electric property and qualified solar water heating property are currently eligible for a 30% credit. Will begin to be phased out by 2022; 26% 2020, 22% by 2021.

56 Thank you Questions? Karly Laughlin, CPA Manager Tax & Small Business Belfint, Lyons & Shuman CPAs Wilmington, DE / West Chester, PA / klaughlin@belfint.com