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Individual Income Tax Planning

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Individual Income Tax Planning Individual income tax planning With the potential for tax reform on the horizon, your peripheral view may include glimpses of changes in individual income tax rates or deductions. However, as you consider individual income tax planning matters, your current goals and objectives need to be front and center. Do not let the potential for tax reform distract you from what is in plain view, because those distractions may turn out to be very costly. Now is the time for you to take another look at tax planning for your 2017 and 2018 individual tax matters. Concentrate your view on planning that is available to you today, based on current law, with an eye toward what issues and opportunities tax reform may create for you tomorrow. This will lead you down the path to realizing a more tax-efficient result for you and your family. Back Forward 1 2018 essential tax and wealth planning guide Individual income tax planning Today’s increased tax rate environment Today’s increased tax rate environment Look again at current tax rates by type of income Individual income tax rates by type of income Self-employment tax There are three lenses through compel it. Failing to acknowledge which we can look again at individual potential tax issues means that Alternative minimum income tax planning. First, we can you could have a less efficient tax tax (AMT) examine how today’s increased tax result. As the potential for tax reform rate environment came to be. This evolves, what you truly need to Health care taxes gives perspective on how rates have understand are the planning options differed for various types of income that exist based on your unique State and foreign taxes over the years. Then we can examine overall financial view. Look again: Year-round the current tax environment and how personalized planning you can plan for potential income Increased individual income tax recognition or timing of controllable rate environment: Look again at Year-round deductions. Finally, we can examine how we got here personalized planning possibilities for tax reform and how As you will see in the following chart, that may reframe the picture of significant changes to individual Planning for tax planning. income tax rates have occurred in long-term gains a relatively short period of time. It has been said that the tax tail This has included both increasing Planning for should not wag the dog. What that tax rates for ordinary income and charitable means is that though our tax rate capital gains, along with adjusting the contributions structure has evolved over the past phaseout of itemized deductions. two decades, your investment and Each shift has affected the options financial goals should remain front available for planning. At times, it and center to create the best view for may also have shifted your financial your tax planning. Within that view objectives by examining the income though, there are certain planning or deductions to which a particular opportunities that are unique to investment may give rise. Therefore, the current tax environment and we will briefly explain how the existing should not be overlooked due to increased individual income tax rate the potential for tax reform. The environment came to be. potential for reform should not paralyze planning, but should Back Forward 2 2018 essential tax and wealth planning guide Individual income tax planning Today’s increased tax rate environment Today’s increased tax rate environment Look again at current tax rates by type of income Individual income tax rates by type of income Self-employment tax 2013 • While passed in 2010, the PPACA imposed the following taxes, effective as of January 1, 2013, for Alternative minimum Patient Protection and taxpayers with adjusted gross income (AGI) over the applicable threshold ($200,000 for single tax (AMT) Affordable Care Act (PPACA) filers)/$250,000 for married filing joint): passed 2010, effective 2013 – 3.8 percent net investment income tax (NIIT) on the net investment income of individuals, estates, and trusts Health care taxes – 0.9 percent increase (from 1.45 percent to 2.35 percent) on the employee share of Medicare taxes imposed on earned income by the Federal Insurance Contributions Act Hospital Insurance (FICA-HI) State and foreign taxes • Permanently extended the reduced tax rates for lower- and middle-income taxpayers, but allowed the Look again: Year-round 2012 top tax rates to increase and return to pre-EGTRRA levels for upper-income taxpayers personalized planning American Taxpayer • Permanently increased the top rate on income from capital gains and qualified dividends to 20 percent • Permanently extended the limitation on itemized deductions, commonly known as the Pease limitation Year-round Relief Act of 2012 (ATRA) and the personal exemption phaseout (PEP), for single taxpayers with AGI over $250,000, or $300,000 for personalized planning married filing jointly (MFJ) filers • Permanently indexed the alternative minimum tax (AMT) exemption amount to inflation to eliminate Planning for the needs for an annual patch long-term gains 2010 • Extended the fully phased-in EGTRRA rate reductions and repealed the Pease and PEP limitations for two Tax Relief, Unemployment Insurance additional years, through 2012 Planning for Reauthorization, and Job Creation • Extended the JGTRRA changes with respect to capital gain and dividend income for two additional years charitable Act of 2010 (TRUIRJCA) contributions 2003 • Accelerated certain tax changes passed under EGTRRA Jobs and Growth Tax • Lowered from tax rate on dividends and capital gains Relief Reconciliation • Increased the exemption amount for the individual AMT Act of 2003 (JGTRRA) 2001 • Phased in a reduction in ordinary and capital gains tax rates over nine years Economic Growth and Tax • Phased out the Pease limitation and PEP Relief Reconciliation Act • Created the concept of qualified dividends with a preferential tax rate • Sunset provision of EGTRRA meant as of January 1, 2011, everything would revert back to of 2001 (EGTRRA) Back Forward pre-EGTRRA levels 3 2018 essential tax and wealth planning guide Individual income tax planning Today’s increased tax rate environment Look again at current tax Look again at current tax rates by type of income rates by type of income Individual income tax rates by type of income Self-employment tax Now that we have briefly examined how the current increased Alternative minimum income tax environment came to be, we will discuss the various tax (AMT) rate components based on the type of income being taxed. Health care taxes Ordinary income tax rates Tax rates on qualified dividends Long-term capital gains tax rates State and foreign taxes Categories of income If your primary source of income We will refer to qualified dividend If you have invested in a capital asset, comes from employment, then income as tax preferential income then the gain on the sale or exchange Look again: Year-round Ordinary income you will generate ordinary income since the top qualified dividend rate of such an asset results in capital gain. personalized planning Qualified dividends in the form of wages, salaries, tips, is 20 percent for taxpayers in the The long-term capital gains tax rate, commissions, bonuses, and other top 39.6 percent bracket. This is in assessed on capital assets held for Year-round Capital gains types of compensation. Other contrast to the 39.6 percent top greater than one year, is 20 percent personalized planning investments may also generate rate assessed on ordinary income. for taxpayers in the top 39.6 percent Planning for ordinary income in the form of For taxpayers in the 25 percent tax bracket, 15 percent for taxpayers long-term gains Categories of tax interest, nonqualified dividends, net through 35 percent ordinary income in the 25 percent through 35 percent income from a sole proprietorship, tax brackets, the top rate on their tax brackets, and zero percent for Income tax Planning for partnership or limited liability qualified dividend income is 15 those taxpayers in the two lowest tax charitable Self-employment company (LLC), rents, royalties, or percent. For those taxpayers in the brackets. Given the reduced rates on contributions gambling winnings. For 2017 (and two lowest ordinary income tax long-term capital gains, we will also Alternative minimum tax (AMT) 2018), the top marginal ordinary brackets, their qualified dividend rate refer to this income as tax preferential income tax rate is 39.6 percent is zero percent. Note that in addition income. Health care taxes for single taxpayers with income to these rates, qualified dividends more than $418,400 ($426,700) and may also be subject to the 3.8 State and foreign taxes married taxpayers with income more percent NIIT. than $470,700 ($480,050). Ordinary tax rates continue to range from 10 percent to 39.6 percent and will remain in place permanently until further reform. Back Forward 4 2018 essential tax and wealth planning guide Individual income tax planning Today’s increased tax rate environment Individual income tax Look again at current tax rates by type of income rates by type of income Individual income tax rates by type of income Self-employment tax Given the tax preferential nature of long-term capital gains are taxed at the same rate as ordinary Gains from installment sales are taxed at the rate capital gain income, special attention should be income, a benefit to short-term capital gains is in effect on the date an installment payment is Alternative minimum given to the holding period of an asset to take full that they can be offset with capital losses since an received. Collectibles remain subject to a 28 percent tax (AMT) advantage of the long-term capital gain rates. individual will net his or her capital gains and losses maximum rate.
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