FEDERAL TAX UPDATE NO BIG CHANGES THIS YEAR 2/5/2016. Salt Lake Estate Planning Council January 20, Small Business Owners: Individual Taxpayers:

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1 FEDERAL TAX UPDATE Salt Lake Estate Planning Council January 20, 2016 NO BIG CHANGES THIS YEAR Individual Taxpayers: Affordable Care Act fees, credit 2015 Tax Rates, NIIT and AMT Deductibles and other tax-reduction moves Education-related deductions Small Business Owners: Expensing ACA nuances Home office deduction State and local taxes 1

2 HEALTH CARE REIMBURSEMENT ARRANGEMENTS (HRAS) KNOW THE RULES Funded solely by employer Can be used with any health plan Not just high deductible No annual limit Must be used along with a health plan Stand-alone HRA no longer compliant : NO NEW TAX BRACKETS RATE SINGLE MARRIED (JOINT) HEAD OF HOUSEHOLD 10% $0 $9,225 $0 $18,450 $0 $13,150 15% $9,226 $37,450 $18,451 $74,900 $13,151 $50,200 25% $37,451 $90,750 $74,901 $151,200 $50,201 $129,600 28% $90,751 $189,300 $151,201 $230,450 $129,601 $209,850 33% $189,301 $411,500 $230,451 $411,500 $209,851 $411,500 35% $411,501 $413,200 $411,501 $464,850 $411,501 $439, % $413,201 and up $464,851 and up $439,001 and up 4 2

3 DIVIDEND AND CAPITAL GAINS RATES UNCHANGED The top tax bracket for dividends and capital gains is 20% (23.8% if net investment income applies). Here s the breakdown: 0% for taxpayers in 0 15% tax brackets 15% for taxpayers in middle-income tax brackets 20% for taxpayers in the highest tax bracket (39.6%) 5 QUICK REVIEW OF NET INVESTMENT INCOME TAX (NIIT) Additional 3.8% tax Affects individuals, estates and trusts with income above certain thresholds Capital gains, interest and dividends Rental and royalty income Medicare surcharge of 0.9% may also apply to wages, compensation and self-employment income 3

4 ALTERNATIVE MINIMUM TAX (AMT) Created to close loopholes exploited by the wealthy How does it work? Adds back certain non-taxable income and removes some deductions Re-computed income is then multiplied by a flat rate = AMT Higher of AMT or regular tax is paid Very complex to calculate 7 AMT GOOD AND BAD NEWS Good news: Higher exemption Indexed for inflation Bad news: Income levels not increased Possible pitfall: Triggering AMT when taking certain tax breaks AMT exemption for 2015: $53,600 (Single/head of household) $83,400 (Married filing jointly) 8 4

5 PERSONAL EXEMPTIONS 2015: $4,000 per eligible person Phase-out: - Single: $258,250 - Married filing jointly: $309,900 - Head of household: $284,050 - Married filing separately: $154,950 9 ITEMIZED DEDUCTIONS Limited for high-income taxpayers 3% reduction once AGI exceeds threshold Reduction never goes below 20% Exceptions for certain deductions include: Medical expenses Investment interest Casualty or theft losses 10 5

6 TAX BENEFITS RENEWED Permanent: Sales tax vs. state income tax deduction Teacher expenses Employer-provided transit benefits Up to $100,000 in qualified distributions from IRA for taxpayers who are at least 70 ½ years old Extended for another year: Qualified tuition expenses Discharge of principal residence debt (short sales) Private mortgage insurance 11 RETIREMENT PLANNING 401(k)/403(b): IRA: $18,000 + $6,000 for over 50 $5,500 + $1,000 for over 50 Roth IRA: Anyone can convert, regardless of income 12 6

7 ESTATE AND GIFT TAXES 2015 estate tax exemption: $5.43 million Top rate is 40% 2015 gift tax annual exclusion: $14,000 Estate planning is more than minimizing estate taxes Outdated documents Repurposing insurance Privacy Asset protection 13 EDUCATION TAX CREDITS American Opportunity Tax Credit Up to $2,500 for first 4 years post-secondary school Permanently Extended Lifetime Learning Credit Up to $2,000 for all post-secondary expenses Tuition and Fees Deduction Extended through

8 MORE EDUCATION INCENTIVES Employer-provided assistance: $5,250 Student loan interest: $2,500 Education savings accounts: $2, TOP ISSUES FOR SMALL BUSINESS 16 8

9 BUSINESS EXPENSING Section 179 expense limit Now permanent Set at $500,000 and indexed to inflation New: Air conditioning and heating units placed in serviced after 2015 will be eligible expenses Eliminates $250,000 cap on qualified real property beginning in 2016 Research credit now permanent Bonus depreciation Extended through 2019 Can now be used for qualified improvement property Percentage lowers in future years. 40% in 2018 & 30% in SHOP MARKETPLACE Employers with 50 or fewer full-time equivalents (FTEs) can participate in the SHOP Marketplace Small businesses can qualify for a credit: Fewer than 25 full-time equivalents Average annual wages less than $50,000 Contribute 50% or more to employee premiums 18 9

10 HOME OFFICE DEDUCTION Two rules define who can take a deduction Regular method: Actual expenses Simplified method: $5 per square foot of home used for business (maximum 300 square feet) 19 SAVING FOR RETIREMENT Savings Incentive Match for Employees (SIMPLE) Simplified Employee Pension (SEP) plans Profit-sharing plans A variety of 401(k) plans 20 10

11 STATE AND LOCAL TAXES Beware of withholding, filing and payment obligations if you operate in multiple states Sales tax rules vary: Type of product Different counties and municipalities 21 PLANNING OPPORTUNITIES Complexity = possible savings opportunities 22 11

12 QUESTIONS 12