Federal and California TaxUpdate for Individuals

Welcome to

Tax Update

Your hosts: Gary McBride and Annette Nellen

For Individuals

January 2018 1

Slides and latest updates at

http://mntaxclass.com2

Look for …

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President Trump signed H.R. 1 on 12/22/17.P.L. 115-97!!

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Tax Cuts and Jobs Act (TCJA)!5

Official name!

Tax Reform Timeline and Links - 1• January 2011 – Chair Camp launches first in series of

hearings on tax reform.• Over 100 hearings held in 112th through 115th Congresses

http://www.sjsu.edu/people/annette.nellen/website/112th-hearings.htm

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Tax Reform Timeline and Links - 2

7Senator Hatch summary of 11/9/17

https://www.finance.senate.gov/imo/media/doc/11.9.17%20Committee%20History.pdf

Timeline from Speaker Ryanhttps://www.speaker.gov/sites/speaker.house.gov/files/tax%20reform%20timeline_1.png

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Tax Reform Timeline and Links - 3• 6/24/16 - House Republican Blueprint

• http://21stcenturytaxation.blogspot.com/2016/07/house-republican-blueprint-and-postcard_1.html

• 4/26/17 – President Trump’s 1 page plan• http://21stcenturytaxation.blogspot.com/2017/04/president-trumps-1-page-tax-plan.html

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Tax Reform Timeline and Links - 4• 9/27/17 – Big 6 Unified Framework released

• https://www.speaker.gov/press-release/unified-framework-fixing-our-broken-tax-code

1. Treasury Secretary Mnuchin2. Economic Adviser Gary Cohn3. Senator McConnell4. Senator Orrin Hatch5. Speaker Paul Ryan6. Congressman Kevin Brady

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Page 12-9

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Tax Reform Timeline and Links - 5

• October Budget Resolution H.Con. Res. 71 allows up to $1.5 trillion cost for tax reform.

• That is, tax reform can add $1.5 trillion to the debt. • Key actions and votes:

• 10/5/17 – passed in House by 219-206• 10/19/17 – passed in Senate by 51-49• 10/26/17 – Senate amendment passed in House by 216-212

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How much is $1.5 trillion over 10 years?

$1.5 trillion 325,365,000 people in the U.S.

= $4,610 per person over 10 years

or $461 per year per person12

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Or per individual tax filers$1.5 trillion

148,840,642 individual tax filers in the U.S.

= $10,078 per individual filer over 10 years

or $1,008 per year per individual filer

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Tax Reform Timeline and Links - 6• 11/2/17 – H.R. 1, Tax Cuts and Jobs Act, introduced in House

• https://waysandmeans.house.gov/chairman-brady-introduces-tax-cuts-jobs-act/

• 11/13/17 – House Ways and Means Committee passes H.R. 1, as amended

• H.Rpt. 115-409 (11/13/17)• https://www.congress.gov/115/crpt/hrpt409/CRPT-115hrpt409.pdf

• 11/16/17 - H.R. 1 as amended passes in House• 227-205 (13 Republicans vote nay)

• Among California’s 14 Republicans, 3 voted no• https://www.congress.gov/bill/115th-congress/house-bill/1/text

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Supplement

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Tax Reform Timeline and Links - 7• 11/9/17 – Senate Finance Committee releases proposal (JCT

summary; no legislative language)• https://www.finance.senate.gov/chairmans-news/hatch-unveils-pro-growth-pro-jobs-pro-family-tax-overhaul-plan-

• Chairman’s mark (253 pages) (JCX-51-17; 11/9/17)• https://www.jct.gov/publications.html?func=startdown&id=5032

• 11/14/17 – Senator Hatch markup to proposal• https://www.finance.senate.gov/chairmans-news/hatch-releases-modifications-to-senate-tax-plan

• Modified mark (103 pages) (JCX-56-17)• https://www.finance.senate.gov/imo/media/doc/11.14.17%20Chairman's%20Modified%20Mark.pdf

• JCT Estimated Revenue Effects (JCX-59-17; 11/17/17)• https://www.jct.gov/publications.html?func=startdown&id=5043

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Tax Reform Timeline and Links - 8• 11/16/17 – SFC passes bill (no legislative language)

• 11/20/17 – SFC releases legislative language• https://www.finance.senate.gov/imo/media/doc/11.20.17%20Tax%20Cuts%20and%20Jobs%20Act.pdf

• 12/1/17 – Senate passes modified H.R. 1 with modifications from SFC version• Bill - https://www.budget.senate.gov/imo/media/doc/TAX%20SUBSTITUTE.pdf

• JCT revenue estimate with list of amendments to SFC bill (JCX-62-17; 12/2/17) - https://www.jct.gov/publications.html?func=startdown&id=5046

• 12/13/17 – Conference Committee + checking to be sure have votes to pass

• 12/15/17 – Conference Committee bill and report released

• 12/19/17 – House passes conference bill (227-203) (12 Republicans vote nay)

• 12/20/17 – Senate passes bill (51-48)

• 12/20/17 – House votes again due to “Byrd” modifications (224-201)• See “enrolled bill” at https://www.congress.gov/bill/115th-congress/house-bill/1/text. [see next slide]

• Links:• http://www.aicpa.org/taxreform

• http://21stcenturytaxation.blogspot.com/2017/11/tax-reform-links-and-examples.html 17

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CONGRESSIONAL RECORD — SENATE – 12/19/17

https://www.congress.gov/crec/2017/12/19/CREC-2017-12-19-pt1-PgS8150.pdf

Apparently changes made relate to the “Byrd” rule that budget reconciliation items must all deal with revenue.

Section 11000(a) provided that the title of HR 1 would be “Tax Cuts and Jobs Act”. This was changed to ‘‘An Act to provide for reconciliation pursuant to titles II and V of the concurrent resolution on the budget for fiscal year 2018.“

11032 allows 529 account funding for elementary and secondary education. (B) is removed; it dealt with expenses related to homeschooling.

13701 addresses an excise tax based on investment income of private colleges and universities (new IRC §4968). Removal of “tuition-paying” from §4968(b) which defines “applicable educational institution” as having at least 500 tuition-paying students during the preceding taxable year, and more than 50% of the tuition-paying students located in the U.S. (and there is more to the definition, see Sec. 13701 of HR 1).

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Lots of changes!• Most effective after 12/31/17.• Most individual changes are temporary.• Requires rethinking in many areas:

• Many of your clients will no longer be itemizers.• Many of your clients won’t owe AMT any more.• Some clients will pay more, others will pay less.• Some favorable method changes for small businesses.• Choice of entity, how to finance assets, estate and gift planning,

charitable giving, and more.• How do changes affect and interplay with remaining rules such as

NIIT, passive activity loss limits, change in entity form, etc.?19

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Key Individual ComparisonsItem Pre-tax reform law P.L. 115-97 (12/22/17; H.R. 1)

Tax brackets 7 rates: 10, 15, 25, 28, 33, 35, 39.6% 7 rates: 10, 12, 22, 24, 32, 35, 37%

Taxable income Many deductions. Fewer deductions, new one for certain business owners (§199A).No personal or dependency exemption (credits instead).

Family provisions Personal and dependency exemptions

$1,000 child credit if under age 17; phaseout starts $110K for MFJ

$2,000 Child credit if under age 17 ($1,400 refundable); need valid SSN.

+ $500 non-child dependent credit (not refundable); only residents of U.S. (not also Canada and Mexico)

Phaseout starts at $200K ($400K if MFJ).

Itemized v standard deduction

33% of individuals itemize deductions

Increase in standard deduction; reduction in itemized deductions. Far fewer individuals will itemize.

Inflation adj* CPI-U Chained Consumer Price Index for All Urban Consumers

Capital gains / qualified dividends

Basically unchangedMFJ: 0% rate up to $77,200; 15% rate up to $479,000; 20% over $479,000

Kiddie tax Rate structure; complex Use estate/trust rates

AMT Several preferences and adj; exemptions adj for inflation

Retained; higher exemptions; adjustments modified due to regular tax changes

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*permanent change

Rates in P.L. 115-97, Tax Cuts & Jobs Act MFJ Single Head-of-

HouseholdEstate or Trust

10% $0 to $19,050 $0 to $9,525 $0 to $13,600 $0 to $2,550

12% $19,051 to $77,400 $9,526 to $38,700 $13,601 to $51,800 --

22% $77,401 to $165,000 $38,701 to $82,500 51,801 to $82,500 --

24% $165,001 - $315,000 $82,501 - $157,500 $82,501 – $157,500 $2,551 to $9,150

32% $315,001 to $400,000

$157,501 to $200,000

$157,501 to $200,000

--

35% $400,001 - $600,000 $200,001 - $500,000 $200,001 - $500,000 $9,151 to $12,500

37% Over $600,000 Over $500,000 Over $500,000 Over $12,500

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Rates apply 2018 through 2025.Existing rate structure for net capital gains and qualified dividends remains.Brackets adjusted annually after 2018 using Chained Consumer Price Index for All Urban Consumers (permanent provision).Section 15 n/a for fiscal year individuals (see new §1(j)(6)).

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Comparison of MFJ Rates:Pre-Tax Reform 2018 Rates vs. P.L. 115-97

Income range 2018 rate w/o reform

PL 115-97 rate $ difference

$1 to $19,050 10% 10% 0

$19,051 to $77,400 15% 12% 1,750

$77,401 to $156,150 25% 22% 2,362

$156,151 to $165,000 28% 22% 531

$165,001 to $237,950 28% 24% 2,918

$237,951 to $315,000 33% 24% 6,934

$315,001 to $400,000 33% 32% 850

$400,001 to $424,950 33% 35% -499

$424,951 to $480,050 35% 35% 0

$480,051 to $600,000 39.6% 35% 5,517

Over $600,000 39.6% 37% **

23CAUTIONS: Taxable income measures differ; child credit rather than dependency exemption but with age differences and other income and deduction differences.

$20,363 savings

** Once P.L. 115-97 taxable income is

$102,819 more than pre-tax reform

income, the individual who has over $600,000 of TI will pay more tax.

(See later example.)

“Exemption Amount” Relevance –such as for “qualifying relative” and head-of-household status• “Qualifying relative” – §152(d)(1)

• (A) who bears a relationship to the taxpayer described in paragraph (2),• (B) whose gross income for the calendar year in which such taxable year

begins is less than the exemption amount (as defined in section 151(d)),• (C) with respect to whom the taxpayer provides over one-half of the

individual’s support for the calendar year in which such taxable year begins, and

• (D) who is not a qualifying child of such taxpayer or of any other taxpayer for any taxable year beginning in the calendar year in which such taxable year begins.

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So, IRS still has to publish “exemption amount” (it’s likely still $4,150 for

2018 per Rev. Proc. 2017-58) but new inflation approach starts for tax years

beginning AFTER 12/31/17.

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Standard Deduction2018 pre-

reform lawP.L. 115-97

Single $6,500 $12,000Head of Household $9,550 $18,000MFJ $13,000 $24,000

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No personal or dependency exemptions (modified child tax credit instead).Add’l standard deduction for age and blind remain.Effective 2018 through 2025, adjusted for inflation after 2018.

Inflation adjustment• Per Bureau of Labor Statistics

• “C-CPI-U is designed to be a closer approximation to a cost-of-living index in that it, in its final form, accounts for any substitution that consumers make across item categories in response to changes in relative prices.”

• “evidence suggests that C-CPI-U over time will trend slightly lower than CPI-U.”• https://www.bls.gov/news.release/cpi.t05.htm• https://www.bls.gov/cpi/additional-resources/chained-cpi.htm

• Includes video explanation and FAQs

• Estimated to raise $133.5 billion over ten years.

Unadjusted 12-month percent changeCPI-U C-CPI-U

December 2016 2.1 1.8November 2017 2.2 2.1

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Kiddie Tax• No change in definition of “kiddie.”• New tax structure designed to be simpler.• Apply capital gains rates for trusts and estates to child’s net

unearned income.• Meaning:

• Earned income taxed per single brackets (same as before).• Child’s tax not affected by parent’s tax situation or unearned

income of siblings.• Effective 2018 through 2025.

http://www.sjsu.edu/people/annette.nellen/1_AmendedByPL115-97.pdf29

AMT Considerations• Exemption amounts increased:

• MFJ $109,400 (without PL 115-97, $86,200)• MFS $ 54,700 (without PL 115-97, $43,100)• S or HH $ 70,300 (without PL 115-97, $55,400)

• Phasedown starts [ends] once AMTI reaches:• MFJ $1,000,000 [$1,437,600] (without PL 115-97, $164,100)• MFS $ 500,000 [$ 718,800] (without PL 115-97, $ 82,050)• S or HH $ 500,000 [$ 781,200] (without PL 115-97, $123,100)

• Adjust for inflation after 2018.30

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AMT - continued• TMT = (per §55(b)(1))

• 26% of taxable excess on first $175,000 • 28% of taxable excess over $175,000

• “taxable excess” = AMTI less exemption amount• 50% of above for MFS

• Inflation adjustments – looks like above will be recomputed for 2018 using chained CPI.

• Rev Proc. 2017-58 inflation adjusted amount for 2018 was to have the 28% rate start at $191,500 (half of that for MFS).

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Changes to Itemized

Deductions by P.L. 115-97

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2018 form will

look different!

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Itemized Deductions - SummaryPL 115-97 – effective 1/1/18

Medical Retain; 7.5% threshold for 2017 & 2018 (also for AMT)

Mortgage interest on principal and 2nd homes Debt up to $750K (remains $1 million for debt that exists on or before 12/15/17)*

Equity debt Repeal; no transitional relief

Investment interest expense Retain

State taxes Maximum $10K ($5K if MFS)*Can’t prepay 2018 income taxes for 2017.

Charitable contribution deduction Cash contribution limit increased to 60% of base.No §170(l) deduction for athletic seating

Casualty/theft loss Repeal, except for federally-declared disasters

Misc itemized ded subject to 2% AGI threshold Repealed

Overall limitation on itemized deductions Repealed

33Most individual changes expire after 2025. * No inflation adjustment

Medical Expenses

•Deduction remains.•2017 and 2018 – 7.5% threshold for regular tax and AMT.

•Then 10% AGI threshold (2019 and beyond).

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State and Local Taxes• 2018 through 2025• Total deduction is $10,000 ($5K if MFS)• May deduct combination of:

• Income or sales tax• State and local property taxes (no foreign real property taxes)

• Exceptions:• Taxes imposed at entity level, such as on a passthrough entity, or in

carrying on a trade or business.• Property taxes for residential rental property or business property.• Property taxes on investment land (likely still allowed on Sch A).

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Prepayment of 2018 state and local income taxes in 2017Change to §164:

• “For purposes of [$10,000 limit], an amount paid in a tax year beginning before January 1, 2018, with respect to a State or local income tax imposed for a tax year beginning after December 31, 2017, shall be treated as paid on the last day of the taxable year for which such tax is so imposed.’’

• Conference Report – “an individual may not claim an itemized deduction in 2017 on a pre-payment of income tax for a future taxable year in order to avoid the dollar limitation applicable for taxable years beginning after 2017.”

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Prepayment of 2018 state and local income taxes in 2017 - more• Rationale: At 12/31/17, have no 2018 state income tax

liability.• Provision helps cash method taxpayers who paid 2018 state

and local income taxes in 2017 (allows cash method taxpayer to deduct a 2017 payment in 2018).

• Note: Paying 4th qtr 2017 estimate in 2017 is fine if was a reasonable estimate (Rev Rul. 82-208)

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What about prepaying 2018 real property taxes?• Similar issue – Does individual have a liability for the taxes at 12/31/17?

• See case law on next slide. ----

• Also, will the tax collector even accept the payment as a 2018 tax?• 12/22/17 – Los Angeles County Assessor said no.

• Property owners may not pre-pay their 2018-2019 property taxes in December 2017. The 2018-2019 property tax bills against which these pre-payments would be credited will not be generated and mailed until September/October 2018. The Assessor does not accept payments; this is solely a function of the Tax Collector. All payments submitted to the Assessor will be returned.

• https://assessor.lacounty.gov/wp-content/uploads/2017/12/Joint-Statement-12-17.pdf

Issue – If paid 2018 unassessed property tax in 2017, can’t deduct in 2017 (not assessed) or 2018 (was paid in 2017).

• Technical correction? 38

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Case law on prepaid property taxes includes …Estate of Hoffman, TC Memo 1999-395, aff’d 87 AFTR2d 2001-2119 (4th Cir, unpublished). • Facts state that taxpayer prepaid $5,520 of 1997 real estate taxes and

deducted amount on the 1996 return.• Per Tax Court: “Deductibility of Prepaid Taxes - Section 164(a)(1) allows a

deduction for real property taxes. Deduction of prepaid real property taxes has been disallowed where a cash basis taxpayer failed to establish that the prepayment represented assessed, rather than estimated, taxes, and that such taxes were due in the year they were paid. See Hradesky v. Commissioner, 540 F.2d 821 (5th Cir. 1976), affg. per curiam 65 T.C. 87 (1975). Petitioners have not established that their $5,520 prepayment represented assessed, rather than estimated, taxes. In addition, they have conceded that the $5,520 was not due in 1996. Accordingly, petitioners may not deduct the $5,520 from their 1996 income.”

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IR-2017-210 (12/27/17) –IRS clarifies prepaid property tax• To deduct in 2017, must be paid and assessed.• Example 2: County assesses and bills property taxes on July 1 for

July 1 through June 30. County revises computer system to take prepayments on taxes to be assessed July 1, 2018.

• “Taxpayers who prepay their 2018-2019 property taxes in 2017 will not be allowed to deduct the prepayment on their federal tax returns because the county will not assess the property tax for the 2018-2019 tax year until July 1, 2018.”

https://www.irs.gov/newsroom/irs-advisory-prepaid-real-property-taxes-may-be-deductible-in-2017-if-assessed-and-paid-in-2017

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What if assessor took the 2018 payment before 2018?• Considerations:

• Taken as a payment or a deposit?• Will it be noted as a payment on the 2018 bill or will the 2018 bill

still show the total amount owed?• Can assessor change the assessment/lien date?

• Or is acceptance considered payment of a true tax liability?• Other considerations?

• If decide to take position contrary to IR-2017-210 (see prior slide), should it be disclosed to avoid §6662 and §6694 penalties?

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Interest Expense• 2018 through 2025• Only interest on Acquisition Indebtedness (AI) up to $750,000

• Unless debt existed at 12/15/17 (then still $1 million AI limit)• Binding contract exception if entered into before 12/15/17, to close on

purchase before 2018 and if purchase before 4/1/18 (see Sec. 11043).• No definition of “binding contract” provided.

• If refinance – treat as incurred on date of original debt to extent doesn’t exceed the refinanced debt.

• No deduction for interest on home equity debt.• Effective tyba 12/31/17

• No transition relief or grandfathering rule.

http://www.sjsu.edu/people/annette.nellen/163_AmendedByPL115-97.pdf 42

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Example – AI and effective date• Purchase home after 12/15/17 using $1.2 million of debt• If no binding contract at 12/14/17 and no agreement to close

by 12/31/17, then can only deduct interest on $750,000 of debt.

• But appears if this debt incurred by 12/31/17, can still use $1 million limit for 2017.

• IF had binding contract at 12/14/17 + agreement to close by 12/31/17 and buy by 3/31/18, then can deduct interest on $1 million of debt.

• After 2025, if still have over $750K of AI, can treat up to $1 million as AI (§163(h)(3)(F)(ii))

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“Binding contract”• No definition provided at revised §163(h) or conference

committee• Will IRS provide one? Refer to an existing definition?• One example – Reg. 1.168(k)-1(b)(4)(ii) – excerpt on next

slide --• Several references to “binding contract” in IRC, regs and

committee reports.• Do any of them apply for the new §163(h) binding contract

exception?• Hopefully IRS will clarify!

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An example of a definition of “binding contract” – but don’t know if this is how IRS will define!

Reg. 1.168(k)-1(b)(4)(ii)

(A) A contract is binding only if it is enforceable under State law against the taxpayer or a predecessor, and does not limit damages to a specified amount (for example, by use of a liquidated damages provision). For this purpose, a contractual provision that limits damages to an amount equal to at least 5 percent of the total contract price will not be treated as limiting damages to a specified amount. In determining whether a contract limits damages, the fact that there may be little or no damages because the contract price does not significantly differ from fair market value will not be taken into account. For example, if a taxpayer entered into an irrevocable written contract to purchase an asset for $100 and the contract contained no provision for liquidated damages, the contract is considered binding notwithstanding the fact that the asset had a fair market value of $99 and under local law the seller would only recover the difference in the event the purchaser failed to perform. If the contract provided for a full refund of the purchase price in lieu of any damages allowable by law in the event of breach or cancellation by the seller, the contract is not considered binding.

(B) Conditions. A contract is binding even if subject to a condition, as long as the condition is not within the control of either party or a predecessor. A contract will continue to be binding if the parties make insubstantial changes in its terms and conditions or because any term is to be determined by a standard beyond the control of either party. A contract that imposes significant obligations on the taxpayer or a predecessor will be treated as binding notwithstanding the fact that insubstantial terms remain to be negotiated by the parties to the contract.

(C) Options. An option to either acquire or sell property is not a binding contract. …

Grandfathered AI Example• At 12/15/17, had $700,000 AI on principal residence.• In 2018, borrow $120,000 secured by home to make substantial

improvements.• How much can be AI? Only $750,000 calculated as follows:

• $700,000 is AI• $50,000 of the post-12/15/17 debt is AI

• Limit of $750,000 AI applies for post-12/15/17 debt• §163(h)(3)(F) – “in applying [$750K limit] to any debt incurred after

[12/15/17], limitation under [that limit] shall be reduced (but not below zero) by amount of any debt incurred on or before December 15, 2017, treated as acquisition debt for the tax year.”

• So, $750,000 less $700,000 = $50,000 46

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Example – Large debt to buy home• 2014 purchased home for $2 million using $1.5 million of debt• 2014 through 2017

• Treat $1 million as AI• Treat $100,000 at home equity debt (per Rev Rul. 2010-25)

• 2018 through 2025• Treat $1 million as AI• Can’t deduct any interest on home equity debt• If refinance, still limited to $1 million of AI (provided had $1 million of

AI at 12/15/17 and when refinance)47

Individual Planning – What To Do with Home Equity Debt Interest Expense

See what homeowner used any existing home equity debt for:

•If for substantial improvements to the home – it’s always been acquisition debt (if $1 million limit not reached).

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Example - Improvements• 2009 buy home for $600,000 with $450,000 of AI• 2012 borrow $80,000 for substantial remodeling work

• This is AI because incurred in substantially improving the residence.

• If have been treating interest on the $80K as home equity, was incorrect.

• It is AI so still produces deductible interest in 2018 through 2025 (and borrower is within the AI dollar limits).

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Individual Planning – What To Do with Home Equity Debt Interest Expense

See what homeowner used any existing home equity debt for:• If for business or other deductible interest category,

follow that use (Reg. 1.163-8T). • Also consider 30-day/any account rule of Notice 89-35

which favorably modifies Reg. 1.163-8T tracing rules for interest expense.

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Individual Planning – What To Do with Home Equity Debt Interest Expense

Per §163(h)(2) – QRI is not personal interest and per §163(h)(3)(A), QRI no longer includes HEI after 2017.

• That alone should make the HEI fall into a traced category.

Note: Perhaps some uncertainty as to whether borrower needs to elect under Reg. 1.163-10T(o)(5) to treat the equity debt as not secured by home.

• HEI definition remains in the law and such interest is disallowed for 2018 through 2025.

• But per above, QRI no longer includes home equity debt.• Confusion due to wording at 1.163-10T(d) and (e) (as well as IRS auditors’

sometimes taxpayer-unfavorable interpretations of §163(h)).

Perhaps IRS will clarify the proper interpretation. 51

Example – equity debt for various needs• 2009 – buy home for $800,000 using $700,000 debt (AI)• 2014 – borrow $150,000 to buy car, pay credit cards, pay kid’s

tuition• 2017 – deduct interest on AI and up to $100,000 of HEI• 2018 through 2025

• Can only deduct interest on AI.• Ask – was home equity debt used for any deductible purpose?

• Would Reg. 1.163-8T interest tracing rule and Notice 89-35 help get a deductible interest category? (30 day before/after, any account rule*)

• Challenge – Does borrower have records from 2014?

*This rule is also mentioned in Pub 535, page 12.52

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Example – equity debt used for Schedule C• 2009 – borrowed $600,000 to buy $800,000 residence• 2014 – borrow $100,000 secured by home to use for business

expenses (such as Schedule C)• Have been treating as HEI deducted on Schedule A

• Did not make Reg. 1.163-10T(o)(5) election to treat the $100K loan as not secured by the residence.

• 2018 (or even 2017)• Consider making the election to treat equity loan as not secured by the home

so can instead treat as trade or business interest expense.• For 2018, don’t need to make the election (see earlier slide on change to

definition of QRI by new §163(h)(3)(F)). But if want to treat equity debt as business interest in 2017, election at Reg. 1.163-10T(o)(5) needed.

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Example – equity debt and Notice 89-35• Homeowner has $1 million acquisition debt• 3/1/15 – borrowed $100,000 to pay various personal bills, debt

secured by residence• Has been treating interest on equity debt as HEI• 2018 – can no longer deduct interest on home equity debt• 2/19/15 sold $150,000 of Intel stock and bought Apple stock (cash

transactions)• Reg. 1.163-8T(c)(4)(iii) modified by Notice 89-35 allows borrower to

treat $100K borrowed 3/1/15 as used to buy the Apple stock that was purchased 30 days before the 3/1 borrowing. Thus, could be investment interest expense starting in 2018.

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Interest Expense Considerations• Read §163(h), Reg. 1.163-8T, Reg. 1.163-10T, Notice 89-35, Pubs 535

and 936, and see what records client has.• http://www.sjsu.edu/people/annette.nellen/163_AmendedByPL115-97.pdf

• Also, if client has little or no AI, might no longer be an itemizer in 2018 – check client’s Schedule A and tax situation before doing any planning for Schedule A items.

• Before treating any single debt consisting of AI and other uses, be sure you’re not considered to have made 1.163-10T(o)(5) election to treat debt as not secured by home. Some risk that IRS could say entire debt no longer secured by home, thereby losing AI deduction.

• See 2011 CCA ------• Watch for any clarification by IRS, such as on the interest tracing rules,

Notice 89-35 and anything about any need to make an election to treat debt as not secured by residence for any debt that generated deductible HEI before 2018.

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Reg. 1.163-10T(o)(5) electionCCA 201201017 – excerpt:• “Election to treat debt as not secured by the qualified residence• The regulations under section 1.163-10T(o) and Publication 936 both state

that taxpayers may make an election to treat a debt that is secured by a qualified residence as not secured by a qualified residence. The election must apply to the entire indebtedness, and the election is made by reporting the interest on the return as business interest or other deductible interest rather than qualified residence interest. Late elections have been permitted under section 301.9100 of the regulations. A purpose of this election is to permit a debt that is allocable to trade or business expenses, and thus deductible without regard to the section 163(h) deduction, to not “use up” the limitation, thereby causing otherwise deductible debts to fail to qualify under the limitation. In addition, the election permits interest on the debt to qualify as an “above the line” deduction (i.e., deductible under section 62 as a deduction allowable in determining adjusted gross income) to the extent the debt is allocable to a trade or business or rental expenditure.” 56

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Back to Earlier Example –Large debt to buy home

• 2014 purchased home for $2 million using $1.5 million of debt• 2014 through 2017

• Treat $1 million as AI• Treat $100,000 at home equity debt (per Rev Rul. 2010-25)

• 2018 through 2025• Treat $1 million as AI• Can’t deduct any interest on home equity debt

• Query – if apply tracing rule to excess over $1 million, will IRS treat borrower as having made election to treat this single debt as not secured by residence (causing loss of AI deduction)? Maybe. Clarification needed. Likely helps to clarify on return that borrower uses exact allocation rule of 1.163-10T(e) (so as to help ensure borrower not treated as using simple method of 1.163-10T(d) which treats any amount beyond AI as personal interest expense). 57

58

Computing mortgage interest deduction when debt limitations are exceeded

Per CCA 201201017, methods include:• Exact method – Reg. 1.163-10T(e)

• Debt by debt analysis• If not QRI, use tracing rules to classify

• Simplified method – Reg. 1.163-10T(d)• Combine debts for calculation• “Since enactment of OBRA 1987 the $1,000,000 acquisition indebtedness limitation and the $100,000

home equity indebtedness limitation must be substituted for the adjusted purchase price.”• Treat excess debt as personal, non-deductible (but see Pub 936 which says use tracking rules to identify

type of interest expense)• Pub 936 method

• Similar to simplified • Classify excess debt per interest tracing rules of Reg. 1.163-8T

• “a reasonable approximation of those methods”• Reminder: CCA and IRS publications are not binding; temporary regulations are

https://www.irs.gov/pub/irs-wd/1201017.pdfhttps://www.irs.gov/pub/irs-pdf/p936.pdf

Not new – just an fyi for your review …

29

In addition to Code, regs and Notices on interest expense, also see …

Pub 535, Business ExpensesFor example:

This is from Notice 89-35.

59

Not new – more fyi for your review …

Charitable Contributions• (D) of §170(f)(8) repealed effective 2017

• Permanent change• (D) read: “Substantiation not required for contributions reported

by the donee organization Subparagraph (A) shall not apply to a contribution if the donee organization files a return, on such form and in accordance with such regulations as the Secretary may prescribe, which includes the information described in subparagraph (B) with respect to the contribution.”

• IRS issued prop regs but pulled them; no regs exist• So contemporaneous written acknowledgement (CWA) still

needed for all donations of $250 or more!60

30

Charitable Contributions

50% limitation increased to 60% of the “contribution base” for cash donations

• Temporary - For 2018 through 2025.• See new Code language at new §170(b)(1)(G)

• Explains carryover and coordination with related rules under §170(b)(1).

61

§170(l) TREATMENT OF CERTAIN AMOUNTS PAID TO OR FOR THE BENEFIT OF INSTITUTIONS OF HIGHEREDUCATION

(1) IN GENERAL For purposes of this section, 80 percent of any amount described in paragraph (2) shall be treated as a charitable contribution.(1) IN GENERAL No deduction shall be allowed under this section for any amount described in paragraph (2).(2) AMOUNT DESCRIBED For purposes of paragraph (1), an amount is described in this paragraph if—

(A) the amount is paid by the taxpayer to or for the benefit of an educational organization—(i) which is described in subsection (b)(1)(A)(ii), and(ii) which is an institution of higher education (as defined in section 3304(f)), and

(B) such amount would be allowable as a deduction under this section but for the fact that the taxpayer receives (directly or indirectly) as a result of paying such amount the right to purchase tickets for seating at an athletic event in an athletic stadium of such institution.

If any portion of a payment is for the purchase of such tickets, such portion and the remaining portion (if any) of such payment shall be treated as separate amounts for purposes of this subsection.Effective for contributions made in tyba 12/31/17.

Permanent change!62

31

Query: What if prepaid one or more years of seat licensing to

university by 12/31/17?Depends …Was it due 12/31/17?12-month rule of Reg. 1.263(a)-4(f) - taxpayer not required to capitalize under this

section amounts paid to create (or to facilitate creation of) any right or benefit for the taxpayer that does not extend beyond the earlier of -(i) 12 months after the first date on which taxpayer realizes the right or benefit; or(ii) end of the tax year following the tax year in which payment is made.

63

Casualty and Theft Loss• For 2018 through 2025• Only personal casualty losses from federally-declared

disasters (per §165(i)(5))• Exception for personal casualty gains.

• Note: Special disaster relief for 2016 disasters (for IRA penalty relief, §165 and more).

• See PL 115-97, Sec. 11028.

64

32

SPECIAL RULES FOR PERSONAL CASUALTY LOSSES RELATED TO 2016 MAJOR DISASTER• For individuals with net disaster loss for any tax year beginning

after 2015 and before 2018.• Act Sec. 11028(c) [Conference report Sec. 11029]

• “The conference agreement follows the Senate amendment with a clarification that casualty loss relief applies to losses arising in taxable years beginning after December 31, 2015, and before January 1, 2018.”

• Appears to still require that the disaster occur in 2016.• Clarification needed.

65

Miscellaneous Itemized Deductions Subject to 2% AGI Threshold

IRC §67, 2% floor on miscellaneous itemized deductions

New (g) added:‘‘(g) SUSPENSION FOR TAXABLE YEARS 2018

THROUGH 2025.―Notwithstanding subsection (a), no miscellaneous itemized deduction shall be allowed for any taxable year beginning after

December 31, 2017, and before January 1, 2026.”66

33

Misc. Itemized Deductions Subject to 2% AGI Floor Include• Unreimbursed employee expenses

• Such as job search, tools, education (see if other benefit such as Lifetime Learning Credit applies though), home office, legal fees related to job, tools for work, dues, work clothes required by employer and not suitable for everyday wear

• Tax prep fees• Hobby expenses• Investment fees and expenses• Legal fees related to producing income or tax advice

• But check §62 to see if deductible for AGI (certain discrimination suits and whistleblower awards).

• Safe deposit fee• Appraisal fees for casualty loss or charitable contributions• Trustee’s administrative fees paid for IRA

67

Miscellaneous Itemized Deductions NOT Subject to 2% AGI Threshold Include (per IRS Pub 529)• Amortizable premium on taxable

bonds.• Casualty and theft losses from

income-producing property.• Federal estate tax on income in

respect of a decedent.• Gambling losses up to the amount

of gambling winnings.• Impairment-related work expenses

of persons with disabilities.

• Loss from other activities from Schedule K-1 (Form 1065-B), box 2.

• Losses from Ponzi-type investment schemes.

• Repayments of more than $3,000 under a claim of right.

• Unrecovered investment in an annuity.

68

34

Tax Prep and Other Fees for Estate and Trusts• Reg. 1.67-4(b)(3) – “Tax preparation fees. Costs relating to all estate and

generation-skipping transfer tax returns, fiduciary income tax returns, and the decedent's final individual income tax returns are not subject to the 2-percent floor. The costs of preparing all other tax returns (for example, gift tax returns) are costs commonly and customarily incurred by individuals and thus are subject to the 2-percent floor.”

• Reg. 1.67-4(b)(4) – Investment advisory fees. – subject to 2% AGI floor.• Reg. 1.167-4(b)(5) – Appraisal fees. – dependsSee §67(e) and (f) and regs for clarification.

Example of need to see how changes affect unchanged areas of the law.

69

§163(d) NII and §1411 NIIT and Changes to Itemized Deductions• §1411(c) Net Investment Income

• Gross income from interest, dividends, annuities, royalties, and rents if not derived in trade or business

• Gross income from a trade or business that is a passive activity• Net gain attributable to disposition of property other than that held in a trade

or business• LESS: “deductions allowed by this subtitle which are properly allocable to

such gross income or net gain”• §1411 is in Subtitle A, Income Taxes (§1 to §1564)

• So if no longer allowed as deduction, can’t reduce NII.• Some individuals may see increase NIIT due to loss of misc itemized

deductions subject to 2% AGI limit.• Similar language at §163(d) on defining net investment income (NII).

70

35

Gambling loss and expenses• Casual Gambler

• Can still claim itemized deduction for losses up to amount of winnings (is a misc itemized deduction not subject to 2% AGI floor).

• Related expenses disallowed as subject to 2% AGI floor.

• Professional Gambler• Claim losses to extent of winnings.• Modification to §165(d) on wagering losses:

• “Losses from wagering transactions shall be allowed only to extent of gains from such transactions. For purposes of preceding sentence, in the case of tax years beginning after December 31, 2017, and before January 1, 2026, the term “losses from wagering transactions” includes any deduction otherwise allowable under this chapter incurred in carrying on any wagering transaction.”

• Reverses Mayo, 136 TC 81 (2011) – thus, gambling expenses are subject to §165(d) limit rather than being a §162 deduction. 71

Overall Limit on Itemized Deductions• IRC §68, Overall limitation on itemized deductions

• Without PL 115-97, for 2018, phase-out applied if AGI exceeded the following amount (Rev. Proc. 2017-58):

• MFJ $320,000• HH $293,350• Single $266,700

• P.L. 115-97 – suspends §68 for 2018 through 2025.• New §68(f).

72

36

Observation: Charitable contributions & Mortgage interest

The reduction in itemized deductions (such as for state taxes and misc itemized subject to 2% AGI floor) and increase in standard deduction means that …

More individuals will claim standard deduction.

Thus, for many individuals, the higher standard deduction is an indirect change to

deductions for charitable, interest expense on acquisition debt, and medical.

73

Individual Planning –Itemized vs. Standard Deduction

If itemized deductions are near standard deduction, bunch charitable contributions every other year (or even every 3rd year);

perhaps same with mortgage interest first or last month’s payment, and when medical

expenses are paid.

74

37

Education-Related Changes• §108(f)(5) – Discharge on account of death of disability

• Exclusion if all requirements met• 2018 through 2025

• §529 Plans• New §529(c)(7) – “qualified higher education expense” includes expenses for

tuition for enrollment or attendance at elementary or secondary public, private or religious school

• §529(e)(3)(A) is amended by adding at the end: • ‘‘The amount of cash distributions from all qualified tuition programs described in subsection

(b)(1)(A)(ii) with respect to a beneficiary during any taxable year shall, in the aggregate, include not more than $10,000 in expenses described in subsection (c)(7) incurred during the taxable year.’’

• Per student (designated beneficiary) rather than per account.• NOTE: Reference to home schooling in conference agreement was pulled due to Byrd rule.

• Effective for distributions after 12/31/17 (permanent change).• Coverdell Accounts (§530) remain.

76

§529A ABLE Accounts• Allows rollovers from 529 qualified tuition program account to ABLE

account without penalty.• ABLE account must be owned by same designated beneficiary or member of the

designated beneficiary’s family.• Count towards limit that can be contributed annually.

• Effective for distributions after 2017 and before 2026.

• Increased contributions to ABLE accounts• Maintains annual contribution limit equal to gift tax exclusion ($15K for 2018)• But designated beneficiary of the ABLE account may contribute add’l amount up to

lesser of:• (A) federal poverty line amount for one-person household, or• (B) individual’s compensation for the year

• And, designated beneficiary may claim saver’s credit for contributions made to their ABLE account.

• Effective 2018 through 2025.

77

38

Add’l Individual ChangesItem Today’s law P.L. 115-97 (12/22/17; H.R. 1)Alimony* Payor can deduct and recipient

reports as income.No deduction or income for divorce

and separation agreements executed after 2018; see special rule for modifications. Act Sec. 11051.

Individual mandate (§5000A)*

Applicable unless have insurance every month or meet exemption

Repealed beginning after 2018

Passthrough entities

Follow owner tax rules; no special deduction

20% deduction of qualified business income for 2018 through 2025

(covered earlier)

78*permanent changes

Other notable

changes -Individuals

• Moving deduction and exclusion for employer reimbursement repealed through 2025 (other than for members of the Armed Forces per §217(g)).

• Fringe benefit changes may result in taxation to worker, or employer no longer offering the benefit (more on Day 2/Tax B).

79

39

Retirement account

changes for individuals

• §72(t) and other provisions for relief for 2016 disasters (Act. Sec. 11028)

• Change to length of service award programs for bona fide public safety volunteers (§457(e)) [Act Sec. 13612]

• Effective tyba 12/31/17; permanent• Extended rollover period for plan loan offset amounts

at §402(c) [Act Sec. 13613] • Recharacterization of IRA contributions - “special rule

that allows a contribution to one type of IRA to be recharacterized as a contribution to the other type of IRA does not apply to a conversion contribution to a Roth IRA. Thus, recharacterization cannot be used to unwind a Roth conversion. However, recharacterization is still permitted with respect to other contributions.” (Conf rpt, Act Sec. 13611; also see §408A(d)(6)(B)).

• Effective for tax years beginning after 2017.

If convert traditional to Roth, can’t reconvert back.So be sure can pay tax on any conversion because won’t beable to convert back.

80

Proposed changes not included in final bill (but were in either House or Senate bill) include …

• Add’l standard deduction for elderly and blind retained.• $250 above-the-line teacher deduction retained; no change in dollar amount.• Exclusion for employer-provided dependent care assistance retained.• Exclusion for adoption assistance programs retained.• §121 exclusion of gain on sale of principal residence unchanged.• Required use of FIFO to determine basis of stock dispositions not included.• Charitable driving stays in statute at 14¢/mile (rather than actual).• Consolidation and modification of education provisions not included (only change is to expand 529 plans).• Plug-in electric vehicle credit (§30D) retained.• Work Opportunity Tax Credit retained (but still set to expire after 2019).• Recovery period for real property retained at 27.5 and 39 years (but ADS period for residential rental property

changed from 40 to 30 (§168(g)(2)(C)).• Deduction deferral for payments made by lawyers in contingency fee cases (no law change made).• Changes to SE tax for S corp shareholders (no change made)

81

40

A Few Examples …

82

Speaker Ryan Example

2018 Pre-Tax Reform

P.L. 115-97

W-2 earnings $73,000 $73,000Standard deduction -13,000 -24,000Personal exemptions -16,600 --Taxable income $43,400 $49,000Tax $5,558 $5,499Child tax credit -2,000 -4,000Net tax liability $3,558 $1,499Tax reduction under P.L. 115-97 $2,059Tax reduction under P.L. 115-97 if children were not under age 17 but otherwise met the definition of a dependent (no child credit under current law and only $500 x 2 under P.L. 115-97)

$1,059

“typical family of four earning the median family income of $73,000 will receive a tax cut of $2,059 (https://www.speaker.gov/general/policy-highlights-tax-cuts-and-jobs-act-conference-report).

83

41

Effect depends on details of each situation

Family of 4, wages $100K, state taxes $8K, mtg int $10.5K, charitable $500

Family of 4, wages $250K, mtg int $40K, State tax $35K, charitable $5K, misc $3K

Pre-tax reform PL 115-97 Pre-tax reform PL 115-97Taxable income $64,400 $76,000 $150,400 $195,000Tax $8,708 $8,739 $28,908 $35,379Child credit $2,000 $4,000 $0 $4,000AMT $0 $0 $3,372 $0Net tax $6,708 $4,739 $32,280 $31,379Savings (add’l tax) $1,969 $901Tax if kids are 17 - 23 $8,708 $7,739 $32,280 $34,379Savings (add’l tax) $969 ($2,099)

If Scenario 2 involved new debt, mortgage interest deduction would be reduced as PL 115-97 limits Acquisition Debt to $750K if incurred after 12/15/17 (unless is a refinancing of grandfathered debt). 84

Married couple, no children, rents, salary $150,000

2018 Pre-Tax Reform

P.L. 115-97

W-2 earnings $150,000 $150,000Standard deduction -13,000 -24,000Personal exemptions -8,300 --Taxable income $128,700 $126,000Tax $23,483 $19,599

Tax reduction w/ reform $3,884Marginal tax rate 25% 22%

85

42

Married couple, no children, rents, salary $150,000, both age 65 or older

2018 Pre-Tax Reform

P.L. 115-97

W-2 earnings $150,000 $150,000Standard deduction -13,000 -24,000Add’l std deduction -2,600 -2,600*Personal exemptions -8,300 --Taxable income $126,100 $123,400Tax $22,833 $19,027

Tax reduction w/ reform $3,806Marginal tax rate 25% 22%

*watch for new inflation adjusted amounts for 2018 from IRS (update to Rev Proc 2017-58).86

Explanation of the $3,884 savings (or $3,806 if age 65 or older)• Deductions are $2,700 more resulting in savings under PL 115-97• Under both old law and PL 115-97, first $19,050 is taxed at 10%• The next $58,350 is taxed at 15% under old law and at 12% under PL 115-

97 for savings of $1,751• Balance of $51,300 under old law is taxed at 25% ($12,825) while the

balance under PL 115-97 of $48,600 is taxed at 22% ($10,692) for a savings of $2,133

• Total savings = $1,751 + $2,133 = $3,884• If age 65 or older, savings is reduced because the $2,600 add’l std

deduction is worth 3% less to this couple with tax reform’s lower bracket rate ($2,600 x 3% = $78).

87

43

Example of high income CA coupleFamily of 4, wages $1,500,000, mtg int $40K, State taxes $160K,

charitable $15K, misc $5K2018 pre-tax reform P.L. 115-97

Taxable income $1,280,000 $1,435,000Tax $451,024 $470,329Child credit $0 $0AMT $0 $0Net tax $451,024 $470,329Additional tax with reform $19,305Marginal tax rate 39.6% 37%Average tax rate 35.2% 32.8%

88Possible reduction if had business income rather than so much wage income (§199A deduction).

Explanation for tax increase• Tax savings on rates on first $600K of taxable income = $20,363

• See earlier slide

• TI under reform is $155K higher than pre-reform• Tax on excess pre-reform is ($1,280,000 – 600,000) x 39.6% = $269,280• Tax on excess for reform is ($1,435,000 – 600,000) x 37% = $308,950

• Difference = $39,670

• Total difference = $39,670 - $20,363 = $19,307 add’l tax under reform

89

44

MFJ, no children. Wage income of $250,000, mortgage of $500K (assume $21,000 interest expense). Assume property taxes $6,000 and state income taxes of $20,000.

Tax for 2018 without tax reform:

Taxable income $194,700Tax (regular) $41,139AMT 208Total tax $ 41,347

Tax for 2018 WITH reform:

Taxable income $219,000Tax $41,139AMT $ 0Total tax $ 41,139

So, tax bill goes down by $208.

90

More changes …

91

45

A variety of changes such as• §1031 – only to apply to non-dealer real property

• Effective for exchanges completed after 2017.• http://www.sjsu.edu/people/annette.nellen/1031_AmendedByPL115-97.pdf

• §162(a)(3) – Eliminate living expense deduction for members of Congress, effective for tyba 12/22/17.

• Treatment of certain individuals performing services in Sinai Peninsula of Egypt as qualified hazardous duty area.

• Various changes – see Act Sec. 11026

• Modify tax treatment of Alaska Native Corporations and Settlement Trusts – new exclusion at §139G for tyba 12/31/16 + new §247 for contributions to such trusts + new §6039H information reporting.

• See Act Sec. 13821.92

Extension of Time Limit to Contest IRS Levy• §6343 - Authority to release levy and return property

• (b) changed from 9 months to 2 years for certain return of property

• §6532 - Periods of limitation on suits• (c) changed from 9 months to 2 years

• Effective • Levies made after 12/22/17• Levies made on or before 12/22/17 if the 9-month period has not

expired under §6343(b) as of 12/22/17.93

46

One change for preparers• §6695(g) due diligence penalty expanded to include any

return where client claims head-of-household status.• Effective tyba 2017

• But existing language of §6695(g) refers to need for regs:• “Any person who is a tax return preparer with respect to any return or claim for refund who

fails to comply with due diligence requirements imposed by the Secretary by regulations with respect to determining eligibility for …”

• So likely not effective until regs issued.

• Reminder: §6695(g) penalty applies per item where due diligence not exercised (rather than per return). [Reg. 1.6695-2T(a)(1)]

94

California – Don’t forget:Extra work for HH already exists

• Form FTB 3532, Head of Household Filing Status Schedule• Per instructions: “For taxable years beginning on or after January 1,

2015, California requires taxpayers who use head of household (HOH) filing status to file form FTB 3532, Head of Household Filing Status Schedule to report how the HOH filing status was determined.”

95

47

Business Changes (Most covered Day 2 / Tax B)

• Corporate rate reduction to flat 21%• tyba 2017

• IRC §15 applies for fiscal year corps• QPSCs too

• Repeal of corporate AMT• Special rules for passthroughs

(new §199A) [2018 through 2025]• Loss limitation for other than C corps

(new §461(l)) [2018 through 2025]• Repeal of §199• Expensing of assets

• Used and new• Only tangible property (see definition at

§168(k) as amended)• Generally, after 9/27/17 and before 2023;

phases down through 2026

• Increases to §179 ($1 million and threshold $2.5 million) + certain lodging property + §280F changes

• Expanded accounting method exceptions for small business §§448, 263A, 471 & 460(e)

• Changes to various fringe benefits including provision of meals and entertainment by employer

• Limit on use of and c/b of NOL• Limitation on interest expense

deduction for non-small businesses (over $25 million receipts); limited exceptions

• Corporate shift from worldwide to territorial system

96

Estate Tax Change (more Day 2 / Tax B)

IRC §2010(c)(3)• New (C) “INCREASE IN BASIC EXCLUSION AMOUNT.—In the case

of estates of decedents dying or gifts made after December 31, 2017, and before January 1, 2026, subparagraph (A) shall be applied by substituting ‘$10,000,000’ for ‘$5,000,000.”

• IRS needs to adjust 2018 amount for chained CPI inflation (indexed for inflation after 2011, per §2010(c)(3))

• Also new §2001(g) – modifications to gift tax payable to reflect different tax rates and possible future changes in exemption amount.

• Watch for IRS release of 2018 inflation-adjusted amounts.

97

48

Also watch/wait for …• Changes to withholding tables for employers.

• IRS issued in January; employers must start using by February 15• https://www.irs.gov/newsroom/irs-statement-withholding-for-2018• https://www.irs.gov/newsroom/updated-2018-withholding-tables-now-available-

taxpayers-could-see-paycheck-changes-by-february• What will states do and when?• Waiting for IRS guidance.• Technical corrections likely, including from 2015 legislation.• Future legislation for additional reforms?

• Changes that could not go into HR 1 due to budget reconciliation limitations (that is, items had to deal with revenue to be in HR 1).

• Effect on financial statements.• SEC has issued guidance.

98

New w/h tables and FAQs

https://www.irs.gov/newsroom/irs-withholding-tables-frequently-asked-questions 99

Especially true for

individuals losing a good

deal of deductions such as for state and

local taxes on Schedule A.

49

Getting Up To SpeedRead and use the legislation and committee report!!

Final bill signed by President Trump:https://www.congress.gov/bill/115th-congress/house-bill/1/text

Conference report & text of P.L. 115-97:http://mntaxclass.com/files/0McBrideLinkedConferenceAgreementwithByrd.pdf

A few IRC sections in “track changes”http://21stcenturytaxation.blogspot.com/2018/01/tax-reform-few-provisions-in-track.html

Watch for Joint Committee on Taxation Bluebook:https://www.jct.gov/publications.html?func=select&id=9

100

Select Revenue Estimates For Individuals (in $billions, 2018-2027)Change in tax rates, brackets -$1,214

Increase in standard deduction -$720

Repeal of personal exemption +$1,212

Increase/expansion of child tax credit -$573

New inflation adjustment +$134

Increase AMT exemption and phase-out level -$637

QBI Deduction -$415

Disallow excess business loss (§461(l)) +$150

Schedule A limits on deductions +$668

50

Select Revenue Estimates For Individuals (in $billions, 2018-2027)Require SSN for child tax credit +$30

Repeal moving deduction and exclusion +$12

Alimony change +7

Repeal individual health insurance mandate +314

Estate tax exemption amount increase -$83

Total individual and estate -$1,127

Budget Effects of PL 115-97 ($billion, 2018-2027) broad categories

Individual changes (incl §199A) -$1,127Business changes -$654International changes +$324Net Total -$1,456

Per Joint Committee on Taxation

51

Number of taxpayers/filers

FY 2015 # returnsIndividual returns 148,840,642C corporate returns 2,216,263S corporate returns 4,257,909Partnership returns 3,611,255Exempt org returns 372,947

https://www.irs.gov/pub/irs-soi/16taxstatscard.pdf

New Law and Related Guidance

Expired and Expiring Tax Provisions

Also:Inflation adjustments2018 Filing Information

Chapters 1 & 2

105

52

2017 Disaster ReliefHurricanes and California Wildfires (other than Santa Barbara and Ventura*)

• Generally extend filing date to 1/31/18 and perhaps also payment date.

• If address is in disaster area.• If not, but records in the area, contact IRS for relief.

• Can claim losses on 2016 or 2017 return.

*Declared as federal disaster 1/2/18• So can declare on 2016 or 2017 return.

https://www.fema.gov/disaster/4353

Page 1-6

106

Paper File Disaster-Delayed 2016 Returns

IR-2017-183 (10/31/17)• E-filing system closed 11/18/17 for 2016 returns. • After this date, paper returns must be filed instead. • “The federally declared disaster areas include hurricane

and tropical storm victims in Georgia, Florida, Puerto Rico, the Virgin Islands and parts of Texas, Louisiana and South Carolina, as well as wildfire victims in parts of California.”

• Victims have until 1/31/18 to file their 2016 returns.

107

Supplement

53

Leave-Based DonationsNotice 2017-48 (9/5/17) & Notice 2017-52 (9/14/17), Notice 2017-62 (10/6/17) & Notice 2017-70 (11/9/17)• Where employee asks employer to donate value of

their vacation, sick or personal leave, to charity for relief of Hurricane or California Wildfire victims before 1/1/19.

• Not included on W-2.• No income or donation deduction to employee.• Employer can treat as §162 business deduction

(rather than charitable donation).108

Disaster Relief Legislation EnactedP.L. 115-63 (9/29/17) Disaster Tax Relief and Airport and Airway Extension Act of 2017 (H.R. 3823)

• Hurricanes only• Relief of penalty for early withdrawal of retirement funds under §72(t)

waived for qualified hurricane distributions. Generally, any amount required to be included in gross income can be spread over 3 years.

• Loan limit from qualified employer plan increased from $50,000 to $100,000. Repayment date for outstanding loans may qualify for delayed repayment.

• Employee retention credits for affected employees and employers created under §38 equal to 40% of qualified wages applied to first $6,000 of wages.

109https://www.congress.gov/bill/115th-congress/house-bill/3823

54

P.L. 115-63 - more• Charitable contributions

• Income limits relaxed for qualified contributions in cash made from 8/23/17 through 12/31/17 for both individuals and corporations.

• CWA required that notes donation will be used for relief efforts.

• 10% of AGI casualty loss limit n/a and taxpayer need not itemize to claim loss. $100 per casualty limit increased to $500 for disaster loss.

• EITC and child tax credit calculations can use earned income for preceding year if greater than earned income for 2017.

110

New Safe Harbors For Measuring Property Loss Including for Hurricanes

• Rev. Proc. 2018-08 • Safe harbors to measure loss for homes and personal belongings• Effective 12/13/17

• Rev. Proc. 2018-09• Safe harbors to measure loss to homes from 2017 hurricanes using cost

indexes• Effective for losses due to 2017 hurricanes that arose in 2017 Disaster Area

after 8/22/17

See IR-2017-202 (12/13/17) for links:https://www.irs.gov/newsroom/irs-provides-safe-harbors-to-help-taxpayers-suffering-property-losses-including-losses-from-hurricanes

111

55

112

Latest from IRS - CA-2018-01 (1/17/18)

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Victims of the wildfires, flooding, mudflows and debris flows that took place beginning on Dec. 4, 2017 in parts of California may qualify for tax relief.Individuals who reside or have a business in Los Angeles, San Diego, Santa Barbara and Ventura Counties may qualify for tax relief.The declaration permits IRS to postpone certain deadlines for taxpayers who reside or have a business in the disaster area. For instance, certain deadlines falling on or after Dec. 4, 2017 and before April 30, 2018, are granted additional time to file through April 30, 2018. This includes 2017 individual income tax returns normally due on April 17, 2018. It also includes the fourth quarter estimated tax payment normally due on Jan. 16, 2018.In addition, penalties on payroll and excise tax deposits due on or after Dec. 4, 2017, and before Dec. 19, 2017, will be abated as long as the deposits were made before Dec. 19, 2017.If an affected taxpayer receives a late filing or late payment penalty notice from the IRS that has an original or extended filing, payment or deposit due date that falls within the postponement period, the taxpayer should call the telephone number on the notice to have the IRS abate the penalty.IRS automatically identifies taxpayers located in covered disaster area and applies automatic filing and payment relief. But affected taxpayers who reside or have a business located outside the covered disaster area must call the IRS disaster hotline at 866-562-5227 to request this tax relief.https://www.irs.gov/newsroom/tax-relief-for-victims-of-wildfires-flooding-mudflows-and-debris-flows-in-california

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See information and links at:http://21stcenturytaxation.blogspot.com/2017/09/disaster-relief-tax-links.htmlFTB - https://www.ftb.ca.gov/Archive/AboutFTB/Press/2017/09-10132017.shtmlCDTFA - https://www.cdtfa.ca.gov/news/17-29.htm 114

Congress and Trump Aim to Curtail State Secure Choice Plans

H.J.Res. 67 (P.L. 115-24; 4/13/17)• Disapproves of 2016 DOL rule to allow such plans w/o

concern over ERISA.• “That Congress disapproves the rule submitted by the

Department of Labor relating to ‘‘Savings Arrangements Established by Qualified State Political Subdivisions for Non-Governmental Employees’’ (published at 81 Fed. Reg. 92639 (December 20, 2016)), and such rule shall have no force or effect.”

• Relevant to CA, CT, IL, MD, OR and a few other states• State goal – get easy retirement plan access to

employees who work for employers w/o plans.

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Regulations list for 2017• 2017 regulations

• http://www.sjsu.edu/people/annette.nellen/website/2017regs.html• Webpage includes details on EO 13789

• Past list links (2011 – 2016)• http://www.sjsu.edu/people/annette.nellen/website/2016regs.html

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Expiring Provisions• Per JCT,

• 36 items expired in 2016• 2 expire in 2017

• 2016 items include:• Several credits including §25C nonbusiness energy property• Certain credits for residential energy property (§25D)

• But two §25D solar energy property credits end 12/31/21• Premiums for mtg insurance deduction as mtg interest• §108(a)(1)(E) CODI for qualified residence interest• §179D energy efficient commercial buildings deduction• §181 special expensing for certain films, TV productions• §222 above the line tuition deduction• §199(d)(8) allowance for production in Puerto Rico

https://www.jct.gov/publications.html?func=startdown&id=4966

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JCT Releases Expiring Provisions Report – 1/10/18• Includes

• 42 items that expired 12/31/16• 25 that will expire 12/31/25 (from PL 115-97)

https://www.jct.gov/publications.html?func=startdown&id=5057

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List of expiring provisions – JCT’s 2017 list versus 2018 list

Year 2017 JCT Report 2018 JCT Report2016 36 342017 2 12018 1 32019 10 92020 1 12021 4 32022 2 22023 1 12024 0 02025 1 232026 0 22027 0 1

TOTAL 58 80

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Will there be an extenders bill in early 2018?• Maybe …• S. 2256, Tax Extender Act of 2017 (Hatch)

• Introduced 12/20/17!• Extends many items that expired 12/31/16 for 2017 and 2018

• Qualified principal residence debt exclusion• Treat mtg insurance as qualified residence interest• Above the line for tuition (§222)• Indian employment tax credit• Race horses as 3-year property• 7-year life for motorsports entertainment complexes• 181 expensing for certain films (only through 2017; see PL 115-97 changes to 168(k) for

films)• 199 deduction for activities in Puerto Rico (only through 2017)• Various energy credits + some modifications

https://www.congress.gov/bill/115th-congress/senate-bill/2256121

AND … Still on the Congressional Agenda

H.R. 601 (PL 115-56, 9/8/17)• Continuing Appropriations Act, 2018

and Supplemental Appropriations for Disaster Relief Requirements Act, 2017

• Budget appropriations and debt ceiling extended to 12/8/17.

• Provided $7.4 billion to Disaster Relief Fund to Homeland Security + amounts to SBA & HUD.

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Modification to Congressional Agenda

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X

X

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Resolution signed 12/22/17 –H.R. 1370 (PL 115-143) – disaster relief funds & delays automatic sequestration

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X

Gov’t shutdown started 1/20/18!Effect on IRS per Contingency Plan

• https://www.treasury.gov/SitePolicies/Documents/FY2018-IRS-Lapse-in-Appropriations-Contingency-Plan_Filing-1-17-18_Single-File.pdf

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More IRS employees considered essential

during filing season

shutdown.

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What else is new?

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Reporting QSEHRA on Form W-2Qualified Small Employer Health Reimbursement Arrangement (QSEHRA) – New HRA Starting 1/1/17 per 21st Century Cares Act. P.L. 114-255 (12/13/16). See IRC sections 9831(d), 106(g), 36B(c)(4) and 6652(o).

• Reimbursement only taxable if employee did not obtain minimum essential coverage.

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FF $xxxx

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New Acting IRS CommissionerDavid Kautter

• 8/3/17 became Ass’t Secretary of Tax Policy at Treasury

• 10/26 – announced he would also be Acting Comm’r starting 11/13/17

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http://www.finra.org/industry/notices/17-11

Effective February 5,

2018.

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2018 Social Security Wage Limit

$128,400*• Up from $127,200 for 2017• *First SSA announcement used $128,700• Affects about 7% of workers• https://www.ssa.gov/news/press/releases/2017/#11-2017-1

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2018 2017Personal exemption (after 2017, only relevant as income threshold for “qualifying relative”)

$4,150 $4,050

28% AMT rate starts at (all but MJS) $191,500 $187,800Foreign earned income exclusion amount $104,100 $102,100Annual gift exclusion $15,000 $14,000

Inflation adjusted amounts for 2018

Rev. Proc. 2017-58 https://www.irs.gov/pub/irs-drop/rp-17-58.pdf

• Many items no longer relevant with PL 115-97.• Will IRS adjust for new use of Chained CPI?

• Effective date: tyba 12/31/17• Watch for new rev proc with chained CPI inflation adjustments for 2018

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Inflation Adjustments for 2018Remember – most $ penalties adjust for inflation.

• Inflation adjustments for certain penalties under §§6651, 6652(c), 6695, 5598, 6699, 6721 and 6722.

• Example – §6695 penalties:

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2018 Retirement Plan Limitations Notice 2017-64 (10/19/17) https://www.irs.gov/pub/irs-drop/n-17-64.pdf

Some amounts unchanged from 2017

• IRA contributor w/o employer plan, married to covered individual• Deduction phased out if couple’s income between $189,000 and $199,000

• Up from $186,000 and $196,000.

• AGI phase-out range for Roth IRA is $189,000 to $199,000 for MFJ• Up from $186,000 to $196,000.

• Elective contribution) limit for 401(k), 403(b), most 457 plans, and federal Thrift Savings Plan increases $500 to $18,500.

• Catch-up contribution for employees aged 50 and over who participate in 401(k), 403(b), most 457 plans, and government’s Thrift Savings Plan remains same at $6,000.

• Limit on annual contributions to IRA is unchanged at $5,500.• Additional catch-up contribution limit for individuals aged 50 or older required to stay at $1,000.

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Mileage Rates for 2018Notice 2018-03 (12/14/17)•Business - 54.5¢/mile [up from 53.5¢]

• 25¢ represents depreciation

•Medical and Moving - 18¢/mile [up from 17¢]

•Charitable - 14 ¢/mile [fixed by statute]Must follow Rev Proc. 2010-51

https://www.irs.gov/pub/irs-drop/n-18-03.pdf138

Supplement

Reminders

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Repeal of individual mandate under PL 115-97 (tax reform), doesn’t start

until 2019.140

Be sure client meets ALL of the §170 substantiation

requirements! See Notice 2007-7 (Q&A 34-44)

and Pub 590-B.141*See helpful AICPA article - https://www.thetaxadviser.com/issues/2018/jan/form-8879.html

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NIIT and §469 Regrouping

Reg. §1.469-11(b)(3)(iv) – one time activity regrouping allowed for first year taxpayer subject to

NIIT.

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Due Diligence RemindersSuch as:• Ask about health coverage / ACA compliance.• Proper charitable contribution documentation.• Proper classification / treatment of residential rentals.

• Section 280A(c)(5) versus 469.• SE tax might apply; 1099s might need to be issued• Local taxes may apply.

• Is taxpayer a real estate professional? (need to check annually and have good records)

• Business expenses and proper documentation.• See what new apps and software tools exist to help.

• FBAR, Form 8938 and other foreign asset/investment forms.• Help client protect info (paper and digital) & reduce ID theft.

• Share tips regularly.• Set good example for clients.

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Questions today for ALL clientsDo you generate funds

from any type of web-based activity? Do you have or use

virtual currency?144

And one more …

Are you involved in any cannabis business or investment?

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Draft Form 8867 for 2017

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Head of Household

to be added

(likely for 2018 form)

Penalty of $520 is per credit for which due diligence was not exercised.

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Pub 4687

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Also see flowcharts in Pub 970 for AOTC

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Due Date for 2017 Returns2017 Forms 1040 are due:

APRIL 17, 2018 (Tuesday)

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April 15, 2018 is a Sunday Emancipation Day is Monday April 16, a holiday in DC.

So filing day is Tuesday, April 17!Or extend to Monday October 15, 2018.

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