Impact of Tax Reform on Individuals. Barbara Coats, CPA

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1 Impact of Tax Reform on Individuals Barbara Coats, CPA

2 Tax Cuts and Jobs Act of 2017 House Passage of HR-1 House of Representatives passed bill by vote of on November 16 Thirteen Republicans voted against bill All but one of House Republicans who voted no are from New York, New Jersey, and California No Democrat voted for it

3 Budget Reconciliation Process Senate generally requires 60 votes to pass legislation and avoid filibuster Special budget reconciliation rules allow tax bill to move forward with simple majority vote in Senate Limit increase in federal budget deficit to $1.5 trillion over 10 years

4 Chances of Passage in Senate Final Senate vote could come as early as November 30 There are 52 Republican Senators Sen. Ron Johnson (R-Wisconsin) and Steve Daines (R- Montana) argue that tax rates on pass through entities are too high Sen. Susan Collins (R-Maine) opposes repeal of health care mandate Sen. Jeff Flake (R-Arizona) and Bob Corker (R- Tennessee) are concerned about budget deficits Other possible swing votes: Sen. John McCain (R- Arizona) and Sen. Lisa Murkowski (R-Alaska)

5 #WBInsights17

6 Tax Brackets for Married Couple Filing Jointly Taxable Income $1,100,000 $1,000,000 $900,000 $800,000 $700,000 $600,000 $500,000 $400,000 $300,000 $200,000 $100,000 $ House 10% 12% 15% 25% 28% 33% 35% 39.6%

7 Tax Brackets for Single Individual $600,000 $500,000 Taxable Income $400,000 $300,000 $200,000 $100,000 $ House 10% 12% 15% 25% 28% 33% 35% 39.6%

8 Tax Bracket for Trusts & Estates Taxable Income $20,000 $18,000 $16,000 $14,000 $12,000 $10,000 $8,000 $6,000 $4,000 $2,000 $ House 12% 15% 25% 28% 33% 35% 39.6%

9 Phase Out of 12% Bracket Phase out benefit of 12% bracket by increasing tax by 6% of excess AGI over threshold Threshold is $1.2 million of AGI for joint returns, $600K for MFS, and $1 million for other individuals Does not apply to estates and trusts

10 Capital Gains Tax Rates 0% capital gains tax rate for taxpayers in 12% bracket 15% capital gain tax for 25% and 35% brackets 20% tax rate for 39.6% bracket taxpayers

11 Change in Inflation Indexing Current tax brackets and exemptions adjust for Consumer Price Index (CPI) House bill ties inflation indexing to Chained CPI Chained CPI assumes that consumers will choose less expensive substitutes in inflationary times. Consumers reduction of quality of consumed goods reduces inflation

12 Divorced Taxpayers Currently, alimony is taxable to recipient and deductible to payor House bill provides that alimony will not be taxable or recipient nor deductible by payor Effective for agreements executed after 2017 No provision in Senate bill

13 Repeal of Tax Free Fringe Benefits After 2017 Dependent care assistance programs current exclusion is maximum of $5,000 per employee per year Qualified tuition reduction attention Emory University Courtesy Scholarship families! Employer provided education assistance $5,250 per employee is currently tax free Employer provided housing Adoption assistance programs currently $13,570 per adoption; phases out for higher income taxpayers Employee achievement awards currently tax-free up to $400 per employee for nonqualified awards and $1,600 for qualified awards

14 Capital Gains Cost Basis Choices Current law provides choice of methods to use for cost basis when selling securities. Choices are average cost, first in, first out (FIFO) and specific identification House bill does not change current law Senate bill requires that cost basis of securities sold after January 1, 2018 use FIFO except to extent that average cost is otherwise allowed

15 Sale of Principal Residence: Gain Exclusion Gain exclusion limited to $500K for joint filers and $250K for singles; does not change Currently available if live in home for 2 out of past 5 years House bill provides gain exclusion only if live in home for 5 out of past 8 years House bill provides exclusion can only be claimed once every 5 years House bill phases out exclusion by $1 for every dollar of AGI over $500K for joint returns and $250K for singles; average of income for year of sale and 2 immediate prior years

16 Repeal of Deductions State and local income tax except for taxes incurred in carrying on a business Property tax over $10,000 Sales tax Medical expenses (House bill not Senate) Personal casualty losses, except for disasters Unreimbursed employee business expenses Moving expenses Tax return preparation expense

17 Mortgage Interest Deduction Current interest deduction $1 million of acquisition debt ($500K for MFS) and $100,000 of home equity debt ($50K for MFS) Principal residence and one other residence House bill Grandfathers existing debt, including refinancing Limits deduction to interest on $500K of debt incurred after November 2, 2017 Can only deduct interest on a principal residence Interest on home equity debt is non-deductible

18 Charitable Contributions Cash contributions currently limited to 50% of adjusted gross income (AGI) Change cash contribution limit to 60% of AGI after 2017 Repeals 80% charitable deduction for contributions to university athletic seating rights New standard mileage rate for charitable use of an auto Repeals the exception that allows charities to file a return with required documentation rather than delivering information to donor directly

19 Pease Limitation on Itemized Deductions Requires higher-income individuals to reduce itemized deductions Lesser of 3% of AGI above a threshold or 80% of itemized deductions Threshold is AGI over $313,180 for joint filers and $261,500 for singles House bill repeals Pease limit

20 Education Funding Accounts Coverdell Education Savings Accounts Prohibit contributions after 2017 Provides tax-free rollover into Section 529 plans Section 529 Plans Distributions of up to $10,000 per year may be used for qualified expenses for elementary school and high school Qualified expenses include expenses associated with apprenticeship programs Unborn child (in utero) may be named as a designated beneficiary

21 Education Items to Repeal Student loan interest deduction Tuition and fee deduction Exclusion of interest from U.S. Savings Bonds Series EE and Series I (issued after 1989) used for qualified higher education expenses Repeals begin in tax year 2018

22 Standard Deduction

23 Personal Exemptions Currently $4,050 per person Phases out for married couples beginning with AGI of $313,800 and $261,500 for singles House bill repeals at end of 2017 & consolidates into standard deduction

24 Alternative Minimum Tax House bill repeals for 2018 tax year Currently, taxpayers receive a tax credit for all or some of AMT paid in prior years House bill allows refund claims for 50% of remaining AMT credits in 2019, 2020, and 2021 Taxpayers can claim refund for 100% of remaining credit in 2022

25 Education Tax Credits Combine current American Opportunity Tax Credit (AOTC), Hope Scholarship Credit, and Lifetime Learning Credit into one enhanced AOTC Repeal Hope and Lifetime Learning credits Limit AOTC to 5 years of post secondary education with credit in 5 th year only half the rate of 1 st 4 years Reduce refundable portion of credit from $1,000 to $500

26 Child Tax Credit Current Law Credit is $1,000 per child under age 17 Credit begins to phase out when MAGI exceeds $110K for joint filers and $75K for singles Credit is refundable for some taxpayers

27 Child & Family Tax Credits Changes Credit increases to $1,600 per child Additional $300 non-refundable credit for non-child dependents New family flexibility credit of $300 $300 credits phase out in 2022 Phase out begins when MAGI exceeds $230K for joint returns and $115K for singles Portion of credit is refundable for some taxpayers

28 Energy Tax Credits Current credit extended through 2022 Credit rate of 26% for property placed in service during 2020 Credit rate of 21% for property placed during 2021

29 Repeal of Tax Credits Electric vehicle credit Adoption credit Disability retirement credit Mortgage interest credit

30 Estate Tax 2018 exemption is currently is $5.6 million per person House bill doubles estate tax exemption and GST exemption to $11.2 million per person; continue adjustment for inflation Estate tax remains at 40% House bill repeals estate tax and GST after 2023 Basis step-up is preserved No portability beginning in 2024

31 Estate Tax Timeline double current exemption estate tax is repealed 2028 reverts to existing law

32 Gift Tax Current gift tax exemption and rate are same as estate tax House bill does not repeal gift tax House bill lowers gift tax rate to 35% for transfers after 12/31/2023 Retains annual gift tax exclusion; $15K per person in 2018, up from $14K per person in 2017

33 The Budget Numbers Preliminary Budget Estimates from the Joint Committee on Taxation Major Sources of Revenue Repeal personal exemptions: $1.57 trillion Repeal itemized deductions: $1.26 trillion Repatriation Tax: $223 billion #WBInsights17 Major Revenue Losses Changes to estate, gift, and GST tax: ($172 billion) Decrease individual tax rates: ($1.1 trillion) Increase standard deductions: ($921 billion) Repeal AMT: ($737.0 billion) Flat 25% pass through rate: ($448 billion) Flat 20% corporate tax rate: ($1.46 trillion)

34 #WBInsights17

35 Example Taxpayers: Impact of Senate Version of Tax Changes James Jason Amber Kayla & Nick Sophie & Chad Ordinary Income $30,000 $52,000 $75,000 $85,000 $165,000 Pass Through Income $- $- $- $- $- Marital Status Single Single Single Married Married Earners Children Tax Def. Retirement Contrib. $2,600 $4,000 $5,500 $5,500 $20,000 Deductions Standard Standard Standard Standard Itemize Current Law $4,331 $5,198 $16,104 $11,035 $29,345 Proposed Law $3,953 $3,306 $14,327 $8,782 $27,122 Change in Tax $(378) $(1,892) $(1,777) $(2,253) $(2,223) % Change in Tax -9% -36% -11% -20% -8% % Change After Tax Income Source: Tax Foundation 1.3% 3.6% 2.4% 2.7% 1.3%

36 Example Taxpayers: Impact of Senate Version of Tax Changes Soren & Linnea Laura & Seth Olivia & Richard Joe & Ethan Ordinary Income $325,000 $2,000,000 $800,000 $48,000 Pass Through Income $- $- $- $- Marital Status Married Married Married Married Earners Retired Children Tax Def. Retirement Contrib. $37,000 $18,500 $18,500 $- Deductions Itemize Itemize Itemize Standard Current Law $71,629 $713,234 $318,315 $3,497 Proposed Law $64,456 $703,749 $292,478 $3,227 Change in Tax $(7,173) $(9,485) $(25,837) $(270) % Change in Tax -10% -1% -8% -8% % Change After Tax Income Source: Tax Foundation 2.2% 0.5% 2.6% 0.6%

37 Planning Actions Traditional advice to defer income/accelerate deductions still applies If not in AMT, prepay state income tax by 12/31/2017 For those who take medical expense deduction, maximize 2017 medical costs and prepayments Prepay required charitable contributions for college athletic seating in 2017

38 Planning Actions If not in 2017 AMT, avoid purchase of GA film credits and low income housing credits Accelerate closing date into 2017 for high income taxpayers selling a principal residence Make 2018 reservation for GA education expense credit by 12/15/2017 Do not make a 2017 gift for which gift tax is owed Purchase fixed assets used in business by 12/31/2017

39 #WBInsights17

40 Tax Planning with Georgia Tax Credits #WBInsights17

41 Georgia Rural Hospital Tax Credit As a response to the financial challenges faced by Rural Hospitals, Georgia Governor Nathan Deal signed into law Senate Bill 258 Effective January 1, 2017, taxpayers who contribute to qualified rural hospital organizations (RHOs) located in Georgia are awarded a 90% tax credit

42 Qualifying Rural Hospitals County population of 50,000 or less Acceptance of Medicare and Medicaid Minimum annual provision for indigent care File 5-year plan with GA Department of Community Health

43 Eligible Rural Hospitals for 2017

44 Eligible Rural Hospitals for 2017

45

46 Size & Duration of Program Annual limit on credits is $60 million per year Each rural hospital cannot access more than $4 million of credits Applies for 2017, 2018, and 2019 tax years Unless renewed, automatically repealed on December 31, 2019

47 Limits on Size of Program From January 1 through June 30 of each year, Georgia Department of Revenue will only approve $2 million of requests from individuals and $2 million from corporations From July 1 to December 31 of each year, DOR will approve additional requests, up to $60 million overall limit

48 Making a Donation Complete Georgia Heart tax credit form tax_contribution Georgia Heart submits application to GA Department of Revenue Within 30 days, DOR notifies its approval

49 Making a Donation Within 60 days of DOR approval, contribute to hospital by making check payable to hospital and send to Georgia HEART Within 30 days of confirmation of contribution, Georgia HEART provides instructions for required confirmation done on GA Tax Center on-line account GA HEART confirms completion

50 Deadline Must complete all required steps by December 31 to claim credit in that year Georgia HEART will begin accepting applications for 2018 credits on January 2, 2018

51 Income Tax Treatment Federal deduction charitable contribution for 100% of contribution Georgia credit 90% of contribution Georgia deduction none

52 Maximum Credit Limits Single individual $5,000 Married couple $10,000 Trust 75% of GA tax C Corporations 75% of GA tax No increased limits for owners of pass-through entities

53 Maximum Contributions Single $5,555 contribution * 90% = $5,000 credit Married couple $11,111 contribution * 90% = $10,000 credit

54 Carryover of Unused Credits Excess credit carry forward for 5 years No carry back is available

55 Planning: Know If You Owe AMT

56 Tax Credits: Rates of Return Credit AMT No AMT Maximum Purchase Education expense 127% 96% $10K but oversold (got 50% in 2017) Rural hospital 119% 91% $10,000 Film at $ % 107% Unlimited Low income housing at $ % 109% Unlimited

57 A Word of Caution! Each taxpayer is unique; need to run the numbers to calculate rate of return

58 Contact Information Barbara M. Coats, CPA Principal Windham Brannon 3630 Peachtree Road NE, Suite 600 Atlanta, GA Main: Direct: Fax: