What Does the New Tax Law Mean for Me? James Bogart, CFP, ChFC Principal Portfolio Manager Director Financial Advisor

Transcription

1 What Does the New Tax Law Mean for Me? James Bogart, CFP, ChFC Principal Portfolio Manager Director Financial Advisor

2 Our Team Brian Bogart Principal James Bogart Principal Peter Knoer VP Financial Advisor Michael Duffy VP Financial Advisor Grant Stucki VP Financial Advisor Michelle Dubay Director of Operations George Musselman Financial Advisor Aleksandr Spencer Portfolio Manager Hal Frankel Portfolio Analyst Angie Hooks Client Service Associate Richard McMahon Client Service Associate Trey Fraim Client Service Associate Mindy Harbour Client Service Associate

3 IN YOUR FOLDER Seminar Evaluation Form ExxonMobil Stock Report Do You Know Your Number? About Bogart Wealth NUA Analysis Client Protection at Schwab 3

4 Our Mission Our mission is to help clients achieve financial peace of mind by preserving and maximizing intergenerational wealth. 4

5 RETIREMENT CASH FLOW OPTIMIZER PLAN Retirement Planning Timeline Retirement Income Planning Social Security Planning Strategies Estate Planning Strategies NUA & Post-retirement Strategies Long Term Care Planning Roth vs. Traditional 401k & IRA 5

6 Disclaimer: We are Not Tax Advisors We are Certified Financial Planners, and are familiar with many of the changes of the new tax law. This presentation is designed to provide a helpful insight into a number of the more significant changes relevant to most of our clients Please consult your tax advisor on the specifics of your situation 6

7 Disclaimer: We are Not Tax Advisors Information contained herein is current as of 1/1/18. It is subject to legislative changes and is not intended to be legal or tax advice. Consult a qualified tax advisor regarding specific circumstances. This material is furnished as is without warranty of any kind. Its accuracy and completeness is not guaranteed and all warranties expressed or implied are hereby excluded. 7

8 Disclaimer: We are Not Tax Advisors Bogart Wealth is neither a law firm nor accounting firm, and no portion of its services (or the content fo this presentation) should be construed as legal or accounting advice. Moreover, you should not assume that any discussion or information contained in this presentation serves as the receipt of, or as a substitute for, personalized advice from the tax advisor fo your choosing. A copy of our current written disclosure Brochure discussing our advisory services and fees is available upon request. 8

9 2018 Tax Reform On December 22, 2017, Tax Reform H.R.1 was signed into law. Also known as The Tax Cuts and Jobs Act of The Joint Committee on Taxation (JCT) estimate cost of $1.456 Trillion over 10 years. Approximately $1 Trillion comes from business tax cuts, such as reducing the Corporate Tax Rate from 35% to 21%. 9

10 Individuals What s Not Changed IRA Contribution Limits Rollover Rules Net Unrealized Appreciation (NUA) Rules Cost Basis Rules Stepped-Up Basis Rules FICA and Medicare Tax 10

11 Traditional IRA Accounts Limit Catch-up (50+) Income Limit Traditional, Non-Deductible $5,500 $1,000 None Traditional, Deductible $5,500 $1,000 If covered by a plan, Single: $63k - $73k Joint: $101k - $121k If one spouse is covered by a plan, Joint: $189k - $199k 11

12 Roth IRA Accounts Limit Catch-up (50+) Income Limit Roth IRA $5,500 $1,000 Single: $120k - $135k Joint: $189k - $199k Roth Conversion No Income Limit 12

13 Back-Door Roth IRA Contributions Pit Stop Post-Tax $ Traditional IRA Roth IRA Non-Deductible Contribution Front-Door Deposit Immediate Conversion Back-Door Deposit 13

14 Retirement Plan Contribution Limits 401k, 403b, Roth 401k $18,500 Catch-up for Individuals 50+ $6,000 Defined-Contribution Plan Limit $55, k Maximum Contribution (50+) $61,000 14

15 Sale of Primary Residence Still can exclude $250,000 ($500,000 joint) of gain Still must reside in property for 2 of last 5 years 15

16 Cost Basis Rules Can still select specific tax lots Must be identified at sale (within 2-day settlement period) Otherwise custodian can not change 16

17 FICA Tax Income Up to $128,400 Employer 6.20% Employee 6.20% 17

18 Medicare Tax Income Up to $200k ($250k for Joint) Employer 1.45% Employee 1.45% Income in Excess of $200k ($250k for Joint) Employer 0.90% Employee 0.90% 18

19 Net Investment Income Tax Obamacare Tax Net Investment Income or Excess of Modified Adjusted Gross Income (MAGI) Single Over $200, % Joint Over $250, % 19

20 Individuals Marginal Tax Rates Itemized Deductions Personal Exemption Capital Gains Thresholds Annual Gift Exclusion Child Tax Credit Estate Exclusion Level What s Changed 20

21 Rate Schedule Single Taxable Income Marginal Rate Average Rate* $0 $9,525 10% 10.0% $9,526 - $38,700 12% 11.5% $38,701 - $82,500 22% 17.1% $82,501 - $157,500 24% 20.4% $157,501 - $200,000 32% 22.8% $200,001 - $500,000 35% 30.1% $500, % *Assumes taxable income equals top of the taxable income range 21

22 Rate Schedule - Joint Taxable Income Marginal Rate Average Rate* $0 $19,050 10% 10.0% $19,051 - $77,400 12% 11.5% $77,401 - $165,000 22% 17.1% $165,001 - $315,000 24% 20.4% $315,001 - $400,000 32% 22.8% $400,001 - $600,000 35% 26.9% $600, % *Assumes taxable income equals top of the taxable income range 22

23 Estates and Trusts Taxable Income Marginal Rate Average Rate* $0 $2,550 10% 10.0% $2,551 - $9,150 24% 20.1% $9,151 - $12,500 35% 24.1% $12, % *Assumes taxable income equals top of the taxable income range 23

24 Children under 19* ( Kiddie Tax ) The first $1,050 of net unearned income is tax-free. The next $1,050 is taxed at the child s rate. Unearned income >$2,100 follows the rate schedule below Taxable Income Marginal Rate Average Rate** $0 $2,550 10% 10.0% $2,551 - $9,150 24% 20.1% $9,151 - $12,500 35% 24.1% $12, % *Under age 19 or under age 24 if a full-time student. **Assumes taxable income equals top of the taxable income range. 24

25 Long-Term Capital Gains & Qualified Dividends Single Joint Rate % Including Obamacare 3.8% Surtax Up to $38,600 Up to $77,200 0% 0% $38,601 $200,000 $77,201 $250,000 15% 15% $200,001 - $425,800 $250,001 - $479,400 15% 18.8% Over $425,800 Over $479,000 20% 23.8% 25

26 Medicare Premiums 2016 MAGI (Single) 2016 MAGI (Joint) Part B Part D < $85,000 < $170,000 $ $0 $85, ,000 $170, ,000 $ $13.00 $107, ,500 $214, ,000 $ $33.60 $133, ,000 $267, ,000 $ $54.20 > $160,000 > $320,000 $ $

27 Changes to Tax Deductions Interest Taxes Charity Other Itemized 27

28 Standard Deduction 2017 Single: $6, Single: $12,000 Joint: $12,700 Joint: $24,000 28

29 Personal Exemption 2017 $4,050 per person 2018 None 29

30 Itemized Deductions - Interest Home Mortgage Home Mortgage (Held prior to 12/31/17) Home Equity Line of Credit (HELOC) Margin Interest Limit $750,000 Limit $1,000,000 Not Deductible* Limit Net Taxable Investment Income *Unless used for home improvement expenses. 30

31 Itemized Deductions - Taxes State and Local Taxes (SALT)* 2017 No Limit 2018 $10,000 Maximum *Includes state and local, sales, real estate, and property taxes 31

32 Itemized Deductions - Charitable Cash and Stock Donations % of AGI % of AGI 32

33 Itemized Deductions - Charitable RMD - to - Charity Individuals over age 70 ½ can transfer up to $100,000 annually from their Traditional IRAs directly to charity. If married, you and your spouse can donate up to $100,000 each from your separate IRAs. The transfers count as all or part of your Required Minimum Distribution. But unlike other distributions, you are not taxed on them and they are not added to your AGI. 33

34 Itemized Deductions - Charitable Donor-Advised Funds (DAFs) Donor Cash or Appreciated Stock Donor- Advised Fund Investment Management Charities Charities Charities Capital Gains Tax Avoidance & Income Tax Deduction Grant to Charities Over Time at Your Convenience 34

35 Itemized Deductions - Charitable Donor-Advised Funds (DAFs) Contribute Cash or Appreciated Securities Receive Immediate Tax Benefit Recommend/Choose Investments Recommend/Choose Grants to Qualified Charities Tax-Free Diversification Strategy ExxonMobil Matching for Qualifying Charities* Plan for a Charitable Legacy Simple Solution for Charities 35

36 ExxonMobil Qualifying Charities Arts and Cultural Matching Gift Program ExxonMobil matches donations to arts and cultural organizations. The company matches the first $2,000 per employee at a 1:1 ratio. Educational Matching Gift Program ExxonMobil matches employee donations to higher education which include U.S. colleges and universities. The company provides a 3:1 match on the first $7,500 donated to educational institutions (max $22,500 company contribution). The programs are open to current employees, spouses, retirees, and surviving spouses. ExxonMobil's Matching Gift Submission Process: Employees / donors should register their matching gift requests electronically at Deadline: Employee have until December 31st of each year to submit matching gift requests. 36

37 Itemized Deductions - Other Miscellaneous Deductions subject to the 2% AGI Limit will be eliminated for tax years 2018 through Examples: Tax Preparation Expenses Unreimbursed Employee Expenses Investment Fees Casualty and Theft Losses 37

38 Itemized Deductions - Phaseouts Phaseouts for itemized deductions have been eliminated for tax years 2018 through Phaseouts began at Single - $261,500 Joint - $313,800 38

39 Presidential Disaster Losses For years 2016 and 2017 Up to $100,000 total Can withdraw from 401k, 403b, or IRA with 10% penalty if under 50 Can pay tax over 3 years Can recontribute funds within 3 years Can deduct losses in addition to standard deduction 39

40 Roth IRA Conversions Eliminated recharacterizations of Roth IRAs. Conversions completed after 2017 are irreversible. Ability to convert Traditional IRA funds to a Roth IRA remains the same, however will be unable to undo the switch. 40

41 Child Tax Credit 2017 $1,000 per child 2018 $2,000 per child Maximum AGI for Full Credit AGI Where Credit Disappears Single $200k $240k Joint $400k $440k 41

42 Alternative Minimum Tax (AMT) Exemption* 2017 Single - $54, Single - $70,300 Joint - $84,500 Joint - $109,400 *Exemption is still subject to income phase outs. 42

43 529 Plans Now, you can use up to $10,000/year for Elementary Schools Secondary Schools Private and Religious Schools 43

44 Annual Gift Exclusion Individual - $14,000 Individual - $15,000 Joint - $28,000 Joint - $30,000 44

45 Estate Tax Exemption Individual - $5.49M Individual - $11.20M Joint - $10.98M Joint - $22.40M *Portable 45

46 Corporate Taxes What s Changed Max rate now 21% vs 35% Pass Through entities get 20% tax deduction Equipment 100% vs 50% depreciation Buyers of heavy SUVs used for business can write off 100% of cost. Must have gross weight rating over 6,000 pounds. Max Repatriation Tax 15.5% vs 35% 46

47 Pass Through Entities LLCs, Partnerships, Sub S Corps Exceptions for Service Entities like lawyers, doctors, accountants, consultants Can deduct 20% of net income If income is less than $157,500 ($315,000 for Joint), taxpayers can simply deduct 20% of their business income. If over this threshold, taxpayers need to determine whether their business qualifies for the deduction at all. The deduction for qualified pass-through business income is also limited to 20% of the household s taxable income (i.e., income after all deductions, but before the QBI deduction itself). 47

48 Pass Through Entities 48

49 Pass Through Entities Joseph and Rachel are married and earn $220,000/year, which includes $90,000 in wages from Joseph s job managing a theater, and $130,000 of net income from Rachel s clothing store (which is simply a sole proprietorship business reported on her Schedule C). In addition, the couple has a $150,000 portfolio, that produced $3,000 of qualified dividends and $2,000 of REIT income in the past year. The couple s total income is $225,000, of which $132,000 (including Rachel s business income and the REIT income) are Qualified Business Income. In 2018, the couple will be eligible for a $24,000 standard deduction, reducing their $225,000 of income down to only $201,000. In addition, they will receive a $26,400 QBI deduction, further reducing their income to $174,600. Given that the couple will be in the 24% tax bracket, this means that the QBI deduction of $26,400 produced a $6,336 tax savings. 49

50 Pass Through Entities Ross and Emily are joint owners of a very successful curio shop, that last year generated $140,000 of net income. In addition, the couple earned about $3,000 of dividend income and had a $5,000 capital gain from the sale of some stocks (that they used to procure an especially rare and old wardrobe from London for the shop). The couple s Qualified Business Income is $140,000, and their total Adjusted Gross Income is $148,000. Ross and Emily are eligible for a $24,000 standard deduction, which results in a tentative taxable income of $124,000 (or $119,000 not including capital gains), and are eligible for a QBI deduction for the lesser of either: 20% of their QBI ($28,000), or 20% of their taxable income not including capital gains (which would be $119,000 x 20% = $23,800). Thus, even though their tentative QBI deduction would have been $28,000, the limitation to only 20%-of-tentative-taxable-income reduces their QBI deduction to just $23,800. Which means their final taxable income is $124,000 $23,800 = $100,200, to which the 2018 tax tables would be applied. 50

51 Special Service Business In this context, specified services are explicitly defined under IRC Section 1202(e)(3)(A), and include: any trade or business involved the performance of services in the fields of health, law, accounting, actuarial science, performing arts, consulting, athletics, financial services, brokerage services, or any trade or business where the principal asset of such trade or business is the reputation or skill of 1 or more of its employees or Which involves the performance of services that consist of investing and investment management, trading, or dealing in securities, partnership interests, or commodities Excludes engineers and architects as specified services under the reasoning that ultimately they produce physical deliverables (architectural or engineering plans and blueprints) and therefore aren t solely just service business. The phase-in range is $50,000 (for individuals, or $100,000 for married couples). Which effectively means that once taxable income exceeds $207,500 or $415,000, respectively, the QBI deduction is phased all the way down to zero for a specified service business. Only applies to business specific Special Services Businesses 51

52 Special Service Business Matthew is a 50% partner in a law firm that generated $500,000 in net profits last year (of which Matthew received his $250,000 share). In addition, Matthew s wife Jennifer is an experienced engineer who makes a $100,000 salary. And the couple has a portfolio that cumulatively generated about $40,000 of interest and dividends in the past year. As a result, their combined Adjusted Gross Income is $390,000, and since they don t own a home (no mortgage interest deduction) and their other deductions are limited, they simply claim the $24,000 Standard Deduction, which reduces their tentative taxable income to $366,000. Matthew would normally be eligible for a $50,000 QBI deduction (which is 20% of his $250,000 share of business income), but as a lawyer, his law firm business income is Specified Service income. And because the couple s tentative taxable income is $366,000, they are 51% of the way through the Specified Service business phaseout zone (being $51,000 out of $100,000 over the $315,000 threshold for married couples). As a result, they only keep 49%, or $24,500, of their QBI deduction, which ultimately reduces their taxable income to $366,000 $24,500 = $341,

53 Special Service Business Charlie is a financial advisor who owns several other businesses as well. His advisory business is an S corporation, which provides him a $150,000 salary, plus an $80,000 income distribution. In addition, he also generates $85,000 of net income from a real estate business (3 small rental properties), along with $25,000 of income from a landscaping business he seeded for his best friend, and his portfolio produced $60,000 of interest and dividend income (of which $15,000 was from REITs). Charlie s total income is $150,000 + $80,000 + $85,000 + $25,000 + $60,000 = $400,000, which as an individual taxpayer is more than enough to exceed the full phaseout threshold for the QBI deduction. However, only his $80,000 profit distribution is actually specified service income; the landscaping business is a service business, but not a specified service business, and his real estate business and REIT income also remain eligible for the QBI deduction. As a result, Charlie s potential QBI deductions would be 20% of his advisory business income ($16,000), plus 20% of his real estate income ($17,000), plus 20% of his landscaping business income ($5,000), plus 20% of his REIT income ($3,000). The $16,000 QBI deduction for the advisory business is phased out due to Charlie s income and the Specified Service business limits, but the other $17,000 + $5,000 + $3,000 = $25,000 of QBI deductions remain (assuming they can otherwise satisfy the wages or wage-and-property tests discussed below). Which means Charlie s taxable income will ultimately be $400,000 $12,000 (Standard Deduction, assuming he does not itemized) $25,000 = $363,

54 W-2 Wages and Property Limits for Pass- Through Business Income Deduction The second limitation that may potentially apply to the QBI deduction is a wage (and property) limit. Specifically, the IRC Section 199A rules stipulate that the QBI deduction is actually the lesser of either 20% of QBI, or the greater of either: 50% of the W-2 wages of the business; or The sum of 25% of W-2 wages plus 2.5% of the unadjusted basis of all qualified property in the business 54

55 W-2 Wages and Property Limits for Pass- Through Business Income Deduction Eric is a real estate investor whose business both purchases and rents properties, and is responsible for property management. In total, the business holds nearly $20,000,000 worth of residential real estate that he has purchased over the past 8 years (combined original purchase prices of $16,000,000), generates net income of approximately $1,000,000, and has 3 people on the payroll earning a total of $230,000. Given these dynamics, Eric s QBI deduction should be 20% of his $1,000,000 of net income (which would be $200,000), but may be limited by the wages and property caps. The wage limit which is 50% of W-2 wages would cap his QBI deduction at just 50% x $230,000 = $115,000. However, the wage-and-property limit caps his QBI deduction at 25% x $230, % x $16M = $457,500. Thus, thanks to the sizable amount of real estate he owns, Eric s wage-andproperty limit is the greater of either $115,000 or $457,500 (which means the property limit applies). And since the QBI deduction is ultimately the lesser of 20% of QBI or the wage-and-property limit, the lesser of $200,000 or $457,500 is $200,000. Which means Eric actually does receive his full QBI deduction. 55

56 How does pass-thru QBI appear on 1040? 56

57 Tax Strategies to Consider Contribute to Roth IRA via Traditional IRA Convert Traditional IRA funds to Roth IRA Net Unrealized Appreciation (NUA) transfers from 401(k)s Sell stock at 0% Long-Term Capital Gains rate Single Taxable Income < $38,600 Joint Taxable Income < $77,200 Donor-Advised Fund Pass-Through Entity Rules 57

58 Changes to Your

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