Tax Reform The Tax Cuts and Jobs Act March 2, 2018

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1 FPA of Greater Indiana Tax Reform The Tax Cuts and Jobs Act March 2, 2018 Presented by: William R. Owen, Jr. CPA, CFP BGBC Partners, LLP 300 N. Meridian Street Indianapolis, IN (317) FPA of Greater Indiana 1 March 2, 2018

2 Overview Tax Cuts and Jobs Act (P.L ) President Trump signed into law on December 22, 2017 A sweeping tax reform law that will entirely change the tax landscape... the largest major tax reform in over three decades but more developments to come FPA of Greater Indiana 2 March 2, 2018

3 Proposed changes not included in final bill (but were in either House or Senate bill) include Additional standard deduction for elderly and blind $250 above-the-line teacher deduction is not changed Exclusion for employer-provided dependent care assistance Exclusion for adoption assistance programs Reduction of capital gain rates/changes to taxation of interest income Limit mortgage interest deduction to one residence Sec. 121 exclusion of gain on sale of principal residence Required use of FIFO to determine basis of stock dispositions Charitable driving remains at 14 cents/mile (rather than actual) Consolidation and modification of education provisions not included (only change is to expand 529 plans) Plug-in electric vehicle credit (Sec. 30D) FPA of Greater Indiana 3 March 2, 2018

4 Many changes! Generally effective after 12/31/17 Most changes for individuals are temporary Sunset after 2025 Guidance is needed Future legislation? Technical Corrections Bill Alignment with Tax Treaties State conformity to changes? FPA of Greater Indiana 4 March 2, 2018

5 The basics Still seven tax brackets 10%, 12%, 22%, 24%, 32%, 35%, 37% No more dependent exemption Higher child tax credit ($2,000) New $500 non-child dependent credit Increase in standard deduction Individual AMT not repealed But exemption amounts have increased FPA of Greater Indiana 5 March 2, 2018

6 Individual Income Tax Rate Comparison TOP OF EACH BRACKET S MFJ/QW MFS HOH T&E 10.0% $ 9,325 $ 18,650 $ 9,325 $ 13, % $ 37,950 $ 75,900 $ 37,950 $ 50,800 $ 2, % $ 91,900 $ 153,100 $ 76,550 $ 131,200 $ 6, % $ 191,650 $ 233,350 $ 116,675 $ 212,500 $ 9, % $ 416,700 $ 416,700 $ 208,350 $ 416,700 $ 12, % $ 418,400 $ 470,700 $ 235,350 $ 444, % 2018 NEW TOP OF EACH BRACKET S MFJ/QW MFS HOH T&E 10.0% $ 9,525 $ 19,050 $ 9,525 $ 13,600 $ 2, % $ 38,700 $ 77,400 $ 38,700 $ 51, % $ 82,500 $ 165,000 $ 82,500 $ 82, % $ 157,500 $ 315,000 $ 157,500 $ 157,500 $ 9, % $ 200,000 $ 400,000 $ 200,000 $ 200, % $ 500,000 $ 600,000 $ 300,000 $ 500,000 $ 12,500 37% FPA of Greater Indiana 6 March 2, 2018

7 Tax Brackets for Trusts & Estates 2017: Taxable income over But not over Is taxed at $ 0 $ 2,550 15% $ 2,550 $ 6,000 25% $ 6,000 $ 9,150 28% $ 9,150 $ 12,500 33% $ 12, % 2018: Taxable income over But not over Is taxed at $ 0 $ 2,550 10% $ 2,550 $ 9,150 24% $ 9,150 $ 12,500 35% $ 12,500 37% FPA of Greater Indiana 7 March 2, 2018

8 Dividend and capital gains rates unchanged The top tax bracket for qualified dividends and capital gains is 20% (23.8% if the net investment income tax applies). Here s the breakdown: 0% for MFJ taxpayers with < $77.2k taxable income 15% for MFJ taxpayers with between $77.2k and $479k taxable income 20% for MFJ taxpayers with taxable income greater than $479k FPA of Greater Indiana 8 March 2, 2018

9 Standard Deduction Comparisons 2017 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, FPA of Greater Indiana 9 March 2, 2018

10 Charitable contribution changes AGI limitation increased to 60% for cash contributions (from 50%) No 80% deduction for right to purchase athletic tickets Exception to contemporaneous written acknowledgement requirement is repealed (must be obtained now for any contribution of $250 or more) FPA of Greater Indiana 10 March 2, 2018

11 Itemized deductions changes Suspension of the overall limitation on itemized deductions (Pease limitation) Medical deduction threshold is 7.5% for 2017 & Reverts to 10% starting in 2019 Mortgage interest limited to $750k of debt ($375,000 for MFS) - Debt prior to 12/15/17 is grandfathered (i.e., still eligible for $1,000,000) - Note - still able to take (primary residence and vacation home) Home equity interest no longer deductible State and local tax deduction is limited to $10k ($5k if MFS) Individual personal casualty and theft losses (subject to the $100 per casualty and 10% AGI limitation) deductible only to the extend attributable to a federally declared disaster. Misc. deductions subject to 2% threshold no longer deductible FPA of Greater Indiana 11 March 2, 2018

12 State and local tax issues Total deduction limit of $10k ($5k if MFS) Combination of income/sales and state/local property taxes Exceptions Tax imposed at entity level Property taxes for residential rental property/business property Prepayment of 2018 state income taxes in 2017 Prepayment of 2018 real estate taxes in 2017 FPA of Greater Indiana 12 March 2, 2018

13 Misc. itemized deductions subject to 2% AGI Unreimbursed employee expenses Tax prep fees Hobby expenses Investment fees/expenses Legal fees related to producing income Safe deposit fee Gambling losses (in excess of winnings) are no longer deductible FPA of Greater Indiana 13 March 2, 2018

14 Other Individual Tax Provisions Alternative minimum tax (AMT) changes Alternative tax system that parallels the regular federal tax (with different rates and rules for deductions) Increase in exemption amount Due to limit on state/local tax deduction and repeal of miscellaneous deductions, impact should be less FPA of Greater Indiana 14 March 2, 2018

15 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 $ 120,700 $ 500,000 Begin of Phaseout, MFJ $ 160,900 $ 1,000,000 55, FPA of Greater Indiana 15 March 2, 2018

16 Other Individual Tax Provisions Affects on the net investment income tax (NIIT) No change to NIIT itself, but Investment fees and state income tax (amount attributable to investment income) reduce investment income to lower amount subject to NIIT Since investment fees are no longer deductible and state income tax is limited to $10k, this will likely cause an increase in the amount subject to NIIT FPA of Greater Indiana 16 March 2, 2018

17 Other Individual Tax Provisions Alimony: Before January 1, 2019: Under pre-act law, alimony and separate maintenance payments were deductible by the payor spouse and includible in income by the recipient spouse. After December 31, 2018: For any divorce or separation instrument executed after December 31, 2018, or for any divorce or separation instrument executed on or before December 31, 2018, and modified after that date, (if the modification expressly provides that the new amendments apply) alimony and separate maintenance payments are not deductible by the payor spouse and are not included in income of the payee spouse. FPA of Greater Indiana 17 March 2, 2018

18 Other Individual Tax Provisions Affordable Care Act impact Penalty to maintain insurance coverage (individual mandate) is repealed for 2019 and forward HOWEVER, still in effect for 2017 and penalty: Higher of 2.5% of yearly household income, or $695 per person ($ per child under 18) FPA of Greater Indiana 18 March 2, 2018

19 Child and Family Tax Credits Summary Credit for Children $ 1,000 $ 2,000 Credit for other Family Members $ 0 $ 500 Phase-out Begins $ 110,000 $ 400,000 Refundable Amount (credit for children only) $ 1,000 $ 1,400 All figures for MJF 24, FPA of Greater Indiana 19 March 2, 2018

20 Education tax benefit changes Section 529 Qualified Tuition Programs After 2017: Distributions are expanded to include qualified education expenses for tuition in connection with attendance of Kindergarten through Grade 12. **However, even though IRS says this is OK, Indiana does not. If you use the money for K- 12 tuition you cannot take the Indiana credit and may have to pay back prior credits Amounts from 529 Plans can be rolled to an ABLE account without penalty, provided the ABLE account is owned by the designated beneficiary of that 529 account or a member of such designated beneficiary s family. Student loan forgiveness will not be taxable income to student upon death/total disability FPA of Greater Indiana 20 March 2, 2018

21 Other Individual Income Tax Provisions Qualified Moving Expenses The exclusion from gross income and wages for reimbursing qualified moving expenses (under Section 217) is suspended except in the case of members of armed forces on active duty who move pursuant to a military order. Kiddie Tax Kiddie tax now at trusts/estate tax rates But only for unearned income (i.e. interest and dividends) Earned income taxed at single tax rates FPA of Greater Indiana 21 March 2, 2018

22 Changes to retirement planning Ability to recharacterize a Roth conversion to a traditional IRA is removed after 2017 Extension of rollover period for plan loan offsets FPA of Greater Indiana 22 March 2, 2018

23 Estate and gift taxes changes 2018 estate tax exemption: $11.2 million Sunsets December 31, Step-up in basis retained at death gift tax annual exclusion: $15,000 Estate planning is more than minimizing estate taxes. Updating documents Repurposing insurance Privacy Asset protection FPA of Greater Indiana 23 March 2, 2018

24 Expired provisions (at the end of 2016) extended for 1 year under Bipartisan Budget Act of 2018 Exclusion of discharge of indebtedness on principal residence Deduction of mortgage insurance premiums Above-the-line deduction for qualified tuition and fees Credits for qualified energy property FPA of Greater Indiana 24 March 2, 2018

25 Business Provisions FPA of Greater Indiana 25 March 2, 2018

26 Overview of business changes C Corporation tax rate reduction to flat 21% Repeal of corporate AMT Special rules for pass-throughs (Sec. 199A) Loss limitation for other than C corps (Sec. 461) Repeal of Sec.199 (DPD) Expensing of assets increases to Sec.179 ($1 million and threshold $2.5 million) Expanded accounting method exceptions for small businesses Changes to various fringe benefits including treatment of meals and entertainment paid by employer Limit on use of and carryback of NOL Limitation on interest expense deduction for non-small businesses (over $25 million receipts); limited exceptions Corporate shift from worldwide to territorial system Most business changes are permanent! FPA of Greater Indiana 26 March 2, 2018

27 Effect on Accounting for Income Taxes under FASB ASC 740 Effect on calculation of deferred tax liabilities/assets (due to change in rate) Additional complications related to fiscal year corporations FPA of Greater Indiana 27 March 2, 2018

28 20% pass-through deduction 20% of qualified business income Qualified business income definitions Qualified trade/business income Not a specified trade/business Trade/business involving performance of services Does not include investment income Does not include reasonable compensation paid from S corporation or guaranteed payments paid to a partner Phase-out limitation Special penalty for substantial understatements for taxpayers claiming 199A deduction FPA of Greater Indiana 28 March 2, 2018

29 20% pass-through deduction Specified Service Trades or Businesses It appears that the normal definition of service industries applies except they carve out architects and engineers. 1202(e)(3)(A) Any trade or business involving the performance of services in the fields of health, law, engineering, architecture, 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. (emphasis added) Insurance appears to be confusing. Need to monitor very closely in 2018 for technical corrections. FPA of Greater Indiana 29 March 2, 2018

30 Depreciation Additional first year/bonus depreciation- 100% for property acquired after 9/27/17 Phase down schedule for years after 2022 Now allowed for new and used property Qualified improvement property no longer qualifies SUV limitation remains at $25,000 Limits are indexed for inflation Expansion for certain real property (roofs, HVAC) Allows residential rental property Luxury auto limits (note that additional $8k depreciation has been extended for 2017) Increases to Sec. 179 ($1M and threshold $2.5M) FPA of Greater Indiana 30 March 2, 2018

31 Accounting methods for small taxpayers Expanded availability of cash method Inventory tracking requirements Sec. 263A threshold raised Expanded availability of completed contract method FPA of Greater Indiana 31 March 2, 2018

32 Changes to fringe benefits/entertainment expense Repeal of business entertainment expenses Repeal of deduction for qualified transportation fringe benefits Repeal of exclusion for bicycle commuting reimbursement Repeal of exclusion for employee reimbursed moving expenses Other changes to employee fringe benefits FPA of Greater Indiana 32 March 2, 2018

33 Net operating loss provisions No longer allowed to carryback NOLs Carried forward indefinitely 80% of taxable income may be reduced by NOL FPA of Greater Indiana 33 March 2, 2018

34 Other business tax changes to note New limits on executive compensation deduction Changes for Sec exchanges Changes to carried interest rule Expenses for employer operating eating facilities is now 50% (rather than fully deductible) Lobbying costs no longer deductible New credit for paid family and medical leave Gains or losses from the sale or exchange of a patent, invention, model or design no longer receive capital gain treatment FPA of Greater Indiana 34 March 2, 2018

35 International tax changes Move to a quasi-territorial system with a 100% dividends received deduction One-time tax on previously unrepatriated earnings Other significant changes for international tax law FPA of Greater Indiana 35 March 2, 2018

36 Planning tips Requires rethinking and planning in many areas Choice of entity for business ventures Charitable giving planning Estate/gift planning with temporary increased exemption Stock option and restricted stock exercise planning Interplay of Sec. 199A (20% pass-through deduction) with remaining rules such as NIIT, passive activity loss limits, retirement plan impact Debt structure due to interest limitations Entertainment expenses Changes to fringe benefits and effect on employees Plan now to avoid underpayment penalties Estimated tax payments/withholding FPA of Greater Indiana 36 March 2, 2018

37 Questions This presentation is for information purposes only. BGBC Partners LLP is not providing tax advice to anyone that has not specifically engaged BGBC for tax preparation, consulting, and advisory services. Please consult your tax advisor for determination of how the new rules may impact your tax situation. FPA of Greater Indiana 37 March 2, 2018