Individual Taxation and Planning

Individual Taxation and Planning Brandy Bradley, CPA May 19, 2016 Tax Bracket Comparison 2016 & 2012 2016 MARRIED FILING JOINT 10% - up to $18,550 15% - $18,551 - $75,300 25% - $75,301 - $151,900 28% - $151,901 - $231,450 33% - $231,451 - $413,350 35% - $413,351 - $466,950 39.6% - $466,951 or more 2012 MARRIED FILING JOINT 10% - up to $17,400 15% - $17,401 - $70,700 25% - $70,701 $142,700 28% - $142,701 - $217,450 33% - $217,451 - $388,350 35% - $388,351 or more 1

Long-Term Capital Gain Rates 2016 MARRIED FILING JOINT For taxpayers in 15% bracket or lower, longterm capital gain rates are 0% 15% for most everyone else except those in the highest bracket 20% for long term capital gains included in the 39.6% bracket Applies to qualified dividends 2012 MARRIED FILING JOINT For taxpayers in 15% bracket or lower, longterm capital gain rates are 0% 15% for all other tax brackets Applies to qualified dividends Taxability of Social Security Benefits Taxpayers may have to include up to 85% of social security benefits in taxable income. The amount of benefits includable in income depends on the taxpayer s provisional income. Provisional income is AGI plus half the social security benefits. None of the benefits are included in income if provisional income is less than the base amounts: $25,000 for single $32,000 for married filing joint Up to 85% of benefits are included if provisional income exceeds the adjusted base amounts below: $34,000 for single $44,000 for married filing joint 2

Pease Limitations Originally introduced in 1990 to raise revenue by limiting popular and common itemized deductions among high-income earners Reduces the value of itemized deductions once AGI reaches a certain point Reduced by lesser of: 3% of the excess over the applicable threshold amount or 80% of the total amount of otherwise allowable itemized deductions Applicable threshold amounts for 2016: $311,300 for MFJ $259,400 for Single Applies to charitable contributions, mortgage interest, taxes paid (state, local, and property), and miscellaneous itemized deductions See Example 3

Personal Exemption Phase-out Personal exemptions for 2016 are $4,050, up from $4,000 in 2015. Phase-out of exemption is a 2% cut for every $2,500 of AGI over: $259,400 for single filers and $311,300 for married filing joint Totally disappear once AGI exceeds $381,900 for singles and $433,800 for married 4

Additional Medicare Tax The Additional Medicare Tax is an additional 0.9% Medicare tax on earned income for single individuals in excess of $200,000 and for married filing joint individuals in excess of $250,000. The employer is required to withhold the additional 0.9% Medicare tax on wages in excess of $200,000 from an individual. The tax is calculated on the individual tax return at the end of the year and netted against any withholdings. Additional Medicare Tax Example John and Amy are married. John's salary is $180,000, and Amy's wages are $150,000. Their total combined wage income is $330,000 ($180,000 + $150,000). Since this amount is over $250,000, they owe the additional 0.9% Medicare tax on $80,000 ($330,000 $250,000). The additional tax due is $720 ($80,000.009). Neither John nor Amy's employer is liable for withholding and remitting the additional tax because neither of them met the $200,000 wage threshold. 5

Net Investment Income Tax (NIIT) The Net Investment Income Tax (NIIT) can apply to individuals, trusts, and estates. NIIT is a 3.8% tax on Net Investment Income(NII). For an individual, the tax is imposed on the lesser of: Net investment income or The excess of Modified Adjusted Gross Income (MAGI) over a specific threshold amount. $250,000 for married filing joint $125,000 for married filing separately $200,000 for all other cases Net Investment Income Tax (NIIT) NII is sum of the following 3 categories of income: Gross income from interest, dividends, annuities, royalties, and rents not derived in the ordinary course of an active trade or business Gross income from a trade or business that is a passive activity or a trade or business of trading in financial instruments or commodities Net gains from the disposition of nonbusiness property and property held in a passive business activity. Capital losses can offset other NII to the extent allowed for regular income tax purposes. 6

Net Investment Income Tax (NIIT) Example Wesley, a single taxpayer, has NII of $110,000 and MAGI of $400,000. Because his MAGI exceeds the $200,000 threshold amount by more than his NII ($200,000 versus $110,000), he will pay 3.8% NIIT on his full $110,000 of NII. Wesley's 3.8% NIIT will be $4,180 ($110,000 3.8%). Affordable Care Act (ACA) Increases for 2016 Individual fine increases in 2016 to the greater of two amounts: Basic fine - $695 ($325 in 2015) per adult, $347.50 ($162.50 in 2015) per child with a family ceiling of $2,085 ($975 in 2015) Income-based 2.5% (2.0% in 2015) of the excess of household income over the tax return filing threshold Income levels to qualify for health premium credit increase in 2016. Available to filers with household income ranging from 100% to 400% of the 2015 federal poverty level Singles - $11,770 to $47,080 Family of four - $24,250 to $97,000 Does not apply to those eligible for Medicaid, other federal insurance, or those who can get affordable insurance through employer 7

ACA Example Allen and Jill are married with two children under age 18. They do not have minimum essential coverage or exemptions for any family members. Their household income is $70,000, and their filing threshold is $20,700. Amount based on household income: ($70,000 - $20,700) x 2.5% = $1,232.50 Flat dollar amount: ($695 x 2) + ($347.50 x 2) = $2,085.00 Greater of line 1 or 2: $2,085.00 Repair Regulations A Quick Review Regulations exceed 200 pages Basically gives some black and white to whether a cost has to be capitalized or can be expensed. Determination of what constitutes a UOP (Unit of Property) Determination if an improvement has been made to the UOP by using three main criteria: Does the cost create a Betterment to the UOP? Does the cost rise to the level of Restoration to the UOP? Does the cost create an Adaptation of the UOP to a new or different use? The regulations are full of examples but still allow subjectivity. 8

Tangible Property Expensing Former de minimis safe harbor for non-applicable financial statement taxpayers (non-afs) was $500. Amount increased to $2,500 as of January 1, 2016 Applies to amounts spent to acquire, produce, or improve tangible property that would normally qualify as a capital asset Applies to purchases of up to $2,500 per invoice, or per item as substantiated by the invoice Taxpayers may consider updating their accounting policies to reflect the change. The de minimis safe harbor for applicable financial statement taxpayers remains at $5,000. Asset Depreciation Rules Bonus depreciation Sec. 179 deduction Applies to new tangible personal property Applies to some new real property Has been available on and off since 2001 50% bonus depreciation has been extended through 2017 Bonus will decrease to 40% in 2018 and 30% in 2019 All businesses can benefit, not just small business Applies to all tangible personal property Has been around for many years Stimulus to increase began in 2001 $500,000 Section 179 maximum deduction Now indexed to inflation in increment of $10,000 for future tax years Mainly a small business benefit due to the acquisition phase-out rules 9

Legislative Items First Effective in 2016 Form 1098-T required to claim education credit or deduction Form 1098 additional information requirements Amount of outstanding mortgage principal as of beginning of calendar year Mortgage origination date Address of the property which secures the mortgage Protecting Americans from Tax Hikes Act of 2015 (PATH Act) Passed late December 2015 Extends/enhances typical tax extenders Makes over 20 key tax provisions permanent Affects both individual and business returns 10

PATH Act - Individual Permanent Extensions State and Local Sales Tax Deduction Election to claim an itemized deduction for state and local general sales taxes, in lieu of deducting state and local income taxes. American Opportunity Tax Credit Makes original AOTC permanent. Rewards qualified taxpayers with a tax credit of 100% of the first $2,000 of qualified tuition and related expenses and 25% of the next $2,000, for a total maximum credit of $2,500 per eligible student. Child Tax Credit Provision for the ability of the credit to be refundable to the extent of 15 percent of the taxpayer s earned income in excess of $3,000. Charitable Distributions from IRAs Provision for individuals age 70 ½ and older to make tax-free distributions from IRAs to a qualified charitable organization. Continues to be capped at a maximum of $100,000 per taxpayer each year. Other Permanent Extensions for Individuals Teachers Classroom Expense deduction up to $250, Qualified Conservation Contributions, Transit Benefits Parity. PATH Act - Individual Two-Year Extensions Qualified Tuition/Related Expenses The above-the-line deduction for qualified tuition and fees for post-secondary education has been extended through 2016. Mortgage Debt Exclusion Up to $2 million can be excluded from income on a cancellation of mortgage debt on a principal residence. Mortgage Insurance Premium Deduction Mortgage insurance premiums are treated as deductible interest that is qualified residence interest subject to AGI phase-out. The Act extends this through 2016. Energy Extenders Code Sec. 25C The Act extends through 2016 the Code Sec. 25C residential energy property credit. Code Sec. 25C property includes adding insulation, energy efficient exterior windows, and energy efficient heating and air conditioning systems. The credit is up to 10% of qualifying expenses with a cap of $500. Solar Incentives The Act extends the solar investment tax credit for qualified residential solar property but subjects the credits to phase-down. 11

PATH Act - Business Permanent Extensions Section 179 The expensing limit has now been permanently set at $500,000 with a $2 million overall investment limit. Research Tax Credit This credit is now permanent and has been increased from 14% to 20%. 100-Percent Gain Exclusion on Qualified Small Business Stock held for more than 5 years has been made permanent. Reduced recognition period for S corporation Built-In Gains Tax 15-year straight-line cost recovery for qualified leasehold improvements, restaurant property and retail improvements Employer wage credit for employees who are active duty members of the uniformed services Charitable deductions for the contribution of food inventory PATH Act - Business Five-Year Extensions Bonus Depreciation Following phase-outs: 50% for 2015-2017, 40% in 2018; and 30% in 2019 Work Opportunity Credit Extended through 2019. The PATH Act also enhances the WOTC for employers that hire long-term unemployed individuals. Two-Year Extensions Indian employment credit/accelerated depreciation Railroad track maintenance credit Film/Television Expensing Empowerment Zones Incentives Three-year recovery period for certain race horses Seven-year recovery period for motorsports entertainment complexes 12

The Surface Transportation and Veterans Health Care Choice Improvement Act of 2015 (Stopgap) Primarily designed as 3-month extension of Highway Trust Fund Changes due dates for partnerships and C corporation returns Revises extended due dates for many returns Provides consistency between estate tax value and income tax basis for assets received from decedent Executor of any estate required to file an estate tax return must furnish a statement identifying the value of each interest as reported on the estate tax return to the IRS and to each person acquiring any interest in property from the estate IRS delayed the reporting requirements until February 29, 2016 STOPGAP DUE DATE CHANGES Type Year Current Due Date Changed Due Date beginning 12/31/15 Partnership Calendar year 04.15 or 3 1/2 months after close 03.15 or 2 1/2 months after close S corp Calendar year 03.15 or 2 1/2 months after close 03.15 or 2 1/2 months after close C corp 12.31 03.15 or 2 1/2 months after close 04.15 or 3 1/2 months after close C corp 06.30 03.15 or 2 1/2 months after close 03.15 or 2 1/2 months after close** C corp Other FY 03.15 or 2 1/2 months after close 04.15 or 3 1/2 months after close FBAR 06/30 04/15 **Until 2025, when the due date will change to 04/15 or 3 1/2 months after close 13

STOPGAP EXTENSION DATE CHANGES Type Year Current extension date New extension date Partnership Calendar year 09.15 (5 months) 09.15 (6 months) S corp Calendar year 09.15 (6 months) 09.15 (6 months) C corp 12.31 09.15 (6 months) 09.15 (5 months) C corp Other FY 6 months 6 months C corp 06.30 03.15 (6 months) 04.15 (7 months) Trust/estate Calendar year 09.15 (5 months) 09.30 (5 1/2 months) Achieving a Better Life Experience Act of 2014 (ABLE) Signed by Obama on 12/19/2014 Adds new Code Section 529A, which provides for a new type of tax-advantaged savings program to help meet the financial needs of certain disabled individuals ABLE program must be established by state (TN) One ABLE account per beneficiary Account Administration Contributions are nondeductible and are treated as gift; limited to annual gift tax exclusion Distributions for qualified disability expenses of beneficiary are not included in gross income Earnings portion of distribution in excess of expenses is included in gross income and may be subject to 10% penalty 14

Tennessee Hall Income Tax Enacted in 1929, the tax is named after the senator who sponsored the legislation. Tax is 6% on taxable dividend and interest income. Exemption for $1,250 for single or entity filer and $2,500 for married filing joint Taxable dividend and interest income include: Dividends from stock in corporations Capital gain distributions from mutual funds S-Corp distributions Corporate bonds interest Non-TN municipal bond interest Tennessee Hall Income Tax - Exemptions Age exemption for those 65 or older If total annual income is below the limits of $37,000 (single filer) or $68,000 (joint filers), the taxpayer(s) are exempt from Hall tax. Any and all sources, including Social Security Regardless of whether income is taxable for federal purposes Not adjusted for any losses Legal blindness Quadriplegic 15

Retirement Contribution Dates IRA contributions must be made by the original due date of the return. Coverdell education accounts contributions must be made by the original due date of the return. Keogh contributions can be made until the extended due date of the return. Plan must have been established before 1/1/2016. SEP contributions can be made until the extended due date of the return. May consider SEP if Keogh was not opened in time. See IRS Publication 3998 for comparisons between SEPs, SIMPLEs, payroll deduction IRAs, profit-sharing plans, 401Ks, and defined benefit plans. MyRAs are not covered in this guide. Retirement Plan Contribution Limits IRA Traditional and Roth 2016 limit is $5,500 and $6,500 if 50 or over. Roth IRA income limitation range for $117,000 to $132,000 for single filers and $184,000 to $194,000 for MFJ. 401(K) and 403(B) 2016 employee deferral maximum is $18,000 and $24,000 if 50 or over. SEP IRA 2016 contribution maximum is $53,000. Simple IRA 2016 contribution maximum is $12,500 and $15,500 if 50 or over. 16

Roth IRA Conversion Traditional IRAs can be converted without penalty to a Roth IRA. This can be advantageous for individuals who exceed the AGI limitations to be able to contribute directly to a Roth. Tax Consequences of a Roth conversion Full amount of the distribution is taxable just as if traditional IRA distribution. Basis in N/D contributions are taken into consideration. Be aware of potential unintended tax consequence when there is more than one IRA, i.e. a N/D IRA and also a traditional IRA (with no basis). Tax Benefits of a Roth IRA Nontaxable distributions. Contributions can continue past 70 ½. No 70 ½ minimum distribution rules. Tax Planning If over the AGI limitations, contribute to a N/D IRA and then convert to a Roth. Charitable Donations from an IRA Individuals age 70 1/2 and older can distribute otherwise taxable traditional and Roth IRA amounts directly to certain tax-exempt charities. These distributions are called qualified charitable distributions. They are federal income tax-free to the donor. No charitable deduction is allowed on Form 1040. Up to $100,000 per individual can be distributed each year. The distributions count towards an individual s Required Minimum Distribution (RMD). Benefits include: Treated as 100% above the line deduction, no impact on 50% limit of AGI for contributions. Since the distribution is not included in AGI, it can prevent unfavorable phase-outs and other limitations based on AGI. 17

My Retirement Account (myra) A New Way to Save Developed by United States Department of Treasury for: People without access to employer-sponsored retirement savings plans People looking for a simple, safe, affordable way to start saving for retirement Specific type of Roth IRA that invests in a new interestbearing short-term Treasury retirement savings bond Tax-free rollover to Roth IRA once an account s balance reaches $15,000 Annual contributions limited to $5,500 ($6,500 if over age 50), and yearly income cap contributions apply Benefits: no cost or fees, no complicated investment options, no risk of losing money https://myra.gov/ Contact Information Brandy Bradley, CPA bbradley@bcscpa.com 423.282.4511 18