Tax Reform Overview. Robert S. Keebler, CPA/PFS, MST, AEP Keebler & Associates, LLP

Transcription

1 Tax Reform Overview Robert S. Keebler, CPA/PFS, MST, AEP Keebler & Associates, LLP

2 Notable Individual Changes Individual Rates Standard Deduction Personal Exemptions Child/Family Credit Senate Overall rate decrease; 7 brackets retained $24,000 (MFJ) Repealed Increased 2 AMT SALT Deduction Mortgage Interest Deduction Pease Limitation Exemption increased; Exemption phaseout threshold substantially increased Limited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Limited to interest on up to $750,000 of acquisition indebtedness; Repeals deduction for home equity indebtedness Repealed Individual provisions sunset December 31, 2025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 Critical Changes Estate & GST tax Doubles the exemption to $11,200,000 in 2018 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added 20% historic rehabilitation credit now claimed over five-years and 10% pre-1936 building rehabilitation credit is repealed 3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 Modifications Discussed, But Not Included: Changes to the exclusion of gain on the sale of a principal residence Elimination of the specific indemnification method in favor a FIFO basis accounting for marketable securities Reduction of the capital gain rates or changes to the taxation of interest income Elimination of the step-up in basis The five-year rule for inherited IRAs Rothification 4

5 2018 Individual Income Tax Rates PROPOSED TOP OF EACH BRACKET S MFJ/QW MFS HOH T&E 10% $ 9,525 $ 19,050 $ 9,525 $ 13,600 $ 2,550 12% $ 38,700 $ 77,400 $ 38,700 $ 51,800-22% $ 82,500 $ 165,000 $ 82,500 $ 82,500-24% $ 157,500 $ 315,000 $ 157,500 $ 157,500 $ 9,150 32% $ 200,000 $ 400,000 $ 200,000 $ 200,000-35% $ 500,000 $ 600,000 $ 300,000 $ 500,000 $ 12,500 37% PROPOSED TOP OF EACH CAPITAL GAINS BRACKET S MFJ/QW MFS HOH T&E 0% $ 38,600 $ 77,200 $ 38,600 $ 51,700 $ 2,600 15% $ 425,800 $ 479,000 $ 239,500 $ 452,400 $ 12,700 20% 5 1, Also, simplifies the kiddie tax by effectively applying ordinary and capital gains rates applicable to trusts and estates to the net unearned income of a child

6 Comparison of MFJ Rates Income Range Scheduled 2018 rate TCJA $1 to $19,050 10% 10% $19,051 to $77,400 15% 12% $77,401 to $156,150 25% 22% $156,150 to $165,000 28% 22% $165,001 to $237,950 28% 24% $237,951 to $315,000 33% 24% $315,001 to $400,000 33% 32% $400,001 to $424,950 33% 35% $424,950 to $480,050 35% 35% $480,051 to $600, % 35% Over $600, % 37% CAUTIONS: Taxable income measures differ; child credit rather than dependency exemption but with age differences. 6

7 Individual Income Tax Rates Comparison $800, $700,000 $600, % 37.0% $500, % $400,000 $300,000 $200,000 $100, % 33.0% 28.0% 25.0% 32.0% 24.0% 22.0% 7 $- 15.0% 12.0% 10.0% 10.0% 2017

8 Individual Income Tax Rates Comparison - $250,000 & Lower $250, % $200, % 24.00% $150,000 $100, % 22.00% $50, % 12.00% $ % 10.00% 8

9 Standard Deduction 2017 CURRENT STANDARD DEDUCTION S MFJ/QW MFS HOH $ 6,350 $ 12,700 $ 6,350 $ 9, STANDARD DEDUCTION S MFJ/QW MFS HOH $ 12,000 $ 24,000 $ 12,000 $ 18,000 63,

10 Exemptions Exemptions are completely repealed at the end of 2017 Consolidated into the standard deduction Expanded child tax credit and a new family tax credit designed to offset the loss for families 151,

11 Child and Family Tax Credits Summary Credit for Children Credit for other Family Members Phase-out Begins Refundable Amount (credit for children only) $1,000 $2,000 $0 $500 $110,000 $400,000 $1,000 $1, , All figures for MFJ

12 Simplification of Deductions 2018 SALT Deduction ( 164, 11042) Limited to $10,000 Mortgage Interest Deduction ( 163, 11043) Charitable Contributions ( 170, 11023) Personal Casualty Losses ( 71, 11044) Medical Expenses ( 213, 11027) Job Expenses & Miscellaneous Deductions ( 67, 11045) Alimony Paid ( 71, 11051) Moving Expenses ( 217, 11049) Limited to interest on up to $750,000 of acquisition indebtedness; Repeals deduction for home equity indebtedness Percentage Limit increased from 50% to 60% (for cash); Repealed, except for declared disasters Expanded for two years by setting the deduction threshold to 7.5% of AGI for all taxpayers All deductions subject to the 2% floor repealed; Many above-the-line deductions retained Repealed for any divorce or separate instrument executed after 12/31/18 Repealed 12

13 AMT 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 Begin of Phaseout, MFJ $120,700 $500,000 $160,900 $1,000,000 55,

14 Retirement Plans Roth Recharacterization Cannot be used to unwind a Roth conversion after 2017 The experts are debating whether 9100 relief may be available to those who miss the deadline Can still be used to change a Roth contribution to a contribution to a traditional IRA Roth conversions now long-term strategic not tactical moves Extended rollover period for plan loan offset amounts after 2017 Currently plan loans must be repaid within 60-days of separating from the employer The proposal moves the deadline to the due date of the employee s income tax return 408A, ,

15 Estate & GST Taxes Doubles the Basic Exclusion Amount and GST exemption in 2018 ($10,000,000 in 2011 dollars) Higher exemption sunsets December 31, 2025 Retains the 1014(a) basis adjustment ( step-up ) 2010,

16 Estate & GST Taxes Estate Tax Exemption - Past & Projected $12,000,000 $10,000,000 $8,000,000 $6,000,000 $4,000,000 $2,000,000 $- 16

17 Estate & GST Taxes Planning for a Future Congressional Reduction in the Exemption Tax-free gifts (to Dynasty Trusts) to use the higher exemption in anticipation of change IDGT sales Transfers taking advantage of valuation discounts. GST planning Shifting growth Four to eight-year GRATs for those in the middle Force inclusion & obtain a step-up sunset in case of death GST grandfathered trusts/gst exempt trusts Portability elections Springing SLATs (i.e. SLAT with contingent GPOA provision) Increased ease of income shifting Note, it will be difficult to decrease the exemption without creating inequitable results 17

18 Corporate Tax Rates % flat rate 11,

19 Business Pass-through Rate Deduction equal to 20% of domestic qualified business income (QBI) from a passthrough entity Basically, provides an effective top marginal rate of 29.6% Applies to trusts & estates 199A,

20 Business Pass-through Rate For those with taxable income in excess of $415,000 (MFJ) the deduction is limited to the greater of: 50% of W-2 Wages 25% of W-2 Wages plus 2.5% of unadjusted basis Unavailable to Specified Service Business owner s taxable income in excess of $415,000 (MFJ) Limitations phased-in from $315,000 - $415,000 (MFJ) of taxable income 199A,

21 Business Pass-through Rate Specified Service Business defined in 1202(e)(3)(A): any trade or business involving 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 The final version includes new statutory language to exclude architects and engineers from the 199A Specified Service Business definition 199A,

22 Business Pass-through Rate The deduction also cannot exceed the lessor 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, % 22

23 Is it a Service Business per 1202(e)(3)(A), 475(c)(2), or 475(e)(2)? No Is taxable income over the threshold? 315/157.5 No Deduction = QBI x 20% Yes Yes Is taxable income over the threshold? 315/157.5 Yes No Deduction = QBI x 20% Over full Phase in? Yes No Deduction Reduced Is taxable income over the full phase-in? Yes No Deduction No Deduction Reduced Deduction equals lessor of: QBI x 20% or The greater of: - W-2 wages x 50% - W-2 wages x 25% + 2.5% of unadjusted basis 23

24 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 24

25 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.) 25

26 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. 26

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