Personal Tax Guide and Tax Tips for 2019
Audit | Tax | Advisory
| Introduction: Change May Be Coming
The Tax Cuts and Jobs Act of 2017 (“TCJA”) is in full effect, with some provisions scheduled to expire life expectancy. The new law specifies that after December 31, 2025. That being said, some new beneficiaries who inherit an account from a tax legislation was enacted this past year: decedent dying after 2019 must empty the account no later than ten years after the • The Further Consolidated Appropriations Act decedent’s death. Certain beneficiaries are was signed into law by President Trump on excluded from this new provision: December 20, 2019, a massive spending measure that enacted an estimated $426 billion in tax cuts • A surviving spouse, who can roll over an for both individuals and businesses. Several tax inherited account and treat it as his own. provisions that had expired at the end of 2017 • A minor child, but this exception ceases have been retroactively reinstated for 2018 and when the child reaches the age of majority. extended for 2019 and 2020. One notable law Then, the remainder of the distribution must change is that cancelled home mortgage debt on be completed within ten years of the age a principal residence of up to $2 million is excluded of majority. from taxable income. • A disabled person, who is unable to • The Setting Every Community Up for Retirement participate in any substantial gainful activity Enhancement Act (“SECURE”) was included due to a medically determined physical or in the spending measure that was enacted in mental impairment. December. This legislation is the first major change for retirement plans and IRAs since the Pension • A chronically ill person, who is unable to Protection Act of 2006. The following are some of perform at least two activities of daily living the “headliners” of the new law: as of the date of death of the IRA owner or plan participant. • Starting in 2020, there is no age limit for someone to make contributions to a traditional • Any individual who is not more than ten years IRA. Therefore, anyone who has income from a younger than the deceased participant or job or self-employment can make contributions. IRA owner. Prior law capped the age at 70½. • The “kiddie tax” was revised under the TCJA to • For anyone who attains age 70½ after 2019, the subject the unearned income of children to a tax required minimum distributions (“RMDs”) do based on the rates for trusts and estates. This not have to commence before age 72. Prior law provision was repealed under the new legislation, specified that the RMDs must begin by the end and the calculation of the kiddie tax reverts to prior of the year in which an individual attains age law. So, a child’s investment income over a set 70½. The first RMD can be postponed until April amount is taxed at the parents’ highest marginal 1 of the following year. rate. This new law goes into effect starting in 2020, but can be elected for 2018 and 2019. • The “stretch” IRA dies! Under prior law, individuals who inherited an IRA or retirement • The “Cadillac” tax imposed on businesses that plan could spread their RMDs over their sponsor health plans costing more than $11,200
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1 EisnerAmper 2020 Personal Tax Guide Follow usonFacebook, Twitter andLinkedIn. how thatwillimpactfamilies andtheirday-to-day whether COVID19 will becomeapandemic,and on many individuals.There isstillmuchuncertainty recent outbreak of thecoronavirus hasimpacted continueto besignificantissues.The imports resulting from U.S.-imposedtariffsoncertain Korea andIran,aswellpotentialtradewars overthethreat ofthe uncertainty warwithNorth withU.S.electionproceedings,over interference global threat of terrorism, theinvestigationof Russia concern tomanyindividualsandfamilies.The The international arena continuestobeof great approaching withcaution. theuseof cryptocurrency and fraudisreal. andbusinessesshouldbe Investors trace. Aswithmanyadvances,threat of corruption that are and canbedifficultto often misunderstood, currencies are complexassets on theriseasvirtual Enforcement byinvestors. activitiesare reported cryptocurrency, andwhetherincomeisproperly areRegulators payingmore attentionto taxexclusion. as welltheenhancedgift rate, bonusdepreciation, andIRCSec.179expensing, currently inplace,includingthe21%corporatetax 2020 totakeadvantageof favorableprovisions lines. Businessesandindividualsmaywanttouse legislation thatwere previously passedalongparty and mayhaveramificationsfortheTCJA andother the Senatewillundoubtedlyupsetstatusquo White House,theHouseof Representatives and willcontrol the Any changesinwhichpoliticalparty upcoming presidential andcongressional elections. The bigdomesticissuefor2020willbethe changes maybecoming. the taxlandscapeoverpastyear, andmore of Indeed, there activityin hasbeennoshortage excise taxhasbeenrepealed. thresholds) aswellthe2.3%medicaldevice for individualsand$30,150families(2019
2 mind in2020andbeyond. wealth tothenextgenerationshouldbetop-of- managing cashflow, andtransferringyourfamily’s Specific goalssuchasretirement planning, so thatyoucanachieveyourfinancialobjectives. that youpayattentiontoyourfinancialposition and geopoliticallandscape,itisextremely important impact of newlegislationandthecurrent economic times.Giventhe their wealthintheseuncertain future, andwhatcanbedonetosustaingrow concerned abouttheirchildren’s andgrandchildren’s Many familieswithwealthcontinuetobevery of paramountconcern tomanyfamilies. evidenced bythedevastatingwildfires inAustralia,is lives. Andof globalclimatechange,as course, and successfulyear! We wishyouandyourfamilyahappy, healthy, situation. apply toyourpersonal whichmight pleased todiscussanyopportunities this year. Asalways,ourtaxprofessionals willbe before proceeding withanytaxplanningtransactions thatyoucheckinwithyourtaxadvisor important the matterwithyourtaxadvisor. Itisespecially toyouruniquesituationandthendiscuss pertinent areas thatmaybemost use thisguideistoidentify 15,2020.Thebestwayto changes through February family’s wealth.Thisguideincludesallmajortaxlaw your accomplish yourfinancialgoalsandpreserve tominimizetaxexposure, opportunities to identify We havewrittenthisguidetoprovide youwitha tool EisnerAmper LLP Leader, ExemptTax Services & Family OfficeServices Tax Partner &Co-Leader CPAMarie Arrigo,MBA,
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TABLE OF CONTENTS
5 Tax Planning Strategies 109 Estate and Gift tax Planning
15 Tax Rate Overview 121 Tax Credits
21 Estimated Tax Requirements 127 Education Incentives
25 Alternative Minimum Tax 131 International Tax Planning and Reporting Requirements
31 Business Owner Issues and Depreciation 147 State Tax Issues Deductions Appendices 41 Capital Gains and Dividend Income 168 Appendix A: 2020 Federal Tax Calendar for Individual 51 Stock Options, Restricted Stock and Deferred Taxpayers Compensation 169 Appendix B: 2019 Federal Tax Rate Schedule 61 Small Business Stock 170 Appendix C: 2020 Federal Tax Rate Schedule 65 Passive and Real Estate Activities 171 Appendix D: 2019 Maximum Effective Rates 75 Principal Residence Sale and Rental 172 Appendix E: 2020 Maximum Effective Rates 81 Charitable Contributions 173 Appendix F: 2019 Federal and State Tax Returns Due 93 Interest Expense Dates
99 Retirement Plans 174 Appendix G: EisnerAmper Tax and Private Business Services Partners and Principals
Editor-in-Chief Marie Arrigo Contributors Jonathan Acquavella, June Albert, Peter Alwardt, Amanda Ammermen, Benjamin Aspir, Julia Bennetsen, Managing Editors Daniel Gibson, Tom Hall, Paul Bleeg, Lina Chan, Edward Choi, Cindy Feder, Robert Levin, Brent Lipschultz William Gentilesco, Matthew Halpern, Joseph Held, Co-Editors Gary Bingel, Angela Chen, Cindy Huang, Sue Huang, Seth Komitzky, Cindy Lai, Christopher Colyer, Denise DeLisser, Jeanne Marie Waldman, Holly Wong Jean Jiang, Aaron Lerner
This tax guide highlights tax planning ideas that may help you minimize your tax liability. This guide does not constitute accounting, tax, or legal advice, nor is it intended to convey a thorough treatment of the subject matter. The best way to use this guide is to identify those issues which could impact you, your family, or your business and then discuss them with your tax advisor. The discussion in this guide is based on the Internal Revenue Code as amended through February 15, 2020. Future legislation, administrative interpretations, and judicial decisions may change the advisability of any course of action. Because of periodic legislation changes, you should always check with your tax advisor before implementing any tax planning ideas. Any tax advice contained in this publication (including any attachments) is not intended for and cannot be used for the purpose of (i) avoiding penalties imposed by the Internal Revenue Code or (ii) promoting, marketing, or recommending any transaction or matter addressed herein.
© Copyright 2020 by EisnerAmper LLP. All rights reserved. This book, or portions thereof, may not be reproduced in any form without permission of EisnerAmper LLP.
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3
Tax Planning Strategies
5 In addition to saving income taxes for the current and future and future for the current taxes income In addition to saving years, effective tax planning can reduce eventual estate taxes, taxes, estate eventual reduce tax planning can years, effective managing your cash flow to help you meet objectives. your financial managing your cash flow maximize the amount of funds you will have available for retirement, for retirement, available funds you will have maximize the amount of reduce the cost of financing your children’s education, and assist you in financing your children’s of the cost reduce
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Strategies Tax Planning Tax EisnerAmper 2020 Personal Tax Guide • • • strategiestominimizeyourtaxesare: identifying youshouldconsiderwhen applicable. Thekeyfactors willnolongerbe strategies utilizedinprioryears sosomeof thaninpastyears, less taxpayers thetax the alternative minimumtax (“AMT”) willlikelyaffect a result of theTax CutsandJobsActof 2017(“TCJA”), a subsequentyear, extracautionmaybenecessary. As differentials However, betweenyears. iftaxratesrisein Tax planningallowsyoutotakeadvantageof taxrate are paid,orcontrolling whenincomeisrecognized. expenses can beaccomplishedbytimingwhencertain use.This cash forinvestment,business,orpersonal taxliabilitytoafutureyear’s year, thereby freeing up Tax planningstrategiescandefersomeof yourcurrent
federal long-term capital gains rate could be 23.8% federal long-term capitalgainsratecouldbe23.8% Contribution Tax onnetinvestmentincome,thetop is 20%.Includingtheadditional3.8%Medicare The current toplong-term capitalgainstaxrate the standard deduction. repealed andinsteadhavebeenconsolidatedinto income (“AGI”). Also,exemptionsare completely they maybelimitedbasedontheiradjustedgross deductions ontheirNYS incometaxreturns, though deduct real estatetaxesandmiscellaneousitemized deductible. Residentsof NewYork will still beableto expenses, andprofessional fees are nolonger such asinvestmentexpenses,unreimbursed business taxes,miscellaneousitemized deductions property In additiontothelimitationsonstateincomeand will applytomanytaxpayers. subject totheAMT. ItisnowlesslikelythattheAMT limited to$10,000andthedeductioncontinuesbe taxdeductions are 2017, stateincomeandproperty subject totheAMT. December31, Beginningafter they mostlikelydidnotreceive abenefitiftheywere taxesagainstfederaltaxableincome, and property were abletodeductthefullamountof stateincome California, Connecticut,Pennsylvania andNewJersey) taxes(suchasNewYork,income andproperty Prior to2018,whileresidents of stateswithhigh
6 •
opportunity zones).Gainscancomefrom any opportunity gains intoareas thatneed investment(qualified canreinvest fund.Investors theircapital opportunity the amountof thegainisinvestedinaqualified prior short-term and/orlong-term capitalgainsif Under theTCJA, maydefer taxon taxpayers could beasmuch40.8%in2019and2020. and thetopfederalshort-term capitalgainstaxrate • • • • • • • the followinggoals: Proper taxplanningcanachieve | • • • • • •
Maximize theamountof wealththatstaysin available taxcredits. Maximize taxsavingsbytakingadvantageof tax liability. Minimize theeffectof theAMTonthisyear’s deductions. Maximize thetaxsavingsfrom allowable Reduce anypotentialfuture taxliabilities. years’ needs. investment, business,orpersonal therebyyears, increasing availabilityof cashfor Defer thecurrent taxliabilitytofuture year’s Reduce thecurrent taxliability. year’s as yourretirement. available tofundyourchildren’s educationaswell Maximize theamountof moneyyouwillhave charities (ratherthanthegovernment). toyourbeneficiaries and/or the amountleft Minimize potentialfuture estatetaxestomaximize payments willberequired. Manage yourcashflowbyprojecting whentax taxes. Avoid penaltiesforunderpayment of estimated investment income. Minimize theMedicare ContributionTax onnet Minimize capitalgainstax. your family. Tax Planning Goals
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Tax Planning Strategies
Expenses You Can Prepay Can Prepay Expenses You property to charities with varying exempt status (such the as private foundations), can limit the amount of deduction allowed in a particular year. and Property Taxes and Local Income Taxes State up to A taxpayer may claim an itemized deduction of prepay or defer deductible expenses and when to defer prepay or collect taxable income. to realized steps to follow relating Tip 3 offers Tax and gains type of capital gains and/or losses, and the losses you should trigger. | most common deductible expenses you the are Here by December 31, if appropriate: can easily prepay Charitable Contributions can deduct charitable gifts cash up to 60% of of You such as clothing tangible personal property, your AGI, and your AGI and household goods, up to 50% of capital gain propertiescharitable gifts appreciated of apply to These percentages your AGI. up to 30% of gifts to work through made to public charities. Be sure the calculations though, as gifting types of different can also defer some of your tax liability to next year your tax liability defer some of can also later years)(or even rather than the giving you, money. your use of government, benefit, you need to project, gain the maximum To and tax situation for the current as best you can, your subsequent years. will help you identify This your tax long- realized year-to-date Your bracket for each year. and losses should be capital gains and short-term consider prior- to Be sure included in your projections. year loss carryforwards (if any). Based on these results, steps to take prior to year-end. you can decide what or not you should will be able to decide whether You deductions and defer income, defer expenses prepay capital losses, or lock in and accelerate income, realize capital gains. basic guidance for deciding when to Tip 2 offers Tax 7 RETURN TO TOC RETURN TO that is preserved for your family. on which state one is a resident of at date of at date of of on which state one is a resident planning techniques and are there death. However, wealth amount of strategies available to maximize the Gift the amount your reduce and estate taxes can by 40% to 50%, depending beneficiaries will receive your security trades to ensure that you receive the full that you receive your security trades to ensure the lowest capital gains tax rate. benefit of Under current law, the complex netting rules have the the law, Under current gains capital long-term your making of effect potential time carefully rates, so you must subject to short-term realized is deemed to be December 31 (or the year- is deemed realized the entity if a fiscal year). end of directly into a property, and funds must invest 90% and into a property, directly their capital into opportunityof zone properties. For entities, the date flow-through from gains realized in a qualified opportunityin a qualified days of fund within 180 The money cannot be invested those gains. realizing investment, whether that is from stocks, bonds, real real stocks, bonds, from whether that is investment, qualify for certain partnershipestate or To interests. investors capital gains must invest their tax breaks, Year-End Tax Planning Tips Planning Tax Year-End you receive income (to the extent you have control) the extent you have control) income (to you receive your taxes. Timing expenses and income can reduce and timely action. Timing when you pay deductible expenses and when tax law for each year to determine the best path totax law for each year to determine these ideas requires many of Implementation of follow. thoughtful planning tax laws, of knowledge a thorough expenses and tax rates will be for the current and expenses and tax rates will be for the current subsequent years and then applying the applicable you identify planning ideas that might apply to your the strategies in mind that many of situation. Keep income, involve knowing what your approximate tax as well as any potential future taxes. While this charttax as well as any potential future is not all inclusive, it is a good starting point to help Tax Tip 1 provides a snapshot of key strategies geared key strategies geared a snapshot of Tip 1 provides Tax helping you achieve your planning goals. It toward year’s your current includes ideas to help you reduce | • • EisnerAmper 2020 Personal Tax Guide Tax Tip This yearyouare intheAMTandnextyou The regular taxrateappliesthisyearandis You havenetrealized capitalgainsthisyear. You havenetrealized capitallossesthisyear Your regular taxratewillincrease nextyear Your regular taxratewillbethesameor Your passiveactivitylossesexceedyour You haveincentivestockoptions thatyou You a concentratedlow- wanttodiversify You are contemplatingpurchasing new A penaltyforunderpaymentof estimated 1. Key Tax PlanningStrategies and theAMTwillnotapplyineitheryear. taxes willapply. will besubjecttoahigherregular taxrate. will applynextyear. higher thantheAMTratethatyouexpect passive income. basis stockpositionandavoidpayingtaxes business equipment. can exercise. currently. from lastyear.or losscarryforwards in eitheryear. lower nextyearandtheAMTwillnotapply Situation • • • • • • • • • • • • • • • • • Planning idea • • • • • December 31. Withhold additionalamountsof taxfrom yourwagesbefore in2020.) be placedinservice Sec. 179deductionsavailablethisyear. (Qualifiedpurchases must Accelerate thepurchases into2020totakeadvantageof IRC fund. Considering Investinginaqualifiedopportunity on netinvestmentincome. Consider theimplicationsof theMedicare ContributionTax Avoid washsalerules. Consider taximplicationsof nettingrules. Use abondswaptorealize losses. it. if marketconditionsjustify Sell securitieswithunrealized lossestooffset thegains– thereby lockingintheappreciation. securities tooffset realized lossesandlosscarryforwards, Consider recognizing capitalgainsbysellingappreciated Accelerate income. with thehighertaxrate–assumingyoucanitemize. Consider bunchingcharitablecontributionsintheyear Defer income. with thehighertaxrate–assumingyoucanitemize. Consider bunchingcharitablecontributionsintheyear warrants acceleratingtaxpayments. Accelerate income,butonlyifthetaxrateincrease Defer deductions. Defer income. Prepay deductions. the impactof theMedicare ContributionTax onnetinvestmentincome. to deductthesuspendedlosson that activity. However, consider Dispose of anactivitythatisgeneratingpassive lossesinorder stock andtheexercise pricewillnotput youintotheAMT. period, butonlyifthespread betweenthemarketpriceof the thelong-term holding Consider exercising youroptionstostart to deferthetaxwhilebenefitingacharityof yourchoice. to sellthestockinexchangeforanannuity. Thiswillallowyou Consider usingacharitableremainder trustthatwillallowyou Have withholdingtakenoutof yourretirement plandistribution. the paymentamount,ifnecessary. 15andincrease estimatesdueJanuary quarter Prepay fourth 8
Detailed discussion
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Tax Planning Strategies
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Detailed discussion
9 annuity trust (“GRAT”). a grantor retained Create Set up a family limited partnership (“FLP”) or family limited liability company (“FLLC”). rates. interest Make loans to your beneficiaries at minimum required as long as tax-free Establish and fund a 529 plan that can grow have you use the funds to pay qualified education expenses. You up to $75,000 (or $150,000 if your spouse the ability to prepay without incurring a gift tax. consents to gift-splitting) by making school tuition gift-tax-free college or private Prepay to the educational institution. payments directly advantage of the best plans available to you prior to December 31. the best plans advantage of Consider converting in the current your traditional IRA into a Roth IRA since the converted tax liability, this will cause a current However, year. the conversion. of amount is subject to income tax in the year $15,000 to each individual in 2020. These giftsMake gifts of would not be subject to gift tax. to the providers. beneficiaries’ tuition and medical expenses directly Pay $11.58 million for 2020. Use your cumulative lifetime gift tax exclusion of For subsequent years, the exclusion will be indexed for inflation, using the chained Consumer Price Index (“CPI”). conservation estate or art in real interest easement, remainder work to a museum. to fund Sell marketable securities with little or no appreciation replacement debt to purchase your needs, and then use margin debt will be deductible, subject to on the securities. The interest the may also reduce limitations. The interest investment interest on net investment income. Contribution Tax Medicare partnerships, distributions, if available, from limited liability Take you have already companies, or S corporations on income that have sufficient tax basis and are you paid taxes on. Be sure “at risk” in the entity. and take accounts Maximize your contributions to your retirement Donate appreciated securities you have held for more than more securities you have held for Donate appreciated one year. a charitable trust or a private foundation, Consider establishing fund. a donor-advised or take advantage of Consider donating partial in certain interests assets such as a • • • • • • • • • • • • Planning idea • • •
designated beneficiaries during your lifetime. deferred nature of retirement accounts. retirement of nature deferred Situation little or no tax impact when you or your improvements to your home in excess of the to your in home excess of improvements or grandchildren’s qualified education costs. or grandchildren’s contributions. beneficiaries take distributions later. estate tax. your assets from protect position your IRA now so that there will be position your IRA now so that there mortgage limitations or to pay tax liabilities.
appreciate over time, and you want to appreciate 1. Key Tax Planning Strategies Tax 1. Key You want to provide for your children’s and/ for your children’s want to provide You You want to transfer assets to your You You have a sizeable estate and want to You You expect the value of your IRA to expect the value of You You want to take advantage of the tax- want to take advantage of You You need funds for personal use, such as You You would like to make significant charitable would You Tax Tip Tax RETURN TO TOC RETURN TO EisnerAmper 2020 Personal Tax Guide Before theendof 2020,acceleratethepurchases of Business Equipment investment income. also reduce theMedicare ContributionTax onnet year-end isonlydeductibleifactuallypaid. Thismay interest before December31,sinceinterest accruedat Before theendof 2020,besure topayanymargin Margin Interest year inorder toacceleratethededuction. inthecurrent paymentfornextJanuary mortgage Before theendof 2020,considerprepaying your Interest Mortgage December31,2025. beginningafter years to thelimitationof 2%of AGI willbesuspendeduntil All miscellaneousitemizeddeductionsthatare subject Miscellaneous Itemized Deductions taxespaid. state andlocalproperty aggregate of (1)stateandlocalincometaxes(2) $10,000 ($5,000formarriedfilingseparately)the Tax Tip (unless youhavelong-termlosses *The chart assumes your regular tax rate on ordinary incomeishigherthanthemaximum AMT taxrateof assumes yourregular 28%. taxrateonordinary *The chart Legend
self-employed consultingfees, self-employed expenses Charitable contributions,mortgage and netshort-termcapitalgains retirement plandistributions, Nature ofdeduction Income suchasbonuses, offsetting thegains) interest, investmentinterestand or income 2. AMTTax PlanningStrategies
= Prepay before theendof thecurrent year/Deferintonextyearorlater/Collectbefore theendof the year.
year ornextandyear’staxrate as thecurrentyear will bethesame or willdecrease You will not be in the AMT this You willnotbeintheAMT Prepay Defer 10 salary orbonusesintothecurrent year.salary You wouldneed rate,youcanaccelerate to belowerthannextyear’s If youanticipateyourcurrent incometaxrate year’s orBonuses Cash Salaries year thatyouare inalowertaxbracket. can gaintheadvantageof havingtheincometaxedina you maybeabletocontrol thetimingof receipt soyou deductions, buthere are sometypesof incomethat Timing incomecanbemore difficultthantiming | the intendeddeduction. intheyearof mustbeplacedinservice the property limitations.Toallowances, subjecttocertain qualify, business equipmenttotakeadvantageof expensing to defersuchincomeuntilnextyearprovided the lower thanyourcurrent rate,itmaymakesense year’s that canbeaccelerated.However, rateis ifnextyear’s to determine ifthere are strictlimitationsonamounts increase Income You CanAccelerate orDefer Collect Defer will
this year Collect Defer only
You areintheAMT* next year this year Prepay Defer and RETURN TORETURN TOC next year Prepay Defer only
Tax Planning Strategies
same or substantially identical security is purchased is purchased same or substantially identical security or after the security that 30 days before the sale of the loss. created losses in your bond Consider a bond swap to realize portfolio. similar This swap allows you to purchase while maintainingbonds and avoid the wash sale rule your overall bond positions. the current year if you expect next year’s year if you expect tax rate to the current not strategy if you do Only consider this be higher. otherwise than the position for more intend to hold capital for the long-term making it eligible 12 months, Medicare the additional 20%, exclusive of gain rate of to apply you may be able However, Contribution Tax. of in the offsetting may result the netting rule which in a tax resulting gains, losses to short-term long-term than 20%. 37% in 2020 rather savings of in a qualified opportunityConsidering investing fund. Review your portfolio if you have any to determine as worthless,securities that you may be able to claim the the end of giving you a capital loss before thereby A similar rule applies to bad debts. year. is disallowed if the wash sales. Loss recognition Avoid • • • • 11 as 37% in 2020 plus 3.8% Medicare Contribution Tax on net investment income). Contribution Tax as 37% in 2020 plus 3.8% Medicare Identify and take the necessary these securities and debts the that steps to ensure Consider taking these steps if held short-term, gains, preferably unrealized Sell securities to recognize loss positions first, losses equal to the net gain, plus $3,000. Use long-term Take loss positions losses equal to the net gain, plus $3,000. Use long-term Take gains (taxed at a rate as high offsetting short-term of first to gain the benefit up to the amount of your losses, less $3,000. up to the amount of loss positions. then short-term substantiation. by having the proper year, current deductible in the losses are
If you are married filing separately, substitute $1,500 for $3,000 in the above tip. separately, married filing If you are
Note: Worthless securities and bad debts Both short-term and long-term gains, or and long-term Both short-term losses long-term gains in excess of short-term Long-term gains in excess of short-term losses short-term gains in excess of Long-term If you have have If you losses and long-term Both short-term 3. Year-End Capital Gains and Losses 3. Year-End Tax Tip Tax RETURN TO TOC RETURN TO consider selling the positions and realize the gains in consider selling the positions and realize If you have unrealized net short-term capital gains, net short-term If you have unrealized The following ideas can lower your taxes this year:The following ideas can lower your • the charitable contribution deduction. Capital Gains exclude the distribution from income; thereby reducing reducing income; thereby exclude the distribution from limit or disallowyour state income taxes in states that age 70½ are allowed to make tax-free distributions allowed to make tax-free age 70½ are accounts individual retirement up to $100,000 from of an individual to(“IRAs”) to public charities. This allows year, you may consider taking a taxable distribution you may consider taking a taxable year, or not required, plan even if it is your retirement from at least consider a Roth IRA conversion. Individuals of Retirement Plan Distributions Retirement 59½ and your tax rate is low this over age If you are rate, you can accelerate income into the current year. year. income into the current rate, you can accelerate Otherwise, want to defer such income. you would Consulting or Other Self-Employment Income or Other Self-Employment Consulting business and you anticipate a cash-basis If you are year’s tax rate to be lower than next year’s your current income is not constructively received (made available to (made available received not constructively income is year). current you in the EisnerAmper 2020 Personal Tax Guide you meet certain eligibility requirements. you meetcertain the parent orrelative asyourdependent,assuming expenses onyourtaxreturn evenifyoudonot claim home foraparent orotherrelative, youcantakethese care. Ifyouare oranursing payingaprivatenurse Medical expensesincludehealthinsuranceanddental expenses intoasingleyearcouldresult inataxbenefit. 10% of AGI.Therefore, bunchingunreimbursed medical 2019 and2020.Thereafter, to thethreshold willrevert Act, the7.5%of AGI threshold hasbeenretained for As aresult ConsolidatedAppropriations of theFurther Medical Expenses | bracket thisyearthannextyear. in thecurrent yearifyouexpecttobeinalowertax you maywanttosellthesebillsrecognize income If youhaveU.S.Treasury Billsmaturingearlynextyear, U.S. Treasury BillIncome much of thattaxtofuture years. payments youreceived, thereby allowingyoutodefer taxable gaininthecurrent yeartotheextentof the of would allowyoutorecognize the onlyaportion theincome.This installment salemethodtoreport payments wouldbeduenextyear. You canusethe the terms of thearrangementsothatmostof the atagain,youwouldnormally structure traded property If youare sellingreal estateorothernon-publicly Sales Property Real Estate andOtherNon-PubliclyTraded • BunchingDeductions not apply. Since thesalesare atagain,thewashsalerulesdo them backtoeffectivelygainastep-upinbasis. at themore favorableratethisyear, andthenbuying to realize long-term capitalgainsthatmaybetaxed Similarly, youmayconsidersellingsecuritiesthisyear
12 deductions. in maximizingthetaxbenefitof suchcharitable yearmaybeeffective a charitabletrustinparticular funding adonor-advised fund,privatefoundationor amounts, and he or she will be able to itemize. Similarly, charitable contributionsexceedthestandard deduction tocharitiesinoneyear,bunch gifts sotheindividual’s for charitablecontributions,itmightbebestto deductions. Thus,inorder tomaximizethededuction of eitherhis/herstandard deductionoritemized substantially. Anindividualcandeductthelarger same time,thestandard deductionhasincreased beenuntouchedbythenewlaw.has virtually At the the charitablecontributionisexception,asit have beeneliminatedorlimited.Thedeductionfor As aresult of theTCJA, manyitemizeddeductions Contributions Charitable depreciation deductions. discussion inthechapteron businessownerissuesand conditions.Seefurther making aloanundercertain limitation, considercontributingcapitaltotheentity or already beentaxed ontheincome.Ifthere isabasis corporation ifyouhavetaxbasisintheentityand limited liability company (“LLC”)from or S a partnership, rules. Or, youmaybeableto take tax-free distributions belimitedbyyourtaxbasisorthe“atrisk” otherwise It maybepossibletodeductlossesthatwould | the amountof thepenalty. the endof theyearinorder toeliminateorminimize or makeanestimatedtaxpaymentbetweennowand timely basis,considerincreasing yourwithholdingand/ for failure topayyourcurrent-year taxliabilityona If youexpecttobesubjectanunderpaymentpenalty | Take Tax-Free Distributions Make Estimated Tax Payments Utilize Business Losses or Utilize BusinessLossesor Adjust Year-End Withholding or
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Tax Planning Strategies
The amount of the lifetime gift exclusion will beThe amount of Tax Strategies for Business Owners Strategies Tax cash flow and want to accelerate your deductions, you card. credit on the company’s the purchases can charge This will allow you to take the deduction in the current made, even though you may is year when the charge Note: Note: adjusted annually for the chained CPI. | Income and Deductions Timing of a cash-basis business and expect your current If you are year’s than next year’s tax rate to be higher rate, you can delay billing until January next year for services of the performed to take advantage of already in order even if you expect Similarly, lower tax rate next year. next year’s rate to be the same as this year’s rate, you to defer the should still delay billing until after year-end or also have the option to prepay You tax to next year. the to realize defer paying business expenses in order deduction in the year that you expect to be subject to the higher tax rate. This can be particularly significant if (and placing in service) considering purchasing you are about your concerned business equipment. If you are without using any of your lifetime exclusion. Also, try exclusion. Also, your lifetime any of without using to giftsmake these year’s to transfer that early in the year your estate. of out appreciation cumulative the increased Furthermore, because of lifetime gift to make exclusion in 2020, you may wish $11.58additional gifts fully utilize such exclusion of to for married couples). The lifetimemillion ($23.16 million the TCJA; gift of has doubled as a result exclusion 2025 reverting back it will sunset at the end of however, giftto the maximum lifetime exclusion in effect before When combined with other became law. the TCJA estate and gift techniques such as a grantor planning annuity trust, tax planning strategies may retained enable you to avoid estate and gift taxes and transfer wealth to other family members (who deal of a great or may needmay be in a lower income tax bracket financial assistance). 13
RETURN TO TOC RETURN TO Estate Planning Estate Incentive Stock Options Stock Incentive Passive Losses Passive own separate accounts). By making these gifts, you your estate can transfer substantial amounts out of of up to $15,000 per year, per individual ($30,000 if you up to $15,000 per year, of election, or $15,000 married and use a gift-splitting are each spouse if the gift his and her from from is funded If you have not already done so, consider making your If you have not already annual exclusion gifts the to your beneficiaries before gifts allowed to make tax-free are You the year. end of | much as to be subject to the AMT. defer the exercise. Conversely, if you are not in the AMT if you are Conversely, defer the exercise. consider accelerating the exercise you should this year, so to not exercise keep in mind the options; however, of generally at 28%. If you expect to be in the AMT thisgenerally at 28%. If you expect to be should you to be next year, year but do not project market value of the stock and your exercise price is a the stock and your exercise market value of in AMT purposes. If you are item for tax preference you will have to pay a tax on that spread, the AMT, Review your incentive stock option plans (“ISOs”)Review your incentive stock option ISOs of timed exercise A poorly prior to year-end. can be very between the fair costly since the spread | potential tax benefit of 40.8% in 2020 inclusive of 40.8% in 2020 inclusive of potential tax benefit of Contribution Tax. the Medicare the Medicare Contribution Tax with all the previously with all the previously Contribution Tax the Medicare ordinary offsetting suspended losses income at a the disposition, you can receive the benefit of having of the benefit can receive the disposition, you taxed at 23.8% (28.8% if the capital gain the long-term inclusive of recapture) depreciation gain is subject to significant since all losses become deductible whensignificant since all is a gain on Even if there the activity. you dispose of you do not materially participateyou do not in excess of that are activities, consider these types of your income from can be The tax savings the activity. disposing of | in which a business from passive losses If you have EisnerAmper 2020 Personal Tax Guide deductions. of astatethatlimitsordisallowsallof youritemized all of yourbusinessinterest, evenifyouare aresident the incomefrom the business.Thisallowsyoutodeduct itemized deduction.Theinterest isadirect reduction of “above-the-line” asbusinessinterest ratherthan asan –youcandeducttheinterest materially participate or LLC involvedinatradeorbusinesswhichyou capital requirements Scorporation of apartnership, expenditures –includingdebtusedtofinancethe If youhavedebtthatcanbetracedtoyourbusiness Business Interest addback. state returns whileIRCSec.179expenseisonlyapartial Note: 100% of theirbusinessinterest expenses. andrealyears estatebusinessesthatelecttodeduct gross receipts of more than$25millionfor thepriorthree depreciation isnotallowedforbusinesseswithannual eligible forthebonusdepreciation. Forexample,bonus Note: purchase). priortothe as thetaxpayerdidnotuseproperty (aslong of toincludeusedproperty qualifiedproperty last year at20%bonus.The TCJA expands the definition 20% eachyear, beginningin2023with2026beingthe 27, 2017.Theallowablebonuspercentage decreases by September after placedinservice 100% forproperty up to$3,590,000.Bonusdepreciation wasincreased to threshold, thedeductionisphasedout,dollar-for-dollar, reaching this doesnotexceed$2,590,000.After service placedin under IRCSec.179is$1,000,000ifproperty 2020. Theamountallowableforfulldeductionin2020 in business equipmentpurchased andplacedinservice Tax benefitsare availableforimmediatedeductionof Business Equipment December31. after not actuallypaytheoutstandingcredit card billuntil The bonus depreciation is an addback on most The bonusdepreciation isanaddbackonmost Under theTCJA, somebusinessesmaynotbe 14 • • apply to: adjusted taxableincome(“ATI”). Suchlimitationdoesnot Note: basis businesses. for in2021are allowabledeductionsin2020forcash Credit card purchases madebefore year-end andpaid charges thatrelate tothebusinessitemspurchased. of thefinance rules thatallowyoutodeducttheportion as additionalloanstothebusiness,subjecttracing the company’s credit card. Thesepurchases are treated that youpurchase foryourbusiness(asanowner)using Business interest alsoincludesfinancecharges onitems excess to be carried forward indefinitely.excess tobecarriedforward offset 80%of taxable incomeinfuture withany years can nolongerbecarriedback.NOLsusedto December31,2017,NOLs after Beginning intaxyears asanetoperatingloss(“NOL”).will becarriedforward Anylossesabovetheseamounts $255,000 (allothers). are limitedto$510,000(marriedfilingjointly)and Excess lossesfrom allof yourtradesorbusinesses Excess BusinessLossesandNetOperating AGI,owner’s itdoesreduce thetaxableincome. Though thisdeductionisnotallowedincalculatingthe income, subjecttovariouslossanddeductionlimitation. business generallyequalto20%of qualifiedbusiness ofand owners pass-through entitiesof a“qualified” provides anIRCSec.199Adeductionforsoleproprietors connected toaU.S.business.Through 2025,theTCJA as netincomeanddeductionsthatare effectively Qualified businessincome(“QBI”)isgenerallydefined Qualified BusinessIncomeDeduction Electing real property tradeorbusiness Electing real property exceed $25million Businesses withaveragegross receipt thatdonot Interest expensededuction islimitedto30%of RETURN TORETURN TOC Tax Rate Overview
15 than 30 years,taxpayers. on individual and had significant impacts The Tax Cuts and Jobs Act of 2017 was the largest tax reform in more in more reform tax 2017 was the largest Cuts and Jobs Act of The Tax Under the TCJA, the effective rate of federal tax on income was reduced, reduced, was tax on income of federal rate Under the TCJA, the effective certain deductions were eliminated and credits were enhanced. The effective rate The effective enhanced. were certain eliminated and credits deductions were of federal tax on income ranges from 0% to 50% for the tax years 0% to 50% for the tax 2019 and 2020. from ranges on income tax federal of
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Overview Tax RateTax EisnerAmper 2020 Personal Tax Guide • are: Medicare ContributionTax onnetinvestmentincome) The mostcommonfederaltaxrates(exclusiveof the • • • • • • • • • • • including: 2019 and2020dependingonmanyfactors, from notaxatalltoarateof approximatelyvary 50%in the benefityoureceive from yourdeductions—can The rateof taxyoupayonyourincome—aswell
gains andqualifieddividends are basedontheir preferential taxratesforthenetlong-term capital UndertheTCJA,for singleindividualtaxpayers. the married filingjointand$434,550($441,450in2020) taxable incomeover$488,850($496,600in2020)for with and qualifieddividendsisapplicabletotaxpayers For 2019,the20%taxratefornetlong-term gains (QBI) andsubjecttoQBIdeduction? Is yourincomeconsidered qualifiedbusinessincome Are credits availabletooffset yourtax? your taxablebase? Is anyof yourincomeeligibletobeexcludedfrom the itemizeddeductionthreshold? yeartomeet deductionsinaparticular and certain Should youaccelerateyourcharitablecontributions standard deduction? Are youtakingtheitemizeddeductionsor Is anyof yourincomesubjecttoself-employment tax? Are yousubjecttotheMedicare Wage Surcharge? net investmentincome? Are yousubjecttotheMedicare ContributionTax on Are yousubjecttotheAMT? capital gainsratebecauseof nettingrules? Are youlosingtheadvantageof thelowerlong-term capital gainincome? dividendincomeornetlong-term income, qualifying What isthenature of yourincome?Isitordinary 16 • • • 2020 formarriedfilingjointly andsingletaxpayers. incomein2019 and brackets thatapplytoordinary 1showsthedifferent tax investment income.Chart inclusive of the Medicare ContributionTax onnet therefore, couldbetaxedatarateashigh40.80%, incomeand, subject tothesamerateasordinary For 2019and2020,netshort-term capitalgainsare LLC orScorporation. partnership, incomepassingthroughof toyoufrom a ordinary Security benefits,alimony, andyourdistributiveshare plan distributions,rental income,taxableSocial dividendincome,taxableretirementnonqualifying and self-employment income,interest income, incomeprimarilyincludeswages,business Ordinary |
Ordinary Income Rates Ordinary separately). filing and$125,000formarriedtaxpayers taxpayers earning more than$200,000($250,000formarried Medicare Tax (orHospital InsuranceTax) paid bythose income. Also,there isanother0.9%Additional employed, therateis2.9%of allself-employment on allincomeearned foremployees.Fortheself- of theFICAtaxremains portion unchangedat1.45% (12.4% forself-employed individuals). TheMedicare incomelistedhereinunchanged at6.2%onthefirst Security FICAtaxthatemployeespayremains for self-employment of Social income.Theportion for 2020)of wagesisapproximately 46%and50% $132,900($137,700 For 2019,thetoprateforfirst $510,300 ($518,400in2020)is37%. withtaxableincomeover and forsingletaxpayers taxable incomeover$612,350($622,050in2020) as short-term with capitalgainsformarriedfilers income,such For 2019,thehighestrateforordinary incomesubjecttotheAMT.28% forordinary incometaxrates. ordinary own taxbracketandtheyare nolongertiedtothe RETURN TORETURN TOC Tax Rate Overview - 10% 12% 10% 12% 37% 37% 22% 32% 35% 22% 32% 35% 24% 24% Rate (Tax on Rate (Tax on Marginal Tax Next Dollar) 987.50 1,975.00 4,617.50 9,235.00 29,211.00 33,271.50 14,605.50 47,367.50 94,735.00 66,543.00 167,307.50 156,235.00 Single Base Tax $ 0 $ 0 9,875 19,750 40,125 80,250 85,525 171,050 163,300 414,700 518,400 207,350 622,050 326,600 Married Filing Jointly or Qualifying Widow(er) Jointly or Qualifying Filing Married Income Taxable Taxable $ 0 $ 0 SCHEDULES RATE TAX FEDERAL 2020 17 10% 12% 10% 12% 37% 37% 35% 22% 32% 35% 22% 32% 24% 24% Rate (Tax on Rate (Tax on Marginal Tax Next Dollar) 970.00 1,940.00 4,543.00 14,382.50 28,765.00 93,257.00 65,497.00 32,748.50 46,628.50 9,086.00 153,798.50 164,709.50 Single Base Tax $ 0 $ 0 9,700
19,400 78,950 39,475 84,200 160,725 510,300 612,330 168,400 204,100 321,450 408,200 Married Filing Jointly or Qualifying Widow(er) Jointly or Qualifying Filing Married
tax rates for married taxpayers filing separately and taxpayers filing as head of house See Appendix B for detailed 2019 tax rate schedules, including tax rates for married taxpayers filing separately and taxpayers as head filing Income Taxable Taxable $ 0 $ 0 SCHEDULES RATE TAX FEDERAL 2019 Note: Note:
hold. See Appendix C for detailed 2020 tax rate schedules, including tax rates for married taxpayers filing separately and taxpayers filing as head of household. of taxpayers head taxpayers and as married separately filing for filing rates tax including schedules, rate tax 2020 detailed for C Appendix See hold. 1. 2019 and 2020 Federal Tax Rate Schedules 2020 Federal Tax 1. 2019 and Chart RETURN TO TOC RETURN TO EisnerAmper 2020 Personal Tax Guide • • are thebasicrules: chapter oncapitalgainsanddividendincome.Buthere income.Thisisdiscussedindetailthe than ordinary are eligibletobetaxedatlowermaximumtaxrates Long-term capitalgainsandqualifieddividendincome | CapitalGainandDividend Income Rates term capital gains (20% for married taxpayers with with term capitalgains(20%formarriedtaxpayers taxed atthesame15%ratethatappliestonetlong- corporations andqualifiedforeign corporationsare For 2019,dividendsreceived from most domestic net long-term capitalgains. Contribution Tax onnetinvestmentincome,including than 12months.There isanadditional3.8%Medicare treatment, youmusthaveheldtheassetformore may stillapply. To benefitfrom long-term capitalgains dividend income.Insomecases,theformer 15%rate be discussedinthechapteroncapitalgainsand and theAMT—withseveralnotableexceptionsto thresholds) forboththeregular tax exceeds certain or amaximumrateof 20%(ifyourtaxableincome Net long-term capitalgainsare taxedat0%,15% **Includes 0.9%HospitalInsuranceTax income thresholds. foramountsabovecertain * Thetaxrateisactually2.9%,butonly 92.35%of self-employment incomeissubjecttotheMedicare Tax. Chart 2. SocialSecurityandMedicareTaxes for2019and2020 Social Security2019 Medicare 2019 2020 2020 Maximum Income Subject toTax No limit $132,900 No limit $137,700 18 2.35%/No limit** 1.45%/No limit 2.35%/No limit** 1.45%/No limit 6.2%/$8,537.40 each 6.2%/$8,239.80 each Employer andEmployee separately and taxpayers filingasheadofseparately andtaxpayers household. filing schedules, includingtaxratesformarriedtaxpayers household. SeeAppendixCfordetailed2020taxrate filingasheadof filing separatelyandtaxpayers schedules, includingtaxratesformarriedtaxpayers Note: qualified dividendsalsoappliestotheAMT. While 15% or20%rateonnetlong-term capitalgainsand maximum rateof 28%.Asmentionedabove,the incomesubjecttotheAMTistaxedata Ordinary | Alternative MinimumTax to dividendincome. net investmentincomethatmayalsoapply is anadditional3.8%Medicare ContributionTax on incometaxrates.There subject tothehigherordinary market fundornonqualifiedforeign corporations,are of 15%(or20%),suchasdividendsfrom amoney forthepreferentialDividends thatdonotqualify rate and $434,550($441,450in2020)forsinglefilers). taxable incomeover$488,850($496,600in2020) Portion See Appendix B for detailed 2019 tax rate See AppendixBfordetailed2019taxrate Tax Rates/Maximum TaxCost Tax Rates/Maximum
3.578%/No limit** 2.678%/No limit* 3.578%/No limit** 2.678%/No limit* 12.4%/$17,074.80 12.4%/$16,479.60 Self-Employed
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Tax Rate Overview
Med Investment IncomeInvestment Medicare Wage Surtax Wage Medicare onNet Tax Contribution icare | and Education Reconciliation Act of The Health Care for a 3.8% tax on net investment income 2010 provided higher income taxpayers for years beginning in 2013. of (with your AGI The additional 3.8% tax will apply if certain $250,000 for a modifications) is in excess of (and qualifyingjoint return widow(er) with dependent child), $200,000 if single, and $125,000 if married filing separate. The tax will apply to the lesser of in excess your net investment income or your AGI amounts stated above. the applicable threshold of dividends, Net investment income includes interest, income from rents, capital gains, annuities, royalties, trading in passive business activities and income from financial instruments or commodities. The amount of by expenses may be reduced investment income gross that income. Such expensesassociated with earning allocable state and local taxes, and include directly 2025, For 2018 through expenses. investment interest suspended the miscellaneous itemized deductions are due to the TCJA. | applies to Tax An additional 0.9% Hospital Insurance self- income. This tax applies to wages and/or earned married $250,000 for employment income in excess of $125,000 for married filing couples filing joint returns, and $200,000 for all other taxpayers. separate returns for inflation. not indexed amounts are The threshold 2019 and 2020, the federal effective tax rate on self- effective tax rate 2020, the federal 2019 and on the first as high as 50% income can be employment such income, compared of ($137,700 for 2020) $132,900 wages (after46% for income from to about including Security and Medicare Social of the employee share is spread a greater is not there taxes). The reason a deduction against you receive primarily because tax you pay. the self-employment for 50% of AGI 19 RETURN TO TOC RETURN TO Employment Taxes Taxes Employment Kiddie Tax Tax Kiddie | also income are wages and self-employment Your taxes. The subject to Social Security and Medicare income subject to the Social Security tax is amount of limited (see Chart income is subject to 2), but all earned self-employed, If you are Contribution Tax. the Medicare taxes almost Social Security and Medicare of your share doubles because you pay both the employer’s and for portions these taxes. As a result, of employee’s For 2020, and beyond, the portion the taxable income of exceeds income and that net unearned that consists of ($2,200 for 2019 and income threshold the unearned is taxed at the2020) is subject to the kiddie tax and federal income tax rate. That rate can marginal parents’ be as high as 37% for ordinary income and short-term The gains and dividends. gains and 20% for long-term Contributionchild may also be subject to the Medicare on net investment income (see below). Tax | into signed Trump On December 20, 2019, President law the Setting Every for Retirement Community Up SECUREEnhancement Act (“SECURE”). In effect, the kiddie tax of the provisions repeals retroactively kiddie the pre-TCJA and reinstates imposed by the TCJA again based on the once tax calculations so that it’s SECURE is effective for 2020 rate. marginal parents’ to apply any is an option there and beyond. However, and amended kiddie tax savings to the 2019 tax returns 2018 returns. the AMT rate on ordinarythe AMT than the income is lower to a higher 37%, if it applies tax rate of highest regular in a greater result base, it should taxable income 2025, the yearstax. For tax through beginning 2018 exemption phase out threshold AMT exemption and which means less significantly, amounts have increased the chapter on See taxpayers to AMT. will be subject detailed discussion. the AMT for a more EisnerAmper 2020 Personal Tax Guide taxpayers haveincreasedtaxpayers from fortaxyears 2018 The standard deductionamountsforindividual Standard deductions through 2025asa result of theTCJA. exemptioniseliminatedfrom The personal 2018 Personal exemptions 1,2026. December 31,2017andbefore January beginningafter temporarily eliminatedfortaxyears preparation feesanddeductiblelegalexpenses are professional duesandsubscriptions, taxreturn fees, unreimbursed employeebusinessexpenses, to the2%disallowancesuchasinvestmentadvisory through December31,2025.Thedeductionssubject 2% “haircut” 1,2018 are suspendedfrom January miscellaneous itemizeddeductionssubjecttothe One of themajorchangesduetoTCJA isthe Suspension of miscellaneousitemized deductions 1,2026. January December31,2017andbefore for anytaxyearafter the itemizeddeductionsare notsubjecttophaseout are subjectto2%AGI floorlimitations.Inaddition, eliminates allmiscellaneousitemizeddeductionsthat state andlocalincometaxespaid.Italsotemporarily either theactualstateandlocalsalestaxpaidor separately. havetheoptiontodeduct Thetaxpayers and$5,000formarriedfiling married orsinglefilers taxestoamaximumof taxes andproperty $10,000for such aslimitingthenon-businessstate/localincome fromdeductions fortaxyears 2018through 2025, The TCJA hasmademodificationstoitemized | indexed forinflation. investment income).Thethreshold amountsare not 3.8% additionalMedicare ContributionTax onnet gains andqualifieddividendswillbe23.8%(20%plus The maximumfederaltaxrateonlong-term capital temized Deductions and Personal Exemptions I 20 instead of itemizeddeductions. maybeclaimingthestandard taxpayers deduction and theincreased standard deductionamounts,more As aresult of thechangesinitemizeddeductions taxpayers. $18,350 ($18,650for2020)headof household (ormarriedfilingseparately)and for singletaxpayers married filingseparately)is$12,200($12,400for2020) is $24,400($24,800for2020),singletaxpayer(or spouse) (orsurviving for marriedfilingjointtaxpayers through 2025.In2019,thestandard deductionsamount RETURN TORETURN TOC
Estimated Tax Requirements
the underpayment penalty. the underpayment 21 tax payments during the year. The appropriate combination of of combination The appropriate during the year. payments tax A penalty will apply if a taxpayer fails to make sufficient estimated fails to make A penalty will apply if a taxpayer other income) can enable the taxpayer to avoid this penalty. Proper tax tax Proper this penalty. to avoid can enable the taxpayer other income) quarterly and withholdings on wages (and certain payments estimated tax planning may help you minimize the required estimated tax payments and avoid and avoid payments estimated tax planning may help you minimize the required
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Requirements Estimated Tax Estimated EisnerAmper 2020 Personal Tax Guide The annualizedincomeinstallmentmethodisapay-as-you-go You mayreceive income,suchasbusiness income,bonusesand • • • beginningin2019and2020: years to considerthefollowingchangescommencingfortax When estimatingyourincometaxliability, makesure | • payments) isthelesserof: (through withholdingand/ortimelypaidestimatedtax of estimatedtaxesiftheamountof taxesyoupay You willnotowethepenaltyforunderpayment | your quarterly estimatedtaxpaymentsbypayingthebased your quarterly year, orpaydeductibleexpensesearlierin the year, youcan reduce more income in the latter part of months more 2020thaninthefirst incomeinthelatterpart of the estimatedtaxpayments. method tocalculatetherequired quarterly pay lessestimatedtaxthanthesafe harbormethodbasedon110% capital gains,unevenlythroughout theyear. Ifyouexpecttoearn on actual quarterly taxprojections. Thismethodprovides awayto on actualquarterly
What’s Newfor2019and2020? Avoiding thePenalty rates are 10, 12, 22, 24, 32, 35, and 37% for ordinary rates are 10,12,22,24,32,35,and37%forordinary Tax rates in2019. Tip 4). the annualizedincomeinstallmentmethod(seeTax 90% of youractualtaxforthecurrent yearbasedon married filingseparately),or returnprior year’s was$150,000orless,$75,000if on asafeharborexception(100%iftheAGI onyour 110% of taxreturn thetaxonyourprioryear’s based tax return, or 90% of theactualtaxshownonyourcurrent year’s Tax Tip 4. the UnderpaymentofEstimated Tax Penalty to Reduce Your QuarterlyEstimatesandEliminate Use theAnnualizedIncomeInstallmentMethod For 2019, the individual income tax For2019,theindividualincometax 22 You canalsousetheannualizedincomemethodtoreduce apotential (or 100% if applicable) of your actual prior year tax for the quarter (or 100%ifapplicable)of youractualprioryeartaxforthequarter • • • accordingly. you mayincrease ordecrease thefuture estimatedtaxpayments when preparing your2020return toreduce oreliminatethepenalty. with lowerincome.Ifyourincomechangesinasubsequentquarter, penalty onyour2020return. Ifthesafeharborexceptionbased eliminate thepenalty, youcanstilluse theannualizedincomemethod on 110%of your2019taxor90%of youractual2020taxdoesnot
deduction for2019through 2025. exemption Act temporarilysuspendedthepersonal for taxyear 2019and 2020. Personal exemptions are completely repealed single; and$311,025formarriedfilingseparately. jointly; $518,400forheadof household;$518,400for the 2020toptaxratesare: $622,050formarriedfiling remains at20%.Theapplicablethreshold amountsfor for long-term capitalgains and qualifieddividends income.Thetoprate 32, 35,and37%forordinary individual incometaxratesremain at10,12,22,24, Tax rates remain stable in2020. years beginning after 2019.For2020,thestandard beginningafter years indexed forinflationusingthechainedCPIintax Theamountoffilers. thestandard deductionwillbe child,and$12,200forsingle at leastonequalifying $18,350forunmarriedindividualswith for jointfilers; the TCJA increased the standard deduction to $24,400 Standard deduction increased in2019. single; and$306,175formarriedfilingseparately. jointly; $510,300forheadof household;$510,300for applicable thresholds are $612,350formarriedfiling and qualifieddividendsremains at20%.The2019 income. Thetoprateforlong-term capitalgains TheTax CutsandJobs For 2020 the For2020the RETURN TORETURN TOC For 2019, For 2019,
Estimated Tax Requirements
There is a surtaxThere Some special tax incentivesSome special or older (2020 and beyond). This special or older (2020 and Work Opportunity for unemployed Work tax credit taxable years beginning veterans extended through December 31, 2019. on or before IRA distributions to a qualified charitableIRA distributions to $100,000 per Up to a maximum of organization. an from if the distribution taxpayer will be tax-free charity is made by a taxpayerIRA account to a public age 70½ distribution will satisfy minimum distribution the made has been This provision requirements. made in and is effective for distributions permanent taxable years beginning after 31, 2014. December Additional Medicare Tax on Earned Income. on Earned Tax Medicare Additional tax applies to Medicare A 0.9% additional Medicare income. This additional wages and self-employment tax applies to income over the threshold Medicare $250,000 for married filing jointly and $200,000 of for married filingfor any other filing status ($125,000 separately). (NIIT). Tax Income Net Investment net investment income or the 3.8% on the lesser of of amount. over the threshold modified AGI excess of amount is $250,000 for joint filersThe threshold or a surviving spouse ($125,000 for married filing separately) and $200,000 for any other filing status. Tax benefits extended. extended. benefits Tax after had expired 2014. “extenders” known as been reinstated have these provisions However, the of beyond as a result for 2015 and retroactively Hikes Act (“PATH”): Americans Against Tax Protecting Year-End Planning Actions Planning Year-End Other Tax Considerations Other Tax
| planning indicates that you have If your year-end you may not need to pay met the 90% test, already your fourthsome or all of quarter estimated tax installment. | • 1. 2. • • 23 For The Tax The Tax The AMT RETURN TO TOC RETURN TO Lifetime Learning Credit income limits increased. Credit Lifetime Learning the maximum Lifetime to claim For 2019, in order must be less than AGI modified Credit, Learning $58,000 ($116,000 if married filing jointly). Modified the above these levels gradually phases out AGI in excess of available for AGI with no credit credit, $68,000 ($136,000 for married joint filers). For 2020, to $59,000 ($118,000 if the amount is increased married filing jointly). 2019, employee’s wages up to the Social Security wages up to the Social 2019, employee’s withheld at the rate $132,900 were limitation of 6.2%. For 2020, the Social Security limitation is of is no change in Medicare to $137,700. There increased withholding rate. Increase in employee’s share of payroll tax. payroll of share in employee’s Increase AMT exemption amount increased. amount increased. AMT exemption annually forexemption amount, which is indexed to $71,700 in 2019 for single inflation, has increased taxpayers, and $111,700 for married filing jointly For 2020, the $55,850 if married filing separately. $72,900 for singles, $113,400 for married amounts are and $56,700 for married filing separately. filing jointly, Itemized deductions limited for tax years starting for tax years deductions limited Itemized January January before 1, 2018 and 1, 2026. deduction is $24,800 for joint filers, is $24,800 for joint deduction head- $18,650 for filers, filers. $12,400 for single and The of-household after amounts expire deduction standard increased 31, 2025. December Cuts and Jobs Act suspends all miscellaneous itemizedCuts and Jobs Act as well as subject to the 2% floor, deductions that are property taxes and real state and local income taxes to deduct up to $10,000 ($5,000(individuals may elect The mortgagefor married filing separately)). interest to home acquisition with respect deduction is reduced after $750,000 incurred December indebtedness of 15, 2017. The limitation reverts back to $1 million after when the debt was of December 31, 2025 regardless expense. The See the chapter on interest incurred. is suspendedoverall limitation on itemized deductions until January 1, 2026.
• • • • EisnerAmper 2020 Personal Tax Guide cost efficienttojustpaythe penalty. cash canbeinvestedathigher rates,itmaybemore low (whichhasbeenthecaseinrecent andthe years) current penaltyrates.Iftheratesare relatively of year-endAs part planning, youshouldconsiderthe tax-deferred retirement account). net amount(i.e.,assumingyoustillwantthemoneyin a 60 dayswiththegross amountwithdrawn,notjustthe taxes withheld,youwillneedtoreplenish theIRAwithin Caution: • • • • of thefollowingactions: reduce oreliminateyourpenaltybytakingonemore penalty forunderpaymentof estimatedtax,youcanstill If yourealize before year-end thatyoumayowethe
the annualizedincomeinstallmentmethod. Eliminate ormitigate theunderpayment by using underpayment. quarterly strategies presented inthisguide to reduce the desirable) by usingtheyear-end taxplanning Lower your taxable income(ifotherwise quarter.the penalty forthefourth Increase your estimated taxpayment to eliminate 1. quarter. There are severalways to achievethis: the underpaymenttaxpenaltyattributabletoaprior or herwithholdingtaxbefore year-end tominimize throughout theyear, anindividualmayincrease his withholdings willbetreated tohavebeenpaidevenly withholdings. Pay orother more taxthrough salary 3. 2. remaining payperiodsthisyear. Increase yourW-2withholdingtaxforthe you are qualifiedtodoso. Withhold taxfrom pensionorIRAdistributionsif year-end. 22% (37%rateifthebonusexceeds$1million)at Withhold more thantherequired bonusrateof If you withdraw money from an IRA and have If youwithdrawmoneyfrom anIRAandhave Sinceanytaxpaidthrough
24 may alsoapplytostateandlocalincometaxpenalties. The foregoing discussionof taxplanningsuggestions | State Tax Considerations RETURN TORETURN TOC Alternative Minimum Tax
and phase-out amounts. and phase-out 25 The AMT was designed to prevent wealthy taxpayers wealthy The AMT was designed to prevent historically the exemption from the AMT had not been from historically the exemption from using tax loopholes to avoid paying taxes. Because Because taxes. paying loopholes to avoid using tax from automatically adjusted for inflation and certainautomatically adjusted for inflation and common deductions were not allowed in computing the AMT, millions of millions of the AMT, in computing not allowed deductions were middle class taxpayers were finding themselves subject to the AMT. subject to the AMT. finding themselves were middle class taxpayers people being subject to the AMT while paying a higher overall rate. a higher overall people being subject to the AMT while paying However, Congress previously provided some annual relief by installing installing by annual relief some provided previously Congress However, significantly for tax years from 2018 through 2025 which will result in fewer result in fewer 2025 which will years 2018 through tax significantly for from “AMT patches” which increased the AMT exemption. The TCJA further closes The TCJA the AMT exemption. which increased patches” “AMT Under the TCJA, the AMT exemption and phase-out amounts have increased increased amounts have and phase-out Under the TCJA, the AMT exemption the gap between the regular tax and the AMT by adjusting the AMT exemption adjusting the AMT exemption the AMT by and tax the regular the gap between
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Minimum Tax Minimum Alternative Alternative EisnerAmper 2020 Personal Tax Guide 2009 and after 2010 isstillsubjecttotheAMT.2009 andafter However, theinterest onsuchbondsissuedbefore preference and,therefore, notsubjecttotheAMT. issued in2009and2010are nolongeranitemof tax Tax-exempt interest onspecifiedprivateactivitybonds | qualified dividendsmaynolongertriggertheAMT. Tax Tip5explainshowlong-term capitalgainsand exceeds theexercise price. stock optionstotheextentfairmarketvalue purposes. Oneexampleistheexercise of incentive exempt forregular taxpurposesbuttaxableforAMT and AMTpurposes.Andsomeforms of incomeare on businessproperty, maybedifferent forregular tax your AMTI.Otherdeductions,suchasdepreciation real estatetaxesare notdeductiblewhencomputing deductions, suchasstateandlocalincometaxes illustrates,certain calculate yourAMTI.Asthechart to 3showsmostof theadjustmentsnecessary Chart now limitedtoamaximumof $10,000. The addbackforthestateandlocaltaxesdeductionis all miscellaneousexpensessubjectto2%AGI limitation. determining theAMTIare nolongerapplicable,suchas itemizeddeductionsthatwere addedbackin certain pay thehigherof theregular taxortheAMT. However, liability maybehigherthanyourregular tax.You will is lessthantheregular maximumtaxrate,yourAMT AMTI. So,eventhoughtheAMTmaximumtaxrate tax are notdeductibleorallowableincomputing and taxcredits thatare usedtocalculateyourregular minimum taxableincome(“AMTI”). Manydeductions adjustments are madetoarriveatyouralternative point, Using yourregular taxableincomeasastarting The AMTiscomputedseparatelyfrom yourregular tax. | Private ActivityBondInterest WhatTriggers theAMT? 26 both theAMTandregular tax. dividends are taxedatthesamemaximum20%ratefor in 2019.Netlong-term capital gainsandqualified AMTIof $97,400($98,950in2020)orless ordinary 26% taxrateappliestomarriedfilingseparatelywith andunmarriedindividuals,whereasjoint filers the 2020) orlessissubjecttoataxrateof 26%formarried AMTIof $194,800($197,900in exclusion. Ordinary 2020) ifmarriedfilingseparatelynetof anyallowable and unmarriedindividuals$97,400($98,950in excess of $194,800($197,900in2020)forjointreturns AMTIin the 28%maximumtaxrateappliestoordinary The AMTistaxedattworates:26%and28%.For2019, | the increase of theAMTexemptionandthreshold willbesubject totheAMTdue Fewer taxpayers inflation adjustmentannually. AMT exemptionandphase-outamountsare subject to threshold filingstatus.The amount forthetaxpayer’s dollarof AMTIabovethe is reduced 25%forevery separately) for2019.TheAMTexemptionamount or headof household) or$733,700(marriedfiling spouse),$797,100(single filing jointlyorsurviving whentheirAMTIreachestaxpayers $1,467,400(married The exemptionsare completelyphasedoutfor separately). (single,headofother filers householdormarriedfiling spouse,$510,300($518,400in2020)forall or surviving $1,020,600 ($1,036,800in2020)formarriedfilingjointly filing separately. Theexemptionbeginstophaseoutat of householdor$55,850($56,700in2020)ifmarried spouse, $71,700 ($72,900 in 2020) if filing single or head ($113,400 in2020)ifmarriedfilingjointlyorsurviving you are allowedanAMTexemptionof upto$111,700 out amountshaveincreased significantly. For2019, 1,2026,theAMTexemptionandphase- before January December31,2017and beginningafter For taxyears | AMTRates AMTExemptions RETURN TORETURN TOC Alternative Minimum Tax You have avoided the AMT, but you still want to but have avoided the AMT, You year. in the current tax liability your regular reduce to the chapter on tax planning strategies for Turn that can minimize your tax planning ideas year-end exposure. Prepay deductions that are not deductible for AMT not deductible deductions that are Prepay year full tax benefit in the current purposes to get the tax benefit next year. rather than lose the the deductible against deductions that are Prepay to gain the such as charitable contributions, AMT, the higher ordinarybenefit of tax rate in the current year. Defer ordinary income, such as bonuses if possible, lower the of to the following year to take advantage AMT rate. Review your ISO awards to determine if you can to determine Review your ISO awards The the year. the end of before any shares exercise up to the extent of this year will be tax-free exercise tax and the point between your regular the break-even in will result any exercises In the following year, AMT. the value of an AMT liability based on the fair market price. over the exercise exercise at the time of shares AMT Credit Can Reduce Future Taxes Future Can Reduce AMT Credit • | you may be entitled to a tax credit If you pay the AMT, You in a subsequent year. tax against your regular items” that qualify on “deferral based for an AMT credit The most common contributed to your AMT liability. adjustments, passive depreciation deferral items are on the activity adjustments and the tax preference ISOs. Other deductions, such as state and of exercise called local income taxes and investment fees, are from cannot get an AMT credit exclusion items. You these deductions. • • • • You are not subject to the AMT in either year: to not subject are You You are not subject to the AMT in the current year current the AMT in the to not subject are You 37% (2019) of tax rate at the regular be taxed will and the AMT next year: to subject be to expect but 27 RETURN TO TOC RETURN TO Take IRA or retirement plan distributions if in AMT; tax plan distributions if in AMT; IRA or retirement Take paid may be at a lower rate. Delay exercising any incentive stock options (“ISOs”) any incentive Delay exercising since you could wind up paying the AMT on the market value and the exercise between the fair spread the options, exercised price. If you have already consider a disqualifying disposition as discussed in the chapter on stock options. Also, see the rule discussed relief some credit later in this chapter that may offer ISOs. of the exercise from for the AMT resulting Realize net short-term capital gains this year to Realize net short-term the lower AMT rates, unless these benefit from losses next year or would short-term gains will offset otherwise be held long-term. Accelerate ordinary year to income into the current the lower AMT rate. benefit from Accelerate certain deductions, such as charitable allowed for AMT purposes, in contributions, that are the to take the itemized deductions instead of order year. deductions in current standard Defer until the following year any deductions thatDefer until the following year any deductions not deductible for AMT purposes. Note that state are and local income taxes and property not taxes are deductible updeductible for AMT purposes and only tax purposes. to $10,000 for regular Planning for AMT Scenarios Planning • • • • • • You are subject to the AMT in the current year, but year, the AMT in the current to subject are You next year: be to expect don’t | whether or not determine planning can help you Tax can enable you This to the AMT. you will be subject Using your overall tax liability. to take steps to reduce possible AMT Chart three are to guide you, here 3 for:scenarios to plan amounts for tax yearsamounts after 2026, and before 2017 certainor scaling back of the elimination as well as deductions. itemized EisnerAmper 2020 Personal Tax Guide This isnolongerthecaseasaresult of theTCJA. Becausestateand 2018 through 2025. to besubjecttheAMT. Thisprovision isineffectforthetaxyears taxable incomewashigherthantheregular taxableincome. taxpayer paidthestateandlocaltaxesonincome,itreduced the tax purposesandfortheAMT. Thereason forthisisthatwhenthe though bothwere taxedatthemaximumtaxrateof 20%forregular Keep inmindthatifyouare subjecttotheMedicare ContributionTax regular tax liability, butdidnotreduce theAMTI.Therefore, theAMT may haveresulted inthetaxpayerbeingsubjecttoAMT, even In prior years, long-term capital gains and qualifying dividendincome long-term capitalgainsandqualifying In prioryears, on netinvestmentincome,considerationshouldbegiventopaying income tax(exceptfor$10,000),itwillmostlikelynotcauseataxpayer local taxesare nolongeradeductionincomputingtheregular Tax Tip erm CapitalGainsandQualifying 5. You intheAMT(Through2025) Dividend IncomeNoLongerWillPut Long-T 28 The reason adeductionisclassifiedasdeferralitembecauseover See thechapteronbusinessownerissuesanddepreciation and localtaxesonnetinvestmentincomecanbedeductedinthe tax andAMTpurposes.Asanexample,adepreciation difference isa time youwillendupwiththesametotaldeductionsforbothregular the lifeof theasset,totaldepreciation willbethesameunder for AMTpurposesthanusedregular taxpurposes.However, over expenses thatare allocableinarrivingatnetinvestmentincomeeven computation of theMedicare ContributionTax. if theyare notdeductibleforregular taxandAMTpurposes.State either taxcomputation.Specialrulesapplyforbonusdepreciation. deferral itemifitiscalculatedusingadifferent assetlifeandmethod deductions. RETURN TORETURN TOC Alternative Minimum Tax
• • • • • Differences Other AMT
• AMT Only Taxable for
• • • • • AMT
• • • • • • • • Tax Regular Deductible in Computing 29
Interest on acquisition debt in excess of $750,000 entered on acquisition debt in excess of Interest
Equity debt used to buy, build or substantially improve your build or substantially improve Equity debt used to buy, only residence Qualified acquisition and equity debt up to $750,000 used to Qualified acquisition and equity debt up to your residence build or improve buy, Medical expenses in excess of 7.5% of AGI* 7.5% of Medical expenses in excess of Net operating losses (subject to different AMT rules) Net operating losses (subject to different Passive activity adjustments Passive 2009 and bonds issued before on private activity Interest after 2010 Depreciation (subject to different AMT rules) (subject to different Depreciation certain Gain or loss on disposition of assets, including sale of small business stock Exercise of ISOs (to the extent the fair market of Exercise price) value exceeds the exercise • • Mortgage on: interest Charitable contributions Investment advisory fees (no longer deductible for either tax purposes) AMT or regular deductible for Employee business expenses (W-2) (no longer tax purposes) either AMT or regular Investment interest expense Investment interest Qualified Motor Vehicle Tax Vehicle Qualified Motor (state or local sales tax or excise tax on purchase) Real estate taxes (personal); up to $10,000 ($5,000 MFS) for Real estate taxes (personal); up to $10,000 ($5,000 MFS) taxes estate combined state and local income and real Description taxes (non-business); up to $10,000 State and local income and real for combined state and local income ($5,000 MFS) estate taxes
Note: Note: into after as mortgage December 15, 2017 is not deductible interest, if tracing rules to determine but the debt is subject to the interest on other debt, such as investment interest. deductible as interest
*As a result of the Further Consolidated Appropriations Act, the medical threshold for both regular and alternative minimum tax purposes is 7.5% for 2019 and alternative the Further for both regular Act, the medical threshold of Appropriations Consolidated a result *As and 2020. 3. AMT vs. Regular Tax Regular 3. AMT vs. Chart RETURN TO TOC RETURN TO
Business Owner Issues and Depreciation Deductions
31 have specific tax planning opportunities specific have to them. available
or through a partnership, limited liability company or S corporation, a partnership,or through or S corporation, limited liability company Individuals who are owners of a business, whether as sole proprietors a business, whether as sole of owners Individuals who are
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Deductions Depreciation Depreciation Issues and Issues Business Owner Owner Business EisnerAmper 2020 Personal Tax Guide component of self-employment taxes. If thetotalof todeferthe2.9% Medicare expenses istheopportunity Another advantageof deferringincomeorprepaying company.) isseparatefrom thecredit card the goods/services (The credit card ruleonlyapplieswhere thesellerof credit of card charges thefollowingyear. inJanuary though youmayactuallypaythebillcontainingthose in thecurrent year whenthecharge ismade,even year end.Thismethodallowsyoutotakeadeduction tax yearbycharging themonacredit card before accelerate thebusiness’s deductionsintothecurrent business equipment.Ifcashflowisaconcern, youmay considering purchasing (andplacinginservice) significantifyouare This choicecanbeparticularly year youexpecttobesubjectthehighertaxrate. inthe business expensessothedeductionoccurs Similarly, youcanprepay ordeferpaying certain current yeartotakeadvantageof thelowertaxrate. year, youcanacceleratebillingandcollectionsinto the current yearbutisnotexpectedtoapplyinthefollowing bracket inthefollowingyear, oriftheAMTappliesin the next year. Alternatively, ifyou expecttobeinahighertax of theincomeandcorresponding taxliabilityuntil thereby already deferringreceipt performed, services of thefollowingyearfor delay billinguntilJanuary If youare anownerof acash-basis business,youcan | 1,2026. before January December31,2017and beginningafter for taxyears subject tothe2%floor, whichtheTCJA suspended be characterizedasmiscellaneousitemizeddeductions person’s businessdeductionscanoffset AGI, ratherthan available. Unlikeasalariedemployee,self-employed may haveadditionaltaxplanningopportunities LLC,business through orScorporation, apartnership, A self-employed individual,orownerof anoperating | Timingof Income andDeductions Tax Advantages forBusinessOwners 32 asset isdepreciable underthe normal rules. the IRCSec.179deduction. Theremaining basisof the Sec. 179electionismade reduced bytheamount of Observation: systems andsecuritysystems. conditioning property, fire protection systems, alarm suchasroofs,property heating,ventilationand air- improvements madetonon-residential realcertain The TCJA alsoexpandedIRCSec.179eligibilityto andqualifiedretail improvementproperty property). leasehold improvement property, qualifiedrestaurant (combiningtheclassificationsofreal property qualified alsoincludescomputersoftware andqualified property the activeconductof atradeorbusiness.Qualified whichispurchased forusein property personal isdefinedasdepreciable tangible Qualified property $1,020,000 ($1,040,000for2020). to thenext$10,000.Themaximum2019deductionis these amountsare indexedforinflationandrounded 2018, beginningafter up to$3.5million.Foryears 2020), thedeductionisphasedout,dollarfordollar, reaching the$2.5millionthreshold ($2,590,000for during thetaxableyearexceeded$2.5million.After the amountbywhichcostof property qualifying $1,000,000 amountisreduced (butnotbelowzero) by forthetaxableyear. placedinservice property The increased to$1,000,000of the costof qualifying IRC Sec.179smallbusinessexpensinglimitationwas December31,2017,the beginningafter For years | Insurance Tax onearned income. Tax onnetinvestmentincomeandthe0.9%Health imposition of theadditional3.8%Medicare Contribution Caution: Social Securitytaxthatyoupay. in 2019($137,7002020),youcanalsoreduce the self-employment incomepluswagesisbelow$132,900 st-Year Expensing forBusiness Equipment Fir It is important to consider the impact of the toconsidertheimpactof the It isimportant The basis of property for which an IRC The basisof forwhichanIRC property RETURN TORETURN TOC Business Owner Issues and Depreciation Deductions
Business Interest | — expenditures If you have debt traced to business capital requirements including debt used to finance the a partnership, involved in a of S corporation or LLC participatetrade or business in which you materially as a business expense, — you can deduct the interest Business interest rather than an itemized deduction. on items which an also includes finance charges card. for the business using a credit owner purchases to as additional loans treated are These purchases which permitthe business, subject to tracing rules that portion the finance charges a deduction of of to the business items purchased. relating limited the Commencing January 1, 2018, the TCJA expense to the sum of deduction for net interest the “adjusted taxable income, 30% of business interest taxes, interest, before – earnings the business income” of amortizationdepreciation, and depletion (“EBITDA”) Afterand floor plan financing interest. 2021, the limitation takes into account only depreciation, earnings amortization and depletion (“EBIT”). The initial EBITDA to most taxpayers. generous more is formula in expense incurred The limitation applies to interest connection with both related-party and unrelated-party disallowed can be carried forwarddebt. Any interest the limitation is entities, For pass-through indefinitely. to include qualified film, television, and live theatrical and live qualified film, television, to include property. production amount depreciation the first-year retained The TCJA $8,000 for passenger automobiles. of the can still offset minimum tax credit Prior-year For tax years beginning tax liability. taxpayer’s regular minimum after prior-year 2022, the and before 2017 an amount equal to 50% in would be refundable credit the excess of (100% for tax years in 2021) of beginning the credit tax year over the amount of for the the credit tax liability. year against regular allowable for the 33 RETURN TO TOC RETURN TO Bonus Depreciation The TCJA expanded the definition of qualified property the definition of expanded The TCJA deduction eligible for the 100% bonus depreciation Qualified improvement property Qualified improvement placed in service after December 31, 2017 is no longer clearly bonus-eligible did not include qualified property because the TCJA 15-year property improvement in its definition of absent a specific recovery Therefore, property. MACRS less than 20 years, qualified improvement period of property The loses its eligibility for bonus depreciation. qualified improvement IRS has said that it will treat property as 39-year property unless corrective legislation modifies the recovery period to 15 years. Prior to the TCJA, bonus depreciation was available for bonus depreciation Prior to the TCJA, eligible property with a recovery than 20 less of period years. This property and included equipment, furniture and qualified improvement computer software fixtures, rules, qualified the pre-TCJA Under property. propertyimprovement the interior portion included of estate placed real the building which is non-residential in service after was first the year the building placed in service. cannot enlarge The qualified improvement escalator or the building, nor can it be an elevator, portion the above framework. The remaining internal of qualified property was eligible for 15-year or 39-year depreciation. | percentage depreciation the bonus TCJA, Under the property to 100% for was increased in service placed after January 27, 2017 and before September 1, 2023. For property in service placed after September 27, December 31, 2017, taxpayers had the 2017 and before to elect to or bonus depreciation option to take 100% 50% bonus rate. The allowable bonusapply the original beginning by 20% each year, decreases percentage being the last year at 20% bonus.in 2023 with 2026 is the expansion An important the TCJA change from qualified property used to include the definition of of Sec. 179, as long the consistent with IRC property, or taxpayer did not use the property purchase before party. a related it from acquire EisnerAmper 2020 Personal Tax Guide • • requirements forthehome office to qualify deduction: home office expenses.Generally, youmustmeettwo activity onScheduleCwillretain theabilitytodeduct expenses. Therefore, who report onlybusinessowners whichincludesemployees’unreimbursed job A, itemized expensessubjecttothe2%flooronSchedule The TCJA suspendedthedeductionof miscellaneous office deductions. a netlossfrom yourbusinessresulting from yourhome overall limitationthatwillprevent youfrom deducting to bothrenters butissubjecttoan andhomeowners, depreciation. Thehomeoffice deductionisavailable interest, rent, utilities,insurance,painting,repairs and running yourhome,suchasreal estatetaxes,mortgage of thecostsof be abletodeductthebusinessportion of yourhomefor business,youmay If youusepart | $26 million. average gross receipts mustbeequaltoorlessthan beginning inboth2019and2020,thethree-year in2019.Fortaxyears annually forinflationstarting for thepriorthree Thisamountwillbeadjusted years. $25 millionorless,measured bytheaveragereceipts small businesseswithaverageannualgross receipts of industriesare exemptfrom thislimitation,asareCertain companies. andlimitedliability for Scorporations,partnerships The treatment of thedisallowedinterest isdifferent applied attheentitylevel,ratherthanownerlevel. HomeOfficeDeductions management activitiesof abusinessandthere isno the homeoffice isusedfortheadministrative or of business. Thisrequirement canbesatisfied if The homeoffice mustbeyourprincipalplace for tradeorbusinessactivities. use” meansaspecificarea of yourhomeisusedonly occasional businessuseisnotregular use.“Exclusive exclusively foratradeorbusiness.Incidental You of yourhomeregularly mustusepart and 34 subsequent year. yearbut may useadifferent methodina particular a taxpayermaynotchangethemethodforthat income taxreturn (includingextensions).Once selected, for ataxableyearontimelyfiledoriginalfederal either thesimplifiedmethodorregular method the simplifiedoptionisused.Thetaxpayermayelect depreciation nordepreciation recapture foranyyear to limitationsundertheTCJA) andthere isneither deductions are claimedinfullonScheduleA(subject maximum of 300square feet; home-related itemized is $5persquare footusedforthebusiness,uptoa Under thestreamlined option,thestandard deduction recordkeeping andcalculationissimplified. deduction remain thesameforbothmethods,but the homeoffice deduction.Therequirements forthe Taxpayers canchooseasimplifiedoptiontocalculate interest, are notsubjecttotheselimitations. such asreal estatetaxesandqualifiedhomemortgage deductible, Expenses whichwouldhavebeenotherwise but are subjecttolimitationscalculatedforthatyear. deductions are carriedovertothesubsequentyear income derivedfrom theuseof thehome.Unused home insuranceandutilities)are limitedtothegross of is usedforbusiness(suchastheportion Expenses thatare deductibleonlybecausethehome and rental. the discussioninchapteronprincipalresidence sale to yourhomeoffice isnoteligibleforthisexclusion.See of thegainattributable be limitedbecausetheportion taxable gainonthesaleof theprincipalresidence will principal residence, yourabilitytoexcludeallof the If youdeductdepreciation forahomeoffice inyour eligible for deduction in the year the active business eligible fordeductioninthe yeartheactivebusiness The amountof capitalizedbusinessstart-up expenses | Start-Up Expenses activities. other fixedlocationwhere youcanconductthese RETURN TORETURN TOC Business Owner Issues and Depreciation Deductions
ake Tax-Free Tax-Free ake Self Utilize Business Losses or T Utilize Business Distributions Tax -Employment
| consists tax rate is 15.3%, which The self-employment tax. 12.4% Social Security tax and 2.9% Medicare of combined 2019 wages and The maximum amount of subject to the 12.4% Social earnings self-employment is Security tax is $132,900 ($137,700 in 2020). There to income subject no limitation on self-employment An additional 0.9% Hospital tax. the 2.9% Medicare | in a partnership, or S If you have an interest LLC the entity deduct losses from corporation, you can that you have tax basis and are only to the extent any of a loss from for the losses. If you have “at-risk” you may want tothese entities which may be limited, year-end before make a capital contribution (or a loan) to qualify the loss for deduction. Nevertheless, those by the passivelosses may still be subject to, and limited activity loss rules. For further see the information, estate activities. chapter on passive and real a partnership, distributions from can take tax-free You or S corporation if you have tax basis in the entity LLC been taxed on the pass-through and have already the of taxed on your share income. Since you are whether of entities regardless pass-through income of made, you may have paid tax or not distributions were on income year, the current or will pay in in a prior year, you can take Therefore, that you have not received. tax (1) if fundsa distribution without paying additional such distributions; available; (2) the entity permits are investment “at-risk” (3) you have both tax basis and an certain are Please note however that there in the entity. special considerations for distributions from S corporations. any employer of yours or of your spouse, or any plan your yours or of of any employer or your your dependent of by any employer maintained child. under-age-27 35 These rules only apply for any calendar month RETURN TO TOC RETURN TO Self Deduction Organization Costs Organization HealthInsurance-Employed in which the taxpayer is not otherwiseeligible to participate subsidized health plan maintained by in any Note: Note: As a self-employed individual, you can deduct 100% As a self-employed you pay for yourself, the health insurance premiums of your your spouse, your dependents, and any of the tax the end of 27 as of under the age of children a general partner This deduction applies if you are year. in a partnership, a limited partner guaranteed receiving who shareholder payments, or a more-than-2% can also an S corporation. You wages from receives care for eligible long-term paid deduct the premiums health insurance insurance policies as self-employed subject to certain also premiums Medicare limitations. qualify for this deduction. | | organization of A taxpayer may expense up to $5,000 by an amount which exceeds $50,000). costs (reduced The excess must be amortized over 180 months. is election Expensing is automatic and no formal amortize electing to Affirmatively necessary. the (including costs on a timely filed return organization the “opting out” of extensions) will be considered expense election. commences (rather than amortizationcommences over 180 by zero) (but not below is $5,000, reduced months) exceed $50,000. expenses the start-up the amount election. no formal requires is automatic and Expensing Nevertheless, taxpayers elect out must wishing to the costs on a timely choose to capitalize affirmatively (including extensions). tax return filed federal income to deduct or to capitalize start-up The election either the taxpayer’s and applies to all of costs is irrevocable costs must be start-up costs. Capitalized start-up amortized over 180 months. EisnerAmper 2020 Personal Tax Guide personal property.personal from theemployee’s wages if theaward istangible may bedeductibleforthe employerandexcludable awards events.Certain tickets totheatre orsporting prohibition includes vacations,meals,lodgingand asemployeeachievementawards. The property of cards andothernon-tangiblepersonal cash,gift The newlawalsoprohibits deduction theemployer’s 2025. after maintained, onsitefacility(cafeteria)willbeeliminated deduction forexpensespaidthrough anemployer- facility are nowsubjecttoa50%limitation.The employer orthrough anemployer-maintained on-site premisesemployer’s fortheconvenienceof the Meal expensesprovided toemployeesonthe 2017. after benefits underIRCSec.132(f)) fringe commuting benefits(qualifiedtransportation costsand are eliminatedformostentertainment As aresult of theTCJA, businessexpensedeductions | result of theTax CutsandJobsAct. 2019, theindividualtaxratesdecreased overallasa information, seethechapterontaxrateoverview. In 50% of theself-employment taxpaid.Forfurther because youreceive adeductionagainstAGI for taxes). Thereason thespread isnotgreater isprimarily your employee’s share of SocialSecurityandMedicare approximately including 46%forwageincome(after rate onself-employment incomeis50%,compared to Because of thesetaxes,the2019federaleffectivetax overview. $200,000 inallothercases.Seethechapterontaxrate filingseparatereturnsfor marriedtaxpayers and income inexcessof $250,000forjointreturns, $125,000 tax, willtotal3.8%)beimposedonself-employment Insurance tax(which,combinedwiththe2.9%Medicare loyer’s Deductions for Entertainment, loyer’s Deductions forEntertainment, Employee Achievement Awards Commuting BenefitsandMeals Emp 36 to future tooffset years bothbusiness andnon-business under thisrulebecomesan NOLandiscarriedforward income of anotherbusinessandanylossdisallowed Taxpayers mayoffset lossesof onebusinessagainst the similar tothoseineffect2017. insurance companiescontinuetousepreferential rules, indefinitely.be carriedforward andcasualty Property December31,2017to beginningafter in taxyears farming losses)andallowsNOLsarising for certain period(except income, repeals thetwo-yearcarryback TCJA nowlimitstheNOLdeductionto80%of taxable The 20years. andforward be carriedbacktwoyears Through 2017,netoperatinglosses(“NOLs”)could | restrictions. to thatchapterforthedetails,includingvariousplan chapter isdedicatedtothisdiscussion.You shouldrefer from, complex,soanentire retirement plansare very Rules governing contributionsto,anddistributions | • • sum of: excess businesslossorEBL,whichistheof the yearalossexceedingtheir deducting inaparticular A non-corporatetaxpayerisnowprohibited from 2026. 1, December31,2017andendingbefore January after beginning engagedinbusinessfortaxyears taxpayers The TCJA imposedalimitationonnon-corporate | erating LossCarrybacks ension and Profit Sharing Plans cess BusinessLoss Disallowance jointly and$255,000forothertaxpayers. threshold filing is$510,000 formarriedtaxpayers beginningin2019,theinflation-adjusted For taxyears businesses; and The aggregate gross receipts from suchtradesor Net Op P Ex RETURN TORETURN TOC Business Owner Issues and Depreciation Deductions The specific facts and circumstances of each of circumstances The specific facts and The employer fails to offer its full-time employees The employer fails to offer (and their dependents) the opportunity to enroll in minimum essential coverage under an eligible plan and any full-time employer-sponsored employee is certifiedthe employer as having to or cost-sharing credit assistance tax a premium or reduction; Affor Large Employer Mandate Employer Large Act dable Care There are certain to smaller applicable are provisions There relief businesses. $2,500 may deduct up to without an AFS A company as long as it has a written expensingper item or invoice tax year. the the beginning of policy in place at In addition, taxpayers should consider whether safe-harbor expensing rule forto adopt the $200 materials and supplies. Caution: will dictate which safe harbors,business taxpayer tax elections and accounting method changes mightreturn a Some elections require or appropriate. be required others tax return; simple attachment to the business’s 3115 as a change ofmay necessitate filing a Form accounting method. | 2010 Act of Care and Affordable Protection The Patient and Education Health Care along with the (“ACA”), the most significant Reconciliation Act, represents system sinceregulatory the U.S. health care overhaul of and Medicaid in 1965. Medicare the passage of the quality and enacted to increase was ACA the use of health insurance through of affordability exchanges. Themandates, subsidies and insurance the ACA: the major considerations of following are • employer that an applicable large requires The ACA pay an excise tax if: 1. 37 The AFS is defined as an audited financial is defined as an audited The AFS RETURN TO TOC RETURN TO Final R R Stock Purchase Plans and ISOs Plans and Purchase Stock Regulations epair/Capitalization forEmployee eporting Requirements statement. Note: Note: The final regulations included an expensing rule The final regulations for taxpayers a safe harbor to deduct which provides certain tangible or produce acquire amounts paid to If the company has an Applicable Financial property. and a written accounting policy for Statement (“AFS”) for such property, expensing amounts paid or incurred up to $5,000 per item or per invoice can be deducted. taxpayers should have had this written policy Therefore, to qualify 2018 in order for 2019 in place by the end of made on an annual basis. and beyond. Elections are The IRS released the final “repair regulations” which regulations” the final “repair The IRS released affected tax years beginning on or after January 1, distinguished the circumstances 2014. These regulations ownersbusiness which under from costs capitalize must for acquiring,those in which they can deduct expenses tangible property. replacing and maintaining, repairing, | Corporations are subject to certainCorporations are reporting plans to employee stock purchase related requirements chapter on stockand incentive stock options. See the compensation stock, and deferred options, restricted plans. | A taxpayer must apply the at-risk and passive loss and the at-risk A taxpayer must apply the EBL calculating IRC Sec. 469 before limits of Under this hierarchy, IRC Sec. 461(l). disallowance of or passive loss under the at-risk if a loss is disallowed that activity would not be from rules, income or loss the taxpayer’s excess in the calculation of considered business loss, if any. income. EBLs for partnershipsincome. EBLs are or S corporations limitation is entity level and the at the determined the individual level. applied at EisnerAmper 2020 Personal Tax Guide 2. aware thatthere isnolongeragoodfaithexceptionto W-2, “Wage andTax Statement.” should be Employers employer-sponsored coverageontheemployee’s Form employees toprovide thecostof theapplicable The ACA requires with50ormore employers requirements. such ashealthinsuranceplans,havesimilarreporting coverage foritsfull-timeemployees.Otherparties, and conditionsof theemployer-provided healthcare to fileaninformation theterms return whichreports The ACA generallyrequires applicablelarge employers • holiday season. including retail employedexclusivelyduringthe workers onaseasonalbasis, services whoperform workers number of are full-timeemployees.Seasonalworkers into accountunderspecialrulesindetermining the areto 50full-timeemployees.Seasonalworkers taken perweekonaverageareemployed 15hours equivalent more perweekonaverageplus20employees hours For example,40fulltimeemployeesemployed30or duringthecalendarmonth. ofleast 130hours service perweekorat average of of atleast30hours service calendarmonthisanemployeewhohas for every full-time equivalentemployees).Aemployee average of atleast50full-timeemployees(including that employswithinthepreceding calendaryearan An applicablelarge employerisdefinedasone obtained through themarketplace. to helpoffset thecostof healthinsurancecoverage The Premium AssistanceTax Credit wasdesigned Employer and Insurer Reporting reduction. a premium assistancetaxcredit orcost-sharing ashaving or more fulltimeemployeeiscertified ortooexpensive.Also,atleastone underfunded employer-sponsored plan,buttheplan iseither minimum essentialcoverageunderaneligible toenroll in their dependents)theopportunity The employeroffers itsfull-timeemployees(and 38 2018. Therefore, beginningwiththe2019 taxyear, December 31, zero forthemonthsbeginningafter The Actreduced theindividualmandatepenalty to plans. Medicaid, moststudenthealthplansorothersimilar through astateor federalmarketplace,Medicare, an employer-sponsored plan,coverageobtained return. Minimumessentialcoverageisunder responsibility payment”(penalty)withhisorher tax essential coverageforeachmonthormakea“shared Under thepriorlaw, minimum individualshadtocarry • expense. the premiums paidinexcessof thecredit asabusiness andare permittedthe credit todeduct backorforward cancarry Smallbusinessemployers exempt employers. and35%forsmalltax- for smallbusinessemployers The maximumcredit is50%of thepremiums paid health optionsprogram (“SHOP”)marketplace. that itoffers toitsemployeesthrough asmallbusiness 50% of thepremium costof aqualifiedhealthplan in whichitpaysauniform percentage of notlessthan arrangement The employermustalsohaveaqualifying $55,200 for2020(thisnumberisindexedinflation). annual wagenotexceeding$54,200in2019and full-time equivalentemployeeswhoearn anaverage An eligiblesmallemployerisonewithnomore than25 two consecutive-yearperiod. through countingtowards 2013withoutthoseyears the have claimedthecredit beginningin2010 fortaxyears 2014.Ataxpayermay taxyearonorafter with thefirst IRC Sec.45Rcredit beginning fortwoconsecutiveyears to theiremployees.Aneligibletaxpayercanclaimthe toprovidesmall employers healthinsurancecoverage The ACA provides ataxcredit toencourageeligible • alternatives inplace. therefore, shouldhavereliable employers reporting missing orincorrect dataonForms 1094-Cand1095-C; Individual Mandate Small BusinessHealthCare Tax Credit RETURN TORETURN TOC Business Owner Issues and Depreciation Deductions Birth of an employee’s child and to care for the child and to care Birth an employee’s of newborn. a child with the employee for adoption Placement of or foster care. child, or parent spouse, for the employee’s care To who has a serious health condition. the employeeA serious health condition that makes his or her position. unable to perform the functions of spouse, Any qualifying event due to an employee’s active duty – or covered being on child, or parent Forces. being called to duty – in the Armed for a service care member who is the employee’s To kin. next of or spouse, child, parent, Has been employed for at least one year prior toHas been employed for at least one taking leave; and year than $72,000 in the preceding more Did not earn 2018 (not “highly compensated”). of pro rata basis. rata pro employee’s the qualified for the credit, be eligible To his 50% of has to be at least during leave compensation salary. or her regular to the employees the wages paid of is 12.5% The credit points by 0.25 percentage increases while on leave and the point which percentage (up to 25%) for each applies to a The credit payment exceeds 50%. rate of annual pay. 12 weeks of maximum of A qualifying employee who: employee is any • • • • • • • • An employer cannot claim both a credit and a An employer cannot claim both a credit deduction for family and medical leave wages; it can The FMLAchoose either the deduction or the credit. allows employees to elect (or employers to require) that they apply any accrued vacation or leave time. leave does not qualify for the tax this type of However, For purposes of this credit, “family and medical leave” is this credit, For purposes of the following reasons: of for one or more time off 39 RETURN TO TOC RETURN TO Other Leg islation To qualify employers, (whether or not for the credit, To subject to the FMLA), must (1) have a written leave employees at least two all full-time policy; (2) provide annual paid family and medical leave; and (3) weeks of qualifying employees working at least 30 part-time offer leave on a hours per week a commensurate amount of | Credit Tax and Medical Leave Family to those businesses a new tax credit affords The TCJA paid family and medical leave companies that offer in tax yearsto their employees. For wages paid 2018 for a or 2019, an employer can claim a tax credit portion during any the wages it pays to employees of on leave. period during which those employees are and Medical Leave Act although the Family Notably, businesses with at least 50 requires 1993 (“FMLA”) of to employees leave weeks of 12 employees to provide does not require under certain the TCJA circumstances, employers to pay wages during that leave. The 21st Century Act enacted in December Cures a provision 2016 includes, among other things, health- to offer allowing small businesses to continue arrangements to employees under reimbursement certain without violating market reforms circumstances risking an excise tax per affected and under the ACA participant. The employer mandate and corresponding reporting corresponding mandate and The employer Employers in effect. must remain requirements In other would “pay or play.” have decided if they have chosen either to meet the they must words, for 2019, coverage requirements minimum essential owners Business should reconsider or incur a penalty. employee compensation entire their company’s their of the cost-effectiveness package, including entire their and perhaps revamping plans, retirement human to obtain and retain compensation strategy capital. individuals will no longer be penalized if they fail to penalized if they will no longer be individuals insurance. adequate health maintain EisnerAmper 2020 Personal Tax Guide information. on passiveandreal estateactivitiesforadditional S corporation,orasoleproprietorship. Seethechapter anLLC an from treated apartnership, asapartnership, domesticqualifiedbusinessincome(“QBI”) taxpayer’s 1, 2026,theTCJA allowsadeductionof 20%of the December31,2017andbefore January beginning after of incomefrom pass-through entities.Fortaxableyears The TCJA madesignificantchangestothetaxtreatment | exceeding anyapplicablestatelawrequirements. credit shouldbebasedontheemployer-provided leave government willalsonotbetakenintoaccount.The Any leavepaidorrequired tobepaidbyastateorlocal more of theof thefamilyandmedicalleavepurposes. credit unlesstheleavehadbeenrestricted tooneor ass-Through Tax Treatment P 40 RETURN TORETURN TOC Capital Gains and Dividend Income
41 Managing capital gains and losses can help you save taxes, taxes, can help you save gains and losses Managing capital defer taxes and obtain the highest after-tax yield on your assets. yield on your assets. the highest after-tax and obtain defer taxes This planning is very rates tax the various critical when considering (including the 3.8% Medicare Contribution Tax for certain taxpayers). Tax Contribution (including the 3.8% Medicare since the rate on short-term capital gains can be as high as 40.8% in 2019 gains can be capital on short-term the rate since compared to the long-term capital gain rate of 23.8% for both 2019 and 2020 23.8% for both of to the long-term gain rate capital compared and 2020 (including the 3.8% Medicare Contribution Tax for certain taxpayers) Tax Contribution and 2020 (including the 3.8% Medicare
RETURN TO TOC RETURN TO
Income and Dividend Dividend and Capital Gains Capital EisnerAmper 2020 Personal Tax Guide 180 daysof realizing thegains.TheQOFsmustinvest mustinvesttheircapitalgainsinaQOFwithin Investors interests. from stocks,bonds,real estateorpartnership Gains canbederivedfrom anyinvestment,whether QOFs are theinstrumentsthatinvestinthesezones. (“QOZs”) are geographicareas thatneedimprovement; zones fund(“QOF”).Qualifiedopportunity opportunity gains iftheamountof thegainisinvestedinaqualified Under theTCJA, maydefertaxoncapital taxpayers | Qualified Opportunity Funds Qualified Opportunity Chart ***MAGI isAGI increased bythenetincome excludedfrom foreign incomeunderIRCSec.911(a). jointly; $461,701forheadof householdand$244,426for marriedfilingseparately. and $300,000formarriedfilingseparately).For2019,thethresholdshold; $500,000forsinglefilers; were $434,551forsingle;$488,851 formarriedfiling threshold amounts($600,000formarriedfiling jointly; $500,000forhead withincomeabovecertain of house- **The 20%taxrateappliestotaxpayers *For 2019thetoptaxrateforregular taxpurposesis37%. Married FilingSeparate Single &HeadofHousehold Widow(er) Qualifying & Joint Filing Married Filing Status Gain attributabletodepreciationontangiblepersonalproperty taxrate taxableatthe10%or15%ordinary Gains otherwise Gain attributabletodepreciationonrealproperty Collectibles, suchasartwork&preciousmetals Exceptions heldmore than12months to the20%taxrate onproperty AMT purposes Regular taxpurposes Long-Term Rate (Holdingperiodgreater than12months) AMT purposes Regular taxpurposes Short-Term Rate (Holdingperiod12monthsorless) Modified Adjusted Gross Income(“MAGI”)*** exceeds thethreshold amountfortheapplicablefilingstatus: Taxpayers are liablefortheadditional3.8%Medicare ContributionTax onnetinvestment incomeiftheir 4. CapitalGainTax Rates–2019 42 37%* • • | order toderivebenefitfrom thisplanningtechnique. tore-invest theentire gainin used. Itisnotnecessary ratherfundsmustbe invested directly intotheproperty; 90% of thecapitalintoQOZs. Themoneycannotbe • CapitalGainTax Rates imposed on your net investment income depending imposed onyournetinvestmentincomedepending additional 3.8%Medicare ContributionTax maybe As aresult of theAffordable Care Act(“ACA”), an 28% • • 25% 25% • 20%** 20%** • • Threshold Amount $ 125,000 $ $ 200,000 $ 250,000
15% 15% • • RETURN TORETURN TOC • 0% 0% Capital Gains and Dividend Income
Comp and Losses and Capital loss limitations that only allow you to deductCapital loss limitations that only allow gains against ordinary losses in excess of $3,000 of income. (If income, such as wages and interest the limit for each individual married filing separately, capital lossesis $1,500.) It should be noted that net income in other categories of cannot reduce Contribution Tax. calculating the Medicare Year-End Trading Strategies Trading Year-End Gains Realized Year-to-Date uting gains of $400,000). Your capital gains tax would be $78,000 ($390,000 capital gains tax would be $78,000 ($390,000 $400,000). Your gains of and also assumes that the top rates apply. and also assumes that of excess long-term gains at 20%). So your tax increase would be gains at 20%). So your tax increase excess long-term of The above example is exclusive of the Medicare Contribution Tax, Contribution Tax, the Medicare exclusive of The above example is Note: the long-term rate of 20% on the additional short-term gain of gain of 20% on the additional short-term rate of the long-term | capital gains or losses, youIf you have unrealized Tip 3 in the chapter on tax planning to Tax should refer to take additionalstrategies to help you decide whether But as this tip the year. the end of gains or losses before your gains and losses will of illustrates, the exact nature dictate which stock positions you should consider selling. | strategy to use, it is which year-end determining Before gains realized important year-to-date to compute your consider the following when you and losses. Make sure gains and losses: realized your year-to-date determining Date Trade theThe trade date, not the settlement date, determines gain or loss holding period and the year you recognize • $30,000 ($78,000 less the original tax of $48,000). You actually paid actually paid $48,000). You the original tax of $30,000 ($78,000 less $150,000. 43 6. Use the Netting Rule to Get the Best Results to Get the Best Netting Rule 6. Use the Tax Tip Tax RETURN TO TOC RETURN TO Exclusion and rollover provisions on the sale of certain on the sale of provisions Exclusion and rollover assets. Sale of real estate that is subject to depreciation estate that is subject to depreciation real Sale of 25%. at a maximum rate of recapture 28% rate on the sale of collectibles, such as artwork28% rate on the sale of ETFs that invest in metals (including and precious metals). precious A netting rule that can flip the actual rate from 20% A netting rule that can flip the actual rate from gains (andto 37% (in 2019 and 2020) on long-term gains) since you must net for short-term the reverse one holding period against the excess losses from Tip 6). the other holding period (see Tax gains of Type of property sold. of Type 28% on assets held short-term. The AMT rate of upon your tax bracket. For more information on information upon your tax bracket. For more on taxhow this tax is computed, see the chapter As Chartrate overview. and 4 illustrates, for 2019 tax rates can apply to many different thereafter, capital gains, but the most important rates to 37% in 2019 tax rates of the maximum are remember assets held 12 months or and 2020 on net gains from and 20% on most assets held more less (short-term) the actual However, than 12 months (long-term). a capital asset can tax you pay on the sale of rate of than just how long you have held depend on more the asset, including: gains of $400,000. In 2019, your capital gains tax would be $48,000 $400,000. In 2019, your capital gains tax gains of capital gains of $390,000 (short-term losses of $10,000 and long-term $10,000 and long-term losses of $390,000 (short-term capital gains of with an unrealized short-term gain of $150,000 that you would like to $150,000 that you would like to gain of short-term with an unrealized • • • • • • sell, but are reluctant to pay the short-term capital gain rate of 37%. capital gain rate of the short-term to pay reluctant sell, but are ($240,000 of excess long-term gains at 20%). You also have assets also You gains at 20%). excess long-term ($240,000 of Since gains are netted, if you realized the gain you would have net the gain you realized netted, if you Since gains are $240,000, made up of short-term losses of $160,000 and long-term $160,000 and long-term losses of short-term $240,000, made up of Assume you determine that your year-to-date net capital gains are are net capital gains that your year-to-date Assume you determine EisnerAmper 2020 Personal Tax Guide as S&PIndexoptionsand regulated futures contracts Capital gainsandlosseson mark-to-market assetssuch Mark-to-market assets any entitiesinwhichyouare anownerorinvestor. share of anydistributablecapitalgainsandlossesfrom distribution. You willneedtodetermine yourprojected to youwhetherornotactuallyreceive acash Scorporations, andLLCs, arepartnerships, taxable Gains andlossesfrom pass-through entities,suchas Pass-through entities distribution (seebelow). before anannounceddividend buy mutualfundsshortly itisusuallyinadvisableto an incometaxperspective, Note: also applies. 15% or20%.The3.8%Medicare ContributionTax rate dividends in2019andbeyondare subjecttoratesof tax rates.However, mutualfundspayingoutqualifying income as dividendincomesubjecttotheordinary from moneymarketconstantdollarfunds,are treated dividends,suchas distributions andnon-qualifying date netcapitalgainorloss.Short-term capitalgain you considerthemwhencomputingyouryear-to- their largest distributionsinDecember, somakesure gains ratherthandividendincome.Manyfundsmake term capitalgaindistributionsthatare taxedascapital Dividends paidbymutualfundstypicallyincludelong- Mutual funddistributions similar contracts. incomefrom Sec. 1256contractsagainstprioryears’ dies; however, backsomelossesonIRC youcancarry are terminated whenthetaxpayer loss carryforwards indefinitely(butnotback)untilused.Capital forward are marriedfilingseparately).Excesslossesare carried incomeperyear($1,500ifyou can reduce yourordinary Only $3,000of capitallossesinexcessof capitalgains Excess capitallosses sales closedataloss. on thesaleof publiclytradedsecurities,exceptforshort Absent unusualcircumstances, andstrictlyfrom 44 disallowed underthoserules. you are required toadjustyourbasisforlosses sale transactionsoccurinthesameaccount.Therefore, required washsaleswhenthepurchase and toreport application of thewashsalerules.Brokers are only onForm 1099-B maynotreflect The basisreported are required tobereported. 1,2014 January Options grantedoracquired onorafter are covered securitiesifacquired beginningin2012. with adividendreinvestment plan,bothof which method isavailableandstockacquired inconnection investment companyforwhichtheaveragebasis acquired beginningin2011exceptstockaregulated Transactions.” Acovered securityincludesallstock 1099-B, “Proceeds Exchange from Broker andBarter short-term. isgenerallydoneonForm Thereporting or losswithrespect tothesecurityislong-term or adjusted basisinthesecurityandwhetheranygain from thesaleof the thesecuritymustalsoreport broker whoisrequired thegross proceeds toreport provided thatinthecaseof acovered security, every The Energy Improvement andExtensionActof 2008 | acquires orredeems thoseshares. in anaccounthandledbyacustodianoragentwho average costbasis.Theshares needtobeondeposit and prices,youcancalculatethegainorlossusingan If youacquire shares inamutualfundatvarioustimes | this chapter. these IRCSec.1256contracts,seethediscussionlaterin to-date capitalgainsandlosses.Forthetaxtreatment of should alsobeconsidered whendetermining youryear- ax Basis Reporting Requirementsax BasisReporting for verage Basisof MutualFund Shares Investors Investors T A RETURN TORETURN TOC Capital Gains and Dividend Income
Are Taxable, Are Taxable, Exchanging mutual funds is generally considered a sale of a sale of Exchanging mutual funds is generally considered Bewar Trap theMutualFund e of gain income of $20,000 (4,000 shares at $5 per share), reportable at $5 per share), on shares $20,000 (4,000 gain income of fund is in the same family of funds. fund is in the same family of the initial fund with potential capital gain or loss results, even if the new results, the initial fund with potential capital gain or loss when the fund is selling for $35 per share. You end up with capital You for $35 per share. when the fund is selling your 2019 return, even though the share value has decreased since value has decreased even though the share your 2019 return, $20,000 by the increases But your basis in the shares your purchase. that you reported as income. Warning: Warning: be publicly traded.) You receive a contribution receive be publicly traded.) You security the value of deduction based on the fair market (subject to certain yet limitations based on your AGI), you never pay tax on the appreciation. if you front rewards even greater This can reap fund load a private foundation or a donor-advised securities to fund long-term with appreciated contributions. See the chapter on charitable future contributions for a detailed discussion. you bought the shares. Tip 7 shows, you end up paying tax on the gains, As Tax whether or not your position in the fund of regardless you have converted In effect, has appreciated. part of your initial investment into taxable income. rather than through directly owning stocks A benefit of when you realize a mutual fund is that you can control deferring gains and losses, giving you the advantage of (For donations to private foundations, the stock must(For donations to private foundations, | a mutual fund may A capital gain distribution from by the fund before include significant gains realized 45
Even if They Are Automatically Reinvested Are Automatically Even if They Mutual Fund Distributions Fund Distributions Mutual This assumes that the objective was to lower 7. Tax Tip Tax RETURN TO TOC RETURN TO A I Charitable Giving Through GainsTax Capital void Taxes Your dentify Reduce Lotsto in the fund. For example, let’s say you purchased 4,000 shares of an of 4,000 shares you purchased say in the fund. For example, let’s equity mutual fund on September 1, 2019 at $50 per share. Just before Just before $50 per share. equity mutual fund on September 1, 2019 at per-share value. per-share fund since it simply increases the number of shares you own at a lower you shares the number of fund since it simply increases However, a distribution is taxable in the year made, even if reinvested is taxable in the year made, even if reinvested a distribution However, year-end, the fund makes a capital gain distribution of $5 per share $5 per share the fund makes a capital gain distribution of year-end, You can avoid paying capital gains tax on appreciated can avoid paying capital gains tax on appreciated You than one year securities that you have held for more if you use them to make your charitable contributions. | realized capital gains in the current year. It may have year. capital gains in the current realized prudent to accelerate gains in the current been more if year and postpone losses until the following year, in theit is anticipated that your tax rate will increase subsequent year. Note: Note: at a loss, generally sell the lowest cost lots first.at a loss, generally sell the lowest cost If you only want to sell part of your holdings of aIf you only want to sell part your holdings of of sell the lot withspecific stock, you typically want to the highest cost firstyou can report so that the lowest automatically sell the frequently brokers gain. However, their relative of lots that you bought first, regardless in your broker this mistake by instructing cost. Avoid sell the lots youadvance, in writing, that you want to cost, assuming with the highest have held long-term selling selling the position at a gain. If you are you are | Typically, distributions from mutual funds are reinvested in the fund. reinvested mutual funds are distributions from Typically, value in the not change your aggregate The distribution itself does EisnerAmper 2020 Personal Tax Guide estate planning. and exhausted theexclusion.See thechapterongift taxifyou have already tax exclusionorresult inagift $15,000 for2019,itwilleitherreduce yourlifetimegift exceeds If thetotalamountof toanyoneperson gifts forgiven loanwillbe treated asthoughyoumadeagift. it isnotreally aloan thatyouhavesimplyforgiven. A how longthedebtwasoutstanding.Butmakesure that the lossistreated as ashort-term lossregardless of However,year inwhichitbecomesentirely worthless. is similarlydeductibleasacapitallossattheendof the A non-businessbaddebt,typicallyanuncollectibleloan, some value. Shares of stockof manycompaniesinbankruptcyhave Note: take thelossinthatyear. the salebefore theendof theyear, youwillbeableto foranominalamount. Ifyoucomplete unrelated party test bysellingthesecurity(inabonafidesale)toan security.worthless You canavoidtheabsolute-no-value value, youwillusuallybeprevented from claimingitasa must haveabsolutelynovalue.Ifithasevennegligible on December31.To asecurity beconsidered worthless, term orshort-term, thesecurityisdeemedtobesold Fordetermining whetherthelossislong- worthless. treated asacapitallossintheyearitbecomestotally securityis your lossesthrough taxsavings.Aworthless youcanatleastrecover someof completely worthless, When asecurityornon-businessloanbecomes | or indexedfund. would beapassivelymanagedexchangetradedfund An alternative toanactivelymanagedmutualfund be availableinamutualfund. may sacrificesomeof thatmay theinvestmentdiversity tax. However, byhavingdirect of ownership stocksyou the taxongain,ortakinglossestominimizeyour ake Lossesfrom Securities Worthless and Bad Debts T Do not confuse bankruptcy with worthlessness. Do notconfusebankruptcywithworthlessness. 46 can be carried back and/or forward underspecial rules. can becarriedbackand/or forward for profit maycreate orincrease anetoperatinglossthat lossinthesetypes ofA theft transactionsentered into loss. the deductibletheft the fictitiousincomemaybeincludedinamount of asincome, withdraw theamountpreviously reported income, andtheinvestordoesnotsubsequently the investorincludedamountinhisorhergross ofand thetheft, priortotheyearofyears discovery totheinvestorasincomein If anamountisreported there isareasonable prospect of recovery. or otherrecoveries andreduced byclaimsastowhich amounts withdrawn,ifany, reduced byreimbursements the arrangementplusanyadditionalinvestments,less arrangement isgenerallytheinitialamountinvestedin The lossresulting from afraudulentinvestment grossinvestor’s income. the claiminalatertaxableyearare notincludibleinthe deduction isreduced bysuchaclaim,recoveries on prospect of recovery. To theextentthatinvestor’s astowhichtheinvestorhasareasonable recovery is notcovered byaclaimforreimbursement orother theloss,provided the taxpayerdiscovers thattheloss arrangement isdeductibleinthetaxableyearwhich various limitations.Alossfrom afraudulentinvestment subjectto compensated byinsuranceorotherwise for lossessustainedduringthetaxableyearnot The Internal RevenueCodeallowsadeduction in thefraudulentarrangement(e.g.,aPonzi scheme). made from hadinvested amountsthatotherinvestors principal tothetaxpayer, butthesepaymentswere incomeor advisor madepaymentsof purported response torequests forwithdrawals,theinvestment orwhollyfictitious.Insomecases,in that were partially investment activitiesandresulting incomeamounts example, aninvestmentadvisormayhavereported loss from afraudulentinvestmentarrangement.For Unfortunately, sometimesexperiencea taxpayers | reatment of Lossesfrom Fraudulent Investment Arrangements T RETURN TORETURN TOC Capital Gains and Dividend Income
Long-T T Income Taxed at 0% Taxed Income Selling Short the Box Against erm CapitalGainsandDividend Taxes Save to Stock ransfer Appreciated issuer or has a materially different stated interest rate stated interest has a materially different issuer or or maturity. You can transfer appreciated securities that you have securities can transfer appreciated You who to your child, or other beneficiary, held long-term is subject to a low income tax rate and then have the child sell the securities and pay no federal tax. The child | capital gains and qualifyingNet long-term dividend not taxed at be taxed are income that would normally all for taxpayers whose taxable income is below certain to taxpayers This rule applies with taxablethresholds. income that would otherwise be taxed at either 10% or this rule. application of 12% before | | the wash sale rule — the ”constructive of The reverse locking in the you from sale” rule — prevents any on a security without recognizing appreciation an identical security short.taxable gain by selling The sale and deemed to be a constructive two positions are security was gain as if the appreciated you must realize short the date of sold for its fair market value on the deferring the gain to you from preventing sale, thereby year. a future to close the shortAn exception to this rule allows you if you the tax year sale within 30 days after the end of position open and at risk for at keep your appreciated the shortleast 60 days following the close of sale. Since closing the short sale is based on the delivery you date, actually need to close the short sale earlier so that you within delivered have enough time to have the shares the 30 days. 47 wap to Realize Losses Realize to wap RETURN TO TOC RETURN TO Use a Bond S W Double up on the position 31 days before selling at a before Double up on the position 31 days loss. Buy shares in a mutual fund (or an exchange-traded Buy shares or fund) that specializes in the same industry, Buy securities of another company in the same Buy securities of or industry,
Loss CanDisallow Your ash Sale You may be holding losses in your bond portfolio You a loss and immediately purchase you can realize where somewhat similar bonds, yet avoid the wash sale rule. to as a bond swap because your This strategy is referred net position after is the sale and subsequent purchase similar to your position prior to the swap. For example, a substantially bond is not considered the replacement identical security (the wash sale test) if it has a different | • • • If you don’t want to risk being out of the position for to risk being out of If you don’t want than 61 days, consider the following alternatives: more | a loss on realizing from you sale rule prohibits The wash identical or a substantially if you buy the same a security to buy such a security) within 30 dayssecurity (or option you to be out of or afterbefore you sell it. This requires at an investment risk for those 61the position and/or yet buy a loss on the security realize days if you want to sale “test,” If you fail the wash growth. it back for future only when the replacement your loss will be realized security is sold. One planning technique available is to sell appreciated to sell appreciated One planning technique available is to utilize capital year in order securities in the current thereby immediately, losses and then buy back the stock sale rule does notsecuring a step-up in basis. The wash apply to gains. You can sell the alternative security or mutual fund after security or mutual fund can sell the alternative You to buy back securities in 30 days and use the proceeds if you prefer. your original company, EisnerAmper 2020 Personal Tax Guide and 40%short-term, regardless of theholdingperiod. contracts isautomaticallytreated as60%long-term typical capitalgainassets.The gainorlossonthese tax issuesrelated to thesecontractsare different than options anddealersecuritiesfutures contracts.The options (includingstockindexoptions),dealerequity contracts, foreign currency contracts,non-equity IRC Sec.1256contractsincluderegulated futures | of thedifferent typesof charitable trusts. charitable contributionsforamore detaileddiscussion will gotoacharityyoudesignate.Seethechapteron The remainder amountattheendof thetrust’s term the taxandtrustwillmakeannualpaymentstoyou. a charitableremainder trust.Bydoingso,youwilldefer to sellbecauseof thecapitalgainstax,considercreating If youhaveappreciated securitiesthatyouare reluctant | rate onhisorhercapitalgains. thetaxpayertoa0%tax tax bracket,thereby qualifying of upto$38,700in2019andstillbethe12%for rate of zero. Asingletaxpayercanhavetaxableincome betaxedat12%(for2019)asbeinga otherwise of aprovision thattreats capitalgainincomethatwould would paynotaxonthe$30,000gain.Thisisbecause only haswagesfrom asummerjobof $4,000.Heorshe age 19(whoisnotafull-timestudent),andthechild unrealized gainsof $30,000toyoursinglechildover As anexample,assumeyoutransfersecuritieswith estate planning. and be considered, asdiscussedinthechapterongift chapter. However, taxissuesmust keepinmindthatgift on yourtaxrate,asdiscussedintherateoverview 24) toavoidthekiddietaxrulethatassessesbased must beoverage19(orifafull-timestudent, ital GainsTax onHighly RS Sec.1256Contracts Appreciated Securities I Defer Cap 48 real estateactivities. assets, seethediscussioninchapteronpassiveand Ifyouare consideringsellingany of these partnership. a privatelyheldcorporationoraninterest inanLLC or sales of non-publiclytradedproperty, suchasstockin considered forreal estatesales,itcan alsoapplyto to realize againonthesaleof anasset.Whiletypically tax-efficientmethod An installmentsalecanbeavery | previous year. gain orlossalready treated asrealized attheendof the as ifsold,withanadjustmenttoyourtaxbasisforthe the contractsatyear-end istaxableinthecurrent year Tax) Anyunrealized taxpayers. gainorlosson forcertain considering theadditional3.8%Medicare Contribution 1256 gainsfor2019and2020is26.8%(30.60%when Thus, themaximumeffectivefederaltaxrateonIRCSec. property. Unlikeinstalmentsales, youcannot“optout”of isthesameassurrendered replacement property Note: discussion of like-kindexchanges. passive andreal estateactivitiesforamore detailed on orbefore December 31,2018.Seethechapteron being exchangedorreceived isexchangedorreceived an exceptionforanyexchangeifeithertheproperty December 31,2018.However,completed after there is is notheldprimarilyforsale,effectiveexchanges of gainforlike-kindexchangesof that real property investment property. TheTCJA limitsthenonrecognition rule appliedforthesaleof aswellother real property received. For2019,this other boot(“unlike”property) in theexchange,excepttoextentof anycashor thatyou havereceived gain untilyouselltheproperty same nature orcharacter. You don’tpaytaxesonany thathasthe forotherproperty by exchangingproperty The like-kindexchangeruleallowsyoutodefertaxes | nstallment Sale Reporting Benefits nstallment SaleReporting RS Sec.1031Like-Kind Exchanges I I Like-kind exchange reporting is mandatory if the ifthe ismandatory Like-kind exchangereporting RETURN TORETURN TOC Capital Gains and Dividend Income
I Money market mutual funds and bond funds.Money market mutual trusts (“REITs”). Real estate investment dividends if your in lieu of you received Payments to a customer (as part a shares loans your broker of short paid to the short and dividends are sale) sale the shortbuyer before sale is closed. RS Sec.1035Exchange | gain or loss shall be that no The law provides annuity contract for an of on the exchange recognized is for another annuity contract. The exchange treatment exchanged one insurance individuals who have merely policy for another which better suits their needs. The an annuity of exchange without gain or loss recognition contract for another annuity contract is limited to cases the obligee the same personpersons or are where or obligees under both the original and exchanged contracts. • • • A qualified foreign corporation is generally a foreign corporation is generally a foreign A qualified foreign a of corporation that is eligible for the benefits with the U.S. that income tax treaty comprehensive In program. information includes an exchange of as a qualified corporation is treated addition, a foreign traded on corporation if its stock is readily foreign U.S. For thisan established securities market in the as so traded if an will be treated purpose, a share backed by the American Depository Receipt (“ADR”) a foreign from is so traded. Dividends received share investment corporation that was either a foreign investment company company or a passive foreign distribution or the (“PFIC”) either for the year of qualified dividends eligible not year are preceding for the 15% or 20% rates. Dividend income that is generally not eligible for the not eligible income that is generally Dividend at your ordinary taxed rates, and therefore 15% or 20% 2019 and 37% or 40.8% in rate (as high as income tax Contribution additional Medicare the of 2020 inclusive from: includes dividends received Tax) 49 RETURN TO TOC RETURN TO Qualified You must hold the stock for more than 60 days must hold the stock for more You the during the 121 days beginning 60 days before 181 to 90 days out of ex-dividend date. This increases rate is days for certain stock. The reduced preferred holding if you are not available for dividends received shortan equivalent offsetting position in the same security. The dividends must be paid by either a domesticThe dividends must be paid by either corporation (as corporation or a qualified foreign defined below). Income Dividend • • | by an individual Qualified dividends received taxed 31, 2019 are December through shareholder at 15% and 20% for taxpayers who fall into the 37% the Medicare exclusive of tax bracket. These rates are 3.8%. The following requirements of Contribution Tax must be satisfied: and restrictions like-kind exchange reporting.like-kind a like-kind exchange While properties, swap of have to be a simultaneous does not gain will or the entire meet two time limits you must The firstbe taxable. 45 days from is that you have limit property relinquished the date you sell the to identify The second limit is that property. potential replacement property and thethe replacement must be received no later than 180 days afterexchange completed the property the exchanged or the due date (withsale of in for the tax year the income tax return extensions) of propertywhich the relinquished was sold, whichever property must be The replacement received is earlier. substantially the same as the property identified within the 45-day limit described previously. Dividends taxed at 15% or 20% are not investment Dividends taxed at 15% or 20% are expense the investment interest income for purposes of just as is the case for net long- limitation. However, gains, you can elect to tax the dividends at capital term ordinary this limitation some or all of rates and eliminate See the interest. investment on the deduction of expense. discussion in the chapter on interest EisnerAmper 2020 Personal Tax Guide exchange. asatax-free transfer qualifies(orisintendedtoqualify) exchange isnottakenintoaccountifthesubsequent of of eithercontractinvolvedinan alloraportion on thedateof thetransfer. Asubsequentdirect transfer or more lives)isreceived duringthe180daysbeginning annuity foraperiodof ormore tenyears orduringone if noamount(otherthananreceived asan be treated asatax-free exchangeunderIRCSec.1035 annuity inexchangeforasecondcontractwill ofof thecashsurrender aportion valueof anexisting Under RevenueProcedure 2011-38,thedirect transfer 50 RETURN TORETURN TOC Stock Options, Restricted Stock and Deferred Compensation
51 Stock options, restricted stock and other types of deferred deferred of stock and other types options, restricted Stock the overall benefits offered to executives of both private and public of both private executives to benefits offered the overall compensation continue to be included by many employers as part employers many to by be included of continue compensation companies. The taxation of these components of compensation are quite are compensation of components these of The taxation companies.
complex and, if mismanaged by an employee, the tax cost could be substantial. could cost the tax an employee, and, if by mismanaged complex
RETURN TO TOC RETURN TO
Compensation and Deferred and Deferred Restricted Stock Stock Restricted Stock Options, Options, Stock EisnerAmper 2020 Personal Tax Guide exercising of ISOsincludethefollowing: The keytaxconsequences related tothegranting and a pricethatisbelowtheirfair marketvalue. applicable holdingperiods—youcanbuyshares at any value.Iftheydo—andonceyou’vesatisfiedthe and thusthestockmustappreciate before theISOshave stock’s fairmarketvalue(“FMV”) atthetimeof thegrant, the company. Theexercise pricecannotbeless thanthe during employmentorwithinthree monthsof leaving transferred (except ondeath)andcanbeexercised only exercised of withintenyears receipt. TheISOscannotbe the optionsare granted.Theoptionsusuallymustbe the future atafixedpricethatisdetermined atthetime ISOs giveyoutherighttopurchase companystockin | theyare exercised)(after before sellingthem. exercise stockoptionsandhowlongtoholdtheshares the optionsissold.You mustcarefully planwhen to are exercised, and(3)thedatestock acquired via date theoptionsare grantedtoyou,(2)thedatethey critical datestoremember fortaxpurposes:(1)the NQSOs. Forallemployeestockoptions,there are three sale of shares differsubstantiallybetweenISOsand taxation of theexercise of optionsandthesubsequent stock options(“NQSOs”).Thetaxrulesgoverning the incentive stockoptions(“ISOs”)andnonqualified There are twokindsof employeestockoptions: stock whileminimizingyourtaxexposure. a strategyforexercising youroptionsandselling still heldfrom previously exercised options,todevelop been grantedbutnotyetexercised, alongwithstock of frequently optionswhichhave review yourinventory flow related totheseinstruments.Itisrecommended to your optionsinorder tomaximizetheafter-tax cash thetaxrulesrelatedoptions, itisvitaltounderstand to an employee’s overallcompensation.Ifyouholdstock ofStock optionsmayrepresent asignificantportion | Incentive Stock Options Stock Option Plans
52 cash flow and tax perspectives, youneedto: cash flowandtaxperspectives, your optionsandselltheunderlyingshares from both In order tomakethebestdecisionof whentoexercise • • • • • • maximum of a20%federaltaxrateappliestoeach. purposes thanforregular taxpurposes,althoughthe above). Thus,thecapitalgainwillbelowerforAMT of exercise (toaccountforthe adjustmentmentioned in thestockwillbefairmarketvalueondate disposition.ForAMTpurposes,thebasis a qualifying of thesaleandyourexercise price.Thisisknownas between thefairmarketvalueof thestockondate amounts. Thegainwillgenerallybethedifference abovethethreshold investment incomefortaxpayers 20%, plusa3.8%Medicare ContributionTax onnet term capitalgainincometaxed atamaximumrateof later, aprofitable saleof thestockwillproduce long- theywere exercised,or oneyearafter whicheveris fromleast twoyears thetimeoptionswere granted If thestockacquired byexercising theISOsisownedat treated asanadditionwhencomputingyourAMTI. fair marketvalueof theshares atthetimeof exercise is the exercise price(whatispaidfortheshares) andthe previously grantedISO. However, thespread between There isnoregular taxliabilitywhenyouexercise a granted. There isnotaxliabilityonthedateoptionsare Project multiplefuture taxscenariosbased ondifferent exercise withoutincurring acurrent-year AMT liability. year todetermine thenumber of shares youcan Project bothyourregular taxandAMT for thecurrent dispositions of ISOs. due onthecompensationderivedfrom disqualifying However, there are noSocialSecurity orMedicare taxes may alsohaveashort-term gaincomponentaswell. the stocksoldchangedfrom thedateof exercise, you taxed atafederalrateashigh37%.Ifthepriceof this salewillbeincludedascompensationand or within24monthsof thegrantdate.Thegainon within thelaterofoptionisexercised, oneyearafter ifyousellthestock dispositionoccurs A disqualifying RETURN TORETURN TOC Stock Options, Restricted Stock and Deferred Compensation
Should Y May reduce your overall AMT liability if you are able your overall AMT liability if you are May reduce the ISOs at a time when you think the to exercise out. Since themarket price is close to bottoming between the fair market price is lower and the spread price may be negligible, you value and your exercise without incurring an AMT options more can exercise Even or just having to pay a small liability. liability, triggers you’ll pay less than the AMT if the exercise an equal number of you would if you had exercised options at a time when the stock price was higher. May create an AMT liability before you have the an AMT liability before May create the stock to pay an AMT the sale of from proceeds and liability, drops the shares Exposes you to a loss if the value of cost. below your exercise Accelerates the use of funds you need to purchase funds you need to purchase Accelerates the use of the shares, Starts your holding period so you can be eligible for rate sooner. capital gain the federal long-term by giving youAllows you to manage your AMT liability just enough options to reach the ability to exercise point between the AMT and regular a break-even avoiding the AMT). This can be done tax (thereby your options with annually to allow you to exercise minimal, or no, AMT cost. Early? ou Exercise • • • • since you exercised the option. But trying the option. exercised since you plan for to the to predict when it is impossible scenarios different know the it difficult to the stock makes price of future your based on some alternatives are Here best choice. holdings combined with certaincurrent assumptions. | until your options early rather than waiting Exercising can be advantageous, but you mustthe expiration date and potential tax costs. On the plusconsider cash flow early: side, exercising • • Alternatively, on the negative side, exercising early: side, exercising on the negative Alternatively, 53 RETURN TO TOC RETURN TO AMT Cr Determine how much cash you have available to how much Determine consider a the options and, if necessary, exercise Among the stock. purchasing financing option for and a stock a cashless exercise are these alternatives will be discussed later in thisswap. These techniques chapter. stock prices to assist you in deciding if you should to assist you in stock prices incurring of even at the expense options now, exercise future greater potentially to gain from an AMT liability, of consider the availability Also, you should tax savings. discussed below. the AMT credit ISO Scenarios ISO edit | yourThe first decision to make is when to exercise due they are now until before existing options, from the options, you exercised Once you have to expire. However, then must decide when to sell the shares. to compared selling the shares the tax consequence of can be complicated since continuing to hold the shares clearly defined,it depends on several factors. Some are price, the original exercise trading such as the current the of the exercise price, the trading price at the time of time you have held the shares option, and the length of Please see the chapter on tax credits for a detailed Please see the chapter on tax credits the AMT credit. discussion of If the exercise of ISOs results in an AMT liability, you AMT liability, in an ISOs results of If the exercise an AMT credit years to receive will be eligible in future the Generally, for AMT paid on these option exercises. you can use is limited to the annual amount that credit tax exceeds your AMT without regard your regular can be Any unused credit in each year. to the credit carried forward it until the full amount is used. While to avoid paying AMT on ISO is usually recommended may be situations whenever possible, there exercises with the exercise when you may decide to go ahead favorable market conditions. because of | • EisnerAmper 2020 Personal Tax Guide loss ($12lessyourexercise costof $15),yourAMTloss While youwouldonlyhave a$3pershare regular tax assume thestockiscurrently tradingat$12per share. the shares andrealize acapitalloss.Asanexample, If youhavenetcapitalgainsfortheyear, youcansell exercise price If thecurrent islower tradingprice thanyour cost of $15. between thefairmarketvalueof $25andtheexercise year of theexercise onthefullamountof thespread exercised thegrant. You were subject totheAMTin and thestockwastradingat$25pershare whenyou in aprioryear. Your exercise costwas$15pershare, more than12monthsfrom theexercise of anISOgrant Assume thefollowing:You haveheld10,000shares for | ISO Exercised inPriorYears Tax Tip • • 3. 2. 1. Assume thefollowingfacts: • • • When youselltheshares: • Your taxconsequenceswithoutconsideringtheMedicare ContributionTax of 3.8%wouldbeasfollows: 8. ISOTax Benefits ou ou haveafederalregular taxliabilityof $45,000 computedbyapplyingthe20%long-term capitalgainratetotheof $225,000, e isnoregular taxduewhen youexercise thegrantandpurchase theshares. However, youwillhaveanAMTpreference of e isnotaxduewhentheoptionsare granted. ou are grantedincentivestockoptionstobuy9,000shares of yourcompanystockfor$20pershare onJune3,2009. anuary 10,2018,youexercise all9,000optionswhenthefairmarketvalueis$30. anuary 12,2019andthensellthemfor$45pershare, andyouwereou holdtheshares uptotheyear intheAMTallyears untilJanuary year. the regular taxof $45,000,thussaving$18,000currently andpossiblysavinganadditional$25,200inthefuture. atax preferenceexercised theoptionsandreported amount).You paythelowerAMTtaxof $27,000intheyearof thesaleratherthan AMT gainof $135,000basedonproceeds of $405,000lessyourAMTtaxcostof $270,000(9,000shares at$30pershare whenyou AMT share). computed bysubtractingthecostof $180,000(9,000shares at$20pershare) from yourproceeds of $405,000(9,000shares at$45per $25,200 ($90,000timestheAMTrateof 28%). $90,000 (9,000shares attheexcessof $30overyourcostof $20).Assumingyouare already intheAMT, youradditionalAMTtaxis of thesale. Y On J Y If Even ifyoucannotutilizetheAMTcr Y Y Ther Ther
you
will
credit
are
be
not
eligible amount,
able
to to
but
use offset
you
all
your
the can
AMT
regular only edit becauseyouare stillintheAMT, yourAMTtaxonthegainis$27,000.This20%of the
credit, utilize
tax
from it you
to
can
the the
extent continue sale
by
your
$25,200
54 to
regular carry
regular tax,ifnotalready utilized.TheAMTcredit is since youhaveanAMTcredit availabletooffset your $4 gainpershare). Butyoumayactuallysave taxes resulting inataxof $9,520 (23.8%of 10,000shares at a gainof $4pershare ($19lessexercise costof $15), If youare notintheAMTforyear, youwillrealize Assume thestockiscurrently tradingat$19pershare. at thetimeyou exercised thegrant exercise butlower price thanthetrading price If thecurrent ishigherthanyour tradingprice Medicare ContributionTax onnetinvestmentincome). long-term capitalgainrateplus$30,000times3.8% savings of $27,140intaxes($130,000timesthe20% per share times10,000shares), creating apotentialtax year, yourAMTlossonthesalewouldbe$130,000 ($13 you exercised theoptions).Ifyouare intheAMTthis would be$13pershare ($12lessthe$25valuewhen of
the
AMT tax
unused
exceeds
that
you credit
your
paid
forward
AMT
when
before
to you
offset
exercised the
regular offsetting
the
tax
option. credit.
in
a RETURN TORETURN TOC
subsequent
This
is
your
Stock Options, Restricted Stock and Deferred Compensation
open
the
in
shares
the
repurchase
then
can
you
tock Price Drops tock Price Drops receive),
you ISO Exercised Earlier in the Current Year in the Current Earlier Exercised ISO
| you may want year, ISOs earlier in the If you exercised in a disqualifying selling shares to consider if disposition assume an original certain conditions exist. Again, let’s price of and a trading per share $15 price of exercise exercise. at the time of $25 per share trading pricethan the price is less If the current the option exercise to paid you $10 amount of First, if the AMT preference determine less exercise price at the time of ($25 trading per share or will put you into the AMT $15 per share) your cost of If so, consider existing AMT liability. an already increase that you will haveselling the stock to eliminate the AMT As Tax has dropped. to pay even though the stock price a substantial taxTip 9 illustrates, you could end up with you can alwayswithout any funds to pay the tax. Also, 30 days to avoidbuy back the stock as long as you wait on capitalthe wash sale rule discussed in the chapter amount gains and dividends. If the AMT preference you can choose to does not put you into the AMT, if you believe the stock continue holding the shares will appreciate. 55 benefit
AMT
any
of
(regardless
gain
a
at
sold
securities
to
apply
Eliminate the AMT if the S Eliminate the AMT After an Exercise not
9. does shares. market, even at a lower price, so that you would still own the same number of A falling stock price can result in costly tax consequences if the sale of stock purchased through exercising an ISO is not planned for exercising through stock purchased if the sale of in costly tax consequences A falling stock price can result has fallen back was earlier this year and the price per share 9,000 shares of Tip 8 but assume your exercise the facts in Tax Take properly. at 28%) if the would be $25,200 ($90,000 preference Tip 8 demonstrates, your AMT tax on the exercise price. As Tax to $20, your exercise equal to the price you paid for them. is currently your shares will have to pay this tax even though the selling price of AMT applies. You - would not have a regu the year so that you will have a disqualifying disposition. You the end of before What can you do? Sell the shares price. But you will eliminate the $25,200 AMT that you would $20 is now equal to your exercise lar tax liability since the selling price of pay if you did nothing. say the stock price has price. Let’s than your exercise even if the selling price is greater It may make sense to consider selling the shares - you will real the year, the end of before If you sell the stock after and you will be in the AMT this year. to $23 per share exercise dropped $20 per share). $23 and your cost of based on the selling price of $3 per share at a gain of ize ordinary $27,000 (9,000 shares income of $25,200 28%), which is less than the AMT disqualifying on the AMT liability the of $7,560 ($27,000 AMT rate will be disposition x However, (as computed above). Because the wash sale rule (as discussed in the chapter on capital gains) that you would pay if you held the shares Tax Tip Tax RETURN TO TOC RETURN TO If the current trading price than both is higher If the current price price and the trading at the exercise your the exercise time of gain for you will have a capital If you sell the shares, the tax and AMT purposes. Assume both regular not in the AMT, stock price is $35. If you are current ($35 $20 per share on the gain of you would pay tax $15). As discussed above, you cost of less your exercise the tax on available to offset may have an AMT credit your subject to the AMT this year, the gain. If you are ($35 less the price AMT gain would be $10 per share for tax increase $25). Your of exercise at the time of on the AMT gainfederal tax purposes would be based $20. However, tax gain of $10 rather than the regular of on net Contribution Tax the additional 3.8% Medicare on the $20 gain. investment income would be based $28,000 (28% of 10,000 shares at an AMT spread of $10 of AMT spread at an shares 10,000 of $28,000 (28% ($28,000 will be $18,480 tax savings Your per share). and Medicare regular less the $9,520 AMT credit assuming you have tax on the sale, Contribution tax liability). sufficient regular EisnerAmper 2020 Personal Tax Guide market valueontheexercise dateoveryour exercise dispositionandtheexcessof disqualifying thefair Once again,ifyousellthe shares youwillhave a time of theexercise your exercise atthe andthetradingprice price If thecurrent ishigherthanboth tradingprice purposes hadyoutakennoaction. tax andAMTcompared to$10of incomeforAMT income of $3persharehave ordinary forbothregular dropped to$18per share. Ifyouselltheshares, youwill exists. Asanexample,let’s assume thestockpricehas per share onphantomappreciation thatnolonger the saleof theshares willeliminate theAMTof $10 as 37%.ButifyouexpecttobeintheAMTthisyear, incometaxratesashigh compensation atordinary price overyourexercise pricewillbetaxableas disposition andtheexcessof thecurrent trading If youselltheshares, youwillhaveadisqualifying when you exercised theoption exercise butlower price thanthetradingprice If thecurrent ishigherthanyour tradingprice Tax Tip shares).since yourbasisis$15pershare ForAMTpurposes,thegainisonly$750,000 (fairmarket value atthetime of theexercise, even The long-term capitalgainforregular(proceeds taxpurposesis$1,050,000 ofyou paidtopurchaseless the$150,000 $1,200,000 the ($150,000 taxontheactualgainof $1,050,000). though Note: ThistabledoesnotincludetheimpactofMedicareContributionTaxonnetinvestmentincome. income.Youliability thatyearbecauseyouhadsubstantialordinary selltheshares in2019for$40pershare and youare intheAMT. for $15pershare. Despitethetaxpreference amountof $300,000(30,000shares timesthe$10pershare spread) youdidnothaveanAMT Assume youexercised anISOgrantin2008andpurchased 30,000shares attheexercise priceof $5pershare whenthestockwasselling the AMTtoYour Advantage to Reduce 10. Effective taxrateonsale Tax at20% Long-term capitalgain
you Use Taxes ontheSaleofISOs
did
not
pay
the
AMT
in
that
year).
The
r esult
o f
the 56
sale
is excess of thestock’s fairmarketvalueonthe dateof tax andAMTpurposes.The incomeisequaltothe incomeintheyearof exerciseordinary forbothregular Unlike ISOs,theexercise of NQSOscreates taxable | AMT paid. This isbecauseyoumaynevergetabenefitforthe item itmaymakesensetoselltheshares byyear-end. been intheAMTwithorwithoutISOpreference sense tosellthestockduringyear. Ifyouwouldhave subject totheAMTduringyear, itwouldnotmake Medicare ContributionTax of 3.8%.Thus,ifyouare not In addition,$5pershare maybesubjecttothe sold taxedatpotentially37%forregular taxpurposes. of theshares wouldresult in$15of incomepershare gain. Soifthestockissellingfor$30pershare, asale the dateof exercise willbetaxedasashort-term capital income taxrates.Theadditionalincrease onthesaleat price willbetaxableascompensationatordinary
Nonqualified Stock Options that
you
only
pay Regular tax
a $ 1,050,000
curr 210,000 ent 20%
federal
effective
tax
rate RETURN TORETURN TOC $ 750,000 150,000
14.29% o f AMT
14.29%
Stock Options, Restricted Stock and Deferred Compensation - (27,000) be: (33,300)
(180,000) $ 164,700 will $ 405,000
sale
and
exercise
the
from
benefit
cash
net
Your
A cashless exercise occurs when a broker lends you the occurs a broker when A cashless exercise the options and then, usually cash needed to exercise sell the stock. The broker helps you on the same day, as well as a small the funds you borrowed recoups excess funds. Your and you keep the interest amount of charge. cost for the transaction is only the small interest acquired A stock swap occurs when you use previously cost. company stock to pay for the options’ exercise options Some companies will even grant you more shares for more than one year after date. for more the exercise shares transferable. sometimes NQSOs are Unlike ISOs, will not the transferee) the employee (and However the income for tax purposes upon generally recognize the options. of exercise in-the-money options receive not allowed to are You substantial penalties under provisions without triggering this type of restricting Revenue Code the Internal of compensation (see below). deferred an exercise consequences of Tip 11 illustrates the tax Tax an of the exercise from received shares and sale of NQSO grant. 57 20%).
at
($135,000
$27,000
of
cost
tax
federal
maximum
a
at
share)
per
This example does not take into consideration Social Security and Medicare taxes. This example does not take into consideration Social Security and Medicare Note: Cost to exercise the shares (9,000 shares at $20 per share) (9,000 shares the shares Cost to exercise options ($90,000 at 37%) of on exercise Tax ($135,000 at 20%) when you sell the shares Tax Net cash benefit Proceeds from the sale 11. NQSO Tax Consequences 11. NQSO Tax $30 If the 9,000 shares from exercise of the ISOs in Tax Tip 8 were from the exercise of NQSOs, you will recognize $90,000 of taxable compensa $90,000 of NQSOs, you will recognize of the exercise from Tip 8 were the ISOs in Tax of exercise from If the 9,000 shares tion from the exercise (9,000 shares at $30 per share fair market value less the $20 exercise cost). When you sell the stock after market value less the $20 exercise fair holding it for at $30 per share (9,000 shares the exercise tion from of basis your less $45 at shares (9,000 $135,000 of gain capital long-term a have will you NQSOs of exercise the from year, one than more Tax Tip Tax RETURN TO TOC RETURN TO Financing Techniques Unless you have sufficient available cash, it can be your to come up with the funds to exercise problematic money — sometimes can borrow stock options. You other ways to are — but there the company itself from such techniques are finance your stock acquisition. Two a stock swap. and a cashless exercise | When you sell the stock afterWhen you sell the any exercising, value will be stock’s in the appreciation/depreciation the The holding period for taxed as capital gains/losses. underlying stock starts — the shares acquire when you the time you held the options. Forit does not include you must hold the capital gain treatment, long-term exercise over the exercise price plus any amount that price exercise over the exercise The granting applicable. for the option, where was paid income unless in taxable result NQSO does not an of ascertainable, is readily the option which of the value upon case. The income recognized generally is not the will be will be taxed as compensation and exercise taxes. Security and Medicare subject to both Social EisnerAmper 2020 Personal Tax Guide Under theTCJA, IRCSec.83(i) wasaddedtotheInternal | it. when yousellthestock,butnotifforfeit the stock’s valuedecreases. You willhaveacapitalloss thestockor can’t berefunded ifyoueventuallyforfeit current year. Plus,taxespaidasaresult of theelection incometaxratesinthe is thatyoupaytaxatordinary The disadvantageof makinganIRCSec.83(b)election on thesale.SeeTax Tip12. whether ornotyousellthestockandrealize anygain the appreciation regardless whentherestrictions lift of incometaxrateson election, youwillpaytaxatordinary taxed atapreferential taxrate.Ifyoudonotmakethe into long-term capitalgainincome,whichistypically future income stockappreciation fromconvert ordinary negligible. Why? Becausetheelectionallowsyouto if theincometaxabletoyouongrantdateis An IRCSec.83(b)electioncanbeextremely important next section. is incompliancewiththerequirements discussedinthe respect tocompensationreceived intheform of stock sure yourcompany’s deferred compensation planwith the stock.However, before makingtheelection,make receiving must makethiselectionwithin30daysafter incomewhenyoureceive thestock.Youordinary But youcanelect,underIRCSec.83(b),torecognize is nolongersubjecttothatriskoryousellthestock. you candefertherecognition of incomeuntilthestock form of stocksubjecttoasubstantialriskof forfeiture, from stockoptions.Ifyoureceive compensationinthe The taxtreatment of restricted considerably stockdiffers | exercise price. be equaltothenumberof shares usedtopaythe swap. Thenumberof additionaloptionsgrantedwill called “reloads” ifyouexercise anoptionwithastock Impact of theTax Cutsand Jobs Act Restricted Stock
58 • • Distributions canonlybemade: calendar yearpriortotheincomeisearned. to defercompensationmustgenerallybemadeinthe and theabilitytotakedistributions.Theinitialelection governing theinitialelectiontodefercompensation a deferred compensation plandependsonrules The taxtreatment of compensation received through | tax years. officers of thecorporationforanyof thetenpreceding year orwhowere oneof thefourhighestcompensated compensated officers of thecorporationfortax aswellanyoffamily members, thefourhighest following: a1%owner, CEO, CFOandrelated Employees ineligibleforthisnewdeferralare the must agree toatthetimeof this election. or exercise mustbeescrowed, whichtheemployee this newcodesection;(c)thedeferred shares atvesting for can specificallyissueequitygrantsthatdon’tqualify (b)companies 80% of employeesinacalendaryear; 83(i), thecompanymustissueequitygrantstoatleast following: (a)To bequalifiedequitygrantsforIRCSec. on thenewcodeIRCSec.83(i).Thenoticestated In IRSNotice2018-97,clarificationwasissuedbythe becomes freely transferrabletoanotherparty. stock optionorRSUs(ii)thedateonwhich the earlierof from (i)fiveyears thedateof vestingof the may electtodeferrecognition of anysuchincomeuntil options orRSUstoatleast80%of full-timeemployees employees of aprivatecompanythatgrantsstock stock units(“RSUs”).UnderIRCSec.83(i),eligible elect todeferincomefrom stockoptionsorrestricted employeesto Revenue Codewhichallowsforcertain Deferred Compensation Plans At thetermination of employmentorservice. participant. based oneitherspecificdates ortheageof the At scheduledtimesselectedatthetimeof thedeferral, RETURN TORETURN TOC Stock Options, Restricted Stock and Deferred Compensation The date the option was granted, The date the option the option, exercised The date the employee to the transferred stock of shares The number of employee, wasoption the when stock the of value market fair The and exercised, the stock. price of The exercise Additional Reporting Additional Requirements | Every employee a to an that transferred corporation an ISO of exercise that person’s to related stock of share 3921 to file Form tax year is required during the current 3921 includes transfer made. Form with the IRS for each the following information: • • • • • The forms are not required for an employee who is a not required are The forms the Forms alien. Employees must receive non-resident 3921 by January the calendar 31 following the end of to be reporting. is also required The Form year of 1096 Form filed with the IRS with the corresponding by February the calendar year reported 28 following 31 if filing electronically). (March for employee stock filing requirements similar are There plans. purchase 59 ISOs are excluded from these provisions because these provisions excluded from ISOs are RETURN TO TOC RETURN TO An interest assessment based on the IRS An interest tax liability resulting underpayment rate plus 1% on the compensation. the of the recognition from An additional tax of 20% on top of the ordinary of 20% on top of An additional tax as compensation. income tax on the amount treated Taxation of the compensation ‘deferred’ at the time it is the compensation ‘deferred’ of Taxation to the participant, or credited deferred or at the time it later. vests, whichever is Following a change in the ownershipFollowing a change or effective the employer. of control On the disability or death of the participant. or death of On the disability emergency. unforeseen alleviate an To • • • • • • their exercise price must be equal to their value at the price must be equal to their value their exercise the grant. time of Note: Note: Failure to follow these rules will result in: will result to follow these rules Failure EisnerAmper 2020 Personal Tax Guide Tax Tip eceive You You selltheshares laterin2019at$8pershare. twoyears for-one 12. Tax savingsbymakingtheelection If youmaketheelection If youdon’tmaketheelection • • • • • • • • •
($600,000 at37%). the substantialriskof nolongerexistsduetoachangeof forfeiture control feature) atamaximumfederaltaxcostof $222,000 You havecompensationof $600,000(100,000shares attheIPOpriceof $6pershare) whenthecompanygoespublic(and You don’thaveanycompensationincomethisyear. You deferthetaxyouwouldhavetopaywhencompanygoespublictimestockissold. You incuraMedicare ContributionTax onnetinvestmentincomeof $29,260($770,000at3.8%). the stock,atamaximumfederaltaxcostof $154,000($770,000at 20%). You realize along-term capitalgainof $770,000(100,000shares at$8pershare lessyourbasisof $0.30pershare) whenyousell Your holdingperiodbeginsonthedayyoureceive thestock. Your thesplit($30,000of basisinthestockis$0.30pershare realized after compensationdividedby100,000shares). ($30,000 at37%in2019). You have$30,000of compensationinthecurrent year(10,000shares at$3pershare) withamaximumfederaltaxcostof $11,100 share) atamaximumfederaltaxcostof $47,600($200,000at23.8%). You havealong-term capitalgainof $200,000whenyousellthestock(100,000shares at$8pershare lessyourbasisof $6per r
stock The BenefitofanIR for Restricted Stock
10,000
split
gives shar If you make receiving anIRC thestock Sec.83(b)electionwithin30daysafter es
you
o f
r 100,000 estricted
shar
stock es.
with A t
the
a
fair If youdon’tmaketheelection time
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o f
the
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IPO 60 ,
the C Sec.83(b)Election o f
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anticipation at
$6
per
shar
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and
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(“IPO”), $ 269,600
is $ 75,240 194,360
r emoved.
a
ten-
Small Business Stock
investments in certain business stock. small investments 61 Take advantage of preferential tax treatment available for available treatment tax preferential of advantage Take
RETURN TO TOC RETURN TO
Stock Small Business Small EisnerAmper 2020 Personal Tax Guide individual cannot become a partner inapartnership individual cannotbecome a partner the dateof acquisitionthrough thedateof sale.An individual taxpayerhasheld thestockconsistentlyfrom entity, fortheexclusion ifthe heorshemay stillqualify If anindividualholdstheQSBstockbyapass-through investment intheQSBstockof issuers. diverse Accordingly, asingletaxpayermayexcludegainfor for eachtaxpayerandissuingcorporation. The gainexclusionmustbeanalyzedseparately the businesshasnotyetproduced revenue. active, qualifiedtradeorbusinessrequirement evenif activities of the afuture tradeorbusinessmaysatisfy forthistreatment. Researchdo notqualify andstart-up hospitality, andmining, financing,professional services, Note: QSB stockisdefinedasstock: rollover whichallowsyoutodeferthetaxongain. The gainfrom thesaleof QSBstockiseligiblefora • • • • • • preferential federaltaxtreatment, including: for Qualified smallbusiness(“QSB”)stockcanqualify | SmallBusinessStock Tax Benefits August 10,1993). Acquired bythetaxpayeratoriginalissuance(after and corporations qualify); Held byanon-corporatetaxpayer(LLCs andS Issued byadomesticCcorporation lossratherthancapitaltreatment. Ordinary reduces taxrates;or Exclusion of gainsfrom incomewhicheffectively used tobuyanotherqualifiedsmallbusinessstock; and Deferral of gainiftheproceeds are “rolled over” • • for restriction); active, qualifiedtradeorbusiness(seeNotebelow which employsatleast80%of itsassetsinan time of issuance;and andimmediatelyafter with lessthan$50millionof gross assetsatthe Businesses in certain industries, such as industries,suchas Businesses incertain 62 the gain. tax treatment maydifferfrom thefederaltreatment of Finally, shouldalsobeaware taxpayers thatthestate has beenexchangedorconverted. holding periodunderIRCSec.1202where QSBstock forpotentiallybroadening the are otheropportunities asQSBstock.There or distributionmayalsoqualify benefits atdateof death sale.Stockreceived bygift, who hasalready purchased QSBandreceive theQSB $10 millionlimitor$5million. separately, thegaineligibleforexclusionis 50%of the of duringthetax year. Ifthetaxpayerismarried filing the basisof allqualified stockof theissuerdisposed or(b) tentimes same corporationtakeninprioryears of (a)$10millionreduced byeligiblegainfrom the to acumulativelimitforgivenyearof the greater ormore,corporation forfiveyears eligiblegainissubject Note: rate of 20%presently ineffect. effective rateof 14%,compared tothecapitalgains tax any, is28%,meaningthat the50%exclusionyieldsan The taxrateonthegainnotsubjecttoexclusion,if dates: amount of exclusionisstaggered basedontaxholding on thesaleof theQSBstockfrom gross income.The of thegain corporation) mayexcludeatleastaportion (based onthepurchaser’s dateof first as aC ownership Taxpayers whoholdQSBstockfor more thanfiveyears | • • • Reduced Tax Rates February 18,2009. February 50% of thegainiftaxholdingdatebeganbefore 17,2009andbefore September28,2010. February 75% of thegainiftaxholdingdatebeganafter permanent. the enactmentof PATH. Thisprovision hasbeenmade September27,2010,resulting fromthat beganafter 100% of thegainifstockhasataxholdingdate If ataxpayerholdsQSBstockof anyone RETURN TORETURN TOC Small Business Stock
6.92% 23.8% 14.38% Benefit if in AMT 23.8% 23.8% 23.8% Capital gain rate 0% There is no carryover is There holding period for of 9.42% 16.88% certain has the taxpayer even where circumstances, years.held the QSB stock for less than five qualifymust option, a taxpayer this rollover for To (b) sell the(a) own the stock for at least six months; sale within 60 days of the proceeds stock; (c) reinvest to apply IRCin other QSB stock; and (d) timely elect for the year during Sec. 1045 on its federal tax return The replacement QSB stock occurred. which the sale of qualify may in the rollover for a stock purchased same rules. The basis in the under the rollover future gain by the deferred stock is reduced replacement and the taxpayer inherits the holding the rollover from whether the the stock sold in determining period of If or long-term. short-term is capital gain treatment the investment in the new QSB stock is less than the the original stock, the the sale of from sale proceeds tax rates. is taxable at regular difference an does not apply to stock of provision The rollover S corporation. Note: the “more-than-six-months” determining purposes of requirement. 63 AMT effective rate 1 2 3 0% 15.9% 7.95% Regular net tax rate* Regular Qualified small business stock held for five years can result in additional savings. result in additional stock held for five yearsQualified small business can
Taxpayers with net capital losses, who take with net capital losses, Taxpayers (28% + 3.8%) x 0% subject to tax after 100% exclusion of gain (28% + 3.8%) x 0% subject to tax after 100% exclusion of (28% + 3.8%) x 25% subject to tax after 75% exclusion of gain (28% + 3.8%) x 25% subject to tax after 75% exclusion of (28% + 3.8%) x 50% subject to tax after 50% exclusion of gain (28% + 3.8%) x 50% subject to tax after 50% exclusion of 02/18/ 2009-09/27 /2010 Planning Tip: 3.8% net investment QSB stock is generally subject to the the sale of from recognized Rate Schedule, the gain Tax shown in the *As 3.8% net investment income income, it follows that the gross the gain is excluded from all of income tax which applies to capital gains. If is in the highest applicable tax bracket. this Schedule assumes that the taxpayer Further, tax would not apply. 09/28/ 2010 and beyond 09/28/ Pre 2001-02/17/2009 Pre 2 3 1
Year of purchase 5. IRC Sec. 1202 Tax Rate Schedule Sales Rate Tax Sec. 1202 5. IRC Chart RETURN TO TOC RETURN TO 7% AMT preference adjustment of the amount adjustment of 7% AMT preference excluded for all sales occurring prior to September 27, 2010. No preference adjustment for the sale of stocks with a stocks sale of adjustment for the No preference tax holding date beginning after 27, 2010, September This provision PATH. the enactment of of as a result has been made permanent. Rollover of QSB Stock of Rollover AMT Adjustments The IRC Sec. 1045 rollover rules permit non-corporate rules permit The IRC Sec. 1045 rollover QSB stock under taxpayers to defer gain on a sale of | • • Although excludable for regular tax purposes, a portionAlthough excludable for regular QSB stock may be the excluded gain on the sale of of also rates are The preference item. an AMT preference dates: based on stock purchase | Caution: that the the exclusion, should be aware advantage of those AMT will trigger utilization of AMT preference capital losses. EisnerAmper 2020 Personal Tax Guide acquisition. showingthedatesof stock such asstockcertificates to establishthattheyhavesatisfiedtheprerequisites, of thesetaxpreferences maintainrecords sufficient Finally, seekingthebenefits itiscriticalthattaxpayers recent taxableyears. exchanges)during thefivemost and salesorproperty activities (interest, dividends,royalties, rents, annuities, not more than50%of itsincome from investment less atthetimestockwasissuedandhavederived must havehadaninitialcapitalizationof $1millionor continuously untildisposition.Theissuingcorporation bought thestockatoriginalissueandhaveheldit To forthistreatment, thetaxpayermusthave qualify of netoperatinglosses. months. Thislossmaybeincludedinthecomputation than capital,eveniftheholdingperiodexceeds12 filingseparately)ofperson thelossasordinary, rather up to$100,000($50,000foranindividualoramarried If yousellsmallbusinessstockataloss,canclassify | long asthereplacement periodisobserved. Note: maydeferinthiscontext. of gainthatapartner addition, there maybeotherlimitationsontheamount — ratherthanthedateyouare notifiedof thesale.In beginning onthedayentitysellsQSBstock replacement stockdirectly. The60-dayrulestillapplies, you of thegainandyoucandefertaxbybuying thepass-through entitycannotify gain. Otherwise, replacement stockandelectatax-free rollover of the orshareholder,you are apartner theentitycanbuy If thestockisheldbyapass-through entityof which Claim Ordinary –NotCapital –Losses ClaimOrdinary Rollovers into new QSB stock are still available as intonewQSBstockareRollovers stillavailableas 64 RETURN TORETURN TOC Passive and Real Estate Activities
65
If you are an owner of a business in which you do not materially of an owner If you are participate, activity rules can limit your ability to deduct the passive even if you materially participate,even unless you qualify estate as a real
losses. And, if you hold rental real estate investments, the losses are passive passive are the losses investments, estate real And, if you hold rental losses. professional. Income from passive activities including rental real estate may estate real activities including rental passive from Income professional.
also be subject to the 3.8% Medicare Contribution Tax on net investment income. on net investment Tax Contribution be subject to 3.8% Medicare the also
RETURN TO TOC RETURN TO
Passive and Passive
Activities Estate Real EisnerAmper 2020 Personal Tax Guide deduct inthecurrent year, theselosses youcancarry the activity. Ifyouhavepassivelossesthatcannot offset thelosses,orwhenyoucompletelydisposeof that youhaveincomefrom otherpassiveactivitiesto Passive activitylossesare deductibleonlytotheextent • • • • limitation rules,are if: business activity, andthereby avoidthepassiveactivity ina ways youare deemedtomateriallyparticipate Themostcommon you donotmateriallyparticipate. A passivelossisafrom abusinessactivityinwhich | Whatare Passive Losses? year inallsuchactivities. several activities,totallingmore per than500hours You workmore peryearineachof than100hours or owners, includingnon- and notlessthananyotherperson, You workmore peryearintheactivity than100hours intheactivity,participation Your constitutessubstantiallyallof the participation during theyear, You more intheactivity than500hours participate This very favorableresult isduetothe factthatthesuspended This very January 1,2018),whereas thelong-term capitalgainfrom thesale January As anexample,assumeyouhavesuspendedpassivelossesof $300,000 from an activitythatyouhaveheldformore thanone taxes. Infact,youmayactuallyreduce yourtaxesdespitethegain. to disposeof apassiveactivityatgainandnothavetopayany year. You disposeof theactivityin2019 and realize acapitalgain well asreceiving theproceeds from thesale. If youhavesuspendedpassiveactivitylosses,maybeable of $340,000.You wouldactuallysavefederaltaxes of $43,000 as losses reduce your ordinary incomeata37%rate (beginningon losses reduce yourordinary Tax Tip Passiveto Activity CapitalGains 13. Use Release SuspendedOrdinary Losses 66 The taxsavingswouldbereduced bythe3.8%Medicare $340,000). If you have a net capital loss carryover thatyoumight $340,000). Ifyouhaveanetcapitallosscarryover Contribution Tax intheamount of $1,520 (3.8%of $40,000,which therefore reduce yourtaxby$111,000(37%of $300,000), butthe would betaxedatnomore than20%.Thesuspendedlosswould benefit of theloss(buta reduced carryover). be abletoutilize,yoursavingswouldevengreater sincethe ordinary loss). ordinary capital gainwouldonlyincrease yourtaxby$68,000(20%of is thedifference betweenthe$340,000 capitalgainand$300,000 gain could be offset by the carryover loss,giving you thefulltax gain couldbeoffset bythecarryover participation. are specificrulesastowhatkindof workqualifiesas inseveralactivities.Moreover,they participate there activity,they spendonaparticular especiallywhen Taxpayers shouldkeepdetailedrecords astothetime passive lossrulesandlimitations. tothefollowingyear,forward subjecttothesame income trapdiscussedinTax Tip14. illustrates. Butyoumustalsobeaware of thephantom a gainonthesale,youcanstillsavetaxesasTax Tip13 (subject tocapitallosslimitations).Evenifyourealize activity issold–includinganylossonthedisposition party. Thelossesbecomefullydeductiblewhenthe passive lossesthrough abonafidesaletoanunrelated Sell anypassiveactivitywithcurrent orsuspended Dispose of theactivity losses intotax-savingdeductiblelosses: thedisallowed are thingsthatyoucandotoconvert passive lossesthatare subjecttoadisallowance,there testsandyouhave If youfailthematerialparticipation | Convert Passive Convert Losses RETURN TORETURN TOC Passive and Real Estate Activities Income Trap Income The Phantom The Phantom 14. Tax Tip Tax Losses fr (“LLCs”) and Limited Liability Partnerships and Limited (“LLCs”) (“LLPs”) Investment and trading partnerships, S corporations that only generate portfolio income, such asand LLCs not passive and dividends, are capital gains, interest activities, even if you do not participate in the activity. your income cannot offset the investment Therefore, passive losses. to fund your expense on money borrowed Interest as an investment in a passive activity is treated additional passive activity deduction, subject to the same disallowance rules. and dividends, from income, such as interest Portfolio the passive losses from a passive activity cannot offset the activity. Identify Your Actual Passive Losses Actual Passive Identify Your Companies Liability om Limited disposition of real estate. This results from prior deductions based prior deductions from results estate. This real disposition of underlying property remains unsold. However, to the extent your prior underlying property However, unsold. remains if you dispose of your interest in the pass-through activity, even if the activity, in the pass-through your interest if you dispose of on indebtedness. Therefore, you may have deducted losses and/or you may have deducted on indebtedness. Therefore, Income in excess of your net proceeds can be triggered upon the can be triggered proceeds your net Income in excess of than your greater cash distributions in prior years that were received negative capital. | to limited partners presumed an LLP are of Generally, not be materially participating in the business, and thus | When identifyingtake into your net passive losses, account the following: • • • Phantom income to the extent of your negative capital can also occur your negative capital Phantom income to the extent of year’s passive losses were suspended, you would have an ordinary suspended, you would have an year’s passive losses were loss to offset this income. As Tax Tip 13 demonstrates, this can actually be Tax Tip 13 demonstrates, a this income. As to offset tax savings opportunity. actual investment in the property. This is sometimes referred to as This is sometimes referred property. actual investment in the 67 RETURN TO TOC RETURN TO Utilize Your Passive Losses Passive Utilize Your Invest in income-producing passive activities passive in income-producing Invest trade or Consider investing in an income-producing business that you will not materially participate in. This to you which can be offset passive income creates other your passive losses from until you utilize all of in the This may result passive activities. unrelated to the extent Contribution Tax additional 3.8% Medicare by passive losses. that the income is not fully offset Decrease your participation in income activities your Decrease participateFor an activity in which you materially that is your participationgenerating non-passive income, limit the activity to less than 500 hours, Therefore, if feasible. use the income tomay become passive and you can you that make sure your passive losses. However, offset active under the other tests. This not still considered are Contribution in the additional 3.8% Medicare may result to the extent that the income is not fully offset Tax by passive losses. If you or your spouse have been materially participating the activity for five out of in the last ten years, you will be deemed to be materially even if you do not participating year, in the current participate year. at all in the current If you have passive losses from activities that you If you have passive losses from cannot convert into “material participation” activities taking theas discussed above, you should consider losses: following steps to utilize your passive | Increase the hours you participate the hours in realIncrease you property trades or businesses estate activities, increase in real engaged If you are test professional estate your hours to meet the real estate professional, a real If you are (discussed below). as passive no longer treated losses are estate your real to deduct them in full. losses, allowing you Increase your participation loss activities in your Increase losses, consider that is generating For an activity your participation the testsincreasing meet one of to to a you will not be subject if possible, so listed above, for the activity in that year. passive loss limitation EisnerAmper 2020 Personal Tax Guide Under the passive activity loss rules contained in IRC Under thepassiveactivitylossrulescontainedinIRC Corporations Limitation onLossesforTaxpayers OtherThan of themember.the participation thenature andextentof must beexaminedtoascertain in theseactivities.Rather, thefactsandcircumstances for purposesof determining theirmaterialparticipation arehave heldthatsuchmembers notlimitedpartners of anLLC. AlthoughtheIRSdoesnotconcur, cases interests alsoapplytomembers to limitedpartnership haveaddressed whethertherulesthatapply The courts interest. passive lossruleswithrespect tothelimitedpartnership general partner. canavoidthe Inthiscase,suchperson anda asbothalimitedpartner a limitedpartnership where anindividualholdsinterest in participation is anexceptiontothepresumption of nomaterial these activitieswouldbeconsidered passive.There Tax Tip our Gain Using the Installment our GainUsing 15. the installment sale method, you will defer $290,000 of federal tax to future years as the mortgage ispaiddownbythebuyer.the installmentsalemethod,youwilldefer$290,000of federaltaxtofuture asthemortgage years before of 2020.Byusing theendof from paymentduein thebuyerforbalance,withfirst theyearandreceiveJanuary amortgage ($2,000,000 lessthecostof $600,000plustheaccumulateddepreciation of $400,000).You willreceive a20%downpaymentof $400,000 improvements). At thetimeof thesale,youhadaccumulateddepreciation of $400,000.Therefore yourtaxablecapitalgainis$1,800,000 In 2019,yousellanonresidential buildingfor$2,000,000,netof closingcosts,whichyouboughtin1998for$600,000(includingsubsequent gain andrelated interest. Note: The3.8%Medicare Contribution Tax onnetinvestment income,whichisnotreflected intheabove illustration,mayapplytothe future installmentsare years’ expectedtoincrease. out”(“FIFO”) method.Also,thismethodmaynotbeadvantageouswhen thetaxrates infirst ona“first deductions onreal of property Caution: ratio of 90%. Thegross profit ratioisthetaxablegain of $1,800,000dividedbythetotalproceeds of $2,000,000. Federal taxcostthisyear Taxable gaininyearofsale The taxablegainusingtheinstallmentsalemethodiscomputedby multiplyingthedownpaymento Deferred tax Defer Y Sale Method You are of subjecttoataxrate of thegainthatisattributabletoprevious 25%onthe portion non-accelerateddepreciation Full paymentincurrentyear 68 trade orbusinessoverthesumof aggregate gross deductions of thetaxpayerattributabletohisorher an excessbusinesslossastheof aggregate December31,2017.TheTCJAbeginning after defines business loss”limitation,effectivefortaxableyears entities otherthanCcorporations,calledan“excess businesslossfromadditional limitationonataxpayer’s The TCJA amendsandaddstoIRCSec.461an income. income, includingearned income orordinary passive andare availabletooffset allcategoriesof derived from real estateactivitiesare notconsidered the taxpayerisareal estateprofessional, thelosses in whichtheyare notmateriallyinvolved.However, if using lossesincurred from income-producing activities level. Thepassivelossrulesprevent from taxpayers incomeattheindividualtaxpayer income orordinary passive activity, thepassivelosscouldnotoffset earned Sec. 469,ifataxpayerhasflow-through lossfrom a $ 1,800,000 380,000 f $400,000bythegr Installment salemethod $ 360,000 290,000 90,000
RETURN TORETURN TOC oss profit Passive and Real Estate Activities If you fail either test and you have real Perform more than 50% of your personal services than 50% of more Perform propertyin real trades or businesses in which you materially participate, and service than 750 hours of Have more in these businesses. Real Estate Professional Rules Professional Estate Real activity. This special allowance is reduced, but not below but not is reduced, special allowance This activity. the taxpayer’s amount by which the AGI 50% of by zero, when AGI phased out It is completely exceeds $100,000. $150,000. reaches | you can deduct estate professional, a real If you are not subject you are estate losses in full since real rental must you qualify, limitations. To to the passive loss annually: • • In addition, you must materially participate in the to be for that activity activity in order estate real rental estate broker nonpassive. For example, a real considered who owns one or two apartments might be a for rent to not be considered but might estate professional real materially participate activity. in the rental professional estate the real a joint return, In the case of at least one of and only if, satisfied if, are requirements In requirements. the spouses separately satisfies both material participation to the regards though, work test performed by a taxpayer’s spouse in a trade or business as work performedis treated the taxpayer. by not subject to the 3.8% are Real estate professionals investment income, on net Contribution Tax Medicare estate activities in real rental including capital gains, from which they materially participate. Observation: estate losses, try service your hours of to increase to meet test, estate professional the real the tests. For purposes of estate their real all of a taxpayer can elect to aggregate material participation. to determine activities rental Once the election is made, it continues unless the IRS consents to its revocation. 69 RETURN TO TOC RETURN TO P Real Estate Activities Estate Real ActivityCredits assive Real estate activities are passive by definition, unless Real estate activities are of Regardless you qualify estate professional. as a real or not, there estate professional a real whether you are the gain on the sale the tax from ways you can defer are A separate estate properties, real as discussed below. of losses each rule allows you to deduct up to $25,000 of year if you actively participate estate real in a rental | Tax credits from passive activities, such as rehabilitation activities, such as rehabilitation passive from credits Tax your can reduce and low-income housing credits, for properties placed into However, tax liability. regular service limited to the are prior to 2008, these credits tax attributable to your net your regular amount of your to reduce passive income, and cannot be used the qualified investments, both For post-2007 AMT. as well as the low-income credit Rehabilitation Tax AMT to tax and both regular can offset housing credit your tax attributable to passive activity the extent of loss, theincome. If you have a net overall passive carried forward are disallowed credits and can be used years. If you have net your taxes in future to offset limited because of are passive income but the credits you can carry forward your the credits to offset the AMT, not in the AMT. years when you are tax in future regular | income or gain for the taxable year plus a threshold year plus a threshold gain for the taxable income or filing jointly for married taxpayer $500,000 amount of for all other taxpayers.or $250,000 threshold The and inflation every will be adjusted for amounts year, afterthis limitation expires 2025. Any December 31, as an NOL carryforward treated are amounts residual the following yearsfor the taxpayer in in accordance the NOL has amended The TCJA with IRC Sec. 172. carryforward be indefinite and limits the NOL to income for a given taxable taxable of deduction to 80% in subsequent When applying the NOL deduction year. years, will need to follow the ordering the taxpayer rules per IRC Sec. 172. EisnerAmper 2020 Personal Tax Guide on like-kind exchanges for assets that included on like-kindexchangesfor assetsthatincluded Previously, IRCSec.1031alloweddeferral of gain | uponthereceiptfirst of principalpayments. of 20%),theunrecaptured IRCSec.1250gainisreported rate of 25%)andregular capitalgain(maximumtaxrate both unrecaptured IRC Sec.1250gain(maximumtax deferred gainonthesaleof real estateisattributableto or 751isrecognized immediately. whenthe Furthermore, sale, anyrecapture incomeunderIRCSecs.1245,1250, Caution: tax (assessedasanadditionaltax)willapply. exceeds $5million,aninterest charge onthedeferred of allinstallmentreceivables youownatDecember31 the instalmentmethod.However, ifthefaceamount you holdaninterest iftheentitydoesnotelectoutof through anentityinwhich if youownedtheproperty received. You canusetheinstallmentsalemethod even incomewhen interest paymentsare taxableasordinary payments onseller-financed orloans.The mortgages deferred payments.You mayalsobeentitledtointerest for theinterest elementifinterest isnotstatedonthe infuture willalsobelong-term except years reported that issoldhadalong-term holdingperiod,thegain character aswhenitwassold.Therefore, ifproperty infuture retains years 15). Thegainyoureport thesame of thesalespricebyafullyear(seeTaxthat portion Tip one paymentuntilnextyear, youcandeferthetaxon as youreceive principalpayments.Bysimplydeferring gainonly The installmentmethodallowsyoutoreport doing so,youcandefermuchof thetaxtofuture years. thegainoninstallmentsalemethod.By report theyearofafter thesalesothat youare eligibleto consider agreeing toreceive oneormore payments Ifyouareyears. contemplatingasaleof real estate, to deferagainonthesaleof real estateforfuture tax-efficientmethod An installmentsalecanbeavery | Like-Kind Exchanges Benefits Installment SaleReporting Evenifnopaymentsare received intheyearof 70 Your apositioninwhichyour specificfactpattern mustsupport 24 months and in each of the two 12-month periods immediately after 24 monthsandineachof thetwo12-monthperiodsimmediatelyafter 2008-16, whichincludesasafe-harborruleunderitsaidwould vacation property orsecondhome wasinfactheldforrental, vacation property foranother,vacation/investment property you cannotimmediately safe harbor, foratleast youmusthaveheldtherelinquished property substantiate that the property was held, treated and reported as rental was held,treated and reported substantiate thatthe property allowed tomoveinimmediately. In2008theIRSissuedRev. Proc. tax-deferred exchangetreatment. the dwellingunitcannotexceedgreater of 14daysor10%of the the exchange:(1)youmustrent thedwellingunittoanotherperson you have converted ittoaninvestmentproperty.you haveconverted Thisconversion Like-kind exchanges for vacation homes that are converted torental Like-kind exchangesforvacationhomesthatare converted was converted andheld forrental orinvestment.Themore youcan was converted Caution: for afairrental for14daysormore; useof and(2)yourownpersonal Like-kind exchange reporting isnotelective.Consider Note: Like-kindexchangereporting home, youare not for isintendedtobeanewsecondorprimary business useactivity, thestronger thefactswillbethatproperty kind exchange. wasacquired inthe1031like- beginning withthedateproperty residence, theexclusionwillnotapplyduringfive-yearperiod residence inthelike-kind exclusion.Ifyouacquire property primary number of daysduringthe12-monthperiodthatdwellingunit forpurposesofproperty alike-kindexchange. Inorder tomeetthis not challengewhetherareplacement dwellingqualifiedasinvestment property. Forexample,ifyoustopusingyourvacationhome,rent it are tricky,property Itispossibleforyouto butcanbeworthwhile. must support such a conversion. In addition, if the property swapped Inaddition,iftheproperty suchaconversion. must support or investmentproperty, thebetter yourpositionwillbetosupport asyourprincipal exchange andlaterattempttosellthatproperty homeandtakeadvantageof the$500,000 ittoyourprimary convert estate andconducttherental of thatreal estateasabusiness,then out forasubstantialperiodof timeandthenexchangeitforotherreal could allow for a like-kind exchange. Of course, thetimingandfacts could allowforalike-kindexchange.Ofcourse, like-kind exchange. investment, orbusinessuseandwouldtherefore fortax- qualify is rented successfullyswappingone atafairrental. Inaddition,after considerations). not engaginginalike-kindexchange ifataxableeventisthe better approach (e.g.,whenyouhaveexpiringlosses,orstatetax deferred exchangetreatment. Themore rental, investment,or do alike-kindexchangeifyouturn avacationhomeintorental Tax Tip 16. The saleof fora yourprincipal residence doesnotqualify Like-Kind Vacation Homes Exchanges for RETURN TORETURN TOC Passive and Real Estate Activities as a partnership, proprietorship. corporation or sole S allowed for a taxpayer’s deduction is also The 20% traded qualified publicly REIT dividends and qualified partnershipas all domestic QBI is defined income. than investment income (e.g.,business income other REIT dividends), investmentdividends other than capital gains, long-term short-term income, interest currency gains and foreign capital gains, commodities compensation include reasonable gains. QBI does not made to the taxpayer. or guaranteed payments For taxpayers the limits whose taxable income is above 20% deduction is not allowed the mentioned below, service a “specified trade from if the QBI is earned A specified service trade or business is or business.” defined, in part, as any trade or business (other than involving the performance or engineering) architecture accounting, servicesof health, law, in the fields of actuarial science, performing arts, consulting, athletics, financial services, services, brokerage or any trade or such trade or the principal asset of business where its of one or more or skill of business is the reputation employees or owners. For specified service above, the 2019 businesses, noted filersjoint for out phases deduction incometaxable with for individualbetween $321,400 and $421,400, and filers between $160,700 and $210,700. earning that are below this income threshold Taxpayers engaged in non-specified service businesses may above this income that deduct the 20%. Taxpayers businesses may still engaged in non-specified are subject to a cap (the “wage deduct the 20% but are limitation test”). The 20% deduction is limited to the the W-2 wages paid with respect (a) 50% of of greater to the qualified trade or business or (b) the sum of to the qualified with respect the W-2 wages 25% of the unadjusted basis, trade or business plus 2.5% of immediately after all qualified property. acquisition, of For this purpose, qualified property is generally defined as tangible property under IRC subject to depreciation Sec. 167, held by a “qualified trade or business” and qualified business income of used in the production 71 RETURN TO TOC RETURN TO Pass-Through Tax Treatment Tax Pass-Through For taxable years beginning after December 31, allows a January2017 and before 1, 2026, the TCJA a taxpayer’s domestic qualified 20% of deduction of a partnership, taxed business income (“QBI”) from LLC The TCJA made significant changes to the tax made significant The TCJA for entities pass-through income from of treatment activities. both investment and noninvestment related an individual taxpayer generally law, Under pre-Act to apply their individual income tax rate, was required taxable depending on their tax bracket, to their regular income. | Like-kind exchanges typically are used when selling Like-kind exchanges typically are estate and can yield substantial tax benefits. Even real like-kind property allowsthough the definition of as permitting such for a certain flexibility, amount of held land for a building if both are an exchange of complex rulesfor investment purposes, specific and a like-kind exchanges. These rules include govern any receive cannot directly that you requirement identifycash or other consideration and must the propertyreplacement with the qualified intermediary holding the funds within 45 days after the sale. If you exchange real propertyIf you exchange real a like- for property of or character), you do not realize kind (same nature exchange, except up to the time of taxable gain at the (such any cash or other boot received the amount of as unlike property). like-kind exchange rule gives The you the opportunity to defer taxes until you sell the property in the exchange. you receive that tangible and intangible personal property. Personal Personal and intangible personaltangible property. property and boats vehicles, furniture, can include gain on of limits the deferral art The TCJA collectibles. afterexchanges completed like-kind 31, December property 2017, to only real for resale. not held primarily property in mind only U.S. real is eligible and Keep propertyreal the U.S. is not eligible. located outside property allowed a deferral will no longer be Personal gain. of EisnerAmper 2020 Personal Tax Guide • • • must bemet: forthesafeharbor,qualify thefollowingrequirements business forQBIdeductionpurposes.Inorder to the real estateactivitieswillbetreated asatradeor which provides safeharborguidelinesunderwhich deduction. Inresponse, theIRSissuedNotice2019-07 whether real estaterental activityqualifiesforthe This provision raisedmanyquestionsrelating to income. AGI butinsteadisallowed asadeductiontotaxable The 20%deductionisnotallowedincomputing asanemployee. business of services performing trade orbusiness(definedabove)the business isanyotherthanaspecifiedservice periodsunderADS).Aqualifiedtradeor recovery without regard toIRCSec.168(g)(whichlistsapplicable underIRCSec.168 that wouldapplytotheproperty period of thelastfullyearinapplicablerecovery thatdateor(2)thelastday after the datetenyears andendingonthelaterof (1) placedinservice first is is theperiodbeginningondateproperty depreciable periodwithrespect toqualifiedproperty has notendedbefore thecloseof thetaxableyear. The (land isnotincluded)thedepreciable periodforwhich owners. ofemployees, agentsorindependent contractors the and/or byowners maybeperformed Rental services rentalconsidered activities. qualifying real estateorlong-term capitalimprovements are not management, timespenttravelingtoandfrom the property, financialmanagement, investment However, andsub-contractors. contractors procuring of employees, management andsupervision tenant application,rental collections,operations, include leasenegotiations, Rental services mustmeetthe250-hourrequirement.years 2022,anythree outof after For years fiveconsecutive 1,2023. priortoJanuary annually fortaxableyears areAt of performed least250hours rental services 72 taking theQBIdeduction. the safeharbordoesnotnecessarilyprevent youfrom Note: • • • • limit is effective in 2018 and applies to existing debt. limit iseffectivein2018and appliestoexistingdebt. IRS and,oncemade,isirrevocable. Thenew interest is madeatatimeandin mannerasprovided bythe as definedunderthepassiveactivityrules.Theelection from tradeorbusiness thelimitationanyreal property rules. Specifically, theelectioncanbemadetoexclude desire toelectoutof thenewinterest disallowance tax may owners deductions), butinvestmentproperty chapter onbusinessownerissuesanddepreciation net interest expense(asexplainedmore fully inthe cancontinuetodeduct owners Investment property deductions. chapter onbusinessownerissuesanddepreciation 179. Bonusdepreciation mayalsobeavailable.Seethe off newinvestments underIRCSec. thecostof certain new taxadvantagewiththeabilitytoimmediatelywrite willreceive owners a Someproperty business owners. 1,2018impactingreal estate beginning January The TCJA alsomakesadditionalchangestotaxlaw | OtherConsiderations for thesafeharbor. the taxes,insuranceandmaintenance,donotqualify Triple of netleases,where thetenantpaysaportion of forthesafeharbor. theyeardoesnotqualify part Real estateusedasaresidence bytheownerforany beginning in2019andshouldinclude: Contemporaneous records mustbemaintained each rental activity. Separate booksandrecords mustbemaintainedfor • • • Who performs theservices Who performs performed ofDates andhours theservices performed Description of services This isasafeharbor. Notmeetingthecriteriaof RETURN TORETURN TOC Passive and Real Estate Activities 73
RETURN TO TOC RETURN TO State and local taxes paid with respect to carryingState and local taxes paid with respect to the related on a trade or business, or in an activity deductible. income, continue to remain of production property rental a can deduct owner Accordingly, property associated with a business asset, such taxes The current depreciation rules for real estate continue. for real rules depreciation The current property owners the real electing to use However, depreciate limit must the interest estate exception to propertyreal recovery under slightly longer periods 30 years for property, 40 years for non-residential of and 20 years for qualified property, rental residential Propertyinterior improvements. owners will need to schedules the longer depreciation take into account to the estate exception the real if they elect to use in covered rules are depreciation limit. The interest detail in the chapter on business owner issues more deductions. and depreciation The interest limit, and the real estate election, applies at election, applies estate and the real limit, The interest level. the entity as any type of rental property. rental as any type of
Principal Residence Sale and Rental
75 A principal residence may be one of the most tax-efficient investments you investments the most tax-efficient may be one of residence A principal can own since you can exclude as much as $500,000 of the gain on its sale. as much as $500,000 of you can exclude since can own
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Sale and Rental Sale and Principal ResidencePrincipal EisnerAmper 2020 Personal Tax Guide pro-rata exclusionisgenerallyequaltoafraction, the unforeseen circumstances The andnaturaldisasters. same pregnancy, divorce orlegalseparation,other from the in employment,healthreasons, multiplebirths tests asaresult of ahardship, whichincludesa change A pro-rata exclusionisallowedifyoufailtheabove will becountedasperiodsof use. absences, isrented during suchtemporary the property such asforvacationorotherseasonalabsences,even if absences, the residence temporary isrequired. Short With regards totheprincipalresidence, occupancyof • • • • meet allof thefollowingconditions: To forthefullamountof qualify theexclusion,youmust | office orrental useisnoteligiblefortheexclusion. of thegainattributabletoahome gain). Anyportion canexcludeupto$250,000of(other taxpayers the married filingjointlyandmeetthetestslistedbelow exclusion of capitalgainupto$500,000,ifyoufileas The saleof yourprincipalresidence iseligibleforan ass TheseTests andExclude Up to past fiveyears. exchange (alsoknownasa1031exchange)duringthe Did notacquire yourhomethrough alike-kind last twoyears. Did notexcludethegainonahomesalewithin period endingonthesaleenddate. intheaggregate,least twoyears, duringthefive-year Have usedthehomeasyourprincipalresidence forat the exclusionof atleast$250,000. inorder tobenefitfromonly onespouseneedqualify full monthsor730days.Ifyouare filingajointreturn, condominium. Thetwo-yearrulemayconsistof 24 or houseboat, mobilehome,cooperativeapartment Youryears. principalresidence canbeahouse, Have ownedyourprincipalhomeforatleasttwo $500,000 of Your Gain P 76 all tests: example foramarriedcouplefilingjointlyandmeeting the maximumexclusionamountallowed.Here isan have topaytaxestheextentthatanetgainexceeds ago (in1997,tobeexact).Undercurrent law, youwill of theoldhome.Thatlawwasrepealed manyyears a newhomethatcostsmore thanthesellingprice gain from thesaleof aprincipalresidence iftheybuy Many peoplemistakenlythinkthatyoucandefera | 25% capitalgainrate. previously deductedanditwillbetaxedataspecial taxable gainwhichequalstheamountof depreciation the rental orbusinessuse.Regardless, there willbea residence, unlessthere wasaseparatestructure for in connectionwiththerental orbusinessuseof the May6,1997 that anydepreciation wastakenafter A reduction of theexclusionisrequired totheextent andthedenominatoris24. the pasttwoyears and ownedthehouseasyourprincipalresidence within numerator of whichisthenumberof monthsyouused this tax. excludable gain($250,000/500,000)isnotsubjectto Contribution taxonnetinvestmentincome.The The taxablegainwillbesubjecttothe3.8%Medicare See thechapteronstatetaxissues. Notes: Contribution Tax onnetinvestment income gain rate andthe3.8%Medicare Federal taxatmaximum20%capital Taxable gain Allowable exclusion onsaleofNet gain home Tax basis (includingcapitalimprovements) Net proceeds onsale
Sell Your HouseTax-Free Do NotAssumeY This gain may be subject to state income taxes. This gainmaybesubjecttostateincometaxes.
ou Can Always ou CanAlways
RETURN TORETURN TOC $ $
(500,000) 2,000,000 1,400,000 6 9 2 00,000 00,000 00,000 14,200
Principal Residence Sale and Rental
f Your Home f Your Know Y Loss on the Sale o Sale b Both you and your spouse must meet the two-year and your spouse Both you meets the test, theIf only one spouse use test. is limited to $250,000. exclusion spouse must meet the “noBoth you and your two years”exclusion in prior test. This can be an home, claimed an exclusion of issue if you sell your $250,000, marry and then jointly sell a homeowner two years.that home within If the spouse meeting the still be eligible he or she will test is the homeowner, and the spouse failing thefor the $250,000 exclusion, unless the exclusion, for a pro-rated test is not eligible as discussed above. rule applies, hardship Basis our Tax y Surviving Spouse Based on historical evidence, you would expect your if after it. However, home to appreciate you purchase you only hold it for a short time, or if unusual market to lose money on it is possible conditions prevail, especially after your principal residence, the sale of | your taxable gain, you will want to minimize To and have thehave the highest tax basis possible, basis calculation.documentation to substantiate the including to maintain accurate records, So be sure closing on your original cost (including information costs) and subsequent capital improvements. deferrals of by any pre-1988 Basis must be reduced gain (i.e., when the law allowed taxpayers to defer tax costing more by buying a new principal residence | • • | A surviving and sells spouse who has not remarried the date within two years from a principal residence gain $500,000 of his or her spouse died can exclude rather than $250,000. their principal residence). of than the net proceeds 77
eration for Those Who RETURN TO TOC RETURN TO Special Consid No Ex File Joint Returns Use of PropertyUse of Any other period of temporaryAny other period of to absence (not two years) due to period of exceed an aggregate employment, health conditions, or such change of as may be specified circumstances other unforeseen by the IRS. Any period (not to exceed an aggregate period of ten period of Any period (not to exceed an aggregate servingyears) spouse are during which you or your of extended duty as a member on qualified official servicesthe uniformed services or foreign the of the intelligence United States, or as an employee of community. Any portion the five-year period ending on the of the sale that is after the last date you (or yourdate of spouse) use the property as a principal residence.
Nonqualified for Allowed clusion If you are married filing jointly, things can get a little married filing jointly, If you are want to be eligible for the complicated if you more $500,000. While either you or maximum exclusion of your spouse can meet the two-year ownership test, the following rules apply to the use test and “no exclusion in prior two years” test: | • • • A period of nonqualified use does not include: A period of Total nonqualified use during period of ownership after nonqualified use during period of Total ownership. 2008, divided by total period of Generally, nonqualified use means any period after nonqualified use means Generally, used the neither you nor your spouse 2008 where the figure property To as a principal residence. portion that is allocated to the period of the gain of multiply the gain by the followingnonqualified use, fraction: Beginning with sales or exchanges of your principal of with sales or exchanges Beginning afterresidence will no December 31, 2008, you exclude gain allocated to periods of longer be able to the property. nonqualified use of | EisnerAmper 2020 Personal Tax Guide days ayearor10%of thetotalnumberof daysitis fornomorefamily members) thanthegreater of 14 useyourvacation home (including If youpersonally Rental expensesdeductible infull 1,2026. January December 31,2017andbeginningbefore beginningafter married filingseparately)fortaxyears taxesupto$10,000($5,000for income, orproperty the TCJA todeductsales, allowsindividualtaxpayers improve theresidence thatsecured theloan.Further, proceeds are usedtobuy, buildorsubstantially 1,2026unlessthedebt 31, 2017andbefore January December beginningafter is suspendedfortaxyears the debtwasincurred. Interest onhomeequityloans backto$1millionregardlesslimitation reverts of when December31,2025,the beginningafter For taxyears December15,2017. $750,000 fordebtincurred after limitation withrespect toacquisitionindebtedness The TCJA interest deduction reduces themortgage to limitations). deductions onyour2019taxreturn (subject interest andreal estatetaxesasitemized mortgage you are stilleligibletodeducttheamountof qualifying thisincome, Even thoughyoudonothavetoreport tax-free, regardless of theamountof rent youreceive. for 14daysorlessduringtheyear, therental incomeis If yourent yourvacationhomeorprincipalresidence Tax-free rental income Proper planningcanhelpyoumaximizetaxsavings. planning torent outyourvacationorsecondhome. You shouldconsiderthetaxconsequencesifyouare | loss. business lossratherthanapersonal deductible, subjecttovariouslimitations,sinceitisa willbe business, thelossattributabletothatportion of yourhomewasrented part orwasusedforyour you donotgainataxbenefitfrom theloss.Butif on thesaleof residence apersonal isnotdeductible, factoring inclosingandimprovement costs.Sincealoss ental of Vacation orSecondHome R
78 chapter onpassiveandreal estateactivities for more may besubjecttothepassive lossrules.Seethe uselessthan10%or 14days)losses estate (personal To qualifiesasrental real theextentthatproperty • your deductionsmaybelimited,asfollows: case),itisconsidered residence apersonal and Court of daysitisrented (oravailableforrental, underaTax than thegreater of 14daysor10%of thetotalnumber useyourvacationhomeformoreIf youpersonally Rental use expenseslimited bypersonal a more detaileddiscussion. See thechapteronpassiveandreal estateactivitiesfor the rental activityisconsidered tobeapassiveactivity. your income,deductiblelossmaybelimitedsince income youreceive. However, ifyourexpensesexceed maintaining thehomeare deductibleagainsttherental expensesof rental property, andnecessary allordinary residence. ratherthanapersonal a rental As property isconsideredactually rented tobe out,theproperty • • • • the year. of daysrented dividedbythe totalnumberof daysin deductible asrental expensesbasedonthenumber interest andreal estatetaxesare mortgage Qualifying sale. in future includingagainonthe years, the property andavailableforuseagainstincome from forward residence are not currently allowablebutare carried Net overalllossesfrom therental of use apersonal costs)are deductibleinfull. income oradvertising itself (suchasbroker commissionsontherental Expenses directly attributabletotherental activity purposes. of wasusedforrental andpersonal daystheproperty wasrented overthetotalnumber days theproperty and repairs, are deductiblebasedonaratioof the Other rental expenses,includingdepreciation, utilities to thenewlawunderTCJA. interest are deductibleasitemizeddeductions,subject The balanceof thereal estate taxesandmortgage RETURN TORETURN TOC Principal Residence Sale and Rental 79 RETURN TO TOC RETURN TO R Lik You have a loss and you received Form 1099-S. Since Form have a loss and you received You you 1099 to your return, the IRS matches all Forms on the return would want to show the sale proceeds is no gain on the sale. Remember and that there not deductible. personal losses are You have a gain on the sale. You would typically show have a gain on the sale. You You your tax return gain on the Schedule D of the entire your gain by the excludible portion.and then reduce eporting Requirements Home forVacation Exchanges e-Kind • • | your principal would typically report the sale of You your personal income tax D of on Schedule residence you do not have to report the sale However, return. on your income tax return your principal residence of unless: See Tax Tip 16 in the passive and real estate activities estate real the passive and Tip 16 in See Tax on a planning opportunitychapter for information for vacation homes. using like-kind exchanges information. |
Charitable Contributions
81
gift you make, while fulfilling your philanthropic objectives. gift while fulfilling your philanthropic you make, Your ability to control when and how you make charitable contributions contributions charitable you make when and how ability to control Your can lower your income tax bill, effectively reducing the actual cost of any of any cost reducing the actual bill, effectively tax your income can lower
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Contributions Charitable EisnerAmper 2020 Personal Tax Guide • • • You cansavesubstantialtaxesbysimply: | make overacoupleof intooneyearinorder years Bunching thecontributionsthatyouwouldnormally year whenyourtaxbracketwillbehigher. Timing yourcontributionssothattheyare madeina charitable contributions. tofundyour Using long-term appreciated property Basic Planning Ideas Tax Tip 17. 1. order: certain of givenina property of thatare deductible,youwouldhavetoanalyzeeachcategory In order thegifts todetermine theportion be deductibleonyourreturn determined asfollows: is$100,000and$30,000carriedoverforfiveyears, withafairmarketvalue ofproperty $50,000andataxbasisof $40,000toaPC.Your 2019AGI is$200,000.Thetotalamountthatwill (PC); (2)a$20,000cashdonationtoyourfamily’s privatenon-operatingfoundation(PF)and(3)adonationof short-term capitalgain You tocharityhelpoffset desire tomakethefollowinggifts your2019taxliability:(1)a$70,000cashdonationtopubliccharity benefit of thefull$120,000(whichis 60% of the foruptofiveyears. AGI), andtheothercontributions of $60,000willbecarriedforward For example,assumethesamefactsas above,butinsteadof donatingcashtoPCsof $70,000,youdonate$120,000. Inthatcaseyouwouldreceive the actually apply. are contributionssubjecttothenew60%limitation.Onlyifyourcash donationstoPCsisequalorexceeds60%of yourAGI, willthe60%limitation It isclearfrom thisexamplethatthedeductionforcharitablecontributionsallowedonreturn isactuallylimitedto50%of AGI, eventhough there Carryforward toSubsequentYears Percentage ofAGI Total Deductible Cash toPF( Short-Term CapitalGainPropertytoaPC( Cash toPC( (Applicable ThresholdPercentage) Description ofPropertyGiven 3. 2. entire $70,000isdeductible. Cash contributionstopubliccharitiesare limitedto60%of AGI. Sincethe$70,000cashcontributedislessthan60%of theAGI, the Cash contributionstoPFsare limitedtothelesserof $60,000(30%of AGI) and$0(thedifference betweencombined$100,000 Short-term islimitedtotheAGI amountof capitalgainproperty $200,000multipliedby50%andthen reduced bythe$70,000 amount already beingdeductedand50%of AGI). Noneof the$20,000cashdonationisdeductibleon2019incometaxreturn. income taxreturn. amount already deducted.$30,000of the$40,000amountisdeductible(thelowerof thefairmarketvalueorbasis)on2019 Are You Really Receiving aCharitable Deduction at 60% of AGI?Deduction at60% 30 60 %) %)
50 %) 82 return. incometax as anitemizeddeductiononyourpersonal Note: Total Gift eliminated orlimited. andmanyitemizeddeductionshavebeen prior years standard deductionhasincreased substantiallyfrom as aresult of theTax CutsandJobsAct,wherein the year. Thisplanningideahasgainedmore importance to exceedthestandard deductionthreshold inthat $30,000 $70,000 40,000 20,000
You canonlyclaimyourcharitabledeductions Deductible Amount $100,000 $70,000 30,000 50%
0
RETURN TORETURN TOC Charitable Contributions
Use Long-Term Appreciated Property Appreciated Use Long-Term New for 2019 | traded publicly should always use appreciated You than one securities that you have held for more rather than cash, to fund significant charitable year, | Certainty and Disaster the Taxpayer The enactment of 2019 temporarily suspends current Relief Act of The for “qualified contributions.” limitations AGI “qualified contributions” means any charitableterm period beginningcontribution that is paid during the on January is 1, 2018 and ending on the date which the Act the enactment of 60 days after the date of efforts relief (December 20, 2019) and is made for in The taxpayer must qualified disaster areas. one or more obtain contemporaneous written acknowledgement that the contribution was used or the organization from efforts.will be used for relief The Act specifies that this does not apply to contributions to 509(a)(3) provision asupporting or to the establishment of organizations fund. an existing, donor-advised or maintenance of new, of the overall charitable deduction to be disallowed in deduction to the overall charitable of amount news is that any The good year. the current forward can be carried disallowed and potentially years, succeeding five used in the upon depending to the particular these limitations application of tax years Planning for future in that year. circumstances do not want to find yourselfis imperative as you in not used excess contributions are the situation where lost (see ultimately period, and are with the five-year tax tip 17). funds donor-advised this provision, For purposes of foundations qualifyand private operating as public non- a contribution to a private charities. Further, under theoperating foundation which qualifies or conduit rules as a pass-through out-of-corpus contributionfoundation also qualifies for the 60% base for cash contributions. 83 RETURN TO TOC RETURN TO Impact of the TCJA on Charitable the TCJA of Impact Contributions of donations interact with one another causes more donations interact with one another causes more of securities and artwork. Sec. 170, which discusses IRC of charitable contributions, is a complicated provision and the way in which these various categories the law, to both public charities and private foundations, or are to both public charities and private foundations, or are both cash and noncash items, such asmaking gifts of Unfortunately, because of the way in which this new law the way in which this new because of Unfortunately, the 60% limitation was insertedprovision in existing law, gifting donors are will not be available in cases where to 60% starting 2025). The 60% (and through in 2018 limit only applies to cash gifts made to public charities. the type of property donated and the type of charity property donated and the type of the type of the donation, as Chartreceiving 6 indicates. For cash the 50% threshold increased contributions, the TCJA There are limitations on the amount of contributions on the amount of limitations are There based on your AGI, that you can deduct in a given year | combine tax planning with your charitable goals. combine tax planning with your charitable More sophisticated planning techniques are discussed sophisticated planning techniques are More funds, using donor-advised including in this chapter, trusts, to help youprivate foundations, and charitable has been repealed. Taxpayers will receive a dollar-for- will receive Taxpayers has been repealed. if they itemize. dollar deduction for their contributions every taxable income over certain dollar of threshold their itemized deductions and ultimately up to 80% of deduction for charitable contributions remains intact. In intact. contributions remains deduction for charitable on itemized deductions which limitation fact, the Pease itemized deductions by 3% for in past years reduced While the TCJA restricted and even eliminated a good and even restricted While the TCJA 2018 to 2025), the (from many itemized deductions charities, and supportCharitable charities. foreign deductible. are organizations contributions to such exceptions may apply. Treaty-based to foreign charities do not generally apply. “Friends apply. do not generally charities to foreign as U.S. domestic typically set up of” are organizations In order to claim a deduction on your personal a deduction on to claim In order be made can only contributions return, income tax Contributions charitable organizations. to U.S.-based EisnerAmper 2020 Personal Tax Guide both single and married filing joint filers. At both singleandmarriedfilingjointfilers. thesame The TCJA doublestheamountpreviously allowedfor through 2025istheincrease inthestandard deduction. financial events.Anotheraspecttoconsiderin2019and Your significantlyinayearof unusual taxratemayvary before years decidingwhentomakeyourcontributions. Always consideryourtaxrateforthisyearandfuture | described above. as forthenextfiveyears, can becarriedforward usually ahighceilingandanydisallowedcontributions and isgenerallylimitedto30%of yourAGI, thisisstill remains unchangedunder thenewtaxlaw property While acontributionof long-term appreciated gains taxontheappreciation (seeTax Tip18). (as ifyoucontributedcash)andavoidpayingcapital the fullfairmarketvalueof thesecurityorproperty double taxbenefitof receiving adeductionequalto can givetoamuseum.Bydoingso,yougetthe eligible appreciated property, thatyou suchasartwork, contributions. You shouldalsoconsiderusingother donating thestockratherthancashwouldbe: littlefuture growth potential.Insteadofthat itmayhavevery sellingthestock,you donateittoyourfavoritecharity. Your taxsavingsby hasappreciatedA stockthatyouhaveownedformanyyears to$100,000from itsoriginalpurchase priceof $60,000.You havedecided Time Your Contributions Net federaltaxsavings Capital gainstaxifstockwassold($40,000at23.8%*in2019) Tax savingsoncontribution($100,000at37%in2019) *Includes 3.8%Medicare ContributionTax onnetinvestmentincome. Tax Tip 18. The BenefitofContributingLong-Term Appreciated Securities RatherThanCash
84 you willneedtohaveitemizeddeductionsinexcessof to secure more taxsavingsatthehigherrate.Also, consider deferringcontributionstonextyearinorder your taxratewillincrease nextyear, youmightwantto tax deduction.Ontheotherhand,ifyouexpectthat and desired) togaintheadvantageof acceleratingthe prepay your charitable contributions this year (if feasible If youexpectyourtaxratetobethesamenextyear, receive manydonationswithsmallamounts. Manycharitiesmaybeimpactedasthey for thegift. foritemization,andthussecure sometaxbenefit qualify charitable contributionsintoasingleyearinorder to contribution. Theymayconsiderbunchingtheir since theymaynolongergetataxbenefitforthe individualstomakecharitablecontributions, for certain suspended through 2025. This may create a disincentive itemizeddeductionsare temporarily time, certain contributions of securities or other property that you contributions of thatyou securitiesorotherproperty thelegaltransferrequirementssure thatyousatisfy for charity actuallyreceives theproperty. Therefore, make The yearthatyoucantakethedeductionis increased charitablecontributions. the standard deductioninorder togetthebenefitof Cash DonationfromProceeds (9,520)
$ 27,480 $ 37,000 Stock Donation 0
$ 37,000 $ 37,000 RETURN TORETURN TOC Charitable Contributions
the value of the painting when contributed. Instead, it the value of would be $100,000 since a subsequent fractional interest the same property is limited to the lesser of donation of the initial fractional contribution the value at the time of or the value on the additional contribution date. charity, not the appraised value. charity, Fractional interest an a gift of contribution consists of A fractional interest undivided portion property to a charity that uses the of property with its exempt purposes (e.g., in connection in artworkan interest that is contributed to a museum). deduction will beIn this situation, your initial charitable the property multiplied by thethe fair market value of contributed. fractional interest a donate the use of say you As an example, let’s for three painting valued at $400,000 to a museum the painting for the remaining months and you retain charitable deduction would be nine months. Your the painting at the value of $100,000 based on 25% of the year). months of (three the contribution the time of the same painting next year forIf you gift the use of months or additional 25%) six months (additional three the painting has increased and the fair market value of to $440,000, your contribution would not be $110,000 additional contribution multiplied by based on 25% of museum). Otherwise,museum). limited deduction will be your fair market basis or the property’s your of to the lesser value. Furthermore, organization if the charitable the property years, the donor within three of disposes ordinary to include as will be required income for the between the the disposition the difference year of and the donor’scharitable deduction basis. However, certifiesif the organization the IRS, in writing, that to be, related use was, or was intended to the property’s or function, this rule wouldto its exempt purpose not apply. Vehicles does not use the vehicle If the charitable organization the vehicle (forin its exempt function, but instead sells will be limitedover $500), your charitable deduction the sale by the from received proceeds to the gross 85
RETURN TO TOC RETURN TO Contributions Deductible Only at Cost Deductible Contributions Rather Than Fair Market Value Market Than Fair Rather the charitable organization must use this propertythe charitable organization in its exempt function (such as a painting given to a deduction, the appreciated propertydeduction, the appreciated must qualify for had it been sold and capital gain treatment long-term Tangible personal property Tangible full fair market value as a get the property’s To property than 12 months. Ordinary more income property includes inventory items and property subject recapture. to depreciation is limited to the lesser of the fair market value or is limited to the lesser of even if you have held the your basis in the property, Other ordinary income property The charitable deduction for ordinary income property market value of the stock and you will permanently lose the stock and you will permanently market value of had you sold the benefit that you would have received these securities at a capital loss. Never use these securities to fund your contributionsNever use these securities to fund your to the lower fairsince your deduction will be limited Securities with a fair market value less than value Securities with a fair market cost your the lesser of the fair market value or your basis in the the fair market value or your basis the lesser of the you lose the deduction for any of stock. Therefore, the security. of appreciation Securities held for 12 months or less have held for 12If you contribute securities that you is equal tomonths or less, your charitable deduction available to fund your charitable contributions. Theseavailable to fund your charitable contributions. property include: types of market value of the property. So, before contributing So, before the property. market value of its eligibility and other options consider property, Certain a property of will not avail you types of fair equal to the appreciated charitable deduction | end, thereby accelerating the process. accelerating end, thereby make prior to year-end. One way to do this is by having to do this is by One way to year-end. make prior your brokerage from directly transferred the securities year- before account brokerage the charity’s account to EisnerAmper 2020 Personal Tax Guide for contributions made in taxable years beginning beginning for contributionsmadein taxable years provision thathadterminated Under atemporary which thedeductionisbased. often givestheIRScausetoscrutinizevaluationon qualified appraisal.Thistypeof charitablecontribution withandwithouttheeasementrequiresproperty a equal tothedifference inthefairmarketvalueof the organization. Thecharitabledeductionis conservation easementisgiventoaqualified perpetual conservation can bedoneonortotheland.Intypicalcase,a enjoyment of the land. The easement only restricts what control,The donordoesnotgiveupownership, or perpetual restriction ontheuseof thereal property. interestA real forthispurposeincludesa property purposes. the easementexclusivelyforconservation interest toacharitableorganizationproperty thatuses easementisacontributionof areal A conservation easement Conservation (deathofconveyance occurs thedonor). untiltheconditionofnot receive theproperty the a current deductioneventhoughthecharitydoes takes titletotheproperty. Therefore, youreceive contractually conveyed,notwhenthecharityactually intheyearthatremainder interestthe property is based onthepresent valueof theremainder interest in organization. You willreceive acharitablededuction her lifeandleavearemainder interest toacharitable can havefulluseof throughout hisor theproperty The ownerof real estate,suchasavacationhome, Remainder interest inreal property penalty of 10%of theamountof theincomeinclusion. the return fortheyearof thedeductionuntilpaidanda deducted plusinterest runningfrom theduedateof period fallsandisintheamountthatwaspreviously of anincomeinclusionintheyearwhichspecified of yourdemise(“specified period”).Recapture consists fromyears theinitialfractionalcontributionordate donee onorbefore theearlierof thedatethat’s ten all of tothesame yourremaining interest intheartwork thenfailtocontribute fractional contributionof artwork, Beware that“recapture” willoccurifyoumakeaninitial 86 deduct expensesof operatingyourcarincludingtolls are are deductible.You performed services can Travel expensestoandfrom theplacewhere the theseservices. expenses incurred whileperforming organization, youmaydeductincidentalunreimbursed onbehalfof performed acharitable for services Although youcannotgetacharitablededuction expenses Unreimbursed provisions. (“PATH”) reinstated andmadepermanent these Protecting Americansfrom Tax HikesActof 2015 applies.The limitation andfive-yearcarryover contributions.’ Rather, the50%contributionbase individuals didnotapplyto‘qualifiedconservation by limitation ondeductionsorcapitalgainproperty December31,2014,the30%contributionbase after deduction onyourtaxreturns. includible asincomenordeductible asanitemized must bemadedirectly tothecharityandare neither an IRAof upto$100,000peryear. These distributions you canmaketax-free distributionstocharityfrom According totheprovision, ifyouare age70½orolder, as aresult of PATH. required minimumdistributions,wasmade permanent of their alloraportion charities tax-free whilesatisfying of theiraccountstoqualifying older totransferportions age70½or which allowsIRAandinheritedowners The provision forqualifiedcharitabledistributions, | organization are notdeductible. onbehalfof acharitable ofthe performance services considered andnotspecificallyincurred personal in are deductibleaswell.Expensesthatare services charitable while “awayfrom home”inperforming per mile.Reasonableexpensesformealsandlodging or carinsurance.Alternatively, youcandeduct14¢ maintenance of thecarsuchasdepreciation, repairs and parkingfeesbutnotexpensesconnectedwith Contributions IRA Distributions as Charitable IRA Distributions asCharitable RETURN TORETURN TOC Charitable Contributions
subject to an excise tax on its net investment income. business income tax It can be subject to the unrelated if conducting prohibited penalty taxes and onerous transactions. Private foundation is subject to tax foundation is subject to Private For tax years beginning after December 20, 2019, a 1.39% excise tax of private foundation is subject to a flat capital realized on its net investment income, including propertygains on the appreciated The contributed. Certainty by the Taxpayer excise tax rate was lowered the previous 2019 from and Disaster Relief Act of calendar year2% rate, which will still apply for the legislation also2019 private foundations. The new that allowed a 1% tax rate to eliminated the provision the 2% rate if a private foundation apply in place of met certain Net investment requirements. distribution income, dividend income is defined to be interest income, certain income, income and royalty rental in connection with the by expenses incurred reduced tax will be such income. An income of production business income unrelated assessed on a foundation’s tax if the foundation excise as well as an onerous or other self-dealing is involved in various acts of fund is not A donor-advised transactions. prohibited to an excise tax on net investment income and other income tax on net investment to an excise Yet, the discussion below). excise taxes (see potential the private foundation disadvantages, despite these if substantial alternative a preferable can still be involved, so consider the following amounts are either when evaluating similarities and differences these options: of charitable deduction in theObtain a large year current fund and a private foundation Both a donor-advised to avoid paying capital gains tax allow you the ability than marketable securities held more on appreciated one year when such property is donated. However, securities is limited funding a private foundation with while a similar donation to a your AGI, to 20% of 30% of limitation fund has a larger donor-advised your AGI. of 87 RETURN TO TOC RETURN TO Donor-Advised Funds vs. Private Funds vs. Private Donor-Advised How to Accelerate the Tax Benefit the Tax Accelerate How to Foundations of Future Contributions and Meet and Contributions Future of Goals Philanthropic Charitable Trusts Private Foundations Donor-Advised Funds Donor-Advised to create a legal entity with annual tax filings, subject to create different limitations), but they have their differences. limitations), but they have their differences. different fund is the simpler and less costly The donor-advised you Using a private foundation requires alternative. Contributing to either a donor-advised fund or a Contributing to either a donor-advised a tax deduction (subject to private foundation offers | • • include: • year while retaining practical control over when such practical control year while retaining actually made to your intended contributions are planning vehicles The most common charitable charity. Certain charitable vehicles allow you to accelerate contributions into the current future the tax benefit of | be a tax efficient way to donate to public charitiesbe a tax efficient way to donate to the TCJA. especially in light of of Part B Medicare premiums you pay as well as the you pay premiums B Medicare Part of based on a are which many tax credits allowance of can this provision In addition, threshold. modified AGI Contribution Tax on net investment income, the on net investment Contribution Tax the for itemizing medical expenses, 7.5% threshold benefits, the amount Social Security deductibility of taxable distribution, the distribution is not includedtaxable distribution, impact the Medicare This may therefore in AGI. not qualify. additional benefits since, unlike aThis technique has In order to qualify, the charitable distribution must be distribution must the charitable to qualify, In order to a donor-advised Payments a public charity. made to fund, supporting do private foundation or organization EisnerAmper 2020 Personal Tax Guide funds donothaveaminimum grantdistributionsrule. than the5%minimumdistribution. Donor-advised appreciation of theassetsinfoundationare greater Typically, althoughnotalways,theactualearnings and fail todistributetherequired minimumdistribution. Excise taxeswillbeassessedonfoundationsthat of theaveragevalueof itsnon-charitableuseassets. an annualdistributiontocharitiesequalatleast5% A privatefoundationissubjecttoarulewhichrequires Make minimumdistributions distributions foryourdonor-advised fund. your children theabilitytorecommend charitable it inyourfamily’s name.Itisalsopossibletogive from onegenerationtoanother, perpetuallykeeping responsibilities of thefoundationcanbepasseddown the family’s overallcharitabledesires. Themanagement decisions andformulating amissionstatementtosatisfy having theresponsibility of makingmanagement Yourphilanthropic effort. familycanbenefitfrom inacollaborative by involvingfamilymembers A privatefoundationcanprovide intangiblebenefits Involve familymembers foundation. andresources tomaximizetheassetsin expertise decisions, allowingyoutouseyourinvestment foundation. You retain fullcontrol overallinvestment This canbeoneof themajoradvantagesof theprivate foundation’s investments Maintain managementcontrol of theprivate accomplished. goals andensure thatyourcharitableobjectivesare sometimes makeiteasiertoachieveyourinvestment generally givesyoumore direct control, whichcan legally obligatedtodoso.Theprivatefoundation follow yourcharitablepreferences, thoughitisnot future charitabledistributions.Typically, thefundwill them inanaccount(whichcanbearyourname)for contributions toapubliccharitythatwillretain The donor-advised fundpermits youtomakeyour payment of future contributions charitable Retain control of thetiming,amountand 88 remainder trusts(“CRTs”) andcharitableleadtrusts There are twotypesof charitabletrusts— • • • • A charitabletrustcanprovide thefollowingbenefits: | The CRT’s assetsgrow tax-deferred because itisnot appreciation inexcessof theannuity). contributed securities(but youwillbeforegoing future the incomeyouare currently receiving from the below. The annuityyoureceive willprobably exceed taxed asyoureceive annuitypayments,asdiscussed based onthesecurities’fairmarketvalue.You willbe market risk,butyouwillalsoreceive anannuity andreduceYou yourportfolio willnotonlydiversify sell themwithoutincurringacurrent capitalgainstax. concentrated positioninlowbasisstock,theCRTcan highly appreciated securitiestoaCRT, suchasa charitable desires (seeTax Tip19).Ifyoucontribute increase yourannualincomestream whilesatisfying and yourportfolio A CRTcanhelpyoudiversify | valuations. annual fairmarketvalue,whichnecessitates since itisbasedonafixedpercentage of thetrust’s value. Theunitrustpaysanannuitythatwillvary that isbasedonafixedpercentage of theinitialtrust unitrust. Theannuitytrustpaysafixeddollar (“CLTs”). You cansetupeitherasanannuitytrustora a charitableleadtrust. Pass appreciation onto yourbeneficiariesbyusing deduction islowerthaninthepast. with thepresent lowinterest rateenvironment, this by usingacharitableremainder trust.However, present valueof aremainder tocharities interest left Obtain acurrent-year charitabledeductionforthe anddefercapitalgainstax. yourportfolio Diversify intoanannuity. appreciated property Convert Charitable Trusts Charitable Remainder Trusts RETURN TORETURN TOC
Charitable Contributions
Charitable Lead Trusts The annual annuity to the beneficiaryincome payout 50% of than must be at least 5%, but not greater to an annuity either the initial amount transferred the fair market value of trust or the annual year-end assets for a unitrust. to the charity interest the remainder The value of initial fair market the trust’s must be at least 10% of value. The term of the trust cannot exceed 20 years the and of The term trust must be irrevocable. deduction if the CLT is structured as a grantor trust is structured deduction if the CLT (with you reporting the annual income and charitable deduction). If the trust is set up as a non-grantor trust, a charitable deduction but you are you don’t receive also not taxed on the income the trust earns. • • • | The annuity the CRT. of is basically the reverse The CLT is paid to the charity and you or your beneficiaries the at the end of interest the remainder receive But the income tax implications are term. trust’s only allowed a charitable complex because you are 89 emainder annuity trust (“CRAT”). By doing so, you can combine your desire to so, you can combine your desire By doing (“CRAT”). emainder annuity trust
and Provide Yourself with an Annuity with an Yourself and Provide Use a CRAT to Diversify Your Portfolio Portfolio Your to Diversify Use CRAT a 19. Tax Tip Tax RETURN TO TOC RETURN TO diversify your portfolio the gain at the time of sell the stock and pay no tax on the $600,000 charitable giving intentions. The trust can with your long-term capital gains tax rate of 23.8% (inclusive of the Medicare Contribution Tax on net investment income) based on the undistributed gain of on net investment income) based on the undistributed gain of Contribution Tax the Medicare 23.8% (inclusive of capital gains tax rate of long-term like to diversify the capital gains tax. portfolio your to do so because of but you have been reluctant your overall portfolio in the trust. interest an annuity allocation since you retain though, that the family loses the remainder value since it will pass to charities at the end of the trust’s term. the trust’s since it will pass to charities at the end of value though, that the family loses the remainder One option you might want to consider is establishing a charitable r want to consider is establishing a charitable One option you might sale since the trust is a tax-exempt entity. The trust can then use the proceeds from the sale to purchase other investments which, in turn, diversifiesother investments which, in turn, the sale to purchase from The trust can then use the proceeds tax-exempt entity. sale since the trust is a rules: lower than your tax rates. the trust must satisfy the following qualify as a CRT, To are at a rate that is lower than the actual growth rate at a rate that is lower than the actual growth are overall can also reduce You experienced by the CRT. tax rates are family income taxes if the beneficiary’s overall gift taxes if the IRS tables used for and estate the annuity payouts value of the present determining made a gift to your beneficiaries equal to the annuity’s made a gift to your beneficiaries equal to the annuity’s value. The gift the present amount is set at the date of in lower this may result Typically, transfer to the CRT. You can choose to have the annuity paid to your You but you must yourself, beneficiaries instead of consider gift tax consequences since you will have remaining at the end of the trust’s term go to your term the trust’s at the end of remaining designated charities. on the trust’s undistributed accumulated income at undistributed on the trust’s rules. The assets to the ordering subject year-end, contributed and spread out the tax on the gain over contributed and spread the annuity (you may never actually pay the the life of the annuity is based of full tax). The taxable nature payouts as you receive them. Therefore, the CRT them. Therefore, payouts as you receive stock that you can immediately sell the appreciated subject to tax and you only pay tax on the annuity subject to tax and you only pay tax $600,000. You will also receive a current-year charitable contribution for the present value of the remainder interest going to charities. Remember, to charities. Remember, going interest the remainder value of charitable contribution for the present a current-year will also receive $600,000. You Assuming you choose a 10% payout rate, you will receive an annuity of $100,000 for the term of the trust, much of which will be eligible for the net which the trust, much of of $100,000 for the term an annuity of will receive Assuming you choose a 10% payout rate, you As an original shareholder in a company that went public, you now own stock that is worth $1,000,000 with a tax basis of only $400,000. You would public, you now own stock that is worth in a company that went As an original shareholder You only $400,000. with a tax basis of $1,000,000 EisnerAmper 2020 Personal Tax Guide ends inorder toreceive theremaining assets. However, theywillhavetowaituntilthetrustterm low.remainder interest, whichhasrecently beenvery the IRStablesforvaluingpresent valueof the the growth willbegreater thantheearnings ratein beneficiaries willenjoytheexcessappreciation since taxes.Ifthestockvaluegrows significantly,gift your stock inanearlystagecompany, andpaylittleorno amuchgreater interestyou togift inassets,suchas remainder interest youare givingaway. Thisallows taxonlyonthepresent valueofsubject togift the andestatetaxplanningtoolbecause youare gift Despite thesecomplexities,aCLT canbeaneffective Chart is limited, you can carry the disallowed contributions forward for five years, subjecttothesameannualpercentage forfiveyears, limitations. thedisallowedcontributionsforward is limited,youcancarry However, seethediscussionaboveandnotesbelowforwaystoincrease someof thelimitationamounts.To theextentthatyourdeduction The maximumdeductionyouare allowedforyourcharitablecontributionsissubjecttoalimitationbasedonAGI, asnotedbelow. 6. *Donor-advised fundsare treated aspubliccharities. • • These ceilingamountscanbeincreasedinthefollowingways: Private OperatingFoundations** Nonoperating PrivateFoundations Public Charities* ordinary income property), the60%deductibilitylimitisnotavailable.Seetaxtip17. incomeproperty), ordinary ***The TCJA forthe60%threshold. provides Ifanycontributionsare thatonlycashcontributionstopubliccharitiesqualify otherthancash(suchas tax-exempt purposes. organizations thatdevotemostof**Private operatingfoundationsare non-publiclysupported theirearnings andassetstotheconductof theirown that youwillbenefitfromthecarryoverinfuture. by electingtoreduceyourcontributiontheproperty’scost.Thisisonlyadvisableifcontributionswouldotherwisebelimitedanditunlikely The 30%limitationforappreciatedcapitalgainpropertydonatedtopubliccharitiesandprivateoperatingfoundationscanbeincreased50% and the20%limitationforappreciatedcapitalgainpropertyincreasesto30%. to 100%ofthecontributionsitreceivedduringthatyear,30%limitationforcashandordinaryincomepropertyincreases50%(or60%***), If anon-operatingprivatefoundationmakesqualifyingdistributionsoutofitscorpuswithin2½monthsaftertheendtaxableyearequal Adjusted GrossIncome Charitable ContributionLimitationsBasedon Contributions MadeTo 90 50% or60%***forcash 50% or60%***forcash Cash andOrdinary IncomeProperty substantiation ifthecontribution is$250ormore. The donations. Acancelledcheck isnolongersufficient yourcashcharitable documentation tosupport Therefore, you mustmakesure toobtainthenecessary contribution andthevalueof anybenefittoyou. date thecontributionwasmade,amountof the showing thenameof thedoneeorganization, the communication from thedoneeorganization be substantiatedwithabankrecord orwritten cash donationstocharitableorganizations must Regardless of theamountof thecontribution, | Contributions Substantiate Your CashCharitable 30% AGI Limitation
Appreciated Capital Gain Property 20% 30% 30% RETURN TORETURN TOC
Charitable Contributions and regularly prepares appraisals for which he or appraisals prepares and regularly verifiable education or demonstrates she is paid, property being type of in valuing the and experience appraised. property the value is not in dispute. and on net investment Contribution Tax Medicare income Charitable gifts not deductible for the purpose are on net Contribution Tax calculating 3.8% Medicare of high income taxpayers. investment income of Contributions of similar items of property with an of similar items Contributions of subject to the value exceeding $5,000 are aggregate For example, if you contribute same requirements. $3,000 to one charity and yourclothing valued at clothing valued at $2,500 tospouse contributes qualified you would need to obtain another charity, contributions. The appraisalappraisals for both cash, of do not apply to contributions requirements traded stockpublicly traded securities or non-publicly worth less than $10,000. not satisfied, no charitable are If these requirements the received deduction is allowed, even if the charity 91 A qualified appraisal must meet certain criteria RETURN TO TOC RETURN TO Noncash Contribution AppraisalNoncash Contribution Requirements and Limitations and Requirements Easements on buildings in historic districts. are claiming a charitable deduction greater than claiming a charitable deduction greater are $500,000. Artwork appraised at $20,000 or more. similar items, for which you of Any item, or group earned an appraisal designation from a recognized from an appraisal designation earned has met certain appraisal organization, professional minimum education and experience requirements, on which the deduction is claimed. The appraiser must be an individual who has either before the date you contribute the property the before and before your tax return the due date (including extensions) of The appraisal must be made no earlier than 60 days • to be acceptable: • • Caution: • • attached to your tax return if you contribute any of the if you contribute any of attached to your tax return following: being used for the charity’s exempt purpose. being used for the charity’s be the signed appraisal must A complete copy of the charitable organization must complete, sign and the charitable organization indicating the the form, section of date the appropriate the contribution and whether the property isdate of Charitable Contributions Appraisal Summary, to Summary, Charitable Contributions Appraisal must include the qualified This form your tax return. and an authorized person from appraiser’s signature, you are required to obtain a qualified appraisal. Also, to obtain a required you are 8283, Noncash and attach Form you must complete If you contribute property worth than $5,000, more | weekly cash contributions made at religious gatherings made at religious contributions weekly cash the substantiation rules. unless you can meet written acknowledgement must explicitly state whethermust explicitly state written acknowledgement or servicesany goods with in connection received were to deduct your ability This rule eliminates the donation.
Interest Expense
93 depends on how the proceeds from the debt are used. the debt are from the proceeds depends on how
Interest expense may reduce your tax liability, but deductibility but deductibility liability, your tax may reduce expense Interest
RETURN TO TOC RETURN TO Interest Expense Interest EisnerAmper 2020 Personal Tax Guide or substantialimprovement of yourprincipalresidence This isdebtincurred on theacquisition,construction Acquisition debt debtare: mortgage interest, subjecttolimitations.Thetwotypesof qualified improve yourhome isdeductibleasqualifiedresidence debtusedtoacquire or Interest paidonmortgage | debt sothatyoucanloweryourtaxes. debt generatingnon-deductibleinterest withother review yourdebttodetermine whetheryoucanreplace the interest youwillpayonthedebt.Also,periodically options availabletoyougetthebesttaxresult from Before incurringanynewdebt,youshouldconsiderthe expense dependsonhowyouusedthedebtproceeds. many rulesandlimitations.Deductibilityof interest Your abilitytodeductinterest paymentsissubjectto | Qualified Residence Interest Deductibility Chart 7. Note: Education loans Passive activities Business activities Trading activities Tax-exempt investments Taxable investments Personal orconsumer Qualified residence(includingasecondhome) Interest ExpenseDeduction Other rulesmaylimityourabilitytodeducttheinterestexpensein full. Nature ofDebt Deductible 94 Not • • $1,000,000 for tax years after December31,2025. after $1,000,000 fortaxyears back to December 15,2017.Thelimitation reverts of acquisition indebtednessfordebtincurred after on $750,000($375,000ifmarried filingseparately) interest deductiontointerestreduces themortgage incurred onorbefore December15,2017.TheTCJA million ($500,000ifmarriedfilingseparately)fordebt be secured bythe residence andislimitedintotalto$1 purposes).For2019,thedebtmust if usedforpersonal and/or yoursecondhome(aso-calledvacation deductions. summarizes thenature of thedifferent typesof interest 7 itemized deductions(orseverely limitthem).Chart local incometaxbill,sincemanystatesdonotallow can especiallybesignificantinreducing yourstateand deductions willyieldabettertaxresult. Thisdifference itemized deduction.Generally, above-the-lineinterest (also knownas“abovethe-line”deductions)oran whether theinterest isdeductibleagainstyourAGI Once deductible,there are alsorulesthatcategorize Nature ofDeduction Deduction Itemized • • Above-the-Line Deduction RETURN TORETURN TOC • • • •
Interest Expense
Nondeductible Nondeductible Debt into Deductible Debt Margin Convert Convert Keep loan proceeds totally separate from other funds Keep loan proceeds totally separate from other 20. Tax Tip Tax Personal or Consumer Debt or Personal deductible margin debt. Rather than using the proceeds from the sale deductible margin debt. Rather than using the into deductible investment interest (assuming no other limitations into deductible investment interest (assuming of securities to buy other securities, use the proceeds to pay off your of securities to buy other securities, use the remain the same, but you will have converted nondeductible interest remain the same, but you will have converted personal debt. You can then use margin debt, to the extent available, personal debt. You can then use margin debt, Caution: whenever possible. This can avoid reallocation by the IRS, and may whenever possible. This can avoid reallocation the rate on consumer debt. to buy new securities. Your total debt and your total stock portfolio to buy new securities. Your total debt and your apply). And the interest rate on margin debt is typically lower than apply). And the interest rate on margin debt (including cars), or satisfy tax liabilities. See Tax Tip 20 for (including cars), or satisfy tax liabilities. See Tax a method to convert personal debt into investment debt. a passive arising from expense If you have interest activity that is being limited because you have excess If the loan is to refinance your principal residence or a your principal residence If the loan is to refinance over the lifesecond home, points must be deducted you may deduct early, the loan. If the loan is paid off of deducted in the year in which any points not already the loan is paid off. the overall limitation on itemized suspends The TCJA deductions for tax years beginning after December 31, January2017, and before 1, 2026. | personal (or consumer) debt expense from Interest paid on debt is nondeductible. This includes interest used to pay personal expenses, buy consumer goods save important tax deductions. You can reduce or eliminate your personal debt by converting it into You can reduce or eliminate your personal debt 95
RETURN TO TOC RETURN TO as points. indebtedness. The amount is clearly shown in the closing statement residence. the of stated as a percentage The points were Your loan is secured by your principal residence. loan is secured Your use the loan to buy or build your principal You • • • • be deductible in the year paid, the following are some be deductible in the year paid, the following are criteria that must be met: Points may be fully deductible in the year paid, or they Points to the loan. In order may be deducted over the life of or substantially improve the residence that secured that secured the residence or substantially improve the loan. years beginning after 31, 2017 and before December build January 1, 2026, unless the debt is used to buy, Home Equity Debt Cuts and Jobs Act suspends the interest The Tax for taxdeduction on home equity indebtedness income of up to $2 million from the cancellation of the cancellation of up to $2 million from income of a mortgage is tax-free. on a principal residence days of the acquisition. days of Under the Further Act, Consolidated Appropriations to secure the acquisition? You can buy the residence can buy the residence the acquisition? You to secure place within 90with cash and then put the debt into What if you desire to purchase a particular to purchase What if you desire home and finance it with a mortgage, but need to act immediately home is not security for the debt and the debt is nothome is not security agency (for government at the appropriate recorded office). clerk’s example, the county your residence qualifies as acquisition debt. Qualified qualifies your residence paid on does not include interest interest residence if your such as your parents, individuals, loans from proceeds used to substantially improve your residence. your residence. improve used to substantially proceeds that is used to substantially improve A home equity loan Acquisition debt also includes debt from a refinancing of of refinancing a debt from debt also includes Acquisition principal but only up to the acquisition debt, an existing plus any the refinancing of debt at the time that of EisnerAmper 2020 Personal Tax Guide and bond funds, are subject to ordinary income tax incometax and bondfunds,are subject toordinary dividends received from moneymarket mutualfunds forthisrate,including dividends notqualifying of theinvestmentinterest expenselimitation.However, rate isnottreated asinvestmentincomeforpurposes married filedjointly($496,600in2020))preferential tax separately ($248,300in2020),and$488,850for ($441,450in2020),$244,425formarriedfiled filers for the15%(20%ifAGI exceeds$434,550forsingle For 2019,qualifieddividendincomethatiseligible adequate netinvestmentincome. be deductedinalateryear, totheextentthatthere is andcan for theregular taxorAMTiscarriedforward not netlong-term capitalgains).Anydisallowedinterest discussed below)andnetshort-term capitalgains(but dividends(as includes taxableinterest, nonqualifying amount of yournetinvestmentincome.Generally, this Investment interest expenseisonlydeductibleuptothe expense asnondeductible. oftax-exempt income,rendering theinterest aportion you are required toallocateinterest expensetothe thanyouwouldexpect.AsTaxfurther Tip21illustrates, tax-deductible. Butbecareful, sincethisrulecanreach tax-exempt income,suchasmunicipalbonds,isnot Interest ondebtusedtobuysecuritieswhichgenerate paid theinterest. debt istreated inthesamemannerasifyoupersonally corporation). Theinvestmentinterest expenseonthis LLC,by apass-through orS entity(partnership, debt isthepro ratashare of investmentdebtincurred investment debt.Anothertypicalsource of investment to buysecuritiesisthemostcommonexampleof assets thatare heldforinvestment.Margin debtused Investment interest isinterest ondebtusedtobuy | Tax Tip20. investment debtinthesamemannerasdiscussed passive losses,considerreplacing thisdebtwith Investment Interest 96 net investmentincome. can helpreduce the 3.8%Medicare ContributionTax on Additionally, theinvestment interest expensededuction all, orsome,of youritemizeddeductions. state of residency allowsyouto reduce yourincomeby drops by$20,000.Plus,youwillsavestatetaxesifyour expense ($100,000at37%).Therefore, yournettax income islowerbytheadditionalinvestmentinterest However, yousave$37,000of taxsinceyourtaxable than 20%). ($100,000 of electedgainstaxedat37%rather you payanextra$17,000of taxonthecapitalgains income, $500,000 long-term capitalgainsasordinary gains of $500,000.Byelectingtotreat $100,000of the investment income.You alsohavenetlong-term capital of investmentinterest expenseinexcessof yournet the maximumtaxrateof 37%andyouhave$100,000 As anexample,assumein2019youare subjectto income taxrates. interest expenseyoudeductatthehigherordinary your taxableincomebytheincreased investment dividend taxrateof 15%or20%,butyougettoreduce you losethefavorablelowercapitalgainsandqualified can deductinthecurrent year. Bymakingthiselection, the amountof investmentinterest expensethatyou inthenearfuture. Thiselectioncanincrease carryover to beableutilizeanyof theinvestmentinterest this electionshouldonlybeusedifyoudonotexpect dividend incomeasinvestmentincome.Generally, of yournetlong-term capitalgainsandqualifying an electionisavailabletoallowyoutreat anyportion If youhaveaninvestmentinterest expenselimitation, rates andtherefore asinvestmentincome. qualify the interest expensereduces yourAGI, which inturn treated asanitemized deduction.Thisisbecause your AGI givesyouagreater taxbenefitthaninterest Interest expensedeductible “above-the-line”against | Above-the LineDeductions RETURN TORETURN TOC
Interest Expense
Tax-Exempt Debt Debt Tax-Exempt Can Limit Your Interest Deductible Indirect 21. Tax Tip Tax deduction will be limited because of an IRS ruling that requires you to that requires an IRS ruling deduction will be limited because of exempt municipal bonds and a separate account that holds mostlyexempt municipal bonds and a separate account exempt account. Therefore, before you borrow against your securities, against your you borrow before exempt account. Therefore, you will be paying. the interest cost of after-tax consider the real It is common to have one investment account that holds mostly tax- It is common to have one investment account holding taxable investments to purchase additional stock. Even though additional holding taxable investments to purchase ruling was designed to prevent a taxpayer from reaping a double tax reaping a taxpayer from ruling was designed to prevent your accounts as one account and deems you benefit, and thus treats you are not using margin in your tax-exempt account, your interest in your tax-exempt account, your interest not using margin you are taxable investments (such as stock in publicly traded companies).taxable investments (such as stock in publicly the ratio of your tax-exempt investments to your total investments. This your tax-exempt investments to your the ratio of the debt to maintain your tax- some of borrowed to have indirectly allocate a portion tax-exempt holdings based on the debt to your of to pay the qualified higher education expenses of the expenses of to pay the qualified higher education the taxpayer’s spouse, or an individual who taxpayer, was the taxpayer’s time the debt was dependent at the incurred. amountFor 2019 and 2020, the maximum deductible is $2,500. The student for educational loan interest begins to phase-out for taxpayers whose loan interest joint exceeds $70,000 in 2019 ($140,000 for MAGI is MAGI and is completely eliminated when returns) For 2020, the loan $85,000 ($170,000 for joint returns). begins to phase-out for taxpayers whose MAGI interest and is exceeds $70,000 ($140,000 for joint returns) ($170,000 is $85,000 completely eliminated when MAGI for joint returns). expense activity interest Passive to on debt incurred expense is interest interest Passive whether paid by you fund passive activity expenditures, the capital requirements through or indirectly directly is an The interest business entity. a pass-through of Assume that you want to use your available margin in the account Assume that you want to use your available margin 97 RETURN TO TOC RETURN TO Interest on education loans Interest solely A qualified education loan is any debt incurred In addition, the TCJA limits the deduction for net In addition, the TCJA expenses startinginterest January 1, 2018. Please see the chapter on business owner issues and depreciation deductions. Business interest on debt traced to your business This is interest including debt used to finance the capital expenditures, a partnership, of S corporation, or LLC requirements you materiallyinvolved in a trade or business in which participate. items that you purchase This also includes card. for your business (as an owner) using your credit as additional loans to treated are These purchases the business, subject to tracing rules that allow you to to that relate deduct the portion the finance charges of the business items purchased. Trading interest Trading against taxable on borrowings incurred This is interest actively engaged in the business securities if you are trading personal propertyof (securities), rather than commonly passes This interest simply as an investor. will a trading partnership The interest through or LLC. to you even if you have be classified as trading interest so the entity, of no involvement in the management actively engaginglong as the entity meets the tests for However, trading personal property. in the business of is still subject to the in such a case, the trading interest expense limitation discussed above. investment interest Interest expense eligible for this favorable treatment treatment expense eligible for this favorable Interest includes: reduces, if applicable, the limitation on deductible if applicable, the reduces, by AGI. items affected and other medical expenses taxpayers beneficial for most is that more But even state against your will be deductible the interest nondeductible if you live in aincome, rather than as allow itemized deductions (such state that does not and New Jersey), or limited Connecticut, Pennsylvania a portionin a state that disallows your itemized of California). and as New York deductions (such EisnerAmper 2020 Personal Tax Guide passive andreal estateactivities. the passiveactivitylosslimitations.Seechapteron overall passiveactivityincomeorloss,itissubjectto of since theinterest your expensebecomespart the activity, thereby deductibleagainstAGI. However, additional deductionagainsttheincomeorlossof 98 RETURN TORETURN TOC Retirement Plans
99 Contributing to retirement plans can provide you with financial plans can provide to retirement Contributing adhere to these rules can have severe, adverse tax consequences. tax adverse severe, rules have can to these adhere security as well as reducing and/or deferring your taxes. However, However, and/or deferring your as reducing taxes. as well security
there are complex rules that govern the type of plans available to you, plans available the type of rules that govern complex are there
the amount you can contribute, whether contributions need to benefit your whether contributions the amount you can contribute, employees, and the requirements for taking funds out of the plan. Failure to the plan. Failure funds out of for taking requirements and the employees,
RETURN TO TOC RETURN TO Retirement Plans Retirement EisnerAmper 2020 Personal Tax Guide make for2019and2020. shows themaximumannual contributionsthatyoucan 9 in.Chart that youmaybeeligibleto participate 8showsthedifferent typesofChart retirement plans traditional orRothIRA. their spousesmayalsobeeligibletocontributea fees). Employeesorself-employed individualsand employment activity(suchasconsultingordirectors’ employer, iftheyhaveearned incomefrom aself- to otherplansinadditiontheonesoffered bytheir Employees mayalsobeeligibletomakecontributions employer matchsomeorallof theircontributions. offers, butmaygaintheadvantageof havingtheir contributions basedonthetypeof plantheiremployer are more limitedsincetheywillhavetomake choose planstomaximizecontributions.Employees Self-employed individualshave more flexibilityto retirement plans. inother whether youcontributetoorparticipate whether youare anemployeeorself-employed, and depends onavarietyof includingyourincome, factors, rules. Thespecificplan(s)youcancontributeto available withdifferent contributionanddistribution There are manydifferent typesof retirement plans | current-year taxdeductionforyourcontributions. growth andwithdrawalsinthefuture, butthere isno byproviding fortax-free tax savingsopportunities Roth IRAsand401(k)contributionsoffer different reducing yourcurrent taxes. year’s • Your contributionsare taxdeductible,thereby • Your contributionsgrow tax-deferred untilwithdrawn. advantages: offering Roth401(k)contributions)offer thesetaxsaving Retirement plans(otherthanRothIRAsand | Available Retirement Plans Retirement PlanBenefits 100 • Education • Traditional • Roth individuals, subjectto incomelimitations: Individual Retirement Accounts(IRAs)available to all • • 401(k)Plans employees include: Employer-sponsored deferralplansavailable to salary plan totheexclusionof otheremployeesorpartners. purposes of retirement plansandmaynotsetuptheirownretirement (generallyLLCs) arepartnerships treated asowner-employees for of andowners entitiestaxedas Note: inpartnerships Partners • DefinedBenefitPlans • DefinedContributionPlansincluding401(k) • SIMPLEIRAor401(k)Plans • SimplifiedEmployee Pension (SEP)Plans Retirement plansavailable to self-employed individualsinclude: $57,000 for2020. of their eligible compensationor$56,000for2019and law employeescovered byaSEPisthelesser of 100% the contribution).Thecontributionlimitforcommon or hereligiblecompensation(netof thedeductionfor of aself-employed individualcannotexceed25%of his $57,000 for2020.However, the contributiononbehalf annual contributiontoaSEPis$56,000for2019and contributions ontheirbehalf. Themaximumallowable you haveeligibleemployees,mustalsomake planforyourbenefit.If plan isasingleparticipant employees’ IRAs.Ifyoudonothaveemployees,the to makecontributionsyourownIRAandeligible A SEPplanallowsyou,inyourcapacityasemployer, | • • Simplified Employee Pension Plans Educational, CharitableandReligiousOrganizations 403(b) PlansforEmployeesof PublicSchoolsorTax-Exempt SIMPLE PlansforCompanieswith100orFewerEmployees 457(b) PlansforEmployeesof Government Organizations etirement Plans 8. Chart R RETURN TORETURN TOC Retirement Plans Effective for tax years beginning after December contributions needed to attain that benefit. Because the that benefit. needed to attain contributions may annual contribution driven, the plan is actuarially plans, and is other types of allowable for exceed those annual income age, average the employee’s based on benefit (limited to the maximum and annual desired benefit). The maximum allowableallowable annual $225,000 in 2019 and lesser of annual benefit is the income. earned or 100% of $230,000 for 2020 a defined contribution or aWhether you choose your plan must be in place bydefined benefit plan, which you want to make the year for December 31 of to the plan. As long astax deductible contributions you can make taxthe plan is in existence on that date, contributiondeductible plan contributions to a defined that year’s tax income plan as late as the due date of extensions (as late as October 15, or including return, partnerships,September 15 for sole proprietors, LLCs defined benefit or corporations). For calendar-year by September 15,plans, contributions must be made until October 15. an extension to file of regardless Note: deadline for31, 2019, the SECURE Act modifies the and definedadopting qualified defined contribution New for 2020. benefit plans. See above section entitled conversions In-Plan Roth Employees can elect under certain conditions to convert certain some or all of amounts that were basis into a Roth contributed to a plan on a pre-tax the plan. This is known as an account inside of after-tax “in-plan” Roth conversion. Both 401(k) plans and 403(b) such a conversion,plans may permit but the plan for the in-plan conversion. documents must provide plans and participantsApplication to plan participant or former Any current who has an account balance in the plan and who is eligible to distribution (“ERD”) can make an eligible rollover receive the Roth conversion election. The election is available to surviving spouses, but not non-spouse beneficiaries. for or filing status restriction is no income limit There this election. The conversion may be applied to any 101 RETURN TO TOC RETURN TO Qualified Defined Benefit Plans Benefit Defined Contribution and Defined A qualified defined benefit plan sets a future annual A qualified defined benefit plan sets a future pension benefit and then actuarially calculates the A qualified defined contribution plan can be a profit- pension plan, or a sharing plan, a money purchase benefit pension plan. The maximum contribution target to a defined contribution plan for each employee is $56,000 in 2019 and $57,000 for 2020 or the lesser of his or her compensation. For self-employed 100% of individuals, the maximum contribution will generally be limited in the same manner as for SEPs unless 401(k) included in the plan. are provisions | New for 2020 The Setting Every for Retirement Community Up 2019 (“SECURE Act”) modifies Enhancement Act of plan for all the deadline for adopting a retirement qualified plans (except for 401(k) provisions). types of the date of Plans can now be adopted by the due including any extensions plan sponsor’s tax return This gives plan and be effective for the prior tax year. sponsors a SEP plan, which to adopting an alternative could plan that of until this change was the only type the plan sponsor’sbe adopted after taxable the end of This change year. year and still be effective for the prior yearsis effective to plans adopted for tax beginning after December 31, 2019. There are several advantages of a SEP compared to a a SEP compared of several advantages are There plan (e.g., a profit-sharing defined contribution qualified must plan, which a defined contribution plan). Unlike can be set 31, a SEP plan by December be established for the tax return to the due date of up any time prior entity (including the sponsoring of year the current can still deduct contributionsextensions) and you made even though on your prior year’s tax return, is that SEPs do Another advantage in the next year. same documentation as defined the not require to be 5500 required nor is Form contribution plans, filed annually. EisnerAmper 2020 Personal Tax Guide Similar provisions applyfor403(b)and457(b) plans. deferral plan. even ifyouhavemore thanoneemployerorsalary This annuallimitappliestoyourtotalcontributions $26,000 respectively age50andover). fortaxpayers 2019 is$19,000andfor2020$19,500($25,000 employee electivecontributionthatcanbemadefor compensation contributedtotheplan.Themaximum of their toelect tohaveaportion participants A 401(k)planisaprofit sharing planthatallows | are:for conversion pre-tax 401(k),403(b),and457(b) as anERD. Contributiontypesthatwouldbeeligible that are currently distributableandwouldbetreated type of vestedcontributions(andearnings thereon) y Deferral Plans (401(k), 403(b) and y DeferralPlans(401(k),403(b) and 457(b) Plans) Salar Chart etirement PlanMaximumAnnualContributionLimits 9. *This isthemaximumannualbenefitthatcanbeprovidedforbyplan,basedon actuarialcomputations. • SIMPLEs • Traditional andRothIRAs • 401(k),403(b)and457(b)plans Catch-up contributionsforindividualsage50orolder SIMPLE plans(savingsincentivematchplanforemployees) SEP Plans Traditional andRothIRAs Defined-benefit plan* Defined-contribution planincludingsalarydeferralamountsabove deferrals 401(k), 403(b),salary Type ofPlan 457(b) salary deferralstostateandlocalgovernment andtax-exemptorganization plans 457(b) salary R 102 than 1% in two out of every fiveyears. than 1%intwooutof every the matchingcontribution tolessthan3%butno the employermaychoosetoreduce For aSIMPLEIRA, at amaximumof 3%of theemployee’s compensation. generally required tomatchemployeecontributions age50andover)withtheemployer for taxpayers $13,500 for2020($16,000and$16,500respectively employees tocontributeup$13,000for2019and the form of anIRAora401(k)plan.Bothplansallow sponsored retirement plan.ASIMPLEplancantake the employerdoesn’tmaintainanyotheremployer- preceding yearcan establishaSIMPLEplanaslong who earned $5,000ormore of compensationinthe An employerthathadnomore than100employees | may berolled overtoanin-planRothaccount. after-taxcontributions. Inaddition,certain contributions deferrals; matchingcontributions;andprofit sharing le Plans Simp Maximum AnnualContribution 2019 $ 19,000 225,000 56,000 56,000 19,000 13,000 6,000 6,000 3,000 1,000 2020 $ 19,500 230,000 RETURN TORETURN TOC 57,000 57,000 19,500 13,500 6,500 6,000 3,000 1,000
Retirement Plans 7.1 9.1 8.1 7.6 6.7 9.6 8.6 14.1 11.4 12.7 10.8 10.2 12.0 14.8 13.4 Period Distribution able 91 87 97 85 92 93 86 88 89 90 95 96 98 99 94 Age 17.1 18.7 17.9 21.2 19.5 16.3 15.5 27.4 20.3 26.5 25.6 24.7 23.8 22.9 22.0 Period Distribution Uniform Life T Uniform 71 81 77 70 78 79 72 73 75 76 74 80 82 83 84 Age Chart 10. If you are either unmarried, or married but your spouse is either not the either unmarried, or married but your If you are you sole beneficiary than 10 years younger than yourself, is not more or minimum distribution by using this table. can compute your required plans, retirement 73 years old and your qualified Assuming you are 2017, you end of valued at $2,000,000 at the were in the aggregate, $80,972 in 2018 minimum distribution of to take a would be required 24.7). a distribution period of ($2,000,000 divided by The two most common types of IRAs are Roth IRAs and IRAs are The two most common types of significant differences are traditional IRAs. While there also common rules that are between these IRAs, there can contribute up to $6,000 them. You apply to both of for 2019 and $6,000 for 2020 ($7,000 if at least age be 50) to either IRA account, or both combined. To deductible as a contribution for a traditional IRA (Roth year, not tax deductible) in the current contributions are April 15 you must make the contribution on or before 103
You can make only one rollover from an IRA from can make only one rollover You If you have three traditional IRAs (IRA-1, IRA-2If you have three The benefit of a SIMPLE plan is that it is not a SIMPLE plan is of The benefit RETURN TO TOC RETURN TO I Rollovers from traditional to Roth IRAs (“conversions”) traditional to Roth IRAs (“conversions”) Rollovers from they generate tax revenue). not limited (because are Trustee-to-trustee transfers between IRAs are not transfers between IRAs are Trustee-to-trustee a physical check limited because you do not receive the originating IRA to deposit to the new IRA. from a rollover the transfer is not considered Therefore, electronically by the IRS. The assets and/or cash are the old IRA trustee to the new IRA from transferred trustee. (IRAs) Accounts Retirement ndividual • • Reminder: 12-month period,to another (or the same) IRA in any The one- IRAs you own. the number of of regardless all limitation is applied by aggregating rollover-per-year IRAs, IRAs, including SEP and SIMPLE an individual’s of effectively treatingas well as traditional and Roth IRAs, the limit. Please note them as one IRA for purposes of this rule: from exempted are that the following rollovers | A taxpayer may roll over amounts from an employer- over amounts from A taxpayer may roll plan (e.g., a 401(k) plan) to a retirement sponsored that the plan has existed for SIMPLE plan, provided Caveat: Caveat: and other qualification non-discrimination subject to generally rules, which are the top-heavy rules, including that you The downside is to qualified plans. applicable to any other employer-sponsored cannot contribute limit is plan and the elective contribution retirement the employee, plans. For types of lower than for other the mandatory can matching requirement employer the limited. For the employer, be attractive, though not discretionary. contributions are at least two years. Example: and IRA-3), and you took a distribution from IRA-1 onand IRA-3), and you took a distribution from January it over into a check) and rolled 1, 2020 (received IRA-2 the same day (must be within 60 days), you could over any other 2020 IRA distribution unless the not roll the above exceptions. meets one of rollover EisnerAmper 2020 Personal Tax Guide • • meet oneof theseexceptions: plan anddeductyourownIRAcontributionsifyou can stillmakecontributionstoanemployer-sponsored ofretirement theyear. planforanypart However, you inanemployer-sponsoreddo notactivelyparticipate to atraditionalIRAifyou(oryourspouse,married) Youyears. canonlymaketaxdeductiblecontributions no longermakecontributionsinthatyearorfuture distribution. Also,onceyoureach age70½,youcan incometaxratesatthetimeof subject toordinary income, distributions willbefullytaxableasordinary contributions loweryourcurrent taxes,butfuture year’s contributions andtheearnings grow tax-deferred. The A traditionalIRAallowsacurrent taxdeductionforyour 2019. December31, beginningafter effective fortaxyears rules stillapplytosuchcontributions.Thischangeis phase-out of thecontribution’s deductibilityand other traditional IRA.Therequirements regarding income, of 70½formakingdeductiblecontributionstoa Note: | alimony isconsidered earned incomeforIRApurposes. or greater thantheIRAcontributionamount.Taxable youmusthaveearned incomeequalto to eitherIRA, does notextendthisdate.To beeligibletocontribute of thefollowingyear. Anextensiontofileyourtaxreturn raditional IRA: Current Tax Deduction in 2020). combined MAGI reaches $203,000in2019($206,000 deductible contributioncan bemadeuntilthe can makeadeductibleIRA contribution.Apartially ($196,000 in2020).Onlythenon-activeparticipant combined MAGI doesn’texceed$193,000in2019 inanemployer-sponsoredparticipates planandyour You are married,butonlyoneof youactively reaches $74,000in2019and$75,000for2020. deductible IRAcontributionisalloweduntilyourMAGI $64,000 in2019and$65,000for2020.Apartially You are singleandyourMAGI doesnotexceed T The SECUREActeliminatestheagerequirement 104 Roth IRAoffers theseadvantagesoveratraditionalIRA: basis, butyourwithdrawalsare generallytax-free. A because yourcontributionsare madeonanafter-tax from A RothIRAdiffers atraditionalIRAprimarily | • • • • • • • oth IRA: NoTaxes onDistributions attain age70½. in anemployer-sponsored planupuntil theyearyou irrespective of theincomelimitationsorparticipation You canalwaysmakeanon-deductiblecontribution and $124,000in2020. contribution untilyourMAGI reaches $123,000in2019 in 2020.You deductibleIRA canmake apartially MAGI doesnotexceed$103,000in2019and$104,000 in employer-sponsored plans,butyourcombined Both youandyourspouse(iffilingjointly)participate Contributions to a Roth IRA can be made even if Contributions toaRothIRA canbemadeevenif sufficient earned incomeand/oralimony. youreach age70½,aslongyouhave plan after Your contributionscancontinuetobemadethe distributions beginningatage70½—orever. designated beneficiariesare notrequired totake andtheir spouseswhoareOriginal accountowners distributions. plus anadditional10%penaltyasnonqualified contributions are subject toregular incometax, However, amountsthatexceedyouraccumulated to withdrawfundscoverfinancialemergencies. they are nottaxed.Thisgivesyoumore flexibility these distributionsdonotexceedyourcontributions, taxable return of yourcontributions. To theextent nonqualified distributions)are treated first asa non- Distributions before reaching age59½ (andother age59½(withafewexceptions). must bemadeafter opened more agoandthedistribution thanfiveyears tax-free distribution,theRothIRAmusthavebeen you takeonlyqualifieddistributions.To asa qualify You neverpayanyincometaxontheearnings if R RETURN TORETURN TOC Retirement Plans Under the SECURE Act, effective for required Act, effective for required Under the SECURE If you turned or will turn 70½ during the year, you 70½ during the year, or will turn If you turned R Rules (“RMD”) MinimumDistribution equired High income individuals whose spouses are much spouses are individuals whose High income to take the need and who do not anticipate younger a conversion should consider distributions Roth to a own the Roth IRA as her spouse may take since the until the second not be required and distributions will spouse passes. | Note: made afterminimum distributions 31, 2019 to December qualified plan participants or IRA account holders who will attain age 70½ after December 31, 2019, the age to from minimum distributions is increased begin required age 70½ prior who attained 70½ to age 72. Participants to continue taking to December 31, 2019 will be required their minimum under the old rules. must generally start your taking RMDs from You or traditional IRA by April 1 plan qualified retirement age the year following the year in which you reach of must the RMD amount 70½. For each year thereafter, a If you are that year. be taken by December 31 of your current participant plan of in a qualified retirement or to the plan document refer you should employer, when you must consult with your employer regarding the plan as some distributions from begin receiving to take distributions until you you plans do not require your employment even if you have already terminate For leaving your employer. age 70½ before reached the employer and example, if you own 5% or less of employer at 70½, the plan still employed by the are document may allow you to defer taking distributions This exception the plan until you actually retire. from does not apply to SEPs or SIMPLE IRAs. Note: can either take a distribution in that year or defer the If you elect to defer, distribution until the following year. you must take two distributions the following year (the first December 31). by April 1 and the second by your if you fail to take an RMD from Generally, 105 Effective for tax years after31, 2017, December RETURN TO TOC RETURN TO What are some planning ideas for high-income some planning What are taxpayers? Who should make a conversion to a Roth IRA? a Roth to a conversion make Who should Those individuals who have many years to go before the to recover and who should be able retirement atax dollars lost on the conversion may benefit from those whoconversion. Others who may benefit are anticipate being in a higher tax bracket in the future and those able to pay the tax on the conversion from account assets. non-retirement your MAGI is too high for a traditional IRA or youhigh for a traditional is too your MAGI plan. The an employer-sponsored by covered are are Roth IRA contributions limits for making AGI married in 2020) if you are in 2019 ($196,000 $193,000 in 2020) or $122,000 in 2019 ($124,000 filing jointly, household (with partial single or head of if you are reaches your AGI until contributions permitted ($206,000 in 2020), if married filing$203,000 in 2019 in 2019 ($139,000 in 2020) ifjointly and $137,000 household). single or head of High-income individuals can make nondeductible contributions to a traditional IRA this year and in years can be converted so that the amounts future to the extent an individual to Roth IRAs. However, also has a traditional IRA funded with pre-tax contributions, the conversion is deemed to be made each IRA. rata from pro • • If you already have a traditional IRA in place, you may If you already part the balancewant to consider rolling or all of is that this rollover into a Roth IRA. The advantage of into tax-free you convert growth future tax-deferred the The disadvantage is that the amount of growth. IRA is taxable, as if you the traditional from rollover over anything, you roll the distribution. Before received growth the tax-free evaluate the potential benefit of on the tax you pay to the lost earnings compared the rollover. because of Note: a of rules allowing recharacterization repealed the TCJA traditional IRA contributions to a conversion of previous the subsequent tax year. Roth IRA by October 15 of EisnerAmper 2020 Personal Tax Guide Note: • penalty unlessyoumeetoneof thefollowingexceptions: 59½ youare alsosubjecttoa10%earlywithdrawal incometaxrate.Iftakenbefore reaching age ordinary qualified plansandIRAaccountsare taxedatyour Generally, withdrawalsfrom employer-sponsored | compute yourRMD. 10withanexampleofis reproduced howto inChart Uniform LifetimeTable, themore commonlyused table, is more youngerthantheindividual.The thantenyears and and isusedwhenthespousesolebeneficiary ExpectancyTabletable istheJointLifeandLastSurvivor youngerthantheindividual.Theother than tenyears orisnotmore spouse iseithernotthesolebeneficiary individuals, oramarriedindividualiftheindividual’s the Uniform LifetimeTable andisusedbyunmarried for determining thedistribution period.Oneiscalled period determined bytheIRS. There are twotables the prioryearanddividingthatsumbyadistribution all yourqualifiedretirement plansatDecember31of RMD iscomputedbytakingtheaggregate valueof had topayonthedistribution,aswellapenalty. The theincometaxthatyouwouldhave effectively covers have totakeacatch-updistributionsincethepenalty Ifyouare subjecttothepenalty,shortfall. youdonot reach 70½,youare subjecttoa50%penaltyonthe qualified retirement you planortraditionalIRAafter void EarlyWithdrawal Penalties separation of service. from anemployeeplan,paymentsmustbegin after (orbeneficiaries). Ifearlydistributionsare beneficiary expectancies) of theindividualanddesignated life (orexpectancy)orthejointlives payments (madeatleastannually)fortheindividual’s of aseriesof as part substantiallyequalperiodic the employer. Thesedistributionsmustbemade at thetimeyouterminate youremploymentwith as earlyretirement) andyouare old atleast55years You takedistributionsbecauseof jobseparation(such A This exceptiondoesnotapply toIRAaccounts. 106 • • • • • • to trustee. If you personally receiveto trustee.Ifyoupersonally thefunds,20%of plan aslongthetransfer isdonedirectly from trustee be rolled overtax-free intoanIRAoranotherqualified Amounts distributedfrom aqualifiedretirement plancan | intheretirementbeen left account. against thelossof thetax-deferred growth hadthefunds make sure youcompare thebenefitof thereduced rate take distributionstoadvantageof alowtaxbracket, distributions are taxableintheyearwithdrawn.Ifyou are notsubjecttotheearlywithdrawalpenalties, to takethemifyourtaxbracketislow. Thoughyou to takethemmeetexpensesoryoumaywant between theagesof 59½and70½,youmayneed Even thoughyouare notrequired totakedistributions | • -Sum (or Other Eligible) -Sum (orOtherEligible) ution Between Age 59½and 70½ purchase (limitedto$10,000). You usethedistributiontomakeafirst-time home youreach age59½. year after andthelastpaymentisreceived least fiveyears ina equal periodicorannuitypaymentsforaperiodof at You takedistributionsintheform of substantially deductible. the amountnototherwise You usedistributionsformedicalexpenses,limitedto participant. You ontheaccountof adeceased are thebeneficiary You disability. haveaqualifying separation ordivorce). toacourt-orderedrelations order (pertaining You receive distributionsunderaqualifieddomestic children oryourgrandchildren. education expensesforyou,yourspouse, You usethedistributiontopayforqualifiedhigher Distributions Lump Distrib RETURN TORETURN TOC Retirement Plans If allowed under the terms of the plan document, the plan of under the terms If allowed qualified participant’s a deceased from distributions over into an rolled to be permitted plan are retirement spouse, beneficiaryIRA for a not the decedent’s who is in must be The rollover the deceased. such as a child of transfer to an IRA trustee-to-trustee a direct of the form an as The IRA is treated the beneficiary. for the benefit of beneficiaryinherited IRA so the will not have the ability However, over the IRA to another IRA in the future. to roll the beneficiary now be allowed to take funds out will her life expectancy, the inherited IRA over his or of rather death, afterbeginning in the year the decedent’s than fully within five years (as noted below). not your plan does If the plan document governing an inherited IRA, to for non-spouse rollovers provide the of as children then non-spouse beneficiaries such over a decedent’s not eligible to roll deceased are plan or IRA.qualified plan balance into their own the minimumThey must take distributions based on if he or shedistribution method used by the decedent 70½, or within five years after reached thehad already not yet begun death if the decedent had decedent’s distributions. minimum taking required IRA will have A non-spouse beneficiary a decedent’s of in the yearto commence taking RMDs beginning the IRA account holder’s death following the year of the oldest beneficiarybased on the life expectancy of than one primary(if more beneficiary is named). This is takingtrue whether the IRA account holder was already beginning or her required his RMDs or died before account holder died before if the IRA date. Alternatively, beginning date, the beneficiaryhis or her required (or still using the five-year beneficiaries) have the option of the any distributions from rule, which does not require account until the year containing the fifth anniversary of the in that year, the IRA account holder’s death. However, distributed. account must be entire 107
Distributions from qualifiedDistributions from The SECURE Act modifies the rules below. Effective The SECURE Act modifies the rules below. RETURN TO TOC RETURN TO Nonsp Sur ouse Beneficiaries Rules Distribution viving Spouse for distributions with respect to plan participantsfor distributions with respect or IRA account holders that die after December 31, 2019, the the account holder will have balance of account entire to be distributed to non-spouse beneficiaries by the end the tenth year following the year the account holderof whether the account of died. This rule applies regardless beginning date or afterholder dies before their required minimum distributions.for required Note: Note: | IRA would not be required until he or she reached IRA would not be required that time, the RMD rules discussed above age 70½. At would apply. Upon the death of a participant/owner a qualifiedUpon the death of of or IRA, plan retirement a surviving spouse can make an distribution into his or her own plan or eligible rollover plan or the survivingIRA. Distributions from spouse’s | plans that are not made from a designated Roth a designated not made from plans that are to a Roth IRA. Under directly over account may be rolled taxes to pay income be required these rules, you will be subject to the distribution, but will not in the year of the mandatory 20% tax withholding or the 10% early age 59½. younger than distribution penalty if you are Roth designated only distributions from Previously, over to rolled be directly qualified plans could accounts of income limitation. a Roth IRA without being subject to the Special Planning Note: Note: Special Planning the distribution is required to be withheld for federal to be is required the distribution state income tax also require (some states income taxes the of the full amount over If you fail to roll withholding). days tax) within 60 any withholding (before distribution plan, you will also qualified retirement to another IRA or tax and possibly early withdrawalbe subject to income age 59½. under if you are penalties on the distribution
Estate and Gift Tax Planning
109
On January 1, 2013, Congress enacted the American Taxpayer On January enacted the American Taxpayer 1, 2013, Congress Trusts and estates can benefit from proper income tax planning. income proper can benefit from and estates Trusts Relief Act of 2012 (“ATRA”). This law created certainty and provides certainty This law created and provides (“ATRA”). 2012 Act of Relief for planning opportunities to reduce tax cost of transferring your assets your assets transferring for planning opportunities of cost tax to reduce to your beneficiaries. On December 22, 2017, President Trump signed the 22, 2017, President to your beneficiaries. On December Tax Cuts and Jobs Act (“TCJA”), which impacted estate and gift estate which impacted planning. tax Cuts and Jobs Act (“TCJA”), Tax
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Planning Gift Tax Gift Estate and Estate EisnerAmper 2020 Personal Tax Guide 2020 lifetimeexclusionis$11.58 million.Theincreased 2019 lifetimeexclusionwas $11.40millionandthe inflation amount,usinganew “chained” CPI.The from $5millionto$10million,indexedforanadjusted transfer, taxexclusionamountisdoubled andgift beginning in2018,theestate,generation-skipping As aresult of theTCJA, andeffectivefortaxyears Impact of theTCJA taxprovisions. enacted estateandgift between 35%and55%marginal taxratesof previously maximum taxrateof 40%.Thisratewasacompromise adjusted forinflation,hasbeenmadepermanent witha provisions. Asaresult of ATRA, the$5millionexclusion, andgeneration-skippingtransfertax estate, gift, and ATRA permanently extendedandmodifiedfederal 1,2013,thefinalcompromise wasreached On January million foramarriedcouple). ($10.24 adjustment madethis$5.12millionperperson federal transfertaxesin2011.For2012,aninflation couples whoseassetswere $10millionorlesstoavoid 31, 2012.Theseprovisions allowedestatesof married skipping transfertaxprovisions through December andgeneration- modified thefederalestate,gift, sunset provisions of EGTRRA. ThisActextendedand Relief Act—atemporary, two-yearreprieve from the In December2010,Congress enactedthe2010Tax for thesetaxestobeginin2010(orearlier). transfer taxesor, more likely, enactamodifiedregime permanently repeal theestateandgeneration-skipping believedthatCongress wouldacttoeither everybody rates (andwiththeexclusions)ineffect2001.Almost and areinstatement of2010atthetax thesetaxesafter 2002 through 2009,eliminationof thesetaxesfor2010, generation-skipping transfertaxesduringtheyears a phasedreduction inthemaximumrateof estateand of 2001(“EGTRRA”) provided, amongotherprovisions, The EconomicGrowth andTax ReliefReconciliationAct Background | e, Gift, and Generation-Skipping and Generation-Skipping e, Gift, Transfer Taxes (“GST”) Estat 110 Also consider utilizing during 2020 all or a portion Also considerutilizingduring 2020alloraportion Use your lifetimeexclusion 2019 to$157,000in2020. non-citizen spousehasincreased from $155,000in to a The federalannualexclusionamountforgifts without usinganyof taxexclusion. yourlifetimegift up transferringsubstantialamountsoutof yourestate any numberof yourrelatives orfriends,youcouldend annually to remains $15,000for2020.Bymakinggifts exclusion $30,000 asamarriedcouple).Theannualgift upto$15,000perindividual(or make tax-free gifts exclusionallowedyouto For 2019,theannualgift Make annualgifts assets: consider toreduce oreliminatetheestatetaxonyour Here are someeffectivestrategiesthat youshould to transfersignificantwealthfamilymembers. transfer, taxexclusionsprovide anopportunity andgift the TCJA. Theincreased estate, generation-skipping especially trueinlightof therecent changesunder that canbetransferred toyourbeneficiaries.Thisis Estate planningwillhelpyoutomaximizethewealth Where doyou begin? assets tobeneficiaries. todecrease taxcost of still opportunities transferring For estatesinexcessof exclusionamounts,there are alternative valuationdate. of decedent’s deathor, ifelected,theFMVonan will beatthefairmarketvalue(“FMV”)ondate acquiredappreciated from property adecedent in basisforthedepreciated assets.Thebasisof in basisfortheappreciated assetsora“step-down” The TCJA retains theIRCSec.1014(a)fora“step-up” new chainedCPI. and willbeadjustedforpost-2011 inflationusingthe backtotheamountof exclusion willrevert $5million maximum estate,generation-skippingtransfer, andgift exclusion sunsetsonDecember31,2025,andthe RETURN TORETURN TOC
Estate and Gift Tax Planning NO NO NO NO NO NO NO NO NO NO NO Credit State Tax
GST $5,120,000 $5,000,000 $5,000,000 $5,250,000 $5,340,000 $5,430,000 $5,450,000 $5,490,000 $11,180,000 $11,580,000 $11,400,000 ax Rates Estate $5,120,000 $5,000,000 $5,000,000 $5,250,000 $5,340,000 $5,430,000 $5,450,000 $5,490,000 $11,180,000 $11,580,000 $11,400,000 Exemptions million estate tax exclusion) of their assets from federal from their assets of tax exclusion) million estate their estates after imposed on transfer taxes both died. exclude couples could in 2011, married Commencing millionfor 2019 and $23.16 ($22.80 million $10 million federal transfer taxes their assets from for 2020) of about separately titlingwithout being as concerned accomplished by a concept knowntheir assets. This is as “portability.” married first-to-die of estates The executors of or afterdecedents dying on January 1, 2011 may elect exclusion to the survivingto transfer any unused by the surviving received spouse. The amount is spouse 111 (Cumulative Tax-Free Transfers) Gift $1,000,000 $5,120,000 $5,000,000 $5,250,000 $5,340,000 $5,430,000 $5,450,000 $5,490,000 $11,180,000 $11,580,000 $11,400,000 Tax 35% 35% 35% 40% 40% 40% 40% 40% 40% 40% 40% Maximum Rates Gift, Estate, and GST
Maximum Gift, Estate, and GST T Maximum Gift, Estate, and Exemptions
Year 2010* 2011 The following chart 2020 and thereafter: shows the rates and exemptions for the tax years 2010 through 2012 2013 2014 2015 2016 2017 2018 2019
2020 and thereafter** 11. *Unless carryover basis and no estate tax is chosen. revert doubled and will be adjusted for inflation, using a new chained CPI. In 2026, the exclusion will back to the exclusions are the TCJA, of a result **As the new chained CPI. inflation, using $5 million plus adjustments for post-2011 Chart
RETURN TO TOC RETURN TO Consider portability exclusion the lifetime of Act, married couples had Relief Prior to the 2010 Tax and maintain separately owned planning to do careful had a $3.5 to exclude $7 million (each assets in order of your remaining $11.58 million lifetime exclusion. If$11.58 million lifetime your remaining of ability your spouse the this gives you and married, (adjusted annually up to $23.16 million to transfer during CPI) tax-free using chained for inflation, is in addition to your annual giftyour lifetimes. This See Chart 11 for the previously. exclusions mentioned see 2020. Also, for 2010 through rates and exemptions Tip 22. Tax EisnerAmper 2020 Personal Tax Guide The benefit of utilizingalltaxexclusionisasfollows of yourlifetimegift You taxexclusionimmediately shouldconsiderusingyourlifetimegift $61,450,375 hadyoutransferred theassets now. which willbeavailabletoyourbeneficiaries $61,450,375 in20years, ($61,450,375 lessthe$23,160,000 at anassumedtaxrateof 40%).Your (assuming a5%compoundedannuallyafter-tax growth rate): surviving spouse’ssurviving death. Asaresult of TCJA, ifyouandyourspouse subject toestatetax,eitheratyourdeath,or, ifmarried,typicallyatyour none of thedeceasedspouse’s $11.58millionexclusion assets andthere isanunlimitedmaritaldeduction,and spousereceives allof the die becausethesurviving estate taxwouldbeduefrom theestateof to thefirst has $5millionof hisorherownassets).Nofederal spouse(who and leavesitalloutrighttothesurviving calendar year2020withataxableestateof $18million As anexample,assumethatonespousediesin atdeath. and transfers arisingfromtaxable transfers subsequentlifetimegifts estate of hisorherlast-deceased spouseagainstany spouse canapplytheDSUEamountreceived from the or portability, of theDSUEamount,surviving federal estatetaxreturn (form 706)andelectstransfer, amount. Iftheexecutorof thedecedent’s estatefileda called theDeceasedSpousalUnusedExclusion(“DSUE”) time of your surviving spouse’stime of yoursurviving death,theestatetaxon assetsthat you did not transfer during your lifetime may be as high as $15,316,150 you didnottransferduringyourlifetime maybeashigh$15,316,150 will haveacombinedestateinexcessof theestatetaxexclusionat free of andestatetaxes.Iftheappreciated assetsremaining gift inyour have not yet used your exclusions, you can make gifts of have notyetusedyourexclusions,youcanmakegifts $22.80million remain inyourestatewithallfuture incomeandappreciation thereon beneficiaries will receive thenetbalance of $46,134,225, ratherthanthe If youtransfer$23.16millionin2020,thewillgrow to in 2019 or $23.16 million in 2020 (in addition to the annual exclusion in 2019or$23.16million2020(inadditiontotheannualexclusion thetransferred assetsmay if youhaven’talready doneso.Otherwise, gross estatepasstoyourbeneficiaries,assumingyouandspouse ofgifts $15,000in2020toeachdoneefrom eachof you). Tax Tip Your Lifetime 22. Use Now Gift Tax Exclusion 112 is ontheamountof totalassetsandnottheamount the estatetaxis“taxinclusive,” whichmeansthatthetax time valueof money.) Thisdifference arisesbecause ($3,571,429 less$3,000,000). (Thisexampleignores the yourbeneficiarieswillreceiveyears, anextra$571,429 forthree ($3,571,429 atthe40%rate)andsurvive taxesof is the$5millionamountlessgift $1,428,571 However, of ifyoumakeanetgift $3,571,429,which rate, yourbeneficiarieswillonlyreceive $3,000,000. Ifyouhave alarge estateatthe40%tax to gift. amount andyouhaveanother$5millionthatwish that youhavepreviously usedyouravailableexclusion available foryourbeneficiaries.Forexample,assume taxeswilloften increase theamount paying gift exclusion andcanafford totransferadditionalassets, for thosepeoplewhohaveuseduptheiravailable Although there taxes, isareluctance topaygift Make taxablegifts • • • of a“bypasstrust.” Theseinclude: spousetodie,whichoften necessitatesthecreationfirst advantages tousingtheexclusioninestateof the tax planningformanycouples,there are stillsignificant of theexclusionsimplifiesestate Although portability made permanent. to thatdate).Asaresult of ATRA, hasbeen portability prior 2026 andnochangeinthetaxlegislationoccurs 1, spousediespriortoJanuary (assuming thesurviving only $840,000willbesubjecttothefederalestatetax spouse has$24millionof assetsonhisorherdeath, from future federaltransfertaxes.Ifthesurviving exclusion (disregarding theinflationindexing)available spousewillhaveacombined$23.16million surviving to transfertheunused$11.58millionexclusion, would beused.Ifthedeceasedspouse’s executorelects the surviving spouseremarries). the surviving children andgrandchildren (e.g.,inasituationwhere of theassetsforfirst-to-diePreservation spouse’s Protection of theassetsfrom potentialcreditors. transfer taxes. Removal of future incomeandappreciation from RETURN TORETURN TOC Estate and Gift Tax Planning
Connecticut is the only state which imposes 1.60 % if the term of the loan is three years or less the loan is three of 1.60 % if the term (short-term). years and less than three is more 1.69 % if the term than nine years (mid-term). is nine years2.07 % if the term or longer (long-term). Direct payment of educational and medical expenseseducational and medical of payment Direct medical institution or the educational to the qualified and provider, bank/securities accounts trust (pay-on-death) Totten • • • • to be repaid) and properly documented. and properly to be repaid) Note: These rates are low by historical standards and standards low by historical These rates are an excellent opportunityprovide to use loans to your beneficiaries as a technique for transferring wealth free you need to make gift estate taxes. However, and of fide (i.e., you intend for it that the loan is bona sure • costs medical and education Pay and medical pay unlimited tuition can directly You gift taxes. This of personexpenses for any free to the annual giftexclusion is in addition exclusion. insurance premiums can include health Payments and tuition for elementary graduate school through to the directly must make these payments school. You qualifying or medical provider. educational organization rather than giftsUse loans is a viable optionLending money to your beneficiaries your lifetime gift to avoid current taxes or the use of gift can then use your annual tax gift exclusion. You exclusion to enable your beneficiary to pay the interest due and/or part the debt principal each year. of JanuaryFor the month of 2020, the minimum interest on loans with by the IRS to be charged rates required to as referred to be compounded annually, interest are: applicable federal rates (“AFR”), gift tax. Use trusts and other family entities for Entities and trusts that should be considered 113
RETURN TO TOC RETURN TO IRC Sec. 529 college savings accounts, IRC Sec. 2503(c) trusts for the benefit of persons IRC Sec. 2503(c) trusts for the benefit of age, under 21 years of Life insurance trusts, Discretionary trusts, • Other methods for transferring assets to minors • It is important that the person who gifts to make sure the propertyserve does not as a custodian under the If to that property. UTMA for the minor with respect the donor is serving the and dies before as a custodian the minor reaches (e.g., before UTMA status terminates 21), the property held under the UTMA willthe age of be included in the donor’s for estate tax taxable estate can be avoided with this result purposes. Fortunately, advance planning. For example, if a spouse proper transfers his or her his or her property for the benefit of child and his or her spouse servesas custodian under the UTMA, the property would not be included in the taxable estate should he or she deceased spouse’s the UTMA status terminates. die before (or for their benefit of) include: Gifts minors to making gifts to the common methods of One of 21 is to of under the age and grandchildren children the assets to be held by an arrange for ownership of for the minor under a state’s individual as custodian This type of to Minors Act (“UTMA”). Transfers Uniform Gifts under the Uniform ownershipwas previously to Under the UTMA, the custodian Minors Act (“UGMA”). the property to transfer to the minor upon is required minor’sthe minor attaining age 21, or to the estate it is age 21. However, upon the minor’s death before age 18 at possible for the custodianship to terminate ownership contains, in substance, if the designation of the phrase “until age 18.” actually going to the heirs.actually going Furthermore,if the grantor his orsurvives from removed years, taxes are the three her estate. • • EisnerAmper 2020 Personal Tax Guide • • taxinclude: minimal ornogift transferring future appreciation outof yourestateat members) (seeTaxmembers) Tip24). (typicallyfamily of distributionstothepartners investment decisionsandthetimingamount at adiscountedvalue,whileyouretain control of you totransferassetsyourbeneficiaries,typically some complicationsandrisks).Theseentitiesallow estate taxplanningvehicles(thoughnotwithout and effectivegift companies (“FLLCs”) canbevery (“FLPs”)andfamilylimitedliability limited partnerships Family and LLCs: limited partnerships attractive option(seeTax Tip23). With theIRSratesrelatively low, theGRAT isan appreciation willpasstax-free toyourbeneficiaries. 2020),theexcess used bytheIRS(2.0%inJanuary assets appreciate inexcessof theinterest rate the assetstransferred totheGRAT. Ifthetransferred pays youanannuityatafixedrateinexchangefor Grantor Retained Trust Annuity (“GRAT”): Tax Tip ransfer Appreciation with aGRAT Free 23. Value of shares transferred to beneficiaries($9pershare) Shares remainingattheendof GRAT’sterm Shares usedtopayannuities: Shares transferredtoGRAT the GRAT doesnotholdanyliquidassets,youwillneedtousethestockpayyourannuity, asfollows: $1,030,078. Assumethestockappreciates to$8pershare attheendof yearand$9attheend thefirst of thesecondyear. Since on thetransfer. You wouldreceive anannuitypaymentof $515,039peryear($1,000,000times51.503914%) totallingpaymentsof 2020)youcouldsettheannuityat51.503914%toeffectivelyzero outthe taxremainder interestrate (forJanuary andpaynogift The securitiesare currently valuedat$1,000,000(200,000shares at$5pershare). Asanexample,based ona2.0%IRCSec.7520 You transfersecuritiesinacompany thathasgreat potentialforfuture appreciation toatwo-yeargrantorretained annuitytrust. Year 2($515,039dividedby$9pershare) Year 1($515,039dividedby$8pershare) T of GiftTaxes Family AGRAT 114 • • • • taxes onthepremiums mayreduce thetaxbenefits. beneficiaries. However, paymentof premiums andgift thereby transferringsubstantialwealthtoyour can remove lifeinsuranceproceeds from yourestate, Irrevocable lifeinsurancetrust(“ILIT”): period of timeastheretained interest. the trustwithyourrighttoliveinhousefora your principalresidence astheassetcontributedto (which isagrantorretained interest trust)thatuses Personal residence trust: discussion. on charitablecontributionsforamore detailed with yourcharitabledesires. Seethechapter andcombineestateplanning yourportfolio diversify Charitable trust: states that only allow an exclusion that is less than the states thatonlyallowanexclusionislessthanthe estate taxwhenthesecondspousedies.However, in appreciation ontheassetsinbypasstrustescape assets properly, sothatthefuture incomeand Bypass trust: This trust can help you divide your This trustcanhelpyoudivideyour A charitable trust can help you A charitabletrustcanhelpyou This isaform of aGRIT RETURN TORETURN TOC $ 705,537
200,000 An ILIT AnILIT (64,380) (57,227)
78,393 Estate and Gift Tax Planning C If you should die before the expiration of the the expiration of If you should die before
F Limited Liability Companies Liability Limited Partnershipsamily Limited Family and transferred to the trust less the present value of the value of to the trust less the present transferred the trust during from annuity payments you will receive calculated are The annuity payments term. the GRAT’s is no giftat the IRC Sec. 7520 rate so there tax on and theoretically GRAT) (“zero-out” transfer to the GRAT term. the GRAT no assets should be left of at the end depends on the amount of the GRAT The success of on the assets during and appreciation income earned in Income and asset appreciation term. the GRAT the IRC Sec. 7520 rate (for example 2.0 % excess of used for January 2020 transfers) annuity will cover and remaining the GRAT of payments during the term giftassets will pass to your beneficiaries (see tax-free Tip 23). Tax is taxable to you, so the by the GRAT All income earned not depleted by income taxes. assets are trust’s Note: grossyour in includible be would assets the term, GRAT’s estate, subject to certain limitations. As Tax Tip 24 illustrates, FLPs or FLLCs can be very can Tip 24 illustrates, FLPs or FLLCs As Tax can contribute beneficial estate planning tools. You assets to such an entity in exchange for general partnership and limited partnership (or interests | 115
The Advantages of an FLP or FLL of an FLP The Advantages 24. of 40%), leaving $61,935,749 to your beneficiaries. Thus, there is a potential savings of $25,850,500. is a potential savings to your beneficiaries. Thus, there 40%), leaving $61,935,749 of How much will your beneficiaries receive? The value of their limited partnership interests could grow, free of gift to or estate taxes, free of their limited partnership value receive? The grow, could How much will your beneficiaries interests Let’s assume in 2020 you and your spouse have not yet used any of your lifetime gift exclusions of $23.16 million ($11.58 million each). $23.16 million your lifetime gift spouse have not yet used any of assume in 2020 you and your exclusions of Let’s accumulate in your estate, the estate tax could be as high as $25,850,500 (net of the $23.16 million exclusion assuming a maximum rate the $23.16 million (net of the estate tax could be as high as $25,850,500 accumulate in your estate, assumption that you can sustain a 30% minority and marketability discount on the value of the limited interests). the limited discount on the value of sustain a 30% minority and marketability assumption that you can Tax Tip Tax $87,786,249 in 20 years from the initial amount of $33,085,714 using a 5% after-tax growth rate. By comparison, if the assets were left By comparison, if the assets were rate. to growth a 5% after-tax $33,085,714 using the initial amount of $87,786,249 in 20 years from You can transfer assets valued at $33,085,714 to an FLP or FLLC, in addition to your annual exclusion gifts, free of gift annual exclusion gifts, in addition to your on the taxes (based of free or FLLC, assets valued at $33,085,714 to an FLP can transfer You RETURN TO TOC RETURN TO Grant Utilize Y federal exclusion, it may be appropriate to limit the federal exclusion, it may be appropriate amount going into a bypass trust. Trust Annuity or Retained our GSTExclusion When you create a GRAT, you (as a grantor) have a GRAT, When you create made a gift the assets equal to the fair market value of | The GST exclusion allows you to transfer up to $11.40 to $11.58 the GST tax in 2019 (increased of million free million in 2020). If you have not yet used the full your gift tax exemption, consider makingamount of gifts (or to a trust for their to your grandchildren GST your remaining benefit) up to the amount of is no to do so. There tax exclusion, if you can afford portability for the GST exclusion. between spouses If you transfer assets directly to your children and to your children If you transfer assets directly to their children, they eventually pass the assets down both estate tax will be paid (assuming two levels of the exclusion amounts). If you in excess of estates are or for to your grandchildren, make transfers directly a trust or other entity, their eventual benefit, through persons” two or more (individuals or to other “skip will be subject togenerations younger than you), you law) under current the GST tax (at a 40% estate tax rate in addition to gift or estate taxes. | EisnerAmper 2020 Personal Tax Guide for your beneficiaries. These trusts can be grantor trusts for yourbeneficiaries.Thesetrustscanbegrantor interests create truststoholdthelimitedpartnership An evenmore effectivewaytouseanFLPorFLLC isto estate. donor’s result intheFLP’s entire assetsbeingincludedinthe must beexercised tobesure thatthecontrol doesnot an appraisaltosubstantiatethediscountedvalue.Care amount ofcanbeincreased. You thegift shouldobtain canbediscountedandthecorresponding tax-freegift of marketabilityandlackof control, thevalueof the limited interests are minorityinterests subjecttolack tax.Becausethe exclusions, thereby avoidinggift not inexcessof youravailableannualandlifetime interests, but onlythelimitedpartnership typically gift this control mustbesetupcarefully). You would of theinvestmentanddistributiondecisions(though This interest allowsyoutoretain managementcontrol the managingmemberof alimitedliabilitycompany). interest (orremain typically keepthegeneralpartner member interest ifaFLLC). You and/oryourspouse Chart Note: California andFloridahavenoestatetax.InFlorida,there maybeaneedtofileotherforms toremove theautomaticFloridaestate taxlien. taxed atamargin ratesbetween 7.8%and12%. option.Thetaxableestateexceeds theexemptionamountwillbe taxexemption.CTdoesn’thave theportability tion willmatchthefederalestateand gift taxexemptionincreased from***Beginning 2019,theCTestateand gift $3.6millionto$9.1in2022.In2023 andbeyond,theConnecticutexemp EstateTax 1,2018,theNewJersey ** EffectiveJanuary wasrepealed. However, Inheritancetaxwasnotrepealed. theNewJersey amount, theentire estateissubjecttotax, notjusttheamountinexcessof theexemptionamount. 1,2020through December31,2020willbe$5,850,000.IftheNYtaxableestateis105%more*The exemptionamountfrom thantheexemption January (b) (a) tate EstateTax RatesandExemptions 12. New York Pennsylvania Connecticut State New Jersey sibl An inheritancetaxwillbeentir An inheritancetaxo ings andotherbeneficiaries.Thetaxwillbeassessedtothebeneficiariesor transfer S f 4.5% is imposed on transfers to direct descendants and lineal heirs, 12% on transfers to siblings and 15% on other taxable transfers. tosiblingsand15%onothertaxabletransfers. todirect 12%ontransfers f 4.5%isimposedontransfers descendantsandlinealheirs, Maximum EstateTaxRate ely exempt on transfers todirect andamaximuminheritancetaxrateofely exemptontransfers descendantsandlinealheirs, to 16%ontransfers 12% 16% (b) (a) 116 Maximum GiftTaxRate method, thetrustcanreceive theincomefree of taxes, from theannualincome.Byusingthisgrantortrust typically distributions tothetrustfrom thepartnership, that youare required toreceive wouldcomefrom be adequatelycapitalized).Theinstallmentpayments installment basis(subjecttoarulerequiring thetrustto to purchase theinterests, thesalewouldbedoneonan their benefit.Sincesuchatrustusuallyhaslimitedfunds beneficiaries istoselltheinterests toagrantortrustfor another waytotransfertheinterests toyour interests, thelimitedpartnership Rather thangifting distributions from thetrust. even thoughyoumaynotbeabletoreceive anycash allow youtocontinuepayingalltheincometaxes this, youshouldmakesure yourfinancialpositionwill are Before makinganadditionaltax-free doing gift. FLLC, allowingthetrusttogrow tax-free. Ineffect,you pay allthetaxesonincomeearned bytheFLPor all of theincomeof thetrustonyourtaxreturn. You for taxpurposes,requiring you,asgrantor, toinclude None None None 12% ees. $3,600,000/$5,100,000*** $5,850,000* Exemption None** None RETURN TORETURN TOC - Estate and Gift Tax Planning Life I Gift sufficient funds to a grantor-type trust so it can trust so it Gift sufficient funds to a grantor-type nsurance (or a trust for their benefit) will own the residence. They will own the residence. for their benefit) (or a trust you to allow value rent you a fair market must charge pay you and the rent using the residence, to continue will furthernot estate. If you do your taxable decrease home and your beneficiaries dointend to live in the the trust can sell the house and not want to live there, either case, the funds in other investments. In reinvest no additional gift is there terminates. tax when the QPRT the lost if you die before the benefits are However, the residence because the full value of ends QPRT term estate. your gross will be includible in • | Life insurance can serve an important your function in your beneficiaries estate plan because it can provide if the value of liquidity to pay estate taxes, especially assets) represents your business (or other non-liquid a significant portion your estate. Life insurance of immediate funds to help your can also provide living and for other of family maintain their standard left are in your taxable purposes. But if the proceeds the proceeds reduce estate, the federal estate tax could avoid To by as much as 40% for 2019 and beyond. your life of that the proceeds this tax, you must ensure not payable to either you or your insurance policies are any you possess estate, and that neither of spouse’s ownership in the policy at death. incidence of life insurance ILIT can remove structured A properly your estate, if the trust is both the from proceeds The trust can also owner and beneficiary. policy’s surviving income to your provide spouse and principal (or other beneficiaries) upon your to your children death. In addition, the trustee can properly spouse’s for future manage and invest the insurance proceeds growth. the following funding methods, you If you use any of the insurance policy can make the trust the owner of without being deemed to have any incidence of ownership: 117 RETURN TO TOC RETURN TO Qualified Trust Residence Personal The value of the house at the end of the QPRT’s term the QPRT’s the house at the end of The value of additional gift or of will go to your beneficiaries free your children expires, estate taxes. When the QPRT term A qualified personal residence trust (“QPRT”)A qualified personal residence is a form a GRIT that allows you to transfer your personal of benefit) to a trust (typically for your children’s residence even though you continue to live in the home during hold an income (e.g., ten years). term You the QPRT’s value of in the home based on the present interest the QPRT. of the term during your right to live there Gift the house tax applies to the fair market value of (as actuarially income interest by the retained reduced rates). computed using IRS interest | In August 2016, the IRS issued proposed regulations regulations In August 2016, the IRS issued proposed limitations onunder IRC Sec. 2704 that imposed in family- interests valuation discounts for transfers of would have limited entities. These regulations controlled discounts and would have control or eliminated lack of On Octoberhad an impact on marketability discounts. Department a final released 4, 2017, the U.S. Treasury under report regulations stating that the proposed as they would hurtIRC Sec. 2704 would be withdrawn valuation discountsfamily-owned businesses by limiting families to transferand made it difficult and costly for their businesses to the next generation. While FLPs and FLLCs can be effective estate planning be effective estate can and FLLCs While FLPs fully structured, be carefully vehicles, they must death occurs, before implemented substantially fide, nontax purpose. In addition,and have a bona should be accounting records tax and the proper and giftmaintained, income should be tax returns and all transactions should conform prepared carefully are Unless these precautions to the legal documents. may not be upheld in the eventtaken, the arrangement a challenge by the IRS. of thereby increasing the annual cash to fund repayment to fund repayment the annual cash increasing thereby installment note. on the interest the principal and of EisnerAmper 2020 Personal Tax Guide in exchangeforyouroldpolicy onatax-free basis. possible tofindamore favorablepolicyandobtain it or thedeathbenefitcanbeincreased. Itissometimes the policytoseeifpremiums canbelowered and/ for atleastthree itmay prove years, beneficialtoreview If youhavealifeinsurancepolicythathasbeeninforce income taxreturns willgenerallynotberequired. and youpaytheannualpremiums through gifts, However, ifthetrustonlyholdslifeinsurancepolicy insurance trustsare almostalwaysgrantor-type trusts. if thetrusthasassetsgeneratingtaxableincome.Life commissions. Also,incometaxreturns mayberequired specificrules,andthere maybetrustee to satisfy trustinstrumentisneeded since acarefully drafted will besomeadditionalcosts:You willincurlegalfees but theycanbeminimizedwithproper planning.There There are somedisadvantagestolife insurancetrusts, requirement. toproperly complywiththisadministrative important are notifiedinwritingof theirrightof withdrawal.Itis withdrawal (Crummey)powerandthebeneficiaries is onlyavailableifthetrustdocumentincludesa The government’s positionisthattheannualexclusion taxexclusion. exclusion andanyremaining lifetimegift taxiftheamountexceedsavailableannual gift existing policythathasvalue.You willonlyincura to purchase thepolicy, paypremiums ortransferan funds Be careful of taxissuestotheextentyougift gift • • first depositingtheminatrustaccount. first owned bythetrusteitherpayingthemdirectly or tothetrustannualpremiums onapolicy Gift inclusion inyourtaxableestate. at leastthree before years yourdeathtoavoid premiums. However, thetransfermustbecompleted futureAssign acurrent policytothetrustandgift future premiums. buy theinsurancepolicyandpayallcurrent and
118 • thefollowingdates: dying onorafter are thebasicexclusionamounts(“BEAs”)fordecedents 1, 2021thebasicexclusionamountis$5,850,000.Below 1,2020andbefore January January $5.25 million.After 2017, reached the2013federalestatetaxexclusionof exclusion amountgraduallyincreased andbyApril1, taxes. UndertheBudgetLegislation,estate $1 millioninassetswere subjecttoNewYork estate Prior tothislegislation,NewYork estatesabove April1,2014. after tax provisions are ineffectfordecedentsdyingonor tax ratesandestateexclusionamounts.Thenew known astheBudgetLegislationwithnewestate On April1,2014,NewYork Statepassedlegislation Changes to estate taxes inNewYork paid toastate. when there isnofederalestatetaxcredit fortaxes (e.g.,Florida)imposenosuchtax estate tax.Others estate orinheritancetaxevenifthere isnofederal state. Someof thesestatescontinuetoimposetheir locatedinthe domiciled inthestateorhaveproperty whoarean estateorinheritancetaxonpersons You shouldkeepinmindthatmanystatesalsoimpose | taxable amountisover105% of thecurrent BEA. exclusion amountisfullyphased outoncetheestate’s theestate’sthe BEAineffectatthattime.Furthermore, to phaseoutoncetheestate’s taxablevalueexceeds Unfortunately, theabovebasicexclusionamountsstart • • • • • tate Estate Tax Considerations January 1,2020andbefore Jan.1 2021: January 1,2019andbefore Jan.1 2020: January April 1,2017andbefore Jan. 1,2019: April 1,2016andbefore April1,2017: April 1,2015andbefore April1,2016: April 1,2014andbefore April1,2015: S
RETURN TORETURN TOC $5,850,000 $5,250,000 $2,062,500 $5,740,000 $4,187,500 $3,125,000
Estate and Gift Tax Planning Do you have adequate creditor protections included protections Do you have adequate creditor in your planning? grandchildren what age do you want your children, At or other beneficiaries to have full access to inherited assets? Do you have a power-of-attorney and is it current? Do you have a power-of-attorney will current? and/or living proxy Is your health care your for care for long-term Have you provided spouse and yourself? your qualified the designated beneficiaries of Are policies in plans and life insurance retirement desires? with your present accordance children, Does your estate plan include new etc.? grandchildren, for your guardians Have you named appropriate be deceased parents should both minor children minors? remain while the children Has anyone mentioned in your will died? Will your assets be preserved for your family in the a divorce? case of Who are your executors and trustees? Who are Non-Tax Considerations Non-Tax • • • • • • • • • • | your estate to review many non-tax reasons are There documents. plan and the related estate plan to your review It is advisable to periodically wishes with your current it is in conformity make sure should include nontax This review law. and current considerations, such as: • Decedent and distributing Schedules A to beneficiaries. and distributing Decedent confirmed December 2016 issued in Final regulations that no further June 30, 2016 would beyond extensions initial reportingapply to going forward and that the rule 706. filing Form within 30 days of is to file the form 119
RETURN TO TOC RETURN TO Consistent Basis Reporting for Estates Consistent Impact on Certain Impact Organizations Exempt Under the Surface Transportation and Veterans Health and Veterans Under the Surface Transportation introduced 2015, IRC Sec. 6035 Choice Act of Care that a beneficiary’s assure to reporting requirements basis in certain a decedent be property from acquired the property for estate taxconsistent with the value of not prepared purposes. Because many executors were the IRS to comply with the new reporting requirements, 8971, Informationextended the due date for filing Form Acquiring Property Beneficiaries a Regarding from | As a result of PATH, the gift tax will not apply to the PATH, of As a result money or other property to a tax-exempttransfer of described in IRC Sec. 501(c)(4) (generally, organization IRC Sec. 501(c)(5) organizations), social welfare or labor and agricultural organizations) (generally, | IRC Sec. 501(c)(6) (generally, trade associations and IRC Sec. 501(c)(6) (generally, business leagues). On January 15, 2019, The New York Governor’s Fiscal On January New York 15, 2019, The would and was released Executive Budget 2020 Year provisions the “clawback” extended have retroactively residents for certain gifts taxable New York made by decedents on death for estates of years of within three or after January January before 16, 2019, and 1, 2026. Another new change in the New York estate tax is that in the New York Another new change qualified terminable a New York the tax law requires election be made on a New propertyinterest (QTIP) on or for decedents dying directly estate return York after New York surviving April 1, 2019. The spouse’s a allowed from estate must include any QTIP gross marital deduction whether allowed New York previously election was made on the transferring the QTIP or on a federal estate tax return New York spouse’s For estates of decedents dying on or after JanuaryFor estates of 1, January2019, and before no addback is 16, 2019, there taxable gifts.of was required. return if no federal return forma pro EisnerAmper 2020 Personal Tax Guide reap taxsavings,ifplanned forproperly. planning. Thetimingof incomeanddeductionscan Choosing thefiscalyear-end of anestateinvolvesmore provide anoverall taxsavings. and receiving ataxabledeductionatthetrustlevel may making distributionstocurrent incomebeneficiaries for 2020(amuchlowerthreshold thanindividuals), income taxrateoncetaxablereaches $12,950 distributions. Asthetrustissubjecttotopordinary income taxliabilitiesthrough themeansof beneficiary and determination of theabilitytopotentiallyreduce trusts shouldconsidertherespective taxbrackets Planning surrounding incometaxationof estatesand and estateshavechangedtothefollowing: As aresult of theTCJA, theincometaxratesfortrusts | • • • ncome Tax Planning forTrusts Taxable receiving interests inthebusiness? where onlychildren workinginthebusinessare Do youneedtoequalizeamongstyourchildren succession planforthebusinessbeenputintoplace? the beneficiarieswhowillreceive thatinterest? Hasa If there isafamilybusiness,are yousatisfiedwith educational organization? Do youwishtoleavealegacycharitableor want toprovide for? withspecialneedsthatyou Do youhaveabeneficiary income income $12,750 I and Estates $9,300 $2,600 over $0
But not But not $12,750 $9,300 $2,600 2019 over
Rate 24% 35% 37% 10%
Taxable income income $12,950 $9,450 $2,600 over $0
But not But not $12,950 $9,450 $2,600 2020 over
Rate 24% 35% 37% 10%
120 RETURN TORETURN TOC Tax Credits
121 but all are subject to complex limitations based on income on income based limitations subject to complex but all are
and whether or not you are subject to the alternative minimum tax. subject to the alternative and whether or not you are There are many credits available to reduce your federal tax liability, liability, tax your federal to reduce available credits many are There
RETURN TO TOC RETURN TO Tax Credits Tax EisnerAmper 2020 Personal Tax Guide • children areQualifying definedas: refund evenifyoudon’toweanytax. Child Tax Credit. Arefundable taxcredit maygiveyoua childastheAdditional refundable foreachqualifying 2025).Upto$1,400ofand after thecredit canbe beginningbeforetax liability($1,000foryears 2018 childisavailabletooffset $2,000 perqualifying your Beginning in2018through 2025,aChildTax Credit of Child Tax Credit that hasaninvestmentinaforeign entity. orotherpass-through entity interest inapartnership investment accountsorfrom anunderlyingownership foreign taxesthrough securitiesthat are heldinyour commontoincur pass-through entities.Itisvery corporations andbusinessincomeearned byforeign of foreign taxesincludedividends paidbyforeign common forms of incomethatresult inthepayment Themost tenyears. carried backoneyearandforward utilized inthecurrent yearduetolimitationsmaybe tax credit allowed.Anyforeign taxcredits notfully in adifference betweenyourregular andAMTforeign foreign taxcredits allowedeachyearwhichcouldresult year.in aparticular There isaseparatecalculationof of foreign taxcredits anindividualmaybeabletotake income subjecttotax.There are limitsontheamount tax liability, whereas adeductionisreduction of a dollar-for-dollar offset U.S.income tothetaxpayer’s U.S. Ingeneral,acredit ismore advantageousasitis imposed byforeign countriesandpossessionsof the its residents eitheracredit ordeductionfortaxes limitations,theU.S.allows taxation, subjecttocertain subject totaxinforeign jurisdictions.To avoiddouble including foreign-source incomewhichmaybealso The U.S.taxesitsresidents ontheirworldwideincome Foreign Tax Credit most taxpayers: The followingisadiscussionof thecredits thatimpact | ax Credit Overview A son,daughter, stepson,stepdaughter, ora T 122 The 35%credit Once isforlower incometaxpayers. applicable credit percentage rangingfrom 20%to35%. the allowablecredit is based onyourAGI, with the dependent care assistanceprogram. Theamountof any paymentsreceived through anemployer-provided care expenseseligibleforacredit mustbereduced by individuals.Theamountof qualifying thedependent individualor$6,000fortwomore one qualifying on whichyoucancalculatethecredit is$3,000for The maximumamountof dependentcare expense more thanhalfof theyear. incapable of self-care andwhohadlivedwithyoufor tax yearoradependentwhowasphysicallymentally dependent whowasunderage13atthecloseof the individualcanincludea individual. Aqualifying andforthecare of aqualifying household services expensesincludepaidfor Qualifying the credit forchildanddependentcare expenses. totake can workorgotoschool,thenyouqualify sothatyouandyourspouse persons other qualifying If youpaysomeonetotakecare of yourchildren or Child andDependentCare Credit or U.S.resident alien. dependent mustbeaU.S.citizen,national, Thequalifying person. up to$500perqualifying Dependents. Thisisanon-refundable taxcredit of youfortheCreditCredit forOther maystillqualify Dependents whocan’tbeclaimedfortheChildTax of MAGI abovethethreshold amount. $1,000,orfractionthereof,is reduced by$50forevery Thetaxcredit widowers. filing separatelyandqualifying unmarried individuals,headof household,married reaches and$200,000for $400,000forjointfilers, The ChildTax Credit beginstophaseoutwhenMAGI • stepsister, oradescendantof suchrelative. descendant of suchchild;abrother, sister, stepbrother, or national,aresident of theU.S. end of thetaxyearandwhoiseitheraU.S.citizen A childwhohasnotattainedtheageof 17bythe RETURN TORETURN TOC
Tax Credits
Small wind energy property, Small wind energy and heat pump property, Geothermal Fuel cell property. In the case of property placed in serviceIn the case of after JanuaryDecember 31, 2016, and before 1, 2020, 30%. property placed in serviceIn the case of after JanuaryDecember 31, 2019, and before 1, 2021, 26%. property placed in serviceIn the case of after JanuaryDecember 31, 2020, and before 1, 2022, 22%. 10%. 2022 onwards, and completely phased out at $254,520. phased out and completely Efficient Property Energy Credit Residential The Bipartisan 2018 extends the Budget Act of efficient property allowed energy credit residential property. qualified energy the cost of up to 30% of fuel capacity of for each half kilowatt of The credit cell property applied This credit is limited to $500. energy for the following qualified to expenditures and placed in serviceequipment installed through December 31, 2021: • • • for solar electric propertyThe credit water and solar for property is available however, heating property, placed in service December 31, 2021, based through The applicable on an applicable percentage. are: percentages • • • • out ratably for taxpayers with MAGI over $214,520 for taxpayersout ratably with MAGI For 2020, the credit allowed is $14,300 and phased allowed is $14,300 the credit For 2020, Vehicle Credit Vehicle allowed for individuals who The maximum tax credit vehicles is $7,500, and if plug-in electric purchase the vehicle did not have battery at least 5 capacity of $2,500 applied. of kilowatt hours, the minimum credit qualify vehicle as a plug-in electric drive vehicle, the To must: Qualified Plug-In Electric Drive MotorQualified Plug-In Electric Drive 123
RETURN TO TOC RETURN TO For U.S. adoptions, you may be able to claim the credit For U.S. adoptions, you may be able to claim the credit and if you adopt a the adoption is finalized before special needs child you may qualify for the full amount the credit. of Adoption Credit up to $14,080 of credit For 2019, a nonrefundable expenses. Themay be claimed for qualified adoption is phased out ratably for taxpayers with MAGI credit is allowed for taxpayers over $211,160 and no credit adoption Qualified or higher. over $251,160 with MAGI and necessaryexpenses include reasonable adoption fees, court fees and other expenses costs, attorney an to the legal adoption of related directly which are eligible child. An eligible child is an individual who has the adoption 18 at the time of not attained the age of caring for or who is physically or mentally incapable of a special for the adoption of A credit himself or herself. the actual qualified of needs child is allowed regardless expenses. PATH has made the American Opportunity Credit PATH permanent. the chapter on education incentives. American Opportunity and Lifetime Learning Credits the American credits: two education-related are There is a modified which Opportunity (“AOC”), Credit These Credit. and the Lifetime Learning Hope Credit, tuition who incurred available to individuals are credits expenses pursuing degrees college or graduate allows taxpayers a or vocational training. The AOC $2,500. The per eligible student of maximum credit allows a taxpayer to take Credit Lifetime Learning A more $2,000 per taxpayer. of a maximum credit can be found in these credits detailed discussion of on the number of qualifying individuals. on the number of These percentages entitle you to a credit of of you to a credit entitle These percentages based $1,050/$2,100, respectively, $600/$1,200 and your AGI exceeds $43,000, the maximum rate allowed $43,000, the maximum exceeds your AGI is 20%. EisnerAmper 2020 Personal Tax Guide incurred thatexceeds 50%of theaveragequalified was equalto14%of thequalifiedresearch expenditures permanent asaresult of PATH. Ingeneral,thecredit improved business component.Thiscredit ismade application wasforuseindevelopinganewor research thatwas technologicalinnature andwhose This isacredit for expenditures paidorincurred for Qualified Research Credit greater thanorequal to2.5kilowatt-hours. capacitywithinthevehiclesmust be at $2,500).Battery capable, two-wheeledplug-inelectricvehicles(capped extends through 2019andisa10%credit forhighway- For two-wheeledplug-inelectricvehicles,theprovision the UnitedStates. usedpredominantly outsideofis allowedforproperty No qualifiedplug-inelectricdrivemotorvehiclecredit credit isallowed. of thephase-outperiod.Thereafter, quarters fourth no credit amount.Thecredit iscutto25%forthethird and phase-out period,thecredit iscutto50%of thefull of the twoquarters 200,000th unitissold.Forthefirst inwhichthe followingthecalendarquarter quarter phase-out periodbeginswiththesecondcalendar have beensoldforuseintheUnitedStates.The 200,000vehicles The credit beginstophase-outafter • • • • • • of electricity. capable of beingrecharged from anexternal source capacity of andthatis notlessthan4kilowatthours witha motor thatdrawselectricityfrom abattery be propelled toasignificantdegree byanelectric 14,000 pounds, have agross vehicleweightratingof notmore than of theCleanAirAct, be treated asamotorvehicleforpurposesof TitleII have itsoriginalusecommencingwiththetaxpayer, be acquired foruseorleasebutnotresale, be madebyamanufacturer, 124 Opportunity Credit are utilized. PreparersOpportunity will be and AdditionalChildTax Credit, andtheAmerican the Earned IncomeCredit, theChildTax Credit attach Form 8867tothereturn inthosecases where Paid preparers willberequired tocomplete and Due DiligenceChecklist individuals (thoseunemployedfor27weeksormore). whohireto employers qualifiedlong-term unemployed PATH alsoextendsthecredit beginningin2016toapply ormore.employed 400hours and40%forthose butfewerthan400hours 120 hours qualified first-year wagesforthose employedatleast wages are cappedat$6,000.Thecredit is25%of the yearoffor thefirst employment.Ingeneral,qualified credit isbasedonqualifiedwagespaidtotheemployee 1,2020.The beginningonorbeforeyears January toemploymentthroughsignificant barriers taxable target groups whohaveconsistentlyfaced certain forhiringindividualsfromavailable toemployers taxcredit isafederaltaxcredit The workopportunity CreditWork Opportunity a more detaileddiscussion. the exercise of ISOs.Seethechapter ontheAMTfor depreciation adjustmentsandthetaxpreference on AMT liabilityisderivedfrom “deferral items”suchas year. You foranAMT credit ifanyof qualify your to ataxcredit againstyourregular taxinasubsequent If youpaytheAMTinoneyear, youmaybeentitled AMT Credit if itgeneratedgross receipts priorto2015. tax year).So,fora2019return, abusinessisnoteligible any taxableyearbefore endingwiththe thefiveyears receipts of $5millionorlessandnogross receipts for businesses(gross liabilities isavailableforcertain Further, thecredit payroll againsttheemployers’ tax receipts) mayclaimthecredit againstAMTliability. eligible smallbusinesses($50millionorlessingross December31,2015, beginningafter for taxableyears research expensesforthethree Inaddition, prior years. RETURN TORETURN TOC
Tax Credits 125 RETURN TO TOC RETURN TO Family Medical Leave Tax Credit Tax Leave Medical Family to those a new tax credit businesses affords The TCJA leave to paid family and medical companies that offer chapter on business owner issuestheir employees. See deductions. and depreciation required to maintain copies of the documents that were that were the documents copies of to maintain required the qualifying eligibility of to determine upon relied taxpayer.
Education Incentives
and certain expenses. other educational 127
Tuition funding programs, tax credits and education expense and education expense credits tax funding programs, Tuition deductions are available to help many families fund the cost of college college of fund families the cost to help many available deductions are
RETURN TO TOC RETURN TO
Education Incentives EisnerAmper 2020 Personal Tax Guide • • • • following benefits: regardless of theirincome.Theseplansoffer the tuition program), sinceitisavailabletoalltaxpayers funding methodisanIRCSec.529plan(qualified Probably themostpopulartaxincentivecollege | • • include: The taxincentivesavailabletohelppaycollegecosts tax issueschapterforadditionalincentives. incentives thatmaybeavailabletoyou.Seethestate to phaseoutsbasedonAGI, thereby limitingthe butsomeoffor yourfamilymembers, themare subject to assistyouinfundingthecostof acollegeeducation There are educationincentivesthatprovide taxbenefits | IRC Sec.529Plan Education Incentives Available educational institution.Allowable computersoftware isenrolled ataneligible thebeneficiary any years andthe beneficiary’s familyduring by thebeneficiary expenses, solongasthecomputerisusedprimarily computer, computersoftware andeveninternet room andboard expenses,books,supplies, a Distributions canbeusedtopayfortuition,certain United Statesaswellmanyschoolsabroad. technicaltrainingschoolsinthe colleges andcertified university, orgraduateschoolandmostcommunity education expensesatanyaccredited college, Distributions are tax-free ifusedtopay qualified federal andstatetaxes. the earnings from theplanare tax-deferred for are notcurrently taxdeductibleonthe federallevel, Although thecontributionstoIRCSec.529plans Education deductions,includingstudentloaninterest. Credit. Credit andLifetimeLearning American Opportunity IRC Sec.529plans. 128 the five years, beginningwiththeyearofthe fiveyears, contribution. of thecontributionineach of exclusion toaportion period. Theelectionallows youtoapplytheannual individual asifyouhadmadeitratablyoverafive-year $75,000 ($150,000ifmarried)of thecontributionforan 2020. For2019and2020,youmayelecttotreat upto exclusion amountof $15,000perdoneefor2019and tostaywithintheannual to limitothertax-free gifts exclusion tofundanIRCSec.529plan,youwillhave However, totheextentyouusedyourannualgift from yourestate,there taxconsiderations. are gift tax purposes.Althoughtheplan’s assetsare excluded benefit of are anotherperson forgift considered agift Funds depositedintoanIRCSec.529planforthe • • • taxable ifnotusedforqualifiededucationpurposes. representing incomeearned withintheplanwillbe have accesstothefunds.However, anydistributions ifafinancialemergencyto yourself requires youto college.You after canalsochangethebeneficiary college, orexcessfundsremain inonechild’s account doesnotgoto another childiftheoriginalbeneficiary any reason. You to maychangethebeneficiary owner tochangebeneficiariesatanytimeandfor reaches legalage,permitting theaccount beneficiary the evenafter account owner(notthebeneficiary), Control of thefundsremains inthehandsof the public, private,orreligious school. orsecondary expenses” (tuition)forelementary maybeusedfor“qualified designated beneficiary is excluded.Distributionsof upto$10,000per orhobbies software designedforgames,sports must bepredominantly educationalinnature, so options andpossiblyhighercontributionceilings. funds toanewplan.Thisgivesyoumore investment 12monthsandroll overplan choice of planevery state youlivein.Inaddition,canchangeyour You are notlimited tojusttheplansoffered bythe incentive educationplans. account ownerorbeneficiary, unlikeothertax Age andincomerestrictions donotapplytothe RETURN TORETURN TOC Education Incentives
A $2,500 annual A $2,000 annual credit per A $2,000 annual credit ortunity Lifetime and Emp American Opp American Assistance Learning Credits Learning and other limitations. American Opportunity Tax Credit. Credit. American Opportunity Tax per student is available for the first four yearscredit on with enrollment education post-secondary of leading to a basis in a program at least a half-time up to $1,000 as a receive you can Generally, degree. no taxes. However, even if you owe credit refundable not be allowed to an will credit the refundable kiddie taxindividual if he or she is subject to the Credit. Lifetime Learning years taxpayer is available for an unlimited number of graduate, or certain other courses post-secondary, of is your job skills. The credit or improve to acquire qualified expenses, the first $10,000 of equal to 20% of $2,000. up to the maximum amount of Educational loyer-Provided
| Under a qualified educational assistance plan, up to the benefits will not be included in the gross $5,250 of • | Credit Opportunity/HopeThe American Scholarship Tax available are Credit Learning and Lifetime (“AOTC”) education tuition and related if you pay qualified courseexpenses, which includes materials such as equipment. Room and board books, supplies and expenses do not qualify either credit. for income limitations which have these credits However, is phased The AOTC credits. phase out the available $80,000 and $90,000 between out ratably with MAGI household and $160,000 and if single or head of 2019. The Lifetime$180,000 if married filing jointly for is phased out ratably with MAGI Credit Learning ($59,000 andbetween $58,000 and $68,000 for 2019 and household of $69,000 for 2020) if single or head and $138,000$116,000 and $136,000 for 2019 ($118,000 for 2020) if married filing jointly. • 129
The Tax Increase Prevention Act of 2014 Act of Prevention Increase The Tax
RETURN TO TOC RETURN TO PATH modified IRC Sec. 529 rules to treat any modified IRC Sec. 529 rules to treat PATH an IRC Sec. 529 account as coming distribution from all of that account, rather than aggregating from individual makingthe accounts. This is so even if the than one account. the distribution is operating more with amounts tuition paid of a refund Additionally, an IRC Sec. 529 account is treated distributed from Observation: a premature distribution from a retirement account. a retirement from distribution a premature are as a qualified expense if those amounts to an IRC Sec. 529 account within re-contributed 60 days. included the Achieving a Better Life Experience (“TIPA”) Act, which allows states to establish and (“ABLE”) disabled individuals Severely operate an ABLE program. (under age 26) would be able to open an IRC Sec. 529 savings account and make annual contributions up $15,000 for 2019 andto the gift tax exclusion limit of 2020, adjusted annually for inflation. The account may abe used to meet qualifying disability expenses of Any distribution that exceeds designated beneficiary. incomequalified disability expenses is included in gross 10%. and subject to an additional tax of IRC Sec. 529 plans also have their disadvantages.IRC Sec. 529 plans choices limited to the plan’s are Investment options even though you can investment vehicles. Also, of qualified higherwithdraw funds for uses other than pay income tax andeducation expenses, you’ll have to to similar an additional 10% penalty on the earnings, Private institutions can offer a prepaid tuition program tuition program prepaid a can offer Private institutions Distributions if they satisfy requirements. IRC Sec. 529 plans used for qualified education these private from be tax-free. expenses will also Also, if your state of residence allows a deduction for allows residence state of Also, if your only be you will generally to the plan, the contributions for one year’s take the deduction allowed to in amount the plan. year that you fund the initial EisnerAmper 2020 Personal Tax Guide higher educationfor2019and2020. gross incomeof upto$2000fortuitionandfees married filingjointlystatus)cantakeadeductionfrom individuals withMAGI of upto$80,000($160,000for ConsolidatedAppropriations Act, Under theFurther | $85,000 ($170,000ifmarriedfilingjointly). jointly) andiscompletelyeliminatedwhenMAGI is when MAGI exceeds$70,000($140,000ifmarriedfiling For 2019and2020,themaximumdeductionisreduced subject toaphaseoutthateliminatesthededuction. of interest paidonqualifiededucationloansannually, can taketheabove-the-linedeductionof upto$2,500 limitations, includinginterest oneducationloans.You computing againstyourfederalAGI, subjecttoincome educationexpensesare deductiblein Certain | TaxOpportunity Credit andLifetimeLearning Credit. other deductionorcredit, includingtheAmerican your employerunderthisplanasthebasisforany any of thetax-free educationexpensespaidforby includible ingross income.Further, youcannotuse of completingacourse retain instructionare after provided toolsorsuppliesthattheemployeemay books; suppliesandequipment.However, employer- expenses includetuition,feesandsimilarpayments; educational assistancebejob-related. Educational income of theemployee.There isnorequirement that uition Feesand Deductions nterest onEducation Loan I T 130 parents isalive. Tax of AmericanOpportunity portion Credit aslong asoneof the Please notethatachildunderage24cannotclaimtherefundable a maximumof $2,000. lifetime learning credit toreduce hisorherowntaxliability, youwillsave on theirtaxreturns instead.Ifyourchildcanclaimthefullamountof the Lifetime Learning Credit, youmayhaveyourchildren claimthecredit Taxprevent you from takingtheAmericanOpportunity Credit or If youpayqualifiedexpensesforyourchildren butincomelimitations Tax Tip GI Too Highto 25. A Take it Have Your Child a Credit? Claim RETURN TORETURN TOC International Tax Planning and Reporting Requirements
bank accounts and other financial investments. and other financial accounts bank
131 required for U.S. persons owning foreign assets including assets foreign owning persons for U.S. required
Foreign-earned income exclusions and foreign tax credits can credits tax and foreign exclusions income Foreign-earned
income and help to avoid double taxation. Complex reporting Complex double taxation. is and help to avoid income significantly reduce the U.S. tax liability incurred on foreign-source on foreign-source tax liability incurred U.S. the reduce significantly
RETURN TO TOC RETURN TO
International
Requirements Tax Planning Tax and Reporting EisnerAmper 2020 Personal Tax Guide income wasincludedintheU.S.shareholder’s 2017 whichever periodhasthegreater amount,andthe as of November2,2017orDecember31,2017; tax bracket.Therepatriation amountwasdetermined rate willultimatelydependontheU.S.shareholder’s a 55.7%reduction forcashamounts.Theeffectivetax allowed a77.1%deductionfornon-cashamountsand the applicablepercentage. U.S.shareholders willbe of theforeignportion earnings are taxablebasedon have notpreviously beentaxedintheU.S.Onlya their share of theoffshore earnings andprofits which in aspecifiedforeign entityare required toinclude All U.S.shareholders withatleast10%ownership (or willimpact)calendar2017andFYE2018taxpayers. earnings heldinaspecified foreign entitythatimpacted one-timerepatriation of offshoremandatory foreign international taxarena. Mostnotably, there wasa The TCJA hashadasignificantimpactinthe | Impact of theTax CutsAndJobs Act The maximum2019foreign earned incomeexclusion is$105,900, Your companysentyoutoworkinDubai2019forseveralyears, As youcansee,yourforeign housingexclusionmightbelimiteddependingonwhere youlive.Inorder toseethedifferences inlimitsfor Tax Tip subject totax:$478,870dividedby $625,000is76.62%). so you qualify asabonafide resident so youqualify of the UAE in2019.Assume you earn $500,000peryearandyourcompanyreimburses you would beabletoexcludethefollowingincomefrom yourU.S. for $125,000of housing costswhichare taxabletoyou.You Although the UAE does not impose an income tax, in this example, if you paid income tax to a country thatimposesatax,you Note: AlthoughtheUAE doesnotimposeanincometax,inthisexample,ifyoupaidtaxtoacountry taxes willbeallowableasaforeign taxcredit thatcanoffsetyour U.S.incometax(i.e.,only$478,870 of thetotal$625,000 of incomewillbe housing exclusion is based on which country andcityyouare housing exclusionisbasedonwhichcountry regardless youare of workingin.The whichforeign country income taxreturn: housing deductions in 2019, see Chart 13onthenextpage. housing deductionsin2019,seeChart may alsobeeligibletoreceive aforeign taxcredit againsttheU.S.taximposedonremaining income.However, only76.62%of these ax Benefits of theForeign-Earned ax BenefitsIncome 26. • $40,230of the housingexpensereimbursements. • $105,900of yoursalary. T and HousingExclusions 132 Therefore, youwillbetaxedintheU.S.on$478,870related $146,130). $125,000 housingcostreimbursements lesstheexclusionsof ($57,174 -$16,944).Whenaddedtoyourforeign earned income annual housingexclusionamountis$57,174.Ofthisamount, to youremploymentinDubai($500,000compensationplus you are not eligibletoexclude$46.42perday, or$16,944fora Dubai isconsidered tobeanexpensivecitylivein,sothe full year. Therefore, your2019housingexclusionwillbe$40,230 cities). exclusion of $105,900,youcanexcludeatotalof $146,130. living in (see Chart 13forsomeof themoreliving in(seeChart commonforeign entities. Ifaforeign (whichincludesindividuals, person requirement forforeign-owned U.S.disregarded withthe2017taxyear,Starting there isafiling | inclusion does not occur sooner than expected. inclusion doesnotoccursoonerthanexpected. be aware of various“triggering”eventstoensure the until theentire inclusionhasbeensatisfied.Onemust of taxwillneedtokeeptrackof thisforthefuture, qualified tomakethedeferralelectionforpayment withaninclusionandwho time event,alltaxpayers believedthistobeaone- Although manytaxpayers tax canstillbepaidoveraneight-year period. to U.S.shareholders. At theelectionof thetaxpayer, the additional repatriation of offshore earnings andprofits foreign corporations(i.e.,FYEin2018)there maybean tax return. Pleasenote,thatforfiscalyearspecified OtherRecent Developments RETURN TORETURN TOC International Tax Planning and Reporting Requirements
71,200 71,800 57,174 39,219 56,124 93,200 47,900 69,200 43,000 114,300 108,000 $ 50,200 Exclusion Maximum Annual Housing Maximum Annual Housing mainstream. Many taxpayers are discovering that Many taxpayers are mainstream. subject to taxation and/or reportingthey are in both Not all U.S. citizens and jurisdictions. U.S. and foreign their obligation to report of aware aliens are resident the U.S. their worldwide income to the IRS. As a result, continues to pursue U.S. persons who fail to report income and file certain These complex tax forms. on an overseas issues not only impact you if you are but have broad- abroad, assignment or retired if you have never left implications even reaching the U.S. For instance, these issues arise if you invest in hedge funds, private equity funds, and other entities operating businesses or in foreign that own interests retirement securities or have foreign invest in foreign bank can trigger plans. Even holding cash in a foreign a reporting requirement. 133 City Toronto Hong Kong Beijing Paris Berlin New Delhi Rome Tokyo Moscow Zurich Dubai London
China France Germany Japan Russia Switzerland United Arab Emirates Country Canada India Italy United Kingdom Foreign Housing Exclusions Foreign Housing
The amount of foreign housing exclusions costs that you can exclude from your 2019 U.S. income tax return depends on both the your 2019 U.S. income tax return you can exclude from housing exclusions costs that foreign The amount of the country cities, before common foreign maximum amounts you can exclude for some listed the Below are living in. and city you are for a full year. or $16,624 $45.55 per day, living cost of adjustment for the daily 13. Chart RETURN TO TOC RETURN TO Foreign Tax Issues Tax Foreign Multinational clients with cross-border income Multinational clients with cross-border in today’s employment and investments are from | partnerships a U.S. and corporations) owns 100% of Such as disregarded. it will effectively be treated LLC, 1120 Form forma to file a pro now required entities are 5472 attachment. This filing requirement with the Form 1120 forma The pro 1120-F. is in addition to filing Form due April 15, 2020 It is cannot be filed electronically. and can be extended. Reportable transactions between owner include contributions and its foreign the U.S. LLC and distributions between the two, and would certainly are There LLC. the of include the setup and closure penalties for non-filing. onerous EisnerAmper 2020 Personal Tax Guide • • • more specialtaxbenefits: if youare foroneor workingabroad, youmay qualify to U.S.citizensorresidents livingintheU.S.However, income taxandreturn filingrequirements thatapply resident whoisworkingabroad issubjecttothesame In general,theworldwideincomeof aU.S.citizenor | responsibilities. additional reporting institutions of foreign nationswillhavesignificant compliance regime, banksandotherinvestment greater globaltaxtransparency; similar totheFATCA regime, theU.S.hasinspired amovementtowards section below. Through thecreation of theFATCA foreign financialaccountinformation. SeeFATCA U.S. taxauthoritiesgreater accessintoU.S.taxpayers’ foreign financialinstitutionsplayakeyrole inproviding Act, alsoknownasFATCA. FATCA requires thatcertain the HIREactisForeign AccountTax Compliance entities setupinforeign jurisdictions.Thisprovision of requirementsthe reporting foroffshore accountsand and tightened income earned bynon-U.S. persons Act”) imposedaU.S.withholdingregime forU.S. Significant legislationenactedin2010(the“HIRE employment andinvestments. requirements, andelectionsinvolvingforeign the incomeexclusions,foreign taxcredits, reporting of This chapterisintendedtoprovide anoverview eign-Earned Income Exclusion and deduction forthetaxespaid. country, orifmore beneficial,takeanitemized for incometaxesyoupayor accruetoaforeign Claim aforeign taxcredit againstyourU.S.taxliability orself-employmentsalary earnings). of having anyhousingcostspaid(i.e.,fortaxpayers orall, reimbursements youreceive or(b)deductpart, orall,of anyhousingincome Either (a)excludepart, 2019 and$107,900in2020. Exclude upto$105,900of foreign-earned incomein Foreign Housing Exclusion/ Deduction For 134 in thecurrent yearsothatalarger amountof foreign may result inalowerutilization of foreign taxcredits You shouldconsider whetherforegoing the exclusion exclusion isclaimed. offset bytheforeign taxcredit regardless of whetherthe U.S. taxontheforeign-earned incomewillbecompletely at ahighereffectiveratethantheU.S.,itislikelythat the On theotherhand,ifforeign jurisdictionimposestax more beneficial. effective taxrate,claimingtheexclusionwillgenerally be tax rateintheforeign jurisdictionislowerthantheU.S. Planning Tip: calendar-year period. consecutive 12-monthperiod,butnotnecessarilya foratleast330fulldaysina a foreign country This testrequires youtobephysicallypresent in Physical presence test to return totheforeign country. resident, aslongthetripsare briefandthere isintent willnotriskyourstatusasabonafide foreign country includes anentire calendaryear. Brieftripsoutsidethe foranuninterruptedperiodthat in aforeign country To underthistest,youmustestablish residency qualify Bona fideresidence test fide residence orphysicalpresence test,definedbelow: andmeeteitherthebona home inaforeign country foreign housingexclusions,youmustestablishatax To fortheforeign-earned incomeandthe qualify • • income. pay U.S.SocialSecurityandMedicare taxonsuch coverage forthesamework.You willberequired to cover socialsecuritytaxes”designedtoeliminatedual Totalization Agreements are essentially“treaties that Agreement theU.S.haswithforeign country. tax intheforeign country, basedonaTotalization If eligible,claimexemptionfrom payingsocialsecurity the U.S.haswithforeign countries. Reduce youroveralltaxliabilityundertreaties that If you pay no foreign tax or the effective If youpaynoforeign taxortheeffective RETURN TORETURN TOC International Tax Planning and Reporting Requirements Taxes paid to the countries that participate in certain Taxes boycotts. international corporations foreign U.S. persons controlling of Taxes and partnerships if certain annual international not filed. are returns Certain and mineral, oil-related, taxes paid on foreign oil and gas extraction income. Taxes paid on income excluded from U.S. gross U.S. gross paid on income excluded from Taxes income exclusion or a income (e.g., foreign-earned position taken). return treaty-based • • • • foreign tax credits include dividends paid by foreign paid by foreign include dividends tax credits foreign paid on your behalf including those corporations, business income fund, and foreign a mutual through entity. by a flow-through earned an or either a tax credit entitled to claim are You countries. for taxes paid to foreign itemized deduction is typically the case, the tax credit Though not always U.S. federal tax your since it can reduce beneficial more basis. liability on a dollar-for-dollar taxes qualify income only foreign for the Generally, and real foreign Other taxes, such as tax credit. foreign personal property taxes, do not qualify. This deduction is virtually eliminated for 2018 (and Cuts and Jobs Act. 2025) under the Tax through for the full amount of ability to claim a credit Your is limited based on a ratio taxes paid or accrued foreign taxable income to your total your foreign-source of taxable income. This ratio is applied to your actual tax on net Contribution Tax (excluding the 3.8% Medicare the to determine the credit investment income) before you can claim. If that the credit maximum amount of the credit not able to claim the full amount of you are you must carry the excess back to year, in the current tax year and if not utilized the immediately preceding is carried forward credit the remaining in the prior year, for the next ten tax years, subject to a similar limitation in those years. 135 For Americans residing overseas, the foreign- For Americans residing RETURN TO TOC RETURN TO For Credit Tax eign | may be claimed by U.S. citizens, tax credit A foreign aliens, and in certainresident cases by nonresident taxes to not allow foreign states do aliens. Typically state income tax liabilities. An exception to this offset for allows a credit State, which includes New York certain income taxes. Unlike the Canadian provincial exclusions discussed above, you do not need to live or countrywork in a foreign to claim the foreign in order if you may be eligible for the credit You tax credit. Common taxes in the tax year. paid or accrued foreign income that may generate foreign-source examples of Note: Note: when income exclusion is not considered earned the 3.8% for either calculating the applicable thresholds investment income or on net Contribution Tax Medicare income. on earned Tax the .9% Additional Medicare Claiming the exclusion is a binding election. Once youClaiming the exclusion to exclusion, you will be required have claimed the the years. If you revoke continue to claim it in all future the exclusionelection, you will not be allowed to claim revocationagain until the sixth tax year after the year of the IRS. If you have from permission unless you receive revoking benefit of claimed the exclusion in the past, the the possiblethe exclusion must be weighed against the exclusion for re-elect being unable to ramifications of the exclusion forgoing of is no downside five years. There if you have never claimed it in the past. Otherwise, in certain it may be more circumstances, claiming in favor of the exclusion beneficial to forego tax credit. foreign only a greater tax credits can be carried back or forward can be tax credits for utilization whether the also consider should in other years. You exclusion exclusion and housing income foreign-earned to the extent tax burden mitigate your state election will worldwide income in the taxable on that you remain residency. state of EisnerAmper 2020 Personal Tax Guide • security isgiventotheIRS. Deferred compensation death,ifsooner)providedtaxpayer’s abondor other the deemedsaleuntil asset isactuallysold(orthe apply. Anelectioncanbemadetodeferthetaxon taken intoaccountandthewashsalerulesdonot immediately taxed(“mark-to-market tax”).Losses are of afloorof $725,000 for2019($737,0002020)is the exittax.Anygainondeemedsaleinexcess in thecaseof a“covered expatriate”whoissubjectto Contribution Tax onnetinvestmentincomemayapply expatriation date.The3.8%additionalMedicare at theirfairmarketvalueonthedaybefore the gains rateasthoughyouhadsoldallof yourassets expatriate,” youwillpayanincometaxatthecapital status (“Green Card”) andare considered a“covered relinquishing yourU.S.legalpermanent residency If youplanongivingupyourU.S.citizenshipor | • determining theallowablecredit: is generallyclassifiedintotwodifferent basketsfor an activetradeorbusiness.Foreign-source income or than foreign taxespaidonincomefrom salary paid ondividendsare subjecttoaseparatelimitation foreign-source income.Inotherwords, foreign taxes The credit iscalculatedforeachseparatetypeof foreign-source underanincometax treaty. U.S. source incomeunderU.S.taxlaw, buttreated as treaty. Thisprovision appliestoincomeclassifiedas in whichincomeisresourced underanincometax foreign taxcredit limitationbasketforeachcountry In addition,youare required tomaintainaseparate atriation Exit Tax trade orbusiness. is incomeearned from salary, pensionsoranactive andgenerally the passiveseparatelimitationcategory income from foreign sources whichdoesnotfallinto General limitationincome: interest, rents, royalties, andannuities. Passive income: Exp This category includes dividends, includesdividends, Thiscategory This category includes includes Thiscategory 136 the highest rate on taxable gifts, whichiscurrently 40%. the highestrateontaxablegifts, covered byanexceptionistaxabletotherecipient at or charitabledeductions.Thevalueof atransfernot forthemarital tax return thatqualify ortotransfers taxreturn orestate onatimelyfiledgift is reported 2019 and2020).Thetaxdoesnotapplyifthetransfer taxexclusion($15,000for is withintheannualgift orbequestduringtheyear to theextentthatgift June17,2008.Thetaxdoesnotapply expatriated after orbequestreceived fromgift anindividualwhohad A U.S.citizenorresident willhavetopaytaxona • graduated tax rates much the same as a U.S. citizen. A graduated taxratesmuch the sameasaU.S.citizen.A Resident aliensare taxedonworldwideincome at Residents are taxeddifferently thannonresidents. | • • regime ifthey: and allU.S.citizensare subjecttotheexpatriation Card foranytimeduringeightoutof thelast15years Former long-term residents whoheldaU.S.Green apply). the expatriationdate(earlydistributionpenaltiesdonot if theywere completelydistributedonthedaybefore othertax-deferred accountsare treatedand certain as withholding taxondistributionstotheexpatriate.IRAs subject tothetaxbutare generallysubjecttoa30% items andinterests innon-grantortrustsare not ncome Taxation of Nonresident which is$168,000for2019and$171,0002020; termination of residency inexcessof anannualceiling, endingbeforefive years thedateof expatriationor Had averageannualnetincometaxliabilityforthe five tax years precedingfive taxyears thedateof expatriation. Statement, withallU.S.federaltaxobligationsforthe onForm 8854,InitialandAnnualExpatriation perjury compliance underpenaltiesofFailed tocertify citizenship orresidency ended;or of $2millionormore Had anetworth when Individuals U.S. I RETURN TORETURN TOC International Tax Planning and Reporting Requirements If you qualify to exclude days of presence in the presence If you qualify exclude days of to
a medical condition or medical problem that arose that arose problem condition or medical a medical in the U.S. were while you Days you were an exempt individual (e.g., foreign (e.g., foreign an exempt individual were Days you or trainee, individual, teacher government-related competing in a athlete student or a professional charitable sporting event). You were present in the U.S. for fewer than 183 days in the U.S. present were You during the calendar year in question, you had a establish that during the calendar year, You and country, tax home in a foreign you had establish that during the calendar year, You countrya closer connection to one foreign in which unless you hadyou had a tax home than to the U.S., countries. a closer connection to two foreign Note: (other than an exempt individual were U.S. because you or because individual) government-related a foreign you must or medical problem, a medical condition of Individuals and 8843, Statement for Exempt file Form In addition, thereIndividuals with a Medical Condition. certainare who move elections available to nonresidents taxation. to the U.S. that could minimize global Even though you may otherwise the substantial meet as a U.S. resident test, you will not be treated presence and: card for 2019 if you do not have a green • • • 5. You will be considered to have a closer connection to a to have a closer will be considered You countryforeign to the U.S. if you or the IRS other than significant establishes that you have maintained more countrycontacts with the foreign than with the U.S. 8840, Closer Connection Exception StatementIRS Form for Aliens, will need to be submitted with your U.S. for the year in which you income tax return nonresident exempt test and you are meet the substantial presence it because you also meet the closer connection test. from a nonresident considered you may be Alternatively, your home if you also would qualify of as a resident an income clause of jurisdiction under the tie breaker with the U.S. tax treaty 137
RETURN TO TOC RETURN TO Days you were unable to leave the U.S. because of leave the U.S. because of unable to Days you were a day. Days you were temporarily in the U.S. as a regular in the U.S. as a regular temporarily Days you were vessel engaged in a foreign member of crew transportation the U.S. and a foreign between country the U.S. unless you or a possession of otherwise engaged in trade or business on such Days you were in the U.S. for less than 24 hours in the U.S. Days you were traveling between two places outside when you were the U.S. Days you regularly commute to work in the U.S. from commute to work in the U.S. from Days you regularly in Canada or Mexico. a residence Lawful permanent residence (Green Card test); or Card (Green residence Lawful permanent test. Substantial presence 4. 3. 2. 1. Except as noted below, you are treated as being treated you are Except as noted below, physically in the U.S. on any day that you are present in the countrypresent at any time during the day. U.S. for theExceptions include days spent in the following circumstances: • • in the U.S. for If an individual is physically present spent at leastat least 31 days during 2019 and has 2017 2019, 2018, and 183 days during the period of in 2019, physical presence the days of counting all of 2018, in presence the days of of but only one-third days in 2017, the number of and only one-sixth of for U.S. tax the individual will be deemed a resident purposes. A foreign national is generally deemed a resident alien resident national is generally deemed a A foreign is met: the two following tests the U.S. if one of of nonresident alien, however, is taxed at graduated rates at graduated is taxed however, alien, nonresident with a U.S. connected that is effectively only on income 30% rate on U.S.-source business or at a flat trade or a U.S. connected with is not effectively income that rate (unless a lower income tax treaty trade or business specifically exempt taxpayers are applies). Nonresident on net Contribution Tax the 3.8% Medicare from investment income. EisnerAmper 2020 Personal Tax Guide is a U.S. person, a Form 1099 would be issued instead; aForm 1099would beissuedinstead; is aU.S.person, 15 of the followingyear. Iftherecipient of theincome This form isnormally distributednolaterthanMarch paid andanytaxeswithheld. yourname, address, amountandtypeofreport income the annualinformation return prepared bythepayorto from U.S.sources, youwillreceive Form 1042-S.Thisis If youare anonresident of theU.S.andreceive income 1042-S Form accounts (seebelow). entities (e.g.,Forms 8621,5471,and8865) andfinancial interests inforeign include applicableforms toreport will berequired tofileForm 1040NR/1040NR-EZand undertheprovision ofof atreaty anothercountry Note: period. 2012mayhaveafive-yearexpiration ITINs issuedafter types of incomesubjecttowithholding(e.g.,pensions). whohavecertain andforpersons personnel military agency. exceptionsforfamiliesof There are certain bytheissuing documents thathavebeencertified orcopiesof these certificates) andbirth (e.g., passports ITINs whenapplicationsincludeoriginaldocumentation Identification Number(“ITIN”).TheIRSwillonlyissue number are required toobtainanIndividualTaxpayer under U.S.lawandare noteligibleforasocialsecurity whohavefilingorpaymentobligations taxpayers Foreign nationals,nonresident aliensandother one ormore states. subject tostateincometaxontheearned in to theU.S.Treasury. AU.S.nonresident mayalsobe excess of paymentsmadeduringtheyearisremitted liability fortheyeariscomputedandanytaxduein payor orthrough estimatedtaxpayments.TheU.S. of U.S.tax,madeeitherthrough withholdingbythe U.S.-source income andthepayments annually report This form isusedbynonresident aliensof theU.S.to 1040NR/1040NR-EZ Form | eporting Requirements eporting for Nonresident Aliens U.S. R When reporting asaU.S.nonresident, residents When reporting 138 • forms are: tax elections.Someof themostcommonof these in substantialpenaltiesandthelossof beneficial income taxreturn. Failure todosocouldresult amount of information youmustincludewithyourU.S. These requirements placeanadditionalburden onthe requirementsor hedgefund,yourreporting increase. pass-through entity suchasaninvestmentpartnership companies, whetherhelddirectly byyouorthrough a valuable toyou.Ifyouhaveinvestmentsinforeign holdings andtomakeelectionsthatcouldprove and attachedtoyourtaxreturn todiscloseforeign There are manyIRStaxforms thatmustbecompleted | correspondence from theIRS. (andavoidable) you willlikelyreceive unnecessary Caution: benefits of anincometaxtreaty. this form shouldalsobecompletedtoclaimthe status asbeneficialownerof theincome.Ifapplicable, therecipient’sits foreign statustoapayorcertify This form isprovided byaforeign entitytodocument W-8BEN-E Form tax treaty. also becompletedtoclaimthebenefitsof anincome owner of theincome.Ifapplicable,thisform should therecipient’sto certify residency statusasbeneficial This form isprovided byanonresident alientoapayor W-8BEN Form residence. of to thetaxauthoritiesinrecipients’ country Information onForm 1042-S mayalsobereported 31of thefollowingyear. nolaterthanJanuary persons Forms 1099are generallyduetobereceived byU.S. eign Reporting Requirementseign Reporting for Accounts. of Foreign Form 114,Report BankandFinancial U.S. CitizensAndResidents For If you give the payor the wrong form Ifyougivethepayorwrong form RETURN TORETURN TOC
International Tax Planning and Reporting Requirements In previous years the maximum penalty was theIn previous as long as they have a document granting them that granting them they have a document as long as the prior BSA an FBAR filing, If amending authority. the original from be provided number must Identification filing. include banks, securities, derivatives,Financial accounts mutual funds or other financial accounts foreign demand, checking, deposit,(including any savings, other than term or life insurance contract annuity, account maintained with a financialinsurance or other continues to suspend the reportinginstitution). The IRS hedge funds commingled funds, such as offshore of funds. and private equity in an account includes being the A financial interest if acting or having legal title, even record owner of capacity onas an agent, nominee, or in some other who have signatory a U.S. person. Taxpayers behalf of othersauthority over accounts owned by (e.g., minor also reportable. are etc.) A financial parents, children, also includes an account held by a corporation interest than more or indirectly, in which you own, directly a shares; the total voting power or value of 50% of than partnership more of in which you own an interest or a trust as to which 50% in the capital or profits; beneficial you or any other U.S. person has a present receives the assets or of than 50% in more interest income. the current than 50% of more to file the FBAR, the a nonwillful failure In the case of $10,000 per IRS may impose a maximum penalty of issued by the IRS in 2015 limit the account. Procedures is willfulness. there maximum penalty imposed where The memo specifically instructs examiners to calculate a single penalty for all years combined and then the The single penalty is 50% of allocate it to each year. the years under in any of balance highest aggregate examination. Criminal penalties could also be assessed for willful violations. Note: the highest balance in the $100,000 or 50% of of greater account during the year. 139
eport Bank Foreign of The requirement for submission of both new for submission of The requirement RETURN TO TOC RETURN TO and Financial Accounts (“FBAR”) and Form 114 — R Form 8938, Statement of Foreign Financial Assets. Foreign 8938, Statement of Form Form 3520-A,Form Foreign of Return Annual Information With a U.S. Owner. Trust Form 3520, Annual Return To Report Transactions Report Transactions To 3520, Annual Return Form Certain and Receipt of Foreign Trusts With Foreign Gifts. Form 5471, Information Return of U.S. Persons With U.S. Persons of Return 5471, Information Form Certain Corporations. Foreign Respect To Form 8865, Return of U.S. Persons With Respect to U.S. Persons of 8865, Return Form Certain Partnerships. Foreign Form 926, Return by a U.S. Transferor of Property to a of Transferor by a U.S. 926, Return Form Corporation. Foreign Form 8621, Return by a Shareholder of a Passive a Passive of by a Shareholder 8621, Return Form (PFIC) or Qualified Investment Company Foreign (QEF). Electing Fund
Note: Note: and amended filings for all years must be done online their clients on behalf of can file FBAR forms and CPAs The FBAR must be filed on an annual basis if you have authority over one in or signature a financial interest country in a foreign financial accounts or more with an $10,000 at any time during value exceeding aggregate Beginning with the 2016 FBAR and forward, the year. the following is April 15 of the due date for this form this deadline may be year and a six-month extension of granted. FinCEN automatically extended the due date for all FBARs until October 15 for the 2019 returns. If you are a U.S. person (including a corporation, If you are partnership, trust or estate) and exempt organization, authority over a in or signature have a financial interest financial account, you may be subject to FBAR foreign reporting. | • • • • • • • EisnerAmper 2020 Personal Tax Guide (“excess distributions”).Also ifneitherof thesetwo distributionsfrom thePFIC investment oroncertain made theywillpaytaxon gains from thesale of the a QEFelectionormark-to-market (“MTM”)electionis is aPFICare PFICregime. subjecttotheharsh Unless whoinvestinaforeignU.S. persons corporationwhich | act promptly. intheSFCPprogram should benefit from participating whocan but cancloseatanytime.Thus,taxpayers program, ifneeded.TheSFCPprogram remains open, recommended toseekoutsidecouncilregarding either against criminalliabilityorsignificantcivilpenalties.Itis OVDP, donotreceive taxpayers automaticprotection Resolution FrameworkforWillfulViolations.Unlikethe 28, 2018.Ithassincebeenreplaced withaNewCivil Note: both intheU.S.andabroad. in taxpayer-friendly residing waystoincludetaxpayers in theOVDP, andexpandedtheoriginalSFCPprogram participating potentially higherpenaltiesfortaxpayers Specifically, theIRSimposedstricterrequirements and changestobothprograms. announced important may alsoavoidcriminalprosecution. In2014theIRS penalty atall.Inthecaseof theOVDP, the individual while payingareduced penaltyor, insomecases,no foreign incomeandfile information returnsunreported and disclose to come forward for taxpayers opportunity Procedure (“SFCP”).Bothprograms provide an (“OVDP”) andtheStreamlined FilingCompliance are theOffshore Voluntary Disclosure Program programs whichfocusondisclosure of foreign assets foreign incomeorassets. Twounreported of the disclosepreviously tovoluntary designed fortaxpayers Since 2009theIRShasoffered variousprograms | e Voluntary Disclosure Programs (“QEF”) (“PFIC”) OrQualifiedElecting Fund a Passive Foreign Investment Company Offshor Form 8621,R The OVDP program was closed on September The OVDPprogram wasclosedonSeptember eturn by aShareholder of 140 required tofileForm 8621regardless of whetheran trusts,andestates)owningPFICsare partnerships, (i.e.,individuals,corporations, U.S. persons income or loss. ordinary or otherdispositionof thePFICstock,are treated as MTM election,aswellgainorlossontheactualsale Amounts includedinincomeordeductedunderthe If theelectionismade,PFICrulesdonotapply. income thatwasincludedinprevious years). of thetaxyear(thedeductionislimitedtocumulative adjusted basisoveritsfairmarketvalueattheclose basis inthestock;ordeductsexcessof thePFIC’s close of thetaxyearovershareholder’s adjusted any, of thefairmarketvalueof thePFICstockasof the income eachyearanamountequaltotheexcess,if If theelectionismade,shareholder includesin MTM electiononForm 8621formarketablePFICstock. Alternatively, ashareholder of aPFICmaymakean thus avoidingtheonerous PFICtax. gains of thecorporation,whetherornotdistributed, pro ratashare earnings andnetcapital of theordinary 8621 are required toannuallyincludeinincomethe U.S. shareholders whomaketheQEFelectiononForm interest, dividends,andcapitalgains. income. Passive incomeincludes, butisnotlimitedto, than 50%of thecorporation’s assetsgeneratepassive the corporation’s incomeispassiveorwhenmore when75%ormoreClassification asaPFICoccurs of (ergo, “harsh”). situations,thistaxcanexceed100%of thegain certain from theperiodtowhichsuchgainisallocated.In charge isalsoimposedonthetax,andbeginsrunning capital gainsrateintheyearof disposition.Aninterest involved,ratherthanthebeneficiallong-term the years incomeineffectforeachof highest rateonordinary which theshares were heldandthatgainistaxedatthe a ratableallocationof during anygainovertheyears PFICruleswillalsoapply.the harsh Theserulesrequire distributions(“excessPFIC stockorcertain distributions”) elections ismade,upondispositionof allorsomeof the RETURN TORETURN TOC International Tax Planning and Reporting Requirements eturn of U.S. Persons with U.S. Persons eturn of eturn by a U.S. Transferor of of U.S. Transferor a eturn by Form 8865, R Form 926, R Form 926, Respect to Certain to Partnerships Foreign Respect Property Corporation a Foreign to If the transferor is a partnership, If the transferor the U.S. partners the partnership, are of the partnership not itself, to reporton 926 based the transfer on Form required the partner’s the transferred proportionate of share property. is reportableIf the transfer includes cash, the transfer 926 if immediately afteron Form the transfer the the 10% of at least or indirectly, person holds, directly the foreign of total voting power or the total value by cash transferred corporation, or the amount of corporation during the the person to the foreign the transfer12-month period ending on the date exceeds $100,000.
| to report with information is required 8865 Form partnerships, foreign to controlled transfersrespect to partnerships,foreign and or acquisitions, dispositions, partnershipchanges in foreign ownership. A separate along with the applicable schedules, is 8865, Form partnership. for each foreign required four categories which define who is required are There must be and how much information to file the form are: The categories provided. | to report 926 is used Form certain tangible transfers of or intangible property corporation. While to a foreign certain are there to the filing, generally the exceptions apply to reportablefollowing special rules transfers: • • The penalty for failure to comply with the reportingThe penalty for failure the value of the fair market is 10% of requirements limited to $100,000 transfer, the property time of at the to comply was not due to intentional if the failure disregard. 141
RETURN TO TOC RETURN TO A limited filing exception applies for certainA limited filing exception applies for owned in a PFIC to an interest with respect shareholders is subject to PFIC tax where for which the shareholder The exceptionno QEF or MTM election is in effect. is not subject to PFIC tax applies only if the shareholder to any excess distributions or gains treated with respect as excess distributions and either (a) the aggregate at the owned by the shareholder all PFIC stock value of exceed does not the shareholder the tax year of end of $25,000 ($50,000 for joint filers), or (b) the PFIC stock is another PFIC, and through owned by the shareholder proportionate of the shareholder’s share the value of PFIC does in the lower-tier PFIC interest the upper-tier not exceed $5,000. U.S. persons who are beneficiaries of foreign estates foreign beneficiaries of U.S. persons who are non-grantor trusts that have made QEF and foreign to file, while those required or MTM elections are only domestic estates or trusts are beneficiaries of or trust fails to file the form. to file if the estate required to report in any case in required U.S. beneficiaries are which the beneficiary an excess distribution or receives as excess distributions. gains treated recognizes U.S. owners of domestic or foreign grantor trusts that domestic or foreign U.S. owners of own PFIC stock. Ownership of PFIC stock through another U.S. taxpayer PFIC stock through Ownership of may also trigger reporting in certain instances. U.S. an amount in to include required persons are who PFIC stock for QEF or MTM regimes income under the not required U.S. taxpayer are another held through the U.S. which through to file if another shareholder person the PFIC stock timely files. The filing holds estates, non-grantor trusts andapplies to domestic excess distribution has occurred or an election has has occurred excess distribution who own U.S. shareholders This applies to been made. at the lowest tier who are and indirectly directly shares companies. a chain of of EisnerAmper 2020 Personal Tax Guide • IRS hassentoutanotification of thefailure toreport oncethe Furthermore, of each foreign partnership. prescribed. Thispenaltyisappliedforeach tax year furnish therequired information withinthe time A penaltyof $10,000canbeassessedforfailure to • • • aeoy 3: Category 2: Category 1: Category aeoy 4: Category certain requirements arecertain met. if may berequired underthiscategory toreport disposed of interest orhadachangeinproportional partnership. inthe remainedwhile theU.S.person apartner disposedof suchproperty if theforeign partnership required thattransferunderIRCSec.6038B, toreport andwas tothepartnership appreciated property thatpreviouslyalso includesaU.S.person transferred not berequired thetransfer. toreport 3 Category willgenerally respect tothecontribution,itspartners alltherequiredand properly reports information with However, filesForm 8865 ifthedomesticpartnership totheforeign partnership. contributed property shareto havetransferred of aproportionate the are considered thepartners a foreign partnership, to contributesproperty If adomesticpartnership orrelatedby suchperson exceeds$100,000. person contribution, orthevalueof contributed theproperty the immediatelyafter in theforeign partnership owned directly orindirectly atleasta 10%interest either ifthatperson for aninterest inthepartnership, person’s inexchange taxyeartoaforeign partnership duringthat whocontributedproperty person, 2filer. willbeconsideredperson aCategory 1fileratanytimeduringthattaxyear,Category no owing atleast10%interest. However, ifthere wasa wascontrolled each byU.S.persons partnership whilethe 10% orgreater interest inthepartnership owneda the taxyearof theforeign partnership during thepartnership’s taxyear. atany time a 50%interest inaforeign partnership A U.S. person, includingarelated AU.S.person, whoatanytimeduring AU.S.person A U.S. person whohadacquired AU.S.person or A U.S. person whoownedmoreA U.S.person than 142 • following tests: be required tofilethisform ifyoumeetoneof the foreign corporations. Youshareholders incertain will whoarefor U.S.persons officers, directors, or requirement thereporting Form 5471isusedtosatisfy | • • • continues, uptoamaximumof $50,000foreachfailure. be assessedforeach30-dayperiodthatthefailure the information, anadditional$10,000penaltycan •
less than the 10% stock ownership requirement.less thanthe10%stockownership in theforeign corporation toreduce yourinterest to You are whodisposesof aU.S.person sufficientstock respect totheforeign corporation,or requirementmeeting the10%stockownership with You are while whobecomesaU.S.person aperson aeoy 1: Category aeoy 3: Category 2: Category corporation, or requirementownership withrespect totheforeign regard tostock already owned,meetsthe10%stock any stockownedonthedateof acquisitionorwithout stock inaforeign corporationwhich,whenadded to outstanding stockof theforeign corporation. or acquired anadditional10%ormore of the 10% ownerwithrespect totheforeign corporation, hasacquiredperson stockthatmakeshim/hera or director of aforeign corporationinwhichaU.S. U.S. Tax Filers). Sec. 965Transition Tax” applicableto2017&2018 hasbeenreinstated sincethe“IRC (This Category on thelastdayinthatyearwhichitwasanSFC. of theforeign corporation,and whoownedthatstock corporation (“SFC”)atanytimeduringtaxyear corporation thatisanIRCSec.965specifiedforeign Corporations Persons withRespect Foreign to Certain Form 5471,I You are whoacquires aU.S. person You are whoisanofficer aU.S. person Includes aU.S.shareholder of a foreign nformation Return of U.S. RETURN TORETURN TOC
International Tax Planning and Reporting Requirements
eturn to Reporteturn to The look-through rule for related parties rule for related The look-through Proposed regulations under IRC Sec. 956 have regulations Proposed Form 3520, Annual R Transactions with Foreign Trusts and Trusts with Foreign Transactions Certain of Gifts Foreign Form and Receipt 3520-A, of Return Annual Information with a U.S. Owner Trust Foreign
Observation: PATH. of extended as a result permanently has been is an (“GILTI”) Intangible Income Taxed Global Low income offshore designed to capture additional regime that Subpart a CFC are of F does not. U.S. shareholders gross into their GILTI of to include their share required tax international of new area is a complex income. GILTI law with very exclusions. little rule under the Subpart F Another oft-encountered in investment which limits the CFC’s is the rule regime a loan if a CFC extends provision the U.S. Under this or a partyto its U.S. shareholder U.S. to its related the loan is deemed a dividend for U.S. shareholder, certain a loan are taxpayers. Included in the definition of as well as using the CFC as collateral trade receivables loan in the U.S.or as a guarantor to obtain a bank Note: rules in which abeen issued by the IRS discussing new received the dividend Corporation would benefit from 956 inclusion.deduction in computing their IRC Sec. this benefit will not apply to individuals. However, Form 3520. Form as a trust in which either a trust is defined A foreign primarycourt the U.S. is able to exercise outside of supervision the trust or one over the administration of non-U.S. persons have the authority to control or more the trust. all substantial decisions of must be filed in connection with return The information cash or transfer of trust, the a foreign of the formation | trust, receive a foreign U.S. persons who either create gifts trust, or receive or a foreign distributions from to file required persons are foreign bequests from 143 You are a U.S. shareholder who owns who shareholder a U.S. are You You are a U.S. shareholder who owns a U.S. shareholder are You Certain constructive ownership rules apply in RETURN TO TOC RETURN TO stock in a controlled foreign corporation (“CFC”) at corporation (“CFC”) foreign stock in a controlled owns the stock on the last day of any time and who corporation A CFC is defined as a foreign that year. with (counting only those that has U.S. shareholders the that own on any day of at least a 10% interest) than 50% corporation more the foreign tax year of all classes of the total combined voting power of of the of the stock its voting stock, or the total value of corporation. more than 50% of the total combined voting power combined voting the total of than 50% more than vote or more stock entitled to all classes of of the stock in a foreign value of the total 50% of the annual accounting period of corporation during corporation. the foreign Category 5: Category 4: Most notably, Subpart F was designed to tax the Most notably, income that could be easily moved into low types of rents tax jurisdictions, such as dividends, interest, The anti-deferral rules aim to subject and royalties. such income to federal tax in the year in which the rule provides subsidiary it. The CFC look-through earns that certain and royalties rents dividends, interest, parties the paid between related excluded from are the look-through Accordingly Subpartcalculation of F. the global effective tax rate for rule operates to reduce many multinational companies. One of the issues faced by U.S. multinationals is that One of be subsidiaries can often by foreign earned profits even if the cashsubjected to U.S. federal income tax, This is not repatriated. those earnings that represents anti-deferral rules the wide variety of of is the result over the years. by Congress introduced The same penalties that apply for failure to file Form The same penalties that apply for failure the discussion in the 5471 (see 8865 also apply to Form to properly required section). The information previous times 5471 can be extensive and at complete Form difficult to obtain. determining stock ownershipdetermining for these purposes. Note: Note: • • EisnerAmper 2020 Personal Tax Guide owners andbeneficiariesofowners thetrust. information totheIRSandother furnishes certain responsible forensuring thattheforeign trustannually benefit of AstheU.S.owner, aU.S.person. youare corpus of thetrustcanbepaidoraccumulatedfor that undertheterms of theagreement, noincome or considered agrantor trustunlessyoucandemonstrate and is trust ispresumed tohaveaU.S.beneficiary toaforeign or indirectly trust,the property transfers a grantortrust.Ifyouare whodirectly aU.S.person with atleastoneU.S.ownerandwhichisconsidered which isanannualinformation return of aforeign trust Information Return of Foreign Trust WithaU.S.Owner, there Annual isalsoarequirement tofileForm 3520-A, In additiontothefilingrequirements of Form 3520, (not toexceed25%of thegift). goesunreported foreachmonthwhichthegift gifts from thetrust,or5%of foreign theamount of certain 35% of thegross valueof thedistributionsreceived the gross valueof transferred tothetrust, anyproperty failure todosomaysubjectyouapenaltyof 35%of individual incometaxreturn, includingextensions.The Form 3520mustbefiledbytheduedateof your onForm 3520. are alsoreported foreign partnership 2019 ($16,649for2020)from aforeign corporationor inexcessof than $100,000annuallyandgifts $16,388in foreign estate)thatisvaluedintheaggregate atmore from anon-residentor property alien(includinga orbequeststhatyoureceive intheform ofGifts money use withinareasonable timeframe. makes apaymentequaltothefairmarketvalueof such loan isrepaid withamarketrateinterest ortheuser will notbeconsidered adistributiontotheextent Theuseorloanofand mustbereported. trustproperty equal tothefairmarketvalueof theuseof theproperty treated asadistributiontothegrantororbeneficiary a U.S.grantor, U.S.beneficiary, oranyrelated is person by (e.g.,real property) estateorpersonal trust property from aforeign trust.Anyuncompensateduseof foreign and thereceipt of anydistributionsbyaU.S.beneficiary other assetsbythesettlororgrantortoaforeign trust, 144 Noncompliance with these rules for any tax year Noncompliance withthese rulesforanytaxyear information returns. oncertain assets reported exceptionforforeignthere financial isareporting is more threshold thantheappropriate and reporting aggregate valueof thespecifiedforeign financialassets tax yearare notrequired tofileForm 8938evenifthe not required tofileaU.S.incometaxreturn forthe Also,individuals (or $200,000forsingletaxpayers). U.S. thefilingthresholds are increased to$400,000 For U.S.citizensorresident alienslivingoutside of the the taxyear. last dayof thetaxyearor$75,000atanytimeduring the totalvalueof thoseassetsexceeds$50,000onthe assets (specialdomesticentities)mustfileForm 8938if holding, directly orindirectly, specifiedforeign financial considered formed oravailedof forthepurposeof andtruststhatare corporations, partnerships, domestic December31,2015,certain Beginning after income taxreturn, whereas theFBARisfiledseparately. of theannual Form 8938is part to theFBARreporting. year threshold ismet.Thisrequirement isinaddition a filingobligationregardless of whethertheend-of- in foreign assetsatanytimeduringtheyearalsohave filing jointlywhohold$150,000(or$75,000forsingle) about thoseassetsonForm 8938.Thosetaxpayers by aforeigner) willberequired information toreport or contractheldforinvestmentthatisandissued interest inaforeign entity, oranyfinancial instrument foreign assets(e.g.,aforeign financialaccount,an incertain $100,000 (or$50,000forsingletaxpayers) hold, attheendof theyear, anaggregate of more than U.S. citizensorresident aliensfilingjointreturns who | Form 7004. trust. Asix-monthextensioncanberequested onIRS foreign trust’s taxyear, inthecaseof acalendar-year the Form 3520-Amustbefiled byMarch 15after
Financial Assets Form 8938,S tatement of Foreign RETURN TORETURN TOC International Tax Planning and Reporting Requirements information to the IRS. Those institutions that do not institutions that to the IRS. Those information participate account owners and provide unwilling to tax to a 30% withholding will be subject information on certain interest, payments including U.S.-source securities. of the source from dividends and proceeds 145 The definition of a reportable foreignThe definition of RETURN TO TOC RETURN TO For — FATCA Act Compliance AccountTax eign Beginning July 1, 2014, foreign financial institutions are financial institutions are Beginning July 1, 2014, foreign to report to the IRS certain directly required information about financial accounts held by U.S. taxpayers, or U.S. taxpayers entities in which hold aby foreign a comply, properly To substantial ownership interest. to enter into was required financial institution foreign with the IRS by June 30, 2014. A a special agreement participating to implement will be required institution certain prior to opening due diligence procedures an account, identify U.S. account holders who have opened accounts or after the the effective date of and have certain for pre- agreement, procedures existing accounts. The U.S. account holder will need to W-9 to identify a Form the institution with provide the status as a U.S. person and the institution will report the | Observation: rules and than under the FBAR asset is much broader equity hedge funds, private in offshore includes interests estate holding companies. funds, and real For tax returns filed after 18, 2010, the statute For tax returns March to cross- with regard limitations for assessing tax of or for certain transactions border assets will foreign the date certain years from be extended for three reportinginformational to the is submitted related to report asset if the failure transaction or the was cause and not willful omission. If due to reasonable to a foreign $5,000 related an omission is in excess of extendedbe will limitations of statute the asset, financial years to six years and would not begin to three from disclosing the run until the taxpayer files the return reportable asset. foreign could result in a failure-to-file penalty of $10,000 and $10,000 of penalty failure-to-file in a could result up to $50,000. to file penalties failure continuing a 40% understatementIn addition, penalty for a transaction of as a result tax of underpayment financial asset specified foreign involving an undisclosed penalties may also apply. can be assessed; criminal
State Tax Issues
147
New York, New Jersey, Connecticut, Pennsylvania, and California Pennsylvania, Connecticut, New Jersey, New York, either limit or exclude the itemized deductions you the itemized claimed on your either limit or exclude
federal return. Florida does not impose income taxes on individuals. taxes income Florida impose does not return. federal Texas also does not impose income taxes, but does impose a margins margins a but does impose taxes, income not impose does also Texas tax most of the income subject to federal income tax, but all five states states but all five tax, income subject to federal the income most of tax tax based on gross receipts on most businesses, including partnerships. on most businesses, receipts on gross based tax
RETURN TO TOC RETURN TO State Tax Issues State EisnerAmper 2020 Personal Tax Guide invested. California is basedonthepercentage of assetsso tax. Theamountof incomethatcanbeexcludedfrom “exempt-interest dividends”tobeexempt from California California oritsmunicipalobligations inorder forany assets investedintax-exemptU.S.obligationsand/or in own. Amutualfundneedstohaveatleast50%of its municipal bondsissuedbyanystateotherthantheir Pennsylvania andCalifornia taxtheinterest incomefrom Caution: • California donottaxthefollowingitemsof income: New York, NewJersey, Connecticut,Pennsylvania and | relating toincomeexclusions,whichare quitesimilar. states from eachother, weshouldpointouttherules But before thatdistinguishthese wediscussthefactors Florida norTexas incometax. imposesapersonal Jersey, Connecticut,Pennsylvania andCalifornia. Neither you ifworkorliveinthestatesof NewYork, New of thestateincometaxesthatmayimpact summary subject totax.Thischapterisdevotedproviding a depending onthestatejurisdictionsinwhichyouare different has specifictaxlawssotheimpactcanbevery typesof income.Eachstate which youderivecertain in thestateorstateswhere youworkorlive,from situation untilyouconsidertheimpactof incometaxes You donotgetacompletepicture of tax yourpersonal | Interest onobligationsof: Income Exclusions Introduction 1. 3. 2. (e.g., U.S.Treasury billsandbonds), Rico The U.S.anditspossessions,suchasPuerto such interest earned through bondfunds. residents of NewYork andNewJersey, including Port Authorityof NewYork for andNewJersey your stateof residence, and Governmental agenciesandmunicipalitieswithin New York, NewJersey, Connecticut, 148 For 2019,themaximumNYS taxrateisapplicableformarriedfilingjoint • the 80%testismet. exempt from taxirrespective NewJersey of whether attributable tointerest from federalobligationsare invested. However, distributionsfrom mutualfunds isbaseduponthepercentageJersey of assetsso amount of incomethatcanbeexcludedfrom New dividends” tobeexemptfrom tax.The NewJersey its municipalobligationsinorder for“exempt-interest or in tax-exemptU.S.obligationsand/orNewJersey A mutualfundneedstohaveatleast80%of itsassets • (2018)) decisionhasimpacted taxationof e-commerce. Wayfair, Inc.,DocketNo.17-494(6/21/2018), 585U.S. The U.S.Supreme Court’s Wayfair (SouthDakotav. | • taxpayers isscheduledtobe6.85%forincomeabove$323,200. taxpayers the toprateis6.85%.For2020-2024,highesttaxforsuch withincomeover$2,155,350.Forunder$2,155,350, taxpayers tain pensionandretirement benefits,subjectto AnUpdate on considered. the ageof therecipient, andwhichstateisbeing various limitations,includingthepayorof thepension, income taxes). allow adeductionforpaymentsof stateandlocal Cer Social Securitybenefits. State andlocalincometaxr Chart 14. New YorkCity New YorkState State orCity New York Tax Rates 2019-2020 Maximum Wayfair efunds (since they do not efunds (sincetheydonot Maximum TaxRates 3.876% 8.82% RETURN TORETURN TOC
State Tax Issues
Wayfair Wayfair
Filing monthly sales tax returns across the country; across sales tax returns Filing monthly and The prospect of increased audits. increased of The prospect Effective December 1, 2018, marketplace facilitators required at least $250,000 are sales of with retail their sales tax on behalf of to collect and remit effective July 1, 2019, marketplace sellers. Further, sales sellers that make at least 200 retail remote in Connecticut and have at least $100,000 in gross Connecticut sales must collect and remit from receipts sales tax. Under California’s provisions, effective April 1, 2019, provisions, Under California’s a remote retailer is required to collect and remit tax in to collect and remit is required retailer a remote calendar or previous during the current if, California exceed $500,000. California its sales to California year, local tax rates which must be of has literally hundreds taken into account. Florida California Connecticut Florida has not yet enacted any economic nexus or marketplace facilitator provisions.
• • For some smaller companies, these burdens could companies, these burdens For some smaller costs of The increased literally be a backbreaker. the country across requirements complying with these $50,000. Consider as an example:can easily exceed average sale is $20 could meet theA company whose having $4,000 in a state with only transaction threshold for compliance cost of sales in that state. Thus, the of evenly sales, if spread $1 million of companies with a the be enough to force could the country, across company to close its doors (or website). the economicThe below paragraphs summarize selected states. of provisions, nexus, and related to our please refer information, For more eisneramper. Hub on our website at: https://www. com/knowledge-center/articles/wayfair-hub-folder/ wayfair-hub/ • 4. 5. 149 the Supreme Courtthe Supreme RETURN TO TOC RETURN TO Numerous registrations just to get on the tax rolls just to get on the tax rolls registrations Numerous and obtain a tax account; Updating systems to be able to track and obtain the necessaryinformation returns; to file the required Keeping current on the over 10,000 sales tax rates on current Keeping the countryacross and implementing these rates with sale system; their invoicing/point of 3. 2. 1. Some of the issues companies must now deal with the issues companies Some of include: overturned the physical presence requirement and overturned requirement physical presence the by enacted nexus provisions found that the economic and were constitutional muster, South Dakota withstood in question the provisions valid. Specifically, therefore responsibility imposed a sales tax collection and filing sellers that had either $100,000 in remote on remote into the state.sales, or 200 separate transactions, The Court the were didn’t rule that these thresholds sufficient. As a result, minimum, just that these were those that mirror many states have enacted provisions with a general all states South Dakota. Currently, of have some typesales tax except Florida and Missouri sales tax, regarding economic nexus provision of for marketplace sellers, and including requirements (which may have a much lower reporting requirements all sizes, many companies, of As a result, threshold). sales array of now find themselves subject to a vast Many companies the country. across tax requirements in only one had filing requirements which previously struggling toor two jurisdictions, now find themselves in keep up with new collection and filing requirements over 40 states, plus local jurisdictions. Prior to this decision, states could generally only could generally decision, states Prior to this if it had someseller to sales tax out-of-state subject an term in that state. The “physical presence” type of to mean misinterpreted was often physical presence In physical establishment. permanent some type of through could be established physical presence reality, visits, and/or the presence agents, affiliates, employee such as or software online marketing agreements of In Wayfair, in a state. “cookies” EisnerAmper 2020 Personal Tax Guide • • • • ork sey 1, 2019through December 31,2019,thesinglelocal Single LocalUseTax Rate. 01-799, the Comptroller’s office of theirelectionbyfilingForm elect tocharge asinglelocalrate.Theymustnotify varies bymunicipality;however, remote may sellers twelve calendarmonths.TheTexas salestaxrate more than$500,000 inTexas revenue inthepreceding a permit andcollectremit salestaxiftheyhave Effective October1,2019,remote mustobtain sellers Texas definitive guidance. is effective,andhasyettoissueFAQs oranyother New York isnotclearonexactlywhenthisprovision in theimmediatelypreceding foursalestaxquarters. 100 separatetransactionsdelivered intoNewYork retroactive toJune21,2018)andhadmore than they havemore than$500,000insales(effective remote mustcollectandremit sellers salestaxif Under NewYork’s economicnexusprovisions, reporting requirementsreporting were effectiveMarch 1,2018. requirements.onerous notificationandreporting These required toeithercollectandremit tax,orcomplywith more than$10,000butless$100,000insalesare thathave andonlinesellers marketplace facilitators requirementsreporting forremote Specifically, sellers. the calendaryear. NotethatPennsylvania alsohas July 1,2019.Thesethresholds are measured by now register, collectandremit salestaxstarting have more than$100,000inPennsylvania salesmust andremoteMarketplace facilitators who sellers New Y New Jer Pennsylvania Jersey invariouscircumstances.Jersey collect salestaxonthetheyfacilitateintoNew Further,customers. must marketplace facilitators more than200separatetransactionswithNewJersey exceeds$100,000,ortheyhave customers New Jersey collect andremit salestaxiftheirgross revenue to Effective November1,2018,remote must sellers
Remote Seller’s Intent to Elect or Revoke Use of IntenttoElectorRevokeUseof Remote Seller’s
Fortheperiodof October
150 advisor forthelateststate guidance. return(s), werecommend thatyouconsultyourtax consideration. Thus,priorto filingyourstatetax may bestatelegislativechangesthatare under of deemedrepatriation/GILTI income.Further, there have beenslowtoissueguidanceonthetreatment in selectedstatesissubjecttochangeassome incometaxtreatmentThe personal of suchprovisions elect topaythetaxonsuchincomeovereightyears. shareholders) or, inthecaseof individuals, theycan specified triggeringevent(thisappliesforScorporation to deferthetaxliabilityonIRCSec.965incomeuntila a taxpayercanelect,forfederalincometaxpurposes, cases, federal taxrateonrepatriation income.Incertain IRC Sec.965(c),whichisadeductionthatreduces the exemption” under income are alloweda“participation specified foreign corporations.Taxpayers such reporting time transitiontaxontheuntaxedearnings of certain generally requires U.S.shareholders topayaone- to theactualreceipt of suchincome. IRCSec.965 requires torecognize taxpayers deemedincomeprior December31,2017.Inbothcases,theTCJAor after beginningon applicablefortaxyears generally first on their2017federalincometaxreturn whileGILTI is formost taxpayers Sec. 965incomewasreportable consider thestatetaxtreatment of suchincome.IRC incometaxreturntheir federalpersonal mustalso underIRCSec.965and/orGILTIreported incomeon A taxpayerthathadorwillhaveincome/deductions | date ontheState Treatment if end of thecalendaryear. continue tocollectthesinglelocaltaxrateuntil year. Noteifyouchangeyourelection,must theComptroller byOctober1ofnotify thecurrent year electionthatwillautomaticallyrenew unlessyou 6.25%, foratotalof salestaxof 8%.Thisisacalendar tax ratewillbe1.75%,inadditiontothestateof Intangible LowTaxed Income (“GILTI”) Deemed Repatriation Income and Global An Up RETURN TORETURN TOC State Tax Issues New Y dividend is received) while New Jersey is following theis received) dividend that raises a concern and timing federal recognition AsNew Jersey in its interpretation. may be mistaken that taxpayers consult with theirrecommend such, we Incometax advisors New Jersey prior to paying Gross on IRC Sec. 965 income. Tax The New York City Department Finance issued of The New York a memorandum advising that unincorporated net amount of businesses generally must include the BusinessIRC Sec. 965 income in their Unincorporated the and that the options for deferring Returns Tax for Newfederal tax on such income do not apply City tax purposes. While the Department of York for Unincorporated GILTI Finance has not addressed is purposes, our initial interpretation Business Tax This is that the City will follow the federal treatment. conformity Tax’s due to the Unincorporated Business with federal taxable income as the starting point for no are there the tax computation and that, currently, such income. modifications allowing for a deduction of ork | Rates Tax Chart tax rates imposed by 14 shows the maximum These rates apply to City. State and New York New York does not have lower income since New York all types of capital gains or qualifyingtax rates for net long-term dividend income. Deduction Adjustments allow taxpayers to and NYC Beginning in 2018, NYS • With respect to GILTI, the Division of Taxation (“Division”) Taxation the Division of to GILTI, With respect (“GIT”) purposes, Income Tax advised that, for Gross be reportedsuch income must in by a shareholder the same year and in the samean S corporation in purposes. For other GIT taxpayersamount as for federal and partners(including individuals in partnership), the should be reported when the Division advised that GILTI and profits earnings income is actually distributed from in the category income. dividend 151 RETURN TO TOC RETURN TO The New Jersey Division of Taxation has addressed IRC has addressed Taxation The New Jersey Division of Sec. 965 income in various notices. In January 2019, reported under the Division advised that “dividends IRC Section 965 must be included in New Jersey gross income in the same tax year and in the same amount Additionally, as reported for federal tax purposes.” the Gross the notice explained that, for purposes of 965(c) deduction is no IRC Sec. there Income Tax, allowed for individual taxpayers, sole proprietorships allowed S corporations are or partnerships. However, similarities are an IRC Sec. 965(c) deduction. There personal between New Jersey and Pennsylvania’s what including their definition of income tax regimes constitutes a dividend. Thus, the fact that Pennsylvania does not tax IRC Sec. 965 income (until an actual The Pennsylvania Department Revenue has of The Pennsylvania Sec. 965 andissued guidance indicating that IRC not taxable for personal income are income GILTI tax (“PIT”) purposes; the rationale being that only or current actual cash or property distributions, out of taxable under are and profits, accumulated earnings cash or property when an actual Importantly, the PIT. PIT and profits, earning distribution is made out of taxpayers must report taxable dividend income it as a Form receive whether or not they of regardless to such distribution. 1099-DIV with respect Connecticut and New York State both use federal State both York Connecticut and New income as the startingadjusted gross point to income. As such, both statesarrive at state taxable net IRC Sec. 965 income and the same recognize that an individual taxpayer reports income GILTI gross income tax income for federal in their adjusted gross nor New York neither Connecticut purposes. However, payment of State allow a taxpayer to elect to defer any portion the tax associated with IRC Sec. 965 of income. California has not adopted the TCJA changes to IRC changes adopted the TCJA has not California 951A. in IRC Sec. provisions or the GILTI Sec. 965 deductions income nor the neither the Accordingly, reportableare personal on California tax income returns. • • • • EisnerAmper 2020 Personal Tax Guide NYAGI of at least$40,000butnotmore than$300,000 credit of $350availablefor NewYork residents with 2014throughFor taxyears 2019,there isarefundable Tax“Circuit Breaker” Credit been updatedtoreflect thesechanges. Form IT-213,ClaimforEmpire StateChildCredit, has based onthe2017federalcredit amountsandincome. New York. Your Empire Statechildtaxcredit willnowbe used tocomputeyourEmpire Statechildcredit for additional childtaxcredit amountmaynolongerbe The current federalchildtaxcredit taxyear’s or Change to theEmpire State ChildTax Credit depreciation deductionschapter. expense, asdiscussedinthebusinessownerissuesand to thefederalrulesregarding IRCSec. 179depreciation bonus depreciation rules.NewYork Statedoesconform your NewYork depreciation withoutapplying the through entity, youwillneedtoseparatelycompute on yourfederalreturn, eitherdirectly orfrom apass- To theextent you takeadvantageof bonusdepreciation ofHouston Street CanalStreet. andnorth andthe“Resurgence Zone,”to theEastRiver; southof Zone,”Manhattan —the“Liberty southof CanalStreet depreciation isallowedinlimitedareas of Lower The exceptiontothisruleisthatfederalbonus chapter. business ownerissuesanddepreciation deductions regarding bonusdepreciation, asdiscussedinthe New York Statedoesnotconform tofederalrules Bonus Depreciation limitations. subject tocertain a deductionforsomequalifiededucationexpenses, each dependent.Inaddition,NewYork Stateallows New York Stateallowsadeductionof $1,000for to thefederalTCJA. based onthefederalrulesastheywere ineffectprior purposes. Itemizeddeductionsshouldbecomputed itemized theirdeductionsforfederalincometax itemize theirdeductionswhetherornotthetaxpayers 152 based upon the amount of quarterly payroll. based upontheamountof For quarterly rate between0.11%and0.34% appliestoemployers Suffolk, Dutchess,andWestchester. Agraduatedtax counties of Nassau,Rockland,Orange,Putnam, within thefiveboroughs of NewYork Cityandthe and self-employed individualsengagedinbusiness Beginning in2009,ataxwasimposedonemployers Tax (“MCTMT”) Metropolitan Commuter Transportation Mobility computed basedonasinglereceipts factor. theUBTwillbe beginning in2018andforward, Foryears its slowtransitiontoasinglesalesfactor: New York Cityhasconcludedtheprocess of ending is limitedto23%of theUBTpaid. your incomereaches $142,000,atwhichpointthecredit taxable incomeis$42,000orless,graduallydecliningas Thecredit is100%of theUBTpaidifyour partnership. by them,includingtheirshare of theUBTtaxpaidbya of NYC theUBTpaid incometaxforaportion personal New York Cityresidents canclaimacredit againsttheir income) anda$5,000exemption). of $10,000(limitedto20%of UBT services taxpayer’s themaximumallowancefor exceeds $85,000(after if theirtotalunincorporatedbusinessgross income subject toa4%UnincorporatedBusinessTax (“UBT”) Self-employed workinginNewYork persons Cityare New York CityUBT York incometax return. Statepersonal to claimtheECEPwagecredit whenfilingtheirNew maybeeligible employers Employees of participating in wagesandcompensationNewYork State. they haveemployeesthatearn over$40,000annually Expense Tax canelecttopayif (ECET)thatemployers establishes anoptionalEmployerCompensation The EmployerCompensationExpenseProgram (ECEP) Employer CompensationExpenseProgram tax liabilitythatwasequaltoorgreater thanzero. the ageof 17onthelastdayof thetaxyearandhada who claimedoneormore dependentchildren under RETURN TORETURN TOC State Tax Issues
New Jer First $250,000 – 5.675%. Over $5 million - $427,887.50 + 10.9% of the excess Over $5 million - $427,887.50 + 10.9% of over $5 million. $250,001 - $1 million - $14,187.50 + 6.52% of the $250,001 - $1 million - $14,187.50 + 6.52% of excess over $250,000. the $1,00,001 - $5 million - $63,087.50 + 9.12% of excess over $1 million. sey at elementary or secondary or religious public, private, withdrawal. schools is a nonqualified York State. Therefore, any withdrawal from a from any withdrawal Therefore, State. York to pay account used 529 college savings New York or attendance connection with enrollment tuition in • • • | New for 2020 to Election Entity Tax New Jersey Enacts Pass-Through Cap. Combat $10,000 SALT Introduction On January 13, 2020 New Jersey Phil Murphy Governor Business signed into law SB3246, the “Pass-Through With this legislation, New Act.” Income Tax Alternative Jersey Rhode joins Connecticut, Louisiana, Oklahoma, entity type of Island and Wisconsin in enacting some entities (“PTEs”) in an effortlevel tax on pass-through the $10,000 federal cap on individuals’ to work around taxes.itemized deductions for state income Overview For tax years starting on or after January 1, 2020, PTEs tax based onmay elect to pay an entity level income the partners. of the distributive shares The the sum of each partners’tax is based on the sum of “distributive this summary as follows (for purposes of proceeds” “partner”the term in an S includes a shareholder corporation): • The partners for their pro credit can claim a refundable the tax paid on their personal return. of rata share 153 RETURN TO TOC RETURN TO For New York purposes, a withdrawal is nonqualified if For New York the withdrawal is actually disbursed in cash or in-kind State 529 college savings account a New York from for the higher education of not used and the funds are Higher education generally the designated beneficiary. or proprietary post- means public or private, non-profit secondary educational institutions, in or outside New New York opted not to follow changes made by the New York allowed withdrawals that are to the types of TCJA account (“QTP”) Program a Qualified Tuition from purposes, established under IRC Sec. 529. For New York withdrawals for kindergarten 12th grade school through not qualified withdrawals under the New tuition are 529 college savings account program. York In addition, a tuition credit or itemized deduction is In addition, a tuition credit State resident a full-year New York available if you were whom you take anand your spouse or dependent (for at student enrolled exemption) was an undergraduate and higher education or who attended an institution of not claimed on are paid qualified tuition expenses, and may be as much The credit return. another person’s up to qualified expenses as $400 per student; 4% of the maximum tuition deduction $10,000. Alternatively, or the may claim the credit is $10,000 per student. You deduction, but not both. College Savings Program, Credits and Expenses Credits Program, College Savings that allows you to make State has a program New York Sec. 529 plans as discussed in detailcontributions to IRC State New York in the chapter on education incentives. if marriedallows a deduction up to $5,000 ($10,000 IRC Sec. 529 plan. filing jointly) if paid to a New York quartersafter beginning on or payroll April 1, 2012, a calendar quarter than $312,500 in greater must be The tax also applies tax applies. the employer before including partners individuals, in to self-employed treated that are partnerships LLCs and members of as partnerships from earnings based on their net The tax does to the MCTD. allocated self-employment self- from net earnings not apply if the allocated $50,000 or less for the year. employment are EisnerAmper 2020 Personal Tax Guide Note: dividendincome. or qualifying not havelowertaxratesfor netlong-term capitalgains applies toalltypesof does incomesinceNewJersey $5,000,000 orlessincomeremains at8.97%.Thisrate with filing status.Themaximumtaxratefortaxpayers have incomeinexcessof $5,000,000regardless of that is10.75%fortaxpayers imposed byNewJersey 1,2019,themaximumtaxrate Effective January Tax Rates offset thisremainingwill atleastpartially liability. Presumably, the credits fortaxespaidtootherstates credits fortaxespaidtootherstates)of $5,107.50. rate) =$5,675.Thisresults inanettaxdue(before taxratemirrors (assuming theirNewJersey thePTE tax ontheirentire distributiveshare: $100,000x5.675% resident, New Jersey income theywilloweNewJersey share (50%)=$567.50.However,proportionate asa residentNew Jersey willonlygetacredit of their this entityis$200,000x10%5.675%=$1,135.The allocation percentage is10%.ThePTEtaxrelated to are $200,000,andthepartnership’s NewJersey distributiveproceeds assume thesumof thepartners’ andwhichmakesthiselection.Further in NewJersey whichisdoingbusiness inapartnership a 50%partner By wayof resident illustration,assumeaNewJersey is proceeds). distributive wouldbetheentire residentfor NewJersey partners distributive proceeds (which “taxed”byNewJersey allocationfactor),asopposedtothe the NewJersey (presumably thedistributiveproceeds multipliedby the distributiveproceeds derivedfrom NewJersey as thetax,andcorresponding credit, are basedon may beproblematic resident forNewJersey partners the Divisionof Taxation tothecontrary, thislanguage source income..” Pending guidancefrom further due .Foranonresident, thismeansNewJersey within theState,anduponwhichtaxisimposed Income Tax “derived from orconnectedwithsources various classesof incomesubjecttoNewJersey’s Gross The term “distributive proceeds” isdefinedasthePTE’s For NewJersey, themarginal tax rateforsingle 154 federal incometaxpurposes oryoureceived wages If youare considered aself-employed individualfor • • • • • • deductions toreduce yourtaxableincome: allowsthefollowing noted above,NewJersey income” state.Inadditiontotheincomeexclusions isa“grossitemized deductionssinceNewJersey Except asnotedbelow, nodeductionisallowedfor Deduction Adjustments marginal rateof 8.97%. jointly withincomesover$500,000are subjecttoatop filing taxpayers Single andmarried/civilunionpartner income inexcessof $150,000butlessthan$500,000. filingjointlyaretaxpayers subjecttothe6.37%rateon less than$500,000is6.37%.Married/civilunionpartner withtaxableincomeinexcessof taxpayers $75,000but are allowedanadditional$1,000exemption. dependentsattendingcollege or disabled,andcertain of ageoroveratthecloseof thetaxableyear, blind, for federalincometaxpurposes).Taxpayers 65years or otherdependent(whoqualifiesasyour exemptionforeachdependentchild $1,500 personal allowsa NewJersey spouse (ordomesticpartner). Personal exemptionsof $1,000eachforyouandyour on 18%of therent paidduringthe year. Tenants taxdeductionbased are allowedaproperty residence.personal taxesuptoamaximumof Property $15,000paidona deduction. travelandentertainment impact ontheNewJersey Therecent federalchangeshaveno in apartnership: andpartners employed individuals,businessowners, expensesforself-Business travelandentertainment income. Medical expensesinexcessof 2%of gross NewJersey recipient lives). gross incomeof therecipient (regardless of where the payments totheextenttheyare includibleinthe Alimony, separatemaintenance,orspousalsupport RETURN TORETURN TOC State Tax Issues The requirements The requirements Under the terms of the State Budget for FY 2020 of Under the terms Have met the income limits for the base year andHave met the income limits for the including thefor each succeeding year up to and claiming the reimbursement. year for which you are marital/civil-union of These limits apply regardless or in a married who are applicants status. However, bothcivil union must report combined income of spouses/civil-union partners. Have been age 65 or older OR receiving federal or older OR receiving Have been age 65 benefits; Social Security disability JerseyHave lived in New for at least ten consecutive years a homeowner or renter; as either lived in your home for at least three Have owned and consecutive years; the property taxes dueHave paid the full amount of each succeedingon the home for the base year and which you are year up to and including the year in and claiming the reimbursement; • • • • • between the amount of property taxes paid for thethe amount of between applying for which you are and the amount base year the must meet Applicants for a reimbursement. Freeze eligible for a Senior conditions to be following property tax reimbursement: Note: Note: applicants whosefor application year 2018, only those and whoseincome for 2017 did not exceed $87,268 will be eligibleincome for 2018 did not exceed $89,013 they met for 2018 provided reimbursements to receive Freeze The Senior requirements. all the other program is expected to continue in 2020 for propertyProgram taxes paid in 2019. Benefit Program: Homestead have slightly different, for the Homestead Benefit are not age-based. and are filings deadlines different It is possible to be eligible for both the Homestead (Property Senior Freeze and the Tax Benefit Program benefits but the amount of Reimbursement) program, property taxes cannot exceed the amount of received paid on their principal residence. 155 The Senior Freeze Program Program The Senior Freeze RETURN TO TOC RETURN TO Senior Freeze Program: Senior Freeze New Jersey Senior Freeze (Property Tax New Jersey (Property Freeze Senior Tax Benefit and Homestead Reimbursement) Programs property for amounts provide tax relief These programs paid on a principal residence. the difference of for a reimbursement provides College Savings Program for a college savingsNew Jersey does not provide or deduction. credit IRC Sec. 179 Expense IRC New Jersey 179 deduction of a limited IRC Sec. permits than $25,000. If you have more up to a maximum of you may not deduct or profession, one business, farm IRC Sec. 179 costs for all $25,000 of than a total of more the extent higher IRC Sec. 179 deductions activities. To you will need to taken for federal purposes, were separately compute your New Jersey deduction. Bonus Depreciation New Jersey to federal rules has not conformed See the chapter on bonus depreciation. regarding deductions. business owner issues and depreciation from an S corporation in which you were a more- which you were S corporation in an from amount you may deduct the you shareholder, than-2% yourself, insurance for the year for health paid during partner/domesticyour spouse/civil-union partner, the deduction The amount of and your dependents. income, your earned amount of may not exceed the income tax purposes, derivedas defined for federal under which the insurance plan was the business from any amounts paid for may not deduct established. You for any month during thehealth insurance coverage eligible to participate were year in which you in any by your (or your spouse’s/ subsidized plan maintained civil-union partner’s/domestic partner’s) employer. you may be able toNote that for federal tax purposes, for any childdeduct amounts paid for health insurance 2019. 27 at the end of yours who is under the age of of Jersey for New purposes, you may deduct However, your dependent. such amounts only if the child was EisnerAmper 2020 Personal Tax Guide is $45,000for2018andwill increase to$75,000 in2020. $50,000 in2020,andfora singletaxpayer, theexclusion the exclusionis$30,000for 2018andwillincrease to filingseparately,$100,000 in2020.Foramarriedperson exclusion willcontinuetoincrease untilitcapsoutat is $64,000,andwillincrease to$80,000in2019. The The 2018retirement incometaxexclusionforjointfilers Retirement IncomeTax indicated below. federal credit taxableincomeas basedonNewJersey individuals.Thecredit isapercentagequalifying of the individualor$1,000fortwomore one qualifying is non-refundable. Thecredit cannot exceed$500for care individual.Thecredit isconsidered aqualifying year andisphysicallyormentallyincapableof self- who livedwiththetaxpayerformore thanhalfof the A childundertheageof 13oraspouse/dependent individualbasedonthefederalcredit. a qualifying allowsachildanddependentcareJersey credit for beginningin2018andthereafter,For taxyears New Child andDependentCare Credit to 40%in2020andthereafter. equal to39%of thefederalcredit. Theratewillincrease earned incometaxcreditThe NewJersey for2019is IncomeTaxEarned Credit repealed. estatetaxwas 1,2018,theNewJersey Effective January Estate Tax communities. that are residents incontinuingcare retirement discharged veteranswasextendedtoinclude taxdeductionforhonorably the annual$250property Veteran’s Tax Property Deduction: $50,001 -$60,000 $40,001 -$50,000 $30,001 -$40,000 $20,001 -$30,000 Not over$20,000 NJ Taxable Income
Amount o 40% o 20% o 30% o 50% o 10% o Beginning in 2019, Beginning in2019, f theNJcredit f federalcredit f federalcredit f federalcredit f federalcredit f federalcredit 156 to $15,000 per year starting in2018. to $15,000peryearstarting year. real TheNewJersey estate taxdeductionislimited IRCSec.179expenseto$25,000per limits ataxpayer’s doesnotadoptbonusdepreciation New Jersey and increased IRCSec.179expenseshouldnotapply as bonus depreciation underIRCSec.168(k)andthe federaldeductions.Further,taxpayer’s theTCJA’s 100% deductionsthatare notbasedona its ownstatutory through has entities,does notapplysinceNewJersey pass- in2018forcertain deduction, allowablestarting Similarly, thefederal20%qualifiedbusinessincome GITliability. NewJersey have noimpactonataxpayer’s etc.should deductibility of mealsandentertainment, of exemptiondeductions,limitingthe personal taxandincome tax,removal deductions forproperty interest, reduced limits ondeductionsformortgage income taxrates,doublingof thestandard deduction, federal lawchangessuchastheloweringof individual income inthestatetaxablecalculation.Thus, federal adjustedgross incomeorfederaltaxable Revenue Codenordoesitadoptoruseataxpayer’s GITActdoesnotadopttheInternal The NewJersey based onthefederaltaxsystem. “Grosstaxes sincetheNewJersey IncomeTax” isnot income personal minimal ornoimpactonNewJersey changes containedintheTCJA are expectedtohave unlikely,appears mostof incometax thepersonal conforming legislation,which Without NewJersey Tax Cuts andJobsActImpact with yourtaxreturn. return forwhichyouare claimingtheexemptionor Submission Form mustbesubmitted priortothefirst of ReleaseorDischarge andtheVeteran Exemption the exemption,acopyof Form DD-124,Certificate residentsJersey andnon-residents. Inorder toclaim veteran. TheexemptionisavailabletobothNew isalsoanhonorablydischarged civil unionpartner) $3,000 exemptioncanbeclaimedifyourspouse(or for anadditional$3,000exemption.An ortheNationalGuard are eligible inthemilitary service Veterans whoare honorablydischarged from active Veterans’ Exemption RETURN TORETURN TOC
State Tax Issues Filing status is Single or Married filing separately: IfFiling status is Single than $200,000. is more Connecticut AGI If Connecticut AGI household: of Filing status is Head than $320,000. is more Filing status is Joint or Qualifying If widow(er): than $400,000. more is Connecticut AGI Connecticut income tax liability using the applicable tax using the applicable income tax liability Connecticut afterrates, and provision, the 3% phase-out applying tax as of amount to add the recapture is required tax is the recapture of The result below. indicated is taxed at the highest AGI entire essentially that the graduated rates. the benefit of income tax rate, without • • • Deduction Adjustments allowed for itemized deductions, as No deductions are state, as modified by income” Connecticut is a “gross the income exclusions noted above. individual taxpayers’ Connecticut allows resident estate and personal property for real income tax credits on theirtaxes paid to Connecticut political subdivisions primary or privately owned or leased motor residences $200 cannot exceed of vehicles. The maximum credit phased out are credits These your personal tax liability. for higher income persons. years For taxable through 2020, the property will only be allowed for credit tax the the close of who is 65 or older before a resident 157
R The maximum tax rate for Connecticut is 6.9%The maximum tax 27. esidency Caution Tax Tip Tax RETURN TO TOC RETURN TO Connecticut Filing status is Joint or Qualifying Widow(er) with over $500,000 but not Connecticut taxable income of over $1,000,000. Filing status is Head of Household with Connecticut Household Filing status is Head of but not over over $400,000 taxable income of $800,000. Filing status is Single or Married filing separately withFiling status is Single over $250,000 but not Connecticut taxable income of over $500,000.
partial day in New York is considered a full day spent in New York with minor exceptions. Also, a day working at your home in Connecticut will with minor spent in New York a full day is considered partial in New York day income it a day working in Connecticut. Therefore, while Connecticut will consider to be a day working in New York, by New York be considered New York for more than 183 days. You are a statutory resident of both New York State and New York City for tax purposes. As a result, Connecticut, City for tax purposes. As a result, State and New York a statutory both New York are of resident than 183 days. You for more New York tax. of this additional some your income. A partial is available to offset City would tax all of credit State, and New York New York allocated to these days will be taxed by both New York State and Connecticut with no offsetting credit. Be sure to maintain substantiation to Be sure credit. State and Connecticut with no offsetting allocated to these days will be taxed by both New York Recapture Tax Amount for Taxpayers In Higher Amount for Taxpayers Tax Recapture Income Brackets exceeds the income A taxpayer whose Connecticut AGI after computing his or her specified below, thresholds If your taxable income is more than these thresholds, than these thresholds, If your taxable income is more the maximum tax rate is 6.99%. • • • Note: Note: for the following individuals: | Rates Tax rate imposed by individual tax The maximum This rate applies to all types of Connecticut is 6.99%. does not have lower tax ratesincome since Connecticut or qualifying capital gains for net long-term dividend income. support New York. the days in and out of Your principal residence is in Connecticut but you work in New York City and maintain an apartment there. During the year you were present in City and maintain an apartment present During the year you were there. York is in Connecticut but you work in New principal residence Your City apartment. By statute, a days or less or by eliminating the New York State for 183 in New York can eliminate this tax by being present You EisnerAmper 2020 Personal Tax Guide offsetting credit againsttheir respective incometax. of theeffectedbusinessentitiesare entitledtoan business entity, butindividualsandcorporatemembers through entities.This taxappliesandispaidbythe Tax” whichimposesan“income”taxonpass- (“PET”), Connecticut haspassedthe“Pass-Through Entity Tax CutsandJobsActImpact adoption andthere are noincomelimitations. thechild’s is12months after or to participate birth enrolled Thedeadline CHETaccountwithinfouryears. family andfriendsaddatleast$150tothechild’s account. Aseconddepositof $150willbemadeif willdeposit$100intoaCHET CHET BabyScholars 1,2015, January children born oradopted onorafter $250 toward anewborn’s future collegecosts.For programThe “CHETBabyScholars” provides up to made. theinitialcontributionwas after forfiveyears forward maximum allowablecontributionsmaybecarried Amountsinexcessofand $10,000forjointfilers. the from federalAGI, upto$5,000forindividualfilers to theConnecticutHigherEducationTrust (“CHET”) maydeductcontributions Connecticut taxpayers College SavingsProgram chapter. business ownerissuesanddepreciation deductions IRC Sec.179depreciation expenseasdiscussedinthe Connecticut doesconform to thefederalrulesregarding IRC Sec.179Expense issues anddepreciation deductions. corporations. Seethechapteronbusinessowner bonus depreciation, withtheexceptionof C Connecticut hasconformed tofederalrulesregarding Bonus Depreciation claiming oneormore dependents. income taxfortheapplicabletaxableyearvalidly applicable year, orwhofilesareturn underthefederal
158 See chart 16forPhiladelphiarateof taxwithheldonForm W-2. See chart or qualifying dividendincome. or qualifying have lowertaxratesfornetlong-term capitalgains to alltypesof incomesincePennsylvania doesnot from another. Thesingleflattaxrateof 3.07%applies one bucketmaynotbeusedtooffset income/loss categories (buckets)of income,andincome/lossfrom 15).Pennsylvaniarate of 3.07%(seeChart haseight Pennsylvania imposesaflattaxonallincomeat Tax Rates | sales factorbaseduponmarket sourcing. methodof asingle the corporatetaxapportionment from method, baseduponcostof differs performance, Note: cost of method. performance three-factor method, andthesalesfactorutilizesa Personal IncomeTax purposesisanequalweighted formula forPennsylvaniaincome. Theapportionment However, theirbusiness apportion mosttaxpayers has booksandrecords tosubstantiatetheallocation. The defaultmethodisspecificallocationifthetaxpayer business” bothwithinandoutsideof Pennsylvania. totheextentbusinessis“doingapportionment Income from abusinessissubjecttoallocationand Pennsylvania Chart 15. Philadelphia Pennsylvania State orCity The Pennsylvania three-factor apportionment Rates Pennsylvania Tax 2019-2020 Maximum Maximum TaxRates (eff July1,2018and subsequent years) 3.8712% 3.07% RETURN TORETURN TOC
State Tax Issues
3.4481% 3.4567% Nonresident partnerships, associations and corporations. Rental to be business activities. usually considered activities are for the BIRT was amended at the The nexus standard Wayfair start 2019 to follow the nexus guidance of of and as such, starting January 1, 2019 Philadelphia applicablebegan imposing BIRT nexus upon all from annual receipts taxpayers with at least $100,000 of Philadelphia customers. Law 86-272 still applies Public for the income tax portion the tax. The BIRT is the of gross two taxes; one on income and one on sum of tax rate receipts For 2019 and 2020, the gross receipts. is 6.25% on netis 0.1415%, and the income tax rate taxtaxable income. For the 2019 and subsequent years, the income tax apportionment methodology The sales factor and taxable is a single sales factor. on determined tax are receipts for the gross receipts performance method for most businesses.a cost of companies use market-based software Notably, receipts. of sourcing Philadelphia imposes the NPT on the net profits a trade, business, profession, the operation of from enterprise or other activity conducted by individuals, partnerships,LLCs, associations or estates and trusts. any of net profit The tax is imposed on the entire Philadelphia of person who is a resident self-employed the business. It is also the location of of regardless imposed on businesses conducted in Philadelphia by not subject to this tax. are Corporations nonresidents. partnership,Also, the proportionate amount of LLC, 159 3.8712% 3.8809% Resident ax Withheld on Form W-2ax Withheld Period
Philadelphia Rate of T Philadelphia For Wages
Effective July 1, 2018
Effective July 1, 2019 16. Chart RETURN TO TOC RETURN TO Philadelphia imposes the BIRT (f/k/a the Business (“BPT”)) upon all persons engaged in Privilege Tax includes individuals, “Persons” business within the City. Philadelphia imposes an unearned income tax, knownPhiladelphia imposes an unearned of upon all residents as the “School District Income Tax,” The tax rate for 2019 and subsequent years is the City. income taxable unearned 3.8712%. Some examples of dividends, certain S corporation are and royalties, rents (held for six months distributed income, and short-term income that is otherwiseor less) capital gains. Earned subject to the Philadelphia Business Income and (“NPT”) or Wage Tax (“BIRT”), the Net Profits Receipt Tax is not subject to the School Income Tax. Tax Philadelphia imposes a Wage Tax on compensation Tax Philadelphia imposes a Wage the City and on nonresidents of by residents earned may be adjusted The tax rate who work within the City. City the annual mid-year with the implementation of during the firstBudget. As such, wages earned half rate than for the the year may be tax at a different of The School District Income Tax a year. second half of Tax the Wage the same as rates are Tax and Net Profits However, to change mid-year. also subject rates and are these returns the filing of the rate in place at the time of tax period. The tax is the rate applied to the entire rate for compensation paid after 1, 2019 is 3.8712% July However, and 3.4481% for nonresidents. for residents may apportionnonresidents their income based upon Philadelphia. City of duty days spent working within the EisnerAmper 2020 Personal Tax Guide federal bonus depreciation. For property placed in placedin federal bonusdepreciation. Forproperty Pennsylvania requires addbackthe that taxpayers Bonus Depreciation Pennsylvania liability. deduction, etc.shouldhavenoimpactonataxpayer’s theQBI the deductibilityof mealsandentertainment, removal of exemptiondeductions,limiting personal taxandincometax, reduced deductionsforproperty interest, deduction, limitsondeductionsformortgage rules underIRCSec.965,doublingof thestandard individual incometaxrates,thedeemedrepatriation Thus, federallawchangessuchastheloweringof taxable incomeinthestatecalculation. federaladjustedgrossa taxpayer’s incomeorfederal the Internal RevenueCodenordoesitadoptoruse The Pennsylvania incomedoesnotadopt personal tax system. incometaxisnotbasedonthefederal personal in theabsenceof legislation,becausethePennsylvania in theTCJA are expected to haveminimalornoimpact, most of incometaxchangescontained thepersonal For Pennsylvania incometaxpurposes, personal (1)(a). adjusted byPennsylvania law. Pa. Stat.Ann.72§7401(3) changes intheTax CutsandJobsActunlessspecifically as currently amended,andtherefore conforms tothe deductions, Pennsylvania generallyconforms totheIRC before netoperatinglossdeductionandspecial corporate taxableincomeisfederal pointforcomputingPennsylvaniaBecause thestarting Tax Cuts andJobsActImpact by theincomeexclusionsnotedabove. as Pennsylvania isa“gross income”state,asmodified No deductionsare allowedforitemizeddeductions, Deduction Adjustments rate is3.4481%for2019andsubsequentyears. andfornonresidents and subsequentyears, theNPT residents, theNPTrateis3.8712%for2019 isexemptfrom ormembers theNPT.partners For and otherassociationincomeattributabletocorporate
160 income. dividend for netlong-term capitalgainsorqualifying income sinceCalifornia doesnothavelowertaxrates for the2019taxyear. Thisrateappliestoalltypesof California’s topmarginal incometaxrateis12.3% Tax Rates | federal annual gift exclusion. federal annualgift taxable income.Thedeductionamountistiedtothe non-Pennsylvania 529planincomputingPennsylvania if marriedfilingjointly)for2019toanyPennsylvania or federal annualexclusionamountof $15,000($30,000 Pennsylvania allowsadeductionof uptothemaximum College SavingsProgram depreciation deductions. will needtoseparatelycomputeyourPennsylvania 179 deductionswere takenforfederalpurposes,you 179 costsforallactivities.To theextenthigherIRCSec. not deductmore thanatotalof $25,000of IRCSec. more thanonebusiness,farm orprofession, youmay maximum of $25,000usingIRCSec.179.Ifyouhave Pennsylvania permits alimiteddeductionof uptoa IRC Sec.179 sevenths rulehistoricallyprovided inPennsylvania. provision generallygetsataxpayerbacktothethree- IRC Sec.168,butnotunder168(k).Thisnew depreciation deductionunderIRCSec.167and/or depreciation butmayagaincontinuetotakeordinary the taxpayerisrequired toaddbackthefederalbonus September27,2017, after placedinservice property isdepreciated forfederaltaxpurpose.For property subtraction maybeclaimedinthelastyearthat disallowed depreciation notclaimedasaresult of the entire amountof theaddbackhasbeenclaimed.Any untilthe be claimedinsucceedingtaxableyears deduction underIRCSec167.Themay depreciation sevenths of ordinary thetaxpayer’s may continuetosubtractanamountequalthree- before September27,2017,thetaxpayer service California RETURN TORETURN TOC State Tax Issues There are limits on the use of the prior year’s the tax safe use of limits on the are There to make estimated required who are Individuals harbor. than is more AGI California and whose tax payments, filing separately), (or $75,000 for married $150,000 of 90% of estimated tax based on the lesser must figure year’s their prior tax year’s tax or 110% of their current year’s California with current Taxpayers including AMT. $1,000,000 (or $500,000 for than equal or greater AGI estimated tax must figure married filing separately) year. the current their tax for based on 90% of CarryoversNet Operating Loss attributable to taxable yearsNet operating losses beginning on or after January and before 1, 2015 January 1, 2019, can be carried back in full. A taxpayer carryback the entire may elect to relinquish period with If to a net operating loss for any taxable year. respect the carrybackthe taxpayer elects to relinquish period, the net operating loss is carried forward only to the years carryover eligible under the applicable period. For tax years after net operating December 31, 2018, losses may only be carried forward. Benefits Child and Dependent Care deduction of does not allow the pre-tax California wage W-2 of benefits as a reduction dependent care benefits dependent care income. The amount of by the taxpayer is added back to California deferred wages. income as a separate adjustment to Exchanges Sec. 1031 Like-Kind IRC Effective January 1, 2014, taxpayers that exchange a propertyCalifornia for a property outside the state gain upon the eventual will be taxed on the deferred The taxpayer must property. the replacement sale of 3840 for each year as long as they own the file Form the filing is to The purpose of property. out-of-state notify that the taxpayer continues to hold the California property replacement and acknowledges the deferred of regardless The annual filing is required liability. whether the taxpayer has any need to otherwise file a in any year. tax return California Cuts and Jobs Act Impact Tax with a few federal tax law has only conformed California 161 9.3% 11.3% 10.3% 12.3% Between $590,746 and $708,890 Between $590,746 and $1,181,484 Between $708,890 and Over $1,181,484 Taxable Income: $590,746 Between $115,648 and RETURN TO TOC RETURN TO You are to remit all payments electronically once you all payments electronically to remit are You make an estimate or extension payment exceeding with a total liability $20,000 or you file an original return over $80,000 for any taxable year that begins on or after January 1, 2009. Once you meet the threshold, amount, tax of all subsequent payments regardless electronically. type, or taxable year must be remitted will be subject Individuals who do not pay electronically to a 1% noncompliance penalty. Estimated Tax Payments Tax Estimated annual the required Installments due shall be 30% of the 40% of installment, payment for the first required for the second required annual payment required annual payment the required installment, and 30% of for the fourth installment. No payment is required installment. for the third required IRC Sec. 179 Expense IRC of law only allows a maximum deduction California amount maximum expensing $25,000. The California qualified dollar by the amount of dollar-for is reduced expensing-eligible property placed in service during $200,000 $200,000. California’s the year in excess of is not adjusted for inflation. phase-out threshold Bonus Depreciation to the federal bonus did not conform California provisions. depreciation There is an additional Mental Health Services Tax of 1% of is an additional Mental Health Services There Tax $1,000,000. for taxable income in excess of The tax rates and brackets for 2020 have not yet beenThe tax rates and released. The following table shows the 2019 marginal tax rates in tax rates the 2019 marginal table shows The following taxpayers: married filing joint effect for EisnerAmper 2020 Personal Tax Guide of 2017. and afewotherprovisions of theTax CutsandJobsAct application of like-kindexchangestoreal estateonly, the federallimitationonexcessbusinesslosses, 1,2019,California hasconformed with Effective January blind individuals. Florida also provides property tax tax blind individuals.Floridaalso provides property whohavenotremarriedand widowers andtolegally taxavailabletowidows $500 exemptionsfrom property In additiontothehomesteadexemption,there are from allnon-schooltaxes. fully taxable,andthethird $25,000of valueisexempt school districttaxes.Thesecond$25,000of valueis residence taxes,including isexemptfrom allproperty of thevalueof primary, ataxpayer’s permanent Florida homestead exemptionprovides $25,000 thatthefirst of taxes.The exemption from Floridaproperty aportion mayreceive owners Florida resident an property TaxProperty Exemptions incometax. Florida doesnotimposeapersonal Tax Rates | • • • • • • exceptions are thefollowing: California taxableincome.These nonconforming the TCJA are nottakenintoaccountindetermining deductions thathavebeendisallowedorlimitedunder changes since2015.Mostimportantly, manyitemized Florida Non-meal entertainment expensesare deductible Non-meal entertainment under IRCSec.199A California doesnothavea20% incomededuction Miscellaneous itemizeddeductionsare noteliminated Real estatetaxesare notlimitedto$10,000peryear Second homeinterest isstilldeductible deduction of interest Personal residence debtlimitisstill$1.1millionfor 162 qualified business assets. qualified businessassets. and notpermit immediateexpensingof certain from thenewfederallawrelated tobonusdepreciation presumed thatFlorida willlikelycontinuetodecouple taxable incomewasincreased bytheaddition.It is amount equaltoone-seventhof theamountbywhich mustsubtractfromtaxpayers thistaxableincomean year andforeachof thesixsubsequenttaxableyears, 1,2021.Forthetaxable 31, 2007,andbefore January December after placedinservice 169, forproperty toIRCSec.167,168(k)and pursuant purposes asbonusdepreciation forthetaxableyear 100% of anyamountdeductedforfederalincometax must add-backtotaxableincomeanamountequal related toregular andbonusdepreciation. Taxpayers Florida decouplesfrom thefederalIRCprovisions C corporationsare taxedinFlorida. Bonus Depreciation TCJA amendments. exceptions whichgenerallyremain unchangedbythe 1,2019wasadopted,butwithspecific effect onJanuary again in2019.TheIRC(withtheTCJA amendments)in to adopttheIRCasamendedannuallyanddidso For corporateincometaxpurposes,Floridacontinues Tax CutsandJobsActImpact parent. separate corporationsorentitiesfrom theScorporation Qualified subchapterSsubsidiariesare nottreated as income isnottaxed. incometax,otherScorporation not haveapersonal and passiveinvestmentincome.BecauseFloridadoes taxable Scorporationsisimposedonlyonbuilt-in gains whentheyarefor years liableforfederaltax.Tax on and doesnotimposetaxonScorporationsexcept Florida recognizes thefederalScorporationelection S Corporations deployed duringtheprevious calendaryear. members veteransandmilitary exemptions formilitary RETURN TORETURN TOC State Tax Issues
2020 0.75% 0.375% $390,000 and 2021 $1,180,000
2018 0.75% 0.375% $370,000 and 2019 $1,130,000 Total revenue minus $1 million (effective January minus $1 million revenue 1, Total 2014). federal obligations; from Dividends and interest Schedule C dividends; under IRC Sec. 78 and dividends royalties Foreign and IRC Secs. 951-964; Certain funds; and flow-through Other industry-specific exclusions. Total revenue multiplied by 70%; revenue Total (as defined Goods Sold minus Cost of revenue Total below); (as defined minus Compensation revenue Total below); or Item Due Threshold No Tax or wholesale) (retail Rate Tax Tax Rate (other than retail or wholesale) retail Rate (other than Tax Limit Compensation Deduction The taxable margin is based on total revenue and may is based on total revenue The taxable margin ways: the following of be calculated in one • • • • • • • • • Total revenue starts revenue amounts that with those revenue Total reportedwere which for federal income tax purposes following statutoryis then adjusted by subtracting the exclusions: Goods Sold deduction does not Costs of The Texas For although it is similar. the federal deduction, mirror Goods Sold generally includes purposes, Costs of Texas acquisition and production to the those costs related tangible personal property property. of and real entities that only sell services typically will not Taxable goods sold deduction. Note that other have a cost of allowances may be available for specific industries. 163 -
- RETURN TO TOC RETURN TO Texas ships (except single member LLCs), general partnershipsships (except single member LLCs), natural person, by a single trustsowned directly qualified under IRS Sec. 401(a), trusts exempt except under IRS Sec. 501(c)(9), unincorporated passive enti Franchise tax rates, thresholds and deduction limits varyFranchise tax rates, thresholds to the the rate that corresponds Use by report year. filing: year for which you are This tax is generally not imposed on sole proprietor This tax is generally not imposed on part an affiliatedNote that taxable entities that are of engaged in a unitarygroup business must file a using the same method combined franchise tax return all members. for to compute margin Texas Margins Tax Margins Texas on an entity’s a franchise tax based is, however, There imposed on most business entities. These margin entities generally include partnerships, limited lability certaincompanies, S corporations, C corporations, corporations and associations, trusts, professional certain and various other legal banks, joint ventures, entities. ties, certain natural persons grantor trusts, estates of unincorporated political committees and and escrows, certain companies. REIT and insurance | Rates Tax is no state income tax on individuals or There businesses. the TCJA related to expensing certain to expensing related depreciable the TCJA business assets. IRC Sec. 179 Expensing Sec. IRC JanuaryFor tax years beginning before 1, 2015, Florida taxpayers that incomeadd back to taxable required $128,000 of deductions in excess IRC Sec. 179 100% of addback each year for the of and deduct one-seventh seven years. placed in service For assets after 2014, for IRC Sec. 179 deductions. required no addbacks are January to the IRC as of conforms 1,Florida currently adopted the changes made by2018, and so it has EisnerAmper 2020 Personal Tax Guide claim anadditionalexemption of $10,000.Similarto Persons whoare atleast65orwhoare disabledmay may opttoallowthededuction aswell. tax,althoughothertypesof property taxingdistricts is typicallyonlyavailableagainsttheschooldistrict value from taxation. Note,however, thatthisexemption residence property least $25,000of theirtotalprimary toexemptat exemption, whichallowshomeowners The mostcommonexemptionisthehomestead taxes. property receive of oneormore exemptionsfrom their aportion Texas maybeeligibleto owners resident property country. taxinTexas Theproperty averagesalmost2%. Texas hassome of taxesinthe thehighestproperty TaxProperty Exemptions rehabilitation historicstructures. of certified development, cleanenergy projects, andforcertified including credits related toqualifiedresearch and There are severalcredits availableagainstthistax, deductions orcredits. goods soldorcompensationtakeanyothermargin method, thetaxpayermaynottakedeductcostof at arateof 0.331%.However, byelectingtheEZ the franchisetaxusingEZComputationmethod revenue of $20millionorless mayelecttocompute Alternatively, taxableentitieswithannualizedtotal payroll taxespaidbytheemployer. Note thatcompensationdoesnotinclude1099laboror retirement related benefits. compensationandmosthealthcareworkers’ and deductible forfederalincometaxpurposes,including are provided totheextenttheyare toallpersonnel This deductionalsoincludesthosebenefitsthat above. chart the taxableentity, subjecttothewagelimitnotedin andemployeesof officers, directors, partners owners, of Medicare ontheW-2for wagesthatare reported The Compensationdeductionisbasedontheamount 164 repealed. 1,2005,theTexasEffective January estatetaxwas Estate Tax locatedinaGovernor-declaredproperty disasterarea. taxexemptionof property provides atemporary taxrelated Constitutionalamendmentthat property On November5,2019,Texas approved voters a • • • • the state.Also,saleof locatedina real property a formula comparingdaysworkedwithinandoutside andotherearned income,using an allocationof salary state. Theincomesubjecttotaxisgenerallybasedon other statesasnonresidents are taxedbythatother Jersey, NewYork, Pennsylvania orTexas workingin Residents of California, Connecticut,Florida, New Nonresident Taxation for useinfuture years. credit,year’s theexcesscredit canbecarriedforward lacks sufficienttaxliabilityinanyyeartofullyutilizethat interest paidonthebondeachyear. Ifthebondholder bondholder anon-refundable taxcredit of 35%of the Build AmericaBonds(taxcredit type)provide the Bonds Build America | also available for certain military personnel: military also availableforcertain taxexemptionsandbenefitsare The followingproperty required tooffer thisexemption. the homesteadexemption,onlyschooldistrictsare OtherConsiderations military personnel. military Penalty forlatepaymentsmadebyactiveduty waivers and veteran’sExemptions related tocertain organizations; their survivors; disabledveteransand exemptionforpartially A partial spouses; surviving A totalexemptionforfullydisabledveteransandtheir RETURN TORETURN TOC State Tax Issues Other state tax credits are allowed for California allowed are tax credits Other state Note: Note: (not to another state income taxes paid for net residents alternative to California’s any tax comparable including California subject to the tax) on income also minimum if the other state allows is allowed income tax. No credit taxes paid to for net income a credit residents California include Arizona, states credit reverse These California. and Virginia. Indiana, Oregon Caution Residency in one jurisdiction, a residence Individuals who maintain in also have a residence but City, such as New York must be veryanother jurisdiction to avoid the careful both of resident strict rules that could make them a Generally, Tip 27). jurisdictions for tax purposes (see Tax abode in New place of if you maintain a permanent and Connecticut or Pennsylvania New Jersey, York, than 183 days in that state, you will be spend more that state even if your primary of taxed as a resident applies a similar is in another state. California residence unless you test using nine months as the threshold, that the time spent in the state was due to can prove a temporary or transitory In addition, the purpose. or York New of you as a resident domicile test treats New Jersey spend as little as 30 days even if you only there. in the state if you continue to be domiciled place which is“Domicile” is generally defined as the a facts using most central to your life and is determined test. and circumstances Or Inheritance Estate Taxes State Connecticut and Pennsylvania New Jersey, New York, impose an estate or inheritance tax on persons who are domiciled in the state or have property located in the state. Prior to 2018, New Jersey imposed both an Estate was eliminated The Estate Tax and Inheritance Tax. Tax do not starting Florida and Texas in 2018. California, have an estate or inheritance tax. See the chapter on estate and gift tax planning for a further discussion. Connecticut is the only state in the country that imposes a state gift tax. The gift tax is imposed if the Connecticut taxable gifts made amount of aggregate on or after January 1, 2005 is $2,000,000. For 2019 165 While Texas has no state income tax, its neighbor, has no state income tax, its neighbor, While Texas Pennsylvania has signed reciprocal agreements signed reciprocal has Pennsylvania New York State treats days worked at home for days worked treats State New York RETURN TO TOC RETURN TO Arkansas, does impose personal income tax on Texas Arkansas, does impose personal income tax on Texas exception. with one narrow who work there, residents have a Texas Arkansas and Texarkana, Texarkana, Exemption. Under this exemption, income City Border is exempt Arkansas Texarkana, of by residents earned by income tax and income earned Arkansas from working in the city of Texas, Texarkana, of residents Arkansas Arkansas is also exempt from Texarkana, Arkansas from Any other income earned Income Tax. is taxable to Arkansas. sources Note: Note: Note: Note: Ohio, Virginia,with Indiana, Maryland, New Jersey, will not under which one state Virginia and West to employertax employee compensation subject apply agreements withholding by the other states. These to employee compensation only and not to income from partnershipssole proprietorships, and other entities. New York taxes certain by a income received New York to a business, trade, profession related nonresident York, carried on within New or occupation previously income includes,whether or not as an employee. This not to to covenants but is not limited to, income related agreements. to termination compete and income related Note: Note: in the employee as days worked the convenience of qualify a day worked outside New York, as To New York. legitimate business was a that there you must prove state, such as you to be out of that required reason should keep a You or customer. meeting with a client diary your activities and with supporting of or calendar (e.g., airplane your whereabouts documents proving statements, bank statements and card tickets, credit your passport). nonresident state by a nonresident is typically subject to is typically by a nonresident state nonresident the gain on This includes state. nonresident tax by the apartment a cooperative the sale of by a nonresident to reduce allowed you are However, State. New York of based on the amount tax by a credit state your resident to limitations. state, subject tax paid to the nonresident EisnerAmper 2020 Personal Tax Guide 2019. 2019. or decedentwillberequired topayis$15millionfor The maximumamountof orestatetaxthatadonor gift match thefederalexemptionasfollows: through 2023andafter, itwillgraduallyincrease to this threshold increases to$3,600,000,andfor2020 2023+ –Sameasfederalexemption 2022 –$9,100,000 2021 –$7,100,000 2020 –$5,100,000 166 RETURN TORETURN TOC
Appendices 167 Appendices RETURN TO TOC RETURN TO EisnerAmper 2020 Personal Tax Guide January 15,2021 January July 31,2020 June 15,2020 15,2020 January April 13,2020 April 1,2020 April 15,2020 September 30,2020 September 15,2020
October 15,2020 October 12,2020 December 31,2020 Note: There are additional filing requirements ifyouhave householdemployeesorifyouare abusinessowner andyoupayemployees Date and/or independentcontractors. Appendix A.
Individual Taxpayers 2020 FederalT
• • • • • • • • • • • • • • • • • • • • • Deadline T Treasury byOctober15,2020ifonextension. Pay finalinstallment of 2020estimatedtaxes. Take required IRAminimumdistributionfor2020. atraditionalIRA to aRothIRA. Convert Establish aKeogh ordefinedbenefitplanfor2020. Accelerate incomeifyouare inalowertaxbracket2020thanyouexpecttobe2021. Prepay expenses deductibleonyour2020return, ifapplicable,andyouwillbeinalowertaxbracket Make 2019profit-sharing Keogh plancontributionsandSEPcontributions,ifyourtax return isonextension. taxreturns, ifonextension. incometaxandgift File 2019individual File electronically 2019Foreign BankandFinancialAccounts(FBAR)intimetobereceived bythe taxreturnFile 2019income fortrusts,ifonextension. Make 2019money-purchase anddefinedbenefitplancontributions. estimatedtaxpaymentfor2020. Make third quarter (Form 5500)orextensionrequest.File Keogh planreport estimated taxpayment for2020. Make secondquarter File incometaxreturns fortrusts(orextensionrequests) andpaybalanceof 2019taxesdue. estimatedtaxpaymentfor2020(forindividualsandtrusts). quarter Make first Make 2019IRAcontributions. taxreturns (orextensionrequests)File individualincometaxandgift andpaybalanceof 2019taxesdue. ofFile electronically Foreign 2019Report Bankand Financial Accounts(FinCEN114)intimetobe Take IRA first required minimum distributionifyou reached age70½ Pay finalinstallment of 2019estimatedtaxes. received bytheTreasury byApril15,2020. in 2021,andtakecapitallossestooffset capitalgains. o ax Calendarfor 168 in2019.
RETURN TORETURN TOC
Appendices er 9,700.00 9,700.00 13,850.00 19,400.00 78,950.00 39,475.00 52,850.00 39,475.00 84,200.00 84,200.00 84,200.00 160,700.00 160,725.00 306,175.00 160,725.00 510,300.00 510,300.00 612,350.00 204,100.00 168,400.00 321,450.00 204,100.00 204,100.00 408,200.00 $ 0.00 $ 0.00 $ 0.00 $ 0.00 Of The Amount Ov
+ 12% 12% 10% 10% 10% 12% 10% 12% 37% 37% 37% 35% 32% 35% 22% 32% 22% 22% 32% 35% 24% 24% 24% 37% 22% 32% 35% 24%
+ + + + + + + + + + + + + + + + + + + + + + + + + + + + ax Is The T Single
169 Head of Household Head of 970.00 970.00 1,385.00 1,940.00 6,065.00 9,086.00 4,543.00 4,543.00 12,962.00 31,322.00 Married Filing Separately 14,382.50 14,382.50 45,210.00 93,257.00 28,765.00 32,748.50 32,748.50 82,354.75 65,497.00 46,628.50 46,628.50 153,798.50 152,380.00 164,709.50 $ 0.00 $ 0.00 $ 0.00 $ 0.00 ax Rate Schedule ax Rate Married Filing Jointly or QualifyingMarried Filing Jointly Widow(er)
er 78,950.00 39,475.00 39,475.00 52,850.00 84,200.00 84,200.00 84,200.00 $ 9,700.00 $ 9,700.00 160,700.00 160,725.00 160,725.00 306,175.00 612,350.00 510,300.00 510,300.00 204,100.00 204,100.00 204,100.00 321,450.00 168,400.00 408,200.00 $ 13,850.00 $ 19,400.00 But Not Ov
er Ov 9,700.00 9,700.00 13,850.00 19,400.00 78,950.00 39,475.00 39,475.00 52,850.00 84,200.00 84,200.00 84,200.00 160,700.00 160,725.00 306,175.00 160,725.00 510,300.00 510,300.00 612,350.00 204,100.00 204,100.00 204,100.00 168,400.00 321,450.00 2019 Federal T 2019 Federal 408,200.00 $ 0.00 $ 0.00 $ 0.00 $ 0.00 B. Appendix If Taxable Income Is: Income If Taxable
RETURN TO TOC RETURN TO EisnerAmper 2020 Personal Tax Guide
If Taxable IncomeIs: Appendix C. $ 0.00 $ 0.00 $ 0.00 $ 0.00 622,050.00 326,600.00 207,350.00 207,350.00 207,350.00 2020 FederalT 518,400.00 518,400.00 414,700.00 163,300.00 163,300.00 163,300.00 311,025.00 171,050.00 85,500.00 85,525.00 85,525.00 80,250.00 53,700.00 40,125.00 40,125.00 19,750.00 14,100.00 9,875.00 9,875.00 Ov er
But NotOv $ 19,750.00 622,050.00 326,600.00 207,350.00 207,350.00 207,350.00 $ 14,100.00 518,400.00 518,400.00 414,700.00 163,300.00 163,300.00 163,300.00 $ 9,875.00 $ 9,875.00 311,025.00 171,050.00 85,500.00 85,525.00 85,525.00 80,250.00 53,700.00 40,125.00 40,125.00 er
Married Filing Jointly or Qualifying Widow(er) Married FilingJointlyorQualifying ax RateSchedule $ 0.00 $ 0.00 $ 0.00 $ 0.00 154,793.50 156,235.00 167,307.50 66,543.00 45,926.00 83,653.75 47,367.50 47,367.50 97,735.00 14,605.50 14,605.50 Married FilingSeparately 31,830.00 33,271.50 33,271.50 13,158.00 29,211.00 9,235.00 6,162.00 4,617.50 4,617.50 1,975.00 1,410.00 987.50 987.50 Head of Household 170
Single The T ax Is + + + + + + + + + + + + + + + + + + + + + + + + + + + +
24% 24% 24% 24% 32% 35% 22% 22% 35% 22% 22% 32% 35% 32% 32% 35% 37% 37% 37% 37% 12% 10% 12% 10% 12% 10% 12% 10% +
Of TheAmountOv $ 0.00 $ 0.00 $ 0.00 $ 0.00 RETURN TORETURN TOC 326,600.00 622,050.00 207,350.00 207,350.00 207,350.00 518,400.00 518,400.00 414,700.00 163,300.00 163,300.00 163,300.00 311,025.00 171,050.00 85,500.00 85,525.00 85,525.00 80,250.00 53,700.00 40,125.00 40,125.00 19,750.00 14,100.00 9,875.00 9,875.00 er Appendices A P 31% 27% 38% 35% 25% 29% 23% 23% 40% Resident 3.07%(e)
NJ 31% 31% 37% 33% 39% 35% 48% 42% 43% ax on net investment income. Resident 10.75%(d)
CT 31% 27% 27% 39% 29% 35% 33% 42% 44% e Contribution T Resident 6.99%(c) s and 37% or 35% federal income tax rate and MAGI s and 37% or 35% federal income tax rate and MAGI
(b) CA 41% 37% 50% 35% 33% 39% 33% 48% 45% 13.3% Resident 171
C 41% 37% 50% 35% 33% 39% 33% 48% 45% NY 12.696% Resident s with taxable income of more than $800,000, the maximum tax rate is 6.99%. more s with taxable income of
S 31% 41% 37% 35% 29% 33% 29% 46% 44% NY Resident 8.82%(a)
f 10.75% for New Jersey applies to taxable income in excess of $5,000,000. If your taxable income is less f 10.75% for New Jersey applies to taxable income in excess of 37% 35% 32% 28% 26% 20% 22% 20% 24% AR% nia rate includes the 1% Mental Health Service Tax. The top rate for married filing jointly taxpayers with nia rate includes the 1% Mental Health Service Tax. V Federal dinary exceeds income (“MAGI”) income tax rate for federal is 37%, 35%, or 32% and modified adjusted gross
2019 Maximum Effective Rates Effective 2019 Maximum
exceeds $200,000 for single, you may be subject to an additional 3.8% Medicar for Philadelphia residents and 3.4481% for nonresidents. and for Philadelphia residents taxable income of more than $1,145,960 is 12.3%. more taxable income of than $5,000,000, your maximum tax rate is 8.97%. The maximum Califor For Connecticut married filing jointly taxpayer The maximum tax rate o The P For NY If the maximum or Similarly, if you meet these MAGI thresholds, long term capital gains may be taxed at 23.8%. long term thresholds, if you meet these MAGI Similarly, $250,000 for married filing joint, $125,000 for married filing separate taxpayer $2,155,350, the rate is 6.85%. D.
Appendix
Effective Tax Rates If Not In The AMT OrdinaryTax Rates Income Effective These effective tax rates do not include payroll and self-employment taxes or the 4% New York City Unincorporated Business Tax. York City Unincorporated Business taxes or the 4% New and self-employment These effective tax rates do not include payroll Note: Long-Term Capital Gains And Qualifying Dividends If In The AMT Long-Term Effective Tax Rates If In The AMT Ordinary If In Tax Rates Income Effective Long-Term Capital Gains And Qualifying Dividends If Not In The AMT Long-Term Maximum Tax Rates
(b) (c) (d) (e) 3.8712% incomeof taxonwagesandself-employment Philadelphia ennsylvania maximumratedoesnotincludetheCityof (a) Iftaxableincomeisunder taxableincomeover$2,155,350formarriedfilingjointly. S, themaximumtaxrateisapplicablefor 26% Bracket 20% Bracket 20% Bracket* 28% Bracket 24% Bracket 22% Bracket 32% Bracket* 37% Bracket* 35% Bracket* * RETURN TO TOC RETURN TO EisnerAmper 2020 Personal Tax Guide * 32% Bracket* 35% Bracket* 37% Bracket* 28% Bracket 20% Bracket* 22% Bracket 24% Bracket 20% Bracket 26% Bracket ennsylvania maximumratedoesnotincludetheCityofennsylvania Philadelphiataxon wagesandself-employment incomeof 3.8712% (e) (d) (c) S, themaximumtaxrateisapplicablefortaxableincomeover$2,155,350married filingjointly. Iftaxableincome isunder (b) (a)
Long-Term DividendsIf InTheAMT CapitalGainsAndQualifying Effective Income Tax Rates IfInTheAMTOrdinary Long-Term DividendsIf NotInTheAMT CapitalGainsAndQualifying Rates Maximum Tax Note: Theseeffectivetaxratesdonotinclude payroll andself-employment taxesorthe4%New York CityUnincorporated Business Tax. Effective Income Tax Rates IfNotInTheAMTOrdinary
Appendix
E. $2,155,350, therateis6.85%. $250,000 formarriedfilingjoint,$125,000separate taxpayer Similarly, ifyoumeettheseMAGI thresholds, longterm capital gainsmaybetaxedat23.8%. If themaximumor The P The maximumtaxrateo For Connecticutmarriedfilingjointlytaxpayer The maximumCalifor For NY than $5,000,000,yourmaximumtaxrateis8.97%. taxable incomeof more than$1,145,960is12.3%. for Philadelphiaresidents and3.4481%fornonresidents. exceeds $200,000forsingle,youmaybesubjecttoanadditional3.8% Medicar
2020 MaximumEffectiveRates
dinary incometaxrateforfederalis37%,35%,or32%andmodifiedadjustedgross income(“MAGI”) exceeds dinary Federal V nia rate includes the 1% Mental Health Service Tax.nia rateincludesthe1%MentalHealthService with Thetoprateformarriedfilingjointlytaxpayers AR% 24% 20% 26% 28% 20% 22% 32% 35% 37% f 10.75% for New Jersey appliestotaxableincomeinexcessoffor NewJersey f 10.75% $5,000,000.Ifyourtaxableincomeisless
8.82%(a) Resident NY 44% 46% 29% 35% 29% 33% 37% 41% 31% S
s withtaxableincomeof more than$800,000,themaximumtaxrateis6.99%. Resident 12.696% NY 45% 48% 33% 39% 33% 35% 50% 37% 41% C
172 Resident 13.3% 45% 48% 33% 39% 33% 35% 50% 37% 41% CA (b)
s and37%or35%federalincometaxrateMAGI 6.99%(c) Resident e ContributionT 44% 42% 33% 35% 29% 39% 27% 27% 31% CT
10.75%(d) Resident ax onnetinvestmentincome. 43% 42% 48% 35% 39% 33% 37% 31% 31% NJ
3.07%(e) Resident 40% 23% 23% 29% 25% 35% 38% 27% 31% P RETURN TORETURN TOC A Appendices A A N/A P N/A SAF N/A P N/A Apr 15 SAF N/A N/A SAF N/A N/A Sept. 30 July 14 Sept. 15 N/A SAF May 15 Apr 15 N/A
months after the
½
N/A NJ N/A SAF N/A NJ N/A Apr 15 SAF N/A N/A SAF N/A N/A Sept. 15 SAF Oct. 15 N/A Apr 15 SAF Apr 15 N/A
. 2 . 2
N/A FL N/A SAF N/A FL N/A Apr 1 N/A N/A N/A N/A N/A N/A N/A Nov Nov Dec. 1 N/A May 1 May 1 June 3
. 16 . 30
N/A CT N/A SAF N/A CT N/A SAF SAF N/A N/A SAF N/A N/A Sept. 16 Nov SAF Nov SAF May 15 SAF SAF
N/A CA N/A SAF N/A CA N/A SAF SAF N/A N/A SAF N/A N/A Oct. 15 Oct. 15 SAF SAF SAF SAF SAF SAF
N/A NY N/A SAF N/A NY N/A SAF SAF** N/A N/A SAF** N/A N/A SAF Oct. 15 Oct. 15 SAF SAF SAF SAF SAF
tate Tax Returns Returns tate Tax 173
ch 16 ch 16 ch 16 f the fourth month following the close of the tax year. For C corporations with fiscal years ending f the fourth the tax year. month following the close of Federal October 15 September 15 October 15 Mar July 31 Federal April 15 No extensions available October 15 October 15 September 15 April 15 Mar April 15 September 30 October 15 September 15 November 16 April 15 Mar May 15 April 15
date is the 15th date of the fourth month after the year-end. The extended due date is 5 The extended due date the fourth date is the 15th date of month after the year-end. tic six-month extension, easing the administrative burden on exempt organizations by simplifying on exempt organizations the process tic six-month extension, easing the administrative burden eturns, FBARs do not have a next-business-day rule if the deadline falls on a Saturday, Sunday, or legal holiday. Sunday, rule if the on a Saturday, deadline falls FBARs do not have a next-business-day eturns,
Due Dates* 2019 Federal and S 2019 Federal
F. Appendix
month extension. of extending the Form 990 returns, and eliminating the need to request a second extension after months. and eliminating the need to request three 990 returns, extending the Form of until 2026. Corporations will be allowed an automatic six-month extension, except the five-month extension until on June 30, this change is deferred original due date. Trusts are always on a calendar-year basis. always on a calendar-year are original due date. Trusts P Note that unlike tax r The extension will be a single, automa For fiscal year estates, the original due For C corporations, the due date is the 15th day o 2026. September 15 will remain for calendar year corporations until 2026, and corporations with a June 30 year-end will get a seven-month extension until 2026, and corporations with a June 30 year-end for calendar year corporations until September 15 will remain
Information Returns (i.e., W-2 and 1099s) Returns Information Individual Information Returns (i.e., W-2 and 1099s), Forms W-2 and certain Returns Information to IRS/SSA January 1099-MISC due due to date they are 31 (same Individual Return Type Return Not on Extension (Assuming calendar year-end for all entities) calendar year-end (Assuming Not on Extension Type Return Extension Requested (Assuming calendar year-end for all entities) (Assuming calendar year-end Requested Extension Form 5500 Form FBAR (a) Partnership (e) Form 5500 Form FBAR (a) Partnership (e) the taxpayer). All other Forms 1099 due Februarythe taxpayer). All other Forms 31 if filed electronically. 28; March C-Corporation (d) C Corporation (d) (e) andwillhaveamaximumsix of theirtaxyear, monthafterof thethird theclose bythe15thday returns artnerships tofiletheir willberequired (a) (b) (c) (d) S-Corporation S Corporation 3520-A 3520 3520-A 3520 Tax-Exempt (b) Tax-Exempt Trust & Estate (c) Trust Tax-Exempt (b) Tax-Exempt Trust & Estate (c) Trust *Revised due dates resulting from the Surface Transportation & Veterans Health Care Choice Improvement Act of 2015 Act of Choice Improvement Health Care & Veterans the Surface from Transportation *Revised due dates resulting due date. due date is the same as the federal return **”SAF” means the state return RETURN TO TOC RETURN TO | EisnerAmper Tax Advisory Services
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