PRIVATE CLIENT SERVICES

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1 PRIVATE CLIENT SERVICES December 12, 2017 BDO USA, LLP, a Delaware limited liability partnership, is the U.S. member of BDO International Limited, a UK company limited by guarantee, and forms part of the international BDO network of independent member firms.

2 CPE and Support CPE Participation Requirements To receive CPE credit for this webcast: You ll need to actively participate throughout the program. Be responsive to at least 75% of the participation pop-ups. Please refer the CPE & Support Handout in the Handouts section for more information about group participation and CPE certificates. Q&A: Questions submitted during the live webinar via the Q&A feature will display both your name and your question to all participants. Otherwise, the attendee list of the webinar will remain confidential. We appreciate your privacy and should you like to speak with one of the presenters from today s webinar, please reach out to Traci Kratish Pumo and Jack Nuckolls directly using contact information included at the end of the presentation. Technical Support: If you should have technical issues, please contact LearnLive: Click on the Live Chat icon under the Support tab, OR call: Audio Audio will be streamed through your computer speakers. If you experience audio issues during today s presentation please dial into the teleconference: , teleconference code: Private Client Services 2017 Year-End Tax Planning

3 AGENDA 3 Private Client Services 2017 Year-End Tax Planning

4 AGENDA Legislative Tax Plans (as of December 2, 2017) Year End Planning Hurricane Relief 4 Private Client Services 2017 Year-End Tax Planning

5 Tax Cuts and Jobs Act 5 Private Client Services 2017 Year-End Tax Planning

6 Tax Cuts and Jobs Act - Goals It is now time for all members of Congress Democrat, Republican and Independent to support pro-american tax reform. It s time for Congress to provide a level playing field for our workers, to bring American companies back home, to attract new companies and businesses to our country, and to put more money into the pockets of everyday hardworking people. President Trump Four Goals of Tax Reform: 1. Make the tax code simple, fair and easy to understand. 2. Give American workers a pay raise by allowing them to keep more of their hardearned paychecks. 3. Make America the jobs magnet of the world by leveling the playing field for American businesses and workers. 4. Bring back trillions of dollars that are currently kept offshore to reinvest in the American economy. 6 Private Client Services 2017 Year-End Tax Planning

7 House Tax Plan Basic Overview The U.S. House of Representatives released their tax reform plan (HR 1), also known as the Tax Cuts and Jobs Act on November 2, The plan was passed on November 16, 2017 with a vote of 227 to 205. No Democrats voted in favor of the plan. The plan calls for a substantial revision of the current tax code for both individuals and businesses. 7 Private Client Services 2017 Year-End Tax Planning

8 Senate Tax Plan Basic Overview The Senate released their mark-up of HR 1, also known as the Tax Cuts and Jobs Act on November 9, The plan was passed on December 2, 2017 with a vote of 51 to 49. No Democrats voted in favor of the plan. Sen. Bob Corker of Tennessee was the only Republican to vote against the bill. The Senate proposal calls for the expiration of its individual tax reform proposals on December 31, Private Client Services 2017 Year-End Tax Planning

9 House Tax Plan Rate Reduction New Rates and Brackets - The House Tax Plan reduces the current income tax rates, and compresses the tax brackets from seven to four. Tax Rate Married Filing Jointly Single Head of Household Married Filing Separately Estates & Trusts 12% $0-$90,000 $0 - $45,000 $0 - $67,500 $0 - $45,000 $0 - $2,550 25% $90,000 - $260,000 $45,000 - $200,000 $67,500 - $200,000 $45,000 - $130,000 $2,550 - $9,150 35% $260,000 - $1,000,000 $200,000 - $500,000 $200,000 - $500,000 $130,000 - $500,000 $9,150 - $12, % Over $1,000,000 Over $500,000 Over $500,000 Over $500,000 Over $12,500 9 Private Client Services 2017 Year-End Tax Planning

10 Senate Tax Plan Rate Reduction Individual Tax Rates & Adjusted Brackets The number of tax brackets remains at seven, but there are new rates and thresholds. Under the Senate proposal, these rates would expire after December 31, Tax Rate Married Filing Jointly Single Head of Household Married Filing Separately Estates & Trusts 10% $0-$19,050 $0-$9,525 $0-$13,600 $0-$9,525 $0-$2,550 12% $19,050-$77,400 $9,525-$38,700 $13,600-$51,800 $9,525-$38,700 N/A 22% $77,400-$140,000 $38,700-$70,000 $51,800-$70,000 $38,700-$70,000 N/A 24% $140,000-$320,000 $70,000-$160,000 $70,000-$160,000 $70,000-$160,000 $2,550-$9,150 32% $320,000-$400,000 $160,000-$200,000 $160,000-$200,000 $160,000-$200,000 N/A 35% $400,000- $1,000,000 $200,000-$500,000 $200,000-$500,000 $200,000-$500,000 $9,150-$12, % Over $1,000,000 Over $500,000 Over $500,000 Over $500,000 Over $12, Private Client Services 2017 Year-End Tax Planning

11 House Tax Plan Rate Reduction Phase out of 12% Rate for high-income earners - For married taxpayers filing jointly, with adjusted gross income over $1.2 million ($1 million for single filers) there is an additional 6-percent tax imposed on the excess over those thresholds. This is to phase-out the benefit from the 12 percent tax rate for high-income earners. Capital Gains Rates - For net capital gains, the preferential rates would remain at 0 percent, 15 percent or 20 percent. The 0 percent bracket would be for joint filers with taxable income up to $77,200 (1/2 that amount for single or MFS), and $51,700 for head of household. The 15 percent bracket would be for joint filers with taxable income up to $479,000 (1/2 those amounts for single or MFS), and $452,400 for head of household. The 20 percent bracket would be for any taxable income in excess of those amounts. 11 Private Client Services 2017 Year-End Tax Planning

12 Senate Tax Plan Capital Gains Capital Gains Rates Capital gains and qualified dividends would retain their preferential tax rates. The 0% rate is for taxable income below $77,200 for joint returns; $38,600 for single returns. The 15% rate is if taxable income exceeds $77,200 for joint returns; $38,600 for single returns. The 20% rate is if taxable income exceeds $479,000 for joint returns; $425,800 for single returns. First-in First-Out (FIFO) The Senate proposal would require that any specified security sold or transferred be determined on a FIFO basis, except where the average basis method is allowed. 12 Private Client Services 2017 Year-End Tax Planning

13 Above-the-Line Deductions Moving Expenses (House & Senate) - The deduction for moving expenses would be repealed, except for members of Armed Forces on active duty. Alimony Payments (House Only) - The deduction for alimony payments would be repealed. Alimony would no longer be included in gross income of recipient. Existing alimony and separate maintenance agreements would be grandfathered, as would modified agreements, unless the modified agreement specifically calls for the application of the rules related to alimony under this Act. Archer MSA (House Only) - The deduction for contributions to Archer MSAs would be repealed. The income exclusion for employer contributions to Archer MSAs would be repealed. Existing balances may be rolled over tax free into a HSA. Employer HSA contributions would be required to be shown on the individual s income tax return. 13 Private Client Services 2017 Year-End Tax Planning

14 Deductions - House Tax Plan Standard Deductions/Personal Exemptions: The standard deduction would be $12,200 for single filers, and $24,400 for joint filers. The additional standard deductions for the elderly and blind would be repealed. Personal exemptions would be repealed. 14 Private Client Services 2017 Year-End Tax Planning

15 Deductions - Senate Tax Plan Standard Deductions/Personal Exemptions: The standard deduction would be $12,000 for single filers, $24,000 for joint filers. Does not repeal the additional standard deduction for the elderly and blind. Personal exemptions would be repealed. 15 Private Client Services 2017 Year-End Tax Planning

16 Itemized Deductions Pease Limitation (House & Senate) The itemized deduction phase-out would be repealed. Mortgage Interest House: The mortgage interest deduction would be limited to interest paid on $500,000 of new acquisition indebtedness and available only for indebtedness on the taxpayer s principal residence incurred after November 2, The home equity indebtedness interest deduction would be repealed. Prior mortgages would generally be grandfathered. Senate: Repeals the deduction for mortgage interest related to home equity indebtedness. The mortgage interest deduction on acquisition indebtedness up to $1,000,000 would remain. State and Local Taxes (House & Senate) - The deduction for state and local income taxes would be eliminated, except for taxes paid in carrying out a trade or business or income producing activity. The deduction for foreign real property taxes paid would be repealed unless paid in carrying out a trade or business. House & Senate: Property taxes would be deductible up to $10,000 ($5,000 for married filing separate filers). 16 Private Client Services 2017 Year-End Tax Planning

17 Itemized Deductions Charitable Contributions (House & Senate) - For cash contributions to a public charity, the AGI limitation would be increased to 60 percent. The 5-year carryover would remain. The 80-percent deduction related to athletic event tickets would be repealed. Tax Preparation Fees (House & Senate) - The deduction for tax preparation expenses would be repealed. Medical Expenses (House Only) - Deductions for medical expenses would be repealed. Senate: Senate bill temporarily lowers the AGI threshold to 7.5%. Casualty Losses House: Deductions for casualty losses would be repealed. Losses related to special disaster relief legislation would remain. Senate: Personal casualty losses would only be allowed only if incurred in a disaster declared by the President. Gambling Losses (House & Senate) - In computing the limitation on gambling losses, expenses incurred in carrying on any wagering transaction would also be limited to the extent of gambling winnings. 17 Private Client Services 2017 Year-End Tax Planning

18 Itemized Deductions Miscellaneous Itemized Deductions Subject to 2% floor (Senate Only) - Repeals all miscellaneous itemized deductions that are subject to the 2-percent AGI floor. Including investment fees and expenses, and unreimbursed employee expenses. 18 Private Client Services 2017 Year-End Tax Planning

19 Exclusions from Income House Tax Plan Only Employer Provided Housing - The exclusion for employer-provided housing would be limited to $50,000 ($25,000 for married taxpayers filing separately). The exclusion would be limited to no more than 1 residence at any given time. The $50,000 exclusion would phase-out for taxpayers whose income exceeds $120,000, by an amount equal to 50% of such excess. Gain on Sale of Principal Residence - The use and ownership test would be extended to 5 of the 8 years preceding sale or exchange. The taxpayer may not have used the exclusion during the 5 years preceding the sale or exchange. The exclusion would be phased out dollar-for-dollar if the taxpayer s average modified adjusted gross income from the year of sale and preceding two years exceeds $500,000 for joint filers ($250,000 for single). Employee Achievement Awards - The exclusion for employee achievement awards would be repealed. 19 Private Client Services 2017 Year-End Tax Planning

20 Taxation of Pass-Through Income House Tax Plan 25 Percent Rate - Maximum individual rate on qualified business income would be 25 percent. Qualified Business Income is the sum of: 100 percent of net business income derived from a passive activity PLUS 30 percent (base capital percentage) of any net business income derived from any active business activity LESS 100 percent of any net business loss derived from a passive activity, LESS 30 percent of any net business loss derived from an active business activity, and LESS any carryover net business loss determined for the preceding taxable year. Any unused carryover business loss from the immediately preceding taxable year would become a carryover business loss to the next year. Qualified business income would include income from sole proprietorships, partnerships, and S corporations. Certain pass-through entities that engage in specified service activities where the principal asset of such trade or business is the reputation or skill of one or more of its employees do not obtain this preferential rate. If a taxpayer engaged in certain prohibited pass-through activities, makes significant capital expenditures, they can annually elect to increase the capital base percentage, provided the applicable percentage for the taxable year is at least 10 percent. 20 Private Client Services 2017 Year-End Tax Planning

21 Taxation of Pass-Through Income House Tax Plan Net business income definition - Is comprised of the net amount of income, expense, gain, deduction, and losses incurred with respect to a business activity. Includes guaranteed payments. Does not include investment-related items, such as capital gains, dividends, or interest. Grouping Elections - For purposes of determining whether business income is generated from a passive vs. active business activity, the taxpayer s groupings under section 469 would apply. Reduced rate for small businesses - There is a reduced rate for small businesses with active business income. The 25% tax would be reduced by 3%* of the excess of: (A) the least of: (i) qualified active business income, (ii) taxable income reduced by net capital gain or (iii) the 9-percent bracket threshold amount over, (B) the excess of taxable income over the applicable threshold amount. *The reduction amount is phased in. In 2018 and 2019, it is 1%. In 2020 and 2021 it is 2%. Starting in 2023 it is 3%. 21 Private Client Services 2017 Year-End Tax Planning

22 Taxation of Pass-Through Income Senate Tax Plan 23 Percent Deduction - The Senate bill would allow an individual taxpayer to deduct 23% of domestic qualified business income from a partnership, S corporation, or sole proprietorship. Domestic qualified business income definition - Income, gain, deduction and loss with respect to the taxpayer s qualified business. Qualified business income does not include: (1) any amount paid by an S corporation that is treated as reasonable compensation of the taxpayer, (2) any amount distributed or allocated to a partner who is acting other than in his capacity as a partner for services, or (3) certain investment-related income, gain, deductions or loss. The deduction is limited to 50% of the W-2 wages for taxpayers who have qualified business income from a partnership or S corporation. 22 Private Client Services 2017 Year-End Tax Planning

23 Taxation of Pass-Through Income Senate Tax Plan The deduction would apply to specified service businesses unless the taxpayer s taxable income exceeds $500,000 for joint filers ($250,000 for all other filers). Specified service businesses are any trade or business where the principal asset of such trade or business is the reputation or skill of one or more of its employees. The Senate proposal does not differentiate treatment between passive vs. active investors. 23 Private Client Services 2017 Year-End Tax Planning

24 Miscellaneous Provisions Private Activity Bonds (House Only) - Interest income would no longer be excluded from gross income for bonds issued after Private activity bond interest income would be subject to ordinary income tax rates. Education Credits and Deductions (House Only) - Credits would be consolidated into a single credit called the American Opportunity Tax Credit. The credit would equal 100% of the first $2,000 of qualified tuition and related expenses plus 25% of the next $2,000 of qualified tuition and related expenses. Up to $800 of the credit would be refundable. Credit phases out for joint taxpayers with AGI over $160,000 ($80,000 for other taxpayers). The above-the-line deductions for student loan interest and qualified tuition and related expenses would be repealed. 24 Private Client Services 2017 Year-End Tax Planning

25 Miscellaneous Provisions Child Tax Credits House: Credit would be increased to $1,600. A $300 family flexibility credit would be available for the taxpayer, spouse and non-dependent children over 16 years old. Credits phase out if modified AGI over $230,000 for joint filers ($115,000 for single). Senate: Credit of $2,000 would be available for any qualifying child under the age of 18. Credit phases out at $500,000 for joint filers. Up to $1,000 of the credit is refundable. A $500 nonrefundable credit would be permitted for a qualifying dependent other than a qualifying child. 25 Private Client Services 2017 Year-End Tax Planning

26 Miscellaneous Provisions Patient Protection and Affordable Care Act (Senate Only) Reduces the amount of the individual shared responsibility payment under the ACA to $0. Simplified Filing Forms (Senate Only) - Creates a new Form 1040SR for use by persons age 65 or older by the close of the taxable year. 26 Private Client Services 2017 Year-End Tax Planning

27 Alternative Minimum Tax House - The Alternative Minimum Tax would be repealed. If a taxpayer has AMT credit carryforwards, 50 percent of the remaining credits (to extent credits exceeded regular tax for the taxable year) may be claimed in tax years beginning 2019, 2020, and 2021, with the remainder claimed beginning Senate Final version of the Senate bill retains AMT but raises the amount of income exempt from it for tax years beginning after 2017 and before Private Client Services 2017 Year-End Tax Planning

28 Estate, Gift and GST Provisions Increased Exemption (House & Senate) - The exemption would be increased to $10 million (as of 2011), then indexed for inflation forward to Repealed After December 31, 2024 (House Only) - The estate and GST taxes would be repealed for estates of decedents dying, and generationskipping transfers, made after December 31, Basis step-up would be retained even for transfers of property after the repeal of the estate tax. Gift Tax - The gift tax rate would be reduced from 40% to 35% for gifts made after December 31, Each individual would continue to have a lifetime gift exemption amount of $10,000,000 (indexed for inflation) 28 Private Client Services 2017 Year-End Tax Planning

29 Summary of Significant Differences 29 Private Client Services 2017 Year-End Tax Planning

30 Significant Differences Between House and Senate Plans House Brackets & Rates 4 Rates 7 Rates Senate Taxation of Pass-Through Entities Mortgage Interest 25% Rate on Qualified Business Income Permissible on $500,000 of acquisition indebtedness 23% Deduction on Domestic Qualified Business Income Permissible on $1,000,000 of acquisition indebtedness Miscellaneous Itemized Deductions Does not contain a blanket disallowance Repeals all miscellaneous itemized deductions subject to 2-percent floor Medical Expenses Repealed Lowers AGI threshold to 7.5% Individual Mandate No Proposal Reduces individual mandate to $0 Estate, Gift, and Generation- Skipping Transfer Taxes Repeals Estate and GST taxes for decedent s dying after December 31, 2024 Does not repeal Estate and GST taxes Alternative Minimum Tax Repeals AMT Retains AMT, but raises the exemption amounts 30 Private Client Services 2017 Year-End Tax Planning

31 Year-End Planning 31 Private Client Services 2017 Year-End Tax Planning

32 Possible Planning Opportunities In light of reform, you want to consider: Accelerating Payments: State Taxes - Pay fourth quarter state income taxes in 2017 (as long as it does not result in you being subject to the AMT), as this may be eliminated from itemized deductions starting in Itemized Deductions - Pay other itemized deductions, such as medical expenses, real estate taxes, personal property taxes, investment interest expense, tax preparation fees and other miscellaneous deductions in These may be eliminated starting in Income Defer ordinary income expected to be taxed at the highest marginal rates into 2018, as both plans propose to reduce income tax rates in Be mindful of Constructive Receipt Doctrine. Consider accelerating income if subject to AMT this year and will be in higher tax brackets next year with elimination of deductions. 32 Private Client Services 2017 Year-End Tax Planning

33 Possible Planning Opportunities In light of reform, you want to consider: Basis Ordering Rules Senate plan will require FIFO to be used for all stock sold after December 31, In light of this, consider: Gifting low basis assets to charity Harvesting losses Selling high-basis assets before end of year Gifting stock to charitable trust Gifting stock to non-grantor trusts Gifting stock to family partnership Especially in light of removal of proposed 2704 regulations 33 Private Client Services 2017 Year-End Tax Planning

34 Possible Planning Opportunities In light of reform, you want to consider: Charitable Planning: Stock Donation - Consider donating appreciated stock to charities, since tax rates are projected to be lower next year. Qualified Charitable Distributions (QCD) Consider making your RMD from an IRA, a QCD to a charity. The RMD will be excluded from income to the extent it is a QCD. State Income Trusts Funding of DING, WING, SING and NING trusts With the potential repeal of state income taxes as an itemized deduction, taxpayers may consider shifting assets to states with no, or low, state income tax. Gift Planning: Wait on making taxable gifts that would result in gift tax due. 34 Private Client Services 2017 Year-End Tax Planning

35 Hurricane Relief 35 Private Client Services 2017 Year-End Tax Planning

36 Hurricane Relief Provisions Following the destruction of Hurricanes Harvey, Irma and Maria in September and October 2017, parts of Texas, Florida, Georgia, Puerto Rico, and the U.S. Virgin Islands are federally declared disaster areas. On September 29, President Trump signed into law P.L , the Disaster Tax Relief and Airport and Airway Extension Act of 2017 (the Act ). The Act provides temporary tax relief to victims of Hurricanes Harvey, Irma and Maria. Affected taxpayers have until January 31, 2018 to file certain federal individual and business tax returns, and to make certain tax payments, that were due between the time of the disaster and January 31, Most states have provided their own formal or informal relief for taxpayers affected by these disasters. 36 Private Client Services 2017 Year-End Tax Planning

37 Hurricane Relief Provisions - continued Qualified disaster relief payments from the federal or a state government are excluded from gross income, so long as they are used to reimburse or pay for reasonable and necessary expenses incurred as a result of the disaster, including personal, family, living, or funeral expenses. Casualty losses incurred as a result of a federally declared disaster are entitled to special relief; affected taxpayers may elect to claim the loss in the year before the disaster to save taxes immediately. Taxpayers that have already filed their 2016 return may consider amending the return to claim the loss in that earlier tax year. 37 Private Client Services 2017 Year-End Tax Planning

38 Hurricane Relief Provisions - continued Casualty losses generally equal the lesser of (i) the adjusted basis in the property before the casualty, and (ii) the decrease in the property s fair market value as a result of the casualty. Casualty losses do not include normal wear and tear or amounts reimbursed by insurance. Moreover, deductible casualty losses are subject to limitations as follows: - Personal use property: After computing the amount of the casualty loss, the loss is reduced by $100. Thereafter, the loss is further reduced by 10% of the taxpayer s AGI. 38 Private Client Services 2017 Year-End Tax Planning

39 Hurricane Relief Provisions - continued Disaster Tax Relief and Airport and Airway Extension Act of 2017 (the Act ) - Eliminates the current law requirement that personal casualty losses must exceed 10% of AGI to qualify for a deduction. - Eliminates the current law requirement that taxpayers must itemize deductions to access this tax relief for losses by increasing an individual taxpayer's standard deduction by the net disaster loss. - Eliminates the rule that generally disallows the standard deduction for AMT purposes, for the portion of the standard deduction attributable to the net disaster loss. - Increases the $100 per-casualty floor to $500 for qualified disaster-related personal casualty losses. - Eases rules to permit victims to receive qualified hurricane distributions (up to $100,000) from their retirement plans without incurring the 10% early withdrawal penalty. - Temporarily suspends the AGI limitation on cash charitable contributions paid to a charitable organization for hurricane relief efforts. 39 Private Client Services 2017 Year-End Tax Planning

40 Conclusion 40 Private Client Services 2017 Year-End Tax Planning

41 Conclusion The final tax bills are likely not to be passed until very close to the end of the year (or beginning of next year), limiting the ability to implement any planning techniques. Any differences between the bills are being worked out in Committee. Remember the possibility of sunset provisions. Flexibility is key, as the provisions in the Bills can change at any moment. 41 Private Client Services 2017 Year-End Tax Planning

42 Presenters Today John (Jack) Nuckolls Technical Tax Leader Private Client Services (Direct) (Internal) (Fax) BDO One Bush Street, Suite 1800 San Francisco, CA UNITED STATES Traci Kratish Pumo Managing Director, National Tax Office Private Client Services (Direct) (Internal) (Mobile) (Fax) BDO 1601 Forum Place, 9th Floor Centurion Plaza West Palm Beach, FL UNITED STATES Private Client Services 2017 Year-End Tax Planning

43 Conclusion Thank you for your participation! Certificate Availability If you participated the entire time and responded to at least 75% of the polling questions, click the Participation tab to access the print certificate button. Please exit the interface by clicking the red X in the upper right hand corner of your screen. 43 Private Client Services 2017 Year-End Tax Planning

44 General Disclaimer: These materials do not constitute tax or legal advice, and cannot be relied upon for purposes of avoiding penalties under the Internal Revenue Code. These materials may omit discussion of exceptions, qualification, definitions, effective dates, jurisdictional differences, and other relevant authorities and considerations. In no event should a reader rely on these materials in planning a specific transaction or litigation. Non-lawyers should not attempt to provide legal services or legal advice in circumstances where that would violate laws against the unauthorized practice of law. BDO will not be responsible for any error, omission, or inaccuracy in these materials. 44 Private Client Services 2017 Year-End Tax Planning