Tax Season Insights with Ernst & Young. March 29, 2019

Transcription

1 Tax Season Insights with Ernst & Young March 29, 2019

2 Disclaimer EY refers to the global organization, and may refer to one or more, of the member firms of Ernst & Young Global Limited, each of which is a separate legal entity. Ernst & Young LLP is a client-serving member firm of Ernst & Young Global Limited operating in the U.S. This presentation is 2019 Ernst & Young LLP. All rights reserved. No part of this document may be reproduced, transmitted or otherwise distributed in any form or by any means, electronic or mechanical, including by photocopying, facsimile transmission, recording, rekeying, or using any information storage and retrieval system, without written permission from Ernst & Young LLP. Any reproduction, transmission or distribution of this form or any of the material herein is prohibited and is in violation of U.S. and international law. Ernst & Young LLP expressly disclaims any liability in connection with use of this presentation or its contents by any third party. Views expressed in this presentation are those of the speakers and do not necessarily represent the views of Ernst & Young LLP. This presentation is provided solely for the purpose of enhancing knowledge on tax matters. It does not provide tax advice to any taxpayer because it does not take into account any specific taxpayer s facts and circumstances. These slides are for educational purposes only and are not intended, and should not be relied upon, as accounting advice. The statements and opinions expressed in this presentations are those of the presenter and not necessarily those of Fidelity Investments. Ernst & Young and Fidelity Investments are independent entities and are not legally affiliated. Neither Fidelity nor Ernst & Young can guarantee the accuracy or completeness of any statement or data. Fidelity does not provide legal or tax advice. The information herein is general and educational in nature and should not be considered legal or tax advice. Tax laws and regulations are complex and subject to change, which can materially impact investment results. Fidelity cannot guarantee that the information herein is accurate, complete, or timely. Fidelity makes no warranties with regard to such information or results obtained by its use, and disclaims any liability arising out of your use of, or any tax position taken in reliance on, such information. Consult an attorney or tax professional regarding your specific situation.

3 Agenda Review and understand major provisions of the new tax law for individuals Identify planning opportunities in light of the current landscape

4 Tax Cuts and Jobs Act

5 Changing tax rates Tax Year Tax Rates % 15% 25% 28% 33% 35% 39.6% % 12% 22% 24% 32% 35% 37% % 15% 25% 28% 33% 35% 39.6%

6 2019 tax brackets Tax Bracket Single Starting at: Head of Household Starting at: Married Filing Jointly Starting at: 10% $0 $0 $0 12% $9,700 $13,850 $19,400 22% $39,475 $52,850 $78,950 24% $84,200 $84,200 $168,400 32% $160,725 $160,700 $321,450 35% $204,100 $204,100 $408,200 37% $510,300 $510,300 $612,350

7 The ever-changing tax landscape Marginal tax rate 100% Highest rate Lowest rate 80% 60% 40% 20%

8 Long-term capital gains and dividends 2019 Single AGI* Starting at: 2019 Married Filing Jointly AGI* Starting at: 0% $0 $0 15% $39,375 $78,750 20% $434,550 $488,850 *AGI = Adjusted Gross Income

9 Standard deduction 2019 (through 2025) Old New Single $6,500 $12,200 Head of Household $9,550 $18,350 Married Filing Jointly $13,000 $24,400

10 Itemized deductions Overall limitation Old Up to 80% phased out when AGI exceeds $266,700/$320,000 No limitation New Casualty and theft losses Any eligible property Federally declared disasters only State and local taxes Home mortgage interest Charitable contributions No limit on the amount of income (sales) tax, real property tax, or personal property tax, assuming not subject to AMT Limited to interest on $1,000,000 of debt; $100,000 for home equity loan Up to 50% of AGI Limited to $10,000 for state, local, and property taxes (combined) Limited to interest on $750,000 for debt incurred after 12/15/2017; no home equity loan deduction unless used to buy, build, or improve home 50% of AGI limit raised to 60% for certain cash gifts

11 Itemized deductions and adjustments Medical expenses Job expenses and certain miscellaneous deductions Moving expenses (adjustment exclusion) Employer-provided bicycle commuter exclusion Old To the extent expenses exceed 10% of AGI floor Eligible expenses deductible Any eligible person Employer reimbursements for qualified bicycle commuting reimbursements up to $20 per month excluded from income New 10% of AGI floor reduced to 7.5% for 2017 and 2018; increased to 10% for years after 2018 Miscellaneous itemized deductions suspended (e.g., tax preparation fees and investment advisory fees) Members of the armed forces on active duty only Repealed

12 Alternative minimum tax (AMT) Old (Single/MFJ) New 2019 (Single/MFJ) MaximumAMT exemption $55,400/$86,200 $71,700/$111,700 Exemption phaseout threshold $123,100/$164,100 $510,300/$1,020,600 26%/28% tax rate threshold $191,500 $194,800 Implications: Higher exemption amounts should mean that fewer individuals will be subject to the AMT.

13 Bonus payments Supplemental withholding Employer is required to withhold at the highest rate bracket (37%) if employee s YTD compensation exceeds $1 million Effective January 1, 2018, through December 31, 2025, highest rate bracket is 37% Supplemental wages of up to $1 million a flat income tax withholding rate of 22% Withholding may not cover actual taxes you will owe Tax projection would be helpful as the tax rate could potentially be 37% but withholding 22%

14 Kiddie tax Old: Unearned income above $2,100 taxed at parent s rate New: Unearned income taxed at trust/estate rates 37% on income over $12,750

15 Section 529 Plans Contributions are after tax Growth is tax deferred Distributions are tax free if used for qualified education expenses State tax-free status varies by state plan Donors not subject to income limitations Tax and penalties apply if not used for qualified education expenses In 2019, you can contribute $15,000 ($30,000 married) per beneficiary per year without triggering gift tax You can use up to $10,000 per year for an elementary or secondary public, private, or religious school tax free (for federal purposes)

16 Roth IRA considerations Ability to contribute dependent on filing status and modified adjusted gross income Single: $122,000 $137,000 MFJ: $193,000 $203,000 After-tax contribution (no deduction) Tax-deferred growth Tax-free qualified distribution Account open for 5 years and age 59½

17 Roth conversions: Point counterpoint Conversion makes more sense Conversion makes less sense Owner can pay the tax on conversion from non-account assets Owner needs to take a distribution from the IRA to pay tax on conversion Assets will pass to non-charitable beneficiaries Assets will be used to fund charitable bequests at death When the investment horizon is longer and/or wealth transfer to heirs is a priority Assets will appreciate When the owner anticipates that their income tax rates will stay the same or increase When the investment horizon is shorter (e.g., assets will be spent in retirement) Assets will depreciate When the owner anticipates that their income tax rates will decrease significantly

18 Roth conversions: Point counterpoint Conversion makes more sense Conversion makes less sense High bracket taxpayer subject to AMT in year of conversion High bracket taxpayer who may be in AMT in a subsequent year IRA has high cost basis When IRA has low basis and owner has NOL, large charitable deductions, or other items that will shelter the income from the conversion IRA has low cost basis creating significant tax liability on conversion Caution: You can no longer unwind a Roth IRA conversion

19 Charitable deduction limits Adjusted gross income limitations Property donated Public charity or donor-advised fund Private foundation Cash, ordinary-income property and unappreciated property Long-term capital gain property deducted at fair market value 60% 30% 30% 20% Long-term capital gain property deducted at basis 50% 30%

20 Giving stocks or other securities Hypothetical example: Sell stock and donate cash Proceeds of sale $1,000 Give stock to charity Value of donation $1,000 Tax on $900 long-term capital gain $135 Tax benefit from charitable deduction $280 Donate net proceeds $865 + Tax benefit from avoiding capital gain taxation $135 Estimated tax benefit $242 = Total estimated tax benefit $415 Assumes stock held for more than one year and in the 28% tax bracket.

21 Donor-advised fund How it works Pros Cons Deduction You contribute cash or appreciated securities to a donor-advised fund set up in your name by a public charity (the parent charity ) You make recommendations on grants to be paid from the fund to specified charities Contribute on your own schedule Assets and growth are removed from your taxable estate You have a say as to how donations are to be used Once you ve transferred assets to the fund, the parent charity retains ultimate control Investment options may be limited Current-year income tax deduction (up to charitable deduction limits)

22 Earned and unearned income Current Tax Law Future Tax Law Other considerations Tax rates of 10% 37% Tax rates of 10% 39.6% Switch pretax 401(k) contributions to Roth 401(k) contributions Consider conversion of IRAs to Roth IRAs Revisit contributions to non-qualified deferred compensation plans But don t forget state tax considerations Exercise and hold of incentive stock options may be more advantageous Revisit investment in taxable versus tax-exempt bonds

23 Recap Tax considerations now that tax reform has passed Charitable contributions still valuable consider bunching deductions Revisit pretax versus Roth 401(k) analysis Fixed income: taxable or tax-exempt bonds Review after-tax cost of mortgages on second homes and home equity lines of credit Revisit state residency

24 Q&A

25 EY Assurance Tax Transactions Advisory About EY EY is a global leader in assurance, tax, transaction and advisory services. The insights and quality services we deliver help build trust and confidence in the capital markets and in economies the world over. We develop outstanding leaders who team to deliver on our promises to all of our stakeholders. In so doing, we play a critical role in building a better working world for our people, for our clients and for our communities. EY refers to the global organization, and may refer to one or more, of the member firms of Ernst & Young Global Limited, each of which is a separate legal entity. Ernst & Young Global Limited, a UK company limited by guarantee, does not provide services to clients. For more information about our organization, please visit ey.com. Ernst & Young LLP is a client-serving member firm of Ernst & Young Global Limited operating in the US Ernst & Young LLP. All Rights Reserved. ED None This material has been prepared for general informational purposes only and is not intended to be relied upon as accounting, tax or other professional advice. Please refer to your advisors for specific advice. ey.com