2018 Spring Professional Advisor Seminar Presentation: Mike Martin - PowerPoint PPT Presentation

2018 Spring Professional Advisor Seminar Presentation: Mike Martin

Today’s Agenda – not necessarily in this order  Review of many (not all) important aspects of the: 2018 Tax Cut and Jobs Act (TCJA)  What is the law?  How do the calculations work?  How will taxpayers, investors, givers react?  The QBID – This is complicated but critically important  Charitable Planning Opportunities  New Significance of QCD – Qualified Charitable Deduction  Gifts of appreciated securities – still good?  Estate Planning - Tax Considerations  The rules have changed and so have planning strategies  Donor Advised Fund Bundling Strategies 2

2018 Tax Cut and Jobs Act 3

Individual Tax Cuts - 2018 4  Seven marginal brackets:  10%, 12%, 22%, 24%, 32%, 35%, 37%  Four marginal brackets for estates and trusts:  10%, 24%, 35%, 37% 4

Individual Tax Cuts - 2018 5  Double the standard deduction – Fewer Sch. A users:  $12,000 single  24,000 joint  No changes made to the elderly and blind additional standard deductions.  Elim inate exemptions, personal and dependent. What Happens to the gross income test of Qualifying Relative rules?  5

Tax Rates Schedules - Single 20 17 Tax Rate Schedule 20 18 Tax Rate Schedule Taxable Income Taxable Income Tax Rate Tax Rate Minimum Maximum Minimum Maximum -- $9,325 10% -- $9,525 10% $9,326 $37,950 15% $9,526 $38,700 12% $37,951 $91,900 25% $38,701 $82,500 22% $91,901 $191,650 28% $82,501 $157,500 24% $191,651 $416,700 33% $157,501 $200,000 32% $416,701 $418,400 35% $200,001 $500,000 35% $418,401 -- 39.6% $500,001 -- 37% 6

Tax Rates Schedules – Married Filing Jointly 20 17 Tax Rate Schedule 20 18 Tax Rate Schedule Taxable Income Taxable Income Tax Rate Tax Rate Minimum Maximum Minimum Maximum -- $18,650 10% -- $19,050 10% $18,651 $75,900 15% $19,051 $77,400 12% $75,901 $153,100 25% $77,401 $165,000 22% $153,101 $233,350 28% $165,001 $315,000 24% $233,351 $416,700 33% $315,001 $400,000 32% $416,701 $470,700 35% $400,001 $600,000 35% $470,701 -- 39.6% $600,001 -- 37% 7

Capital Gains - 2018 8  Under the Act, a 0 % capital gains bracket applies to capital gains “below the 15% rate threshold” ($77,200 for a joint return or surviving spouse, $51,700 for a head of household, half of the joint amount for other individuals, and $2,600 for estates and trusts).  A 15% bracket applies to gains below the 20% rate threshold ($479,000 for joint return or surviving spouse, half the joint amount for a married individual filing separately, $425,800 for any other individual, and $12,700 for an estate or trust). 8

Tax Rate Schedules Amounts were simply adjusted for inflation from 2017. The capital gains tax rate schedules no longer tie to the ordinary income tax rate schedules. 20 18 Long-Term Capital Gains & Qualified Dividends Rates Single Married Filing Jointly Taxable Income Tax Rate Taxable Income Minimum Maximum Minimum Maximum -- $38,600 0% -- $77,200 $38,601 $425,800 15% $77,201 $479,000 $425,801 -- 20% $479,001 -- The 3.8% Net Investment Income Tax applies to single taxpayers with modified adjusted gross income (MAGI) in excess of $200,000 and married taxpayers filing jointly with MAGI in excess of $250,000. 9

Deductions, Exem ptions & Credits Standard Deductions Filing Status 2017 2018 Single $6,350 $12,000 Married Filing Jointly $12,700 $24,000 Additional Standard Deductions Filing Status 2017 2018 Single, Age 65+ OR Blind $1,550 $1,600 Single, Age 65+ AND Blind $3,100 $3,200 Married, Age 65+ OR Blind $1,250 $1,300 Married, Age 65+ AND Blind $2,500 $2,600 *Per Person 10

Deductions, Exem ptions & Credits Personal & Dependency Exem ptions Filing Status 2017 2018 Single $4,050 -- Married Filing Jointly $8,100 -- Dependents $4,050 -- In 2017, personal and dependency exemptions phased out when AGI exceeded $384,000 for single taxpayers and $436,300 for married taxpayers filing jointly. Standard Deductions + Personal Exem ptions Filing Status 2017 2018 Single $10,400 $12,000 Married Filing Jointly $20,800 $24,000 11

State and Local Personal Itemized Tax Deductions Retained, but With New Limits A taxpayer may claim an itemized deduction of up to $10,000 ($5,000 for a married taxpayer filing a separate return) for the aggregate of: State and local property taxes not paid or accrued in • carrying on a trade or business or activity described in Code Sec. 212 (i.e. Rental); and State and local incom e , war profits, and excess profits taxes • (or sales taxes in lieu of income, etc. taxes) paid or accrued in the tax year. Foreign real property taxes may not be deducted. (Code Sec. 164(b)(6)) How we going to know how to tax state 2017 refunds received • in 2018 on 2018 Federal Returns? 12

Mortgage Interest Deduction Retained, But With New Limits - 2018 The deduction for interest on hom e equity indebtedness is suspended, and the deduction for mortgage interest is limited to underlying indebtedness of up to $750,000 ($375,000 for married taxpayers filing separately). (Code Sec. 163(h)(3)(F)). As under prior law , the loan m ust be secured by the taxpayer's m ain hom e or second hom e (know n as a qualified residence), not exceed the cost of the hom e and m eet other requirem ents. Treatm ent of indebtedness incurred on or before Decem ber 15, 2017 - The new lower limit doesn’t apply to any acquisition indebtedness incurred before December 15, 2017. Refinancing – The $1 million/ $500,000 limitations continue to apply to taxpayers who refinance existing qualified residence indebtedness that was incurred before December 31, 2017, so long as the indebtedness resulting from the refinancing doesn't exceed the amount of the refinanced indebtedness. (Code Sec. 163(h)(3)(F)) 13

Examples: IR 2018-32  Exam ple 1 : In January 2018, a taxpayer takes out a $500,000 mortgage to purchase a main home with a fair market value of $800,000. In February 2018, the taxpayer takes out a $250,000 home equity loan to put an addition on the main home. Both loans are secured by the main home and the total does not exceed the cost of the home. Because the total amount of both loans does not exceed $750,000, all of the interest paid on the loans is deductible.  However, if the taxpayer used the home equity loan proceeds for personal expenses, such as paying off student loans and credit cards, then the interest on the home equity loan would not be deductible.

Examples: IR 2018-32 15  Exam ple 2 : In January 2018, a taxpayer takes out a $500,000 mortgage to purchase a main home. The loan is secured by the main home. In February 2018, the taxpayer takes out a $250,000 loan to purchase a vacation home. The loan is secured by the vacation home.  Because the total amount of both mortgages does not exceed $750,000, all of the interest paid on both mortgages is deductible.  However, if the taxpayer took out a $250,000 home equity loan on the main home to purchase the vacation home, then the interest on the home equity loan would not be deductible. (This presenter finds this very curious)

Examples: IR 2018-32 16  Exam ple 3 : In January 2018, a taxpayer takes out a $500,000 mortgage to purchase a main home. The loan is secured by the main home. In February 2018, the taxpayer takes out a $500,000 loan to purchase a vacation home. The loan is secured by the vacation home.  Because the total amount of both mortgages exceeds $750,000, not all of the interest paid on the mortgages is deductible. A percentage of the total interest paid is deductible (see Publication 936).

Deductions, Exem ptions & Credits Item ized Deductions – Gifts to Charity • Up to 60% of AGI for contributions of cash or cash equivalents and up to 30% of AGI for contributions of long-term appreciated property donated to public charities and operating private foundations. • Up to 30% of AGI for contributions of cash or cash equivalents and up to 20% of AGI for contributions of long-term appreciated property to non-operating private foundations. • Charitable deductions for contributions to colleges or universities made in exchange for athletic event seating rights are no longer deductible. • Qualified Charitable Distributions (QCDs) from IRAs provide a tax benefit to taxpayers claiming the standard deduction. Examples later in presentation. 17

Deductions, Exem ptions & Credits Item ized Deductions – Miscellaneous Deductions • Miscellaneous itemized deductions subject to the 2% AGI threshold are no longer allowed. This includes • Unreimbursed employee expenses, tax preparation fees, investment expenses, safe deposit box, etc. • Miscellaneous itemized deductions NOT subject to the 2% AGI threshold are still allowed. This includes: • Casualty losses attributable to a federally declared disaster, federal estate tax on income in respect of decedent, and gambling losses up to the amount of gambling winnings 18

Deductions, Exem ptions & Credits Item ized Deduction Phase Out (“Pease” Lim itation) • The overall limitation on itemized deductions no longer exists. • In 2017, itemized deductions were phased out by 3% of the amount AGI exceeded $261,500 for single taxpayers and $313,800 for married taxpayers filing jointly. 19