DrawDown & Portfolio Strategies

Transcription

1 DrawDown & Portfolio Strategies Robert S. Keebler, CPA/PFS, MST, AEP Keebler & Associates, LLP

2 Tax Reform Overview for Investors 2 Individual Rates Standard Deduction Personal Exemptions Child/Family Credit AMT SALT Deduction Mortgage Interest Deduction Pease Limitation Overall rate decrease; 7 brackets retained $24,000 (MFJ) Repealed Increased Exemption increased; Exemption phaseout threshold substantially increased Limited to $10,000 in property and state/local income taxes (except for taxes incurred in a trade or business) Limited to interest on up to $750,000 of acquisition indebtedness; Repeals deduction for home equity indebtedness Repealed Individual provisions sunset December 31, 2025

3 Tax Reform Overview for Investors Estate & GST tax Doubles the exemption to $11,180,000 in 2018 (Senate & House) Double exemption sunsets December 31, 2025 Step-up in basis retained at death Business Lowers the corporate rate to 21% Lowers tax liability for certain pass-through business income Increased expensing of capital items Business interest deduction limited Active business losses limited NOL deduction modified Like-kind exchanges limited to real property New markets tax credit retained and opportunity zones added 20% historic rehabilitation credit now claimed over five-years and 10% pre-1936 building rehabilitation credit is repealed 3

4 Tax Reform Overview for Investors 4

5 Tax Reform Overview for Investors 2017: Taxable income over But not over Is taxed at $0 $2,550 15% $2,550 $6,000 25% $6,000 $9,150 28% House Version: $9,150 $12,500 33% $12, % 2018: Trust & Estate Rates Taxable income over But not over Tax Bill $0 $2,550 10% $2,550 $9,150 24% $9,150 $12,500 35% $12,500 37% 5

6 Tax Reform Overview for Investors AMT Exemption Increased Single or Head of Household $54,300 $70,300 Married Filing Jointly $84,500 $109,400 Begin of Phaseout, Single or HoH $120,700 $500,000 Begin of Phaseout, MFJ $160,900 $1,000,0 00 6

7 Tax Reform Overview for Investors Unimplemented Proposals Elimination of the specific indemnification method in favor of a FIFO basis accounting for marketable securities Reduction of the capital gain rates or changes to the taxation of interest income NIIT repeal AMT repeal Private activity bond repeal Changes to the exclusion of gain on the sale of a principal residence Elimination of the step-up in basis The five-year rule for inherited IRAs Rothification 7

8 IRC 199A Overview Deduction against taxable income equal to 20% of Qualified Business Income Qualified Business Income generally means income from pass-through businesses Limited for business owners with income in excess of $315,000 (MFJ) 8

9 IRC 199A Eligible Taxpayers TYPES OF TAXPAYERS THRESHOLD AMOUNT Single persons $ 157,500 Married persons $ 315,000 Trusts & Estates $ 157,500 9

10 IRC 199A Eligible Taxpayers Owners of: Eligible Taxpayers REITs & PTPs Sole proprietorships (Schedule C) Sole owners (or TIC owners) of rental real estate (Schedule E) S-Corporation owners (Form 1120S) Partnership owners (Form 1065) ALL QUALIFY BUT THE COMPUTATION DIFFERS 10

11 IRC 199A Basics The deduction also cannot exceed the lesser of The Combined QBI Amount, or 20% x (total taxable income capital gain) Combined QBI amount = deduction for each qualified trade or business PLUS 20% of REIT dividends and PTP income 199A, % 11

12 DrawDown Strategies Basic key concepts Tax structure Determining the mix of taxable investments, tax-deferred investments and tax-free investments Asset location Determining the distribution of assets across taxable accounts, tax-deferred accounts and tax-exempt accounts to create tax advantages Tax-sensitive asset allocation Asset allocation done on an after-tax basis Bracket management Short-term timing of income and expenses on a year-byyear basis so as to minimize overall income taxes over the long-term Tax Alpha The improvement in portfolio returns produced by efficient income tax management 12

13 DrawDown Strategies Tax Structure Key Factors Age Sources of income Cash flow requirements Current & future tax rate Asset location Ideas Income assets in Tradition IRA Growth assets in Roth IRA 13

14 DrawDown Strategies Tax-sensitive asset allocation Interest Income Dividend Income Capital Gain Income Tax Exempt Interest Pension and IRA Income Real Estate and Oil & Gas Roth IRA and Insurance Money market Corporate bonds US Treasury bonds Attributes Annual income tax on interest Taxed at highest marginal rates Equity Securities Attributes Qualified dividends at LTCG rate Return of capital dividend Capital gain dividends Equity Securities Attributes Deferral until sale Reduced capital gains rate Step-up basis at death Bonds issued by state and local governmental entities Attributes Federal tax exempt State tax exempt Pension plans Profit sharing plans Annuities Attributes Growth during lifetime RMD for IRA and qualified plans No step-up Real Estate Depreciation tax shield 199A deduction 1031 exchanges Deferral on growth until sale Oil & Gas Large up front IDC deductions Depletion allowances Roth IRA Tax-free growth during lifetime No 70½ RMD Tax-free distributions out to beneficiaries life expectancy Life Insurance Tax-deferred growth Tax-exempt payout at death 14

15 DrawDown Strategies Bracket Management Principals Know current & future brackets Tactical timing of income and deductions Understand bracket differences by filing status Understand thresholds where tax benefits are lost Tax Alpha Low-turnover strategies Strategic gain & loss harvesting Understand statutory tax shelters 15

16 Roth Conversions TAX REFORM REPEALED THE ABILITY TO RECHARACTERIZE A ROTH CONVERSION 16

17 Creating Trusts to Save Income Tax 17

18 Creating Trusts to Save Income Tax 643(f) Treatment of multiple trusts For purposes of this subchapter, under regulations prescribed by the Secretary, 2 or more trusts shall be treated as 1 trust if (1) such trusts have substantially the same grantor or grantors and substantially the same primary beneficiary or beneficiaries, and (2) a principal purpose of such trusts is the avoidance of the tax imposed by this chapter. For purposes of the preceding sentence, a husband and wife shall be treated as 1 person. 18

19 Creating Trusts to Save Income Tax Saving State Income Tax A grantor in a state with an income tax can settle a trust under the laws of a state without income tax Whether its possible is dependent on the: grantor s state, beneficiary s state, trustee s state, and the state of administration Current No SALT Out of Deduction State Trust Income $ 100 $ 100 $ 100 State Tax 5% (5) (5) Federal Tax 37% (35) (37) (37) Net to Family $ 60 $ 58 $ 63 19

20 Creating Trusts to Save Income Tax Qualified Business Income - 199A The deduction is limited after the business owner s taxable income exceeds a threshold amount Gifting business interests to trust can increase the amount of income which qualifies for the full deduction TYPES OF TAXPAYERS THRESHOLD AMOUNT Single persons $ 157,500 Married persons $ 315,000 Estates $ 157,500 Non-grantor completed gift trusts $ 157,500 Non-grantor incomplete gift trusts $ 157,500 Children subject to the kiddie tax $ 157,500 20

21 Creating Trusts to Save Income Tax State & Local Tax Deduction The deduction is now limited to $10,000 ($5,000 for MFS) Settling a nongrantor trust can create an additional taxpayer and therefore an additional $10,000 SALT deduction 21

22 Portfolio Strategies to Reduce Income Tax Life insurance Tax-Deferred Growth Tax-Free Death Benefit Tax-Free Basis Distributions First Tax-Free Loans Leap-frog over high-tax years Nonqualified Annuities Tax-deferred Growth Pro-rated basis distributions if annuitized Leap-frog over high-tax years 22

23 Portfolio Strategies to Reduce Income Tax Low Turn-over Portfolios Reduces trading or management costs Reduces tax costs Fewer recognition events (government s share working longer for the investor) Avoids short-term gains $35,000 Total After-Tax Investment Balance $30,000 $25,000 $20,000 $15,000 Ordinary Income Rate: 24% Capital Gains Rate: 15% $5000 initially invested 6% overall pre-tax rate of return for all accounts 1.5% Yield (favorably assume all div. are qual.) Invest at age 30 $10, $5, % Turnover 50% Turnover 100% Turnover

24 Portfolio Strategies to Reduce Income Tax Master Limited Partnerships An MLP is a publicly traded limited partnership Not subject to corporate double taxation (lower cost of capital) Depreciation and other deductions shield the majority of the distributions from taxation (but these distributions reduce basis) Not prohibited in IRAs, but is UBTI Eligible for the new Section 199A Deduction Generally provides a high yield and overall return (good return profile for investors focused on yield) Low correlation coefficients with other securities Low Beta and low volatility 24

25 Portfolio Strategies to Reduce Income Tax Oil & Gas Investments Working Interests Responsible for development & operation Tax benefits: Intangible drilling costs (IDCs), depreciation of equipment, depletion, deductions for lease and exploration costs IDCs can be 60-80% of the cost of drilling and are 100% deductible in the year incurred with an election Non-operating Interests Generally a royalty interest 25

26 Portfolio Strategies to Reduce Income Tax Qualified Tuition Programs (QTPs/529s) Age and AGI limits of ESAs do not apply Effective annual contribution limit is $15,000 Contributions are considered a completed gift for transfer tax purposes However, 5 years of contributions can be made in an accelerated lump-sum: $15,000 x 5=$75,000 No further contributions during the 5-year period if you take advantage of this acceleration provision Overall contribution limit varies by state Most states provide contribution incentives such as tax deductions, tax credits, or matching grants. 26

27 Portfolio Strategies to Reduce Income Tax Qualified Tuition Programs (QTPs/529s) For wealthy clients: Tax-free savings even more advantageous. IRC 2503(e)provides gift tax exemption for tuition, which prudent, wealthy (grand)parents of students take advantage of. However, it does not include books, supplies, dormitory fees, board, or other similar expenses. Reg s remain useful. 27

28 Portfolio Strategies to Reduce Income Tax Qualified Tuition Programs (QTPs/529s) 2017 Tax Act changes: Distributions of up to $10,000 may be used for elementary school and high school qualified expenses Rollovers from QTP accounts to ABLE accounts allowed 28

29 Portfolio Strategies to Reduce Income Tax Qualified Tuition Programs (QTPs/529s) $17,000 Total After-Tax Investment Balance $15,000 $13,000 $11,000 Ordinary Income Average Rate: 25% Capital Gains Rate: 15% $5000 initially invested 6% overall pre-tax rate of return for all accounts 1.5% Yield / 10% Turnover of stock account Parents invest at age 30 $9,000 $7,000 $5, QTP / ESA Taxable Stock Portfolio Taxable Bond Portfolio The chart merely depicts the difference due to the income tax treatment for each option if all other variables are held constant. 29

30 AICPA PFP Section Member Resources PFP Section members, inclusive of CPA/PFS credential holders, have access to resources on the latest planning strategies and trends in personal financial planning services so that they can practice competently and profitably. Visit aicpa.org/pfp/resources. Estate Tax Retirement Investment Insurance & Risk Management Practice Management Legislative/ Regulatory Professional Responsibilities Consumer Content 30

31 About the PFP Section & PFS Credential The AICPA Personal Financial Planning (PFP) Section is the premier provider of information, tools, advocacy and guidance for CPAs who specialize in providing estate, tax, retirement, risk management and/or investment planning advice to individuals, families and business owners. (Learn more at aicpa.org/pfp.) The Personal Financial Specialist (PFS) program allows CPAs to gain and demonstrate competence and confidence in providing estate, tax, retirement, risk management and/or investment planning advice to individuals, families and business owners through experience, education, examination and the resulting PFS credential. (Learn more at aicpa.org/pfs.) 31

32 Disclaimer This podcast is designed to provide illustrative information with respect to the subject matter covered, and does not represent an official opinion or position of the AICPA or AICPA.Org. It is provided with the understanding that the AICPA and AICPA.Org are not engaged in offering legal, accounting or other professional service. If such advice or expert assistance is required, the services of a competent, professional person should be sought. The AICPA and AICPA.Org make no representations, warranties or guarantees as to, and assume no responsibility for, the content or application of the material contained herein, and especially disclaim all liability for any damages arising out of the use of, reference to, or reliance on such material. 32

33