YEAR-END TAX STRATEGIES · 2019-11-14 · Year-End Tax Planning •Prepayment of state and local...

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

mgaudet@cshco.com

513-241-3111

Larry Powell

lpowell@cshco.com

937-226-0070

Questions?