How Will The New Tax Bill Affect you? You May Be Surprised.

Have you had a chance to read the new 479 page tax bill?
 

I wouldn’t define it as a page turner. Like most new laws, the new tax bill is complicated and confusing.

We took it upon ourselves to break it down into a chart, showing the old law next to the new law. Which will give you an idea of how it will affect you.

tax bill image 1.jpg
Tax Bill
tax bill 3.jpg

 

Tax Law provisions unaffected by 2017 Tax Reform
 

FICA Tax increase – additional Medicare Tax of 0.9% on Taxpayers Wages received with respect to employment in excess of $200,000 for Single - $250,000 for Married Filing Jointly.
 

Net Investment Income – 3.8% add on tax on lesser of Net Investment Income or Adjusted GrossIncome (“AGI”) over $200K for Single - $250K for Married Filing Jointly
 

Action to Consider
 

  • Focus Income Tax Planning on Reducing or Deferring Income in order to avoid the above phase - outs and additional 3.8% and 0.9% taxes and to possibly take advantage of lower income tax rates and brackets under the new tax legislation described above.  If you will itemize your deductions in 2017 but will no longer itemize your deductions in 2018 and future years due to the elimination of these deductions and the increased standard deduction, as described in the above tax reform legislation, review your marginal tax bracket in 2017 and compare it to the new 2018 tax rates. After that review, determine whether deferring income and accelerating itemized deductions such as state and local income and property taxes and charitable contributions into 2017 makes sense. (See section on Charitable Planning below).  However, if you are projected to be in the AMT in 2017, you should not accelerate state and local income taxes, real estate taxes or miscellaneous itemized deductions such as investment expenses and employee business expenses because you will not receive a tax benefit from those deductions.
     
    • IMPORTANT NOTE:  Under the new tax reform legislation, taxpayers may not claim a deduction in 2017 on the prepayment of state income tax for 2018 and future years in order to avoid the dollar limitation applicable to tax years beginning after 2017.
       
  • Consider incomplete non-grantor trusts (e.g. NINGs and DINGs) to avoid state income tax.
     
  • Discuss with your accountant whether your estimated tax payments for 2017 are sufficient.
     
  • If you are selling a small business or other appreciated property, consider an installment sale if you want to defer income into 2018.
     
  • If you are a resident in a state that does not have a state income tax, consider accelerating large purchases to deduct any sales tax.
     
  • Consider like-kind exchanges to defer income to future years.  The new legislation limits Section 1031 like-kind exchanges to real estate beginning in 2018.
     
  • Accelerate medical expenses into 2017 to take advantage of the 7.5% of AGI limitation.
     
  • Incentive Stock Options: exercise in years where AMT doesn’t apply due to the higher exemption.
     
  • Clients who are doing business as or considering forming a pass-through entity ( e.g. S Corporation, LLC, Partnership or Sole Proprietorship) should compare the advantages and disadvantages of pass-through entities with the drop of C Corporation rate to 21%.
     
  • Areas to consider in reducing AGI
    •    Time Income if possible
      •      Split sales into 2 years to keep AGI under threshold.
      •      Installment sales.
      •       Sec.1031 like kind exchanges for real estate used in a trade or business or held for investment.
         
  •  Make sure the sale of your primary residence doesn’t generate capital gains which will put you over the threshold.
    •      Apply $250,000 ($500,000 for married couple) Capital Gain Exemption.
    •      2 year holding period (i.e. owned and lived in for 2 out of 5 last years).
    •      Include all expenditures that will increase basis.
       
  •    Hold highly appreciated assets until death
    •    Step up in income tax basis to fair market value at death.
       

RETIREMENT PLANNING

  • Maximize Contribution to Qualified Retirement Plans
    •  401(k): increase deferrals up to $18,000 this year ($18,500 in 2018).
    •  If age 50, contribute $6,000 on catch-up ($6,000 in 2018).
    •  Adopt a Profit Sharing Plan or add it on to your 401(k) before year-end.
    •  Defined Benefit Plan or Cash Balance Plan – consider adopting for your business before year-end.
    • DB and PS Plans can be funded after year-end up to due date of tax return (plus extensions)
    •  SEP – can be adopted and funded after year-end up to due date of tax return (plus extensions)
       
  •  Traditional and Roth IRA Contribution limit
    •    $5,500 this year ($5,500 in 2018) - additional catch-up of $1,000 ($1,000 in 2018).
    •    Income limitations on Roth contributions.
    •    Income limitations on traditional IRA deductible contributions where individual or spouse is an active participant in a Qualified Retirement Plan.
       
  •  Consider a Non-Qualified Deferred Compensation Plan.  You should be aware that the new tax law contains provisions relating to the inclusion in income of employer stock transferred to an employee.
     
  • Know what type of retirement income helps or hurts
    • Taxable payments from pension plans, IRAs and Social Security are not considered “Net
    • Investment Income” for purposes of the additional 3.8% tax.
    • These types of income do raise AGI which could result in other investment income being exposed to the tax.
    • Best income is a Roth IRA payout – it’s not income and is not taxable.
    • Also, Roth IRA payouts do not raise Medicare premiums or tax on social security payments.
       
  •  Consider Roth IRA conversion
    •  Conversion could make sense for Taxpayer who may have income above the thresholds later in retirement e.g. people waiting until age 70 to take social security and age 70 ½ for IRA withdrawals.  However, based on the new tax reform legislation, consider waiting until 2018 to convert if it will be beneficial from a tax savings standpoint.
       

IMPORTANT NOTE:  If you are considering a recharacterization of your Roth conversion, make sure you recharacterize back to your traditional IRA before the end of 2017 as the new legislation prohibits such recharacterization after the end of 2017.
 

INVESTMENT PLANNING
 

  • Tax Harvesting of Capital Losses
    • Up to amount of capital gains plus $3,000.
    • Excess losses can be carried forward.

Cautions:

(1) NJ does not allow loss carryovers so may want to limit losses to gains;

(2) Remember wash sale rules when buying replacement securities. Dividend may trigger loss disallowance.

  • Tax Location
    • Allocate income generating investments e.g. high yield bonds, REITs – (nonqualified dividends) and high turnover mutual funds/hedge funds in tax sheltered accounts such as
    • IRAs, 401(k)s, pensions, Tax Deferred Annuities.
    • Taxable accounts – fund with passive or low turnover equity strategies and municipal bonds.
       
  • Recognize what other income is exempt from the 3.8% tax
    • Tax-free muni bond interest (but not Capital Gain on sale of bonds).
    • Life Insurance proceeds, loans on cash value, surrenders up to basis.
    • Gifts and Inheritances.
    • Appreciated assets donated to charity.
    • Income from Real Estate activity earned by a “qualified professional” (750 hours actively managing Real Estate and these hours need to be more than 50% of working hours).
    • Income from Rental Real Estate activities where qualified real estate professional participates for more than 500 hours in a particular year.
    • Sub S Shareholders actively involved in the business (e.g. 500 hours a year), but not business income from trading financial instruments or commodities.
    • Active partners of a partnership – no 3.8% on business income, unless from trading financial instruments or commodities.
       

CHARITABLE PLANNING
 

  • Charitable Contributions
    • Charitable gift of appreciated stock rather than cash eliminates the capital gain on the sale of the stock which would increase AGI.
    • Qualified Charitable Distributions from IRAs became permanent law in 2015.  Clients who are already age 70 ½ and taking required minimum distributions (RMDs) from their IRAs can instead direct up to $100,000 to be distributed to charity.  The distributed amount counts towards the RMD obligation without being included in the client’s federal taxable income.  The recipient must be a §501(c) (3) charity and may not be a Donor Advised Fund or a private foundation. Causes you to lose the benefits of itemizing your deductions in future years
    • If the limitations on itemized deductions after 2017 as a result of the new tax legislation causes you to lose the tax benefits of itemizing your deductions in future years, consider a sizable gift to a Donor Advised Fund (DAF) in 2017 to the extent deductible, then recommend grants from the DAF to other charities in 2018 and later years.  Charitable gifts of appreciated stock would be preferable to cash.
       

ESTATE PLANNING
 

  • Gifting
    • Don’t forget that the annual gift tax exclusion of $14,000 ($28,000 if gift splitting) needs to be used by the end of 2017 or you lose it.  The annual exclusion increases to $15,000 for 2018.
    • In addition to annual exclusion gifts, consider making tax-free gifts using your lifetime gift tax exclusion of $5.49M per individual ($10.98M per married couple) over lifetime.  In 2018, the lifetime gift tax exclusion increases to $11.20M per individual ($22.40 per married couple).  Be sure that you take into account that there still is a step-up in basis at death for income tax purposes.
    • Planning is critical for families with large closely held businesses or net worth above the exemption amounts.
    • Doubling of exemptions sunsets in 2026 and could be changed sooner by a future Congress.
    • Gifts to Irrevocable Trusts – Remember gift-splitting and make sure you send Crummey withdrawal notices.
       
  • Trust Taxation
    • Net Investment Income retained in a trust is subject to 3.8% tax on income above $12,500.
    • This income level is retained under the new tax legislation for purposes of taxation at the
    • 37% rate and for purposes of the 3.8% tax. Consider making distribution of income to lower tax-bracket beneficiaries to reduce income tax liability.
       
  • Health Care Proxy, HIPAA Authorization, Living Will and Power of Attorney
    • A child becomes an adult when he or she reaches age of majority (age 18 in most states including NJ, NY and CT).  At that point you no longer have the authority to make medical decisions for him or her or to access your child’s medical records.  You should consider having that child execute a Health Care Proxy and a HIPAA Authorization to Disclose Medical Information giving you this authority in the event your child is incapacitated, along with a Living Will and a Durable Power of Attorney.

 

If you are interested in learning how to take advantage of the changes in the new tax bill and set yourself up for retirement you can attend one of our FREE private briefings.

salvo wealth.jpg

Approval Code. 20180113-040