Tax Reform 2017: Frequently Asked Questions

J.P. MORGAN PRIVATE BANK WASHINGTON WATCH Tax Reform 2017: Frequently Asked Questions November 22, 2017 The House passed a tax reform bill on November 16, and the Senate is expected to debate and vote on its version next week. So what do you need to know? Here are our answers as of November 22 to questions you may have regarding the current proposals. Please note, however, that the proposals are very much in flux. It is important that you check with your tax and legal advisors before taking any tax-related action. IS TAX REFORM GOING TO PASS THIS YEAR? This cannot be answered with any certainty. A bill may pass by the end of 2017 or early in 2018. But if no new law is enacted by the end of Q1 2018, tax reform is unlikely to occur until 2019, if at all. Congress would be too distracted by the mid-term elections. Representatives up for reelection in 2018 (which includes everyone in the House and a third of the Senate) would likely be more focused on campaigning than tax reform. Also, as a practical matter on the corporate side, making tax reform effective retroactive to January 1, 2018, would become increasingly difficult the further into 2018 we get. IF A TAX BILL DOES PASS, WHAT ARE SOME OF THE POTENTIALLY IMPORTANT CHANGES? Current proposals would affect virtually every taxpayer in some way. Many high-income taxpayers would pay more in taxes than previously, as their tax rates would likely not be reduced enough to offset benefits lost from the elimination of deductions for: State and local income taxes paid Property taxes paid (even though this deduction may be capped rather than completely eliminated) Medical expenses paid Casualty losses suffered Other important provisions include: Repeal of the alternative minimum tax (AMT) Doubling of the exclusions for (and potential repeal of) the estate and GST taxes The cost basis of securities being sold, exchanged or otherwise disposed of would be determined on a first-in-first-out (FIFO) basis, rather than through specific identification Sunsetting, under the Senate version, of all individual and pass-through provisions in 2025 WHAT WOULD STAY THE SAME IF TAX REFORM WERE TO PASS? In the current proposals, many important provisions would remain, including: The top rate on long-term gains and on qualified dividend income; both would continue at 20% The Medicare surtax of 3.8% on net investment income would be preserved Municipal bond income would still be federally tax-exempt except for private activity bonds and advanced refunding bonds Deductions for charitable donations and for investment interest expense would remain Non-qualified deferred compensation plans and equity-based awards would be untouched Tax treatment of both contributions to, and distributions from, IRAs, 401(k) accounts and other qualified deferral plans would be the same. However, recharacterizations of Roth conversions would be eliminated It seems that the tax treatment of vested options, stock appreciation rights and restricted stock would not change This material is for information purposes only. The views, opinions, estimates and strategies expressed herein constitute the judgment of J.P. Morgan s private banking business, based on current information and conditions as of November 22, 2017 that is subject to change without notice, and may differ from those expressed by other areas of J.P. Morgan. The nature of tax reform is uncertain and no one can predict the final outcome. The materials included are considerations under current proposals but may have different impacts under any final bill enacted into law. This information in no way constitutes tax, legal, or investment advice--and should not be treated as such. The information presented is not intended to be making value judgments on the preferred outcome of government decisions, or guarantee of future results. Please read all Important Information at the end of the material. INVESTMENT PRODUCTS: NOT FDIC INSURED NO BANK GUARANTEE MAY LOSE VALUE

2 WHAT SHOULD I CONSIDER DOING NOW? You should speak with your accountants to get a good sense what taxes you may owe this year and next. Depending on your circumstances, your professional advisors might recommend: Paying state and local taxes this year, rather than next year, because you may not have the deduction for state and local taxes next year Making charitable donations this year versus next year (due to considerations stemming from the Pease limitation, effective tax rates or specific-lot identification) Realizing income and capital gains this year, rather than next year Your response to the potential changes depends on your personal tax position. Still, as a general rule, you may want to consider: Pre-pay in 2017 state and local income taxes Pre-pay in 2017 property taxes Avoid making gifts in 2017 that would result in the payment of gift tax WHAT MAY HAPPEN TO THE MORTGAGE INTEREST DEDUCTION? The House bill: Limits the amount of interest deductible on a new mortgage to the interest attributable to $500,000 of principal debt, down from the law s current $1 million Limits the deduction to mortgages on a taxpayer s principal residence Eliminates any interest deduction for amounts paid on a home equity line of credit (HELOC) There is no point in trying to get a new mortgage in place before the law may be enacted because the rule would likely be effective the day the bill was introduced in the House that is, November 2, 2017. The deductibility of interest on up to $1 million of principal on existing mortgages would be grandfathered under the House bill. For those looking to refinance, note that only the principal amount outstanding immediately before the refinancing is eligible for the grandfathering provisions. However, you may be able to extend the remaining mortgage term. The Senate proposal keeps the existing $1 million principal figure (while also doing away with the HELOC interest deduction). This point is likely to be negotiated between the House and the Senate. WOULD ANY INTEREST STILL BE DEDUCTIBLE? Investment interest expense for taxable investments is likely to continue to be deductible, as it is not mentioned in either the House or Senate bills. Interest on business indebtedness would generally be limited to 30% of the business s taxable income and subject to a carryforward for excess interest expense. Smaller businesses under both bills (defined in the House, for example, as those with $25 million or less in gross receipts) would not be subject to these limitations. IS THERE A BORROWING STRATEGY THAT MIGHT HELP ME TO MINIMIZE TAXES? The deductibility of some mortgage interest is preserved in both bills (subject to a cap). If you have an outstanding mortgage, if you would be limited by these proposed caps, and if you have the wherewithal to accomplish this strategy, you may want to consider: 1. Paying off your mortgages in excess of the deductible amount under the bill, and your HELOCs 2. At some time later, borrowing against those properties 3. Investing the borrowed money in a trade or business, or in taxable investment accounts Investment interest on such debt is slated to remain fully deductible. WHAT IS HAPPENING TO THE SALT DEDUCTION? Both the House bill and the proposal put forth by the Senate Finance Committee would eliminate the deduction for state and local taxes (SALT) paid, except for $10,000 of property taxes under the House version. Eliminating that deduction would have an enormous impact on high-income residents of high-income tax states, such as California, Illinois, New York, New Jersey and Connecticut. WHAT ABOUT THE AMT? Both the House and Senate versions of the tax bill eliminate the AMT, (although under the Senate version, the AMT would be reinstated in 2025). The AMT is a separate tax system designed to ensure that taxpayers do not use certain deductions, exemptions, losses or credits to circumvent paying U.S. income tax. Many expenses deductible under the regular tax system are not deductible under the AMT system, and there are many preference items taxable for AMT but not reportable as income for regular tax purposes. Taxpayers must compute their liability under both systems, with their AMT liability being the excess of their AMT tax over their regular tax.

3 The SALT deduction is not available in AMT calculations. As a result, many taxpayers are forced to pay based on the AMT system, under which they face a top marginal tax rate of 28% (albeit on a larger taxable base). The potential elimination of the AMT reduces taxpayers ability to reduce their effective tax rates on discretionary income realizations. The potential elimination of the AMT system should prompt taxpayers to consider paying their entire 2017 state and local income taxes in 2017. Even if taxpayers are subject to AMT and cannot deduct these taxes against the 28% top rate, if there were no SALT deductibility in 2018, they might still benefit from a deduction against the 3.8% surtax on their net investment income in 2017. Because the interaction between potential AMT repeal and SALT deductions are complex, you should discuss with your tax advisor prior to engaging in any tax planning transactions. IS THERE AN OPPORTUNITY IN THE LAW THAT AMT TAXPAYERS WHO ARE CORPORATE EXECUTIVES MIGHT USE IN 2017? If the AMT is repealed as proposed, executives who are AMT taxpayers and have deep-in-the-money, non-qualified stock options (NQSOs) or stock appreciation rights (SARs) with short time to expiry should consider exercising those NQSOs or SARs in 2017. That way, they would pay tax at a maximum rate of 28%. If the executives were to exercise next year, tax may be due at 39.6% or 38.5% (depending on which version of tax reform is passed into law). Executives in this situation may want to consider this approach but only if exercising these options and rights does not generate so much ordinary income that the executives tip into the regular tax system and have to pay tax on that ordinary income at 39.6%. Non-tax consequences should also be carefully considered prior to exercising NQSOs or SARs. Executives who are insiders at a public company can exercise only during an open window. So the insiders deadline to decide whether to implement this strategy may be sometime before December 31. The deadline would effectively be the day the fourth quarter window closes, which could be any day. Even executives who are not AMT taxpayers may benefit from 2017 exercises to take advantage of the deduction for state and local taxes withheld on exercise (which may not be available next year). It is always important, but much more so for an executive subject to regular tax, also to consider non-tax investment factors, including dividends, remaining time value and diversification. WHAT SHOULD I DO WITH AMT CREDITS IF THE AMT IS REPEALED? Under both the House and Senate versions of the bill, AMT credit carryforwards could be used to offset regular tax liability and are partially refundable over several years. Under the House version, for example, taxpayers would recoup the entire credit by 2022. IS THE DEDUCTION FOR PROPERTY TAXES GOING AWAY? Not certain. The only real difference between the House and Senate versions is that the Senate would eliminate the deduction entirely, while the House would allow a deduction for up to $10,000 in property taxes paid. WOULD ELIMINATING THE PROPERTY TAX DEDUCTION REDUCE THE VALUE OF REAL ESTATE? On paper it would, as increasing the effective cost of owning a home would seem to reduce the value of that home. Conversely, it seems that the relative benefit of renting would increase. The impact of pass-through tax reform (and resulting lower tax rate) on real estate investors may be a counteracting force. ARE LIKE-KIND EXCHANGES GOING AWAY? Not quite. Like-kind exchanges of real property used in a trade or business, or held for investment purposes would remain tax-free (the Senate version restricts further to real property not held primarily for sale ). But like-kind exchanges of all other currently qualifying property (including art) would no longer be tax-free exchanges. Both the House and Senate bills would provide a transition rule making it so that exchanges of personal property could be completed if the taxpayer has disposed of the relinquished property, or acquired replacement property, before the end of the year. CAN I STILL EXCLUDE GAIN REALIZED ON THE SALE OF A PRINCIPAL RESIDENCE? Both the House and Senate bills would continue to exclude gain ($500,000 married/$250,000 other) from the sale of a principal residence. However, this exclusion would be available only if the taxpayer owned and used the house as a principal residence for five of the previous eight years. The exclusion would be available only once every five years. Moreover, the House version would phase this exclusion out on a dollar-for-dollar basis if a taxpayer s gross income exceeds $500,000 or $250,000, respectively. IS IT STILL A GOOD TAX STRATEGY TO GIVE TO CHARITY BEFORE YEAR-END? It depends. This decision is not one you can make without knowing (or at least estimating) what your effective tax rate in 2017 versus 2018 would be. We strongly recommend you consult your accountant about this issue. If you think your effective tax rate is going to materially increase next year, it might be a better economic choice to wait until next year to make a donation to charity. For example, if a client is in AMT this year, the charitable contribution is worth 28%; but if AMT is repealed effective 2018, the charitable contribution is worth 39.6%.

4 In a similar vein, taxpayers in low-income tax states such as Florida and Texas may find it to be a good idea to wait until 2018 to make a charitable donation because of the elimination of the Pease limitation, which has generally limited the deductibility of large donations. Conversely, the House and Senate both propose to increase the income tax charitable deduction limit for donations of cash to a public charity. This potential change should not deter giving this year for taxpayers who would not: Have a higher effective tax rate next year (there is relative regular rate parity under current law and marginal rate proposals) Be affected by the Pease limitations in 2017 (perhaps because they live in high-tax states) These taxpayers could give this year up to the limit and give incrementally next year. I HEARD SOMETHING ABOUT FIFO. ISN T THAT AN ACCOUNTING TERM? Usually FIFO is just an accounting term, meaning first-in-first out. In the current tax reform context, FIFO is being used as shorthand to refer to what could be a major change for owners of different lots of public securities. Today, taxpayers can decide which lots of the same stock they want to sell or donate to charity. They may use last-in-first-out (LIFO), first-in-first-out (FIFO), or specific identification, among other options. This flexibility allows them to choose: Highest basis lots when selling to minimize capital gains recognition or to maximize capital loss recognition Lower basis lots for donations to charity to maximize the capital gain exclusion for donated property This proposal would force taxpayers first to sell the longest-held securities (first-in-first-out, or FIFO). These securities are often the lowest-basis assets. IS THERE STILL A PROPOSAL TO CHANGE THE TAX TREATMENT OF NQSOS AND SARS? No. A proposal was dropped in both the House and Senate versions that would have taxed NQSOs and SARs at the time of vesting rather than at the time of exercise. That proposal would have affected how startups arrange for their employees compensation. WHAT IS HAPPENING WITH NON-QUALIFIED DEFERRED COMPENSATION PLANS? Non-qualified deferred compensation plans are just as viable as they were last month meaning, very. However, executives who have the ability by December 31 to defer 2018 salary and guaranteed compensation may still want to wait until after the Senate votes on its bill, expected next week, to see whether the Senate s version includes any relevant provisions. If there is no provision impacting deferred compensation in either the House or Senate version that goes to the joint conference committee for reconciling legislative differences, congressional rules prohibit it from being reintroduced in a final bill. HOW ABOUT QUALIFIED DEFERRED COMPENSATION PLANS, LIKE IRAS AND 401(K) ACCOUNTS? Neither the House nor the Senate version of tax reform changes the taxation of IRAs, 401(k) accounts, and other deferred income accounts. WHAT ABOUT ESTATE TAXES? The House bill repealed estate taxes effective in 2025; the Senate bill would not. What will the final bill do? There is a general lack of enthusiasm for outright repeal for political and fiscal reasons, so it is unlikely that estate taxes will be repealed. However, the gift, estate and generation-skipping transfer tax lifetime exclusions are proposed to roughly double to $10 million (adjusted for inflation). For example, in the House version, the exclusion would increase to $11.2 million in 2018, from $5.49 million now. That would be a significant increase and take many taxpayers out of the U.S. transfer tax system. Because of this potentially massive increase in the exclusions, you should strongly consider avoiding making gifts in 2017 that would result in the payment of gift tax. Those same gifts in 2018 would not be subject to as much, if any, gift tax. You may still want to make top off gifts of your incremental, inflation-adjusted exclusion this year, or otherwise make gifts applying your gift tax exclusion. You also should consider continuing to implement non-taxable estate planning strategies, including zeroed-out GRATs. ARE THERE SIGNIFICANT CHANGES ON THE CORPORATE TAX SIDE? Yes. Under the current House and Senate proposals, there would be a flat 20% tax on corporate income going forward, down from a maximum 35% rate (although there is speculation that this rate may increase slightly in the joint conference committee). For multinationals, there would basically be a 10% minimum tax on income from non-u.s. operations.

5 For the trillions of dollars of historic offshore earnings that have been untaxed, it has been proposed that this income be deemed to have been brought onshore. It therefore would be subject to U.S. tax at anywhere from 10% to 14% for cash assets, and 5% to 7% for non-cash assets. This tax would be paid over eight years. There would be no holiday during which repatriated assets would be completely untaxed. WHAT ABOUT TAXES ON PASS-THROUGH ENTITIES, SUCH AS LLCS, PARTNERSHIPS AND S CORPORATIONS? Because corporate rates may go down, operating companies (generally smaller) that are not subject to entity-level taxation also want a tax break and some may get one. Under the House version, a 25% rate would be applicable to the business activity s passive investors and the principal s portion of income attributable to capital (versus labor) of active business activity. The Senate version achieves a similar result by providing for a 17.4% deduction for qualified business income, limited to 50% of wages. Personal service businesses would be exempt from these reduction provisions, which include services in the health, law, accounting or financial services fields, among others. That means both the House and Senate: Would reduce the tax on those pass-through entities from what is now a maximum 39.6% Use complicated formulas to accomplish this task Make it so that personal service businesses generally get no break; this includes accounting and law firms, as well as hedge funds If this formulation becomes law, expect a lot of corporate restructurings as pass-throughs try to adjust their business models or character to qualify for lower rates. YOU LEFT OUT PRIVATE EQUITY FIRMS. WHY? Private equity firms, if operating an active business, might be able to qualify for potentially lowered pass-through rates based on their capital investments. Here is a special wrinkle for PE firms and hedge funds: The holding period for long-term gains treatment for carried interest and distributions they receive would be extended to three years (from one year for any other capital asset). ARE COLLEGES AND UNIVERSITIES TAXED UNDER THESE PROPOSALS? Both the House and Senate versions would impose a new annual 1.4% excise tax on private college and university endowments if the institution s assets (other than those used directly in carrying out its exempt purpose) exceed $250,000 per student in value.

6 IMPORTANT INFORMATION Purpose of This Material This material is for information purposes only. The views, opinions, estimates and strategies expressed herein constitute the judgment of J.P. Morgan s private banking business, based on current information and conditions as of November 22, 2017 that is subject to change without notice, and may differ from those expressed by other areas of J.P. Morgan. This information in no way constitutes tax, legal, or investment advice and should not be treated as such. The information presented is not intended to be making value judgments on the preferred outcome of government decisions, or guarantee of future results. Please read all Important Information at the end of the material. JPMorgan Chase & Co., its affiliates and employees do not provide tax, legal or accounting advice. This material has been prepared for informational purposes only. You should consult your own tax, legal and accounting advisors before engaging in any financial transactions. Estate planning requires legal assistance. You should consult with your independent advisors concerning such matters. Each recipient of this material, and each agent thereof, may disclose to any person, without limitation, the U.S. income and franchise tax treatment and tax structure of the transactions described herein and may disclose all materials of any kind (including opinions or other tax analyses) provided to each recipient insofar as the materials relate to a U.S. income or franchise tax strategy provided to such recipient by JPMorgan Chase & Co. and its subsidiaries. Receipt of this material does not constitute an offer or solicitation to any person in any jurisdiction in which such offer or solicitation is not authorized or to any person to whom it would be unlawful to make such offer or solicitation. This material is confidential and intended for your personal use. It should not be circulated to or used by any other person, or duplicated for non-personal use, without our permission. Legal Entity and Regulatory Information JPMorgan Chase Bank, N.A. and its affiliates (collectively JPMCB ) offer investment products, which may include bank-managed accounts and custody, as part of its trust and fiduciary services. Other investment products and services, such as brokerage and advisory accounts, are offered through J.P. Morgan Securities LLC ( JPMS ), a member of FINRA and SIPC. JPMCB and JPMS are affiliated companies under the common control of JPMorgan Chase & Co. Products not available in all states. Non-reliance We believe the information contained in this material to be reliable and have sought to take reasonable care in its preparation; however, we do not represent or warrant its accuracy, reliability or completeness, or accept any liability for any loss or damage (whether direct or indirect) arising out of the use of all or any part of this material. We do not make any representation or warranty with regard to any computations, graphs, tables, diagrams or commentary in this material which are provided for illustration/reference purposes only. The views, opinions, estimates and strategies expressed in it constitute our judgment based on current market conditions and are subject to change without notice. We assume no duty to update any information in this material in the event that such information changes. Views, opinions, estimates and strategies expressed herein may differ from those expressed by other areas of J.P. Morgan, view expressed for other purposes or in other contexts, and this materials should not be regarded as a research report. Any projected results and risks are based solely on hypothetical examples cited, and actual results and risks will vary depending on specific circumstances. Forward looking statements should not be considered as guarantees or predictions of future events. Investors may get back less than they invested, and past performance is not a reliable indicator of future results. Risks, Considerations and Additional Information There may be different or additional factors which are not reflected in this material, but which may impact on a client s portfolio or investment decision. The information contained in Loans and lines of credit are extended at the discretion of J.P. Morgan, and J.P. Morgan has no commitment to either extend any loan or line of credit, or make loans available under a line of credit. Any extension of credit is subject to credit approval by J.P. Morgan and, if approved, the terms contained in the definitive loan documents. Loans collateralized by securities involve certain risks and may not be suitable for all borrowers and investors. A decline in the value of securities pledged as collateral may require the borrower to provide additional collateral and/or pay down the loan or line of credit in order to avoid the forced sale of the securities by the lender. Please read your loan documents carefully so that you understand your obligations. Investors should understand the potential tax liabilities surrounding a municipal bond purchase. Certain municipal bonds are federally taxed if the holder is subject to alternative minimum tax. Capital gains, if any, are federally taxable. The investor should note that the income from tax-free municipal bond funds may be subject to state and local taxation and the Alternative Minimum Tax (AMT). There may be different or additional factors which are not reflected in this material, but which may impact on a client s portfolio or investment decision. The information contained in this should not be relied upon in isolation for the purpose of making an investment decision. Nothing in this document shall be construed as giving rise to any duty of care owed to, or advisory relationship with, you or any third party. Nothing in this document is intended to constitute a representation that any investment strategy or product is suitable for you. You should consider carefully whether any products and strategies discussed are suitable for your needs, and to obtain additional information prior to making an investment decision. References in this report to J.P. Morgan are to JPMorgan Chase & Co., its subsidiaries and affiliates worldwide. J.P. Morgan Private Bank is the marketing name for the private banking business conducted by J.P. Morgan. If you have any questions or no longer wish to receive these communications, please contact your usual J.P. Morgan representative. JPMorgan Chase Bank, N.A. Member FDIC Not a commitment to lend. All extensions of credit are subject to credit approval. 2017 JPMorgan Chase & Co. All rights reserved. 1117-0731