year-end tax strategies · 2019-11-14 · year-end tax planning •prepayment of state and local...
TRANSCRIPT
YEAR-END
TAX STRATEGIES
FOR INDIVIDUALS
Incorporating lessons learned
and planning for the future
Mark GaudetShareholder
Larry PowellShareholder
PRESENTERS
Today’s Agenda• TCJA review
• Individual Rates
• Small Business Deduction
• Ohio Small Business Deduction
• Itemized Deductions
• Estate & Gift
• Year-End Tax Planning
• Year 2020 and Beyond
• Summary & Questions
Tax Cuts & Jobs Act
• TCJA introduced on
November 2, 2017.
• President Trump signed the
legislation into law on
December 22, 2017.
• Many of the individual tax
provisions are subject to
sunset after December 31,
2025.
Tax Rates
Individual
• Ordinary income tax rates for
individuals – retains seven rate
brackets, but lowering top
marginal rate to 37%
• Tax rates of 10%, 12%, 22%, 24%,
32%, 35% and 37%
• Retains 0%, 15% and 20% tax rate
for long-term capital gains and
qualified dividends
• Retains 3.8% net investment income tax and
additional 0.9% FICA surtax on earned income
Individual Income Tax Rates
Tax Rates –
Prior to Tax Reform Tax Cuts and Jobs Act - 2018
Married Couples Filing Jointly Married Couples Filing Jointly
Ordinary
Income Tax
Rate
Taxable
Income over
($)
But not
more than
($)
Ordinary
Income Tax
Rate
Taxable
Income over
($)
But not
more than
($)
10.0% -- 19,050 10.0% -- 19,050
15.0% 19,050 77,400 12.0% 19,050 77,400
25.0% 77,400 156,150 22.0% 77,400 165,000
28.0% 156,150 237,950 24.0% 165,000 315,000
33.0% 237,950 424,950 32.0% 315,000 400,000
35.0% 424,950 480,050 35.0% 400,000 600,000
39.6% 480,050 37.0% 600,000
Individual Income Tax Rates
Tax Cuts and Jobs Act - 2019 Tax Cuts and Jobs Act - 2020
Married Couples Filing Jointly Married Couples Filing Jointly
Ordinary
Income Tax
Rate
Taxable
Income over
($)
But not
more than
($)
Ordinary
Income Tax
Rate
Taxable
Income over
($)
But not
more than
($)
10.0% -- 19,400 10.0% -- 19,750
12.0% 19,400 78,950 12.0% 19,750 80,250
22.0% 78,950 168,400 22.0% 80,250 171,050
24.0% 168,400 321,450 24.0% 171,050 326,600
32.0% 321,450 408,200 32.0% 326,600 414,700
35.0% 408,200 612,350 35.0% 414,700 622,050
37.0% 612,350 37.0% 622,050
Individual Capital Gain
Tax Rates
Tax Cuts and Jobs Act - 2019 Tax Cuts and Jobs Act - 2020
Married Couples Filing Jointly Married Couples Filing Jointly
Capital Gain
Income Tax
Rate
Taxable
Income over
($)
But not
more than
($)
Capital Gain
Income Tax
Rate
Taxable
Income over
($)
But not
more than
($)
0% -- 78,750 0% -- 80,000
15.0% 78,750 488,850 15.0% 80,000 496,600
20.0% 488,850 ++++ 20.0% 496,600 ++++
Allows an individual taxpayer to deduct 20% of domestic qualified business income from a pass-through entity or sole proprietorship
Also applies to REIT dividends and Publicly Traded Partnership (PTP) income
Deduction limited to 50% of W-2 wages or 25% of W-2 wages plus 2.5% of the unadjusted basis of qualified property after wage limitation phase-in
Small Business
Deduction
Small Business Deduction
• Deduction applies to income from a
qualified trade or business other than a
specified service trade or business (SSTB)
• Specified service trade or business means
any trade or business involving the
performance of services in the fields of
health, law, accounting, actuarial science,
performing arts, consulting, athletics,
financial services, brokerage services,
investing, investment management, trading
and dealing.
• SSTB exclusion does not apply if the
taxpayer’s taxable income (before deduction)
does not exceed certain thresholds
• SSTB exclusion threshold for joint filers is
taxable income of $321,400 or less. The
exclusion is gradually phased out with
taxable income beginning at $321,400 and
fully phased out at taxable income of
$421,400.
• SSTB exclusion threshold for other filers is
taxable income of $160,700 or less. The
exclusion is phased out between $160,700
and $210,700.
Small Business Deduction
• Qualified business income (QBI) includes the
net domestic taxable business income and
loss with respect to any qualified trade or
business
• QBI excludes the following items of income
or loss:
• Investment income such as investment
interest and dividends, short-term and
long-term capital gains, gains from
commodities and foreign currency, and
other similar items
• IRC Section 707(c) guaranteed payments
paid to partners in partnerships for
compensation of services performed
Small Business Deduction
• For taxpayers that are eligible to claim the full 20%
deduction on QBI, their maximum effective tax rate
on this income will be 29.6%
• Trusts and estates are eligible for the deduction
• Sunsets December 31, 2025
• Aggregation election – 50% or more common
ownership and 2 of 3 factors satisfied:
• Businesses provide products/property/services
that are the same or customarily offered together
• Businesses share facilities or significant
centralized business elements
• Businesses are operated in coordination with
or with reliance on one or more businesses in
the group
Small Business Deduction
• Real estate safe harbor:
• 250 hours of service with contemporaneous
records (hours can be from
owners/employees/contractors)
• It can’t be a triple net lease
• Must separate residential from commercial
• Must attach statement to return showing
properties included, etc.
• Planning considerations:
• Do you have the right type of tax entity?
• Re-evaluate guaranteed payments
• The amount of owner salaries
• Aggregation
Small Business Deduction
Ohio Small Business Deduction
• First $250,000 of business income is 100%
excluded from Ohio income tax. Business
income greater than $250,000 taxed at flat
3% rate.
• Business income earned by sole
proprietorship or pass-through entities qualify
• Investment income doesn’t qualify
• Wages or guaranteed payments by a 20% or
greater owner is considered business
income. No constructive ownership allowed.
Excess Business
Loss Limitation
• An excess business loss is not allowed in the
current year and carried forward as part of net
operating loss (NOL)
• Excess business loss is the excess of aggregate
business deductions over the sum of aggregate
business income plus a threshold amount
($500,000 MFJ)
• Applies at partner or shareholder level for
pass-through entities. Excess business loss is
computed after applying the passive loss rules.
Net Operating Loss (NOL)
• Carryback of NOL no longer permitted
for NOLs arising in tax years beginning
after 2017
• NOL deduction limited to lesser of 80%
of taxable income or aggregate NOL
carryforward/carryback. 90% limitation
for AMT.
• Carryforward period for NOL is
indefinite
Standard Deduction &
Personal Exemptions
• Increased standard deduction to $24,400
(MFJ) from 24,000 (2018). Additional $1,300
deduction for each taxpayer born before
January 2, 1954.
• Increased standard deduction to $12,200
(Single) from 12,000 (2018). Additional
$1,650 deduction for each taxpayer born
before January 2, 1954.
• No deduction for personal exemptions
Itemized Deductions
• 10% of AGI floor for medical expense
deduction for 2019, was 7.5% of AGI
through 2018
• Limit deduction for state and local taxes
to $10,000 (MFJ). Combines real
property taxes, personal property taxes,
income taxes and sales taxes (if elected).
• Limit mortgage interest deduction on
loans up to $750,000 (MFJ). Debt
incurred before 12/15/17 is
grandfathered and subject to a
$1,000,000 limitation.
• Suspend the deduction for interest on home
equity indebtedness for tax years through 2025
• Increase AGI limitation for cash charitable
contributions from 50% of AGI to 60% of AGI
• Repeal deduction for
contributions to higher
education institutions if
related to right to purchase
tickets or seating at an
athletic event
Itemized Deductions
• Suspend deduction for personal casualty
losses, except for federally declared disasters
• Suspend the deduction for miscellaneous
itemized deductions that are subject to the 2%
AGI floor
• Suspend 3% limitation on itemized
deductions for taxpayers with AGI
over threshold amount
(Pease limitation)
Itemized Deductions
Alternative Minimum Tax
• Retain the individual alternative minimum
tax (AMT)
• Increase the AMT exemption amount for
individuals to $111,700 (MFJ) and $71,700
(Single)
• Increase AMT phase-out threshold to
$1,020,600 (MFJ)
• No change to exemption amount and
phase-out amount for trusts and estates
Other Provisions
• Child tax credit of $2,000 for each qualifying
child (phased out based on modified AGI).
Credit phased out for joint filers with
modified AGI of $400,000 or more.
• $500 nonrefundable credit for dependents
other than qualifying children.
• No deduction for alimony payments for
payor spouse and no income inclusion for
the payee spouse for any divorce or
separation agreement executed after
December 31, 2018.
Other Provisions
• Elementary and high school
expenses of up to $10,000 per year
would be qualified expenses for Sec.
529 plans
Estate & Gift Tax
• Applicable exclusion amount (including
GST) to $10 million (indexed for inflation)
for transfers occurring after December 31,
2017
• 2019 exemption is $11,400,000 per
individual
• 2020 exemption is $11,580,000 per
individual
• Increased exemption amount will sunset
after December 31, 2025, to $5 million
(indexed for inflation)
Estate & Gift Tax
• Gift tax annual exclusion amount for 2019 -
$15,000 per donee
• IRS guidance provided on claw back
Payroll Review
• Review your most recent pay stub to make sure you
are taking advantage of all tax deferral opportunities:
• 401(k) limit - $19,000 ($19,500 in 2020)
• 401(k) catch up if you turn 50 in 2019 or older -
$6,000 ($6,500 in 2020)
• Health Savings Account - $3,500 Self only/$7,000
Family/$1,000 catch up if you turn 55 in 2019 or
older. ($3,550, $7,100, $1,000 for 2020)
• Withholding review – Remember that you can
catch up shortfalls in bonus or last few checks
without penalty. Can’t do that if making estimated
payments.
• Are city and/or school district withholdings correct,
if applicable?
Year-End Tax Planning
• Prepayment of state and local income taxes
and property taxes generally will not result in
any additional tax benefits in 2019, as a
result of $10K on SALT deduction for
itemized deductions
• Harvest capital losses, beware of wash sale
rules
• Consider converting traditional IRAs to Roth
IRAs. No longer allowed to recharacterize
after conversion.
• Consider distributions from retirement
accounts, if over age 59 ½
• Make additional contribution to retirement
plans, take advantage of catch-up
provisions if over age 50
• Evaluate retirement plan options if self-
employed – possible implementation of
defined benefit plan
Year-End Tax Planning
• If over age 70 ½, consider making qualified
charitable distributions from your IRA (capped
at $100,000 per year)
• Gift long-term appreciated securities to charity,
as opposed to cash gifts
• Consider a donor advised fund for multiple
year charitable gifts and current year
deduction
Year-End Tax Planning
• Bunch itemized deductions if you are
projected to exceed AGI thresholds and
potential tax benefit
• Avoid and/or reduce exposure to
underpayment penalties – check withholding
and estimated tax payments
Year-End Tax Planning
• Pass-through business deduction planning
• Review of entity structure. March 15
deadline for conversions of C
Corporation to S Corporation.
• Review applicability of bonus
depreciation and Section 179 expensing
• Ohio SBD deduction
Year-End Tax Planning
• Consider annual exclusion gifts to family and
friends for transfer tax purposes. 2019 annual
exclusion amount is $15,000.
• Take advantage of education and medical
exceptions for gift tax purposes
• Revisit traditional estate planning techniques;
however, avoid current payment of any gift tax.
• Evaluate use of increased lifetime exemption
for gift, estate and GST tax purposes. 2019
exemption amount is $11,400,000 per
individual. No claw back provision.
Year-End Tax Planning
What We Know Now
• Probably the lowest tax rate environment you’ll see
Tax Planning: Looking Forward
What We Know Now
• Continued U.S. political divide
• Likely continued divided legislature in 2020
• Impact of 2020 elections?
Tax Planning: Looking Forward
Tax Planning:
Comparison of
Candidate Plans on
Individual Rates
A quick look at several Democratic presidential candidates’ current tax proposals:
• Senator Elizabeth Warren Massachusetts
• Senator Bernie Sanders Vermont
Tax Planning: Looking Forward
• Sen. Warren’s Wealth Tax calls for a 2% tax on net worth above $50 million, increasing to 6% tax for net worth above $1 billion
• Sen. Sanders’ Wealth Tax calls for a
1% tax on net worth above $32
million, going to 8% above $10 billion
Tax Planning: Looking Forward
All the major Democratic candidates
have talked about unifying qualified
dividends and capital gain rates with
ordinary income.
Other Democratic Proposals:
• A 10% surtax on wages
and capital gains income
topping $2 million
• Raise the individual top
marginal rate back to
39.6%
Tax Planning: Looking Forward
Democratic Candidates’ Proposals for Payroll and NIIT
• Sen. Sanders – a new 6.2% payroll tax by employers
• Sen. Sanders – unlimited tax base for FICA
• Sen. Warren – an additional 14.8% payroll tax on wages above $250,000 and on families with net investment income above $400,000
• Sen. Warren – corporations will pay their health insurance to the government
Tax Planning: Looking Forward
• Sen. Sanders’ proposal to have derivatives marked to market each year
• Sen. Warren to tax companies based on book income aka “The Real Corporate Profits” tax
• Sen. Sanders’ proposal to tax all carried interests as ordinary income
• Sen. Warren – eliminate accelerated depreciation
• Sen. Warren and Sen. Sanders – enact a financial transactions tax
Tax Planning: Looking Forward
Mark Gaudet
513-241-3111
Larry Powell
937-226-0070
Questions?