2018 personal tax guide and tax tips for 2017
Featuring coverage of the Tax Cuts and Jobs Act of 2017 and the Bipartisan Budget Act of 2018
EisnerAmper LLP Accountants and Advisors www.eisneramper.com
INTRODUCTION: 2018 IS A YEAR OF CHANGE
In 2017, we were subject to the tax regime resulting from the before January 1, 2026. All miscellaneous itemized deductions American Taxpayer Relief Act of 2012 (“ATRA”): The top federal that are subject to the 2% AGI limit are repealed for tax years ordinary income tax rate was at 39.6%, the top federal long-term 2018-2025. Home mortgage interest expense is limited to interest capital gains tax was at 20% and the top alternative minimum tax on acquisition debt for tax years 2018-2025, with the maximum rate was at 28%. The top estate and gift tax rate was at 40% and amount that may be treated as acquisition debt reduced to a $5.49 million gift, estate and generation-skipping tax exclusion $750,000 (from $1 million) and applied to any acquisition debt was in effect. incurred after December 15, 2017. The $1 million threshold is reinstated starting in 2026. Interest paid on home equity debt In addition, the enactment of the Protecting Americans from Tax of any qualified residence is not deductible except for loans used Hikes Act of 2015 (“PATH”) extended many of the tax incentives and to buy, build or substantially improve the taxpayer’s home that credits for individuals and businesses—some on a permanent basis. secures the loan. The Patient Protection and Affordable Care Act (“ACA”) continued to impose a 0.9% Health Insurance Tax on earned income for • Charitable deductions remain a viable itemized deduction. The higher income individuals and a 3.8% Medicare Contribution Tax Act increases the percentage of an individual’s AGI limitation that on net investment income. The tax is imposed on the lesser of may be deducted for cash contributions to public charities and (a) net investment income (interest income, dividends, capital other certain other tax-exempt organizations (such as a donor gains and passive income less expenses directly attributable to the advised fund) to 60%, which is up from 50%. As the law is currently production of such income and (b) the excess of modified adjusted written, the 60% threshold applies only to cash contributions. gross income over a specified dollar amount ($250,000 for joint Because of the increase in the standard deduction and the filers or a surviving spouse, $125,000 for married filing separately scaling back of the itemized deductions, many individuals will and $300,000 for other taxpayers). not be itemizing on their tax returns starting in 2018. The Urban- Brookings Tax Policy Center believes that the number of taxpayers On December 22, 2017, the Tax Cuts and Jobs Act of 2017 (the filing returns claiming deductions for charitable contributions will “Act”) was signed into law by President Trump. The Act is the most drop from about 37 million to about 16 million in 2018. This is an significant piece of tax legislation since the Tax Reform Actof issue that is concerning many exempt organizations, as there is 1986, more than 30 years ago. The Act has broad impact on all now a disincentive to making charitable contributions. aspects of the American economy and will impact businesses and individuals alike. It also has a substantial impact on multinationals • The Act increases the estate, gift and generation-skipping and international transactions. The Act even impacts not-for-profit transfer tax exclusions from $5 million to $10 million, indexed for organizations. Most of the provisions are effective for tax years inflation. The inflation adjusted exclusion for 2018 is $11.18 million beginning after December 31, 2017. Some of the provisions expire per person, or $22.36 million per married couple. The top estate after December 31, 2025. and gift tax rate remains at 40%.
Some of the major provisions are as follows: • The top tax rate for C corporations is now 21%, a decrease from 35% in 2017. • The top individual tax rate is at 37%, down from 39.6% in 2017. The top long-term capital gains tax remains at 20% and there • There is a new qualified business income deduction of up to is no change to the 3.8% Medicare Contribution Tax on net 20% for pass-through entities, such as partnerships, limited investment income, nor the 0.9% Health Insurance Tax on earned liability companies, S corporations and sole proprietors. The income for higher income individuals. deduction is generally limited to the greater of (1) 50% of W-2 wages paid by the business or (2) the sum of 25% of the W-2 • The top rate of 28% for alternative minimum tax for individuals wages paid plus 2.5% of the unadjusted basis of certain property remains the same. the business uses to produce qualified business income. Certain other limitations apply. • For individuals, the standard deduction almost doubles, while itemized deductions are either limited or eliminated. State/local • The alternative minimum tax for corporations has been and property tax deductions are eliminated, except for $10,000 permanently repealed for tax years beginning after December for tax years beginning after December 31, 2017 and ending 31, 2017. On February 9, 2018, President Trump signed the Bipartisan Budget the investigation of Russia over interference with U.S. election Act of 2018 (also known as the Honoring Hometown Heroes Act). proceedings, the continued tension between the U.S. and North The bill is the third in a series that increased spending caps originally Korea, and potential trade wars that may result from the U.S. imposed by the Budget Control Act of 2011; the first two were the imposing tariffs on steel and aluminum imports continue tobe Bipartisan Budget Act of 2013 and the Bipartisan Budget Act of significant issues. 2015. This Act funds the government for two years and features some of the largest increases in government ever. Here are some Many families with wealth are very concerned about their children’s of the highlights: and grandchildren’s future, and wonder what can be done to sustain and grow their wealth in these uncertain times. Given the • Spending limits will be raised by about $300 billion over the next impact of new legislation and the current economic and geopolitical two years. conditions, it is extremely important that you pay attention to your • Defense spending will be raised by $80 billion in the current fiscal financial position so that you can achieve your financial objectives. year and $85 billion next year. Specific goals such as retirement planning, managing cash • Domestic spending will increase by $63 billion this year and $68 flow, financing the cost of your children’s college education and billion next year. transferring your family’s wealth to the next generation should be • The debt limit will be suspended through March 2019, putting the top-of-mind in 2018 and beyond. next vote on this issue past the 2018 midterm elections. • $20 billion has been designated for infrastructure programs such We have written this guide to provide you with a tool to identify as surface transportation, rural water and wastewater systems. opportunities to minimize tax exposure, accomplish your financial • $6 billion has been designated to fight the opioid crisis goals and preserve your family’s wealth. This guide includes all • $4 billion has been designated for college affordability programs major law changes through March 15, 2018. The best way to use for teachers, firefighters and police officers. this guide is to identify areas that may be most pertinent to your • $90 billion has been designated for disaster aid for Texas, Florida unique situation and then discuss the matter with your tax advisor. and Puerto Rico. It is especially important that you check in with your tax advisor • There are no funds designated for President Trump’s proposed before proceeding with any tax planning transactions this year. southern border wall. Because the Tax Cuts and Jobs Act was hastily enacted at the end of • There is no legislation addressing Deferred Action for Childhood 2017, we are seeing many areas of the law where further guidance Arrivals (“DACA”). from the IRS or even a Technical Corrections Act are needed to • This Act extends some expiring tax provisions, offering some tax clarify the application of the law. As always, our tax professionals relief for families and individuals, including extension of mortgage will be pleased to discuss any of the ideas in this guide or any insurance premiums treated as qualified residence interest, above- other planning opportunities which might apply to your personal the-line deduction for qualified tuition and related expenses and situation. credits for certain energy production and conservation. • This Act repeals Obamacare’s Independent Payment Advisory Board, which was designed to limit Medicare costs. • This Act extends the Children’s Health Insurance Program for ten years.
We have included in our tax guide details on both of these acts and Marie Arrigo, CPA, MBA how they might impact your tax situation. Tax Partner & Co-Leader Family Office Services & The international arena continues to be of great concern to Leader, Not-for-Profit Tax Services many individuals and families. The global threat of terrorism, EisnerAmper LLP
Follow us on Facebook, Twitter, LinkedIn, YouTube and Google+. © Copyright 2018byEisnerAmper LLP. thereof, Thisbook, orportions Allrights reserved. maynot be reproduced inany form withoutpermission of EisnerAmperLLP. 44 24 Co-Editors Managing Editors Editor-in-Chief 63 56 36 74 52 30 20 or matteraddressed herein. transaction any recommending or marketing, promoting, (ii) or Code Revenue Internal the by imposed penalties avoiding of(i) any attachments)isnotintendedforandcannotbe usedforthepurpose Any taxadvicecontainedinthis publication(including legislation changes,youshould alwayscheckwithyourtaxadvisorbefore implementinganytaxplanning ideas. administrative interpretations, andjudicialdecisionsmaychangetheadvisability of of anycourse action.Becauseof periodic legislation, Future 2018. 15, Marchthrough amended as Code Revenue Internal the on based is guide this in discussion The thoseissueswhichcould impact you,yourfamily,identify oryourbusinessand thendiscussthemwithyourtaxadvisor. tax, orlegaladvice,norisitintendedtoconveyathorough treatment of the subjectmatter. Thebestwaytousethisguideis liability. tax your minimize you help may that ideas tax planning highlights taxguide This accounting, constitute not guidedoes This 79 67 14 5 Retirement Plans Interest Expense Charitable Contributions Principal ResidenceSaleandRental Passive andReal Estate Activities Small BusinessStock Deferred Compensation Stock Options,Restrictedand Capital GainsandDividendIncome Deductions Business OwnerIssuesandDepreciation Alternative MinimumTax Estimated Tax Requirements Tax RateOverview Tax PlanningStrategies TABLE OF CONTENTS
Tom Hall,DanGibson, Carolyn Dolci,StephanieHines Levin Robert Marie Arrigo Gary Bingel,AngelaChen, DeniseDeLisser,Gary
Contributors
134 129 130 105 135 133 132 131 101 117 97 87
Kevin Sohr, JeanneMarieWaldman, HollyWong Cindy Huang,SueSethKomitzky, CindyLai, William Gentilesco,MatthewHalpern, JosephHeld, Ben Aspir, Paul Bleeg,CindyFeder, JeanJiang, Jonathan Acquavella, June Albert, PeterJonathan Acquavella,JuneAlbert, Alwardt, Appendix C:2018FederalTax RateSchedule Appendix B:2017FederalTax RateSchedule Taxpayers Appendix A:2018FederalTax CalendarforIndividual Appendices State Tax Issues International Tax Requirements Planning andReporting Education Incentives Tax Credits TaxEstate andGift Planning Services Partners andPrincipals Partners Services Appendix G:EisnerAmperTax andPrivateBusiness Due Dates Appendix F:2018FederalandStateTax Returns Appendix E:2018MaximumEffectiveRates Appendix D:2017MaximumEffectiveRates
state tax issues 3 tax planning strategies
In addition to saving income taxes for the current and future years, effective tax planning can reduce eventual estate taxes, maximize the amount of funds you will have available for retirement, reduce the cost of financing your children’s education, and assist you in managing your cash flow to help you meet your financial objectives. EisnerAmper 2018 personal tax guide 6 • • • • • • minimize yourtaxesare: as you look forThe wayskey to things you should understand tax benefitof manyof yourdeductions. ofimpact alternativetax(“AMT”) the minimum the preserve and tax planningcan alsohelp youminimize, oreven prevent, the quent year, extra caution may be necessary. If monitored properly, differentials However, betweenyears. iftaxratesriseinasubse recognized. Tax planningallows youtotakeadvantageof tax rate expensesare paid,orcontrolling whenincomeis when certain use. This can be accomplished by timing business, or personal liability toafuture year, thereby freeing upcashforinvestment, Tax planningstrategiescandefersomeof yourcurrent tax year’s is aresident of at date of death. However, there are planning ries willreceive by40%to50%,dependingonwhichstate one andestate taxes can reduceGift the amount yourbeneficia make sensetoprepay theseexpensesbefore theendof 2018. anditmay interest andstatetaxes,maydecrease thesurtax direct andindirectsituation. Certain expenses, such asmargin Tax tax particular onyour incomewillhave netinvestment on Consider the impact that the additional Medicare Contribution have beenconsolidatedintothestandard deduction. Pease provision. Exemptionsare completely repealed and instead 31, 2017, many deductions have been eliminated along with the December tax liabilityandyoureffectiverate.Beginningafter reduce yourdeductionsand/orexemptions canincrease your on your adjusted gross income (“AGI”). Various phaseouts that amount of exemptionsprovision yourpersonal (“PEP”)based itemized deductions(“Pease” provision) andontheallowable For 2017,there maybelimitationsonthedeductibilityof your tax rate. ensure thatyoureceive thefullbenefitof thelowestcapitalgains term rates, so you must carefully time your security trades to effect of making yourlong-term capital gainssubject to short- Under current law, thecomplexnettingruleshavepotential 43.4% in2017and40.8%2018. the top short-term capital gains tax rate could be as much as and be the 23.8% could top long-termrate income, capitalgains the additional3.8%Medicare ContributionTax onnetinvestment The current top long-term capital gainstax rate is20%.Including will applytomosttaxpayers. are limited to $10,000,thereby making it unlikely that the AMT taxdeductions December 31,2017,stateincomeandproperty New Jersey, were most likely subject tothe AMT. Beginning after taxes, suchasNewYork, California, Connecticut,Pennsylvania and Prior to 2018, residents of states with high income and property - - wealth that is preserved foryourfamily.wealth thatispreserved techniques andstrategiesavailable tomaximizetheamountof • • • • • goals: Proper taxplanningcanachieve thefollowing • • • • • • • • • TAX GOALS PLANNING tax liability. Minimize theeffectof theAMTonthisyear’s deductions. Maximize thetaxsavingsfrom allowable Reduce anypotentialfuture taxliabilities. years’ Defer thecurrent taxliabilitytofuture year’s years. Reduce thecurrent taxliability. year’s as yourretirement. available tofundyourchildren’s educationaswell Maximize theamountof moneyyouwillhave charities (ratherthanthegovernment). toyourbeneficiariesand/or the amountleft Minimize potentialfuture estatetaxestomaximize payments willberequired. Manage yourcashflowbyprojecting when tax tax liability. needsbydeferringyour business, orpersonal Increase availabilityof cashforinvestment, taxes. Avoid penaltiesforunderpaymentof estimated investment income. Minimize theMedicare ContributionTax onnet Minimize capitalgainstax. your family. Maximize theamountof wealththatstaysin available taxcredits. Maximize taxsavingsbytakingadvantageof
and/or losses,andthe type of gainsandlosses youshouldtrigger. Tax Tip3offers stepstofollowrelating torealized capitalgains deductible expensesandwhentodeferorcollecttaxableincome. Tax Tip2offers basic guidance for deciding when to prepay ordefer lock incapitalgains. defer expensesandaccelerateincome,realize capitallosses,or whether ornotyoushouldprepay deductionsanddeferincome, what stepstotakeprioryear-end. You willbeabletodecide (ifany).Basedon theseresults, youcandecide forwards carry included inyourprojections. Besure toconsiderprior-year loss realized long-andshort-term capitalgainsandlossesshouldbe yourtaxbracketforeachyear.help youidentify Your year-to-date current forthe your taxsituation will This years. subsequent and To gainthemaximumbenefit,youneedtoproject, asbestyoucan, than thegovernment, useof yourmoney. rather you, giving years) year to your even later (or next tax liability your taxes.Timingexpensesandincomecanalsodefersomeof income (totheextentyouhavecontrol) canpermanently reduce Timing when you pay deductible expenses and when you receive knowledge of taxlaws,thoughtfulplanningandtimelyaction. follow. of Implementation of many requires ideas these thorougha the applicable tax law for each year to determine the best path to will beforthecurrent andthenapplying andsubsequentyears knowing whatyourapproximate income,expensesandtaxrates your situation. Keep inmind that many of the strategies involve planningideasthatmight applyto point tohelpyouidentify isnotallinclusive,itagoodstarting taxes. Whilethischart you reduce yourcurrent taxaswellanypotentialfuture year’s helping you achieve your planning goals. It includes ideas to help Tax Tip1provides asnapshotof keystrategiesgeared toward YEAR - END TAX TIPS PLANNING Beginning after December31,2017,allmiscellaneousitemized Beginning after Miscellaneous Itemized Deductions taxespaid. and (2)statelocalproperty for theaggregateseparately) ofstate andlocalincometaxes (1) itemized deductionof upto$10,000($5,000formarriedfiling ataxpayermayclaiman 2017, December 31, Beginning after State and LocalIncome Taxes Taxes and Property of upto30%of appreciated capitalgainproperties yourAGI. up to 50% of and charitable gifts your AGI (60% if only cash gifts) property, tangible personal goods, as clothing and household such of in2018,youcandeductcharitablegifts cashand Starting Charitable Contributions prepay byDecember31, ifappropriate: Here are themostcommondeductibleexpensesyoucaneasily service intheyearof theintendeddeduction. service limitations.Toto certain qualify, mustbe placed in the property equipment to take advantage of expensing allowances,subject Before the end of 2018,accelerate the purchases of business Business Equipment Tax onnetinvestmentincome. if actuallypaid.Thismayalsoreduce theMedicare Contribution December 31,sinceinterest accruedatyear-end isonlydeductible Before theendof 2018,besure topayanymargin interest before Margin Interest the deduction. inthe current year in orderpayment for next January to accelerate Before the end of 2018, consider prepaying your mortgage Interest Mortgage December31,2025. beginningafter be suspendeduntilyears deductions that are subject to the limitation of 2% of AGI will EXPENSES YOU CAN PREPAY
tax planning strategies 7 EisnerAmper 2018 personal tax guide 8 tax tip This yearyouare intheAMTandnextyou The regular taxrateappliesthisyearand You havenetrealized capitallossesthisyear Your regular taxratewillincrease nextyear Your regular taxratewillbethesameor Your passiveactivitylossesexceedyour You haveincentivestockoptions thatyou You a concentratedlow- wanttodiversify You are contemplatingpurchasing new You havenetrealized capitalgainsthisyear. A penaltyforunderpaymentof estimated and theAMTwillnotapplyineitheryear. taxes willapply. will besubjecttoahigherregular taxrate. will applynextyear. Situation passive income. basis stockpositionandavoidpayingtaxes business equipment. can exercise. currently. from lastyear.or losscarryforwards is higherthantheAMTratethatyouexpect in eitheryear. lower nextyearandtheAMTwillnotapply 1 KEY TAXKEY STRATEGIES PLANNING
• • • • • • • • • • • • • • • • • Planning idea • • • • impact of theMedicare ContributionTax onnetinvestmentincome. deduct thesuspendedlossonthat activity. However, considerthe Dispose of anactivitythatisgeneratingpassive lossesinorder to exercise pricewillnotputyouintotheAMT. but onlyifthespread betweenthemarketpriceof thestockand thelong-term holdingperiod, Consider exercising youroptionstostart tax whilebenefitingacharityof yourchoice. the stockinexchangeforanannuity. Thiswillallowyoutodeferthe Consider usingacharitableremainder trustthatwillallowyoutosell Have withholdingtakenoutof yourretirement plandistribution. payment amount,ifnecessary. 15andincrease the estimatesdueJanuary quarter Prepay fourth December 31. Withhold additionalamountsof taxfrom yourwagesbefore in2018.) in service deductions availablethisyear. (Qualifiedpurchases mustbeplaced Accelerate thepurchases into2018totakeadvantageof section179 on netinvestmentincome. Consider theimplicationsof theMedicare ContributionTax Avoid washsalerules. Consider taximplicationsof nettingrules. Use abondswaptorealize losses. it. if marketconditionsjustify Sell securitieswithunrealized lossestooffset thegains— in theappreciation. thereby locking to offset realized lossesandlosscarryforwards, Consider recognizing capitalgainsbysellingappreciated securities Accelerate income. the highertaxrate—assumingyoucanitemize. Consider bunchingcharitablecontributionsintheyearwith Defer income. year withthehighertaxrate—assumingyoucanitemize. Consider bunchingcharitablecontributionsinthe warrants acceleratingtaxpayments. Accelerate income,butonlyifthetaxrateincrease Defer deductions. Defer income. Prepay deductions.
Detailed discussion
Page 45 Page 38 Page 25 Page 57 Page 27 Page 41 Page 41 Page 21 Page 31 Page 18 Page 10 Page 10 Page 71 Page 11 Page 11 Page 7
tax tip You wouldliketomakesignificantcharitable You wanttoprovide foryourchildren’s and/ You wanttotransferassetsyour You haveasizeableestateandwantto You expectthevalueof yourIRAto You wanttotakeadvantageof the You use,suchas needfundsforpersonal appreciate over time,andyouwantto tax-deferred nature of retirement accounts. mortgage limitationsortopaytaxliabilities. mortgage protect yourassetsfrom estatetax. beneficiaries takedistributionslater. position yourIRAnowsothatthere willbe contributions. or grandchildren’s qualifiededucationcosts. improvementsofexcess home in toyour the little ornotaximpactwhenyouyour Situation designated beneficiariesduringyourlifetime. 1 KEY TAXKEY STRATEGIES PLANNING • • • • • • • • • • Planning idea • • • • • using thechainedConsumerPriceIndex(“CPI”). theexclusionwillbeindexedforinflation, for subsequentyears, taxexclusionofUse yourlifetimegift $11.18millioneffectivefor 2018; providers. Pay beneficiaries’tuitionandmedicalexpensesdirectly tothe ofMake gifts $15,000toeachindividualin2018. amount issubjecttoincometaxintheyearof theconversion. year. However, thiswillcauseacurrent taxliability, sincetheconverted yourtraditionalIRAintoaRothinthecurrent Consider converting advantage of thebestplansavailabletoyoupriorDecember31. Maximize yourcontributionstoretirement accountsandtake in theentity. paid taxeson.Besure youhavesufficienttaxbasisandare “atrisk” companies, orScorporationsonincomethatyouhavealready Take limitedliability distributions,ifavailable,from partnerships, Tax onnetinvestmentincome. interest limitations.Theinterest mayalsoreduce theMedicare Contribution The interest onthedebtwillbedeductible,subjecttoinvestment needs, andthenusemargin debttopurchase replacement securities. Sell marketablesecuritieswithlittleornoappreciation tofundyour work toamuseum. easement,remainder interest inreal estateorart a conservation assetssuchas interests incertain Consider donatingpartial or takeadvantageof adonor-advised fund. Consider establishingacharitabletrustorprivatefoundation, one year. Donate appreciated securitiesyouhaveheldformore than gift-splitting) tax. withoutincurringagift to prepay upto$75,000(or$150,000ifyourspouseconsents use thefundstopayqualifiededucationexpenses.You havetheability Establish andfunda529planthatcangrow tax-free aslongyou Make loanstoyourbeneficiariesatminimumrequired interest rates. company (“FLLC”). (“FLP”)orfamilylimitedliability Set upafamilylimitedpartnership Create agrantor retained annuitytrust(“GRAT”). payments directly totheeducationalinstitution. Prepay college orprivateschooltuitiongift-tax-free bymaking
Page 102 Page 89 Page 83 Page 80 Page 33 Page 69 Page 68 Page 92 Page 92 Page 76 Page 70 Page 91 Page 91
tax planning strategies 9 EisnerAmper 2018 personal tax guide 10 (unless youhavelong-termlosses Retirement PlanDistributions such income. income intothecurrent year. youwould want todefer Otherwise, accelerate you can rate, tax rate to be year’s next lower than year’s If youare acash-basisbusinessandyouanticipateyourcurrent Consulting orOtherSelf-Employment Income constructively received (madeavailable toyouinthecurrent year). to defer such income until next year provided the income isnot rateislower thanyourcurrentyear’s rate,itmay make sense year’s limitations onamountsthatcanbeaccelerated.However, ifnext the current year. You wouldneedtodetermine ifthere are strict orbonusesinto rate,youcanacceleratesalary than nextyear’s If youanticipateyourcurrent income taxratetobelower year’s Cash SalariesorBonuses income taxedinayearthatyouare inalowertaxbracket. the timing of receipt soyoucan gainthe advantage of havingthe here are sometypesof incomethatyoumay beabletocontrol Timing incomecanbemore difficult thantimingdeductions,but *The chart assumes your regular tax rate on ordinary incomeishigherthanthemaximum AMT taxrateof assumes yourregular 28%. taxrateonordinary *The chart Legend plan evenifitisnotrequired, orconsideraRothIRAconversion. may consider taking ataxable distribution from yourretirement If youare overage59½andyourtaxrateislowthisyear, you tax tip
self-employed consultingfees, self-employed expenses Charitable contributions,mortgage and netshort-termcapitalgains Nature ofdeduction INCOME YOU CAN ACCELERATE OR DEFER retirement plandistributions, Income suchasbonuses, offsetting thegains) interest, investmentinterestand or income 2
= Prepay before theendof thecurrent year/Deferintonextyearorlater/Collectbefore theendof the year) AMTTAX STRATEGIES PLANNING
year ornextandyear’staxrate as thecurrentyear will bethesame or willdecrease You willnotbeintheAMTthis Prepay Defer • The followingideascanloweryourtaxesthisyear: Capital Gains of AGI andalsoreducing state taxable income. income; thereby reducing thelimitationsbasedonapercentage charities. Thisallows anindividualto exclude the distribution from distributions from individual retirement accounts (“IRAs”) to public Individuals of at least age70½are allowed to make tax-free • you may be able to applythe netting rule which may result in exclusive of theadditionalMedicare ContributionTax. However, making iteligibleforthelong-term capitalgainrate of 20%, intendtoholdthepositionformore than12months, otherwise Tax).Contribution donot ifyou strategy this consider Only year butat37%next(exclusiveof theadditionalMedicare strategy ifthegainwill betaxedattheAMTrateof 28%this taxrate tobehigher.you expectnextyear’s maybeagood This selling thepositionsandrealize thegainsincurrent yearif If youhaveunrealized netshort-term capitalgains,consider to baddebts. a capitallossbefore theendof theyear. Asimilarruleapplies thereby givingyou that youmaybeabletoclaimasworthless, securities todetermineany have ifyou portfolio your Review in ataxsavingsof 37%in2018ratherthan20%. the offsetting of long-term lossestoshort-term gains,resulting increase Collect Defer will
this year Collect Defer only
You areintheAMT* next year this year Prepay Defer and next year Prepay Defer only
you expecttobeinalowertaxbracketthisyearthannextyear. want to sell these bills to recognize income in the current year if If youhaveU.S.Treasury Billsmaturingearlynextyear, youmay U.S. Treasury BillIncome allowing youtodefermuchof thattaxtofuture years. current yeartotheextentof thepaymentsyoureceived, thereby of allow to you recognizethe in gain taxable the portion a only theincome.Thiswould use theinstallmentsalemethodtoreport so that most of the payments would be due next year. You can a gain,youwouldnormally structure theterms of thearrangement areIf you at real selling property traded non-publicly other or estate Real Estate and OtherNon-PubliclyTraded Sales Property • • tax tip Note: securitiesandbaddebts Worthless short-term gainsinexcessof long-term losses Both short-term andlong-term gains,or Long-term gainsinexcessof short-term losses Both short-term andlong-term losses If you have do notapply. step-up inbasis.Since thesalesare at again,the wash salerules year,this rate a gain to effectively back them buying then and long-term capital gainsthat may betaxed atthe more favorable Similarly, youmayconsidersellingsecuritiesthisyeartorealize wash salerulewhilemaintainingyouroverallbondpositions. This swap allows you to purchase similar bonds and avoid the Consider a bond swap to realize losses in your bond portfolio. 3
If youare marriedfilingseparately, substitute$1,500for$3,000in theabovetip. YEAR - END CAPITAL GAINS AND LOSSES losses are deductibleinthecurrent year, byhavingtheproper substantiation. then short-term losspositions. up totheamountof yourlosses,less$3,000. Identify these securities and debts and take the necessary stepstoensure thatthe thesesecuritiesand debts andtakethenecessary Identify as 37%in2018plus3.8%Medicare ContributionTax onnetinvestmentincome). togainthebenefitfirst of offsettingshort-term gains(taxedatarateashigh Take lossesequaltothenetgain,plus$3,000.Uselong-term losspositions Take lossesequaltothenetgain,plus$3,000.Uselong-term losspositionsfirst, Sell securitiestorecognize unrealized gains,preferably ifheldshort-term, Consider taking thesesteps to payyourcurrent-year taxliabilityonatimelybasis,consider If youexpecttobesubjectanunderpaymentpenaltyforfailure eligibility requirements. parent orrelative asyourdependent,assumingyoumeetcertain take theseexpensesonyourtaxreturn evenifyoudonotclaimthe home foraparent oranursing nurse orother relative, youcan anddentalcare. insurance health include are Ifyou aprivate paying into asingleyearcouldresult inataxbenefit. Medicalexpenses purposes). Therefore, bunchingunreimbursed medicalexpenses your AGI, adecrease from (also7.5%forAMT 10%inprioryears These expensesare deductibleonlyifthey exceeded7.5%of Medical Expenses minimize theamountof thepenalty. theendof and now between order yearin the or toeliminate increasing yourwithholding and/ormake anestimated tax payment MAKE ESTIMATED TAX PAYMENTS ADJUST YEAR BUNCHING DEDUCTIONS - END WITHHOLDING OR
tax planning strategies 11 EisnerAmper 2018 personal tax guide 12 to transfer that year’s appreciationto transfer that year’s out of your estate.The annual early in theyear tomakethese gifts your lifetimeexclusion.Also,try transfer substantial amounts out of your estate without using any of you can and her own separate accounts). By making these gifts, election, isfunded from or$15,000from his each spouse if the gift per individual($30,000ifyouare marriedanduseagift-splitting You are of allowedtomaketax-free gifts upto$15,000peryear, to your beneficiaries beforeexclusion gifts the end of the year. If youhavenotalready doneso,considermakingyourannual to besubjecttheAMT. of theoptions;however, keepinmindtonotexercise somuchas the AMT this year, you should consider accelerating the exercise year, youshoulddefertheexercise. Conversely, ifyouare notin expect to be in the AMT this year but do not project to be next you willhaveto pay ataxon that spread, generallyat28%. If you is ataxpreference itemforAMTpurposes.Ifyouare intheAMT, between the fair market value of the stock and your exercise price costlysincethespread A poorlytimedexercise of ISOscanbevery Review yourincentivestockoptionplans(“ISOs”)priortoyear-end. of theMedicare ContributionTax. potential taxbenefitof 43.4%in2017and40.8%2018inclusive the previously incomeata suspendedlossesoffsetting ordinary taxed at23.8%inclusiveof the Medicare ContributionTax withall you canreceive thebenefitof havingthelong-term capitalgain dispose of theactivity. Evenifthere isagainonthedisposition, sincealllossesbecomedeductiblewhenyou can besignificant types of activities,considerdisposingof theactivity. Thetaxsavings that are inexcess ofmaterially participate yourincome from these If youhavepassivelossesfrom abusinessinwhichyoudonot owner issuesanddepreciation deductions. discussioninthechapteronbusiness conditions.Seefurther certain consider contributingcapitaltotheentityormaking aloanunder already beentaxedon the income.Ifthere isabasislimitation, (“LLC”) orScorporationifyouhavetaxbasisintheentityand limited liabilitycompany tax-free distributionsfrom apartnership, by yourtax basisorthe “at risk” rules. Or, youmay be able to take belimited It maybepossibletodeductlossesthatwouldotherwise ESTATE PLANNING INCENTIVE STOCK OPTIONS PASSIVE LOSSES TAKE TAX UTILIZE BUSINESS LOSSES OR - FREE DISTRIBUTIONS
annually forthechainedCPI. Note: or mayneedfinancialassistance). (whomaybeinalowerincometaxbracket other familymembers taxesandtransfera great dealofavoid estateandgift wealthto retained annuitytrust,taxplanning strategiesmayenableyouto planningtechniques suchasagrantor with otherestateandgift as aresult of theTax CutsandJobsActof 2017.Whencombined exclusionhasbeendoubled for marriedcouples).Thelifetimegift tofullyutilizesuchexclusionof gifts $11.18million($22.36 youmaywishtomakeadditional exclusionin2018, lifetime gift the gift-splitting because of election. Furthermore, the increased Thisbenefitisdoubledifyouarein prioryears. marriedanduse in2018ofexclusion for gifts $15,000is anincrease from $14,000 for more details. the chapteronbusinessownerissues anddepreciation deductions prior to the purchase). the taxpayer did See not use the property as long (as ofproperty definition used to include property qualified the lastyearat20%bonus.TheTax CutsandJobsActexpandsthe decreases by20%eachyear, beginningin2023with2025being Theallowablebonuspercentage September27,2017. after service depreciation isincreased placedin from 50%to100%forproperty doesnotexceed$2,500,000.Bonus placedinservice if property allowable for full deduction in under 2018 Section is $1,000,000 179 in2018.Theamount equipment purchased andplacedinservice Tax benefitsare availableforimmediatedeductionof business Business Equipment credit December31. card billuntilafter is made,eventhoughyoumaynotactuallypaytheoutstanding you totakethedeductionincurrent yearwhenthecharge charge thepurchases onthecompany’s credit card. Thiswillallow your cashflowandwanttoacceleratedeductions,youcan business equipment. If youare concerned about placing inservice) significantifyouare purchasing considering (and be particularly that youexpecttobesubjectthehighertaxrate.Thiscan business expensesinorder torealize thedeductioninyear to nextyear. You alsohavetheoptiontoprepay ordeferpaying year-endyou should still delay billing until after to defer the tax rate, ratetobethesameasthisyear’s if youexpectnextyear’s to take advantage of the lower tax rate next year. Similarly, even inorder already performed of nextyearforservices until January you rate, can delay rate tax billing to be higher next than year’s If youare acash-basisbusinessandexpectyourcurrent year’s Timing of Income andDeductions TAX STRATEGIES FOR BUSINESS OWNERS The amount of the lifetime gift exclusion will be adjusted The amountof exclusionwillbeadjusted thelifetimegift certain financialgoalsandrealize taxsavings. certain Now, more thanever, effectiveplanningiscrucialifonetoachieve businesses. paid forin2019are allowabledeductionsin2018forcashbasis purchased. Credit card purchases made before year-end and of the finance chargesportion that relate to the business items the business,subjecttotracingrulesthatallowyoudeduct credit card. purchases These are treated to asadditionalloans purchase for your business(asanowner)usingthecompany’s Business interest alsoincludes financecharges onitemsthatyou your itemizeddeductions. even ifyouare a resident of astatethatlimitsordisallowsallof the business.Thisallowsyoutodeductallof yourbusinessinterest, deduction. The interest is adirect reduction of the income from “above-the-line” asbusinessinterest ratherthanasanitemized — you can deduct the interest in which you materially participate S corporation or LLC involved in atrade or business partnership, capitalrequirements the tofinance debtused — including of a expendituresIf youhavedebtthatcanbetracedtoyourbusiness Business Interest CONCLUSION
tax planning strategies 13 tax rate overview
The effective rate of federal tax on income ranges from 0% to 56% for the tax year 2017. For 2018, the top effective rate is reduced to just over 53%. • Contribution Tax onnetinvestmentincome)are: The most common federal tax rates (exclusive of the Medicare • • • • • • • • • • including: many factors, a rate of approximately depending on 56% in in 2018) (53% 2017 from notaxatallto you receive from yourdeductions—canvary The rateof taxyoupayonyourincome—aswellthebenefit adjusted forinflationinthefuture. withincomebelow$418,400in2017.Theseamountsare taxpayers with taxable income below $470,700 in2017andsingle taxpayers Bush-era tax cuts were extended and made permanent for married As aresult of theAmericanTaxpayer Relief Actof 2012(“ATRA”), the taxpayers. $479,000 formarriedfilingjointand$425,800 forsingleindividual dividends are with applicable taxable toincome taxpayers over the20% tax ratefornet long-termFor 2018, gainsandqualified filers). forsingle ($418,400 $470,700 over income taxable with 2017 inthe39.6%taxbracket,suchasformarriedtaxpayers taxpayers 20% fornetlong-term capitalgainsandqualifieddividendsfor Are credits availabletooffset yourtax? base? Is any of your income eligible to be excluded from your taxable 1,2018 throughrepealed December31, 2025. from January a result of theTax exemptionsare CutsandJobsAct,personal areFor 2017, exemptionsbeingphasedout? yourpersonal As 2018 through December31,2025. Tax Cuts andJobsAct, these itemsare1, suspended from January and totalitemizeddeductionsare beinglimited? As aresult of the For 2017,howmuchof yourmiscellaneousitemizeddeductions Is anyof yourincomesubjecttoself-employment tax? Are yousubjecttotheMedicare Wage Surcharge? income? Are yousubjecttotheMedicare ContributionTax onnetinvestment Are yousubjecttotheAMT? rate becauseof nettingrules? Are youlosingtheadvantageof thelowerlong-term capital gains dividend incomeornetlong-term capitalgainincome? qualifying the natureis income, What of ordinary Is it income? your • • • • income. Buthere are thebasicrules: is in discussed dividend and detail capital on chapter the in gains income. This to be taxed at lower maximum tax rates than ordinary Long-term capital gains and qualified dividend income are eligible 2018 formarriedfilingjointlyandsingletaxpayers. and incomein2017 the different taxbracketsthatapplytoordinary 1 shows investment income. For 2018, this rate drops to 40.8%. Chart high as43.4%, inclusiveof theMedicare Contribution Tax onnet incomeand,therefore, couldbetaxedatarateas as ordinary For 2017, net short-term capital gains are subject to the same rate or Scorporation. LLC income passingthrough to youfromordinary apartnership, Social Securitybenefits,alimony, andyourdistributiveshare of income, taxable retirement plan distributions, rental income, taxable dividend interestemployment income, income,nonqualifying andself- incomeprimarilyincludeswages,business Ordinary CAPITAL GAIN AND DIVIDEND INCOME RATES ORDINARY INCOME RATES Additional Medicare Tax (orHospitalInsuranceTax) paidbythose is 2.9% of all self-employment income. Also, there is another 0.9% all incomeearned foremployees.Fortheself-employed, therate of Medicare theFICAtaxremains portion on unchangedat1.45% incomelistedhereinfirst (12.4%forself-employed individuals).The FICA taxthatemployeespayremains unchangedat6.2%onthe 53% forself-employment of SocialSecurity portion income.The drops toprate the For2018, income. employment and to45% 2017 ($128,400 in 2018) is approximately 48% and 56% for self- $127,200ofThe 2017top rate for the first wages earned in withtaxableincomeover$500,000. taxpayers withtaxableincomeover$600,000andforsingle for marriedfilers income, such as short-term highest rate for ordinary capital gains For2018,the37% over $470,700and$418,400forsinglefilers. short-term with taxable income capitalgainsfor married taxpayers income,including 39.6%maximumrateforordinary For 2017, incomesubjecttotheAMT.28% forordinary regular taxandtheAMT—withseveralnotableexceptions tobe thresholds) for both the your (if taxable income exceeds certain Net long-term capitalgains are taxedatamaximum rateof 20% filingseparately). $125,000 formarriedtaxpayers earning more and than$200,000($250,000formarriedtaxpayers
tax rate overview 15 EisnerAmper 2018 personal tax guide 16 taxpayers filingashead taxpayers of household. as headof filingseparatelyand household.SeeAppendixCfordetailed2018tax rate schedules,includingtaxratesformarriedtaxpayers Note: 2017 FEDERAL TAX RATE SCHEDULES 2017 AND 2018 FEDERAL TAX RATE SCHEDULES $ 0 $ 0 Taxable Income Married Filing JointlyorQualifying Widow(er) tax rates for married taxpayers filing separately and taxpayers filing filing filingseparatelyandtaxpayers See AppendixBfordetailed2017tax rateschedules,includingtaxratesformarriedtaxpayers 233,350 470,700 418,400 416,700 416,700 191,650 153,100 75,900 37,950 91,900 18,650 9,325 $ 0 $ 0 Base Tax Single 131,628.00 121,505.25 120,910.25 112,728.00 46,643.75 52,222.50 29,752.50 10,452.50 18,713.75 5,226.25 1,865.00 932.50 Next Dollar) Marginal Tax Marginal Tax Rate (Taxon 39.6% 39.6% 35% 33% 28% 25% 35% 33% 28% 25% 15% 10% 15% 10% 2018 FEDERAL TAX RATE SCHEDULES $ 0 $ 0 Taxable Income Married Filing JointlyorQualifying Widow(er) 400,000 500,000 200,000 600,000 315,000 165,000 157,500 82,500 38,700 77,400 19,050 9,525 $ 0 $ 0 Base Tax Single 150,689.50 161,379.00 8,907.00 45,689.50 32,089.50 14,089.50 64,179.00 91,379.00 28,179.00 4,453.50 1,905.00 952.50 Next Dollar) Marginal Tax Marginal Tax Rate (Taxon chart 1 24% 24% 35% 32% 22% 35% 32% 22% 37% 37% 12% 10% 12% 10% to a highertaxable income base and frequently results in a greater regular taxrateof itusuallyapplies (37% for2018), 39.6%for2017 highest the lowerthan is income onordinary rate AMT the While term totheAMT. capitalgainsandqualifieddividends alsoapplies of 28%.Asmentionedabove,the15%or20%rateonnetlong- income subject totheAMTistaxed at amaximum rate Ordinary • **Includes 0.9%HospitalInsuranceTax income thresholds. foramountsabovecertain * Thetaxrateisactually2.9%,butonly 92.35%of self-employment incomeissubjecttotheMedicare Tax. ALTERNATIVE MINIMUM TAX investment incomethatmayalsoapplytodividendincome. There is an additional 3.8% Medicare Contribution Tax on net incometaxrates. corporations, are subjecttothe higherordinary dividends from a moneymarketfundornonqualifiedforeign forthepreferentialdo notqualify rateof (or20%),suchas 15% Dividendsthat and $418,400($425,800in2018)forsinglefilers). with taxable income over $470,700 ($479,000 in 2018) taxpayers rate thatappliestonetlong-term capitalgains(20%formarried and qualifiedforeign corporationsare taxedatthesame15% received dividends For 2017, from corporations domestic most term capitalgains. TaxContribution on net investment income, including net long- for more than12months. There isanadditional3.8%Medicare long-term capitalgainstreatment, youmusthaveheldtheasset some cases,theformer 15%ratemaystillapply. To benefitfrom discussed inthechapteroncapitalgainsanddividendincome.In SOCIAL SECURITY AND MEDICARE TAXES FOR 2017 AND 2018 Social Security2017 Medicare 2017 2018 2018 Maximum Income Subject toTax No limit No limit $128,400 $127,200 2.35%/No limit** 1.45%/No limit 2.35%/No limit** 1.45%/No limit 6.2%/$7,960.80 each 6.2%/$7,886.40 each Employer andEmployee Any excess of unearned income above $2,100 is then taxed at the free. istaxedatthechild’s for2017 Thenext$1,050 marginal rate. $1,050ofrate. For2017,thefirst thechild’s unearned incomeistax- parents’ highermarginal taxratetothechild’s generallylowertax incomefrom of the thatwouldshift income-producing property This is designedtolessen the effectivenessof intra-familytransfers student underage24,isgenerallytaxedattheparents’ taxrate. The unearned incomeof achildunderage19,orfull-time the AMTforamore detailed discussion. out threshold amounts have been increased. See the chapter on AMT.your phase exemption and exemption AMT the For2018, your AGI, since these deductions are not allowed in computing or youhavesignificantinvestmentexpensesinexcessof 2%of state withhighincometaxratesandreal estatetaxes,and/ tax. Thiswasespeciallytrueforthe2017taxyear, ifyouliveina income (see below). income (seebelow). also be subject to the Medicare Contribution Tax onnet investment the extent that rate applies to the parents’ income. The child may eligibleforthepreferentialincome is taxrateof or20%to 15% dividend income such as net long-term capital gains and qualifying wages, thatincomeistaxedatthechild’s marginal rate.Unearned the child’s). To theextentthatchildhasearned incomesuchas parents’ marginal rate(assumingtheparents’ rateishigherthan KIDDIE TAX Portion 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%/$15,921.60 12.4%/$15,772.80 Self-Employed chart
2
tax rate overview 17 EisnerAmper 2018 personal tax guide 18 $125,000 if married filing separate. The tax will apply to the lesser of lesser tothe apply will tax The separate. filing married if $125,000 widow(er)withdependentchild),$200,000ifsingle,and qualifying modifications) isinexcessof $250,000forajointreturn (and The additional3.8%taxwillapplyifyourAGI (withcertain beginningin2013. for years for a3.8%taxonnetinvestmentincomeof higherincometaxpayers The HealthCare andEducationReconciliationActof provided 2010 The threshold amountsare notindexedforinflation. married filing separate returns and $200,000 for all other taxpayers. of $250,000formarriedcouplesfilingjointreturns, $125,000for This taxappliestowagesand/orself-employment incomeinexcess An additional0.9%HospitalInsuranceTax appliestoearned income. the self-employment taxyoupay. primarily because you receive a deduction against AGI for 50% of and Medicare taxes). The reason there is not a greater spread is includingyouremployeesharefrom of wages(after SocialSecurity such income, compared to about 48% (43% for 2018)for income of for2018) ($128,400 $127,200 onthefirst 56% (53%for2018) effective taxrateonself-employment incomecanbeashigh employee’s of these taxes. As a result, portions for 2017, the federal and taxes almostdoublesbecauseyoupayboththeemployer’s If you are self-employed, your share of Social Security and Medicare subject totheMedicare ContributionTax. 2),butallearned incomeis Social Securitytaxislimited(seeChart Security and Medicare taxes. The amount of income subject to the Your wages and self-employment income are also subject to Social longer affectedbytheparent’s orsiblings’taxsituations. tax bracketsand rates. Therefore, the “kiddie tax” calculation is no of thechildisbeingtaxedatsingleindividual’sincome portion trusts andestates taxbrackets andrates, whereas the taxableearned of child’s The child. a atthe taxed unearnedis nettaxable income rates applicable to trusts andestates to the net unearned income andcapitalgains “kiddie tax”issimplifiedbyapplyingtheordinary through 2018 1, the 2025, December31, year beginningJanuary The Tax Cuts and Jobs Act has simplified the “kiddie tax.” From tax INVESTMENT INCOME MEDICARE CONTRIBUTION TAX ON NET MEDICARE WAGE SURTAX EMPLOYMENT TAXES are notindexedforinflation. Contribution Tax onnetinvestment income).Thethreshold amounts qualified dividendswillbe23.8%(20%plus3.8%additionalMedicare The maximumfederaltaxrateonlong-term capitalgainsand interest expenses. fees(over2%of AGI), andinvestment taxes, investment advisory income. Suchexpensesincludedirectly allocablestateandlocal income maybereduced byexpensesassociatedwithearning that instruments orcommodities.Theamountof gross investment from passive business activities andincome from trading infinancial interest, royalties, annuities, capitalgains, dividends, rents, income threshold amounts stated above. Net investment income includes your netinvestmentincomeorAGI inexcessof theapplicable result of theTax CutsandJobsAct. exemptioniseliminatedfromthe personal 2018through 2025asa at $384,000for However,2017. at $436,300 and forsingletaxpayers AGI over$261,500.Itcompletelyphasesoutformarriedtaxpayers withAGImarried taxpayers with over $313,800andsingletaxpayers of dependents. The 2017 PEP begins to phase out for your qualifying is$4,050foreach exemptionamount(“PEP”)for 2017 The personal Personal exemptions December 31,2025. through 2018 1, rules. Thisprovision issuspendedfrom January limit or80%of theitemizeddeductionssubjecttoreduction of the lesser 3% of AGI by which the amount exceeds a certain itemizeddeductionsare tobereduced by over $261,500.Certain with AGItaxpayers with AGI over $313,800and single taxpayers For 2017,the reduction of itemized deductions affects married Reduction of itemized deductions 1, 2018through December31,2025. deductions subjecttothe2%“haircut” are suspendedfrom January fees anddeductiblelegalexpenses.Miscellaneousitemized expenses, professional duesandsubscriptions,taxreturn preparation unreimbursed fees, business employee advisory investment include by 2%of yourAGI. Thedeductionssubjecttothe2%disallowance miscellaneous itemized deductions For 2017, you must reduce certain Reduction of itemized miscellaneous deductions PERSONAL EXEMPTIONS ITEMIZED DEDUCTIONS AND standard deductioninsteadof itemizeddeduction. standard deductionamounts,more maybeclaimingthe taxpayers As aresult of thechangesinitemized deductionsandtheincreased 1,2026. December31,2017andbefore January year after the itemizeddeductionsare notsubjecttophaseoutforanytax deductions thatare subjectto2% AGI floorlimitations.Inaddition, taxes paid. It also temporarily eliminates all miscellaneous itemized actual stateandlocalsalestaxpaidortheincome separately. havetheoptiontodeducteither Thetaxpayers of and$5,000formarriedfiling $10,000formarriedorsinglefilers taxes to amaximum the nonbusiness state/local taxes andproperty fromdeductions for tax years through 2018 2025,such as limiting The Tax Cuts and Jobs Act hasmade modifications to itemized FOR 2018 AND BEYOND
tax rate overview 19 estimated tax requirements
A penalty will apply if a taxpayer fails to make sufficient estimated tax payments during the year. The appropriate combination of quarterly estimated tax payments and withholdings on wages (and certain other income) can enable the taxpayer to avoid this penalty. Proper tax planning may help you minimize the required estimated tax payments and avoid the underpayment penalty. The annualized income The annualized installment method is apay-as-you-go You mayreceiveand income, bonuses income,suchasbusiness (or 100% if applicable) of your actual prior year tax for the quarter ofif applicable) (or 100% year taxforthequarter actual prior your tax tip • 2017 and2018: beginningin the following changescommencing fortaxyears When estimatingyourincometaxliability, makesure toconsider withholding taxestobeappliedevenlythroughout theyear. installment method(seeTax Tip4).Alternatively, youmayincrease be possible to avoid this situation by using the annualized income It may tomakeuptheunderpayment. taxinlaterquarters pay the evenif you still owethepenaltyforanearlierduedateshortage, estimated taxes. Youwithholding tax and timely paid quarterly may basiscombiningthe The penaltyisdetermined onaquarterly • • • timely paidestimatedtaxpayments)isthelesserof: taxes if the amount of taxes you pay (through withholding and/or You willnotowethepenaltyforunderpaymentof estimated your quarterly estimated tax payments by paying the taxbased estimatedtaxpaymentsbypaying your quarterly year, orpaydeductibleexpensesearlierin the year, you canreduce pay lessestimatedtaxthanthesafe harbormethodbasedon110% more income in the latter ofpart 2018 than in the first months of the estimated taxpayments. method tocalculatetherequired quarterly WHAT’S NEW FOR 2017 AND 2018? AND 2017 FOR NEW WHAT’S AVOIDING THE PENALTY on actual quarterly taxprojections. Thismethod provides awayto on actualquarterly capital gains,unevenlythroughout theyear. If you expect to earn income taxratesremained at10,15,25,28,33,35and39.6%for 2017. in Tax stable remained rates ized incomeinstallmentmethod(seeTax Tip4). 90% of youractualtaxforthecurrent yearbasedontheannual was $150,000orless,$75,000ifmarriedfilingseparately), harbor exception (100% if the AGI return on your prioryear’s 110% of taxreturn thetaxonyourprioryear’s basedonasafe 90% of theactualtaxshownonyourcurrent taxreturn, year’s or 4 UNDERPAYMENT OF ESTIMATED TAX PENALTY REDUCE YOUR QUARTERLY ESTIMATES AND ELIMINATE THE USE THE ANNUALIZED INCOME INSTALLMENT METHOD TO For 2017 the individual theindividual For2017 - You canalsousetheannualized incomemethodtoreduce a accordingly. you mayincrease ordecrease the future estimated tax payments with lower income.If your income changes inasubsequent quarter, based on110%of your2017taxor90% of youractual 2018tax potential penaltyonyour2018return. Ifthesafeharborexception eliminate thepenalty. income methodwhenpreparing your2018 return toreduce or does noteliminatethepenalty, you canstillusetheannualized • • • • if marriedfilingseparately. exemptionamountfor Thepersonal $287,650 ifheadof household;$261,500ifsingle;or$156,900 withAGItaxpayers atorbelow$313,800 ifmarriedfilingjointly; exemptionamountremained2017, thepersonal at$4,050for Personal exemption phaseouts increased in 2017. ried filingseparately. head of household;$500,000forsingle;and$300,000mar thresholds are $600,000for married filing jointly; $500,000for and qualifieddividendswillremain at20%.The2018applicable income.Thetoprateforlong-term capitalgains 37% forordinary individual income taxrates will beat 10,12,22,24, 32,35and 2018. in rates tax New $235,350 formarriedfilingseparately. jointly; $444,550 for head of household; $418,400 for single; and amounts forthe2017toptaxratesare: $470,700formarriedfiling qualified dividends remained at 20%.Theapplicable threshold income.Thetoprateforlong-term capitalgainsand ordinary amounts expire after December 31, 2025. December31,2025. amounts expire after increased The 2018. standard after beginning deduction tax years deduction willbeindexedforinflationusingtheChainedCPIin Theamountofchild, and$12,000forsinglefilers. thestandard $18,000 for unmarried individuals withatleastonequalifying Act increased thestandard deductionto$24,000forjointfilers; Standard deduction increased in 2018. result of theTax CutsandJobsAct. 2026, 1, January before and 2017, 31, December after Personal exemptions are completely repealed for tax years withAGItaxpayers abovetheseamounts maybereduced. For 2018 and subsequent years, the the For 2018 and subsequent years, The Tax CutsandJobs For tax year For tax year as a asa -
estimated tax requirements 21 EisnerAmper 2018 personal tax guide 22 • • • • • 1. Modified AGI abovetheselevelsgraduallyphasesoutthecredit, AGI must be less than $56,000($112,000 if married filing jointly). in order to claim the maximum lifetime learning credit, modified increased. limits income credit learning Lifetime withholding. tion isincreased to$128,400.There isnochangeinMedicare withheld attherateof 6.2%.For2018,theSocialSecuritylimita ee’s wagesuptotheSocialSecuritylimitationof $127,200were Increase in employee’s share of payroll tax. and $54,700formarriedfilingseparately. amounts are $70,300forsingles,$109,400marriedfilingjointly, ing jointlyand$42,250ifmarriedfilingseparately. For2018,the $84,500formarriedfil to $54,300in2017forsingletaxpayers, amount, which is indexed annuallyfor inflation, hasincreased increased. amount exemption AMT 1,2026. is suspendeduntilJanuary on interest expense.Theoveralllimitation onitemized deductions 2025 regardless of when the debt was incurred. See the chapter December 31, back to $1million after 2017. The limitation reverts acquisition indebtedness of December 15, $750,000incurred after interest deduction isreduced with respectmortgage to home on the last day of the tax year for which such tax isimposed. The December31,2017are treatedtaxes beginningafter asifpaid 1,2018relating tostateorlocalincome beginning before January ($5,000 for married filing separately)). Amounts paidinatax year taxes(individualsmay electtodeductup$10,000 property to the2%floor, aswellstateandlocalincometaxesreal suspends allmiscellaneous itemized deductions that are subject 31, 2017 and before 1, January 2026. December after years tax for limited deductions Itemized result of PATH. have beenreinstated retroactively andbeyond asa for2015 “extenders” 2014. However, hadexpired after these provisions Taxextended. benefits ($114,000 ifmarriedfilingjointly). For2018,theamountisincreased married jointfilers). to$57,000 with nocredit available for AGI inexcess of $66,000($132,000for made in taxable years beginning after December31,2014. beginning after made intaxableyears has been made permanent andiseffective for distributions theminimumdistributionrequirements.satisfy Thisprovision by ataxpayerage70 distribution from anIRA account to apublic charity ismade a maximumof $100,000 per taxpayer will betaxfree ifthe IRA distributionstoaqualifiedcharitableorganization. Upto ½ Some special tax incentives known as Some special tax incentivesknownas orolder. This specialdistribution will TheTax CutsandJobsAct The AMT exemption For 2017,employ For 2017, For 2017, - - - • • • • your penaltybytakingoneormore of thefollowingactions: underpayment of estimatedtax,youcanstillreduce oreliminate If yourealize before year-end thatyoumayowethepenaltyfor estimatedtaxinstallment. quarter orallof topaysome notneed you may test, 90% yourfourth If youryear-end planningindicatesthatyou have already metthe OTHER TAX CONSIDERATIONS YEAR 2. 3. 3. 2. 1. separately) and$200,000foranyotherfilingstatus. spouse($125,000formarriedfiling orasurviving for jointfilers over the threshold amount. The threshold amount is$250,000 the lesserof netinvestmentincomeortheexcessof modifiedAGI Net Investment Income Tax (NIIT). any otherfilingstatus($125,000formarriedseparately). threshold of $250,000formarriedfilingjointlyand$200,000 income. ThisadditionalMedicare taxappliestoincomeoverthe Medicare taxappliestoMedicare wagesandself-employment Additional Medicare Tax on Earned Income. for the fourth quarter.for thefourth Increase your estimated tax payment to eliminate the penalty to achievethis: tax penaltyattributabletoapriorquarter. There are severalways before tax withholding year-end underpayment the tominimize evenly throughout the year, an individual may increase his or her tax paidthrough withholdingswillbetreated tohavebeenpaid Pay more tax through or salary other withholdings.
ods thisyear. Increase your W-2 withholding tax for the remaining pay peri Work Opportunity taxcreditWork for unemployed veterans extended Opportunity 2019. through beginning on or before taxable years December 31, fied todoso. Withhold taxfrom pensionorIRAdistributionsifyouare quali lion) atyear-end. (for 2017)or37%2018)rateifthebonusexceeds$1mil Withhold more than the required bonusrate of 25%(39.6% - END PLANNING ACTIONS There is a surtax of There 3.8%on isasurtax A 0.9% additional A 0.9% additional Since any Since any - - - apply tostateandlocalincometaxpenalties. The foregoing discussionof taxplanningsuggestionsmayalso rates, itmaybemore costefficienttojustpaythepenalty. the case inrecent andthe cash can be invested at higher years) penalty rates. If the penalty rates are relatively low (which hasbeen of year-endAs part planning,youshouldconsider the current want themoneyinatax-deferred retirement account). youstill assuming the netamount(i.e., not just amount withdrawn, held, youwill need toreplenish the IRAwithin 60dayswith the gross Caution: • • STATE TAX CONSIDERATIONS income installmentmethod. annualized byusingthe Eliminate ormitigatetheunderpayment underpayment. the quarterly year-end taxplanningstrategiespresented inthisguidetoreduce desirable)byusingthe Lower yourtaxableincome(ifotherwise
If you withdraw money from an IRA and have taxes with -
estimated tax requirements 23 alternative minimum tax
The AMT was designed to prevent wealthy taxpayers from using tax loopholes to avoid paying taxes. Because historically the exemption from the AMT had not been automatically adjusted for inflation and certain common deductions were not allowed in computing the AMT, millions of middle class taxpayers were finding themselves subject to the AMT. However, Congress provided some annual relief in the recent past by installing “AMT patches” which increased the AMT exemption.
ATRA permanently increased the AMT exemption beginning in 2012 and provided for indexing of the exemption for 2013 and beyond. Since ATRA increased income tax rates for certain taxpayers beginning in 2013, fewer people may be subject to the AMT while paying a higher overall rate. Proper planning requires a two-year analysis in order to determine the true benefits you can achieve.
The Tax Cuts and Jobs Act of 2017 has also impacted the AMT. For 2017,youare allowedanAMTexemptionof upto$84,500if Beginning in 2013, the exemption amount is indexed for inflation. the samemaximum20%rateforbothAMTandregular tax. are dividends qualified Net long-term and gains capital taxedat AMTI of $93,900 or less. to married filing separately with ordinary andunmarriedindividuals,whereasfilers the26%taxrateapplies $187,800 orlessissubjecttoataxrateof 26%formarriedjoint AMTIoffiling separatelynetof anyallowable exclusion.Ordinary for joint returns andunmarried individualsand$93,900ifmarried AMTIinexcess of $187,800 maximum taxrateappliestoordinary The AMTistaxedattworates:26%and28%.For2017,the28% 2010isstill subject to thebonds issued before AMT. 2009andafter therefore, notsubjecttotheAMT. However, theinterest onsuch are 2010 and 2009 in itemof an longer no preference tax and, Tax-exempt interest onspecified privateactivitybondsissued qualified dividendsmaytriggertheAMT. Tax Tip6explainshowstatetaxesonlong-term capitalgainsand Tax Tip5demonstratesthehighcostof beingintheAMT. the fairmarketvalueexceedsexercise price. One exampleistheexercise of incentivestockoptionstotheextent exempt for regular tax purposes but taxable for AMT purposes. regular forms Andsome of purposes. AMT taxand are income such asdepreciation onbusinessproperty, may bedifferent for not deductiblewhencomputingyourAMTI.Otherdeductions, real and taxes income local and state are 2017), (for taxes estate deductions,suchas illustrates,certain your AMTI.Asthechart to calculate 3shows most of the adjustments necessary Chart regular tax.You willpaythehigherof theregular taxortheAMT. maximum tax rate, yourAMT liability may be higher than your even though the AMT maximum tax rate is less than the regular regular tax are not deductible or allowable in computing So, AMTI. Many deductionsandtaxcredits thatare usedtocalculateyour to arriveatyouralternative minimumtaxableincome(“AMTI”). point,adjustmentsare made regular taxableincomeasastarting The AMTiscomputedseparatelyfrom yourregular tax.Usingyour AMT EXEMPTION AMT RATES PRIVATE ACTIVITY BOND INTEREST WHAT TRIGGERS THE AMT? In addition, for tax years beginning after December 31, 2017 and December31,2017 and beginning after In addition, fortax years head of and $54,700 for married filing separately. household filers; spouses;$70,300forsingleor married filingjointlyorsurviving increased for throughindividuals effective2018 for 2025:$109,400 the regular taxandtheAMT. TheAMTexemptionamountsare For 2018,theTax closesthegapbetween CutsandJobsActfurther range, yourmarginal AMT tax rate can be ashigh35%for 2017. Be advisedthatwhileyouare inthe AMT exemptionphaseout AMTI abovethethreshold filingstatus. amount forthetaxpayer’s dollarof The AMTexemptionamountisreduced 25%forevery of household) or $249,450 (married filing separately) for 2017. reaches $498,900 (marriedfilingjointly),$337,900(singleorhead areExemptions AMTI their when fortaxpayers out fullyphased or head of household, or $80,450 for married filing separately. phase out at $160,900for married filing jointly, $120,700for single or $42,250 if married filing separately. The exemption begins to married filing jointly, $54,300 if filing single or head of household • expect to be nextyear: You are subject to the AMT inthe current year, but don’t possible AMTscenariostoplanfor: your overall tax liability. 3to guide you,here are Using Chart three subject totheAMT. Thiscanenableyoutotake stepstoreduce Tax planningcanhelpyoudetermine whether ornotyouwillbe itemizeddeductions. of certain 2017 andbefore 2026,aswell astheeliminationorscalingback of theAMTexemptionandthreshold after amountsfortaxyears willbesubjecttotheAMTdueincreaseFewer taxpayers $1forAMTIoverthethreshold amount. phase-out 25%of every $718,800 for married filing separately. The exemption continues to ing spouses;$781,200forsingleorheadof and householdfilers; the AMTIreaches formarriedfilingjointlyorsurviv $1,437,600 The exemption 2018 amounts are completely phased-out when are subjecttoinflationadjustmentannually. ried filing separately). TheAMT exemption andphase outamounts (single,headofand $500,000forallotherfilers householdormar spouses; follows: $1millionformarriedfilingjointlyandsurviving 2026, 1, the phase-out exemptions amounts are before as January PLANNING FORPLANNING AMT SCENARIOS and onlydeductibleupto$10,000 forregular taxpurposes. taxesare nolongerdeductibleforAMTpurposes and property ible forAMTpurposes.Notethat stateandlocalincometaxes Defer untilthefollowingyearany deductionsthatare notdeduct - - -
alternative minimum tax 25 EisnerAmper 2018 personal tax guide 26 tax tip 31, 2017,youpaidthefollowingexpenses: Failing toconsidertheAMTandincorrectly timingthepaymentof someof yourdeductionscanbecostly. Let’s saythatbefore December AMT calculation. Caveat: charitable contributions. Therefore, youlostthefullbenefitfrom theprepayment of yourstateestimatedtaxand real estate taxes,aswellsome of thebenefit of prepaying Because youmustpaythehigherof thetwotaxes,yourtaxwillbe$39,991—that’s $20,713of AMTtaxinexcessof yourregular tax. net investmentincome) Total federaltax(includingMedicare ContributionTaxon Medicare ContributionTaxonnetinvestmentincome Federal Tax Taxable Income Personal phaseouts) exemptions(marriedwith2children) (after Net ItemizedDeductions 3% AGI Floor fees(2%of AGI)Disallowance of advisory Investment advisoryfees Contributions Mortgage interest Real estatetaxes State &localincometaxes Total Income Long-term capitalgains Qualifying dividends Earned income • • • $20,000 incharitablecontributionsthatyoucouldhavedelayeduntil2018. $10,000 inreal estatetaxes(taxwasassesseddueinJanuary, 2018),and 15,2018), 2017taxpayment(dueJanuary quarter $15,000 stateestimatedfourth 5 Keep inmindchangeslawunder theTax CutsandJobsAct thatare andhowthatcould impactthe effectiveforthe2018-2025 taxyears, THE HIGH COST OF THE AMT Income Deductions
Year-End Payments Regular Tax After $ 19,278 $ 200,000 $ $ 170,726 $ $ 224,414 $ $ 14,224 $ $ 400,000 $ 100,000 175,000 (2,586) (8,000) 40,000 25,000 25,000 50,000 20,000 5,054 4,860
$ $ 310,000 $ 0 $ 34,937 $ $ 90,000 $ 200,000 $ $ 39,991 $ 400,000 175,000 40,000 25,000 50,000 5,054 AMT 0 0 0 0 0 This isnolongerthecaseasaresult of theTax CutsandJobsAct. Therefore,than the regular theAMTtaxableincomewashigher taxable income. Because state and local taxes are no longera deduction incom when the taxpayer paidthe state andlocaltaxesonthe income, regular tax purposes andfor the AMT. The reason for this isthat In prior years, long-term capital gains and qualifying dividendin long-term capital gainsandqualifying In prioryears, even thoughbothwere taxedatthemaximumtaxrateoffor 20% come mayhaveresulted inthetaxpayerbeingsubjecttoAMT, it reduced theregulartax liability, butdidnotreduce theAMTI. • be subject to theAMTnextyear: be taxed attheregular tax rate of 37%(2018)but expect to You are not subject to the AMT in the current year and will • • • • • tax tip tax benefitnextyear. get thefulltaxbenefitincurrent yearratherthanlosethe Prepay deductions that are not deductible for AMTpurposes to be atalowerrate. Take IRAorretirement plandistributionsifinAMT; taxpaidmay from theexercise of ISOs. chapter that may offer some credit relief for the AMT resulting chapter onstockoptions.Also,seetherulediscussedlaterinthis dispositionasdiscussedinthe options, consideradisqualifying market valueandtheexercise price.Ifyoualready exercised the could winduppayingtheAMTonspread betweenthefair Delay exercising any incentive stock options (“ISOs”) since you beheldlongterm. next yearorwouldotherwise lower AMTrates,unlessthesegainswilloffset short-term losses Realize netshort-term capitalgainsthisyear tobenefitfrom the the lowerAMTrate. income into the current year to benefit fromAccelerate ordinary for AMTpurposes. evenifthedeductionsare notallowed to lowerthe3.8%surtax are directly canbeused and income allocabletonetinvestment etc. fees, investment paid, taxes local stateand as such Expenses taking such deductions inthe current year, even ifintheAMT. when computingnetinvestmentincomemaywanttoconsider for AMTbutconsidered a direct expensethatcanbededucted Taxpayers withlarge itemizeddeductionsthatare disallowed 6 NO LONGER WILL PUT YOU INTO THE AMT STARTING IN 2018 LONG - TERM CAPITAL GAINS AND QUALIFYING DIVIDEND INCOME - - • You are notsubject to theAMTineitheryear: • • • are deferralitems. 5 wouldnotcreate anAMTcredit sincenoneof theadjustments AMT credit from thesedeductions.TheAMTillustrationinTax Tip and investment fees, are called exclusion items. You cannot get an of ISOs. deductions, Other such as state and local income taxes passive activity adjustments andthe tax preference onthe exercise The mostcommondeferralitemsare depreciation adjustments, based on“deferral items”thatcontributedtoyourAMTliability. your regular taxinasubsequentyear. You foran AMT credit qualify If youpaytheAMT, youmaybeentitledtoataxcredit against AMT CREDIT CAN REDUCE FUTURE TAXES Tax onnetinvestment income,considerationshouldbegivento AMT. This provision is in effect for the tax 2018 years through 2025. $10,000), it willmostlikelynotcauseataxpayertobesubjectthe $10,000), Keep in mindthatifyouare subject to the Medicare Contribution purposes. State and localtaxes onnet investment income can be expenses thatarepaying at netinvestment allocableinarriving the regularputing incometax(exceptfortheelectiontodeduct income even iftheyare notdeductible forregular taxandAMT deducted inthecomputationof theMedicare ContributionTax. planning strategiesforyear-end planningideasthatcanminimize regular tax liability in the current year. Turn to the chapter on tax You have avoided the AMT, but youstill want to reduce your shares atthetimeof exercise over theexercise price. result inanAMTliability based onthe fair market value of the regular taxandtheAMT. Inthefollowingyear, anyexercises will this year up to the extent of the break-even point between your shares before theendof theyear. Theexercise willbetax-free Review yourISOawards todetermine ifyoucanexercise any lowing yeartotakeadvantageof thelowerAMTrate. income, suchasbonusesifpossible,tothefol Defer ordinary tax rateinthecurrent year. charitable contributions,to gainthebenefitof thehigherordinary Prepay deductionsthat are deductibleagainsttheAMT, suchas your taxexposure. -
alternative minimum tax 27 EisnerAmper 2018 personal tax guide 28 and depreciation deductions. depreciation.for bonus ownerissues business on chapter Seethe will be the same under either tax computation. Special rules apply purposes. However, overthelifeof theasset,totaldepreciation asset life and method for AMT purposes then used for regular tax difference isadeferralitem ifitiscalculatedusingadifferent regular tax andAMT purposes. As anexample, adepreciation over time you will end up with the same total deductions for both The reason adeductionisclassified asadeferralitemisbecause * Passive activityadjustments small businessstock assets, includingsaleofGain orlossondispositionof certain Depreciation (subjecttodifferent AMTrules) value exceedstheexercise price) Exercise of ISOS(totheextentfairmarket Medical expensesinexcessof 7.5%of AGI* residence thatsecures theloanisstilldeductible. Note: deductible asinterest onotherdebt,suchasinvestmentinterest. but thedebtissubjecttointerest tracingrulestodetermine if interest, December15,2017isnotdeductibleasmortgage into after Note: • • interest on: Mortgage either AMTorregular taxpurposes) Employee businessexpenses(W-2)(nolongerdeductiblefor AMT orregular taxpurposes) fees(nolongerdeductibleforeither Investment advisory Charitable contributions Investment interest expense (state orlocalsalestaxexciseonpurchase) Qualified Motor Vehicle Tax taxes estate real and income local and state combined for canelectupto$10,000($5,000MFS)Real estatetaxes(personal); real estate taxes $10,000 ($5,000MFS) forcombinedstateandlocalincome State andlocalincometaxes(non-business);canelectupto Description Net operatinglosses(subjecttodifferent AMT rules) 2010 Interest onprivateactivitybondsissuedbefore 2009andafter AMT VS. TAX REGULAR January 1,2019. January For regular andalternative December31,2016and before minimumtaxpurposes,the medicalexpensethreshold is7.5% foranytaxyearbeginningafter purposes) residence (nolongerdeductibleforeitherAMTorregular tax Equity debtnotusedtobuy, buildorsubstantiallyimprove your buy, build,orimprove yourresidence Qualified acquisitionandequitydebtupto$750,000used Equity debtusedtobuy, buildorsubstantiallyimprove the Interest onacquisitiondebtinexcessof $750,000entered — STARTING IN 2018
Deductible inComputing Regular Tax • • • • • • •
AMT • • • •
Taxable for AMT Only •
Other AMT Differences chart 3 • • • • •
alternative minimum tax 29 business owner issues and depreciation deductions
Individuals who are owners of a business, whether as sole proprietors or through a partnership, limited liability company or S corporation, have specific tax planning opportunities available to them. taxable yearexceeded$2,030,000. duringthe by theamount by whichthecostof property qualifying taxable year. The $510,000 amount was reduced (but not below zero) forthe $510,000 of placedinservice thecostof property qualifying For 2017,theSection179smallbusiness expensinglimitationwas EQUIPMENT FORBUSINESS EXPENSING FIRST-YEAR income andthe0.9%HealthInsuranceTax onearned income. the additional 3.8% Medicare Contribution Tax on net investment Caution: the SocialSecuritytaxthatyoupay. is below$127,200in2017($128,4002018),youcanalsoreduce employment taxes. If thetotalof self-employment income plus wages to defer the 2.9% Medicare component ofis the opportunity self- Another advantageof deferringincome orprepaying expenses isdifferent from the credit cardservices company.) year. (The credit card rule only applies where the seller of the goods/ bill containingthosecredit of card charges thefollowing inJanuary when thecharge ismade,eventhoughyoumayactuallypaythe card. Thismethod allows youto take adeduction inthe current year accelerate thebusiness’s deductionsbycharging themonacredit as thenextsectionaddresses. Ifcashflowisaconcern, youcan business equipment, sidering purchasing (and placing in service) significant ifyouare con tax rate.Thischoicecanbeparticularly intheyearyouexpecttobesubjecthigher deduction occurs Similarly, youcanprepay ordeferpayingbusinessexpensessothe advantage of thelowertaxrate. can acceleratebillingandcollectionsintothecurrent yeartotake current yearbutisnotexpectedtoapplyinthefollowingyear, you higher taxbracketinthefollowingyear, oriftheAMTappliesin ring thetaxuntilnextyear. Alternatively, ifyouexpecttobeina thereby already defer performed, of thefollowingyearforservices If youare in acash-basisbusiness,youcandelaybillinguntilJanuary TIMING OFINCOME ANDDEDUCTIONS are subjecttothe2%floor issuspended. 1, 2026,thedeductionformiscellaneousitemizeddeductionsthat December31,2017andbefore January beginningafter for taxyears limitations anddisallowances.Thisisespeciallysignificantgiventhat than be characterized asitemized deductions, subject tovarious self-employed person’s offset can deductions business AGI, rather available.Unlikeasalariedemployee, tax planningopportunities LLC, through or S corporation, may have additional a partnership, A self-employed individual,or owner of an operatingbusiness TAX ADVANTAGES FOR BUSINESS OWNERS
It is important to consider the impact of the imposition of It is important - - Under theTax CutsandJobsAct,qualifiedleaseholdimprovement in2017. 15-year straightlinecostrecovery improvements, and qualifiedretail improvements are still eligible for Qualified leaseholdimprovements, qualifiedrestaurant buildingsand units. heating fied retail alongwithairconditioningand improvement property) improvement property, and quali qualified restaurant property software andqualified (e.g., realqualified leasehold property of alsoincludescomputer atradeorbusiness.Qualifiedproperty purchased is which conduct active the in foruse property sonal isdefinedasdepreciable tangibleper For 2017,qualifiedproperty and rounded tothenext $10,000. 2018, these amounts are indexed for inflation beginning after years and the phase-out threshold amount is increased to $2.5 million. For a taxpayermay expenseunderSection179isincreased to$1million December31,2017,themaximumamount beginningafter For years enlarge thebuilding,norcanitbeanelevator, escalator orinternal improvement qualified The cannot service. in placed first was ing the year the build after non-residential real estate placed inservice of thebuildingwhichis includestheinteriorportion ment property improvement property. Underthepre-Act rules,qualifiedimprove equipment, furniture and fixtures, computersoftware andqualified periodof This includes lessthan 20 years. witharecovery property Prior to the Act, bonusdepreciation was available for eligible before purchase. the taxpayerdidnotuseproperty the definition of to include used property, qualified property as long change from theAct istheexpansionof 20% bonus.Animportant 20% each year, beginning in 2023 with2026 being thelast year at 50% bonusrate.Theallowablepercentage decreases by to take100%bonusdepreciation ortoelectapplytheoriginal 27, 2017andbefore havetheoption December31,2017,taxpayers September after placed inservice December 31,2022.For property through September27,2017 after placeinservice for property Jobs Act, the bonus depreciation percentage is increased to 100% through UndertheTax September26,2017. in service Cutsand The bonusdepreciation placed percentage is50%forproperty BONUS DEPRECIATION remaining basisof theassetisdepreciable underthenormal rules. is made is reduced by the amount of the section 179 deduction. The Observation: alarm systems andsecurity systems to the list of property. qualifying ventilation and air-conditioning property, fire protection systems, qualified improvement property. TheActalsoaddsroofs, heating, of havenowbeencombinedintothesinglecategory ment property property, and qualified retail qualified restaurant improve property The basis of property for which a section 179 election The basisof forwhichasection179election property - - - - -
business owner issues and depreciation deductions 31 EisnerAmper 2018 personal tax guide 32 The limitation appliestointerest expenseincurred inconnection with more generous to taxpayers. TheinitialEBITDA formula is anddepletion(“EBIT”). amortization 2021, the earnings limitation takes into account onlydepreciation, and depletion (“EBITDA”) andfloor planfinancing interest. After income” –earnings before interest, taxes,depreciation, amortization business interest income,30%of thebusiness’s “adjustedtaxable The Actlimits thedeductionfornetinterest expensestothesumof 2017, thefulldeductionof business interest ispermitted. The interest is a direct reduction of the business’s income and, in purchased. ofof thefinancecharges thatportion relating tothebusinessitems to thebusiness,subjecttracingruleswhichpermit adeduction using a credit card. These purchases are treated as additional loans finance charges onitemswhichanownerpurchases forthebusiness rather thananitemizeddeduction.Businessinterest alsoincludes —youcandeducttheinterest asabusinessexpense, participate tion orLLC involvedinatradeorbusinesswhichyoumaterially used tofinance the capital requirements Scorpora of apartnership, If youhavedebttracedtobusinessexpenditures —includingdebt BUSINESS INTEREST the yearagainstregular taxliability. credit forthetaxyearoveramountof thecredit allowablefor beginningin2021)ofto 50%(100%fortaxyears theexcessof the prior-year minimumcredit wouldberefundable inanamountequal tax liability. 2017andbefore 2022,the beginningafter Fortaxyears Prior-year minimumtaxcredit canstilloffset regular thetaxpayer’s place of bonusdepreciation. to claim prior-year opportunity taxpayer’s minimum tax credits in elimination of the corporate AMT, the Act also repeals a corporate AMT credits inlieuof bonusdepreciation for2017.Inviewof the cancontinuetoelectacceleratetheuseof Corporate taxpayers passenger automobiles. The Act retains the first-year depreciation amount of $8,000 for to maintaineligibilityforbonusdepreciation. future technicalcorrections shouldincludeaddingthe15-yearlife but tax law specialists have commented that or39years 15 years unclear, underthenewlaw, whetherthe lifeof classis thisproperty television, andlivetheatricalproduction property. Itispresently the 100% bonus depreciation deduction to include qualified film, The Actexpandedthedefinitionof eligiblefor qualifiedproperty is eligiblefor15-yearor39-yeardepreciation. offramework. The remaining the above qualified property portion - office deduction: Generally, youmustmeet tworequirements forthehome toqualify resulting from yourhomeoffice deductions. that willprevent youfrom deductinganetlossfrom yourbusiness limitation overall toan subject is but both renters homeowners, and repairs anddepreciation. Thehomeoffice deductionisavailableto interest, rent,estate taxes, mortgage utilities, insurance, painting, of thecostsofthe businessportion runningyourhome,suchasreal of maybeabletodeduct you forbusiness, yourhome part use If you HOME OFFICE DEDUCTIONS nesses withaverageannualgross receipts of $25millionorless. industries are exempt fromCertain thislimitation, asare small busi limitation isappliedattheentitylevel,ratherthanownerlevel. indefinitely.can becarriedforward Forpass-through entities,the debt.Anyinterest disallowed andunrelated-party both related-party Schedule A(subjecttolimitations undertheTax CutsandJobsAct) home-relatedfeet; itemizeddeductionsare claimedinfullon square footusedforthebusiness,uptoamaximumof 300square Under thestreamlined option,thestandard deductionis$5per both methods,buttherecordkeeping andcalculationissimplified. deduction. Therequirements forthedeductionremain thesamefor Taxpayers can choose a simplified option to calculate the home office interest, arequalified homenot subject mortgage to these limitations. deductible,such asreal estatetaxesand would havebeenotherwise but are subject to limitations calculated for that year. which Expenses home. Unuseddeductionsare carriedovertothesubsequentyear ties) are limitedtothegross incomederivedfrom theuseof the of homeinsuranceandutili business (suchastheportion Expenses thatare deductibleonlybecausethehomeisusedfor the discussioninchapteronprincipalresidence saleandrental. attributable toyourhome office isnoteligiblefor thisexclusion.See of the principalresidence thegain willbelimitedbecausetheportion dence, yourabilitytoexcludeallof thetaxablegainonsaleof If youdeductdepreciation forahomeoffice inyourprincipalresi • • is nootherfixedlocationwhere youcanconducttheseactivities. administrative ormanagementactivitiesof abusinessandthere requirement canbesatisfiedifthehomeoffice isusedforthe The home office must be your principal place of business. This used onlyfortradeorbusinessactivities. regular use.“Exclusiveuse”meansaspecificarea of yourhomeis a tradeorbusiness.Incidentaloccasionalbusinessuseisnot You of yourhomeregularly mustusepart andexclusivelyfor - - - your spouse,oranyplanmaintained byanyemployerof your sidized health plan maintained by any employer of or of yours inanysub eligibletoparticipate the taxpayerisnototherwise Note: limitations.Medicare forthisdeduction. premiums alsoqualify certain care insurancepoliciesasself-employed healthinsurancesubjectto tion. You can also deduct the premiums paid for eligible long-term more-than-2% shareholder who receives wages from anScorpora receiving guaranteed payments, or a a limited partner partnership, the taxyear. ina This deductionappliesifyouare ageneral partner dents, andanyof yourchildren under the age of 27asof the end of insurance premiums youpayforyourself, yourspouse,depen As aself-employed individual,youcan deduct 100% of the health DEDUCTION SELF-EMPLOYED HEALTH INSURANCE “opting out”of theexpenseelection. on atimelyfiledreturn (includingextensions)willbe considered the organization necessary.is costs Affirmatively electing to amortize tized over180months.Expensingisautomaticandnoformal election by an amount which exceeds $50,000). The excess must be amor A taxpayermayexpenseupto$5,000of organization costs(reduced ORGANIZATION COSTS over180months. Capitalized start-up costsmustbeamortized costs is irrevocable and applies to all of start-up the taxpayer’s costs. extensions). Theelectioneithertodeductorcapitalizestart-up ize the costs onatimely filed federal income tax return (including wishingtoelectoutmustaffirmatively choosetocapital taxpayers Expensing isautomaticandrequires noformal election.Nevertheless, below zero) bytheamountstart-up expensesexceed$50,000. over180months)is$5,000,reduced (butnot than amortization for deduction in the year the active business commences (rather The amount of capitalized businessstart-up expenseseligible START-UP EXPENSES office expenses. activity onScheduleCwillretain theabilitytodeducttheirhome who report owners business contrast, In job expenses. imbursed expenses subjecttothe2%floor, whichincludesemployees’unre The Actsuspendedthe deduction of miscellaneous itemized yearbutmayuseadifferent methodinasubsequentyear.particular Once selected,ataxpayermaynotchangethemethodforthat timely filedoriginalfederalincometaxreturn (includingextensions). simplified method or the regular method for a taxable year on a year thesimplifiedoptionisused.Thetaxpayermayelecteither and there isneitherdepreciation nordepreciation recapture forany These rules only apply These for any calendar month in which ------whether or not distributions were made, you may havepaid tax shareyour of incomeof the pass-through regardless entities, of been taxedonthepass-through income. Sinceyouare taxedon corporation ifyouhavetaxbasisintheentityandalready You LLC cantaketax-free from distributions orS apartnership, the chapteronpassiveandreal estateactivities. information, see limited bythepassiveactivitylossrules.Forfurther those losses may still beof subject to and the loss. Nevertheless, contribution (oraloan)before year-end toenablethededuction these entitieswhichmaybelimited,youwanttomakeacapital tax basis and are “at-risk” for the losses. If you have a loss from any of can deduct losses from the entity only to the extent that you have LLC If you haveaninterest orScorporation,you inapartnership, DISTRIBUTIONS UTILIZE BUSINESS LOSSES OR TAKE TAX-FREE dependent oryourunder-age-27 child. As aresult of theTax CutsandJobsAct,business expensedeductions COMMUTING BENEFITS ANDMEALS EMPLOYER’S DEDUCTIONS FOR ENTERTAINMENT, rates willdecrease overallasaresult of theTax CutsandJobsAct. tion, seethechapterontaxrateoverview. In2018,theindividualtax AGI for50%of theself-employment informa taxpaid.Forfurther is notgreater isprimarilybecauseyoureceive adeductionagainst share of SocialSecurity andMedicare taxes).Thereason thespread approximately including your employee’s 48% for wage income (after self-employment incomecanbeashigh56%, compared to Because of federaleffectivetaxrateon thesetaxes, the2017 in allothercases.Seethechapterontaxrateoverview. filing separate returns$125,000 for married taxpayers and$200,000 on self-employment incomeinexcessof $250,000forjointreturns, combined withthe2.9%Medicare tax,willtotal3.8%)beimposed Medicare tax.Anadditional0.9%Hospital Insurancetax(which, is nolimitation onself-employment income subject to the 2.9% the 12.4%SocialSecuritytaxis$127,200($128,400in2018).There of combined2017wagesandself-employment earnings subjectto Social Security tax and 2.9% Medicare tax. The maximum amount The self-employment whichconsistsof taxrateis15.3%, 12.4% SELF-EMPLOYMENT TAX distributions from Scorporations. in the entity. However, special considerations for there are certain such distributions,totheextentof yourtaxbasisandat-risk amount paying additionaltax,iffundsare availableandtheentitypermits have notreceived. Therefore, youcantakeadistributionwithout in aprior year, or will payinthe current year, on income that you -
business owner issues and depreciation deductions 33 EisnerAmper 2018 personal tax guide 34 There are certain reliefThere provisions are applicabletosmallerbusinesses. certain Note: for2017 andbeyond.Electionsare made onanannualbasis. qualify have hadthiswrittenpolicyinplacebytheendof 2016inorder to per itemorinvoicecanbededucted.Therefore, should taxpayers expensing amounts paidorincurred for suchproperty, upto$5,000 Financial Statement (“AFS”) and a written accounting policy for or produce tangible property. If the company has an Applicable amountspaidtoacquire todeductcertain safe harborfortaxpayers The finalregulations includedanexpensingrulewhich provides a acquiring, maintaining,repairing, andreplacing tangibleproperty. capitalize costs from those in which they can deduct expenses for tinguished thecircumstances must underwhichbusinessowners 1,2014.Theseregulations dis January beginningonorafter years The IRSreleased thefinal“repair regulations” whichaffectedtax FINAL REPAIR/CAPITALIZATION REGULATIONS pensation plans. the chapteronstockoptions,restricted stock,anddeferred com to employeestockpurchase plansandincentivestockoptions.See requirements reporting related Corporations are subjecttocertain STOCK ANDISOs PURCHASE PLANS REPORTING REQUIREMENTS FOR EMPLOYEE similar tothoseineffect2017. casualty insurancecompaniescontinuetousepreferential rules, indefinitely.December 31,2017to be carried forward and Property beginningafter farming losses)andallowsNOLsarisingintaxyears period(exceptforcertain income, repeals thetwo-yearcarryback The Tax Cuts and Jobs Act limits the NOL deduction to 80% of taxable undertherulesineffectfor2017. 20years carried forward and be can Net carried back (“NOLs”) losses operating two years OPERATINGNET LOSS CARRYBACKS mation, includingvariousplanrestrictions. discussion. You shouldrefer tothatchapterformore specificinfor complex,soanentire chapterisdedicatedtothis plans are very Rules governing contributionsto,anddistributionsfrom, retirement PENSION ANDPROFIT SHARING PLANS 2025. employer-providedcertain meal expenses will be eliminated after 2017.Also, after underIRCsection132(f)) (qualified transportation costs and commuting benefits are eliminated for most entertainment
The AFS isdefinedasanauditedfinancialstatement. - - - most significant regulatory overhaulof theU.S.healthcare most significantregulatory system with theHealthCare andEducationReconciliationAct,represents the The Patient Protection andAffordable Care Actof (“ACA”), 2010 along AFFORDABLE CAREACT method. maynecessitate filing aFormothers 3115asachange of accounting elections require a simple attachment to the business’s tax return; accounting methodchangesmightbe required orappropriate. Some tax returntaxpayer will dictatewhichsafeharbors, elections and Caution: safe-harbor expensingruleformaterialsandsupplies. should consider whether to adopt the $200 In addition, taxpayers beginning of thetaxyear. invoice aslongithasawritten expensingpolicyinplaceatthe AFSA companywithoutan peritemor upto$2,500 maydeduct the calendar month. For example, 40 full-time employees employed the calendarmonth.Forexample, 40full-timeemployeesemployed during of per week or at least 130 hours service of30 hours service calendarmonthisanemployeewhohasaverage of atleast every (including full-time equivalent employees). A full-time employee for one calendaryearanaverageof atleast 50full-timeemployees large applicable An within employs that one as defined employeris cost of healthinsurance coverageobtainedthrough themarketplace. The Premium AssistanceTax Credit wasdesigned tohelpoffset the tax if: The ACA requires thatanapplicablelarge employerpayanexcise • exchanges. Thefollowingare themajorconsiderationsof theACA: insurance through theuseof mandates, subsidiesandinsurance ACA was enacted to increase the quality and affordability of health since thepassageof Medicare andMedicaidin1965. Large EmployerMandate 2. 1. mium assistancetaxcredit orcost-sharing reduction; or totheemployer ashavingapre full-time employee iscertified coverage underaneligibleemployer-sponsored planandany to enroll inminimum essential dependents) the opportunity The employerfailstooffer itsfull-timeemployees(andtheir credit orcost-sharing reduction. ashavingapremium assistancetax time employeeiscertified ortooexpensive.Also,atleastonemore full- underfunded under aneligible employer-sponsored plan, but the plan iseither toenroll inminimumessential coverage dents) theopportunity The employer offers its full-time employees (and their depen The specificfactsandcircumstances of eachbusiness - - that from anemployer-sponsored plan,coverageobtainedthrough (penalty) with his or her tax return. Minimum essential coverage is “shared a ormake month foreach coverage responsibility payment” Under the current law, minimum essential individuals must carry • a businessexpense. permitted to deduct the premiums paidinexcess of the credit as andare the credit backorforward cancarry business employers Small forsmalltax-exemptemployers. and35% employers ness maximum The credit is 50% of the premiums paid for busi small a smallbusinesshealthoptionsprogram (“SHOP”)marketplace. cost of aqualifiedhealthplanthatitoffers toitsemployeesthrough it paysauniform percentage of notlessthan50%of thepremium in which arrangement qualifying a have also employermust The exceeding $52,400 in 2017 (this number is indexed for inflation). equivalent employeeswhoearn anaverageannual wagenot nomore employerisonewith An eligiblesmall than 25 full-time consecutive-year period. 2010 through counting towards 2013 without those years the two- A taxpayermayhaveclaimedthecredit beginningin fortaxyears 2014. taxyearonorafter beginningwiththefirst consecutive years eligible taxpayercanclaimtheCodeSection45Bcredit fortwo to provideers health insurance coverage to their employees. An The ACA provides a tax credit to encourage eligible small employ • alternatives in place. should havereliable reporting or incorrect data onForms 1094-C and 1095-C; therefore, employers be aware that there is no longeragoodfaithexceptiontomissing employee’s Form W-2,“Wage andTax Statement.” should Employers the cost of the applicable employer-sponsored coverage on the The ACA requires with50ormore employers employeestoprovide requirements. suchashealthinsuranceplans,havesimilarreporting parties, Other employer-provided health care coverage for its full-time employees. information theterms return andconditionsof whichreports the The ACA generallyrequires applicable large tofilean employers • employedexclusivelyduringtheholidayseason. workers onaseasonalbasis,includingretail services are whoperform workers determining thenumberof full-timeemployees.Seasonalworkers areees. Seasonalworkers takenintoaccountunderspecialrulesin perweekonaverageare hours 15 equivalentto50full-timeemploy 30 ormore perweekonaverageplus20employeesemployed hours Individual Mandate Small BusinessHealthCare Tax Credit Employer andInsurer Reporting - - - penalty. shouldreconsider Businessowners theircompany’s entire the minimumessentialcoveragerequirements for2017,orincura or play.” Inotherwords, theymusthavechoseneithertomeet remain must have decided if they would “pay in effect. Employers requirementsThe employer mandate andcorresponding reporting return. There isafamilymaximumpenaltyof $2,085. amount of income for requiring the taxpayer to file an income tax householdincomeforthetaxableyearover threshold taxpayer’s and $347.50 perchildunderage18or2.5%of theexcessof the For both 2017 and 2018, the penalty is the greater of $695 per adult insurance. will nolongerbepenalizediftheyfailtomaintainadequatehealth in 2019.Therefore, beginningwiththe2019taxyear, individuals The Actreduces theindividual mandatepenaltytozero beginning health plansorothersimilarplans. a stateorfederalmarketplace,Medicare, Medicaid,moststudent whose wagesare factored intotheemployeeretention credit. tax credit may not be claimed for the same employees opportunity the hurricane disaster zone. To avoiddouble-counting, the work areees worked who employees for those eligible an employer in 1,2018.Eligibleemploy the hurricaneoccurred andbefore January the date hurricane occurred and was inoperable on any day after operations inahurricanedisasterarea onthedaterespective are Eligibleemployers period. during this whohavebusiness those regardless of whether the eligible employee was actually working those wages paidduringtheperiodthatbusinesswas inoperable qualified wages, limitedto$6,000peremployee. Qualified wages are the businesswasinoperable.Thecredit is40%of eachemployee’s period the during employees their compensated that businesses The Disaster Tax Relief Act established a credit for hurricane-affected fema.gov/disasters). in federallydeclared disasterareas (asdefinedbyFEMAatwww. Tax ReliefAct”),whichprovides taxrelief forhurricanevictimslocated Tax Extension Act of 2017(“Disaster andAirway Relief andAirport and Maria onbusinesses, the President signed into law the Disaster impactof tomitigatetheadverse HurricanesHarvey, Irma In aneffort OTHER LEGISLATION AFFECTING 2017-2018 the ACA andriskinganexcisetaxperaffectedparticipant. circumstances without violatingmarket reforms under certain under tinue tooffer health-reimbursement arrangements to employees among otherthings,aprovision allowingsmallbusinessestocon Cures includes, ActenactedinDecember2016 Century The 21st pensation strategytoobtainandretain humancapital. of theirretirement plans,andperhapsrevamping theirentire com employee compensationpackage,includingthecost-effectiveness - - -
business owner issues and depreciation deductions 35 capital gains and dividend income
Managing capital gains and losses can help you save taxes, defer taxes and obtain the highest after-tax yield on your assets. This planning is very critical when considering the various tax rates since the rate on short-term capital gains can be as high as 43.4% in 2017 and 40.8% in 2018 (including the 3.8% Medicare Contribution Tax for certain taxpayers) compared to the long-term capital gain rate of 23.8% for both 2017 and 2018 (including the 3.8% Medicare Contribution Tax for certain taxpayers). • CAPITAL GAIN TAX RATES CAPITAL GAIN TAX RATES ***MAGI isAGI increased bythenetincomeexcludedfrom foreign incomeunderInternal RevenueCodeSection911(a). filing jointly;$440,500forhead and$235,350formarriedfilingseparately.of household;$418,400 for singlefilers $500,000 forheadof and$300,000formarriedfilingseparately).For 2017, thethresholds household;$500,000forsinglefilers; were $470,700formarried threshold amounts($600,000 formarriedfilingjointly; withincomeabovecertain **The 20%taxrateappliestotaxpayers *For 2017,thetoptaxrateforregular taxpurposesis39.6%. Married FilingSeparate Single &HeadofHousehold Widow(er) Qualifying & Joint Filing Married Filing Status Modified Adjusted Gross Income(“MAGI”)*** exceeds thethreshold amountfortheapplicablefilingstatus: Taxpayers are liablefortheadditional3.8%Medicare ContributionTax onnetinvestment incomeiftheir 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) important ratestoremember are themaximumtaxratesofimportant many different tax rates can apply to capital gains, but the most 4illustrates,for2017andthereafter,tax rateoverview. AsChart information onhow this tax is computed,see the chapter on investment incomedependinguponyourtaxbracket.Formore 3.8% Medicare ContributionTax may be imposed onyournet As aresult of theAffordable Care Act(“ACA”), anadditional - 2018 • • 37%* The AMTrateof 28%onassetsheldshort-term. Type of sold. property than justhowlongyouhaveheldtheasset,including: tax youpayonthe sale of acapital assetcan depend onmore more than12months(long-term). However, theactualrateof 12 months or less (short-term) and 20% on most assets held 39.6% in2017and37%2018onnetgainsfrom assets held • • 28% • • 25% •
20%** • • Threshold Amount $ 125,000 $ $ 200,000 $ 250,000
15% • • chart 4 • 0%
capital gains and dividend income 37 EisnerAmper 2018 personal tax guide 38 Assume youdetermine thatyouryear-to-date net capital gainsaremade up of $240,000, short-term losses ofand long-term $160,000 Since gainsare netted,ifyourealized thegainyouwouldhavenetcapitalgainsof(short-term $390,000 losses ofand long-term $10,000 $30,000 ($78,000lessthe original tax of $48,000). You actuallypaidthe long-term rate of 20% onthe additional short-term gain of $150,000. tax tip an unrealized short-term gain of thatyouwouldlike to $150,000 sell, butare reluctant to pay the short-term capital gainrate of 39.6%. • • • • • to compute your year-to-date realized gains andlosses.Makesure Before determining whichyear-end strategytouse,itisimportant dictate whichstockpositionsyoushouldconsiderselling. natureexact the tipillustrates, this But as of will losses and yourgains whether totakeadditionalgainsorlossesbefore theendof theyear. Tip 3inthechapterontaxplanningstrategiestohelpyoudecide If you have unrealized capital gains or losses, you should refer to Tax Note: gains ofgains Your $400,000). of($390,000 capitalgainstaxwouldbe$78,000 excesslong-termSo yourtaxincreaseat 20%). gains wouldbe ofgains of($240,000 tax wouldbe$48,000 capital gains your In2017, $400,000. excess long-termYouat 20%). gains with assets have also YEAR GAINS AND LOSSES COMPUTING YEAR the Medicare ContributionTax. reduce cannot losses of categories other calculating in income each individualis$1,500.)Itshouldbenotedthatnetcapital and interest income. (If married filing separately, the limit for income, such as wages losses in excess of gains against ordinary ofthat onlyallowyoutodeduct$3,000 limitations loss Capital Exclusion androllover provisions assets. onthesaleof certain a maximumrateof 25%. Sale of real estate that issubject to depreciation recapture at cious metals(includingETFsthatinvestinprecious metals). andpre28% rateonthesaleof collectibles,suchasartwork (see Tax Tip7). holding periodagainstthegainsof theotherholdingperiod for short-term gains)sinceyoumustnetexcesslossesfrom one on long-term(in 2017)or37%2018) gains (and thereverse A netting rulethatcanflipthe actual rate from 20% to 39.6% 7
The aboveexampleisexclusiveof theMedicare ContributionTax, andalsoassumesthatthetop ratesapply. - END TRADING STRATEGIES USE THE RULE NETTING TO GET THE BEST RESULTS - TO - DATE REALIZED - realized gainsandlosses: you considerthefollowingwhendetermining youryear-to-date before anannounceddividenddistribution(seebelow). itisusually inadvisabletobuymutualfundsshortly tax perspective, Note: rate alsoapplies. to ratesof or20%.The3.8%Medicare 15% ContributionTax and beyondare dividendsin2017 subject paying outqualifying However, rates. tax income ordinary tothe subject funds mutual market constant dollar funds, are treated asdividend income dividends,suchasfrom money distributions andnon-qualifying year-to-dateyour Short-termor capital net loss. gain gain capital December, somakesure youconsiderthemwhencomputing dividend income. Many fundsmake their largest distributions in tal gain distributions that are taxed as capital gains rather than Dividends paidbymutualfundstypicallyincludelong-term capi Mutual funddistributions contracts. income from contracts againstprioryears’ Section 1256 similar the taxpayerdies;however,on backsomelosses can carry you are terminated when back) untilused.Capitallosscarryforwards not (but indefinitely are losses Excess separately). forward carried income per year ($1,500if you are married filing your ordinary Only $3,000 of capital losses in excess of capital gains can reduce Excess capitallosses sales closedat a loss. publicly tradedsecurities,except for short period and the year you recognize gain or loss on the sale of The trade date, not the settlement date, determines the holding Trade date
Absent unusualcircumstances, andstrictlyfrom anincome - The distributionitselfdoesnotchangeyouraggregate value inthe Typically, distributionsfrom mutual fundsare reinvested inthe fund. share. before Just year-end, thefundmakesacapitalgaindistri shares ofper at $50 2017 anequitymutualfundonSeptember1, However,is taxableintheyear made,evenifre adistribution in connectionwithadividendreinvestment plan,bothof whichare stock acquiredand method isavailable basis for whichtheaverage except stock inaregulatedin 2011 beginning investmentcompany Exchange Transactions.” A covered security includes all stock acquired generally doneonForm“Proceeds 1099-B, from Broker andBarter respect to the security is long-term or short-term. is The reporting the adjusted basis inthe security andwhether any gainorlosswith the gross proceeds from thesaleof thesecuritymustalsoreport the caseof a covered security, broker whoisrequired toreport every The Energy Improvement andExtension Act of 2008provided that in see thediscussionlaterinthischapter. losses. Forthetaxtreatment of these“Section1256contracts,” considered when determining your year-to-date capital gains and Index optionsandregulated futures contractsshouldalsobe Capital gainsandlossesonmark-to-market assets suchasS&P Mark-to-market assets from anyentitiesinwhichyouare anownerorinvestor. your projected share of any distributable capital gains and losses actually receive acashdistribution. You will needtodetermine S corporations,andLLCs, are taxabletoyouwhether ornotyou Gains and losses from pass-through entities, such as partnerships, Pass-through entities under thoserules. Therefore, youare required toadjustyourbasisforlossesdisallowed when the purchase andsale transactions occur inthe same account. Brokers rules. sale the wash are only required sales wash toreport onForm 1099-B may not reflectThe basisreported application of 1,2014are required January or acquired to be reported. on orafter covered securitiesifacquired granted Options beginningin2012. fund sinceitsimplyincreases thenumberof shares youownata tax tip invested inthefund.Forexample, let’s sayyoupurchased 4,000 lower per-share value. FOR INVESTORS TAX BASIS REPORTING REQUIREMENTS 8 EVEN IF THEY ARE AUTOMATICALLY REINVESTED MUTUAL FUND DISTRIBUTIONS ARE TAXABLE, - - a loss,generallysellthelowestcostlotsfirst. areyou assuming areIf you the positionatagain. selling at selling want tosellthelotsyouhaveheldlong-term withthehighestcost, this mistakebyinstructingyourbroker inadvance,writing,thatyou regardlessthe lots that you boughtfirst, of their relative cost.Avoid thelowestgain.However,report brokers frequently automaticallysell so that you can typically want to sell the lot with the highest cost first of yourholdingsofIf youonlywanttosellpart a specific stock, you or agentwhoacquires orredeems thoseshares. shares needtobeondepositinanaccounthandledbyacustodian The you cancalculatethegainorlossusinganaveragecostbasis. If youacquire shares inamutualfundatvarioustimesandprices, tations basedonyourAGI), yetyouneverpaytaxontheappreciation. limibased onthe fair market value of the security (subject to certain stock must be publicly traded.) You receive acontribution deduction the (For donationstoprivatefoundations, charitable contributions. you haveheldformore thanoneyearifyouusethemtomakeyour You can avoid paying capital gains tax on appreciated securities that it isanticipatedthatyourtaxratewillincrease inthesubsequentyear. gains in the current year and postpone losses until the following year, if gains inthecurrent year. Itmayhavebeenmore prudenttoaccelerate Note: IDENTIFY LOTS TO REDUCE YOUR TAXES SHARES AVERAGE BASIS OF MUTUAL FUND CHARITABLE GIVING AVOID CAPITAL GAINS TAX THROUGH You end up with capital gainincome of $20,000 (4,000shares at $5 per share), reportable onyour2017 return,$5 per share), eventhoughthe reportable Warning: share valuehasdecreased sinceyourpurchase.in Butyourbasis the shares asincome. increases bythe$20,000thatyoureported the newfundisinsamefamily of funds. bution of $5pershare whenthefundissellingfor$35pershare. of the initial fund with potential capital gain or loss results, even if This assumes that the objective was to lower realized capital realized lower to was objective the that assumes This
Exchanging mutualfundsisgenerally considered asale
-
capital gains and dividend income 39 EisnerAmper 2018 personal tax guide 40 loan will be treated as though you made a gift. Ifthetotalamountofloan willbetreated asthoughyoumadeagift. that itisnotreally aloanthatyouhavesimply forgiven. Aforgiven regardless of sure Butmake outstanding. debt was howlong the However,entirely worthless. the loss is treated as a short-term loss deductible asacapitallossattheendof theyearinwhich itbecomes bad debt,typicallyanuncollectibleloan,issimilarly A non-business of manycompaniesinbankruptcyhavesomevalue. Note: year, you will beabletotakethelossinthatyear. a nominalamount.Ifyoucompletethesalebefore theendof the for by sellingthesecurity(inabonafidesale)toanunrelated party security.it asaworthless Youtest canavoidtheabsolute-no-value has evennegligiblevalue,youwill usuallybeprevented from claiming asecurity musthaveabsolutelynovalue.Ifit considered worthless, short-term, thesecurityisdeemed tobesoldonDecember 31.To be For determining whether the loss is long-term or totally worthless. securityistreated asacapitallossintheyearitbecomes worthless you canat least recover some of your lossesthrough taxA savings. completelyworthless, loanbecomes asecurityornon-business When sively managedexchangetradedfundorindexedfund. An alternative toanactivelymanaged mutualfundwouldbeapas be availableinamutualfund. stocks youmaysacrificesomeof thatmay theinvestmentdiversity losses to minimize yourtax. However, byhavingdirect of ownership giving you the advantage of deferring the tax on the gain, or taking fund isthat you can control when yourealize gains and losses, A benefitof owning stocksdirectly rather thanthrough a mutual taxable income. of yourinitialinvestment into part In effect,youhaveconverted less of whether ornot yourposition inthe fund hasappreciated. As Tax Tip 8 shows, you end up paying tax on the gains, regard gains realized bythefundbefore youboughttheshares. A capitalgaindistributionfrom amutualfundmayincludesignificant for adetaileddiscussion. fund future contributions.Seethechapteroncharitablecontributions tion oradonor-advised fundwithappreciated long-term securities to This canreap evengreater rewards ifyoufront loadaprivatefounda SECURITIES AND BAD DEBTS TAKE LOSSES FROM WORTHLESS BEWARE OF THE MUTUAL FUND TRAP
Do not confuse bankruptcy with worthlessness. Shares ofDo notconfusebankruptcywithworthlessness. stock - - - The Internalsustained RevenueCodeallowsadeductionforlosses in thefraudulentarrangement(e.g.,aPonzi scheme). payments were madefrom hadinvested amountsthatotherinvestors income or principal to the taxpayer, payments of purported but these response torequestsmade forwithdrawals,theinvestmentadvisor orwhollyfictitious.Insomecases,in amounts thatwere partially investment activities and resulting may incomehave reported lent investment arrangement. For example, an investment advisor Unfortunately, sometimesexperiencealossfrom taxpayers afraudu andestateplanning. gift tax ifyouhavealreadySee thechapteron exhaustedtheexclusion. taxexclusionorresultit willeitherreduce inagift yourlifetimegift exceeds$14,000 for2017($15,0002018), toanyoneperson gifts or forward underspecialrules. or forward create orincrease and/ back becarried can that loss operating net a lossinthesetypesof transactionsenteredA theft intoforprofit may income maybeincludedintheamountof loss. thedeductibletheft asincome,thefictitious withdraw theamountpreviously reported in hisorhergross income,andtheinvestordoesnotsubsequently of and the investor included the amount the theft, year of discovery priorto the to the investor asincome inyears If anamount isreported which there isareasonable prospect of recovery. reimbursements recoveries orother reduced and to as byclaims additional investments,lessamountswithdrawn,ifany, reduced by generally theinitialamountinvestedinarrangementplusany The lossresulting from afraudulentinvestment arrangement is later taxableyearare gross notincludibleintheinvestor’s income. deduction isreduced bysuch aclaim, recoveries on the claim ina a reasonable prospect of recovery. To theextent that the investor’s astowhich theinvestorhas for reimbursement orotherrecovery theloss,provideddiscovers thatthe loss isnotcovered byaclaim arrangement isdeductible in the taxable year inwhich the taxpayer subject tovariouslimitations.Alossfrom afraudulentinvestment during thetaxableyearnotcompensatedbyinsuranceorotherwise INVESTMENT ARRANGEMENTS TREATMENT OF LOSSES FROM FRAUDULENT - from deferringthegaintoafuture year. thereby sale, market valueonthedateof preventing you theshort must realize gainasiftheappreciated securitywas soldforitsfair The two positions are deemed to be a constructive sale and you recognizing short. security identical an selling by gain taxable any prevents youfrom locking intheappreciation onasecuritywithout The reverse of thewashsale rule — the”constructive sale”rule— stated interest rateormaturity. a differentwash saletest)ifithas a materiallydifferent orhas issuer ment bondisnot considered asubstantiallyidentical security (the similar toyourpositionpriortheswap.Forexample,replace thesaleandsubsequentpurchase is because yournetpositionafter avoid thewashsalerule.Thisstrategyisreferred toasabondswap realize a loss and immediately purchase somewhat similar bonds, yet You where youcan maybeholdinglossesinyour bondportfolio sale ruledoesnotapplytogains. the stock immediately, thereby securing a step-up in basis. The wash the currentorder yearin back then buy and losses toutilizecapital is tosellappreciatedtechnique available One planning securitiesin if youprefer. proceedsthe use company,original your in to back buy securities You 30 days and cansellthealternative securityormutualfundafter • • • days, considerthefollowingalternatives: If youdon’twanttoriskbeingoutof thepositionformore than61 be realized onlywhenthereplacement securityissold. it back for future growth. If youfail the wash sale “test,” yourlosswill torealize want ifyou days 61 for those buy yet security the on aloss requires youtobeoutofat aninvestmentrisk thepositionand/or yousellit.This to buysuchasecurity)within30daysbefore orafter if youbuythesameorasubstantiallyidenticalsecurity(oroption The washsaleruleprohibits youfrom realizing alossonsecurity SELLING SHORT AGAINST THE BOX USE A BOND SWAP TO REALIZE LOSSES WASH SALE CAN DISALLOW YOUR LOSS Double upontheposition31daysbefore sellingataloss. specializes inthesameindustry, or Buy shares in a mutual fund (or an exchange-traded fund) that Buy securitiesof anothercompanyinthesameindustry, or - 10% or15%(for2017;12%for2018)before application of thisrule. betaxedateither withtaxableincome that wouldotherwise payers thresholds. Thisruleappliesto tax taxable income is below certain would normally be taxed are notwhose taxed at all for taxpayers dividendincomethat Net long-term capitalgainsandqualifying have enoughtimetotheshares delivered withinthe30days. sale earlier sothat you date, youactually need toclose the short on thedelivery is based sale the short Since closing sale. the short position openandatriskforleast60daysfollowingthe close of of end the appreciated taxyearifyoukeepyour the after days 30 sale within An exception to this rule allows you to close the short types of charitabletrusts. charitable contributionsfor a more detaileddiscussionof thedifferent the trust’s term will goto acharityyoudesignate.Seethechapter on make annualpaymentstoyou.The remainder amount attheendof remainder trust.Bydoingso,youwilldefer thetaxandtrustwill because of thecapitalgainstax,considercreating acharitable If youhave appreciated securities that youare reluctant to sell the taxpayertoa0%taxrateonhisorhercapitalgains. be inthe15%(for2017;12%for2018)taxbracket,thereby qualifying taxable income of up to $37,950 in ($38,700 in 2017 and still 2018) tax rate as beingtaxed at arateof zero. A single taxpayer canhave graduated for 2018) 12% at taxed 2017; (for either or the 15% 10% be a provision thattreatsincome thatwouldotherwise capitalgain He or she would paynotax on the $30,000 gain.Thisisbecauseof student), andthechildonlyhaswages from asummer jobof $4,000. of $30,000toyoursinglechildoverage19(whoisnotafull-time As anexample, assume youtransfersecurities with unrealized gains andestateplanning. chapter ongift tax issues mustbe considered, asdiscussed inthe in mindthatgift chapter.rate, asdiscussed inthe tax rate overview However, keep tax basedonyour 24) toavoidthekiddietaxrulethatassesses tax. The child must be over age 19(orif afull-time student, over age no pay and federal the securities the sell child have then and rate to yourchild, orother beneficiary, who issubject to alow income tax You can transfer appreciated securities that youhave held long-term TRANSFER APPRECIATED STOCK DIVIDEND INCOME TAXED AT 0% LONG APPRECIATED SECURITIES DEFER CAPITAL GAINS TAX ON HIGHLY TO SAVE TAXES - TERM CAPITAL GAINS AND
-
capital gains and dividend income 41 EisnerAmper 2018 personal tax guide 42 The second limit is that the replacement property must be receivedThe secondlimitisthatthereplacement property potential replacement toidentify property.the relinquished property taxable. The first limit is that you have 45 days from the date you sell you must meet two time limits or the entireproperties, gain will be a like-kind exchange does not have to be a simultaneous swap of sales, youcannot“optout”of While like-kindexchangereporting. isthesameassurrenderedproperty property. Unlikeinstallment Note: detailed discussionof like-kindexchanges. 2017. See the chapter onpassive andreal estate activities for amore or received orreceived exchanged is before or on 31, December beingexchanged an exceptionforanyexchangeifeithertheproperty December31,2017.However,for exchangescompletedafter there is exchanges of thatisnotheldprimarily forsale,effective real property Tax CutsandJobsAct limits thenonrecognition of gainforlike-kind for thesaleof aswellotherinvestmentproperty. real property The received. For 2017, thisruleapplied other boot (“unlike” property) have received intheexchange,except to theextent of anycashor You thatyou the property sell you until gain taxes onany don’tpay that has the same nature for or other character.property property The like-kind exchange rule allows you to defer taxes byexchanging the discussioninchapteronpassiveandreal estateactivities. Ifyouare considering selling anyof these assets,see partnership. as stock inaprivately held corporation or aninterest inanLLC or sales, itcanalsoapplytosalesof non-publiclytradedproperty, such gain onthesaleof anasset.While typically considered forreal estate tax-efficientmethodtorealize a An installmentsalecanbeavery realized attheendof theprevious year. alreadyor loss for thegain adjustment toyourtaxbasis treated as contracts at year-end istaxable inthe current year asif sold,with an the MedicareTax). Contribution Any unrealized on the or loss gain the maximum effective when including federal rateis26.8%(30.6% 3.8% Medicare Contribution Tax) For 2018, taxpayers. for certain whenconsideringtheadditionalgains for2017is27.84%(31.64% period. Thus,themaximumeffectivefederaltaxrateonSection1256 as 60%long-term and40% short-term, regardless of theholding assets. The gainorlossonthese contracts isautomatically treated issues related tothesecontractsare different thantypicalcapitalgain dealer equityoptions anddealersecurities futures contracts. The tax currency contracts, non-equity options (including stock index options), Section 1256contractsincluderegulated futures contracts,foreign SECTION 1031LIKE INSTALLMENT SALE REPORTING BENEFITS SECTION 1256CONTRACTS
Like-kind exchange reporting is mandatory ifthe replacement ismandatory Like-kind exchange reporting - KIND EXCHANGES • requirements andrestrictions mustbesatisfied: ofexclusive theMedicare Tax Contribution of following The 3.8%. fall into the 39.6% (37% for year 2018) tax bracket. These rates are December 31,2017are who taxedat15%and20%fortaxpayers Qualified dividendsreceived byanindividualshareholder through limit describedpreviously. be substantially the same as the property identified within the 45-day was sold,whicheverisearlier. received Thereplacement must property income taxreturn for the tax year in whichthe relinquished property the of extensions) (with date due the or property exchanged the of sale the after days 180 than later no completed exchange the and traded if an American Depository Receipt(“ADR”)traded ifanAmericanDepository backed by theshare market inthe U.S. For this purpose, ashare will be treated asso corporation ifitsstockisreadily tradedon anestablishedsecurities In addition,aforeign corporationistreated as aqualifiedforeign with theU.S.thatincludesanexchange of information program. of benefits eligibleforthe is that comprehensive a treaty incometax A qualifiedforeign corporationisgenerallyaforeign corporation • • • Medicaretional Tax), Contribution received dividends includes from: 39.6% or 43.4% in 2017, 37% or 40.8% in 2018 inclusive of the addi highas incometaxrate(as rates, andtherefore taxed atyourordinary or20%Dividend incomethatisgenerallynoteligibleforthe15% chapter oninterest expense. on thedeductionof investmentinterest. Seethediscussionin ratesandeliminatesomeorallof thislimitation dividends atordinary is thecasefornet long-term capital gains,youcanelect to tax the poses of interest investment the limitation.However, expense justas or 20%areDividends taxedat15% notinvestmentincomeforpur • QUALIFIED DIVIDEND INCOME qualified foreign corporation(asdefinedbelow). The dividendsmustbe paid byeitheradomestic corporation ora are paid to the short sale buyer before the short saleisclosed. salebuyerbefore the short are paidto theshort sale) anddividends ofyour shares a short to a customer (as part Payments youreceived inlieuof dividendsifyourbroker loans Real estateinvestmenttrusts(“REITs”). Money marketmutualfundsandbondfunds. positioninthesamesecurity.equivalent offsetting short rate isnotavailablefordividendsreceived ifyouare holdingan preferred90 daysout of stock. The reduced 181daysfor certain beginning 60daysbefore the ex-dividend date.Thisincreases to You holdthestockformore must days the121 than60daysduring - - transfer qualifies (or is intended to qualify) as atax-free exchange. transfer qualifies(orisintendedtoqualify) in anexchangeisnottakenintoaccountifthesubsequent involved A subsequent direct of transfer of either contract all or a portion is received duringthe180daysbeginningondateof thetransfer. annuity foraperiodof ormore tenyears orduringonemore lives) ifnoamount(otherthananreceivedSection 1035 asan second annuitycontractwill betreated asatax-free exchangeunder of thecashsurrenderof value exchange fora in existing annuity an Under Revenue Procedure the 2011-38, direct transfer of a portion exchanged contracts. areor persons and theobligeeorobligeesunderbothoriginal another annuitycontract is limited to cases where the same person exchange without gain orlossrecognition of an annuitycontractfor policyforanotherwhichbetter one insurance suits theirneeds.The exchange treatment is for individuals who have merely exchanged exchange of anannuity contract for another annuity contract. The The law provides that no gain or loss shall be recognized on the year are notqualifieddividendseligibleforthe15%or20%rates. company (“PFIC”) either for the year of distribution or the preceding either aforeign investment company orapassive foreign investment is sotraded.Dividendsreceived from aforeign corporationthatwas SECTION 1035EXCHANGE
capital gains and dividend income 43 stock options, restricted stock and deferred compensation
Stock options, restricted stock, and other types of deferred compensation continue to be included by many employers as part of the overall benefits offered to executives of both private and public companies. The taxation of these components of compensation are quite complex and, if these benefits are mismanaged by an employee, the tax cost could be substantial. • • • of ISOsincludethefollowing: The key tax consequences related to the granting andexercising their fairmarketvalue. holding periods — youcan buyshares at aprice that isbelow any value. If they do — and once you’ve satisfied the applicable grant, andthusthe stock must appreciate before the ISOs have less thanthestock’s fairmarketvalue(“FMV”)atthetimeof the ofmonths the company. leaving exercise The beprice cannot and can be exercised onlyduringemployment orwithin three of receipt. The ISOs cannot be transferred (except on death) must beexercisedusually The options granted. withintenyears at afixedpricethatisdetermined atthetimeoptionsare ISOs giveyoutherighttopurchase companystockinthefuture theyare exercised)(after before sellingthem. when toexercise stockoptionsandhowlongtoholdtheshares the stock acquired viathe options issold.You must carefully plan granted to you, (2)the date they are exercised, and(3)the date dates toremember fortaxpurposes:(1)thedateoptionsare NQSOs. For allemployee stock options,there are three critical sale ofsubsequent sharesand between ISOs differsubstantially tax rulesgoverning thetaxationof theexercise of optionsandthe options (“ISOs”)andnonqualifiedstockThe options (“NQSOs”). There are twokindsofincentive stock employeestockoptions: minimizing yourtaxexposure. a strategyforexercising youroptionsandsellingstockwhile with stockstillheldfrom previously exercised options,todevelop options whichhavebeengrantedbutnotyetexercised, along of recommendedis frequently you that review yourinventory maximize theafter-tax cashflowrelatedIt totheseinstruments. thetaxrulesrelatedto understand toyouroptionsinorder to ee’s vital itis options, holdstock Ifyou compensation. overall Stock options may represent of anemploy asignificant portion INCENTIVE STOCK OPTIONS STOCK OPTION PLANS after theywere exercised,after whicheverislater, aprofitable saleof fromtwo years the time the options were granted oroneyear If the stock acquired by exercising the ISOs is owned at least computing yourAMTI. shares atthetimeof exercise istreated asanadditionwhen (what ispaidfortheshares) andthefairmarketvalueof the granted ISO. However, the spread between the exercise price There isnoregular taxliabilitywhenyouexercise apreviously There isnotaxliabilityonthedateoptionsare granted. - • recommended toavoidpayingAMTonISOexercises whenever usually itis While used. is amount full the until forward be carried without regard to the credit in each year. Anyunused credit can to theannualamountthatyour regular taxexceedsyourAMT these optionexercises. Generally, thecredit youcan useislimited eligible in future to receive years an AMT credit for AMT paid on If the exercise of ISOs results in an AMT liability, you will be • • • youneedto: tax perspectives, options andselltheunderlyingshares from bothcashflow and In order to make the best decision of when to exercise your AMT CREDIT term gaincomponentaswell.However, there are noSocial changed from thedateof exercise, youmayalsohaveashort- 39.6% (37%beginningin2018).Ifthepriceof thestocksold as as compensationandwillbetaxedatafederalratehigh ofmonths beincluded will sale this on gain The date. grant the exercised,is theoption the laterofor within24 after oneyear ifyousellthestockwithin dispositionoccurs A disqualifying federal taxrateappliestoeach. than forregular taxpurposes,although themaximumof a20% above). Thus,thecapitalgainwillbelowerforAMTpurposes the dateof exercise (toaccountfortheadjustment mentioned purposes, the basis in the stock will be the fair market value on disposition.ForAMT exercise price.Thisisknown asaqualifying fair market value of the stock on the date of the sale andyour amounts. The gain will generally be the difference between the abovethethresholdon netinvestmentincomefortaxpayers maximum rateofMedicarea 3.8% plus 20%, Tax Contribution the stock will produce long-term capitalgainincome taxedata later inthischapter. exercise andastockswap.Thesetechniqueswillbediscussed purchasing thestock.Amongthesealternatives are acashless the optionsand,ifnecessary, considerafinancingoptionfor Determine how much cashyouhaveavailabletoexercise consider theavailabilityof the AMTcredit discussedbelow. from potentiallygreater future taxsavings.Also,youshould now, evenatthe expense of incurring anAMTliability, to gain prices toassistyou in deciding if you should exercise options Project multiplefuture taxscenariosbasedondifferent stock incurring acurrent-year AMTliability. to determine of the number shares exercise can you without Project both yourregular tax andAMT for the current year dispositionsoffrom disqualifying ISOs. Security or Medicare taxes due onthe compensation derived
stock options, restricted stock and deferred compensation 45 EisnerAmper 2018 personal tax guide 46 holdings combined with certain assumptions. holdings combinedwithcertain best choice. Here are some alternatives basedonyourcurrent predict thefuture price of thestock makes itdifficult to know the to plan for different scenarios when it is impossible to But trying time youhaveheldtheshares sinceyouexercised theoption. price atthetimeof theexercise ofthe lengthofand theoption, as the current trading price, the original exercise price, the trading Somearesince itdependsonseveralfactors. clearlydefined,such comparedto holdtheshares tocontinuing canbecomplicated the shares. However, the tax consequence of selling the shares exercisedhave tosell decidewhen must youthen options, the options, from now until before they are due to expire. Once you decisiontomakeiswhenexerciseThe first yourexisting of theAMTcredit. thechapterontaxcreditsPlease see foradetaileddiscussion ahead with the exercise because of favorablemarketconditions. possible, there may besituationswhenyoumaydecidetogo tax tip n n n n When youselltheshares: n n Your taxconsequenceswithoutconsideringtheMedicare ContributionTax of 3.8%wouldbeasfollows: 3. 2. 1. Assume thefollowingfacts: ISO SCENARIOS
There isnotaxduewhentheoptionsare granted. year. tooffset theunusedcredit forward If youareregular taxinasubsequent notabletousealltheAMTcredit, youcan continuetocarry regular taxof $45,000,thussaving$18,000currently andpossiblysavinganadditional $25,200 inthefuture. ataxpreferencecised theoptionsandreported amount).You paythelowerAMTtaxof $27,000intheyearof thesaleratherthan gain of $135,000basedonproceeds of $405,000lessyourAMTtaxcostof $270,000(9,000shares at$30pershare whenyouexer Even ifyoucannotutilizetheAMT credit because youare stillintheAMT, yourAMTtaxonthegainis$27,000.This20%of theAMT AMT credit amount,butyoucanonlyutilizeittotheextentyourregular taxexceeds yourAMTbefore theoffsetting credit. You willbeeligibletooffset your regular taxfrom thesaleby$25,200 of AMTthatyoupaidwhenexercised theoption.Thisisyour share). computed bysubtractingthecostof $180,000(9,000shares at$20pershare) from yourproceeds of $405,000(9,000shares at$45per You haveafederalregular taxliabilityof $45,000computedbyapplyingthe20%long-term capitalgainrate tothegainof $225,000, $25,200 ($90,000timestheAMTrateof 28%). $90,000 (9,000shares attheexcessof $30overyourcostof $20).Assumingyouare already intheAMT, youradditionalAMTtaxis There isnoregular tax duewhenyouexercise thegrantandpurchase theshares. However, youwillhaveanAMTpreference of of thesale. You 12,2018andthensellthemfor$45pershare, andyouwere holdtheshares up totheyear intheAMTallyears untilJanuary 10,2017,youexercise all9,000optionswhenthefairmarketvalueis$30. On January You are grantedincentivestockoptionstobuy9,000shares of yourcompanystockfor$20pershare onJune3,2008. 9 ISO TAX BENEFITS • • • and potentialtaxcosts.Ontheplusside,exercising early: tion datecanbeadvantageous,butyoumustconsidercashflow Exercising your options early rather than waiting until the expira SHOULD YOU EXERCISE EARLY? between thefairmarketvalueandyourexercise pricemaybe close to bottoming out. Since the price islower andthe spread cise the ISOsat atime when youthink the market price is May reduce youroverallAMTliabilityifyouare abletoexer options withminimal,orno,AMTcost. to allowyouexerciseAMT). Thiscanbedoneannually your point between the AMTandregular tax(therebythe avoiding ability to exercise just enough options to reach abreak-even Allows youtomanage your AMTliabilitybygivingyouthe long-term capitalgainratesooner. yourholdingperiodsoyoucanbeeligibleforthefederal Starts exercise theAMTyou’llpaylessthanyouwould ifyou triggers AMT liability, orjusthavingtopayasmallliability. Evenifthe negligible, youcan exercise more options without incurring an -
- - If you sell the shares, you will havea capital gain for bothregular price andthetradingat thetimeof theexercise The current trading price is higher than both your exercise have sufficientregular taxliability). regular Medicare and you assuming sale, the tax on Contribution AMT credit($28,000 willbe $18,480 tax savings lessthe$9,520 of(28% shares 10,000 atanAMTspread ofper share). $10 Your your regular if tax, not already creditThe AMT utilized. is $28,000 ally save taxes since youhaveanAMTcredit available to offset (23.8% of 10,000shares at$4gainpershare). Butyoumayactu share ($19 lessexercise cost of resulting$15), inatax of $9,520 are notintheAMTforyear, youwillrealizeof again $4per Assume the stock iscurrently trading at $19per share. If you the grant exercisedyou time the at price trading the than lower but If the current trading price is higher than your exercise price times 3.8% Medicare Contribution Tax on net investment income). ($130,000 timesthe20%long-term capitalgainrateplus $30,000 10,000 shares), creating apotential tax savingsof $27,140 intaxes your AMT loss on the sale would be $130,000 ($13 per share times when you exercised the options). If you are in the AMT this year, your AMTlosswouldbe$13pershare ($12lessthe$25value $3 pershare regularless yourexercise taxloss($12 costof $15), currentlyper share. tradingat$12 Whileyouwouldonlyhavea and realize acapital loss.As anexample, assume the stock is for theyear,If youhavenetcapitalgains youcanselltheshares If the current trading price is lower than your exercise price between thefairmarket valueof $25andtheexercise costof $15. AMT inthe yearof the exercise onthe full amount of the spread per share when you exercised the grant. You were subject to the exercise costwas$15pershare, andthestockwastradingat$25 12 months from the exercise of anISOgrant inaprioryear. Your Assume thefollowing:You haveheld10,000shares formore than • • • Alternatively, onthenegativeside,exercising early: ISO EXERCISED IN PRIOR YEARS your exercise cost. Exposes youto alossifthe value of the shares drops below the saleof thestocktopayanAMTliability, and May create anAMTliabilitybefore youhavetheproceeds from Accelerates theuseofyou needtopurchase funds theshares, stock pricewashigher. had exercised anequalnumberof optionsatatime when the - selling shares in a disqualifying disposition if certain conditions conditions ifcertain disposition sharesselling adisqualifying in If youexercised ISOsearlier inthe year, youmay want to consider investment incomewouldbebasedonthe$20gain. However, theadditional3.8%Medicare ContributionTax onnet on theAMTgainofrather thantheregular $10 taxgainof $20. $25). Your taxincrease forfederaltaxpurposeswouldbebased persharebe $10 of time the thepriceat less ($35 exercise of If youare year, subjecttotheAMTthis gainwould yourAMT may haveanAMTcreditto offset available thetaxongain. share ($35lessyourexercise costof $15).Asdiscussedabove, you you are notintheAMT, youwouldpaytaxonthegainof $20per tax andAMTpurposes.Assumethecurrent stock price is$35. If CURRENT YEAR ISOS EXERCISED EARLIER IN THE same numberof shares. market, evenatalowerprice,so thatyouwouldstillownthe receive),you can thenrepurchase you thesharesthe open in (regardlessgain a at sold securities to apply of benefit AMT any does not sale rule(asdiscussedinthechapter oncapitalgains) if you heldthe shares (ascomputed above). Because the wash AMTthatyouwouldpay which islessthanthe$25,200 28%), x AMTrateof($27,000 will be$7,560 disposition disqualifying your costof $20pershare). However,on the theAMTliability ofat again $3pershareprice ofon theselling based and $23 year, income ofwill realizeyou shares(9,000 $27,000 ordinary be intheAMTthisyear.sell thestockbefore Ifyou theendof the price hasdropped exercise to$23pershare andyouwill after ing priceisgreater thanyourexercise price.Let’s saythestock It maymakesensetoconsidersellingtheshares evenifthesell AMT thatyouwouldpayifdidnothing. equal to your exercise price. But you will eliminate the $25,200 have aregular taxliabilitysincethe selling priceof $20 isnow You disposition. so thatyouwillhaveadisqualifying wouldnot What canyoudo?Selltheshares before theendof theyear rently equaltothepriceyoupaidforthem. pay thistaxeventhoughthesellingpriceof your shares iscur preference($90,000 at 28%)iftheAMTapplies.You willhaveto demonstrates, yourAMTtaxontheexercise wouldbe$25,200 shareyour exercise hasfallenbackto$20, price.AsTax Tip9 ercise of 9,000 shares wasearlierthisyearandthe price per for properly. Take the factsinTax Tip9butassumeyourex sale of stock purchased through exercising anISOisnot planned stock pricecanresultA falling incostlytaxconsequencesifthe tax tip 10 EXERCISE DROPS AFTER AN IF THE STOCK PRICE ELIMINATE THE AMT
- - -
stock options, restricted stock and deferred compensation 47 EisnerAmper 2018 personal tax guide 48 in the AMT this year, the sale of the shares will eliminate the AMT But ifyouexpect to be in 2018). beginning (37% high as39.6% income tax ratesas will betaxableascompensation atordinary ofthe excess thecurrent tradingprice overyourexercise price If you sell disposition the shares,and you will have a disqualifying option the exercisedyou when price trading the than lower but If the current trading price is higher than your exercise price believe thestockwillappreciate. the AMT, youcan choose to continue holding the shares if you dividends. IftheAMTpreference amount does notputyouinto the washsalerulediscussedinchapteroncapitalgainsand always buyback the stock as longyouwait 30 daysto avoid substantial tax without any funds to pay the tax. Also, you can has dropped. As Tax Tip10illustrates, youcould end upwith a the AMTthatyouwillhavetopayeventhoughstockprice liability.ing AMT considersellingthestockto eliminate Ifso, per share) willputyouintotheAMTorincrease analready exist tradingpriceatthetimeof($25 exercise yourcostof less $15 determine iftheAMTpreferenceFirst, amountof $10pershare to exercise theoption paid you price the than less is price trading current the If share price ofa trading and per share $25 timeof the at exercise. exist. Again,let’s assumeanoriginalexercise priceof per $15 tax tip though you did not pay the AMT in that year). The result of the sale is that you only pay a current federal effective tax rate of 14.29% of rate tax effective federal current a pay only you ($150,000 taxontheactualgainofthat $1,050,000). is sale the of result The year). that in AMT the pay not did you though 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 Note: AMT. income.YouAMT liabilitythatyearbecauseyouhadsubstantialordinary selltheshares in2017for$40pershare andyouare inthe for $15pershare. Despitethetaxpreference amountof $300,000(30,000shares timesthe$10pershare spread) youdidnothavean Assume youexercised anISOgrantin2007andpurchased 30,000shares attheexercise priceof $5pershare whenthestockwasselling Effective taxrateonsale Tax at20% Long-term capitalgain 11 ThistabledoesnotincludetheimpactofMedicareContributionTaxonnetinvestmentincome. - because youmaynevergetabenefitfortheAMTpaid. tosellthesharesitem itmaymakesense byyear-end. is This preference withorwithouttheISO intheAMT would havebeen the year.the stockduring not makesense tosell it would Ifyou 3.8%. Thus,ifyouare notsubjecttotheAMTduringyear, per share maybesubjecttotheMedicare Tax Contribution of for regular(37% beginningin2018) tax purposes. Inaddition$5 result in$15of income per share sold taxed at potentially 39.6% if the stock isselling for $30per share, asale of the shares would the date of exercise will be taxed as a short-term capital gain. So increase additional The rates. tax income at sale the on ordinary date overyourexercise pricewillbetaxableascompensationat of the excess and disposition on the exercisethe fair market value Once again,ifyouselltheshares youwillhaveadisqualifying price andthetradingattimeof theexercise If the current trading price is higher than both your exercise of incomeforAMTpurposeshadyoutakennoaction. ofper share $3 forbothregularAMT comparedtax and to$10 per share. income If yousellthe shares, youwill haveordinary As anexample,let’s assumethestock price hasdropped to$18 ofper share $10 on phantomappreciationexists. thatnolonger 210,000 Regular tax $ 1,050,000 20%
150,000
$ 750,000 14.29% AMT $30 pershare) atamaximumfederaltaxcostof $27,000($135,000at20%).Your netcashbenefitfrom theexercise andsalewillbe: more than one year, from the exercise of NQSOs you will have a long-term capital gain of $135,000 (9,000 shares at $45 less your basis of tion from theexercise (9,000shares at$30pershare holdingitfor fairmarketvaluelessthe$20exercise cost).Whenyousell thestockafter If the9,000shares from exercise of theISOsinTax Tip9were from theexercise of NQSOs,youwillrecognize $90,000of taxablecompensa tax tip (see below). Revenue Code restricting this type of deferred compensation triggering substantial penalties underprovisions of the Internal You are notallowedtoreceive in-the-moneyoptionswithout for taxpurposesupontheexercise of theoptions. employee (and not the transferee) will generally recognize income Unlike ISOs,NQSOsare sometimestransferable.Howeverthe theexercisefor more date. thanoneyearafter For long-term capital gaintreatment, you must hold the shares the sharesheld theoptions. —itdoesnotincludethetimeyou when you acquire holding period for the underlying stock starts ciation inthestock’s valuewillbetaxedascapitalgains/losses.The exercising, anyappreciation/depreWhen yousellthestockafter Medicare taxes. as compensationandwillbesubjecttobothSocialSecurity not the case. The income recognized upon exercise will be taxed the valueof whichgenerallyis theoptionisreadily ascertainable, granting of anNQSOdoesnotresult intaxableincomeunless any amountthatwaspaidfortheoption,where applicable.The dateofmarket valueonthe exercise exercise overthe priceplus purposes. Theincomeisequaltotheexcessof thestock’s fair of the year in income exercise regularboth for AMT and tax Unlike ISOs,theexercise of NQSOscreates taxableordinary NONQUALIFIED STOCK OPTIONS 12 Net cashbenefit Tax whenyousellthe shares ($135,000 at20%) Tax onexercise of options($90,000at39.6%) Cost toexercise theshares (9,000shares at$20pershare) Proceeds fromthesale Note: Thisexampledoesnottakeinto considerationSocialSecurityandMedicare taxes. NQSO TAX CONSEQUENCES - interest charge. Yourthe excessfunds. is onlythesmall costforthetransaction borrowed aswellasmallamountof interest andyoukeep day, helpsyousellthestock.Thebroker recoups thefundsyou needed toexercise theoptions andthen,usuallyonthesame exerciseA cashless whenabroker occurs lendsyouthecash techniques are acashlessexercise andastockswap. there are other ways to finance your stock acquisition. Two such can borrow money — sometimes from the company itself —but to come up with the funds to exercise your stock options. You it canbeproblematiccash, sufficient available have you Unless of shares received from theexercise of anNQSOgrant. Tax Tip12illustrates the taxconsequencesof anexercise andsale exercise price. granted will be equal to the number of shares used to pay the an optionwith a stock swap. Thenumberof additional options even grantyoumore optionscalled“reloads” ifyouexercise stock topayfortheoptions’exercise cost.Somecompanieswill whenyouusepreviouslyA stockswapoccurs acquired company FINANCING TECHNIQUES $405,000 $ 162,360 (180,000) (35.640) (27,000) -
stock options, restricted stock and deferred compensation 49 EisnerAmper 2018 personal tax guide 50 of thetenpreceding wouldalsobeineligible. taxyears the fourhighestcompensatedofficers of thecorporation forany officers of the corporation for the tax year, orwho were one of aswellanyoffamily members, thefourhighestcompensated new deferral are the following: a 1% owner, CEO, CFO and related freely transferrabletoanotherparty. Employeesineligible forthis thedateonwhichstockbecomes stock optionorRSUs(ii) until theearlierof from (i)fiveyears thedateof vestingof the employees may elect to defer recognition of any such income pany thatgrantsstockoptionsorRSUstoatleast80%of full-time of eligibleemployees UnderSection83(i), (“RSUs”). aprivatecom elect to defer income from stock options orrestricted stock units employees to Internal RevenueCodewhichallows forcertain Under the Tax Cuts and Jobs Act, Section 83(i) was added to the STARTINGNEW IN2018 it. capital losswhenyousellthestock,butnotifforfeit the stock or the stock’sforfeit value decreases. You will have a paid asaresult of theelectioncan’tberefunded ifyoueventually income tax rates in the current year.pay tax at ordinary Plus, taxes The disadvantageof makingaSection83(b)electionisthatyou you sellthestockandrealize anygainonthesale.SeeTax Tip13. appreciation regardless when therestrictions lift of whether ornot incometaxratesonthe election, youwillpaytaxatordinary taxed atapreferentialtypically do notmakethe taxrate.Ifyou incomeintolong-term capitalgainincome,whichis ordinary future stock appreciationelection allows you to convert from taxable toyouonthegrantdateisnegligible.Why? Becausethe iftheincome A Section83(b)electioncanbeextremely important with therequirements discussedinthenextsection. receivedto compensation intheform of stockisincompliance sure yourcompany’s deferred compensationplanwithrespect receiving thestock. However, before making theelection,make receive the stock. You must make this election within 30 days after Code risk oryousellthestock.Butcanelect,underInternal Revenue recognition of income until the stock is no longer subject to that subject toasubstantial risk of youcandeferthe forfeiture, If youreceivestock options. compensationintheform of stock The taxtreatment of restricted considerablyfrom stockdiffers RESTRICTED STOCK Section 83(b), to recognize ordinary incomewhenyou Section 83(b),torecognize ordinary -
• • • • Distributions canonlybemade: the calendaryearpriortoincomeisearned. bemade in generally must electiontodefercompensation initial to defer compensation andthe ability to take The distributions. compensation plandependsonrulesgoverning theinitialelection treatment tax The of received compensation through adeferred • • transfer made.Form 3921includesthefollowinginformation: rent taxyearisrequired tofileForm 3921withtheIRSforeach stock related to that person’s exercise of an ISO duringthe cur corporation thattransferred toanemployeeashare ofEvery cise pricemustbeequaltotheirvalueatthetimeof thegrant. Note: • • • Failure tofollowtheseruleswillresult in: • DEFERRED COMPENSATION PLANS ADDITIONAL REPORTING REQUIREMENTS To alleviateanunforeseen emergency. On thedisabilityordeathof the participant. At thetermination of employmentorservice. on eitherspecificdatesortheageof theparticipant. Attimes selectedatthetimeof scheduled based thedeferral, The datetheemployeeexercised theoption, The datetheoptionwasgranted, compensation. onthetaxliabilityresultingplus 1% from therecognition of the interestAn IRS on based rateunderpayment the assessment the amounttreated ascompensation. An additionaltaxof income taxon 20%ontopof theordinary is later. orat the time it vests, whichever or credited to the participant, Taxation of ‘deferred’ thecompensation atthetimeit isdeferred the employer. oreffectivecontrol intheownership Following achange of ISOs are excludedfrom theseprovisions becausetheirexer - - alien. Employees must receive the Forms 3921 by January 31 alien. Employeesmustreceive theForms byJanuary 3921 The forms are not required for an employee who is a non-resident • • • tax tip You selltheshares laterin2017at$8pershare. twoyears for-one stock split gives you 100,000 shares. At the time of the IPO, the stock is offered at $6 per share and the risk of forfeiture is removed. You receive 10,000 shares of restricted stock with a fair market value of $3 per share. In anticipation of an initial public offering (“IPO”), a ten- The exercise priceof thestock. cised, and The fair-market value of the stock when the option was exer The numberof shares of stocktransferred totheemployee, 13 Tax savingsbymakingtheelection If youmaketheelection If youdon’tmaketheelection • • • • • • • • • share) atamaximumfederaltaxcostof $47,600($200,000at23.8%). You havealong-term capitalgainof $200,000whenyousellthestock(100,000shares at$8pershare lessyourbasisof $6per ($600,000 at39.6%).For2018,thetoprateis37%. the substantialriskof nolongerexistsduetoachangeof forfeiture control feature) atamaximumfederaltaxcostof $237,600 You havecompensationof $600,000(100,000shares attheIPOpriceof $6pershare) whenthecompany goespublic(and You don’thaveanycompensation incomethisyear. 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 at39.6%in2017).For2018,thetoprateis37%. You have$30,000of compensationinthecurrent year(10,000shares at$3pershare) withamaximum federaltaxcostof $11,880 If you make anInternal Revenue receiving thestock CodeSection83(b)electionwithin30daysafter THE BENEFIT OF A SECTION 83 If youdon’tmaketheelection Income TaxComparison - plans. There are similar filing requirements for employee stock purchase (March 31iffilingelectronically). reported year following thecalendar 28 Formby February 1096 is also required to be filed with the IRS with the corresponding following theendof thecalendaryearof TheForm reporting. ( b ) ELECTION FOR RESTRICTED STOCK $ 285,200 $ 90,060 195,140
stock options, restricted stock and deferred compensation 51 small business stock
Take advantage of preferential tax treatment available for investments in certain small business stock. If anindividualholdstheQSBstock byapass-through entity, heor exclude gainforinvestmentinthe QSBstockof issuers. diverse corporation.Accordingly,each issuing taxpayer may asingle The gainexclusionisanalyzedseparately for each taxpayer and stock inprioryears. excluded on earlier dispositions of the same corporation’s QSB bythetotaleligiblegain taxpayerhas in subsequentyears millionamountmustbereducedin theQSBstock.The$10 to thegreater of ormore,five years thegaineligibleforexclusionislimited If ataxpayer holdsthe QSB stock of anyone corporation for requirement evenifthebusinesshasnotyetproduced revenue. the active, qualified trade orbusinessor business maysatisfy upactivitiesofthis treatment. Research afuture andstart trade for and mining,do not financing,qualify professional services, Note: • • • as stock: allows youtodeferthe taxonthegain.QSBstock isdefined The gainfrom thesaleof QSBstockiseligibleforarollover which • • • federal taxtreatment, including: forpreferential stockcanqualify (“QSB”) business Qualified small SMALL BUSINESS STOCK TAX BENEFITS SMALL BUSINESS STOCK TAX BENEFITS Held byanon-corporate taxpayer(LLCs andScorporations Issued byadomesticCcorporation lossratherthancapitaltreatment. Ordinary Reduced taxrates;or buy anotherqualifiedsmallbusinessstock; Deferral andusedto of gain if the proceeds are “rolled over” 10, 1993). AugustAcquired bythe taxpayer at original issuance (after and qualify); • • trade orbusiness(seeNotebelowforrestriction); of 80% least at employs which qualified inanactive, itsassets issuance;and immediately after with lessthan$50million of assetsat the time of and
Businesses in certain industries,suchashospitality,Businesses incertain
$10 million or ten times the taxpayers’ basis $10 millionortentimesthetaxpayers’ based ontaxholdingdates: stock from gross income.Theamountof exclusionisstaggered of the gain on the sale ofmay exclude at least aportion the QSB on thepurchaser’s dateof first asaCcorporation) ownership Taxpayers who hold QSB stock for more (based than five years may differfrom thefederaltreatment of thegain. Finally, shouldalsobeaware taxpayers thatthestatetaxtreatment Section 1202 where QSB stock has been exchanged or converted. broadening the holding periodunderInternal RevenueCode asQSB stock. forpotentially There arequalify other opportunities date of death ordistributionmayalso sale.Stockreceived bygift, held the stock consistently from the date of acquisition through the for the exclusion if the individualtaxpayer has she may still qualify • purchase dates: preference item. The preference rates are also based on stock of sale excludedgainonthe the AMT maybean QSBstock ofAlthough excludable for regular tax purposes, a portion for exclusionis50%of the $10millionlimitor$5million. year. Ifthe taxpayer is married filing separately, the gain eligible cost of all qualified stock of the issuer disposedof during the tax reduced by eligible or gain (b) ten taken times in the prior years cumulative limit for a given year of the greater of (a) $10 million Note: compared to the capital gainstaxrateof 20%presently ineffect. meaning thatthe50%exclusionyieldsaneffective rate of 14%, The taxrateonthegainnotsubjecttoexclusion,ifany, is28%, • • • REDUCED TAX RATES AMT ADJUSTMENTS permanent. of the enactmentof PATH. Thisprovision hasbeenmade September 27,2010, asaresult holding datebeginningafter No preference adjustmentforthesaleof stockswithatax 18, 2009. 50% of thegainiftaxholdingdatebeganbefore February 17, 2009andbefore September28,2010. 75% of February thegainiftaxholdingdatebeganafter This provision hasbeenmadepermanent. resulting September27,2010, fromafter theenactmentof PATH. 100% of the gain if the stock hasatax holding date that began Eligible gain from any one corporation is subject to a
small business stock 53 EisnerAmper 2018 personal tax guide 54 regular taxrates. from thesaleof the originalstock,thedifference istaxableat the investmentinnewQSBstock islessthanthesaleproceeds treatment gain capital the whether short-term is orlong-term. If inherits theholdingperiodof thestock soldindetermining reduced bythedeferred gainfrom therollover andthetaxpayer under thesamerules.Thebasisinreplacement stockis stock purchased forafuture inthe rollover rollover mayqualify during whichthe sale of QSB stock occurred. Thereplacement elect to applySection1045onitsfederaltaxreturn fortheyear proceeds within60daysof saleinotherQSBstock;and(d)timely stock foratleastsixmonths;(b)sellthestock;(c)reinvest the To for this rollover option,ataxpayer must qualify (a)own the five years. even where the taxpayer has held the QSB stock for less than circumstances,to defer gain on a sale of QSB stock under certain rollover1045 Section The permitrules taxpayers non-corporate trigger utilizationof thoseAMTcapitallosses. of theexclusion, shouldbeaware thatthe AMTpreference will Caution: • ROLLOVER OF QSB STOCK sales occurringpriortoSeptember27,2010. 7% AMT preference adjustment of the amount excluded for all SECTION 1202 TAX RATE SCHEDULE SALES 3 2 1 tax wouldnotapply. Further, thisScheduleassumesthatthetaxpayerisinhighestapplicabletaxbracket. income taxwhichappliestocapitalgains.Ifallof thegainisexcludedfrom gross income,itfollowsthatthe3.8%netinvestmentincome *As shownintheTax RateSchedule,thegainrecognized from thesaleof QSBstockisgenerallysubjecttothe3.8%netinvestment Planning Tip: 09/28/ 2010 andbeyond /2010 2009-09/27 02/18/ Pre 2001-02/17/2009 Year ofpurchase (28% + 3.8%) x 50% subject to tax after 50%exclusionof(28% +3.8%)x50%subjecttotaxafter gain (28% + 3.8%) x 25% subject to tax after 75%exclusionof(28% +3.8%)x25%subjecttotaxafter gain (28% + 3.8%) x 0% subject to tax after 100%exclusionof(28% +3.8%)x0%subjecttotaxafter gain Taxpayerswho takeadvantage with netcapitallosses, Qualified small business stock held for five years canQualified smallbusinessstockheldforfiveyears resultinadditionalsavings. Regular nettaxrate* 7.95% 15.9% 0% 3 2 1 AMT effectiverate the stock at originalissue andhave held it continuously until To forthistreatment, thetaxpayermusthavebought qualify in thecomputationof netoperatinglosses. months.Thislossmaybeincluded the holdingperiodexceeds12 separately) of the lossasanordinary, rather than acapital, even if filing $100,000 ($50,000foranindividualoramarriedperson upto If yousell small business stock at aloss,youcan classify the replacement periodisobserved. Note: may deferinthiscontext. may beotherlimitationsontheamount of gainthatapartner rather thanthedateyouare notifiedof thesale.Inaddition,there — theQSBstock beginningonthedayentity sells applies, by buyingthereplacement stock directly. The60-dayrulestill youofthrough entitycannotify thegainandyoucandefertax and elect atax-free the pass- rollover of thegain.Otherwise, orshareholder,partner theentity canbuyreplacement stock If the stock is held by a pass-through entity of which you are a determining the“more-than-six-months” requirement. Note: The rollover provision doesnotapplytostockof anScorporation. CLAIM ORDINARYCLAIM 16.88% 9.42% Rollovers into new QSB stockareRollovers still available as long as There is no carryover of holding period for purposes Thereof is no carryover 0% Capital gainrate — NOT CAPITAL 23.8% 23.8% 23.8% Benefit ifinAMT — chart LOSSES 5 14.38% 23.8% 6.92% the datesof stockacquisition. showing have satisfiedtheprerequisites, suchasstockcertificates tax preferences maintainrecords sufficienttoestablishthatthey Finally, seekingthebenefitsof itiscriticalthattaxpayers these taxable years. exchanges)duringthefivemostrecent and salesorproperty investment activities(interest, dividends,royalties, rents, annuities, issued andhavederivednotmore than 50%of itsincome from capitalization of $1 million or less at the time the stock was disposition. Theissuingcorporationmusthavehadaninitial
small business stock 55 passive and real estate activities
If you are an owner of a business in which you do not materially participate, the passive activity rules can limit your ability to deduct losses. And, if you hold rental real estate investments, the losses are passive even if you materially participate, unless you qualify as a real estate professional. Income from passive activities including rental real estate may also be subject to the 3.8% Medicare Contribution Tax on net investment income. This very favorableresult isdueto thefactthatsuspended very This January 1, 2018), whereas2018), 1, thelong-termfromgain capital the sale January As anexample,assumeyouhavesuspendedpassivelossesof $340,000. You wouldactuallysave federal taxes of $43,000 aswell from$300,000 an activity that you haveheldfor more than one work qualifiesasparticipation. activities. Moreover, there are specificrulesastowhatkindof activity, inseveral on aparticular participate they when especially Taxpayers shouldkeepdetailedrecords astothetimetheyspend passive lossrulesandlimitations. to the following year,these losses forward subject to the same the currentcannot deduct in that you losses year, can carry you when youcompletelydisposeof theactivity. Ifyouhavepassive have income from otherpassiveactivitiestooffset the losses,or Passiveareactivity losses deductibleonlytotheextentthatyou • • • • the passiveactivitylimitationrules,are if: inabusinessactivity,to materiallyparticipate andthereby avoid The most common ways youare deemed materially participate. A passivelossisafrom abusinessactivityinwhichyoudonot as receiving theproceeds from thesale. year. You disposeofand realize theactivity in 2018 acapitalgainof WHAT ARE PASSIVE LOSSES? In fact,youmayactuallyreduce yourtaxesdespitethegain. you maybeableto activity losses, passive If youhavesuspended losses reduce your ordinary income at a 37% rate (beginning on incomeata37%rate(beginning reducelosses ordinary your dispose of activity atagainandnothaveto a passive pay anytaxes. tax tip activities. activities, totalingmore peryearinallsuch than500hours You work more peryear ineach of than100hours several or includingnon-owners, less thananyotherperson, You work more peryearinthe activity andnot than 100hours in theactivity, Your constitutessubstantiallyallof theparticipation participation the year, You more intheactivityduring than500hours participate 14 RELEASE SUSPENDED ORDINARY LOSSES USE PASSIVE ACTIVITY CAPITAL GAINS TO participation tomeet oneof thetests listed above,if possible,so participation For an activity that is generating losses, consider increasing your Increase your inlossactivities participation trap discussedinTax Tip15. illustrates. But you must also be aware of the phantom income realize againonthesale, youcanstillsavetaxesasTax Tip14 the disposition(subjecttocapitallosslimitations).Evenifyou fully deductiblewhentheactivityissold—includinganylosson through a bona fide sale to an unrelated party. The losses become Sell anypassiveactivitywithcurrent orsuspendedpassivelosses Dispose of theactivity deductible losses: the disallowed losses into tax-saving you can do to convert thatarelosses there subjecttoadisallowance, are that things passive have you and tests participation material the fail If you treated aspassivelosses,allowingyoutodeducttheminfull. are areal estateprofessional, yourreal estatelossesare nolonger to meet the real estate professional test (discussed below). If you areIf you inreal engaged increase activities, estate yourhours or businesses trades Increase you participate thehours inreal property in thatyear. you will not be subject to a passive loss limitation for the activity CONVERT PASSIVE LOSSES The tax savings wouldbereduced by the 3.8% Medicare Contribu $340,000). If you have a net capital loss carryover thatyoumight If youhaveanetcapitallosscarryover $340,000). tion Tax intheamount ofof(3.8% $1,520 which isthe dif $40,000, therefore reduce(37% of your tax by $111,000 but the $300,000), would betaxedatnomore than20%.Thesuspendedlosswould ference between the $340,000 capital gain and $300,000 ordinary ferenceordinary capital gain and$300,000 between the $340,000 benefit of theloss(buta reduced carryover). even begreaterwould savings not beabletoutilize,your sincethe capital gain would only increasewould only capital gain of(20% tax by$68,000 your loss). gain could be offset by the carryover loss, giving you the full tax full the you giving loss, carryover the by offset be could gain - -
passive and real estate activities 57 EisnerAmper 2018 personal tax guide 58 14 demonstrates,thiscanactually beataxsavingsopportunity. the incomeisnotfullyoffset bypassivelosses. the additional 3.8% Medicare Contribution Tax to the extent that losses from otherunrelatedmay resultactivities. This passive in to youwhichcanbeoffset utilizeallof untilyou yourpassive in.Thiscreates passiveincome you will notmaterially participate Consider investinginanincome-producing tradeorbusinessthat Invest inincome-producing passive activities atallinthe current year.even ifyoudonotparticipate inthe current year,will be deemed to be materially participating intheactivityforfiveoutof you thelasttenyears, participating by passive losses. If you or yourspouse have been materially Contribution Tax to the extent that the income is not fully offset the othertests.ThismayresultMedicare3.8% intheadditional However, makesure thatyouare notstillconsidered activeunder passive and you can use the income to offset your passive losses. if feasible. Therefore,than 500hours, the activity may become to less generating non-passive income, limit yourparticipation thatis For anactivity inwhich youmaterially participate Decrease your inincomeactivities participation losses: should considertakingthefollowingstepstoutilizeyourpassive activitiesasdiscussedabove,you into “materialparticipation” If youhavepassivelossesfrom activitiesthatyou cannot convert sometimes referred toasnegativecapital. the extent your prior year’s passivelosseswerethe extent your prior year’s suspended, you the dispositionof real estate.Thisresults from priordeductions tax tip Phantom income to the extent of your negativecapitalcan also would have an ordinary loss to offset this income. As Tip As Tax income. this offset to loss ordinary an have would were greater than youractualinvestmentintheproperty. Thisis based onindebtedness.Therefore, youmayhavededucted Income inexcessof yournetproceeds canbetriggered upon UTILIZE YOUR PASSIVE LOSSES even if the underlying property remains unsold.However,even if the underlying property to ofoccur ifyoudispose your interest in the pass-through activity, losses and/orreceived that cashdistributionsinprioryears 15 INCOME TRAP THE PHANTOM
• • • following: take intoaccountthe losses, net passive your When identifying ordinary income. ordinary to offset allcategoriesof income,includingearned incomeor real estate activitiesare notconsidered passiveandare available the taxpayerisareal estateprofessional, thelossesderivedfrom activities inwhichtheyare notmateriallyinvolved.However, if fromtaxpayers using losses incurred from income-producing at theindividualtaxpayerlevel.Thepassivelossrulesprevent income could notoffsetloss passive earned incomeorordinary a flow-throughif ataxpayerhas fromloss activity, apassive the Under thepassiveactivitylossrulescontainedinIRCSec.469, Limitation onLossesfor Taxpayers OtherThan Corporations of themember.participation naturethe of extent and the toascertain be examined must intheseactivities.Rather,participation thefactsandcircumstances of forpurposes determining theirmaterial not limitedpartners the IRSdoesnotconcur, are caseshaveheldthatsuchmembers interests of tomembers apply also LLC. an partnership Although haveaddressed whethertherulesthatapplytolimited The courts interest. passive lossruleswithrespect tothelimitedpartnership and ageneralpartner. canavoidthe Inthiscase,suchperson asbothalimitedpartner holds aninterest inalimitedpartnership presumption where of anindividual nomaterialparticipation would beconsidered passive.There isanexceptiontothe and thustheseactivities inthebusiness, materially participating Generally, of anLLPare presumed limitedpartners tonotbe IDENTIFY YOUR ACTUAL PASSIVE LOSSES LIABILITY PARTNERSHIPS COMPANIES LOSSES FROM LIMITED LIABILITY activity cannotoffset thepassivelossesfrom theactivity. Portfolio interest as such income, from dividends, and passive a deduction, subjecttothesamedisallowancerules. in apassiveactivityis treated asan additional passive activity Interest expense on money borrowed to fund your investment income cannotoffset yourpassivelosses. intheactivity.do notparticipate Therefore, theinvestment interest anddividends, are notpassiveactivities,evenifyou income, suchascapital gains, that onlygenerate portfolio ScorporationsandLLCs Investment andtradingpartnerships, ( “LLC s ” ) AND LIMITED ( “LLP s ” ) low-income housing credits, can reduce your regular tax liability. Tax credits from rehabilitation as such activities, passive and taxpayer willneedtofollowtheordering rulesperIRCSec.172. year. the When applyingtheNOLdeductioninsubsequentyears, of to80% deduction NOL taxable taxableincomeforagiven to be indefinite andlimits the amended the NOL carryforward in accordancethe following years with IRC Sec. 172. The Act has tothetaxpayerin amounts are treated asanNOLcarryforward 2025. December31, Any residualand thislimitationexpires after year,The thresholdevery for inflation amounts willbeadjusted married taxpayerfilingjointlyor$250,000forallothertaxpayers. gain forthetaxableyearplusathreshold amountof $500,000for trade orbusinessoverthesumof aggregate gross incomeor aggregate deductionsof thetaxpayerattributabletohisorher 31, 2017.TheActdefinesanexcessbusinesslossastheof December after beginning limitation, effective for taxableyears other than C corporations, called an “excess business loss” businesslossfromadditional limitationonataxpayer’s entities The Tax Cuts andJobsAct amends andaddsto IRC Sec. 461 an ispaiddownbythebuyer.the installmentsalemethod,youwilldefer$290,000of federaltaxtofuture asthemortgage years before of 2018.Byusing the endof from paymentduein thebuyerforbalance,withfirst the yearandreceiveJanuary 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 2017,yousellanonresidential buildingfor$2,000,000,netof closingcosts,whichyouboughtin1998for$600,000(includingsubsequent tax tip PASSIVE ACTIVITY CREDITS 16 gain andrelated interest. Note: future installmentsare years’ expectedtoincrease. out”(“FIFO”)method.Also,thismethodmaynotbeadvantageouswhenthetaxrates infirst ona“first deductions onreal of property Caution: ratio of 90%.Thegross profit ratioisthetaxablegain of $1,800,000dividedbythetotalproceeds of $2,000,000. The taxablegainusingtheinstallmentsalemethodiscomputedbymultiplyingdownpaymento Deferred tax Federal taxcostthisyear Taxable gaininyearofsale The 3.8%Medicare ContributionTax onnetinvestmentincome,whichisnotreflected intheaboveillustration,mayapplyto You are of subjecttoataxrateof thegainthat isattributabletoprevious 25%ontheportion non-accelerateddepreciation THE INSTALLMENT SALE METHOD DEFER YOUR GAIN USING Full paymentincurrentyear activity. specialallowanceisreduced, This butnotbelowzero, by a rental in real estate participate actively if you each year losses below. Aseparateruleallowsyoutodeductup$25,000 of from the gainonsaleof asdiscussed real estateproperties, estate professional or not,there are ways youcandefer the tax reala as estate professional. Regardless of arewhether you reala Real estateactivitiesareyou qualify passivebydefinition,unless you are notintheAMT. tooffsetcredits yourregular forward taxinfuture when years but thecredits are limitedbecauseof theAMT, the youcancarry offset your taxesinfuture Ifyouhavenetpassiveincome years. andcanbeusedtothe disallowedcredits are carriedforward loss, passive activityincome.Ifyouhaveanetoverall to passive both regularAMT totheextentoftax and tax attributable your Tax credit aswellthelow-incomehousingcredit canoffset AMT. For post-2007 investments, both the qualified Rehabilitation income, andcannotbeusedtoreduceto yournetpassive your credits are limited to the amount of yourregular tax attributable However, priorto2008,these placedintoservice forproperties REAL ESTATE ACTIVITIES $ 1,800,000 380,000 f $400,000bythegross profit Installment salemethod $ 360,000 290,000 90,000
passive and real estate activities 59 EisnerAmper 2018 personal tax guide 60 The installment method allows you to report gain only asyou The installmentmethodallows youtoreport doing so,youcandefermuchof thetaxtofuture years. thegainoninstallmentsalemethod.By eligible toreport theyear ofone ormore thesalesothatyouare paymentsafter contemplating asale of real estate, consider agreeing to receive a gainonthesaleof real estate forfuture Ifyouare years. tax-efficient method todefer An installmentsalecanbeavery it continuesunlesstheIRSconsentstoitsrevocation. of determining material participation. Once the election is made, to aggregate all of their real estate rental activities for purposes purposes of the real estate professional test, a taxpayer can elect to losses, increasetry your hours ofto meet service the tests. For Observation: participate. gains, from rental real estateactivitiesinwhichtheymaterially TaxContribution capital including investment income, onnet Real estateprofessionals are notsubjecttothe3.8%Medicare the taxpayer. by spouse inatradeorbusinessistreated asworkperformed byataxpayer’s testthough,workperformed participation separately satisfies both requirements. In regards to the material requirements are satisfied if, and only if, at least one of thespouses In thecaseof ajointreturn, thereal estateprofessional intherental activity.considered tomateriallyparticipate for rent might be areal estate professional but might not be example, a real estate broker who owns oneortwo apartments activity inorder forthatactivitytobeconsidered nonpassive.For intherental real estate In addition,youmustmateriallyparticipate • • limitations. To qualify, youmustannually: in fullsinceyouareestate losses loss notsubjecttothepassive If youare areal estate professional, youcan deduct rental real It iscompletelyphasedoutwhenAGI reaches $150,000. 50% of AGI theamountbywhichtaxpayer’s exceeds$100,000. INSTALLMENT SALE REPORTING BENEFITS REAL ESTATE PROFESSIONAL RULES Have more than 750 hours of service inthesebusinesses. Have more of than750hours service and participate, trades or businesses inwhich you materiallyproperty Perform in real more than 50%of services your personal
If you fail either test and you have real estate real have you and test either fail you If recognized immediately. Furthermore, when the deferred gain on is 751 or 1250, 1245, sections IRC under income recapture any Caution: on thedeferred tax(assessedasanadditional tax)willapply. interestan million, exceeds $5 own atDecember31 you charge method. However, ifthefaceamountof allinstallmentreceivables hold aninterest notelectoutof iftheentitydoes theinstallment through anentity in which you even ifyouownedthe property income whenreceived. You canusetheinstallmentsalemethod or loans. The interest payments aremortgages taxable asordinary You mayalsobeentitledtointerest paymentsonseller-financed interest element if interest is not stated on the deferred payments. in future will also be long-termreported exceptyears for the that is sold had a long-term holding period, the gain if property retainsyears the same character as when it was sold.Therefore, price byafullyear(seeTax infuture Tip16).Thegainyoureport until next year, of thesales youcandeferthetaxonthat portion receive principal payments. By simply deferring one payment holding the funds within 45 days after thesale. holding thefundswithin45days after with the qualified intermediary the replacement property identify cannot directly receive anycashorotherconsideration andmust like-kind exchanges. Theserulesincludea requirement that you govern complexrules and specific purposes, forinvestment held such aspermitting anexchangeof landforabuildingifbothare amount of flexibility,of allowsforacertain like-kindproperty and can yield substantial tax benefits. Even though the definition Like-kind exchangestypicallyare usedwhensellingreal estate thatyoureceive intheexchange. property to defer taxes until yousell the rule gives you the opportunity Thelike-kindexchange boot receivedas unlikeproperty). (such of the exchange, except up to the amountof any cashorother nature orcharacter),youdonotrealize taxablegainatthetime of forproperty alike-kind(same If youexchangereal property of gain. resale. Personal will no longer be allowed adeferral property notheldprimarilyfor to onlyrealDecember 2017, 31, property limits thedeferralof gainonlike-kindexchangescompletedafter collectibles.TheTaxfurniture, boatsandart CutsandJobsAct property.personal Personal can include vehicles, property intangible and tangible included that forassets exchanges Previously, IRCSec.1031 allowed deferralof gainonlike-kind uponthe receipt first ofis reported principal payments. gain 1250 unrecapturedsection the 20%), of rate tax (maximum gain capital regular and 25%) of rate tax (maximum gain 1250 the sale of real estate is attributable to both unrecaptured section LIKE - KIND EXCHANGES Even if no payments are received in the year of sale, of year the in received are payments no if Even Your a positioninwhich your specific fact pattern must support 12-month periodthatthedwellingunitisrented atafairrental. (2) your own personal useof(2) yourownpersonal the dwellingunitcannotexceed vacation property orsecond home was infact held for rental,vacation property vacation home, rent it out for asubstantial period of time and sible foryoutodoalike-kindexchangeifturn avacation and reported as rental or investment property,and reported the better your to rental property areto rental tricky, property Itispos butcanbeworthwhile. tax-deferred exchangetreatment. Themore rental, investment, the greater ofofor 10% 14days thenumberofthe during days this safeharbor, youmusthaveheldtherelinquished property home,youare notallowedto to beanewsecondorprimary ittoan that realconverted then youhave a business, estate as then exchangeitforotherreal estateandconducttherental of tax tip Like-kind exchanges for vacation homes that are converted Like-kind exchanges for vacation homes that are converted which includes a safe harbor rule under which it said it would not for atleast24monthsandineachof thetwo12-monthperiods position will be to support tax-deferred exchangetreatment. position willbetosupport washeld,treatedmore you cansubstantiatethattheproperty and held for rental or investment. The was converted property wasacquired inthe1031 beginning withthedateproperty residence, theexclusionwillnotapplyduringfive-yearperiod residence exclusion. If you acquire inthe like-kind property home andtake advantage of the $500,000primary primary foranother,property ittoyour youcannotimmediately convert of forpurposes property In order alike-kindexchange. tomeet move inimmediately. In2008theIRSissuedRev. Proc. 2008-16, home intoarental property.your Forexample,ifyoustopusing In addition, after successfully swapping one vacation/investment successfullyswappingonevacation/investment In addition,after or business use activity, the stronger the facts will be that the asyourprincipal exchange andlaterattempttosellthatproperty challenge whether areplacement dwelling qualifiedasinvestment intended swappedforis if theproperty In addition, conversion. sucha thetimingandfactsmustsupport exchange. Ofcourse, investment, orbusinessuseandwouldtherefore for qualify you must theexchange: rent(1) thedwelling immediately after investment property. couldallowforalike-kind conversion This like-kind exchange. unit to another person forafairrentalunit toanotherperson or more; for14days and 17 FOR VACATION HOMES LIKE - KIND EXCHANGES
-
For taxable years beginning after December31,2017andbefore beginningafter For taxableyears their regular taxableincome. individual incometaxrate,dependingontheirbracket,to law,was requiredtaxpayer generally anindividual their toapply investment andnon-investmentrelated activities.Underpre-Act the taxtreatment of incomefrom pass-through entitiesforboth The Tax CutsandJobsAct of 2017 makes significant changesto considerations). better approach (e.g., when you have expiring losses, or state tax not engaginginalike-kindexchangeiftaxableeventisthe Note: a like-kindexchange. Caution: limitation test”). The 20%deduction islimited to the greater of may stilldeductthe20%butare subjecttoacap (the“wage above thisincome thatare engagedinnon-specified businesses maydeductthe20%.Taxpayers businesses specified service Taxpayers below this income threshold that are engaged innon- and $207,500. earning between $157,500 and $415,000, andforindividualfilers withtaxableincomebetween$315,000 outforjointfilers phases businesses,notedabove,thededuction For specifiedservice of itsemployeesorowners. reputation the is orbusiness trade such of orskill ormore one where tradeorbusiness or any of asset theprincipal services, brokerage consulting, athletics, financial services, arts, performing in thefieldsof health,law,services accounting, actuarial science, than architecture ofthe performance involving orengineering) asanytradeor business(other or businessisdefined,inpart, tradeorbusiness.”a “specified service trade Aspecifiedservice below, if is not allowed the QBI deduction is earnedthe 20% from whose taxable income isabove theFor limits taxpayers mentioned to thetaxpayer. include reasonable compensationorguaranteedpaymentsmade commodities gainsandforeign currency gains.QBIdoesnot interest income,short-term capitalgains,long-term capitalgains, income (e.g.,dividendsotherthanREITdividends),investment is defined asalldomestic businessincome other than investment income. QBI dividends and qualified publicly traded partnership qualifiedREIT The 20%deductionisalsoallowedforataxpayer’s S corporation or sole proprietorship.LLC taxed as a partnership, income (“QBI”)fromdomestic qualifiedbusiness apartnership, 2026,theActallowsadeductionof 1, 20%ofJanuary ataxpayer’s PASS Like-kind exchange reporting is not elective. Consider elective. not is reporting exchange Like-kind - THROUGH TAX TREATMENT
The sale of yourprincipalresidence for does notqualify
passive and real estate activities 61 EisnerAmper 2018 personal tax guide 62 depreciation deductions. be available.Seethechapteronbusinessownerissuesand investments underIRCSec.179.Bonusdepreciation mayalso with the ability to immediately write off new the cost of certain willreceive owners anewtaxadvantage Some property owners. 1,2018impacting real estate business law beginningJanuary The Taxto tax changes Act alsomakesadditional CutsandJobs is allowedasadeductiontotaxableincome. AGI computing in allowed not is deduction 20% The instead but as anemployee. of(defined above)orthetradebusiness services performing tradeorbusiness any businessotherthanaspecifiedservice is tradeorbusiness Aqualified ADS). under periods recovery without regardSec. 168 applicable lists (which Sec. 168(g) toIRC under IRC period that would apply to the property recovery ofthe lastday that dateor(2) thelastfullyearinapplicable andendingonthelaterof after the datetenyears (1) in service placed isfirst is theperiodbeginningon date the property year. depreciable The respect periodwith property toqualified period forwhichhasnotendedbefore thecloseof thetaxable qualified businessincome (land isnot included) the depreciable a “qualified trade or business” and used inthe production of subjectto depreciation under IRC Sec. 167, held byproperty isgenerallydefinedastangible this purpose,qualifiedproperty of acquisition, allqualifiedproperty.immediately after basis, For to thequalifiedtradeorbusinessplus2.5%of theunadjusted or business or (b) the sum of 25% of the W-2 wages with respect (a) 50%of theW-2wagespaidwithrespect tothequalifiedtrade account thelongerdepreciation schedulesiftheyelecttouse will needtotakeinto owners interior improvements. Property forresidentialyears rental property, forqualified and20years periodsof fornon-residential 40years property,recovery 30 interest limit must depreciate underslightly longer real property opting to use the real owners estate exception to the property The current depreciation rulesforreal estate continues.However, the entitylevel. debt. Theinterest limit, andthereal estateelection,appliesat The newinterestand appliestoexisting limitis effective in 2018 manner asprovided by the IRS and,once made, is irrevocable. the passiveactivityrules.Theelectionismadeatatime andina tradeorbusinessasdefinedunder the limitationanyreal property Specifically,tax rules. theelectioncanbemadetoexcludefrom maydesireowners to elect out of the new interest disallowance issues anddepreciation deductions),butinvestmentproperty expense (as explained more fully in the chapter on business owner cancontinuetodeductnetinterest owners Investment property asset, suchasanytypeof rental property. taxes associated with abusiness owner can deduct property toremaincontinue Accordingly, deductible. rental a property business, or in an activity related to the production of income, onatradeor State andlocaltaxespaidinrespect tocarrying the real estateexceptiontotheinterest limit. principal residence sale and rental
A principal residence may be one of the most tax-efficient investments you can own since you can exclude as much as $500,000 of the gain on its sale. EisnerAmper 2018 personal tax guide 64 gain rate. previouslydeducted anditwillbetaxedataspecial25%capital which equalstheamountofwill beataxablegain depreciation separate structure for the rental or business use. Regardless, there the rental orbusiness use of the residence, unless there was a May 6,1997inconnectionwith depreciation wastakenafter A reduction of theexclusion isrequired totheextentthatany andthedenominatoris24. the pasttwoyears used andowned thehouseasyourprincipalresidence within fraction, thenumeratorof which isthenumberof monthsyou The pro-ratanatural disasters. exclusion is generally equal to a or legalseparation,otherunforeseen circumstances and from thehealth same reasons, pregnancy, multiple births divorce result of ahardship, whichincludesachangeinemployment, A pro-rata exclusionisallowedifyoufailtheabovetestsasa absences,willbecountedasperiodsof use. such temporary isrented during or otherseasonalabsences,eveniftheproperty absences,suchasforvacation temporary dence isrequired. Short With regards totheprincipal residence, occupancy of theresi • • • • of thefollowingconditions: To forthefullamountof qualify meetall youmust theexclusion, to ahomeoffice orrental useisnoteligiblefortheexclusion. ofto $250,000of thegainattributable thegain).Anyportion can exclude up and meet the tests listed below (other taxpayers ofif youfileasmarriedfilingjointly up to$500,000, capitalgain The saleof yourprincipalresidence iseligibleforanexclusion UP TO $500,000 OF YOUR GAIN YOUR TO $500,000 OF UP PASS THESE TESTS AND EXCLUDE known asa1031exchange)duringthepastfiveyears. Did not acquire yourhome through alike-kind exchange (also years. Did not exclude the gain on a home sale within the last two on thesaleenddate. intheaggregate,two years, duringthefive-year periodending Have usedthehomeasyourprincipalresidence foratleast from theexclusionof atleast$250,000. joint return, inorder to benefit onlyone spouse need qualify of consist may are Ifyou days. or730 24fullmonths a filing orcondominium.Thetwo-yearrule cooperative apartment residenceprincipal mobile home, houseboat, canbeahouse, Your twoyears. least homeforat principal ownedyour Have
- gain rate andthe3.8%Medicare Federal taxatmaximum20%capital Taxable gain Allowable exclusion onsaleofNet gain home Tax basis (includingcapitalimprovements) Net proceeds onsale a marriedcouplefilingjointlyandmeetingalltests: the maximum exclusion amount allowed. Here is an example for you will have to pay taxes to the extent that a net gain exceeds repealed tobeexact).Undercurrent 1997, ago(in manyyears law, costs more thanthesellingpriceof theoldhome.Thatlawwas the saleof aprincipalresidence iftheybuyanewhomethat Many peoplemistakenlythinkthatyoucandeferagainfrom • A periodof nonqualifiedusedoes notinclude: divided bytotalperiodof ownership. Total 2008, nonqualifieduse duringperiod of after ownership ing fraction: the periodofuse, multiplythegainbyfollow nonqualified residence. To of figure thegainthatisallocatedto theportion asaprincipal usedtheproperty neither younoryourspouse Generally,where 2008 period after use meansany nonqualified gain allocatedtoperiodsof nonqualifieduseof theproperty. be abletoexclude will nolonger you 2008, December 31, after of or exchanges with sales Beginning residence principal your ($250,000/500,000) isnotsubjecttothistax. Contribution taxonnetinvestmentincome.Theexcludablegain The taxable gain will be subject to the 3.8% Medicare chapter onstatetaxissues. Notes: Contribution Tax onnetinvestment income SELL YOUR HOUSE TAX DO NOT ASSUME YOU CAN ALWAYS NONQUALIFIED USE OF PROPERTY NO EXCLUSION ALLOWED FOR property asaprincipalresidence. property the use yourspouse) (or dateyou last the isafter that sale of thefive-yearperiodendingondate ofAny portion the
This gain may be subject to state income taxes. See the - FREE
$ $
(500,000) 2,000,000 1,400,000 600,000 900,000 900,000 214,200
- when the to law defer allowed tax taxpayers by buying a new Basis mustbereduced byanypre-1988 deferralsof gain(i.e., costs) andsubsequentcapitalimprovements. including information on youroriginalcost(includingclosing the basiscalculation.Sobesure tomaintainaccuraterecords, have thedocumentation tosubstantiate and possible, tax basis To minimize yourtaxablegain,youwill want to have thehighest can exclude$500,000of gainratherthan$250,000. residence from withintwoyears thedatehisorherspousedied whohasnotremarried spouse andsellsaprincipal A surviving • • test: exclusion inpriortwoyears” test,thefollowingrulesapplytousetest and “no ownership $500,000. While either you or yourspouse can meet the two-year plicated ifyouwanttobeeligibleforthemaximumexclusionof If youare marriedfilingjointly,can getalittlemore things com • • KNOW YOUR TAX BASIS SALE BY SURVIVING SPOUSE WHO FILE JOINT RETURNS SPECIAL CONSIDERATION FOR THOSE claimed an exclusion of $250,000, marry a homeowner and then a homeowner andthen claimed anexclusionof $250,000, marry test.Thiscanbeanissueifyousellyourhome, prior 2years” Both youandyourspousemustmeetthe“noexclusionin $250,000. If only one spouse meets the test, the exclusion islimited to Both youandyourspouse must meet the two-year use test. may bespecifiedbytheIRS. health conditions, or such other unforeseen circumstances as aggregate period of due to change of two years) employment, toexceedan (not absence periodof other Any temporary intelligence community. of the United States, or as an employee offoreign the services or cial extended duty asamember of the uniformed services onqualifiedoffi during which you or your spouseare serving Any period (not to exceed anaggregate period of ten years) discussed above. for apro-rated exclusion, unless the hardship rule applies, as $250,000 exclusion,andthespousefailingtestisnoteligible the testishomeowner, heorshewillstillbeeligibleforthe Ifthespousemeeting jointly sellthathomewithintwoyears. - - is a business loss rather than a personal loss. is abusinesslossratherthanpersonal willbedeductible,subjecttovariouslimitations,sinceit portion rented or was used for yourbusiness, the loss attributable to that ofgain ataxbenefitfrom yourhomewas theloss.Butifpart the sale of residence a personal is not deductible, you do not factoring inclosingandimprovement costs.Since alosson after to lose money on the sale of your principal residence, especially time,orif unusual market conditions prevail, it is possible a short purchase you appreciate it.However, after it for hold only ifyou Based onhistoricalevidence,youwouldexpectyourhometo principal residence). principal residence costing more than the net proceeds of their dence. As rental property, all ordinary and necessary expensesof dence. Asrental property, andnecessary all ordinary considered resi rather than a personal to be a rental property the totalnumberof is rentedit isactually days out,theproperty fornomorebers) thanthegreater of of daysayear or10% 14 use your vacation family home (including mem If you personally Rental expensesdeductible infull 1,2026. January December 31, 2017andbeginningbefore beginningafter years for taxes marriedfilingseparately)for ($5,000 up totax $10,000 toelect to deductsales,income or property vidual taxpayers residence thatsecured theloan.Further, theActallowsindi proceeds are used to buy, build or substantially improve the 1,2026unlessthedebt and beforeDecember 2017 31, January beginning after on home equity loansissuspended for tax years to $1 millionregardless of when the debt was incurred. Interest back 2025, December the 31, limitation reverts beginning after Fortaxyears 2017. December15, fordebtincurred$750,000 after deduction limitationwith respect to acquisitionindebtedness The Tax interest CutsandJobsActreduces themortgage on your2017taxreturn. interestreal and estatetaxesasitemizeddeductions mortgage thisincome,youcanstilldeducttheamountof report qualifying the amount of rent you receive. Even though you do not have to or lessduringtheyear, therental incomeistax-free, regardless of If yourent yourvacation home orprincipal residence for14 days Tax-free rental income help youmaximizetaxsavings. to rent outyourvacationorsecondhome.Proper planningcan You shouldconsiderthetaxconsequencesifyou are planning RENTAL OF VACATION OR SECOND HOME LOSS ON THE SALE OF YOUR HOME - - -
principal residence sale and rental 65 EisnerAmper 2018 personal tax guide 66 • • • • • follows: residencea personal and your deductions may be limited, as forrental,(or available underaTax case), it is considered Court greater of of or10% days 14 thetotalnumberof daysitisrented use your vacation home for moreIf you personally than the Rental use expenseslimited bypersonal and real estate activitiesforamore detaileddiscussion. considered tobeapassiveactivity. Seethechapteronpassive your deductiblelossmaybelimitedsincetherental activityis you receive. However, ifyourexpensesexceedincome, maintaining the home are deductible againstthe rental income able for use against income from the property infutureable foruseagainstincomefrom years, theproperty are and avail notcurrently allowablebutare carriedforward Net overalllossesfrom therental ofuse residence apersonal are deductibleinfull. broker costs) commissions on the rental income or advertising Expenses directly attributable to the rental activity itself (such as for rental purposes. andpersonal rentedwas of number used overthetotal was daystheproperty repairs, are deductiblebasedonaratioof thedaysproperty Other rental expenses, including depreciation, utilities and the Tax CutsandJobsAct.. deductible asitemizeddeductions,subjecttothenewlawunder The balanceof interest are thereal estatetaxesandmortgage divided bythetotalnumberof daysintheyear. ible asrental expenses based onthenumberof daysrented interest andreal mortgage estate taxes areQualifying deduct including againonthesale. - - income taxreturn unless: thesaleofnot havetoreport yourprincipalresidence onyour Schedule Dof incometaxreturn. yourpersonal However, youdo You thesaleof wouldtypicallyreport yourprincipalresidence on for vacationhomes. using like-kind exchanges information on a planning opportunity See Tax Tip17inthe passive andreal estate activities chapter for activities formore information. the passive loss rules. See the chapter on passive and real estate uselessthan10%or14days)lossesmaybesubjectto (personal To qualifiesasrental real theextentthatproperty estate • • REPORTING REQUIREMENTS HOMES LIKE sale. Remember personal lossesaresale. Rememberpersonal notdeductible. the saleproceeds onthereturn andthatthere isnogainonthe matches all Forms 1099 to the return, you would want to show You havealossand you received Form Sincethe IRS 1099-S. gain bytheexcludibleportion. gain onthe Schedule D of yourtax return andthen reduce your You You a gain on the sale. have the entireshow would typically - KIND EXCHANGES FOR VACATION charitable contributions
Your ability to control when and how you make charitable contributions can lower your income tax bill, effectively reducing the actual cost of any gift you make, while fulfilling your philanthropic objectives. EisnerAmper 2018 personal tax guide 68 tax tip donating thestockratherthancashwouldbe: littlefuture growth potential.Insteadofthat itmayhavevery sellingthestock,you donateittoyourfavoritecharity. Your taxsavingsby hasappreciatedA stockthatyouhaveownedformanyyears to$100,000from itsoriginalpurchase priceof $60,000.You havedecided capital gainstaxontheappreciation (seeTax Tip18). (asifyoucontributedcash)andavoidpaying security orproperty of receiving adeduction equaltothe full fair market value of the give toamuseum.Bydoingso,youcangetthedoubletaxbenefit other eligibleappreciated property, thatyoucan suchasartwork, significant charitablecontributions.You shouldalsoconsiderusing formore held have you year, one than tofund cash, than rather You shouldalwaysuseappreciated publiclytradedsecuritiesthat a dollar-for-dollar deductionfortheircontributionsiftheyitemize. on itemized deductions hasbeen repealed. Taxpayers will receive 2018, asaresult of theTax CutsandJobsAct,thePease limitation that applies when AGI For exceeds $261,500 ($313,800 for joint filers). reduced due to the itemized deduction limitation (“Pease” provision) thebenefitofFor 2017, thecharitablecontributiondeductionmaybe charitable goals. and charitabletrusts,tohelpyoucombinetaxplanningwithyour chapter, includingusingdonor-advised funds,privatefoundations, More sophisticatedplanningtechniques are discussedinthis • • You cansavesubstantialtaxesbysimply: USE LONG BASIC IDEAS PLANNING your taxbracketwillbehigher. Timing yourcontributionssothattheyare madeinayearwhen contributions. Using long-term to fund your charitable appreciated property 18 *Includes 3.8%Medicare ContributionTax onnetinvestmentincome. Net federaltaxsavings Capital gainstaxifstockwassold ($40,000at23.8%*in2017) Tax savingsoncontribution($100,000at39.6%in2017) - TERM APPRECIATED PROPERTY deduction. The Tax CutsandJobsAct doublesthe amount previ consider in2018andthrough 2025istheincrease inthestandard significantly inayearof unusualfinancial events.Another aspect to deciding whentomakeyourcontributions.Your taxratemay vary Always consideryourtaxrateforthisyearandfuture before years property, backto50%. thethreshold reverts to publiccharities.Ifsome of income thecontributionsare ordinary made in2018.The60%limitonlyappliestocashgifts 60% starting TheTaxfive years. CutsandJobsActincreases the50%threshold to forthenext and anydisallowedcontributionscanbecarriedforward property, income ordinary and ceiling cash ahigh usually still is this ofto 30% AGI your to applies that 2017 limitin 50% the than rather a contributionof isgenerallylimited long-term appreciated property 6indicates.While deduct inagivenyearbasedonyourAGI, asChart There are limitationsontheamountof contributionsthatyoucan you expectthatyourtaxratewillincrease nextyear, youmightwant advantage of acceleratingthetaxdeduction.Onotherhand,if charitable contributionsthisyear(iffeasibleanddesired) togainthe If you expect yourtax rate to be the same next year, prepay your small amounts. charities may be impacted as they receive many donations with Many itemization, andthussecure sometaxbenefitforthegift. for charitable contributionsintoasingleyearinorder toqualify tax benefitforthecontribution.Theymayconsiderbunchingtheir to makecharitablecontributions,sincetheymaynolongergeta individuals through 2025.Thismaycreate adisincentiveforcertain itemizeddeductionsare temporarilysuspended same time,certain At ously allowed for both single and married filing joint filers. the TIME YOUR CONTRIBUTIONS Cash DonationfromProceeds (9,520) $ 30,080 $ 39,600 $
Stock Donation 0
$ 39,600 $ 39,600 - of thedispositiondifference betweenthecharitablededuction incomefortheyear the donorwillberequired toincludeasordinary charitable organization of disposes within three years, theproperty of your basis or the property’s if the fair market value. Furthermore, yourdeduction will be limited to the lesser museum). Otherwise, toa given painting a as (such exemptfunction its in property this ment haditbeensoldandthecharitableorganization mustuse forlong-term capitalgaintreat mustqualify appreciated property To property’s getthe the adeduction, as value fullfairmarket Tangible property personal depreciation recapture. subjectto itemsandproperty includes inventory income property moreeven if you have held the property than 12months. Ordinary to thelesserof thefairmarket valueoryourbasisintheproperty, islimited incomeproperty The charitabledeductionforordinary incomeproperty Other ordinary received hadyousoldthesesecuritiesatacapitalloss. and youwillpermanently losethebenefit thatyouwouldhave deduction willbelimitedtothelowerfairmarketvalueof thestock Never usethesesecuritiestofundyourcontributionssince Securities withafairmarket value lessthan your cost for anyof theappreciation of thesecurity. value or your basis in the stock. Therefore, you lose the deduction your charitabledeductionisequaltothelesserof thefairmarket If you contribute securities that you have held for 12months or less, Securities held for12monthsorless of include: property options available to fundyourcharitable contributions. These types So, before contributingproperty, consideritseligibilityandother tion equaltotheappreciated fairmarketvalueof theproperty. typesof willnotavailyouof property acharitablededuc Certain accelerating theprocess. account tothecharity’s brokerage accountbefore year-end, thereby by havingthesecuritiestransferred directly from yourbrokerage that you make prior to year-end.property One way to do this is the legal transfer requirements for contributions of securities or other actually receives theproperty. Therefore, makesure thatyousatisfy thecharity year the is deduction the take can you that year The to getthebenefitof increased charitablecontributions. itemized deductionsinexcessof thestandard deductionsinorder more Also,youwillneedtohave rate. atthehigher taxsavings to considerdeferringcontributionsnextyearinorder tosecure RATHER THAN FAIR MARKET VALUE CONTRIBUTIONS DEDUCTIBLE ONLY AT COST - - As an example, let’s say you donate the use of a painting valued at by thefractionalinterest contributed. deduction willbethefairmarketvalueof multiplied theproperty contributed toamuseum).Inthissituation,yourinitialcharitable that is tion with its exempt purposes (e.g., an interest in artwork in connec of to a charity that uses the property property portion A fractional interest contribution consists of of a gift an undivided Fractional interest sale bythecharity, nottheappraisedvalue. deduction willbelimitedtothegross proceeds received from the function, butinsteadsellsthevehicle(forover$500),yourcharitable If thecharitableorganization exempt vehicleinits notusethe does Vehicles related toitsexemptpurposeorfunction, thisrulewouldnotapply. IRS, inwriting,thattheproperty’s usewas,orwasintendedtobe, basis. However,and the donor’s to the if the organization certifies occurs (deathofoccurs thedonor). untiltheconditionofdoes notreceive theproperty theconveyance Therefore, youreceive acurrent deduction even though the charity conveyed, notwhenthecharityactually takestitletotheproperty. intheyearthatremainder interest the property iscontractually deduction basedonthepresent valueof theremainder interest in interest organization. toacharitable You willreceive acharitable of throughout orherlifeandleavearemainder his theproperty The ownerof real estate,suchasavacationhome,canhavefulluse Remainder interest inreal property paid andapenaltyof 10%of theamountof theincomeinclusion. from the due date of the return for the year of the deduction until is intheamountthatwaspreviously deductedplusinterest running income inclusionintheyearwhichspecifiedperiodfallsand the dateof yourdemise(“specified period”).Recapture consistsof an of the date that’s from ten years the initial fractional contribution or tothesamedoneeonor before theearlier interest intheartwork then fail to contribute all ofcontribution of your remaining artwork, Beware that“recapture” willoccurifyoumakeaninitialfractional contribution orthevalueonadditionaldate. limited tothelesserof thevalueattimeof theinitial fractional a subsequentfractionalinterest donationof is thesameproperty the paintingwhencontributed.Instead,itwouldbe$100,000since based on25%of additionalcontributionmultipliedbythevalueof increased to$440,000,yourcontributionwouldnotbe$110,000 of fairmarketvalue andthe or additional25%) has thepainting the same painting next year for six months (additional three months of thecontribution(three monthsof theuseof theyear).Ifyougift be $100,000basedon25%of thevalueof thepaintingattime for theremaining ninemonths.Your charitabledeductionwould $400,000 toamuseumforthree monthsandyouretain thepainting -
charitable contributions 69 EisnerAmper 2018 personal tax guide 70 deduction onyourtaxreturns. and are neitherincludibleasincomenordeductibleanitemized per year. Thesedistributionsmust bemadedirectly tothecharity make tax-free distributionstocharityfrom an IRAof upto$100,000 According totheprovision, ifyouare age70½orolder, youcan permanent asaresult of PATH. of theirrequiredor aportion minimumdistributions,wasmade of all charities tax-free while satisfying their accounts to qualifying age 70½ or older to transferand inherited portions IRA owners The provision forqualifiedcharitabledistributions,whichallowsIRA onbehalfof acharitableorganizationof are services notdeductible. considered and not specifically incurred personal in the performance are deductible aswell. Expenses that are forming charitable services expenses formealsandlodgingwhile“awayfrom home”inper insurance. Alternatively, per youcan mile. Reasonable deduct 14¢ with maintenance of the car such asdepreciation, repairs or car connected expenses not but fees parking and tolls including car your areare deductible.You performed candeduct expenses of operating Travelservices. expensestoandfrom theplacewhere the services incidental unreimbursed these expenses incurred while performing formed onbehalfof acharitableorganization, youmaydeduct per Although youcannot get acharitable deduction for services Unreimbursed expenses 2015 (“PATH”) reinstated andmadepermanent theseprovisions. applies.TheProtecting Americansfrom Taxcarryover Hikes Actof tions.’ Rather, five-year and limitation base contribution 50% the contribu by individuals didnotapplyto‘qualifiedconservation contribution baselimitation ondeductions orcapital gainproperty December 31,2014,the30% beginningafter made intaxableyears provision thathadterminated forcontributions Under atemporary the valuationonwhichdeductionisbased. type of charitable contribution often gives the IRS cause to scrutinize and withouttheeasementrequires aqualifiedappraisal.This equal tothedifference inthefairmarketvalue of with theproperty organization. Thecharitabledeductionis to aqualifiedconservation easement is given land. In the typical case, a perpetual conservation land. The easement onlyrestricts what can be done onorto the control,donor doesnotgiveupownership, orenjoymentof the includes a perpetualrestriction onthe use of thereal property. The purposes. A real interest property for this purpose conservation to acharitableorganization that usestheeasementexclusivelyfor easementisacontributionof interest areal property A conservation easement Conservation CONTRIBUTIONS IRA DISTRIBUTIONS AS CHARITABLE - - - intended charity. Themost common charitable planningvehicles control over when such contributions are actually made to your of future intothecurrent contributions yearwhileretaining practical charitablevehiclesallowyoutoacceleratethetaxbenefit Certain limitation of exemptions(for2017only). personal the 3%reduction of itemized deductions (for 2017 only), and the impact theMedicare Contribution Tax onnetinvestment income, bution, the distribution is not included in AGI. may This therefore This technique has additional benefits since, unlike a taxable distri organization orprivate foundation donotqualify. a public charity. Payments to a donor-advised fund, supporting In order toqualify, thecharitabledistributionmustbemadeto An income tax will be assessed on a foundation’s unrelated business to 1%dependingonthefoundation’s level of grantinginagivenyear. you appreciatedcontributed. The excise tax can be reduced property realized including income, investment net its the on gains capital However, aprivatefoundationissubjecttoanexcisetax of 2%on isdonated. securities heldmore thanoneyearwhensuchproperty ability to avoid paying capitalgainstaxonappreciated marketable Both adonor-advised fundandaprivatefoundationallowyouthe Obtain alarge charitable deduction inthecurrent year when evaluatingeitherof these options: are differences and similarities following the consider so involved, foundation canstillbeapreferable alternative ifsubstantialamounts the discussion below). Yet, despite these disadvantages, the private on netinvestmentincomeandotherpotentialexcisetaxes(see create a legal entity with annual tax filings, subject to an excise tax less costlyalternative. Usingaprivatefoundationrequires youto differences. their have donor-advised The and simpler the is fund offers ataxdeduction(subjecttodifferent limitations),butthey Contributing toeitheradonor-advised fund oraprivatefoundation • • • include: PHILANTHROPIC PHILANTHROPIC GOALS OF FUTURE CONTRIBUTIONS AND MEET HOW TO ACCELERATE THE TAX BENEFIT FOUNDATIONS DONOR Charitable Trusts Private Foundations Donor-Advised Funds - ADVISED FUNDS VS. PRIVATE - You would like to diversify your portfolio butyou havebeenreluctantYou todosobecauseof yourportfolio thecapitalgainstax. wouldliketodiversify 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 $1,000,000 As anoriginalshareholder only $400,000. inacompanythatwent public, younow own stock that isworth Assuming you choose a 10% payout rate, youwillreceiveAssuming youchoosea10% anannuityoffor theterm $100,000 of thetrust,much of which willbeeligible A private foundation is subject to a rule which requires which toarule subject is A privatefoundation anannual Make minimum distributions for yourdonor-advised fund. give yourchildren theabilitytorecommend charitabledistributions family’skeeping it in your perpetually to possible It also is name. foundation can be passed down from one generation to another, overall charitable desires. The management responsibilities of the thefamily’sdecisions and formulating a mission statement to satisfy can benefitfrom havingtheresponsibility of makingmanagement Your inacollaborativephilanthropicfamily members effort. family A privatefoundationcanprovide intangiblebenefitsbyinvolving Involve familymembers assets inthefoundation. and resourcesto use your investment expertise to maximize the You retain fullcontrol overallinvestmentdecisions,allowingyou This can be one of the major advantages of the private foundation. investments foundation’sprivate the of control management Maintain goals andensure that yourcharitable objectives are accomplished. which cansometimesmakeiteasiertoachieveyourinvestment so. The private foundation generally gives you more direct control, your charitable preferences, though it isnotlegally obligated todo name) forfuture charitabledistributions. Typically, thefundwillfollow public charity that will retain them in an account (which can bear your donor-advisedThe fundpermits youtomakeyourcontributionsa charitable contributions future ofpayment and amount timing, the ofRetaincontrol in variousactsof self-dealing orotherprohibited transactions. income aswellanonerous excisetax ifthefoundationisinvolved tax tip One option you might want to consider is establishing a charitableremainderOne optionyoumightwanttoconsiderisestablishing annuitytrust(“CRAT”). Bydoingso,youcancombineyour the timeof thesalesincetrustisanontaxableentity. Thetrustcanthenusetheproceeds from thesaletopurchase otherinvestments which, in turn, diversifies your overall portfolio allocationsinceyou retain anannuity interest inthetrust. youroverallportfolio which, inturn, diversifies for thenetlong-termtax rateof capitalgains of(inclusive 23.8% theMedicareTax Contribution onnetinvestmentincome) basedonthe undistributed gain ofgain undistributed You $600,000. receive willalso acurrent-yearfor thepresent charitablecontribution valueof theremainder interest going tocharities.Remember, though,that thefamilylosesremainder valuesinceitwillpasstocharitiesattheendof thetrust’s term. gain at withyourcharitablegivingintentions.Thetrustcansellthestockandpaynotaxon$600,000 yourportfolio desire todiversify 19 AND PROVIDE YOURSELF WITH AN ANNUITY USE A CRAT TO DIVERSIFY YOUR PORTFOLIO • • • A charitabletrustcanprovide thefollowingbenefits: minimum grantdistributionsrule. Donor-advised distribution. 5% minimum funds do have not a appreciation of theassetsinfoundationare greater thanthe bution. Typically, although not always, the actual earnings and foundations thatfailtodistributetherequired minimumdistri ofon Excise taxeswillbeassessed use assets. itsnon-charitable distribution tocharitiesequalatleast5%of theaveragevalue value, whichnecessitatesannualvaluations. it isbased onafixed percentage of the trust’s annualfair market since initial trust value. The unitrust paysanannuity that will vary fixed dollarannuitythatisbasedonapercentage of the either as anannuitytrustoraunitrust.Thepays trusts (“CRTs”)and charitableleadtrusts(“CLTs”). You cansetup There are twotypesoftrusts —charitableremainder charitable • CHARITABLE TRUSTS of aremainder tocharitiesbyusingacharitable interest left Obtain acurrent-year charitabledeductionforthepresent value anddefercapitalgainstax. yourportfolio Diversify intoanannuity. appreciated property Convert lead trust. Pass appreciation on to your beneficiaries by using a charitable environment, thisdeductionislowerthaninthepast. remainder trust.However, withthepresent low interest rate -
charitable contributions 71 EisnerAmper 2018 personal tax guide 72 charities. remaining endof the at trust’s the term designated gotoyour lated income at year-end, subject to the ordering rules. The assets nature of theannuityisbasedontrust’s undistributedaccumu the annuity(youmay neveractually paythefulltax). Thetaxable you contributed and spread outthetaxon the gainoverlife of Therefore, theCRTcanimmediatelysellappreciated stockthat and youonlypaytaxontheannuitypayoutsasreceive them. The CRT’s assetsgrow tax-deferred becauseitisnotsubjecttotax future appreciation inexcessof theannuity). receiving from the contributed securities (but youwill beforegoing ity youreceive will probably exceed theincome youare currently as youreceive annuitypayments, asdiscussedbelow. Theannu annuity basedonthesecurities’fairmarket value.You will betaxed andreduce marketrisk,butyouwillalsoreceive an your portfolio without incurringacurrent capital gainstax.You willnotonlydiversify concentrated position in low basis stock, the CRT can sell them If youcontribute highlyappreciated securities to aCRT, such asa charitabledesiresincome stream (seeTax while satisfying Tip19). and increase your annual your portfolio A CRT can help you diversify CHARITABLE REMAINDER TRUSTS BASED ON ADJUSTED GROSS INCOME CHARITABLE CONTRIBUTION LIMITATIONS These ceilingamountscanbeincreasedinthefollowingways: Private OperatingFoundations** Nonoperating PrivateFoundations Public Charities* subjecttothesameannualpercentage forfiveyears, limitations. thedisallowedcontributionsforward duction islimited,youcancarry However, see thediscussionaboveandnotesbelowforwaystoincrease someof thelimitation amounts.To theextentthatyourde The maximumdeductionyouare allowedforyourcharitablecontributionsissubjecttoalimitationbasedonAGI, asnotedbelow. other than cash (such as ordinary income property), the threshold reverts to50%. thethreshold reverts incomeproperty), other thancash(such asordinary ***The Tax CutsandJobs Act of forthe60%threshold. 2017provides Ifanycontributionsare thatonlycashcontributions to publiccharitiesqualify tax-exempt purposes. organizations thatdevotemostof**Private operatingfoundationsare nonpubliclysupported theirearnings andassetstotheconduct of theirown *Donor-advised fundsare treated aspubliccharities. • • electing toreduceyourcontribution theproperty’scost.Thisisonlyadvisableifyourcontributionswouldotherwise belimitedanditisunlikely The 30%limitationforappreciatedcapitalgainpropertydonatedtopublic charitiesandprivateoperatingfoundationscanbeincreasedto50%by is subjecttoIRSguidance,whichwillhopefullybeprovidedinthefuture. 2018***), andthe20%limitationforappreciatedcapitalgainpropertyincreases to30%.Whetherthe60%thresholdappliesinsituationfor2018 100% ofthecontributionsitreceivedduringthatyear,30%limitationfor cashandordinaryincomepropertyincreasesto50%in2017(60% If anonoperatingprivatefoundationmakesqualifyingdistributionsoutofits corpuswithin2½monthsaftertheendofitstaxableyearequalto that youwillbenefitfromthecarryover inthefuture. Contributions MadeTo 50% in2017/60%2018*** 50% in2017/60%2018*** - - Cash andOrdinary IncomeProperty • • To asaCRT, qualify thefollowingrules: thetrustmustsatisfy than yourtaxrates. overall family income taxes if the beneficiary’s tax rates are lower actual growth rateexperiencedbytheCRT. You canalsoreduce value of theannuitypayoutsare ataratethatislowerthanthe and estatetaxesiftheIRStablesusedfordetermining thepresent transfer totheCRT. Typically, thismayresult inloweroverallgift annuity’s amountissetatthedateof present the value.Thegift to your beneficiaries equal to the since you will have made a gift ofinstead yourself, consequences tax gift consider must you but You can choose to have theannuity paidto yourbeneficiaries • transferred toanannuitytrustortheannualyear-end fairmarket least 5%,butnotgreater than50%of eithertheinitialamount mustbeat The annualannuityincomepayouttothebeneficiary be irrevocable. The term of andthetrustmust thetrustcannotexceed20years 10% of thetrust’s initialfairmarketvalue. The value of the remainder interest to the charity must be at least value of theassetsforaunitrust.
30% AGI Limitation
Appreciated Capital Gain Property 30% 20% 30% chart 6
- from the charitable organization mustcomplete, sign anddate the signature,qualified appraiser’s and an authorized person Appraisal Summary, toyourtaxreturn. Thisform mustinclude plete and attach Form 8283, NoncashCharitableContributions required to obtain aqualified appraisal. Also, youmust com more than$5,000,youare worth If youcontributeproperty unless youcanmeetthesubstantiationrules. to deductweeklycashcontributionsmadeatreligious gatherings in connectionwiththedonation.Thisruleeliminatesyourability were received must explicitlystatewhetheranygoodsorservices the contributionis$250ormore. writtenacknowledgement The tions. A cancelled check isnolonger sufficient substantiation if yourcashcharitabledona documentationtosupport necessary benefit toyou.Therefore, youmustmakesure toobtainthe was made,theamountof thecontributionandvalueof any the name of the donee organization, the date the contribution fromor writtencommunication organization donee the showing charitable organizations mustbesubstantiatedwithabankrecord Regardless of of amount the to donations cash contribution, the to receive theremaining assets. However, theywillhavetowaituntilthetrustterm endsinorder value of low. theremainder interest, whichhasrecently beenvery than theearnings rateintheIRStablesforvaluingpresent enjoy theexcessappreciation sincethegrowth willbegreater taxes. Ifthestockvaluegrows significantly, yourbeneficiarieswill such asstockinanearlystagecompany, and paylittleornogift away. amuchgreater interest Thisallowsyoutogift inassets, on thepresent of value remainder the interest youare giving taxonly tool becauseyouareestate taxplanning subjecttogift Despite these complexities, aCLT and canbe aneffective gift trust earns. table deduction but you are also not taxed on the income the trust, youdon’treceivetrust issetupasanon-grantor achari the annual income and charitable deduction). If the reporting deduction if the CLT is structured as a grantor trust (with you arecations are complexbecauseyou allowed acharitable only interest attheendof thetrust’s term. Buttheincometaximpli beneficiaries receiveor your you and the charity theremainder The CLT is basically the reverse of the CRT. The annuity is paid to REQUIREMENTS AND LIMITATIONS NONCASH CONTRIBUTION APPRAISAL CONTRIBUTIONS SUBSTANTIATE YOUR CASH CHARITABLE CHARITABLE LEAD TRUSTS - - - - • acceptable: Caution: • • • your taxreturn ifyoucontributeanyof thefollowing: A completecopyof thesignedappraisalmustbeattachedto charity’s exemptpurpose. isbeing used for the contribution andwhether the property the appropriate sectionof theform, indicatingthedateof the high incometaxpayers. 3.8% Medicare ContributionTax onnetinvestmentincomeof are notdeductibleforthepurposeofCharitable gifts calculating Medicare ContributionTax onnetinvestment income is notindispute. and the allowed, even value if the charity received the property If these requirements are not satisfied, no charitable deduction is lessthan $10,000. traded stockworth contributions of cash,publiclytradedsecuritiesornon-publicly requirementsThe appraisal both contributions. to donotapply another charity, youwouldneedtoobtainqualifiedappraisalsfor to at$2,500 valued clothing contributes spouse your and charity to one For example,ifyoucontributeclothingvaluedat$3,000 value exceeding $5,000 are subject to the same requirements. Contributions of of similaritems withanaggregate property • the date you contribute the property and before the date due you datecontribute the property The appraisalmustbemadenotearlierthan60daysbefore in valuingthetypeof beingappraised. property she ispaid,ordemonstratesverifiableeducationandexperience ence requirements, regularly prepares appraisals for which he or minimumeducationandexperi organization, hasmetcertain appraisal designationfrom arecognized professional appraisal The appraisermustbeanindividualwhohaseitherearned an is claimed. (including extensions) of yourtax return onwhich the deduction Easements onbuildingsinhistoricdistricts. a charitabledeductiongreater than$500,000. Any item, or group of similar items, for which you are claiming appraisedat$20,000ormore. Artwork
A qualified appraisal must meet certain criteriatobe A qualifiedappraisalmustmeetcertain -
charitable contributions 73 interest expense
Interest expense may reduce your tax liability, but deductibility depends on how the proceeds from the debt are used. nature of thedifferent typesof interest deductions. 7summarizes the ized deductions (orseverely limit them). Chart and local income tax bill,since many states do not allow item This difference canespeciallybesignificantinreducing yourstate above-the-line interest deductionswill yieldabettertaxresult. the-line” deductions) or asanitemized deduction. Generally, interest is deductible against your AGI (also known as “above- Once deductible,there are alsorulesthatcategorizewhetherthe can loweryourtaxes. generating interestnondeductible with other debt that so you review yourdebttodetermine whetheryoucanreplace debt result from theinterest youwill payonthedebt. Also,periodically to getthebesttax toyou available the options consider should thedebtproceeds.you used Before anynewdebt,you incurring and limitations.Deductibilityof interest expensedependsonhow Your abilitytodeductinterest paymentsissubjecttomanyrules INTEREST DEDUCTIBILITY INTEREST EXPENSE DEDUCTION Note: Education loans Passive activities Business activities Trading activities Tax-exempt investments Taxable investments Personal orconsumer Qualified residence(includingasecondhome) Other rulesmaylimityourability to deducttheinterestexpenseinfull. Nature OfDebt Deductible - Not • • existing acquisitiondebt,butonlyuptotheprincipalof that Acquisition debt also includes debt from arefinancing of an December 31,2025. after for taxyears backto$1,000,000 December15,2017.Thelimitationreverts after interest of on$750,000 fordebtincurred indebtedness acquisition interest deduction to Cuts and Jobs Act reduces the mortgage in totalto$1million($500,000ifmarriedfilingseparately).TheTax For 2017,thedebtmustbesecured bytheresidence andislimited purposes). home (aso-calledvacationifusedforpersonal improvement of yourprincipalresidence and/oryoursecond This isdebtincurred onthe acquisition,constructionorsubstantial Acquisition debt debtare:limitations. Thetwotypesof qualifiedmortgage home is deductible as qualified residence interest, subjectto debt used to acquire Interestor improve paid on your mortgage substantially improvesubstantially residence. your is that loan equity Ahome debt atthetimeof therefinancing plusanyproceeds usedto QUALIFIED RESIDENCE
Nature ofDeduction Deduction Itemized • •
Above-the-Line Deduction • • • • chart 7
interest expense 75 EisnerAmper 2018 personal tax guide 76 reduced appliesdue to that the limitation itemized deduction interestFor 2017, the benefit of deduction may be the mortgage deducted intheyearwhich loanispaidoff. loan ispaidoff early, you maydeductanypointsnotalready must bedeductedoverthelifeofhome, points If the theloan. If to is loan the refinance residenceprincipal your or a second • • • • the year paid, the following are some criteria that must be met: deducted overthe life of the loan. In order to bedeductible in Points maybefullydeductibleinthe year paid,ortheymaybe Points secured theloan. is usedtobuy, improve buildorsubstantially theresidence that 1, 2026,unlessthe debt December 31, 2017,andbefore January beginningafter tion onhome equity indebtednessfortaxyears AMT. Tax The interest the Actsuspends Jobs and Cuts deduc thereby effectively increasing yourinterest rateif you are in the residenceyour the AMT,a deductionagainst isnotallowableas interestimprove onhomeequitydebtnotusedtosubstantially ceeds (exceptifusedtopurchase tax-exemptHowever,bonds). interest regardlessqualified mortgage of howyouusethepro interest onhome equity debt upto $100,000isdeductible as For2017, debtupto$1,100,000. deduct interest onqualifying your house.Combinedwithacquisitiondebt,itallowsyouto qualified principalresidence and does not exceed the equity in if marriedfilingseparately)aslongthedebtissecured bya gage interest onahomeequitydebtupto$100,000($50,000 In addition toacquisition you debt, can deduct for 2017, mort Home equitydebt with AGIphases out ratably for taxpayers of $100,000to $110,000. interest for purposesof deduction.Thisdeduction themortgage treatment insurance premiums of asinterest qualified mortgage BudgetActof 2018extendedthroughThe Bipartisan 2017the insurancepremiums Mortgage clerk’s office). at theappropriate government agency(forexample,thecounty home is not security forthe debt and the debt is not recorded paid onloansfrom individuals, suchasyourparents, ifyour residencetion debt.Qualified interestinterest doesnotinclude used to substantially improve your residence qualifies as acquisi The amount is clearly shown intheclosingstatementaspoints. clearlyshown amountis The The pointswere statedasapercentage of theindebtedness. You usetheloantobuyorbuildyourprincipalresidence. Your loanissecured byyourprincipalresidence. - - - - treated paidthe interest. inthe same manner asif youpersonally corporation). Theinvestmentinterest expenseonthisdebtis LLC,debt incurred byapass-through orS entity(partnership, source of investmentdebtisthepro ratashare of investment the mostcommonexampleof investmentdebt.Anothertypical are held for investment. Margin debt usedto buy securities is interestInvestment is interest that on debt to buy assets used discussed inTax Tip20. replacing thisdebtwith investment debt in thesamemanneras consider losses, being limitedbecauseyouhaveexcesspassive If you have interest expense arising from a passive activity that is into investmentdebt. liabilities. See Tax debt personal Tip 20for a method to convert tax orsatisfy expenses, buyconsumergoods(includingcars), interest includes This ible. personal topay used debt on paid Interest expense from (orconsumer) debt isnondeduct personal 1, 2026. andbefore 2017, December31, January beginningafter years suspends theoveralllimitationonitemizeddeductionsfortax amount of the itemized deductions. The Tax Cuts and Jobs Act 3% of the AGI above the applicable amount or(b)80%of the Yourfilers). itemized deduction limitation will be the lesser of (a) when AGI exceeds$261,500($313,800 forjoint forsinglefilers INVESTMENT INTEREST PERSONAL OR CONSUMER DEBT You can reduce or eliminate your personal debt by converting it it converting personaldebtby your oreliminate canreduce You tax tip (assuming nootherlimitations apply).Andthe interest rate on verted nondeductible interest into deductible investment interest the extent available, to buy new securities. Yourtotal debt and the sale of securities to buy other securities, use the proceeds to your totalstockportfolioremainthesame, butyouwill havecon whenever possible.ThiscanavoidreallocationbytheIRS,and Caution: margin debtistypicallylowerthantherateonconsumerdebt. pay off your personal debt. You can then use margin debt, to into deductible margin debt. Rather than using the proceeds from into deductible margin debt. Rather than using the proceeds from may saveimportanttaxdeductions. 20 Keeploanproceedstotallyseparatefromotherfunds MARGIN DEBT DEBT INTO DEDUCTIBLE CONVERT NONDEDUCTIBLE - - gains ($100,000of electedgainstaxedat39.6%ratherthan20%). of income,youpayanextra$19,600 taxonthe capital ordinary to treat of $100,000 the$500,000 long-term capitalgainsas also havenetlong-term capitalgainsof $500,000.Byelecting interest expense in excess of your net investment income. You mum tax rate of 39.6%andyouhave $100,000of investment areyou in 2017 example, As an assume to the maxi subject income tax rates. est expense you deduct at the higher ordinary to reduce yourtaxableincomebytheincreased investmentinter gains andqualifieddividendtaxrateof or20%,butyouget 15% year. By making thiselection,youlosethefavorablelowercapital of investmentinterest expensethatyoucandeduct inthecurrent inthe near future. Thiselection can increase the amount carryover not expecttobeableutilizeanyof theinvestmentinterest income. Generally, thiselectionshould only beusedifyoudo dividend income asinvestment term capital gainsandqualifying ofis availabletoallowyoutreat yournetlong- anyportion If you have an investment interest expense limitation, an election income taxratesandtherefore asinvestmentincome. qualify market mutual funds andbondfunds, are subject to ordinary for this rate, including dividends receivedqualifying from money investment interest expenselimitation.However, dividendsnot tax rate is not treated as investment income for purposes of the $470,700 for married filedjointly ($479,000 in preferential2018)) $235,350 formarried filed separately($239,500 in 2018), and (20% if AGI ($425,800 in2018), exceeds $418,400 for single filers qualifieddividendincomethatiseligibleforthe15% For 2017, there isadequatenetinvestmentincome. and canbe deducted in alater year,forward to the extent that Any disallowed interest fortheregular tax orAMTiscarried deductible investmentinterest canbegreater forAMTpurposes. not receive ataxbenefitforthesedeductions.Asresult, your it doesnotgetreduced byinvestmentexpensessinceyoudid AMT, your net investment income will generally be higher because only to the extent they exceed 2% of your AGI. If you are in the fees)but tion of investmentincome(e.g.,advisory expenses (otherthaninterest) directly connectedwiththeproduc Your investment income isreduced by deductible investment short-term capital gains(but not net long-term capital gains). dividends (asdiscussedbelow)andnet interest, nonqualifying of yournetinvestment income. Generally, thisincludestaxable Investment interest expenseisonlydeductibleuptotheamount interest expenseasnondeductible. ofexpense tothe tax-exempt income, rendering the aportion As Tax Tip21illustrates,youare required toallocateinterest than youwouldexpect. careful, sincethisrulecan reach further income, such asmunicipalbonds,isnot tax-deductible. But be Interest on debt used to buy securities which generate tax-exempt - - - tion ondeductiblemedical expenses,charitable deductionsand itemized deductions (for 2017 only) and, if applicable, the limita which inturn reduces the2%phase-outof yourmiscellaneous deduction. Thisisbecause the interest expense reduces yourAGI, gives youagreater taxbenefit thaninterest treated asanitemized Interest expensedeductible“above-the-line” againstyourAGI income. reduce the 3.8% Medicare Contribution Tax on net investment Additionally, theinvestmentinterest expensededuction can help your incomebyall,orsome,of youritemizeddeductions. save statetaxesifyourof residency allowsyoutoreduce Therefore,39.6%). net taxdrops your you will Plus, by$20,000. lower bytheadditionalinvestmentinterest expense($100,000at However, yousave $39,600of tax since yourtaxable income is (such asNewYork andCalifornia). of itemized your deductions in portion a a disallows that state Pennsylvania Connecticut, as (such orlimited NewJersey), and deductions itemized allow not does that state a in live ible ifyou be deductible against yourstate income, rather than nondeduct But evenmore isthattheinterest beneficialformosttaxpayers will exemptions. limitation onyouritemizeddeductionsandpersonal other itemsaffectedbyAGI. For2017,itwillalsoimpacttheoverall ABOVE tax tip securities, consider the real after-tax cost oftheinterest you stock. Eventhoughyouarenotusingmargin inyourtax-exempt account, your interest deductionwillbelimited because of an tax-exempt account.Therefore,before youborrowagainstyour thus treats youraccounts asone account anddeems youto to prevent ataxpayer from reaping a double tax benefit, and the account holding taxable investments to purchase additional tax-exempt municipalbondsandaseparateaccountthatholds your tax-exempt holdingsbased onthe ratio of yourtax-exempt will bepaying. have indirectlyborrowedsome of thedebttomaintainyour panies). Assumethatyouwanttouseyouravailablemarginin mostly taxableinvestments(suchasstockinpubliclytradedcom IRS rulingthatrequiresyoutoallocateaportionofthedebt It iscommon to have one investment account that holds mostly investments toyourtotalinvestments.Thisrulingwasdesigned 21 - THE - LINE DEDUCTIONS DEDUCTIBLE INTEREST DEBT CAN LIMIT YOUR INDIRECT TAX - EXEMPT - - -
interest expense 77 EisnerAmper 2018 personal tax guide 78 the finance charges thatrelate to the business items purchased. of subject totracingrulesthatallowyoudeducttheportion These purchases are treated as additionalloansto the business, purchase for yourbusiness (asanowner) usingyourcredit card. Thisalsoincludesitemsthat you which youmateriallyparticipate. S corporation,orLLC nership, in involvedinatradeorbusiness including debtusedtofinancethecapitalrequirements of apart This isinterest ondebttracedtoyourbusinessexpenditures, Business interest limitation discussedabove. trading interest is still subject to the investment interest expense ness of property. trading personal However, insuchacase,the as theentitymeetstestsforactively engaginginthebusi have no involvement in the management of the entity, so long interest will be classified as trading interest to you even if you orLLC.est commonlypassesthrough The atrading partnership (securities),ratherthansimplyasaninvestor.property Thisinter if youare activelyengagedinthebusiness of tradingpersonal This isinterest incurred onborrowings against taxablesecurities Trading interest Interest expenseeligibleforthis favorabletreatment includes: - - - business entity. Theinterest isanadditionaldeductionagainst indirectly through the capital requirements of apass-through passive activityexpenditures, whetherpaidbyyoudirectly or Passive interest expense isinterest on debt incurred to fund Passive activity interest expense or phaseoutthresholds for2018. and JobsAct didnot change the student loaninterest deduction when MAGIfor jointreturns).($165,000 is$80,000 TaxThe Cuts and 2018($135,000forjointreturns) andiscompletelyeliminated whoseMAGIphase-out fortaxpayers exceeds$65,000in2017 tional loaninterest is$2,500.The student loaninterest begins to For 2017 and2018,the maximum deductible amount for educa at thetimedebtwasincurred. dependent who wasthetaxpayer’s spouse,oranindividual er’s ofqualified highereducationexpenses thetaxpayer, thetaxpay A qualified education loan is any debt incurred solely to pay the Interest oneducationloans estate activities. and realsive activitylosslimitations.Seethechapteronpassive overall passive activity income or loss, it is subject to the pas AGI. However, of sincetheinterest your expensebecomes part the incomeorlossof theactivity, thereby deductibleagainst - - - retirement plans
Contributing to retirement plans can provide you with financial security as well as reducing and/or deferring your taxes. However, there are complex rules that govern the type of plans available to you, the amount you can contribute, whether contributions need to benefit your employees, and the requirements for taking funds out of the plan. Failure to adhere to these rules can have severe, adverse tax consequences. EisnerAmper 2018 personal tax guide 80 IRA acceptsrollovers). repayments or rollovers within three (provided years a plan or permits ratable income inclusion over three and permits years; retirementwithholding; plandistributionsfrom the 20% mandatory subject totherelief islimitedto$100,000.Therelief alsoexempts identially-designated disasterareas. Thedistributionamount 1, 2018 are waived for victims preswho are residents in certain 1,2016andJanuary and IRAdistributionstakenbetweenJanuary (pre-age 59½) withdrawals anddistributions from qualified plans Jobs Actof 2017provides thatthe10%additionaltaxon“early” New: • 401(k) contributions)offer thesetaxsavingadvantages: Retirement plans (otherthanRothIRAsandoffering Roth RETIREMENT BENEFITS PLAN Your contributionsgrow tax-deferred untilwithdrawn.
RETIREMENT PLANS • • • individuals, subjectto incomelimitations: Individual Retirement Accounts(IRAs)available to all • • • • to employees include: Employer-sponsored deferralplansavailable salary of otheremployeesorpartners. may notsetuptheirownretirement plan totheexclusion owner-employees forpurposesof retirement plansand (generallyLLCs) aretaxed aspartnerships treated as Note: • • • • individuals include: Retirement plansavailable to self-employed Education Traditional Roth SIMPLE PlansforCompanieswith100orFewerEmployees 457(b) PlansforEmployeesof Government Organizations empt Educational,CharitableandReligiousOrganizations 403(b) PlansforEmployeesof PublicSchoolsorTax-Ex 401(k) Plans Defined BenefitPlans Defined ContributionPlansincluding401(k) SIMPLE IRAor401(k)Plans Simplified Employee Pension (SEP)Plans For distributions from all types of plans, the Tax Cuts and Partners in partnerships and owners of andowners entities inpartnerships Partners chart
8 - - maximize contributions. Employeesare more limited since they Self-employed individualshavemore flexibility tochooseplans inother retirement plans. whether youcontributetoorparticipate your income, whether you are an employee or self-employed, and ofon avariety can contributetodepends you including factors, different contributionanddistributionrules. Thespecificplan(s) There are manydifferent typesof retirement plansavailablewith contributions. in thefuture, but there is nocurrent-year taxdeductionforyour byprovidingfor tax-free growthopportunities andwithdrawals Roth IRAs and Roth 401(k) contributions offer different tax savings • Unlike adefinedcontributionplan, whichmustbeestablished fied defined contribution plan(e.g., aprofit-sharing plan). There are severaladvantagesof aSEPcompared toaquali $55,000 for2018. ofof 100% theireligiblecompensationor$54,000for2017and limit for common law employees covered by aSEPisthelesser tion (netof thedeductionforcontribution). Thecontribution individual cannot exceed 25%of his or her eligible compensa for 2018.However, the contribution on behalf of aself-employed annual contributiontoaSEPis$54,000for2017and$55,000 ontheirbehalf. makecontributions also maximumallowable The plan foryourbenefit.If you haveeligibleemployees,must If youdonothaveemployees,theplanisasingleparticipant contributions to your own IRA and to eligible employees’ IRAs. A SEPplanallowsyou,inyourcapacityasemployer, to make contributions thatyoucanmakefor2017and2018. annual maximum the shows 9 Chart in. be eligibletoparticipate 8showsthedifferent typesofChart retirement plansthatyoumay Roth IRA. spouses may alsobe eligible to contribute to a traditional or directors’ or Employees self-employed fees). their and individuals income from a self-employment activity (such as consulting or offered totheones tion bytheiremployer, iftheyhaveearned may alsobe eligible to make contributions toother plansinaddi employer matchsomeorallof theircontributions.Employees employer offers, but may gain the advantage of havingtheir will have to make contributions basedonthe type of plan their AVAILABLE RETIREMENT PLANS SIMPLIFIED EMPLOYEE PENSION PLAN current taxes. year’s Your contributions are tax deductible, thereby reducing your - - - included intheplan. in the same manner asfor SEPs unless 401(k) provisions are individuals, the maximum contribution will generally be limited or100%of2018 hisorhercompensation.For self-employed each employeeisthelesseroffor and $55,000 in 2017 $54,000 The maximumcontributiontoadefinedplanfor a money purchase pension plan,oratarget benefit pension plan. A qualified defined contribution plan can be a profit-sharing plan, required tobefiledannually. nor isFormplans, documentation asdefinedcontribution 5500 year. AnotheradvantageisthatSEPsdonotrequire thesame taxreturn,on yourprioryear’s eventhoughmadeinthenext contributions deduct still can you and extensions) (including entity due dateof thetaxreturn forthecurrent yearof thesponsoring by December a SEPplancanbesetupanytimepriortothe 31, AND BENEFIT PLANS QUALIFIED DEFINED CONTRIBUTION *This isthemaximumannualbenefit thatcanbeprovidedforbytheplan,basedon actuarialcomputations. RETIREMENT MAXIMUM PLAN ANNUAL CONTRIBUTION LIMITS • • • Catch-up contributionsforindividuals age50orolder SIMPLE plans(savingsincentivematchplanforemployees) deferralstostateandlocalgovernment andtax-exemptorganization plans 457(b) salary SEP Plans Traditional andRothIRAs Defined-benefit plan* Defined-contribution planincludingsalarydeferralamountsabove deferrals 401(k), 403(b),salary Type ofPlan SIMPLEs Traditional andRothIRAs 401(k), 403(b)and457(b)plans
defined benefit plans,contributions must be made bySeptember LLCsproprietors, orcorporations).Forcalendar-year partnerships, ing extensions (as late as October or 15, September 15 for sole as late as the due date of income tax return, that year’s includ to adefinedcontributionplan tax deductibleplancontributions As longastheplanisinexistenceonthatdate,youcanmake tax to plan. to the deductible make want contributions you which plan, your plan must be in place by December 31 of the year for Whether youchooseadefinedcontributionorbenefit of earned income. is thelesserofor 100% for 2018 in 2017and$220,000 $215,000 allowable annualbenefit).Themaximumbenefit desired annual and income to benefit maximumthe (limited of plans,andisbasedontheemployee’s age,averageannual annual contribution may exceed those allowable for other types the driven, actuarially is plan the Because benefit. that attain to calculates thecontributionsneeded benefit andthenactuarially A qualified defined benefit plansets afuture annualpension 15, regardless of anextensiontofileuntilOctober15. Maximum AnnualContribution 2017 $ 18,000 215,000 54,000 54,000 12,500 18,000 6,000 3,000 5,500 1,000 2018 $ 18,500 220,000 55,000 55,000 chart 12,500 18,500 6,000 3,000 5,500 1,000 9 -
retirement plans 81 EisnerAmper 2018 personal tax guide 82 no less than 1% in two out of every fiveyears. no lessthan1%intwooutof every toreducechoose but 3% than to less contribution matching the employee’s theemployermay ForaSIMPLEIRA, compensation. to matchemployeecontributionsatamaximumof 3%of the age 50andover) with the employer generally requiredtaxpayers ees tocontributeup$12,500for2017and2018($15,500 take the form of an IRA or a 401(k) plan. Both plans allow employ other employer-sponsored retirement plan. A SIMPLE plan can lish a SIMPLEplanaslong as the employer doesn’t maintain any $5,000 ormore of compensation inthepreceding yearcanestab An employer that hadnomore than 100employees who earned Similar provisions applyfor403(b)and457(b)plans. deferralplan. than oneemployerorsalary limit applies to yourtotal contributions even if you have more $24,500 respectively age50andover).Thisannual fortaxpayers made for2017is$18,000and2018$18,500($24,000 and plan. Themaximum employee elective contribution thatcanbe of theircompensationcontributedtothe elect tohaveaportion A 401(k) planisaprofit to sharingplanthat allows participants rolled overtoanin-planRothaccount. after-tax certain contributions. Inaddition, maybe contributions and 457(b)deferrals;matchingcontributions;profit sharing are: that wouldbeeligibleforconversion pre-tax403(b), 401(k), distributable andwould betreated asanERD. Contribution types earnings (and contributions vested thereon) thatare currently maybeappliedtoanytypeoffor thiselection.Theconversion beneficiaries. There isnoincomelimitorfilingstatusrestriction notnon-spouse but spouses, tosurviving isavailable election election. The distribution (“ERD”)canmake the Roth conversion ance intheplanandwhoiseligibletoreceive aneligiblerollover whohasanaccountbal Any current orformer planparticipant Application to plansand participants documents mustprovide forthein-plan conversion. buttheplan and 403(b)plansmaypermit suchaconversion, This is known as an “in-plan” Roth conversion. Both 401(k) plans pre-tax basis intoaRothafter-tax accountinsideof theplan. amounts thatwereor allof contributedtoaplanon certain some to convert conditions Employees canelectundercertain In-Plan Roth conversions SIMPLE PLANS 457 AND SALARY DEFERRAL PLANS ( b ) PLANS ) ( 401 ( k ) , 403 ( b )
- - -
UNIFORM LIFE TABLE of 24.7). $80,972 in2018($2,000,000dividedbyadistributionperiod you wouldberequired totakeaminimumdistributionof aggregate, were valuedat$2,000,000theendof 2017, the in plans, retirement qualified your and old years 73 are minimum distributionbyusingthistable.Assumingyou younger than yourself, you can compute your required years 10 than more not is or beneficiary sole the not either If youare eitherunmarried,ormarriedbutyourspouseis Age 84 83 82 80 74 70 79 78 76 75 73 72 77 81 71 Distribution Period 20.3 22.0 22.9 23.8 25.6 26.5 27.4 24.7 15.5 16.3 19.5 21.2 17.9 18.7 17.1 Age 94 85 99 98 96 95 93 92 90 89 88 86 97 87 91 Distribution Period 10 chart 14.8 13.4 10.2 10.8 12.0 12.7 11.4 14.1 8.6 9.6 6.7 7.6 8.1 9.1 7.1 contribute to either IRA, youmusthaveearned incomeequalto contribute toeitherIRA, file yourtax return does not extend this date. To be eligible to tion onorbeforeof April15 thefollowing year. Anextensionto tax deductible) inthe current year, you must make thecontribu as acontribution for atraditional IRA (Roth contributions are not 50) to either IRA account, orboth combined. To be deductible contribute upto $5,500for 2017and2018($6,500if at least age there are alsocommon rulesthatapplytobothof them.You can IRAs. Whilethere are significantdifferences between theseIRAs, The twomostcommontypesof IRAsare RothIRAsandtraditional or thetransitionrulediscussedbelow. distribution unlesstherollover meetsoneof theaboveexceptions be within 60 days), you could not roll over any other 2018 IRA (received acheck)androlled itoverintoIRA-2thesameday(must 1, 2018 IRA-3), and you took a distribution from IRA-1 on January Example: • • the followingrollovers are exemptedfrom thisrule: treating them as one IRA for purposes of the limit. Please note that and SIMPLE IRAs, aswell as traditional and RothIRAs,effectively is appliedbyaggregating allof anindividual’s IRAs,includingSEP the numberof IRAsyouown.Theone-rollover-per-year limitation another (orthesame)IRAinany12-monthperiod,regardless of Reminder: ( provided thattheplanhas existedforatleasttwoyears. sponsored retirement plan(e.g., a401(k) plan)to aSIMPLE plan, PATH allows ataxpayerto roll overamountsfrom an employer- limited. Fortheemployer, thecontributionsare notdiscretionary. employermatchingrequirement canbeattractive,though tory lower than for other types of plans. For the employee, the manda sponsored retirement plan and the elective contribution limit is The downside is that you cannot contribute to any other employer- top-heavy rules, which are generally applicabletoqualified plans. non-discrimination andotherqualificationrules,includingthe Caveat: INDIVIDUAL RETIREMENT ACCOUNTS IRA nating IRA to deposit to the new IRA. Therefore, the transfer because youdonotreceive aphysicalcheckfrom theorigi Trustee-to-trustee betweenIRAsare transfers notlimited limited (becausetheygeneratetaxrevenue). fromRollovers traditional to Roth IRAs(“conversions”) are not new IRAtrustee. are electronically transferred from theoldIRAtrusteeto is not considered arollover bytheIRS.Theassetsand/orcash s ) The benefit of a SIMPLE plan is that it is not subject to If you have three traditional IRAs (IRA-1, IRA-2 and You can makeonlyone rollover from an IRAto - - - meet oneof theseexceptions: sponsored plananddeduct yourown IRAcontributions if you year.However, employer-to an make contributions can still you in anemployer-sponsored of retirement the planforanypart donotactivelyparticipate ifmarried) yourspouse, ifyou(or IRA You canonlymake tax deductiblecontributionstoatraditional you cannolongermake contributionsinthatyearorfuture years. rates atthetimeofAlso, onceyoureach distribution. age70½, income tax income,subjecttoordinary fully taxableasordinary lower yourcurrent taxes,butfuture year’s distributionswillbe earnings grow the and butions tax-deferred. contributions The A traditional IRAallowsacurrent tax deduction for your contri considered earned incomeforIRApurposes. or greater than the IRA contributionamount.Taxable alimonyis • a traditionalIRA: are generally tax-free. ARothIRAoffers theseadvantages over contributions are madeonanafter-tax basis,but yourwithdrawals fromA RothIRAdiffers atraditionalIRAprimarilybecauseyour • • • • CURRENT TAX DEDUCTION TRADITIONAL IRA: ROTH IRA: NO TAXES ON DISTRIBUTIONS qualified distributions. Todistributions. qualified a tax-free as the distribution, qualify You neverpayanyincometaxontheearnings ifyoutake only sored planupuntiltheyearyouattainage70½. inanemployer-sponof theincomelimitationsorparticipation You canalwaysmakeanondeductiblecontributionirrespective $119,000 in2017and$121,0002018. deductible IRA contribution until your MAGI reaches a partially not exceed $99,000in2017and$101,0002018.You can make employer-sponsored plans, but your combined MAGI does in participate jointly) filing (if spouse your and you Both reaches $196,000in2017($199,0002018). deductible contributioncanbemadeuntilthecombinedMAGI can make adeductible IRA contribution. A partially participant exceed $186,000 in2017($189,0002018).Onlythe non-active employer-sponsored plan andyourcombined MAGI doesn’t You are inan married,butonlyoneof youactivelyparticipates for 2018. MAGIyour allowed until reaches$73,000 and 2017 in $72,000 deductible IRA contribution is and $63,000 for 2018. A partially You are single andyourMAGI does not exceed $62,000in2017
- -
retirement plans 83 EisnerAmper 2018 personal tax guide 84 • earnings onthetaxyoupaybecauseof therollover. the potential benefit of the tax-free growth compared to the lost received the distribution. Before you roll over anything, evaluate amount of therollover from thetraditionalIRAistaxable,asifyou future growth into tax-free growth. The disadvantageisthat the The advantageof tax-deferred this rollover isthat youconvert orallofto considerrolling IRA. thebalanceintoa Roth part If you already have a traditional IRA in place, you maywant IRA byOctober15of thesubsequenttaxyear. of aprevious of conversion traditional IRAcontributionstoaRoth Cuts and Jobs Act of 2017 repeals rules allowing recharaterization Note: • • • • 2018) ifsingleorheadof household). 2018), ifmarriedfilingjointlyand$133,000in2017($135,000 permitted untilyourAGI reaches $196,000in2017($199,000 you are contributions singleorheadof household(withpartial married filingjointly, or$118,000in2017($120,000 in2018)if contributions are ifyouare in2018) ($189,000 in2017 $186,000 employer-sponsoredAGIThe plan. limitsformakingRothIRA is toohighforatraditionalIRAoryouare covered byan Contributions to aRoth IRA can be made even if yourMAGI income and/oralimony. you reach age70½,aslongyouhavesufficientearned Your can continuetobemadetheplanafter contributions at age70½—orever. beneficiaries are not required to take distributions beginning andtheir spouses who areOriginal account owners designated as nonqualifieddistributions. are subject toregular penalty incometax,plusanadditional10% However, amountsthatexceedyouraccumulatedcontributions flexibility to withdraw funds to cover financial emergencies. your contributions,theyare nottaxed.Thisgivesyoumore Tocontributions. do notexceed theextent these distributions distributions) are treated first asanontaxablereturn of your Distributions before reaching age 59½(andother nonqualified exceptions). age 59½(withafew and the distribution mustbe made after Roth IRAmusthavebeenopenedmore ago thanfiveyears non-retirement account assets. future from andthose able to paythe taxonthe conversion are thosewhoanticipatebeinginahighertaxbracket inthe who may benefit sion maybenefitfrom Others aconversion. should beabletorecover lostontheconver thetaxdollars togobefore years many whohave viduals retirement who and Who should make aconversion to aRoth IRA? Effective for tax years after December31,2017,theTax after Effective fortaxyears Those indi - - You from RMDs taking retire qualified your generallystart must ( second spousepasses. willnotberequired distributions herownand as IRA the until toaRothsincethespousemaytake sider aconversion who do not anticipate the need to take distributions should con whose spousesareHigh income individuals muchyoungerand • ciary orisnotmorethe individual. than younger ten years than ciary if theindividual’sindividual spouse iseithernotthesolebenefi Lifetime Table and isused byunmarried individuals,oramarried for determining thedistributionperiod. OneiscalledtheUniform a distributionperioddetermined bythe IRS.There are twotables plans atDecember 31of the prioryearanddividingthat sum by by taking the aggregate value of all your qualified retirement penalty. a wellas as thedistribution, on computed is RMD The the tax income would you that have had to pay effectively covers you donothavetotakeacatch-updistributionsincethepenalty Ifyouare subjecttothepenalty,a 50%penaltyontheshortfall. youreach 70½,youareplan ortraditionalIRAafter subjectto Generally, ifyoufailtotakeanRMDfrom yourqualifiedretirement by December31). byApril1andthesecond distributions thefollowingyear(thefirst until the following year. If you elect to defer, you must take two either take a distribution in that year or defer the distribution Note: exception doesnotapplytoSEPsorSIMPLEIRAs. taking distributionsfrom theplanuntilyouactuallyretire. This the employerat70½,plandocumentmayallowyoutodefer you own5%orlessof theemployerandare stillemployedby reached age70½beforeemployer.your leaving Forexample,if until you terminate your employment even if you have already from theplanassome plansdonotrequire youtotakeRMDs your employerregarding whenyoumustbeginreceiving RMDs employer, refer youshould with totheplandocumentorconsult inaqualifiedretirementare planof aparticipant yourcurrent ofDecember 31 RMD amountmustbetakenby thatyear. Ifyou year inwhichyoureach age70½.Foreachyearthereafter, the ofApril 1 IRA by or traditional ment plan theyearfollowing REQUIRED MINIMUM DISTRIBUTION “RMD” rata from eachIRA. isdeemed to bemade protax contributions, theconversion extent anindividualalsohasatraditionalIRAfundedwith pre- However, toRothIRAs. can beconverted the amounts tothe and in future year IRA to tions this traditional a thatso years contribu makenondeductible can individuals High-income What are some planning ideas for high-income taxpayers?
If you turned or will turn 70½ during the year, you can ) RULES - - - - • • • • • • • Note: • exceptions: early withdrawal penalty unless you meet one of the following taken before reaching age 59½you are also subject to a 10% incometaxrate.If IRA accountsareand ordinary taxedatyour Generally, withdrawals from employer-sponsored qualified plans with anexampleof howtocomputeyourRMD. Table, themore 10 reproduced commonlyusedtable,is inChart youngerthantheindividual.TheUniform Lifetime than tenyears andismore and isusedwhenthespousesolebeneficiary ExpectancyTableThe othertableistheJointLifeandLastSurvivor AVOID EARLY WITHDRAWAL PENALTIES You receive distributions under aqualified domestic relations separationof service. begin after areearly distributions from anemployee plan, paymentsmust (orbeneficiaries).If individual andthedesignatedbeneficiary joint lifeexpectancies)of(or lives expectancy) orthejoint the payments (made at least annually) for the individual’s life (or life of aseriesofmust bemadeaspart substantiallyequalperiodic minate youremploymentwiththeemployer. Thesedistributions retirement) andyouare old atthetimeyouter atleast55years You take distributions becauseof job separation(suchasearly grandchildren. tion expenses foryou,your spouse, your children or your You use the distribution to pay for qualified higher educa (limited to$10,000). You usethedistributiontomakeafirst-time homepurchase youreachlast paymentisreceived age59½. inayearafter or annuitypaymentsfor a periodof andthe at least five years You takedistributionsintheform of substantiallyequalperiodic deductible. amount nototherwise You usedistributionsformedicalexpenses,limitedtothe You onthe account of adeceased participant. are the beneficiary You disability. haveaqualifying toacourt-orderedorder (pertaining separationordivorce).
This exceptiondoesnotapplytoIRAaccounts. - - rolled overtax-free long qualifiedplan as intoanIRAoranother Amounts distributed from a qualified retirement plancanbe retirement account. loss of thetax-deferred inthe growth hadthefundsbeenleft sure youcompare the benefit of the reduced rate against the ofto takeadvantage take distributions alowtaxbracket,make are distributions the ties, taxableintheyearwithdrawn.Ifyou low. youare Though not subject to the early withdrawal penal expenses oryoumaywanttotakethemifyourtaxbracketis the agesof 59½and70½,youmayneedtotakethemmeet areyou Even though notrequiredbetween totakedistributions above wouldapply. or she reached age 70½. At that time, the RMD rules discussed spouse’sthe surviving plan or IRA would not be required until he distribution into hisorher own planorIRA. Distributions from spousecanmakeaneligiblerollover asurviving plan orIRA, of Upon thedeathofretirement aqualified aparticipant/owner to theincomelimitation. could be directly rolled over to a RothIRA without being subject from distributions only of accounts Roth designated qualifiedplans distribution penalty if you are younger thanage 59½. Previously, 20% tax withholding or the 10% early subject tothemandatory pay income taxes inthe year of the distribution, but will not be directly toaRothIRA.Undertheserules,youwillberequired to are not made from a designated Roth account may be rolled over Special Planning Note: distribution ifyouare underage59½. to income tax and possibly early withdrawal penalties on the retirement orqualified IRA another besubject also will you plan, of (before distribution the to days within60 tax) withholding any income taxwithholding).Ifyoufailtoroll overthefullamount withheld for federal income taxes (some states also require state sonally receive the funds, 20% of the distribution is required to be as the transfer is done directly from trustee to trustee. If you per DISTRIBUTIONS LUMP 70½ AND 59½ AGE DISTRIBUTIONS BETWEEN SURVIVING SPOUSE DISTRIBUTION RULES - SUM ( OR OTHER ELIGIBLE
Distributions from qualified plans that
)
- -
retirement plans 85 EisnerAmper 2018 personal tax guide 86 that year, theentire accountmustbedistributed. of death.However, theIRAaccountholder’s anniversary fifth in any distributionsfrom the account untilthe year containingthe ofthe option notrequire whichdoes rule, five-year the using still (orbeneficiaries)have required beginning date,the beneficiary Alternatively, iftheIRAaccountholderdiedbefore hisorher taking RMDsordiedbefore hisorherrequired beginningdate. named). Thisistruewhether theIRAaccountholderwas already is beneficiary (if more than one primary the oldest beneficiary deathbasedonthelifeexpectancyofthe IRAaccountholder’s in theyearfollowingofmence taking RMDsbeginning of adecedent’sA non-spousebeneficiary IRAwillhavetocom distributions. if the decedent hadnot yet begun taking required minimum the decedent’sreached after 70½,orwithin five years death distribution method used bythe decedent if he orshe hadalready plan orIRA.They must take distributions basedonthe minimum to roll over a decedent’s qualified plan balance into their own beneficiaries such as children of the deceased are not eligible non-spouse then rolloversfor non-spouse IRA, inherited toan governingIf document the provideplan not does plan your (asnotedbelow). death, ratherthanfullywithinfiveyears or herlifeexpectancy, thedecedent’s beginningintheyearafter will nowbeallowedtotakefundsoutof theinheritedIRAoverhis over theIRAtoanotherinfuture. However, thebeneficiary willnothavetheabilitytoroll an inheritedIRAsothebeneficiary to an IRAforthe benefit of the beneficiary. TheIRAistreated as rollover mustbeintheform of adirect trustee-to-trusteetransfer the decedent’s spouse, such asachild of the deceased. The who is not mitted to be rolled overintoanIRA for abeneficiary from adeceasedparticipant’sretirement qualified are plan per If allowedundertheterms of theplandocument,distributions NONSPOUSE BENEFICIARIES - - estate and gift tax planning
On January 1, 2013, Congress enacted ATRA. This law created certainty and provides for planning opportunities to reduce tax cost of transferring your assets to your beneficiaries. On December 22, 2017, President Trump signed the Tax Cuts and Jobs Act, which impacted estate and gift tax planning.
Trusts and estates can benefit from proper income tax planning. EisnerAmper 2018 personal tax guide 88 TAXES The EconomicGrowth andTax ReliefReconciliationActof 2001 revert backto$5millionasadjustedforinflation,usingthenewchainedCPI. revert **As aresult of theTax CutsandJobs Act, theexclusionsare doubledandwillbeadjustedforinflation,usinganewchained CPI.In2026,theexclusionwill *Unless carryoverbasisandnoestate tax ischosen. (“EGTRRA”) provided, among other provisions, a phased reduction a temporary, two-yearreprieve from thesunset provisions of the estate andgeneration-skipping taxes or, more likely, enact a for 2010,andareinstatement of 2010atthetax thesetaxesafter In December 2010, Congress enacted the 2010Tax Relief Act— EGTRRA. This Act extended and modified the federal estate, gift, EGTRRA. ThisActextendedandmodifiedthefederalestate,gift, Background ESTATE, GIFT AND GENERATION modified regime forthese taxestobeginin2010(orearlier). believed thatCongress would acttoeitherpermanently repeal rates (andwiththeexclusions)ineffect2001.Almosteverybody during the years 2002 through 2002 years the during of elimination 2009, taxes these in themaximum rateof estate andgeneration-skipping taxes EXEMPTIONS MAXIMUM GIFT, ESTATE, AND GST TAX RATES AND thereafter** 2018 and 2017 2016 2015 2014 2013 2012 2011 2010* Year 2010through shows the ratesandexemptionsfortaxyears 2018andthereafter: The followingchart Gift, EstateandGST Maximum Rates 40% 40% 40% 40% 40% 40% 35% 35% 35% Tax - SKIPPING $11,180,000 $5,490,000 $5,450,000 $5,430,000 $5,340,000 $5,250,000 $5,000,000 $5,120,000 $1,000,000 Gift (Cumulative Tax-FreeTransfers) These provisions allowedestatesof marriedcoupleswhoseassets 2012, an inflation adjustment made this $5.12 million per person 2012, aninflation adjustment made this$5.12million perperson $10.98 millionpercouple). As aresult of ATRA, the$5million exclusion,adjustedforinflation, ($10.24 millionforamarriedcouple). adjustment, the exclusion amount increasedamount the exclusion adjustment, million (or to $5.49 and generation-skipping tax provisions through December 31,2012. were $10 million or less to avoid federal transfer taxes in 2011. For On January 1, 2013, the final compromise was reachedOn January and ATRA rate wasacompromise between35%and55%marginal taxrates has beenmade permanent withamaximum taxrateof 40%. This and permanently extended and modified federal estate, gift, of taxprovisions. previously enactedestateandgift generation-skipping taxprovisions. For2017duetoinflation Exemptions $11,180,000 $5,490,000 $5,450,000 $5,430,000 $5,340,000 $5,250,000 $5,000,000 $5,000,000 $5,120,000 Estate $11,180,000 $5,490,000 $5,450,000 $5,430,000 $5,340,000 $5,250,000 $5,000,000 $5,000,000 $5,120,000 GST State Tax Credit chart 11 NO NO NO NO NO NO NO NO NO “chained” CPI.The2018exclusionis$11.18million.increased The federal annual exclusion amount for gifts to a non-citizen toanon-citizen The federalannualexclusionamountforgifts exclusion increased to $15,000for 2018.Bymaking The annualgift The increased estate,generation-skippingtransfer, tax andgift The Actretains theIRCsec. 1014(a)fora“step-up” inbasisforthe $11.18 million (adjusted each year for inflation, using chained CPI million(adjustedeach year forinflation,usingchainedCPI $11.18 Also consider utilizing your 2018 lifetime gift taxexclusionof lifetimegift Also considerutilizingyour2018 As aresult of theTax CutsandJobsAct,effectivefortax (adjusted annuallyforinflation,using chainedCPI)tax-free during Where do you begin? you and your spouse the ability to transfer up to $22.36 million to $22.36 up to transfer spouse the ability your and you beginning in the 2018, estate, generation-skipping transfer,years your lifetimes. This is in addition to your annual gift exclusions your lifetimes. This is in addition to your annual gift spouse hasincreased from $149,000in2017to$152,0002018. and for anyexclusion previously utilized). Ifmarried, this gives assets. The basis of appreciated acquired from property adecedent appreciated assets ora“step-down” in basis for the depreciated tax exclusion amount is doubled from $5 million to $10 and gift to familymembers. 1,2018.Thisamountis$5millionand the amountpriortoJanuary will beatthefairmarketvalue(“FMV”)ondateof decedent’s will beadjustedforinflationusingthenewchainedCPI. for 2010through 2018.Also,seeTax Tip22. For 2017, the annual gift exclusionallowedyoutomaketax-free For 2017,theannualgift Here are some effective strategies that you should consider to Estate planning will help you to maximize the wealth that can of excess in For estates there amounts, exclusion are still Use your lifetime exclusion Make annual gifts New for2018and Beyond light of the recent changes under the Tax Cuts and Jobs Act. mentioned previously. 11fortheratesandexemptions See Chart reduce theeventualestatetaxonyourassets: be transferred toyourbeneficiaries.Thisisespeciallytruein beneficiaries. million, indexed for anadjusted inflation amount, using anew using anyof taxexclusion. yourlifetimegift exclusions provide an opportunity to transfer significantwealth exclusions provide anopportunity todecrease taxcostofopportunities transferringassetsto death or, ifelected,theFMVonanalternative valuation date. generation-skipping transfer, backto exclusionwillrevert andgift exclusion sunsetsonDecember31,2025,andthemaximumestate, end uptransferring substantial amounts out of your estate without annuallytoanynumber ofgifts yourrelatives orfriends, youcould amarriedcouple). as $28,000 (or perindividual to$14,000 up gifts The executors of estates of decedents dying on or after January 1, 1, ofThe executors estates of January decedentsdyingonorafter 2011 may elect to transfer any unused exclusion to the surviving 2011 mayelecttotransferanyunusedexclusionthesurviving $10 million($10.98for2017and$22.362018)of $7 million(eachhada$3.5estatetaxexclusion)of their As anexample, assume that one spouse dies in calendar year 2018 spouse. The amount received by the surviving spouse is called spouseiscalled amountreceivedspouse. The bythesurviving against any tax liability arising from subsequent lifetime gifts and and against any tax liability arising from subsequent lifetime gifts amount received from theestateof hisorherlast-deceased spouse assets from federal transfer taxes imposed on their estates after transfers atdeath. transfers the DeceasedSpousalUnusedExclusion(“DSUE”)amount.If their assetsfrom federaltransfertaxes.Thisisaccomplishedbya with ataxableestateof $18millionandleavesitalloutrightto the Prior tothe2010Tax ReliefAct,marriedcoupleshadtodocareful Consider portability of thelifetimeexclusionConsider portability both died. Commencing in 2011, married couples could exclude both died.Commencing in2011,married couplescould exclude in order owned assets separately maintain and planning to exclude of the DSUE amount, the surviving spouse can apply the DSUE spousecanapplytheDSUE of theDSUEamount, thesurviving executor of the decedent’s estate elects transfer, orportability, concept knownas“portability.” The benefit of utilizing your lifetime gift tax exclusion is as fol as is exclusion tax gift lifetime your utilizing of benefit The tax tip You taxexclusionim shouldconsiderusingyourlifetime gift As aresult of ATRA, if you andyour spouse havenot yet used $22.36 million in 2018 (in addition to the annual exclusion gifts exclusion gifts million in2018(inadditiontotheannual $22.36 $44,540,642, rather than the $59,327,737 had youtransferred$44,540,642, ratherthanthe $59,327,737 sets pass to your beneficiaries through your estates, assuming estates, your through beneficiaries your to pass sets and appreciation thereon subjectto estate tax, eitheratyour the assetsnow. spouse’s the estatetaxexclusionattime of yoursurviving your exclusions, you can make gifts ofyour exclusions,youcanmakemillionin2017or gifts $10.98 you andyourspousewillhaveacombined estate in excess of ferred assetsmayremain inyourestatewithallfuture income rate): thetrans haven’t alreadymediately ifyou Otherwise, doneso. rate of 40%). Your beneficiaries will receive the net balance of balance net the receive will beneficiaries Your 40%). of rate as appreciated the If taxes. estate and gift free of beneficiaries If you transfer $22.36 million in 2018, the $22.36 million will the $22.36 million in2018, If youtransfer$22.36 each of you). ofto eachdoneefromin 2018 and$15,000 in2017 $14,000 lows (assuming a 5% compounded annually after-taxcompounded annually a 5% lows (assuming growth less the $22.36 million exclusion still available at anassumedtax million exclusionstillavailable less the$22.36 death, or, spouse’s ifmarried,typicallyatyoursurviving death. during yourlifetime may ($59,327,737 be as high$14,787,095 death, theestatetaxonassetsthatyoudidnottransfer growto your which willbeavailable in 20years, to$59,327,737 22 TAX EXCLUSION NOW USE YOUR LIFETIME GIFT - - - -
estate and gift tax planning 89 EisnerAmper 2018 personal tax guide 90 • • • Although portability of planning tax estate simplifies exclusion the portability Although surviving spouse(whohas$5millionof hisorherownassets). surviving spouse dies prior to January 1,2019).Asaresult ofspouse diespriortoJanuary ATRA, portability spouse has$23millionof assetsonhisorherdeath,only$640,000 spouse will have a$22.36million exclusion (disregarding surviving spouse’s executorelectstotransfertheunused$11.18million, spouse’s millionexclusionwouldbeused.Ifthedeceased $11.18 tax tip the exclusioninestateof spousetodie,whichoften thefirst the inflation indexing) from federal transfer taxes. If the surviving there of anunlimitedmaritaldeduction,andnone is thedeceased will be subject to the federal estate tax (assuming the surviving will be subject to the federal estate tax (assuming the surviving for many couples, there couples, for many are tousing advantages significant still No federal estate tax would be due from the estate of to the first necessitates thecreation of a“bypasstrust.” Theseinclude: has beenmadepermanent. die because the surviving spouse receives spouse allof and assets the surviving the die because 23 taxes. Preservation of theassetsforchildrenPreservation andgrandchildren (e.g., Protection of theassetsfrom potentialcreditors. Removal of future incomeandappreciation from transfer in a situation where the surviving spouseremarries). in asituationwhere thesurviving Value of shares transferred to beneficiaries ($9 per share) Shares remainingattheendof GRAT’sterm Year 2($521,150dividedby$9pershare) Year 1($521,150dividedby$8pershare) Shares usedtopayannuities: Shares transferredtoGRAT you willneedtousethestockpayyourannuity, asfollows: year. second assets, the liquid GRAT end of any the the hold Since at not $9 does and year first ofthe end the at share per $8 to annuity payment of $521,150 per year ($1,000,000 times 52.115%) totalling payments of $1,042,300. Assume the stock appreciates you couldsettheannuityat52.115%tozero out the remainder taxonthe transfer. interest and payno gift You would receive an are currently 2018) valued at $1,000,000 (200,000 shares at $5 per share). As an example, based on a 2.8% IRS rate (for February You transfersecuritiesinacompanythathasgreat potentialtoatwo-yeargrantorretained annuitytrust(“GRAT”). Thesecurities TRANSFER APPRECIATION WITH A GRAT FREE OF GIFT TAXES This difference arisesbecausetheestatetaxis“tax inclusive,” which This typeof to waspreviously ownership undertheUniform Gifts Although there taxes,forthosepeople isareluctance topaygift years, yourbeneficiarieswillreceive years, ($3,571,429 anextra$571,429 you have previously used your available exclusion amount and you survives three thetaxes are years, removed fromsurvives hisorherestate. amount actually going to the heirs. Furthermore, if the grantor ifthegrantor Furthermore, amount actuallygoingtotheheirs. of whichisthe$5millionamountlessgift $3,571,429, a netgift amount available for your beneficiaries. For example, assume that taxes of $1,428,571 ($3,571,429 at the 40% rate) and survive for 3 for 3 taxes of $1,428,571 ($3,571,429 atthe 40% rate) andsurvive taxes willoften increase the transfer additionalassets,payinggift who haveuseduptheiravailableexclusionandcanafford to One of tochildren thecommonmethodsof and makinggifts Make taxable gifts Gifts to minors Gifts less $3,000,000).(Thisexampleignores thetimevalueof money.) means that means tax the on is amount the of total not and assets the beneficiaries willonlyreceive $3,000,000. However, ifyoumake Ifyouhavealarge have another$5millionthatyouwishtogift. minor under astate’s Uniform Transfers Act (“UTMA”). to Minors estate, assuming the 40% estate tax rate effective for 2018, your estate, assuming the40%estatetaxrateeffectivefor2018,your of for the as custodian to be held by individual an the assets grandchildren undertheageof 21istoarrangeforownership $ 692,550
200,000 (57,906) (65,144) 76,950 • • • • • 40%), leaving$59,796,345toyour beneficiaries.Thus,there isapotential savings of $24,957,564. $84,753,909 in 20 years fromin 20years $84,753,909 theinitialamountofa 5%after-taxusing $31,942,857 growth to rate.Bycomparison,if theassetswere left at age if 18 the designation of contains, in substance, ownership age 21.However, itispossibleforthecustodianshiptoterminate death before estateupontheminor’s age 21,ortotheminor’s sumption thatyoucansustaina30% minorityandmarketabilitydiscountonthevalueof thelimitedinterests). accumulate in your estate, the estate tax could be as high as $24,957,564 (net ofaccumulate inyourestate,theestate taxcouldbeashigh$24,957,564 a maximum rate ofmillion exclusionassuming the$22.36 the UTMAstatusterminates. the deceased spouse’s taxable estate should he or she die before the phrase“untilage18.” totheminoruponattaining to transfertheproperty Other methods for transferring assets to minors (or for their benefit (orfortheirbenefit Other methodsfortransferringassetstominors How much will your beneficiaries receive? The value of their limited partnership interests could grow, free of gift or estate taxes,to estate giftor of free grow, could interests partnership limited oftheir value The receive? beneficiaries your will much How Let’s assume in 2018youandyourspousehavenot yet used anyof exclusions of your lifetime million each).Yougift $22.36 million($11.18 for the benefit of his or her child and his or her spouse serves as as for thebenefitof hisorherchildandspouseserves It is important to make sure that the person who gifts the property the property to make sure who gifts that the person It isimportant Fortunately, thisresult canbeavoidedwithproper advance Act(“UGMA”).Minors thecustodianisrequired UndertheUTMA, can transfer assets valued at $31,942,857 to anFLP or FLLC,can transferassetsvaluedat$31,942,857 free taxes(basedon theas of inadditiontoyourannualexclusiongifts, gift planning. For example, if a spouse transfers his or her property hisorherproperty planning. Forexample,ifaspousetransfers taxableestatefortaxpurposes. be includedinthedonor’s reaches the age of held under the UTMA will 21), the property respect to that property. asacustodian and If the donor isserving of) include: of) wouldnotbeincludedin theproperty custodian undertheUTMA, dies before theUTMAstatusterminates (e.g.,before theminor asacustodian under the UTMAfor the minor with does notserve tax tip 24 Direct paymentof educationalandmedicalexpensestothe trusts, Discretionary Life insurancetrusts, Section 2503(c)trustsforthebenefitof under21years persons Section 529collegesavingsaccounts, qualified educationalinstitutionorthemedicalprovider, and of age, THE ADVANTAGES OF AN FLP OR FLLC These rates are low byhistorical standards andprovide anexcellent You directly can forany tuitionandmedicalexpenses unlimited pay • • • • and tuition for elementary school through graduate school. Youand tuition for elementary to pay the interest due and/or part ofto paythe interest the debt principal each year. dueand/orpart tax exclusion to enable your beneficiary then use your annual gift to make sure that the loan is bona fide (i.e., you intend for it to be to makesure tobe forit intend you fide(i.e., bona is loan the that transferring wealth free of and estate taxes. However, gift youneed with interestwith to be annually,compounded referred applicable to as federal rates(“AFR”), are: For the month of February 2018, the minimum interest rates For the month of February Lending money toyourbeneficiaries isaviable option toavoid Use loans ratherthangifts Pay medical andeducation costs required by the Internal Revenue Service tobecharged required onloans bytheInternal RevenueService educational must makethesepaymentsdirectly tothequalifying free person of taxes.Thisexclusionisinadditiontotheannual gift repaid) andproperly documented. current gift taxesortheuseof exclusion.Youcurrent gift yourlifetime gift can organization ormedical provider. exclusion.Paymentsgift canincludehealthinsurancepremiums opportunity to use loans to your beneficiaries as a technique for touseloansyourbeneficiariesasatechnique for opportunity 2.66% if the term is nine years orlonger(long-term). 2.66%iftheterm isnineyears 1.81%iftheterm of theloan isthree orless(short-term). years years (mid-term). years 2.31% if theterm ismore thanthree andlessthan nine years Totten trust(pay-on-death)bank/securitiesaccounts. -
estate and gift tax planning 91 EisnerAmper 2018 personal tax guide 92 • • • • • • appreciation outof taxinclude: yourestateatminimalornogift Entities and trusts that should be considered for transferring future Use trustsand otherfamilyentities Note: (typically family members) (seeTax(typically familymembers) Tip 24). (though notwithoutsome complicationsandrisks).Theseentities andestatetaxplanningvehicles effectivegift (“FLLCs”) canbevery your beneficiaries. With the IRS rates relatively low, the GRAT is substantial wealth to your beneficiaries. However, beneficiaries. wealthtoyour substantial paymentof so that the future income and appreciation on the assets in the as the asset contributed to the trust with your right to live in the as theassetcontributedtotrustwithyourrightlivein and thetiming and amount of distributions to the partners allow youtotransferassetsyourbeneficiaries,typicallyata an attractiveoption(seeTax Tip23). appreciate in excess of the interest rate used by the IRS (2.8% the federalexclusion,itmaybeappropriate tolimittheamount Bypass trust: Charitable trust: (“ILIT”): trust insurance life Irrevocable Personal residence trust: LLCs: and partnerships limited Family GRAT: for theassetstransferred totheGRAT. Ifthetransferred assets However, instates that onlyallow anexclusionthat is lessthan life insuranceproceeds from yourestate,thereby transferring portfolio and combine estate planning with your charitable portfolio benefits. taxes on the premiumspremiums may reduce and gift the tax house foraperiodof timeastheannuitypayment. (“FLPs”)andfamily limited liabilitycompanies partnerships bypass trust escape estate tax when the second spouse dies. bypass trustescape estate tax when thesecondspousedies. detailed discussion. desires. Seethechapteroncharitablecontributionsforamore grantor retained interest trust) that uses yourprincipal residence while you value, retaindiscounted control of investment decisions going intoabypasstrust. in February 2018),the excess appreciation will passtax-free to in February Connecticut is the only state which imposes gift taxes. Connecticut istheonlystatewhichimposesgift A GRAT paysyouanannuityatafixedrateinexchange Thistrustcanhelpyoudivideyourassetsproperly, A charitable trust can help you diversify your your A charitable trust can help you diversify This isaform of aGRIT(whichis An ILIT can remove Family limited “skip (individualstwoormore persons” generationsyoungerthan TRANSFER TAX EXCLUSION The GSTexclusionallowsyoutotransferup$5.49millionfree The success of theGRAT depends on theamount of income earned As Tax beneficial estate Tip24 illustrates, FLPs or FLLCs can be very All incomeearned bytheGRAT istaxabletoyou,sothetrust’s When youcreate aGRAT, equal you(asagrantor)havemade agift you can afford to do so. There is no portability between spouses betweenspouses you canafford todoso.There isnoportability you), youwillbesubjecttotheGSTtax(ata40%estaterate amounts). If you make transfers directlyamounts). Ifyoumaketransfers toyourgrandchildren, or assets are notdepletedbyincometaxes. asset appreciation in excess of theIRSrate(forexample 2.8%used and appreciation ontheassetsduringGRAT term. Incomeand at theendof thetrustterm. at theIRSprescribed taxontransfertothe ratesothere isnogift term of the trust and remaining assets will pass to your beneficiaries trust duringthetrust’s term. Theannuitypaymentsare calculated the present valueof theannuitypaymentsyouwillreceive from the to thefairmarketvalueof theassetstransferred totheGRAT less UTILIZE YOUR GENERATION will bepaid(assumingbothestatesare inexcessof theexclusion GRAT (“zero-out” GRAT) and theoretically no assets should be left for theGSTexclusion. for theireventualbenefit,through atrustorotherentity, ortoother for February 2018 transfers) will cover annuity payments during the will cover annuity payments duringthe 2018 transfers) for February to certain limitations. to certain the assets would be brought back into your taxable estate, subject If youtransferassetsdirectly toyourchildren andtheyeventually Note: LIMITED LIABILITY COMPANIES FAMILY LIMITED PARTNERSHIPS AND benefit) uptotheamountof yourremaining GSTtaxexclusion,if have notyetusedthefullamountof taxexemption, yourgift pass theassetsdowntotheirchildren, two levelsof estatetax planning tools.You cancontributeassetstosuch anentityin under current law) in addition to gift orestatetaxes. under current law)inaddition togift GRANTOR RETAINED ANNUITY TRUST consider making gifts to your grandchildren (or to a trust for their consider making gifts of theGSTtaxin2017(increasing to$11.18millionin2018).Ifyou gift tax-free (seeTaxgift Tip23). If you should die before the expiration of the GRAT’sthe ofterm, expiration the before die should you If - SKIPPING These trustscanbegrantorfortaxpurposes,requiring you, An evenmore effectivewaytouseanFLPorFLLC istocreate (though this control must be set up carefully). You would typically (or memberinterest ifan FLLC). You and/oryourspousetypically your financial position will allow you to continue paying all the an additional tax-free gift. Beforean additionaltax-free doingthis,youshouldmakesure gift. as grantor, to include allof the income of the trust onyourtax tax. available annualandlifetimeexclusions,thereby avoidinggift trusts to hold the limited partnership interests foryourbeneficiaries. trusts toholdthelimitedpartnership estate. the grantor’s the discountedvalue.Care must beexercised tobesure thatthe from theFLPorFLLC. FLLC, allowingthetrusttogrow tax-free. Ineffect,youare making Because thelimitedinterests are minorityinterests subjecttolack return. You pay all the taxes on the income earned by the FLP or management control of the investment anddistribution decisions interest (orremain themanagingmember keep thegeneralpartner control doesnotresult intheFLP’s entire assetsbeingincludedin can beincreased. You shouldobtainanappraisaltosubstantiate corresponding the and discounted tax-free of amount thegift of marketabilityandlackof control, thevalueof canbe thegift interests, butnot inexcess of onlythe your limited partnership gift of alimited liabilitycompany).Thisinterest allowsyoutoretain interests and limited partnership for exchange partnership general income taxes even though you cannot take any cash distributions income taxeseventhoughyoucannottakeanycashdistributions tax lien. Note: exemption willbe$2.6million,$3.6million andfederalthreshold in 2018,2019,and2020thereafter. taxexemptionwillincrease overathree-year***Beginning 2018,theCTestateand gift periodfrom $2milliontothefederalestatetaxthreshold. The Inheritancetaxwillnotberepealed.New Jersey EstateTax**In 2017,theNewJersey EstateTax 1,2018,theNewJersey Exclusionincreases to$2,000,000.EffectiveJanuary willberepealed. However, the 105% more thantheexemptionamount,entire estateissubjecttotax,notjusttheamountinexcessof theexemption amount. *The exemptionamountchangedonApril1,2017.Thefrom April1,2017through December31,2018willbe$5,250,000.IftheNYtaxableestateis (a) Aninheritancetaxof tosiblingsand15%onother taxabletransfers. todirect 12% ontransfers 4.5%isimposedontransfers descendantsandlinealheirs, STATE ESTATE TAX RATES AND EXEMPTIONS Pennsylvania Connecticut New Jersey New York State California andFlorida havenoestatetax.InFlorida,there may beaneedtofileotherforms toremove theautomaticFloridaestate Maximum EstateTaxRate 12% 16% 16% (a) Maximum GiftTaxRate 2704 that imposed limitations on valuation discounts for transfers 2704 thatimposedlimitationsonvaluationdiscountsfortransfers While FLPsandFLLCs canbeeffectiveestateplanningvehicles,they adequately capitalized).Theinstallmentpaymentsthatyouare transactions should conform to the legal documents. Unless these these Unless conform documents. legal should tothe transactions the proper taxandaccountingrecords shouldbemaintained, the installmentnote. this grantortrustmethod,thecanreceive theincomefree to agrantortrustfortheirbenefit.Sincesuchusuallyhas to transfertheinterests toyour beneficiariesistoselltheinterests from the partnership, typicallyfrom theannualincome.Byusing from thepartnership, In August 2016,the IRSissued proposed regulations under Section Rather than gifting the limited partnership interests, another way the limited partnership Rather than gifting limited fundstopurchase theinterests, thesalewouldbedone precautions are taken,thearrangementmaynotbeupheldin must becarefully structured, fullyimplementedsubstantiallybefore required to receive would come from distributions to the trust had an impact on marketability discounts. On October 4, 2017, had animpactonmarketabilitydiscounts.OnOctober4,2017, have limited or eliminated lack of control discounts and would have death occurs, and have a bona fide, nontax purpose. In addition, andhaveabonafide,nontaxpurpose.Inaddition, death occurs, of taxes, thereby increasing the annualcash to fund payment of on aninstallmentbasis(subjecttoarulerequiring thetrusttobe of interests infamily-controlled entities.Theseregulations would event of achallengebytheInternal RevenueService. income and gift tax returnsincome andgift shouldbe carefully prepared andall None None None 12%
$2,000,000/$2,600,000*** $5,250,000* $2,000,000** Exemption None 12 chart
estate and gift tax planning 93 EisnerAmper 2018 personal tax guide 94 The trust can also provide income to your surviving spouse and spouseand The trustcanalsoprovide incometoyoursurviving The value of the house at the end of the QPRT’s term will goto A qualified personal residence trust (“QPRT”) is a form of residenceA qualified personal trust (“QPRT”) a GRIT that A properly structured ILITcanremove lifeinsuranceproceeds from (as actuariallycomputedusingIRSinterest rates). your estate, if the trust is both the policy’s owner and beneficiary. your beneficiariesfree oforestatetaxes.Whenthe additionalgift spouse’s death.Inaddition,thetrusteecan properly manageand sell the house andreinvest the funds in other investments. In either allows you to transfer your personal residenceallows youtotransferyourpersonal toatrust(typically family-ownedbusinessesbylimitingvaluation as theywouldhurt and that neitherofand that anyincidenceof youpossess in ownership inyourtaxableestate,thefederalestatetaxcouldreduceare left ofassets) represents yourestate.Lifeinsurance asignificantportion the policyatdeath. this tax,youmustensure thattheproceeds of yourlifeinsurance the proceeds byasmuch40%for2017andbeyond.To avoid standardtheir of proceeds ifthe But purposes. forother and living taxes, especially if the value of your business (or other non-liquid to allowyoucontinueusingtheresidence, andtherent youpay their businessestothenextgeneration. the proposed regulations under Section 2704 would be withdrawn the U.S. Treasury stating that released a finalreport Department will decrease your taxable estate.Ifyou do notintendto live in the QPRT term expires, yourchildren (oratrustfortheirbenefit)will for your children’sfor your the tolivein continue you though even benefit) Life insurance can serve an important function in your estate plan function in your estate plan an important Life insurance can serve However, are thebenefits diebefore lostifyou term QPRT the ends. LIFE INSURANCE live there duringtheterm taxappliestothefair of thetrust.Gift principal to yourchildren (orother beneficiaries) upon your policies are not payabletoeither youoryour spouse’s estate, because itcanprovide yourbeneficiariesliquiditytopayestate home andyourbeneficiariesdonotwant tolivethere, thetrustcan market valueof thehousereduced bytheretained incomeinterest home duringthetrust’s You term (e.g.,tenyears). holdan income QUALIFIED PERSONAL RESIDENCE TRUST can also provide immediate funds to help your family maintain taxwhentheQPRTterminates. case, there isnoadditionalgift own the residence. They must charge you afair market value rent discounts andmade it difficult andcostly for families to transfer invest theinsuranceproceeds forfuture growth. interest inthehomebasedon thepresent valueof yourrightto There are some disadvantages to life insurance trusts, but they You should keep in mind that many states also impose an estate • • • • (Crummey) powerandthebeneficiariesare notifiedinwritingof value. You tax ifthe amount exceeds the will onlyincur agift see if premiums can be lowered and/or the death benefit can be and obtainitinexchangeforyouroldpolicyonatax-free basis. always grantor trusts. However, if the trust onlyholds the life additional costs: You will incur legal fees since a carefully drafted tax remaining any and exclusion annual available gift lifetime the policy, paypremiums ortransferanexistingpolicythathas to haveanyincidenceof ownership: the trust the owner of the insurance policy without being deemed to impose their estate or inheritance tax even if there is no federal specificrules,andthere may trust instrumentisneededtosatisfy this administrativerequirement. toproperly their rightof complywith withdrawal.Itisimportant STATE ESTATE TAX CONSIDERATIONS If youuseanyof thefollowingfundingmethods,youcanmake If you have a life insurance policy that has been in force beenin has policythat lifeinsurance a have If you forat Be careful funds to purchase of tax issues to the extent yougift gift least three itmayprove years, beneficialtoreview thepolicyto no federalestatetaxcredit fortaxespaidtoastate. locatedinthestate.Someof have property thesestatescontinue be trusteecommissions.Also, income tax returns may be required estate tax. Others (e.g., Florida) impose no such tax when thereestate tax. Others is whoareor inheritancetaxonpersons domiciledinthestateor can beminimized with proper planning.There will be some exclusion. Thegovernment’s positionisthattheannualexclusion increased. Itissometimespossibletofindamore favorablepolicy income taxreturns willgenerallynotberequired. insurance policyandyoupaytheannualpremiums through gifts, if thetrusthasassetsgeneratingtaxableincome.Theseare almost is onlyavailableifthetrustdocument includesawithdrawal a trustaccount. and payallcurrent andfuture premiums. trust eitherbypayingthemdirectly depositingthemin orfirst Assign a current policy to the trust and gift futureAssign a current premiums. policy to the trust and gift Gift sufficient funds to the trust so it can buy the insurance policy sufficient funds to the trust soit can buythe insurance policy Gift Sale of thepolicytotrust. tothetrustannualpremiums onapolicyownedbythe Gift However, three becompletedatleast must thetransfer years before yourdeathtoavoid inclusioninyourtaxableestate. The legislation also provides for inclusion of “not taxable gifts • • • • • $5.25 million. After January 1, 2019 the basic exclusion amount 1, 2019 the basic exclusion amount January $5.25 million. After As aresult of PATH, tax will not applytothe transfer of the gift after March 31, 2014 and before January 1, 2019 and the gift was was 1,2019andthegift March 31,2014andbeforeafter January thefollowingdates: after assets were subjecttoNewYork estatetaxes.UndertheBudget time. Furthermore, theestate’stime. Furthermore, exclusionamountisfullyphasedout the basic exclusion amounts (“BEAs”) for decedents dying on or the Budget Legislation with the new estate tax rates and estate
will equal the federal exclusion amount and will be indexed for will equalthefederalexclusionamountandbeindexedfor On April 1, 2014, New York 2014, April On 1, as known legislation State passed Unfortunately, the above basic exclusion amounts start to phase tophase Unfortunately, theabovebasicexclusionamountsstart IRC section 501(c)(6) (generally, 501(c)(6) section IRC business and tradeassociations Legislation, theestateexclusionamountgraduallyincreased and Prior tothislegislation,NewYork estatesabove$1million in Changes to estate taxes inNewYork IMPACT ON CERTAIN EXEMPT leagues). money or other property to a tax-exempt organization toatax-exempt described property orother money made within three of years the donor’s death. Annual exclusion by April1,2017,reached the2013federal estatetaxexclusionof ORGANIZATIONS decedents dying on or after April1, 2014. decedents dyingonorafter exclusion amounts. The new estate tax provisions are in effect for gifts donotgetpulledbackintotheNewYorkgifts taxableestate. made was included” in the federal gross if estate the gift otherwise once theestate’s taxableamountisover105%of thecurrent BEA. out oncetheestate’s taxablevalueexceedstheBEAineffectatthat in IRCsection501(c)(4)(generally, socialwelfare organizations) or Beloware thefederalexclusion. as manner inthesame inflation January 1,2019andbeyond: January April 1,2017andbefore Jan. 1,2019: April 1,2016andbefore April1,2017: April 1,2015andbefore April1,2016: April 1,2014andbefore April1,2015: federal exclusionamount indexed forinflation $5,250,000 $2,062,500 $4,187,500 $3,125,000 There are reasonsmany non-tax to review estate your plan and • • • • • • • • • • A tobeneficiaries.Finalregulations issuedinDecember2016 From aDecedent and distributingSchedules Acquiring Property Act of 2015,IRC sec. 6035introduced requirements reporting to apply to initial reporting and that the rule going forward is to file istofile andthattherulegoingforward apply toinitialreporting acquiredassure from property that abeneficiary’s a basisincertain the form within30daysof filingForm 706. the law. Thisreview shouldincludenontaxconsiderations,suchas: the related documents. with the new reporting requirements,with the new reporting the IRS extended the due Under the Surface TransportationUnder theSurface andVeterans HealthCare Choice It isadvisabletoperiodically review yourestate planto make sure NON purposes. Because many executors werepurposes. Because many executors not prepared to comply CONSISTENT BASIS REPORTING FOR ESTATES confirmed that no further extensions beyond June 30, 2016 would extensions beyond June 30,2016would confirmed that no further date forfilingForm Information 8971, Regarding Beneficiaries decedent beconsistentwiththevalueof forestatetax theproperty it isinconformity with yourcurrent wishes and the current state of yourself? should both parents both should thechildren while bedeceased remain Do you have adequate creditor protections included inyour foryourfamily inthecaseof a Will yourassetsbepreserved Has anyonementionedinyourwilldied? appropriate named you Have guardians children minor foryour Does your estate plan include new children, grandchildren, etc.? Are thebeneficiariesonyourqualifiedplansandlifeinsurance Have you provided for long-term care for your spouse and Is yourhealthcare proxy and/orlivingwillcurrent? Do youhaveapower-of-attorney andisitcurrent? Who are andtrustees? yourexecutors planning? minors? policies inaccordance withyourpresent desires? divorce? - TAX CONSIDERATIONS
estate and gift tax planning 95 EisnerAmper 2018 personal tax guide 96 • • • • 2017. The IRC sec. 645 election allows an executor to choose a TheIRCsec.645electionallowsanexecutortochoose a 2017. As aresult of theTax CutsandJobsAct,theincometaxratesfor AND ESTATES the timingof incomeanddeductionscanalsoreap taxsavings,if taxable yearendsothatfavorable taxlawsapplytotheestate.Also, to potentiallyreduce incometaxliabilitiesthrough themeansof trusts andestateshavedecreased tothefollowing: Choosing theyear-end of anestateinvolvesmore planning.For Planning surrounding incometaxationof estatesandtrustsshould INCOME TAX FOR PLANNING TRUSTS level mayprovide anoveralltaxsavings. lower bracket then individuals), making distributions to current planned forproperly. may result inanincometaxbenefitsincetheratesare lowerthan period willdetermine theapplicablelaw. Ayearendingin2018 distributions.Asthetrustissubject to thetopordinary beneficiary end for the estate can make adifference asthe end of the reporting example, if the taxpayer diedduring2017,reflecting a fiscal year- consider therespective taxbracketsanddetermination of theability income beneficiaries andreceiving ataxable deduction at the trust income taxrateoncetaxablereaches (amuch $12,500 your children where onlychildren workinginthebusinessare If there isafamilybusiness,are yousatisfiedwiththebeneficiaries Do youwishtoleavealegacycharitableoreducational withspecialneedsthatyouwantto Do youhaveabeneficiary At whatagedoyouwantyourchildren, grandchildren orother who will receive that interest? Has a succession plan for the the for plan succession a interest?Has that receive will who receiving interests inthebusiness? business been put into place? Do you need to equalize amongst provide for? beneficiaries tohavefullaccessinheritedassets? organization? Taxable incomeover $12,500 $6,000 $2,550 $9,150 $0 But notover $12,500 $6,000 $2,550 $9,150 39.6% 2017 33% 28% 25% 15%
2018 35% 24% 24% 37% 10% tax credits
There are many credits available to reduce your federal tax liability, but all are subject to complex limitations based on income and whether or not you are subject to the alternative minimum tax. EisnerAmper 2018 personal tax guide 98 old amount. $1,000,orfractionthereof,every of MAGI abovethethresh Thecredit widowers. isreducedand qualifying by$50for and $75,000forunmarriedindividuals, headof household $55,000formarriedfilingseparately$110,000 forjointfilers, sinceitbeginstophaseoutwhenMAGIpayers reaches However, the child tax credit is not available to many tax • • children areQualifying definedas: child isavailabletooffset yourtaxliability. A nonrefundable childtaxcredit of $1,000perqualifying Child Tax Credit in aforeign entity. orotherpass-throughnership entitythathasaninvestment counts orfrom interest anunderlyingownership inapart taxes through securitiesthatare heldinyourinvestmentac commonto incur foreignpass-through entities. It is very foreign corporationsandbusinessincomeearned byforeign in thepaymentof foreign taxesincludedividendspaidby The most common forms often years. income that result due tolimitationsmaybecarriedbackoneyearandforward Any foreign taxcredits notfullyutilizedinthecurrent year between your regular and AMT foreign tax credit allowed. credits allowedeachyearwhichcouldresult inadifference year.particular There isaseparatecalculationof foreign tax foreign taxcredits anindividualmaybeabletotakeina to income subject to tax. There are limits on the amount of U.S. incometaxliability, whereas adeductionisreduction vantageous asitisadollar-for-dollar offset tothetaxpayer’s and possessions of the U.S. In general, a credit is more ad a credit or deduction fortaxesimposedbyforeign countries limitations,theU.S.allowsitsresidents eitherject tocertain to taxinforeign jurisdictions. To avoiddoubletaxation,sub cluding foreign-sourced income which may bealsosubject The U.S.taxesitsresidents ontheirworldwideincomein Foreign Tax Credit taxpayers: The followingisadiscussionof thecredits thatimpactmost TAX CREDIT OVERVIEW a resident of theU.S. the taxyearandwhoiseitheraU.S.citizenornational, A childwhohas not attainedtheage of 17by the end of descendant of suchrelative. of suchchild;abrother, sister, stepbrother, stepsister, ora A son,daughter, stepson, stepdaughter, or a descendant ------by PATH. The earned income threshold of $3,000 is made permanent AMT. credit exceeds the total tax liability, taking into account the $1,000 perchildcredit amount,iftheallowablechildtax income credit fortheyear. Thecredit isalloweduptothe social security taxes earnedfor the year over the taxpayer’s allowed without the tax limit and the excess of the taxpayer’s will beequaltothelesserof thecredit thatwouldhavebeen with three children, ormore therefundable qualifying credit The earned income limitation is set at $3,000. For taxpayers income inexcessof $3,000. of the non-refundable credit amount or 15% of their earned child taxcredit equalto thelesserof theunclaimedportion it may be allowed. Individuals are eligible for a refundable Should the credit be disallowed, an additional child tax cred AGI exceeds $43,000,themaximumrateallowedis20%. The 35%credit Onceyour isforlowerincometaxpayers. the applicable credit percentage ranging from 20% to 35%. amount of the allowable credit is based on your AGI, with ployer-provided dependent care assistance program. The must bereduced byanypaymentsreceived through anem amount of thedependentcare expenseseligibleforacredit individuals.Thevidual or$6,000fortwomore qualifying indi you cancalculatethecredit is$3,000foronequalifying The maximumamountof dependent care expense onwhich the year. self-care andwhohadlivedwithyouformore thanhalfof or adependentwhowasphysicallymentallyincapableof dependent whowasunderage13atthecloseof thetaxyear individualcanincludea individual.Aqualifying qualifying andforthecare of aexpenses paidforhouseholdservices expenses includeand dependent care expenses. Qualifying totakethecredit forchildor gotoschool,thenyouqualify sothatyouandyourspousecanwork persons qualifying If you pay someone to take care of your children or other CareChild andDependent Credit 2018throughfor taxyears 2025. threshold is reduced to $2,500. These provisions are effective income earned the and inflation for indexed is but child, ing qualify per $1,400 to limited is credit) tax child (additional of child.Therefundable thecredit portion is notaqualifying viding a $500 nonrefundable credit for each dependent who married filing jointly ($200,000 for other taxpayers), and pro $2,000, increasing thephase-outthreshold to$400,000if increasing childto thecredit amountforeachqualifying 2017byThe childtaxcredit istemporarilyexpandedafter - - - - - half kilowattof capacityof islimitedto fuelcellproperty cost of and thecredit qualifiedenergy foreach property creditenergy allowed up to30%of efficientproperty the BudgetAct of 2018extendstheresidentialThe Bipartisan Residential Credit Energy EfficientProperty curred forqualifiedenergy improvements, upto$500. provision allowsacredit of 10%of theamount paidorin credit forpurchases of nonbusinessenergy property. The BudgetActof 2018extendsthroughThe Bipartisan 2017the Residential Credit Energy Property phased outat$247,580. withMAGIably fortaxpayers over$207,580andcompletely For 2018,thecredit allowedis$13,840andphasedoutrat forthefullamountofneeds childyoumayqualify thecredit. before theadoptionisfinalizedandifyouadoptaspecial For U.S.adoptions,youmaybeabletoclaimthecredit allowed regardless of theactualqualifiedexpenses. herself. Acredit fortheadoptionof aspecialneedschildis is physicallyormentallyincapableof caringforhimselfor not attainedtheageof 18atthetimeof theadoptionor who of aneligiblechild.Anchildisindividualwhohas er expenseswhichare directly related tothelegaladoption costs,attorney feesandoth adoptionfees,court necessary higher. Qualifiedadoptionexpensesincludereasonable and credit withMAGI isallowedfortaxpayers over$243,540 or withMAGIout ratablyfortaxpayers over$203,540andno claimed for qualifiedadoption expenses. The credit is phased For 2017,anonrefundable credit of upto$13,570maybe Adoption Credit manent. PATH taxcredit per hasmadetheAmericanOpportunity on educationincentives. tailed discussionof thesecredits canbefoundinthechapter take amaximumcredit of $2,000pertaxpayer. Amore de $2,500. The Lifetime Learning Credit allows a taxpayer to amaximumcreditallows taxpayers pereligiblestudentof lege orgraduatedegrees or vocationaltraining.TheAOC to individualswhoincurred col tuitionexpensespursuing and theLifetimeLearning Credit. Thesecredits are available Credit, Hope modified a is (“AOC”),which Credit portunity There are two education-related credits: the American Op Credits andLifetimeLearning Opportunity American ing individuals. $1,050/$2,100, respectively, basedonthenumberof qualify These percentages entitleyou toacredit of $600/$1,200and ------• • percentage. Theapplicablepercentages are: through December31,2021,basedonanapplicable service ing property, however, placedin isavailableforproperty andsolarwaterheat The credit forsolarelectricproperty • • • through December31,2021: qualified energy equipment installedandplacedinservice $500. Thiscredit appliedto expenditures forthefollowing riod begins with the second calendar quarter followingthe riod beginswiththesecondcalendar quarter been soldforuseintheUnited States.Thephase-outpe 200,000vehicleshaveThe credit beginstophase-outafter • • • • • • To asaplug-inelectricdrivevehicle,thevehiclemust: qualify minimum credit of $2,500applied. capacity of the at least 5 kilowatt hours, did not have battery chase plug-inelectricvehiclesis$7,500,andifthevehicle The maximum tax credit allowed for individuals who pur Qualified Plug-In ElectricDrive Motor Vehicle Credit • In the case of property placed in service after December after In thecaseof placedinservice property 1,2020,30%. 31, 2016,andbefore January December after In thecaseof placedinservice property Fuel cellproperty. Geothermal heatpumpproperty, and Small windenergy property, charged from anexternal source of electricity. and that is capable ofless than 4 kilowatt hours being re withacapacity of notthat drawselectricityfrom abattery be propelled toasignificantdegree byanelectricmotor pounds, have agross vehicleweightratingof notmore than14,000 Clean AirAct, be treated asamotorvehicleforpurposesof TitleIIof the have itsoriginalusecommencingwiththetaxpayer, be acquired foruseorleasebutnotresale, be madebyamanufacturer, 1,2022,22%. 31, 2020,andbefore January December after In thecaseof placedinservice property 1,2021,26%. 31, 2019,andbefore January - - - -
tax credits 99 EisnerAmper 2018 personal tax guide 100 prior to2013. return, abusinessisnoteligibleifitgeneratedgross receipts before the five years ending with the tax year). So, for a 2017 million or less and no gross receipts for any taxable year $5 of receipts (gross businesses certain for available is ties Further, thecredit payroll againsttheemployers’ taxliabili receipts) mayclaimthecredit againstAMTliability. gross in less or million ($50 businesses small eligible 2015, December31, beginningafter In addition,fortaxableyears age qualifiedresearch expensesforthethree prioryears. search expenditures incurred thatexceeds50%of theaver In general,thecredit wasequalto14%of thequalifiedre nent. Thiscredit ismadepermanent asaresult of PATH. for useindevelopinganeworimproved businesscompo that was technological in nature and whose application was This isacredit forexpenditures paidorincurred forresearch Qualified Research Credit two-wheeled plug-inelectricvehicles(cappedat$2,500). 2018, known as the golf-cart credit. This is a 10% credit for 1,wheeled plug-inelectricvehiclesacquired before January BudgetActof 2018extendsthecreditThe Bipartisan fortwo- ed States. usedpredominantly outsideoflowed forproperty theUnit No qualifiedplug-inelectricdrivemotorvehiclecredit isal Thereafter, nocredit isallowed. of thephase-outperiod. quarters for thethird andfourth to 50%of thefullcredit amount.Thecredit iscutto25% of thephaseoutperiod,credit iscut twoquarters first inwhichthe200,000 calendar quarter th unitissold.Forthe ------ployed 400 hours ormore.ployed 400hours and40%forthoseem butfewerthan400hours 120 hours the qualifiedfirst-year wagesfor those employedatleast qualified wagesare cappedat$6,000.Thecredit is25%of yearofto theemployeeforfirst employment.Ingeneral, 1,2020.Thecredit isbasedonqualifiedwagespaidJanuary employment through beginningonorbefore taxable years groups to whohaveconsistently facedsignificantbarriers target for hiring individualsfromable toemployers certain taxcredit isafederaltaxcredit avail The workopportunity CreditWork Opportunity chapter ontheAMTforamore detaileddiscussion. and thetaxpreference ontheexercise of ISOs.Seethe rived from “deferral items” such as depreciation adjustments foranAMTcredit ifanyofqualify yourAMTliabilityisde tax credit againstyourregular taxinasubsequentyear. You If youpaytheAMTinoneyear, youmaybeentitledtoa AMT Credit taxpayer. were relied upontodetermine eligibilityof thequalifying will berequired tomaintaincopiesof thedocumentsthat Credit are utilized. Preparersand the American Opportunity Credit, theChildTax Credit andadditionalChildTax Credit, 8867 tothereturn inthosecaseswhere theEarned Income Paid preparers willberequired tocompleteandattachForm Due Diligence Checklist viduals (thoseunemployedfor27weeksormore). whohireemployers qualifiedlong-term unemployedindi PATH alsoextendsthecredit beginningin2016toapply - - - - education incentives
Tuition funding programs, tax credits and education expense deductions are available to help many families fund the cost of college and certain other educational expenses. EisnerAmper 2018 personal tax guide 102 • • • • offer thefollowingbenefits: regardless toalltaxpayers available of plans These income. their is aSection 529plan (qualified tuition program), since it is Probably themostpopulartaxincentivecollegefundingmethod 529 PLANS • • • The taxincentivesavailabletohelppaycollegecostsinclude: you. Seethestatetaxissueschapterforadditionalincentives. on AGI, thereby limitingtheincentivesthatmaybeavailableto butsomeofmembers, themare subjecttophaseoutsbased of thecost funding in you foryourfamily collegeeducation a There are provide that incentives education taxbenefitstoassist EDUCATION INCENTIVES AVAILABLE abroad. training in schools the United States well as as many schools technical school andmostcommunitycollegescertified expenses atanyaccredited college,university, orgraduate Distributions are tax-free ifusedtopayqualifiededucation are tax-deferred forfederalandstatetaxes. tax deductibleonthefederallevel,earningsfrom theplan areplans to the529 the contributions Although notcurrently Education deductions,includingstudentloaninterest. credit andLifetimeLearning credit. American Opportunity Section 529plans. emergency requires you to have access to the funds. However, You ifafinancial toyourself canalsochangethebeneficiary or excess funds remain inone child’s college. account after does not go to college, another child if theoriginalbeneficiary any time andforanyreason. You to may changethe beneficiary age, permitting theaccountownertochangebeneficiariesat reaches legal the beneficiary even after (not the beneficiary), Control of thefundsremains inthehandsof theaccountowner schoolandhighschool. expenses” forelementary distributions of upto$10,000may beusedfor“qualified in 2018, Starting or is excluded. hobbies sports for games, be predominantly educational in nature, so software designed is usedforcollegework.Allowablecomputersoftware must software andeveninternet expenses,solongasthecomputer and board expenses,books,supplies,acomputer, computer room Distributions canbeusedtopayfortuition,certain per per donee donee for For ($15,000 for 2017 2017, you 2018). exclusion amountof tostaywithintheannual free $14,000 gifts exclusion to fund a 529 plan, you will have to limit other tax- gift considerations. However, totheextentyouusedyourannual plan’s assetsare excludedfrom yourestate,there tax are gift the Although taxpurposes. areperson forgift considered agift Funds depositedintoaSection529planforthebenefitof another • • included the Achieving a Better Life Experience (“ABLE”) Act, which Observation: within 60days. if those amounts are re-contributed to aSection 529 account from a Section 529 account is treated as a qualified expense Additionally, a refund of tuition paid with amounts distributed making the distribution isoperating more than one account. aggregating allof theaccounts.Thisissoeven iftheindividual Section 529accountascoming from thataccount,ratherthan PATH modified Section 529 rulesto treat any distributionfrom a premature distributionfrom aretirement account. penaltyontheearnings, toa similar 10% tax andanadditional qualified highereducationexpenses,you’llhavetopayincome Also, even though you can withdraw funds for uses other than options are limited to the plan’s choicesof investment vehicles. Section 529 plans also have their disadvantages. Investment plans usedforqualifiededucationexpenseswillalsobetax-free. Section 529 requirements.satisfy Distributions from these private Private institutionscanoffer aprepaid tuitionprogram ifthey the initialyearthatyoufundplan. amountin only beallowedtotakethedeductionforoneyear’s you willgenerally to theplan, a deductionforthecontributions with theyearof contribution.Also,ifyourstateof residence allows of thecontributionineachof beginning a portion thefiveyears, married). Theelectionallowsyoutoapplytheannualexclusion a five-year period (for 2018, $75,000 if single and$150,000if over made itratably if youhad as individual for an contribution may electtotreat of ifmarried) upto$70,000($140,000 the ceilings. you more investment options and possibly higher contribution 12 months androll over planfunds to anew plan.Thisgives you canchangeyourchoiceoflive in.Inaddition, planevery You are notlimitedtojusttheplansoffered bythestateyou or beneficiary, unlikeothertaxincentiveeducationplans. Age andincomerestrictions donotapplytotheaccountowner will betaxableifnotusedforqualifiededucationpurposes. any distributions representing income earned within the plan
The Tax Increase Prevention Actof 2014(“TIPA”) similar payments,books,supplies, andequipment.However, be job-related. Educational expenses include tuition, fees and employee. There isnorequirement thateducationalassistance of thebenefitswillnotbeincludedingross incomeof the Under aqualified educational assistance plan,upto $5,250 • • filing jointly. and $132,000for2017($114,000 and$134,000 for2018)if married ifsingleorheadof$67,000 for2018) household and$112,000 with MAGI between $56,000and$66,000for2017($57,000 2017 and2018.TheLifetimeLearning credit isphasedoutratably for theyears jointly if marriedfiling $180,000 and $160,000 and orheadof ifsingle $90,000 and $80,000 between household the available credits. TheAOTC is phasedout ratably with MAGI However, these credits have income limitations which phase out foreithercredit.board expensesdonotqualify materials suchasbooks,suppliesandequipment.Room tuition andrelated education expenses, which includes course and Lifetime Learning credit are available if youpayqualified Tax Scholarship AmericanOpportunity/Hope The credit (“AOTC”) in gross incomeandsubjecttoanadditionaltaxof 10%. distribution thatexceedsqualifieddisabilityexpensesisincluded disabilityexpensesofqualifying adesignated beneficiary. Any adjusted annuallyforinflation.Theaccountmaybeusedtomeet taxexclusionlimitoffor 2018), for 2017(also$15,000 gift $14,000 529 savingsaccountandmakeannualcontributionsuptothe disabled individuals(under age 26) would be able to open aSection allows states to establish and operate an ABLE program. Severely ASSISTANCE EMPLOYER LEARNING CREDITS AMERICAN OPPORTUNITY AND LIFETIME qualified expenses,uptothemaximumamountof $2,000. job skills.Thecredit isequalto20%of of $10,000 thefirst toacquire othercourses orimprove your or certain graduate, available foranunlimitednumberof of years post-secondary, Lifetime Learning credit. A$2,000annualcredit pertaxpayeris or sheissubjecttothekiddietaxandotherlimitations. the refundable creditif he willnotbeallowedtoanindividual asarefundable$1,000 credit evenifyouowenotaxes.However, program leadingtoadegree. Generally, youcanreceive upto education withenrollment onatleastahalf-time basisina of fouryears student isavailableforthefirst post-secondary taxcredit. A$2,500annualcredit per American Opportunity - PROVIDED EDUCATIONAL on interest expense. For morefor other taxpayers. on this topic please see the chapter out whenMAGIif marriedfilingjointlyand$80,000 is$165,000 deduction The is completely phased $65,000 for other taxpayers. when yourMAGI reaches ifmarriedfilingjointlyand $135,000 the maximumdeductionisreducedand 2018, For taxyear2017 annually, subjecttoaphaseoutthateliminatesthe deduction. of upto$2,500of interest paidonqualifiededucationloans on educationloans.You cantake the above-the-line deduction AGI, federal your interest including limitations, toincome subject education expenses are deductible in computing against Certain American Opportunity taxcredit andLifetimeLearning credit. American Opportunity as thebasisforanyotherdeductionorcredit, includingthe plan this under employer your forby paid expenses education in gross income.Further, youcannotuseany of thetax-free of completingacourse retain are instruction after includible employer-provided tools orsuppliesthattheemployee may INTEREST ON EDUCATION LOAN exemption deduction may also be disallowed. This benefit may This be disallowed. exemption deductionmayalso threshold amounts,yourpersonal and yourAGI isabovecertain toAMT. subject computing yourincome are Ifyou notinAMT if youare exemptionsare intheAMTasnopersonal allowedin a maximum of $582.Thissavingscouldincrease upto$2,000 learning credit toreduce hisorherowntaxliability, youwillsave of of amount full the claim Ifyourchildcan 35%*). thelifetime in 2017is$1,418 ($4,050 exemption times themaximum rate wise entitledto.The maximum federal tax benefit you willlose forego claimingthedependencyexemption that youare other claim thecredit ontheirtaxreturnsHowever,instead. must you credit orLifetime Learning credit, youmay have yourchildren tations prevent tax youfrom taking the American Opportunity childrenIf youpayqualifiedexpensesforyour butincomelimi parents isalive. taxcredit of as longoneof AmericanOpportunity the portion Please notethatachildunderage24cannotclaimtherefundable are fullyphasedout. is at35%,becausethattheratewhere exemptions thepersonal 2017), themaximumratethatcanbeappliedforeducationcredit *Although themaximumfederal income taxrateisat39.6%(in be reduced whenconsideringthestateincometaximpact. 25 YOUR CHILD TAKE IT ACLAIM CREDIT? HAVE AGI TOO HIGH TO - -
education incentives 103 EisnerAmper 2018 personal tax guide 104 exceed $80,000($160,000forjointfilers). if filing jointly) or $2,000for anindividual whose AGI does not whose AGIfor anindividual ($130,000 doesnotexceed $65,000 expenses forhighereducation.Thedeductioniscappedat$4,000 the above-the-linedeductionforqualifiedtuitionandrelated Budget Act of 2018extended throughThe Bipartisan 2017 and related expenses Extension of above-the-line deduction for qualified tuition international tax planning and reporting requirements
Foreign earned income exclusions and foreign tax credits can significantly reduce the U.S. tax liability incurred on foreign- source income and help to avoid double taxation. Complex reporting is required for U.S. persons owning foreign assets including bank accounts and other financial investments. EisnerAmper 2018 personal tax guide 106 The Tax Cuts and Jobs Act of 2017 will have a significant impact Taxsignificant The a have will of2017 Act Jobs and Cuts 100% of a U.S. LLC, it will effectively be treated as disregarded.as treated be effectively will LLC,it U.S. ofa 100% 2, 2017 or December 31, 2017; whichever period has the greater Such entities are now required to file a pro forma Form 1120 Form forma pro a file requiredto now are entities Such with the 2017 tax year,Starting there is a new filing requirement (which includes individuals, and partnerships corporations) owns The maximum 2017 foreign earned income exclusion is $102,100, is exclusion income earned foreign 2017 maximum The shareholders will be allowed a 77.1% deduction for non-cash for deduction 77.1% a allowed be will shareholders addition to filing Form 1120-F. The pro forma 1120 cannot be 1120-F.cannot Form 1120 filing forma proto The addition share U.S. the in includible be will income the and amount, effec The amounts. cash for reduction 55.7% a and amounts foreignspecified a entity. 10% shareholdersleast U.S. at All with NEW IN2018 NEW tive tax rate will ultimately depend on the U.S. shareholder’s tax not have profitswhich and offshore earningsofthe share their in held offshoreofrepatriationearnings foreign one-time tory with the Form 5472 attachment. This filing requirement is in requirementis filing This attachment. 5472 Form the with for foreign-owned U.S. disregarded entities. If a foreign person foreignperson a disregardedIf foreign-ownedU.S. entities. for holder’s 2017 tax return. At the election of the taxpayer,ofthe election return.the Attax tax 2017 the holder’s bracket. The repatriation amount is determined as of November foreign the of portion a Only U.S. the in taxed been previously tax tip can bepaidoveraneight-year period. U.S. percentage. applicable the on based taxable are earnings include requiredareto entity foreign specified a in ownership in the international tax arena. Most notably, there is a manda notably,a Most is there arena. tax international the in Your for severalyears, companysentyoutoworkinDubai2017 As youcanseeinTax Tip26,yourforeign housing exclusion mightbelimiteddependingonwhere youlive.Inorder toseethedifferences subject totax:$482,062dividedby $625,000is77.13%). • • so you qualify as a bona fide resident of the UAE in 2017. Assume 2017. in the UAE fide resident of bona a as qualify you so tax return: you earn peryearandyourcompany reimburses $500,000 you for $125,000 of housing costs which are taxable to you. You would Note: taxes willbeallowableasaforeign taxcredit thatcanoffsetyour U.S.incometax(i.e.,only$482,062 of thetotal$625,000 of incomewillbe regardless of which foreign country you are working in. The hous The in. working are you country foreignregardlessof which income U.S. your from income following the exclude to able be in limits for housing deductions in 2017, see Chart 13onthenextpage. in limitsforhousingdeductions 2017,seeChart may alsobeeligibletoreceive aforeign taxcredit against theU.S.taximposedonremaining income. However, only77.13%of these 26 $102,100of yoursalary. $40,838 of the housingexpensereimbursements. Although the UAE does not impose an income tax, in this example, if you paid income tax to a country thatimposesatax,you Although theUAE doesnotimposeanincometax,inthisexample,ifyoupaidtaxtoacountry INCOME ANDHOUSINGEXCLUSIONS TAX BENEFITS OF THEFOREIGNEARNED - - - - There are oneruspenaltiesfornon-filing. and resident aliens are aware of their obligation to report their report to obligation their ofawareare aliens resident and report and/or taxation to subject are they that discovering are LLC.the ofclosure and setup the include certainly would and a reporting requirement.a reporting FOREIGN TAX ISSUES tax forms. These complex issues not only impact you if you areyou if you impact only not issues complex These forms. tax worldwide income to the IRS. As a result, the U.S. continues to continues U.S. the result, a As IRS. the to income worldwide filed electronically. It is due April 17, 2018 and can be extended. be can electronically.and filed 2018 17, April due is It Multinational clients with cross-border income from employ fromcross-border income with clients Multinational foreign its LLCand U.S. the between transactions Reportable reaching implications even if you have never left the U.S. For U.S. the left never have you if even implications reaching certain file and income report to fail who persons U.S. pursue ment and investments are in today’s mainstream. Many taxpayers retirement plans. Even holding cash in a foreign bank can trigger on an overseas assignment or retired abroad, but have broad- have retiredbut abroad,or assignment overseas an on two, the between distributions and contributions include owner operating businesses or invest in foreign securities or have foreign foreign in interests own that entities other and funds, equity ing in both U.S. and foreign jurisdictions. Not all U.S. citizens U.S. all Not jurisdictions. foreign and U.S. both in ing instance, these issues arise if you invest in hedge funds, private funds, hedge in invest you if arise issues these instance, Therefore, you will be taxed in the U.S. on $482,062 related to your your to related $482,062 on U.S. the in taxed be will Therefore,you - ($57,174 $40,838 be will exclusion housing 2017 your Therefore, $102,100, youcanexcludeatotalof $142,938. $16,336). When added to your foreign earned income exclusion of (see Chart 13forsomeof themore(see Chart commonforeign cities). are not eligible to exclude $44.76 per day, or $16,336 for a full year. you amount, this Of $57,174. is amount exclusion housing annual ua i cniee t b a epnie iy o ie n s the so in, live to city expensive an be to considered is Dubai employment in Dubai ($500,000 compensation plus $125,000 hous $125,000 plus compensation ($500,000 Dubai in employment ing costreimbursements lesstheexclusionsof $142,938). in living are you city and country which on based is exclusion ing - - -
Through the creation of the FATCA regime, the U.S. has inspired income the of overview an provide to intended is chapter This See FATCA section below. imposed Act”) “HIRE (the 2010 in enacted legislation Significant access into U.S. taxpayers’ foreign financial account information. accounts and entities set up in foreign jurisdictions. This provision non-U.S. by earned income U.S. for regime withholding U.S. a a movementtowards greater globaltax transparency; similar to the FATCAthe to investment other and banks regime, compliance tions involvingforeign employment andinvestments. known as FATCA.as known FATCA financial foreign certain requiresthat requirementsoffshore for reporting the tightened and persons of the HIRE act is the Foreign Account Tax Compliance Act, also exclusions, foreign requirements, taxcredits, reporting andelec institutions play a key role in providing U.S. tax authorities greater FOREIGN HOUSINGEXCLUSIONS adjustment forthedailylivingcostof $44.76perday, or$16,336forafullyear. andcityyouare livingin. Below are listedthemaximumamountsyoucanexcludeforsomecommonforeign cities,beforecountry the The amountof foreign housingexclusionscoststhatyoucanexcludefrom your2017U.S.incometaxreturn dependsonboththe United Kingdom United ArabEmirates Switzerland Russia Japan Italy India Germany France China Canada Country Paris Beijing Hong Kong Toronto City London Dubai Zurich Moscow Tokyo Rome New Delhi Berlin - • AND FOREIGN HOUSINGEXCLUSION/ DEDUCTION INCOMEFOREIGN EARNED EXCLUSION for oneormore specialtaxbenefits: residentsliving or citizens U.S. to requirementsapply filing that In general, the worldwide income of a U.S. citizen or resident who reporting responsibilities. reporting in the U.S. However, if you are working abroad, you may qualify is working abroad is subject to the same income tax and return additional significant have will nations foreignof institutions $104,100 in2018. Exclude up to $102,100 of$102,100 to up and Exclude foreign2017 in income earned
Housing Exclusion Maximum Annual $ 45,600 114,300 108,000 44,200 66,400 39,800 68,700 85,700 56,124 39,219 71,200 57,174 13 chart
international tax planning and reporting requirements 107 EisnerAmper 2018 personal tax guide 108 • • • • This test requires you to be physically present in a foreign country for a in residency establish must Toyou test, this under qualify To qualify for the foreign earned income and the foreign housing You should considerwhether foregoing the exclusion may result On the other hand, if the foreign jurisdiction imposes tax at a your status as a bona fide resident, as long as the trips are brief and there isintenttoreturn totheforeign country. presence physical or residence fide bona the either meet and sion election will mitigate yourstate tax burden to the extent that test, definedbelow: for at least 330 full days in a consecutive 12-month period, but period, 12-month consecutive a in days full 330 least at for that a larger amount of foreign tax credits can be carried back carried be can credits tax foreign of amount larger a that tax credit regardless of whethertheexclusionisclaimed. the foreign earned will income be offsetcompletely by the foreign whether the foreign earned income exclusionand housing exclu Planning Tip: Planning Physical presence test Bona fideresidence test not necessarilyacalendar-year period. calendar year. Brief trips outside the foreignwill not country risk for eign an country uninterrupted period that includes an entire country foreign a in home tax a establish must you exclusions, in alower utilization of foreign tax credits in the current year so in the foreign jurisdiction islower than the U.S. effective tax rate, or forward for utilization in other years. You for utilizationinother years. or forward shouldalso consider claiming theexclusionwillgenerallybemore beneficial. higher effective rate than the U.S., it is likely that the U.S. tax on tax U.S. the that likely is it U.S., the than effective rate higher “treaties that cover social security taxes” designed to eliminate to designed taxes” security social “treatiescover that taxes youpayoraccrue toaforeign country, orif more benefi If eligible, claim exemption from paying social security tax in the Reduce your overall tax liability under tax treaties that the U.S. Claim a foreign tax credit against your U.S. tax liability for income Either (a) exclude or part, all, of any housing income reimburse with the foreign country. Totalization Agreements are essentially foreign country, based on a Totalization Agreement the U.S. has U.S. SocialSecurityandMedicare taxonsuchincome. has withforeign countries. housing ofany all, or part, deduct (b) or receive you ments dual coverage for the same work. You will be required to pay requiredYouto work. be same will the for coverage dual cial, takeanitemizeddeductionforthetaxespaid. earnings). costs paid (i.e., for taxpayers or having self-employmentsalary
If you pay no foreign tax or the effective tax rate tax effective the or tax foreign no pay you If - - - - You are entitled to claim either a tax credit or an itemized deduc An exception to this includes New York State, which allows a allows Yorkwhich New State, includes this to exception An residentcitizens, U.S. by claimed be may credit tax foreign A your U.S.federaltaxliabilityonadollar-for-dollar basis. as itemizeddeductionsonyour U.S. incometaxreturn for2017. a flow-through entity. Youcredit. tax foreign the claim to order in country foreign a aliens, and in cases certain by nonresident aliens. Typically states FOREIGN TAX CREDIT tion for taxes paid to foreign countries. Though not always the always not Though countries. foreign to paid taxes for tion through a mutual fund, and foreign business income earned by paid dividends include credits tax foreign generate may that Generally, only foreign income taxes qualify for the foreign tax tax foreign the for qualify taxes Generally,income foreign only by foreign corporations, including those paid on your behalf your on paid those including corporations, foreign by may be eligible for the credit if you paid or accrued foreign taxes do not qualify. However, these other taxes may still be deductible credit. Other taxes, such as foreign real and personal property taxes, case, the tax credit is typically more beneficial since it can reduce above, youdonotneedtoliveorworkin exclusions discussed the Unlike taxes. income provincial Canadian certain for credit liabilities. tax income offsetstate to taxes foreign allow not do in the tax year.tax foreign-sourcedofincomethe examples in Common Claiming the exclusion is a binding election. Once you have you Once election. binding a is exclusion the Claiming circumstances, it may be more in certain beneficial to Otherwise, years. Thereyears. is no downside of forgoing the exclusion if you have you remain taxable onworldwide income inthe state of residency. IRS. If you have claimed the exclusion in the past, the benefit the past, the in exclusion the claimed have you If IRS. the yearof revocation unlessyoureceive permission from the tax credit. Note: forego the exclusion infavor of claimingonlyagreater foreign income exclusionisnotconsidered whencalculatingtheappli be not will you election, the revoke you If years. future all in it of revoking the exclusion must be weighed against the possible the against weighed be must exclusion the revoking of allowed toclaimtheexclusionagainuntilsixthtaxyearafter claimed the exclusion, you will be required to continue to claim on earned income. TaxMedicare Additional .9% the or income investment net on TaxContribution Medicare 3.8% the either for thresholds cable ramifications oframifications beingunabletore-elect forfive theexclusion never claimeditinthepast. For Americans residing the foreign overseas, earned - - • The credit is calculated for each separate type of foreign-sourced This deduction is eliminated virtually for 2018 under the Tax Cuts subject to a separate limitation than foreign taxes paid on income and JobsActof 2017. the allowablecredit: treated asforeign-source under anincometaxtreaty. is income which in country each for basket limitation credit tax • • • • • from salary fromor an salary active trade or business. Foreign-source income In addition you are required to maintain a separate foreign separate a maintain to requiredare you addition In resourced under an income tax treaty.tax income resourcedan to under provisionapplies This income classified as U.S. sourced income under U.S. tax law, but is generallyclassifiedintotwodifferent basketsfordetermining are dividends on paid taxes foreignwords, other In income.
Your ability to claim a credit for the full amount of foreign taxes subject toasimilarlimitationinthoseyears. sourced taxable income to your total taxable income. This ratio the remaining credit is carried for forward the next ten tax years, can you that credit the of amount maximum the determine to Contribution Tax on net investment income) before the creditTax the beforeContribution income) investment net on paid oraccruedislimitedbasedonaratioof yourforeign- diately preceding tax year and if not utilized in the prior year,prior the in utilized not if and year tax preceding diately creditofthe amount full the claim to able arenot you If claim. in the current year, you the must excess carry back to the imme Medicare 3.8% the (excluding tax actual your to applied is tion taken). Taxes paid on income excluded from U.S. gross income (e.g., income Taxesgross U.S. from excluded income on paid foreign earned incomeexclusionoratreaty-based return posi salary, pensionsoranactivetradebusiness. tional boycotts. General limitation income: limitation General Passiveincome: Taxesand corporations foreigncontrolling persons U.S. of Certain taxes paid on foreignon taxes paid oil-related, and oil and mineral, Certain interna certain in Taxesparticipate that countries the to paid from foreign sources which does not fall into the passive sepa partnerships if annual partnerships certain international returns are not filed. rents, royalties, andannuities. rate limitation category and generally is income earned from rate limitation category gas extractionincome. This category includes dividends, interest,dividends, includes category This This category includes income includes category This - - - - The 3.8% additional Medicare Contribution Tax on net investment 2008. The tax does not apply to the extent that the gift or bequest A U.S. citizen or resident will have to pay tax on a gift or bequest (or the taxpayer’s death, if sooner) provided a bond or other or bond a provided sooner) if death, taxpayer’s the (or your U.S. legal permanent residency status (“green card”) and are security is given to the IRS. Deferred compensation items and items compensation Deferred IRS. the to given is security subject to the exit tax. Any gain on the deemed sale in excess of subject totheexpatriationregime ifthey: a floor of $699,000 for 2017 ($713,000 for 2018) is immediately is 2018) for ($713,000 2017 for $699,000 of floor a at their fair market value on the day before the expatriation date. EXPATRIATION TAX EXIT the expatriate. IRAs and other certain tax-deferred accounts are to made be apply.can not election do An rules sale wash the taxed (“mark-to-market tax”). Losses are taken into account and assets ofyour all sold had you though as rate gains capital the transfer is reported on a timely filed gift taxreturn orestatetax onatimely filedgift transfer isreported time during eight out of the last 15 years and all U.S. citizens are the expatriationdate(earlydistributionpenaltiesdonotapply). treated as if they were completely distributed on the day before • • • which iscurrently 40%. for 2017 and $15,000 for 2018). The tax does not apply if the if apply not does tax The 2018). for $15,000 and 2017 for If you plan on giving up your U.S. citizenship or relinquishing or citizenship U.S. your up giving on plan you If Former long-term residents who held a U.S. green card for any return or to transfers that qualify for the marital or charitable or marital the for qualify that transfers to or return 17, June after expatriated had who individual an fromreceived generally subject to a 30% withholding tax on distributions to distributions on tax withholding 30% a to subject generally sold actually is asset the until sale deemed the on tax the defer considered a “covered expatriate,” you will pay an income tax at deductions. The value of a transfer not covered by an exception ($14,000 exclusion tax gift annual the within is year the during interests in non-grantor trusts are not subject to the tax but are “covereda ofis case who the expatriate” in apply may income is taxable to the recipient at the highest rate on taxable gifts, gifts, taxable on rate highest the at recipient the to taxable is and $165,000for2018; Failed compliance to under certify penalties ofon Form perjury or citizenship when more or million of$2 worth net a Had years five the for liability tax income net annual average Had federal tax obligations for the five tax years preceding the date 8854, Initial and Annual Expatriation Statement, with all U.S. all with Statement, Expatriation Annual and Initial 8854, residency ended;or of expatriation. dency in excess of an annual ceiling, which is $162,000 for 2017 ofresitermination or ofexpatriation date the before ending - -
international tax planning and reporting requirements 109 EisnerAmper 2018 personal tax guide 110 2017, 2016, and 2015 counting all of the days of physical presence A foreign national is generally deemed a resident alien of the U.S. U.S. INCOME TAXATION OF at any time during the day. Exceptions include days spent in the aliens are taxed on worldwideincomeatgraduatedtaxrates NONRESIDENT INDIVIDUALS trade or business (unless a lower income tax treaty rate applies). • • U.S. forthefollowingcircumstances: country the in present physically are you that day any on U.S. U.S. a with connected effectively not is that income U.S.-source If an individual is physically present in the U.S. for at least 31 days Except as noted below, you are treated as being present in the in presentbelow, being noted aretreatedas as you Except Medicare ContributionTax onnetinvestmentincome. 3.8% the from exempt specifically are taxpayers Nonresident Resident nonresidents. than differently taxed are Residents be deemedaresident forU.S.taxpurposes. however,alien, nonresident A citizen. U.S. a as same the much only one-sixth ofonly thenumberofwill the individual in 2015, days during 2017 and has spent at least 183 days during the period of connected with a U.S. trade or business or at a flat 30% rate on in 2017, but only one-third of the days of presence in 2016, and if oneof thetwofollowingtestsismet: effectively is that income on only rates graduated at taxed is Substantial presence test. Lawful permanent residence (green card test);or 1. 1. 2. 3. 4. 4. 5. 5. residence inCanadaorMexico. Days you regularly commute to work in the U.S. from afrom U.S. the in work to commute regularly you Days Days you were in the U.S. for less than 24 when hours you Days you were temporarily in the U.S. as a regular crewregular a as U.S. the in temporarily were you Days the U.S. unless engaged you in otherwise trade or business Days you were unable to leave the U.S. because of a medical a professional athlete competing in a charitable sporting sporting charitable a in competing professionalathlete a Days you were an exempt individual (e.g., foreign gov foreign (e.g., individual exempt an were you Days were travelingbetweentwoplacesoutsidetheU.S. between the U.S. and a foreign country or a possession ofpossession a or foreigna and between theU.S. country member of aforeign vessel engaged intransportation on suchaday. event). or student trainee, ernment-relatedor teacher individual, condition or medical problem that arose while you were you while arose that problem medical or condition in theU.S.
- This form is used by nonresident aliens of the U.S. to annually to U.S. ofthe aliens nonresident by used is form This You will be considered to have a closer connection to a foreigna Youto connection closer a consideredhave be to will Alternatively, you may be considered a nonresident if you also you if nonresident a considered be Alternatively,may you U.S. REPORTING REQUIREMENTSFOR you have maintained more significant contacts with the foreignthe with more contacts maintained significant have you state incometaxonthe earned inoneormore states. NONRESIDENT ALIENS Exempt Individuals and Individuals with a Medical Condition. In Condition. Medical a with Individuals and Individuals Exempt test, you will not be treated as a U.S. resident for 2017 if you do to the U.S. Treasury. A U.S. nonresident may also be subject toTreasury. subject U.S. be the also to may nonresident U.S. A tax due in excess of payments made during the year is remitted tie breaker clauseof anincometaxtreaty withtheU.S. test and you are exempt from it because you also meet the closer • • • would qualify as a resident of your home jurisdiction under the under jurisdiction residentofhome a your as qualify would will need to be submitted with your U.S. nonresident income tax tion or medical problem, you must file Form 8843, Statement for IRS Form 8840, Closer Connection Exception Statement for Aliens, Even though you may otherwise meet the substantial presencesubstantial the meet otherwise may you though Even Foreign nationals, nonresident aliens and other taxpayers who taxpayers other and aliens nonresident nationals, Foreign Note: Form 1040NR/1040NR-EZ not haveagreen card and: payments. The U.S. tax liability for the year is computed and any made tax, ofU.S. payments the and U.S.-sourceincome report presence substantial the meet you which in year the for return because you were an exempt individual (other than a foreign a than (other individual exempt an were you because either through withholding by the payor or through estimated tax connection test. thanwiththeU.S. country that establishes IRS the or you if U.S. the to than other country addition, there are certain electionsavailabletononresidentsaddition, there who are certain move totheU.S.thatcouldminimizeglobaltaxation. government-related individual) or because of a medical condi medical a of because or government-relatedindividual) two foreign countries. You establish that during the calendar year,closer calendar a the had during you Youthat establish You establish that during the calendar year, you had a tax home You were present in the U.S. for fewer than 183 days during the home than to the U.S., unless you had a closer connection to connection closer a had you unless U.S., the to than home calendar yearinquestion, connection to one foreign country in which you had a tax a had you which in country foreign one to connection in aforeign country, and If you qualify to exclude days of presence in the U.S. the in presence of days exclude to qualify you If - There are many IRS tax forms that must be completed and completed be must that forms tax IRS many are There This form is provided by a foreign entity to document its foreign This form is provided by a nonresident alien to a payor to certify ofthe 15 March than later no distributed normally is form This status to a payor to certify the recipient’sthe beneficial as status certify to payor a to status attached to your tax return to disclose foreign holdings and to and holdings foreign disclose to return tax your to attached address, amount and type of income paid and any taxes withheld. andfor personnel exceptionsforfamiliesofare military certain FOR U.S.CITIZENSAND RESIDENTS FOREIGN REPORTING REQUIREMENTS Form 1040NR/1040NR-EZ and include applicable forms to report the recipient’s residency status as beneficial owner of the income. of residence.to thetaxauthoritiesinrecipients’ country ofthe 31 January than later no persons U.S. by received be to ofthese copies or certificates) birth and passports (e.g., tion following following year. Information on Form 1042-S may also be reported a person, U.S. a is year.income following the ofrecipient the If U.S. sources, you will receive Form 1042-S. This is the annual the is This 1042-S. Formreceive will you sources, U.S. If applicable, this form should also be completed to claim the claim to completed be also should form this applicable, If from income receive and U.S. ofthe nonresident a are you If will TaxpayerIRS Individual The (“ITIN”). Number Identification Form 1099 would be issued instead; Forms 1099 are generally due Form W-8BEN-E Form W-8BEN Form 1042-S Note: Caution: financial accounts(seebelow). make elections that could prove valuable to you. If you have you If you. to valuable prove could that elections make benefits of anincometaxtreaty. withhold to subject income of types certain have who persons not are and law U.S. under obligations payment or filing have expiration period. documents that have been by certified the issuing agency. There documenta original include applications when ITINs issue only arenumber security for eligible a social required anto obtain completed toclaimthebenefitsof anincometaxtreaty. be also should form this applicable, If income. the of owner information return prepared by the payor to report your name, your report to returnpayor preparedinformation the by ing (e.g., pensions). ITINs issued after 2012 may have a five-year interests in foreign entities, (e.g., Forms 8621, 5471, and 8865) and country under the provision of a treatycountry will be required to file receive unnecessary (and avoidable) correspondence from the IRS. When reporting asaU.S.nonresident, residentsWhen reporting of another
If you give the payor the wrong form you will likely will you form wrong the payor the give you If
- - — REPORT OFFOREIGN BANKAND These requirements place an additional burden on the amount the on burden additional an requirementsplace These The FBAR must be filed on an annual basis if you have a finan a have you if basis annual an on filed be must FBAR The $10,000 at any time during the year. Beginning with the 2016 FBAR and forward, the due date for this form will be April 15 ofthe 15 April be will form this for date due the forward, and accounts in a foreignwith an country aggregate value exceeding FINANCIAL ACCOUNTS (“FBAR”) FORM 114(FORMERLY TDF90-22.1) • • • • • • • • forms are: following year and a six-month extension of this deadline may deadline this of extension six-month a and year following If you are a U.S. person (including a corporation, partnership, partnership, corporation, a (including person U.S. a are you If Failure to do so could result in substantial penalties and the loss FBARs untilOctober15for2016 and2017returns. Note: nership or hedge fund, your reporting requirementsincrease. reporting your fund, hedge or nership be granted. FinCEN automatically extended the due date for all may besubjecttoFBARreporting. of beneficial tax elections. Some of the most common ofthese common most ofthe Some elections. tax ofbeneficial of information you must include with your U.S. income tax return. part investment an as such entity pass-through a through or cial interest in or signature authority over one or more financial exempt organization, trust or estate) and have a financial interest investments in foreign companies, whether held directly by you in or signature authority over a foreign financial account, you account, financial foreign a over authority signature or in Trusts Foreign andReceiptof Gifts. Certain a U.S.Owner. Form 8865, Return of U.S. Persons With Respect to Certain Certain to Respect PersonsWith ofU.S. Return 8865, Form Form 926, Return by a U.S. Transferor of Property to a Foreign ForeignPassive a of Shareholder a by Return 8621, Form of Foreignand Bank Report 90-22.1), TDF (formerly 114 Form Form 8938,Statementof Foreign FinancialAssets. Form Annual 3520-A, Information Return of Foreign Trust With Form 3520, Annual Return To TransactionsReport With Foreign Form 5471, Information Return of U.S. Persons With Respect To Corporation. Certain Foreign Corporations. Certain Investment Company(PFIC)orQualifiedElectingFund(QEF). Financial Accounts. Foreign Partnerships. The requirement forsubmissionof both newandamended - -
international tax planning and reporting requirements 111 EisnerAmper 2018 personal tax guide 112 Since 2009 the IRS has offered various programs designed for designed programsoffered various has IRS the 2009 Since 50% of thecurrent income. A financial interest in an account includes being the owner ofowner the being includes account an in interest financial A (“SFCP”). Both programs provide an opportunity for taxpay for opportunity an provide programs Both (“SFCP”). ProcedureCompliance Filing Streamlined the and (“OVDP”) (e.g., minor children, parents, etc.) are also reportable. A financial you own, directly or indirectly, more than 50% of the total voting and file information returns while paying a reduced penalty or,penalty reduced a paying while returns information file and PROGRAMS BSA Identification number must be provided from the original filing. taxpayers to voluntary disclose previously unreported foreign disclosepreviously unreported tovoluntary taxpayers then allocate it to each year. The single penalty is 50% ofthe 50% year.is each penalty to single it The allocate then beneficial present a has person U.S. other any or you which to OFFSHORE VOLUNTARY DISCLOSURE where there is willfulness. The memo specifically instructs exam others by owned accounts over authority signatory have who Criminal penaltiescouldalsobeassessedforwillfulviolations. financial financial institution). The IRS continues to suspend the reporting the year. In the case of a nonwillful failure to file the FBAR, the IRS may IRS the FBAR, the file to failure nonwillful a of case the In Financial accounts include banks, securities, derivatives, foreignderivatives, securities, banks, include accounts Financial Note: forms on behalf of their clients as long as they have a document FBAR file CPAscan and online done be must years all for filings highest aggregate balance in any of the years under examination. an own you which in partnership a ofshares; value or power record or having legal title, even if acting as an agent, nominee, savings, any (including accounts financial other or funds mutual ers to come forward and disclose unreported foreign income unreported disclose and to come forward ers of foreign assets are the Offshore Voluntary Disclosure Program behalf ofon in someothercapacity or Taxpayers person. U.S. a equity funds. of offshore commingled funds, such as hedge funds and private a with maintained account other or insurance term than other contract insurance annuity,life deposit, or checking, demand, in some cases, no penalty at all. In the case of the OVDP,ofthe case the In all. at penalty no the cases, some in income or assets. Two of the programs which focus on disclosure combined and to calculate a single penalty for all years iners imposed penalty maximum the limit 2015 in IRS the by issued impose a maximum penalty of $10,000 per account. Procedures than morereceives or assets ofthe 50% than more in interest as trust a profits;or or capital the in 50% than moreofinterest interest also includes an account held by a corporation in which of $100,000 or 50% of the highest balance in the account during granting them that authority. If amending an FBAR filing, the prior In previous years the maximum penalty was the greater the was penalty maximum the years previous In - - SFCP program in taxpayer friendly ways to include taxpayers taxpayers include to ways friendly taxpayer in program SFCP Alternatively, a shareholder of a PFIC may make an MTM election stock or certain distributions (“excess harsh distributions the distributions”) certain or stock announced important announced changes important to both programs. Specifically, the are required to annually include in income the pro rata share of and that gain is taxed at the income highest rate in on ordinary or election QEF a Unless regime. PFIC harsh the to subject are ELECTING FUND(“QEF”) BYFORM 8621,RETURN ASHAREHOLDER the stock; or deducts the excess of the PFIC’s adjusted basis over the close of the tax year over the shareholder’s adjusted basis in the excess, if any, of the fair market value of the PFIC stock as of the shareholder includes in income each year an amount equal to corporation, the of gains capital net and earnings ordinary the tax canexceed100%of thegain(ergo, “harsh”). COMPANY (“PFIC”)ORQUALIFIED OF APASSIVE FOREIGN INVESTMENT whether ornotdistributed,thusavoidingtheonerous PFICtax. Classification as a PFIC occurs when 75% or more of the cor ofthe more or 75% when occurs PFIC a as Classification for taxpayers in participating the OVDP, and expanded the original from the PFIC (“excess distributions”). Also if neither of these two U.S. persons who invest in a foreigna in PFIC a invest who is which corporation persons U.S. U.S. shareholders who make the QEF election on Form 8621 Form on election QEF the make who shareholders U.S. to end them altogether at any time. Thus, taxpayers whocan to endthemaltogetheratanytime.Thus,taxpayers IRS imposed stricter requirements and potentially higher penalties PFIC rules will also apply. These rules require a ratable allocation Note: limited to cumulative income that was included in previous years). long-term capital gains rate in the year of disposition. An interest residing bothintheU.S. andabroad. poration’s income is passive or when more than 50% of the of 50% than more when or passive poration’sis income this situations, certain In allocated. is gain such which to period on tax pay will they made mark-to-marketis election (“MTM”) benefit from participating inthesebenefit programs from should act promptly. participating on Form 8621 for marketable PFIC stock. If the election is made, Passiveincomeincome. corporation’s passive generate assets charge is also imposed on the tax, and begins running from the beneficial the than rather involved, years ofthe each for effect held wereshares the which during years the over gain ofany PFIC ofthe some or ofall disposition upon made, is elections gains from the sale of the investment or distributions on certain individual may also avoid criminal prosecution. In 2014 the IRS the 2014 In prosecution. criminal avoid also may individual its fair market value at the close of the tax year (the deduction is includes, but is not limited to, interest, dividends, and capital gains. and the IRS can change the terms, increase penalties or decide or penalties increase terms, the change can IRS the and There isnosetapplicationdeadline for these programs - TRANSFEROR OFPROPERTY TO The exception applies only if the shareholder is not subject to subject not is shareholder the if only applies exception The A limited filing exception applies for certain shareholders with shareholders certain for applies exception filing limited A A FOREIGNCORPORATION stock, are treated as ordinary incomeorloss. stock, are treated asordinary share of the upper-tier PFIC interest in the lower-tierupper-tierthe ofthe sharedoes in interest PFIC PFIC another PFIC, and the value of the shareholder’s proportionate ofshareholder’svalue proportionate the the and PFIC, another all of value aggregate the (a) either and distributions excess as also instances. trigger U.S. in reporting persons certain who are and estates) owning PFICs are required to file Form 8621 regard as gain or loss on the actual sale or other disposition of the PFIC FORM 926, RETURN BYFORM 926,RETURN AU.S. to reportable transfers: to reportable treated asexcessdistributions. receivesthe beneficiary an excess distribution or recognizes gains trusts are only required to file if the estate or trust fails to file the Ownership of PFIC stock through another U.S. taxpayer may taxpayer U.S. another through stock PFIC of Ownership filers), filers), or (b) the PFIC stock is owned by the shareholder through form. U.S. beneficiaries are required to report in any case in which U.S. persons who are beneficiaries of foreign estates and foreign U.S. person holds the PFIC stock timely files. The filing applies to trusts, partnerships, corporations, individuals, (i.e., persons U.S. If the election is made, the PFIC rules do not apply.not do Amounts rules PFIC the made, is election the If Form 926 is used transfers ofto certain report tangible or intan shareholderofthe end by the owned at stock year PFIC tax the PFIC tax with respect to any excess distributions or gains treated less of whether an excess distribution has occurred or an election not exceed$5,000. respect to an interest owned in a PFIC for which the shareholder or estates ofdomestic beneficiaries those while requiredfile, to are elections MTM or QEF made have that trusts non-grantor the which throughshareholder another if file requiredto not are taxpayer U.S. another through held stock PFIC for regimes required to include an amount in income under the QEF or MTM has been made. This applies to U.S. shareholders who own shares or foreign grantortruststhatownPFICstock. domestic estates, non-grantor trusts and U.S. owners of domestic companies. ofchain ofa tier lowest the at are who indirectly and directly exceptions exceptions to the filing, generally the following special rules apply foreigna to thereWhile corporation. areproperty gible certain joint for ($50,000 $25,000 exceed not does shareholder the of is subject to PFIC tax where no QEF or MTM election is in effect. included in income or deducted under the MTM election, as well
- - The penalty for failure to comply with the reporting requirements There are four categories which define who is required to file requiredto is who define which categories four areThere WITH RESPECTTO CERTAIN FOREIGN schedules, isrequired foreachforeign partnership. acquisitions, dispositions, and changes in foreign partnership partnership foreign in changes and dispositions, acquisitions, PARTNERSHIPS OFU.S.PERSONSFORM 8865,RETURN to intentionaldisregard. transfer, limited to $100,000 if the failure to comply was not due the form and how much information must be provided. The provided. be must information much how and form the trolled foreign transfers to partnerships, foreign or partnerships, • • • • • Form 8865 is required to report information with respect to con categories are: applicable the with along 8865, Form separate A ownership. is 10% of the fair market value of the at property the time of the $100,000. 926 if immediately after the 926 transfer if the holds, immediately person directlyafter share of thetransferred property. a Category 1 filer at any time during that tax year,tax that person during no time any at filer 1 Category a the 12-month period ending on the date the transfer exceeds transfer the date the on ending period 12-month the during corporation foreign the to person the by transferred ofcash amount the or corporation, foreign ofthe value total proportionate partner’s the on based 926 Form on transfer the value of the property contributed by such person or related U.S. by controlled was partnership the while partnership the tax year. If the transfer includes cash, the transfer is reportable on Form Category 3: Category 2: Category Category 1: If the transferor is a partnership, the U.S. partners of part the partners U.S. the transferorthe If partnership, a is will be considered a Category 2filer.will beconsidered aCategory nership, not the partnership itself, are required to report the itself, report requiredareto partnership the not nership, property property to a foreign the arepartnership, partners considered person exceeds $100,000. If a domestic contributes partnership person either owned directly or indirectly at least a 10% interest in partnership exchange for an interest in the if partnership, that persons each owing at least 10% interest. However, if there was or indirectly, at least 10% of the total voting power or the or power voting total the of 10% least indirectly,at or contributed property during that person’s tax year to a foreign in interestgreater or 10% a owned partnership foreign ofthe in the foreign immediately partnership after the contribution, or partnership’s the during time any at partnership foreign a in A U.S. person who owned more than a 50% interest A U.S. person who at any time during the tax year A U.S. person, including a related person, who person, related a including person, U.S. A - -
international tax planning and reporting requirements 113 EisnerAmper 2018 personal tax guide 114 A penalty of $10,000 can be assessed for failure to furnish the furnish to failure for assessed be can $10,000 of penalty A U.S. PERSONS WITHRESPECTTO CERTAIN applied for each tax year of each foreign Furthermore, partnership. FOREIGN CORPORATIONS FORM 5471,INFORMATION OF RETURN • • • foreign corporations. You will be required to file this form if you Form 5471 is used to satisfy the reporting requirement for U.S. requirementfor reporting the satisfy to used is 5471 Form meet one of the 1 following has tests been (Category repealed): certain in shareholders or directors,officers, are who persons is penalty This prescribed. time the within requiredinformation of $50,000foreachfailure. each 30-day period that the failure continues, up to a maximum once the IRS has sent out a notification of the failure to report the information, anadditional$10,000penaltycanbeassessedfor stock that makes him/her a 10% owner with respect to the to respect with owner 10% a him/her makes that stock the the date of acquisition or without regard to stock already owned, the outstandingstockof theforeign corporation. partnership foreign the if 6038B, section IRC under transfer contributed the ofshare proportionate a transferred have to Category 3: Category 2: Category 4: Category foreign corporation,or foreign corporation which, when added to any stock owned on foreign corporation, or acquired an additional 10% or more of had a change in proportional interest may be required to report inthepartnership. partner that report requiredto was and partnership the to property files partnership Form 8865 and properly reports all the required However, domestic the partnership. if foreign the to property meets the 10% stock ownership requirement with respect to the under this category if certain requirements are ifcertain met. under thiscategory of a foreign corporation in which a U.S. person has acquired has person U.S. a which in corporation foreign a of a remained person U.S. the while property such of disposed generally not be required to report the transfer. 3 also Category includes a U.S. person that previouslythat person U.S. a includes transferred appreciated will partners its contribution, the to respect with information • • 10% stock ownership requirement.10% stockownership the 10% stock ownership requirement with respect to the to respectrequirement with ownership stock 10% the You are a U.S. person who disposes of sufficient stock in the You are a person who becomes a U.S. person while meeting foreign corporation to reduce your interest to less than the than less to interest your reduce to corporation foreign foreign corporation,or A U.S. person who had acquired or disposed of or You are a U.S. person who is an officer or director You are a U.S. person who acquires stock in a in stock acquires who person YouU.S. a are The information required to properly complete Form 5471 can 5471 Form completeproperly required to information The also 8865 Form file to failure for apply that penalties same The Another oft-encountered rule under the F Subpart regime is the Accordingly the look-through rule operates to reduce the global aim to subject such income to federal tax in the year in which in year the in tax federal to income such subject to aim anti-deferral rulesintroduced byCongress overtheyears. previoussection). the in discussion the (see 5471 Form to apply stock ownership for these purposes. Beginning in 2017, a nonresi the subsidiary earns it. The CFC the look-throughsubsidiary rule provides that as such jurisdictions, tax low into moved easily be could that • • One of the issues faced by U.S. multinationals is that profitsthat is multinationals U.S. by faced issues the of One federal income tax, even if the cash that represents those earn representsthose that cash the if even tax, income federal the rest of your family are not, yet each (or any) individual owns individual any) (or resteach the areyet offamily not, your and areyou person consideredIf U.S. a related person. a U.S. to Most notably, F Subpart was designed to tax the types of income Note: Observation: Observation: rule which limits the CFC’s investment in U.S. Under this provision F. Subpart of calculation the from excluded are parties related be extensiveandattimesdifficulttoobtain. effective taxrateformanymultinationalcompanies. dividends,interest, rents and royaltiescertain paidbetween rules anti-deferral The royalties. and rentsinterest, dividends, U.S. to subjected be often can subsidiaries foreign by earned if a CFC extends a loan to its U.S. shareholder or relateda party of variety wide the ofresult the is This repatriated. not is ings dent’s inaforeign ownership corporationcannowbe attributed attributed to your own. If you did not meet one of the filing require an interest in the same foreign gets corporation, their ownership ments previously, youmaymeetitnow. permanently extendedasaresult of PATH. 50% of the total combined voting power of all classes of stock Category 5: Category 4: Category has U.S. shareholders (counting only those with at least a 10% period of 30 days or more and who owns the stock on the last of thecorporation. stock ofthe value total the or stock, voting ofits classes ofall corporation more than 50% of the total combined voting power day of that year. A CFC is defined as a foreign corporation that uninterrupted an for (“CFC”) corporation foreigncontrolled or more duringanytaxyearof theforeign corporation. entitled to vote or more than 50% of the total value of the stock interest) that own on any day of the tax year of the foreign the of year tax the of day any on own that interest) in a foreign corporation for an uninterrupted period of 30 days Certain Certain constructive ownership rules apply in determining You are a U.S. shareholder who owns stock in a in Youstock owns shareholderwho U.S. area The look-through rule for related parties has been You are a U.S. shareholder who owns more than
- - - TRUST WITHAU.S.OWNER TRANSACTIONS WITHFOREIGN TRUSTS The information return must be filed in connection with the for the with connection in filed be must return information The A foreign trust is defined as a trust in which either a court out court a either which in trust a as defined is trust foreign A AND RECEIPT OFCERTAIN FOREIGN valued in the aggregate at more than $100,000 annually and gifts side of the U.S. is able to exercise primary supervision over the over supervision exerciseprimary to able is U.S. ofthe side subject you to a penalty of 35% of the gross value of any property a requirement to file Form Annual 3520-A, Information Return of a market rate interest or the user makes a payment equal to the and must be The reported. use or loan of trust will property not Any trust. foreign a from beneficiary U.S. a by distributions any persons non-U.S. more or one or trust the of administration FORM 3520,ANNUAL TO RETURN REPORT transferred to the trust, 35% of the gross value of the distributions to obtainabankloanintheU.S. trade certain are loan a of definition the in Included taxpayers. U.S. for dividend shareholder,a U.S. deemed its is to loan the GIFTS AND FORM 3520-A, ANNUAL ANDFORM 3520-A, GIFTS Gifts Gifts or bequests that you receive in the form of money or prop fair marketvalueof suchusewithinareasonable timeframe. from aforeign orbequestsfrom trust,orreceive foreign gifts U.S. persons who either create a foreign trust, receive distributions In addition to the filing requirements of Form 3520, there is also INFORMATION OFFOREIGN RETURN Foreign Trust With a U.S. Owner, which is an annual information individual your of date due the by filed be must 3520 Form received from the trust, or 5% of the amount of certain foreign ofofamount certain 5% the or receivedtrust, fromthe poration or foreign are partnership also reported on Form 3520. be considered a distribution to the extent the loan is repaid with related is person treated as a distribution to the grantor or ben ofreceipt the and trust, foreign a to grantor or settlor the by assets other or ofcash transfer the trust, foreign ofa mation have the authority to control all substantial decisions of the trust. arepersons required tofileForm 3520. receivables as well as using the CFC as collateral or as a guarantor uncompensated use of foreign trust property (e.g., real estate real (e.g., property trust offoreign use uncompensated or personal property) by a U.S. grantor,U.S. a by property) any beneficiary,or personal U.S. or exceed 25%of the gift). (not to goes unreported for each month for which the gift gifts fromerty a non-resident alien (including a foreign estate) that is equal to eficiary the fair market value of the use of the property income tax return, including extensions. The failure to do so may in excess of $15,797 in 2017 ($16,111 for 2018) from a foreign cor - - - - - $50,000 for single taxpayers) in certain foreign assets (e.g., a (e.g., assets foreign certain in taxpayers) single for $50,000 year, in the case of a calendar-year trust. A six-month extension annually trust foreign the that ensuring for responsibleare you and beneficiariesof thetrust. owner,ofU.S. benefit the the As for accumulated person. U.S. a or paid be can trust the of corpus or income no agreement, a reporting exception for foreign financial assets reported on exceptionforforeign financialassetsreported a reporting addition to the FBAR Form reporting. 8938 ofis part the annual jointly filing taxpayers Those 8938. Form on assets those about and issued by a foreigner) will be required to report information FINANCIAL ASSETS FORM 8938,STATEMENT OFFOREIGN trust unless you can demonstrate that under the terms ofthe terms the under that demonstrate can you unless trust taxpayers). taxpayers). Also, individuals not required to file a U.S. income tax the taxyearor$75,000atanytimeduringyear. the total value of those assets exceeds $50,000 on the last day of regardlessofobligation filing a have also year the during time (oryear, $100,000 ofthe than end ofmoreaggregate the an whether the end-of-year threshold is met. This requirement is in who hold $150,000 (or $75,000 for single) in foreign assets at any furnishes certain information to the IRS and the other owners owners other the and IRS the to information certain furnishes file penalties up to $50,000. In addition, a 40% understatement understatement 40% a addition, In $50,000. to up penalties file filing thresholds are increased to $400,000 (or $200,000 for single financial assets (special domestic entities) must file Form 8938 if for the purpose of holding, directly or indirectly, specified foreign held is that investment for held contract or instrument financial foreign interest an account, financial aforeign in entity, any or U.S. citizens or resident aliens filing joint returns who hold, at hold, who returns joint filing aliens resident or citizens U.S. Form 3520-A must be filed by March 15 after the foreign trust’s tax Noncompliance with these rules for any tax year could result could year tax any for rules these with Noncompliance the U.S. ofthe outside living aliens resident or citizens U.S. For domestic corporations, December 31,2015,certain Beginning after presumed to have a and U.S. is beneficiary considered a grantor return of a foreign trust with at least one U.S. owner and which is penalty for underpayment of tax asaresult of atransaction even 8938 Form file requiredto not are year tax the for return and partnerships, trusts that are considered formed or availed of can berequested onIRSForm 7004. is trust the trust, foreign a to property transfers indirectly or considered a grantor trust. If you are a U.S. who person directly certain information returns. certain in afailure-to-file penaltyof andcontinuingfailure $10,000 to is there and threshold reporting appropriate the than more is assets financial foreign specified the ofvalue aggregate the if income taxreturn, whereas theFBARisfiledseparately.
international tax planning and reporting requirements 115 EisnerAmper 2018 personal tax guide 116 ACT —FATCA special agreement with the IRS by June 30, 2014. A participating accounts held by U.S. taxpayers, or by foreign entities in which in entities foreign by or taxpayers, U.S. by held accounts assessed; criminalpenaltiesmayalsoapply. and proceeds from thesource of securities. Those IRS. the to information the report will institution the and accounts. The U.S. account holder will need to provide the insti FOREIGN ACCOUNT TAX COMPLIANCE shore hedge funds, private equity funds, andreal estate holding to provide information will be subject to a 30% withholding tax withholding 30% a to subject be will provideinformation to person U.S. a as status the identify to W-9 Form a with tution financial about information certain IRS the to directly report to the transaction or the asset if the failure to report was due to due was report to failure the if asset the or transaction the relatedsubmitted to is reporting informational certain date the cross-bordertransactions regardto with tax assessing for tions would not begin to run until the taxpayer files the return disclos U.S. taxpayers hold a substantial ownership interest. To properly Beginning July 1, 2014, foreign2014, 1, July Beginning areinstitutions financial required limita of statute the 2010, 18, March after filed returns tax For Observation: Observation: holders who have opened accounts or after the effective date effective the after or accounts opened have who holders account U.S. identify account, an opening to proceduresprior in is omission an If omission. willful not and cause reasonable broader than under the FBAR rules and includes interests in off in interests includes and rules FBAR the under than broader on certain U.S.-source payments including interest, dividends interest, including payments U.S.-source certain on of the agreement,procedures and have certain for pre-existing comply, aforeign financial institution was required to enter into a of limitations will be extended from three and to six years years statute the asset, foreignfinancial a relatedto of$5,000 excess or for foreigncertain assets will be extended for three years from institutions that do not and participate account owners unwilling duediligence institution willberequired toimplementcertain foreign asset. ing thereportable involving an undisclosed specified foreign financial asset can be companies. The definitionof foreign assetismuch areportable
- - - - state tax issues
New York, New Jersey, Connecticut, Pennsylvania, and California tax most of the income subject to federal income tax, but all five states either limit or exclude the itemized deductions you claimed on your federal return. Florida does not impose income taxes on individuals. EisnerAmper 2018 personal tax guide 118 tax irrespective of whetherthe80%testismet. to interest from federal obligations are exempt from New Jersey invested. However, distributions from mutual funds attributable so assets of percentage the upon based is Jersey New from from New Jersey tax. The amount of income that can be excluded obligations in order for “exempt-interest dividends” to be exempt municipal its or Jersey New in and/or obligations U.S. exempt tax- in assets its of 80% least at have to needs fund mutual A based onthepercentage of assets soinvested. is California from excluded be can that income of amount The tax. California from exempt “exempt-interestbe to dividends” and/or in California or its municipal obligations in order for any at least 50% of its assets invested in tax-exempt U.S. obligations by any state other than their own. A mutual fund needs to have issuedbonds frominterestmunicipal income the tax California Caution: • do nottaxthefollowingitemsof income: New York, New Jersey, Connecticut, Pennsylvania and California INCOME EXCLUSIONS income exclusions,whichare quitesimilar: from eachother, rulesrelating the out point weshould to But before thatdistinguishthesestates wediscussthe factors incometax. impose apersonal PennsylvaniaConnecticut, California. and not Floridadoes you ifwork orliveinthestatesof New York, New Jersey, of the state income taxes that may impactproviding asummary in which youare subject to tax. Thischapter isdevoted to different depending onthe state jurisdictions can be very types of income.Eachstatehasspecifictaxlawssotheimpact states where youworkorlive,from whichyouderivecertain until youconsidertheimpactof incometaxesinthestateor You donotgetacompletepicture of taxsituation yourpersonal INTRODUCTION Interest onobligationsof: 3. 3. 2. 1. Treasury billsandbonds), Rico(e.g.,U.S. The U.S.anditspossessions,suchasPuerto through bondfunds. New York andNewJersey, includingsuchinterest earned Port Authorityof New York forresidents andNew Jersey of of residence, and Governmental agenciesandmunicipalitieswithinyourstate New York, New Jersey, Connecticut, Pennsylvania and through taxyear2019. is reduced to 25%for individualswith NYAGI over $10million of thefederaldeductionforcharitablecontributions.The50% than $10million,totalitemized deductionsare limited to50% 2017, forindividualswithNYAGI of more than$1millionandless through million.Fortaxyears exceeds $525,000andisbelow$1 at25%andincreases to50%ifyourNYAGIreduction starts The for singleormarriedfilingseparatelyfilers). ($100,000 New York adjusted gross income (“NYAGI”) exceeds $200,000 Your allowable federalitemized deductions are reduced ifyour DEDUCTION ADJUSTMENTS dividendincome. capital gainsorqualifying since New York doesnothavelower taxratesfornetlong-term State andNewYork City. Theseratesapplytoalltypes of income 14showsthemaximumtaxratesimposedbyNewYorkChart TAX RATES YORKNEW • • • recipient, andwhichstateisbeingconsidered. limitations, including the payor of the pension, the age of the pensionandretirement benefits,subjecttovariousCertain Social Securitybenefits. a deductionforpaymentsof stateandlocalincometaxes). State andlocalincometaxrefunds (sincetheydonotallow $2,155,350, the top rate is 6.85%. For 2020-2024, the highest highest the 2020-2024, For 6.85%. is rate top the $2,155,350, For 2012-2017,themaximumNYS taxrateisapplicable for tax rate for such taxpayers is scheduled to be 6.85% for income income for 6.85% be to scheduled is taxpayers such for rate tax filing married for applicable is rate tax NYS maximum the income under $2 million, the top rate is 6.85%. For 2018-2019, 2018-2019, For 6.85%. is rate top the million, $2 under income above $323,200. joint taxpayers with income over $2,155,350. For income under under income For $2,155,350. over income with taxpayers joint married filing joint taxpayers with income over $2 million. For $2million. over income with taxpayers joint filing married 2017 NEW YORK TAX RATES New YorkCity New YorkState State orCity - 2018 MAXIMUM Maximum Tax Rates
3.876% 8.82% 14 chart (limited to20%of UBTincome)anda$5,000exemption). of $10,000 the maximum allowance services for taxpayer’s unincorporated businessgross incomeexceeds$85,000 (after to a4% Unincorporated BusinessTax if their total (“UBT”) Self-employed workinginNew York persons Cityare subject YORK UBTNEW CITY than zero. tax year andhad atax liability that was equal to or greater dependent children undertheageof 17onthelast dayof the $40,000 but not more than $300,000who claimed one ormore of $350availableforNewYork residents withNYAGI of atleast through 2014 For taxyears there 2019, isarefundable credit “CIRCUIT TAX BREAKER” CREDIT long-term care insurancepolicy.under aqualifying paid during the tax year for the purchase or continuing coverage New York Stateallowsacredit equalto20%of the premiums CREDIT YORKNEW LONG-TERM CAREINSURANCE and depreciation deductionschapter. depreciation expense,asdiscussedinthebusinessownerissues does conform to the federal rules regarding IRC Section 179 without applyingthe bonusdepreciation rules. New York State will needtoseparatelycomputeyourNewYork depreciation federal return, either directly orfrom apass-through entity, you To theextentyoutakeadvantageof bonusdepreciation onyour Canal Street. the “Resurgence Zone,” of of south Street Houston north and Zone,”“Liberty and south of CanalStreet to the East River; is allowedinlimitedareas of LowerManhattan—the The exceptiontothisruleisthatfederalbonusdepreciation and depreciation deductions chapter. bonus depreciation, as discussed in the business owner issues New York State does not conform to federal rules regarding BONUS DEPRECIATION limitations. education expenses,subjecttocertain In addition, New York State allows adeduction forsome qualified New York Stateallowsadeductionof $1,000foreachdependent. five boroughs of New York City andthe counties of Nassau, self-employed individualsengaged inbusiness within the Beginning in2009,a tax and was imposed on employers TRANSPORTATION TAX MOBILITY (“MCTMT”) METROPOLITAN COMMUTER UBT willbecomputedbasedonasinglereceipts factor. receipts, 3.5%property, 2017,the 3.5%payroll. after Foryears for 2017, the allocation formula was 93% a single sales factor: New York Cityisintheprocess of endingitsslowtransitionto which pointthecredit is limitedto23%of theUBTpaid. or less, graduallydeclining asyourincome reaches $142,000, at credit is100%of theUBTpaidifyourtaxableincomeis$42,000 Theincluding theirshare of theUBTtaxpaidbyapartnership. of bythem, paid UBT the portion fora incometax personal New York Cityresidents can claim acredit againsttheirNYC the deduction,butnotboth. deduction is $10,000 per student. You may claim the credit or expenses upto $10,000. Alternatively, the maximum tuition credit maybeasmuch$400perstudent;4% of qualified expenses, andare notclaimedonanotherperson’s return. The an institution of higher education andpaidqualified tuition was anundergraduate studentenrolled atorwhoattended spouse ordependent (for whom youtaken anexemption) if youwere afull-yearNewYork Stateresident andyour In addition,atuitioncredit oritemizeddeductionisavailable to aNewYork Section529plan. deduction up to $5,000 ($10,000 if married filing jointly) if paid the chapter oneducation incentives. New York State allows a contributions toSection529plansasdiscussedindetail New York State has a program that allows you to make CREDITS ANDEXPENSES COLLEGE SAVINGS PROGRAM, or lessfortheyear. if the allocated net earnings from self-employment are $50,000 self-employment allocated to the MCTD. The tax does not apply based on their net earnings fromare treated partnerships as of andmembers LLCs inpartnerships that including partners tax applies.Thealsoappliestoself-employed individuals, before theemployergreater than$312,500inacalendarquarter April 1, 2012, payroll beginning on or after must be quarters payroll. based upon the amount ofemployers For quarterly to applies and0.34% A graduatedtaxratebetween0.11% Rockland, Orange,Putnam,Suffolk,Dutchess,andWestchester.
state tax issues 119 EisnerAmper 2018 personal tax guide 120 If youare considered a self-employed individualforfederal • • • • • • allows thefollowingdeductionstoreduce yourtaxableincome: addition to the income exclusions noted above, New Jersey isa“grossdeductions sinceNew Jersey income” state.In Except asnotedbelow, nodeductionisallowedforitemized DEDUCTION ADJUSTMENTS marginal rateof 8.97%. top a to subject are $500,000 over incomes with jointly filing than $500,000. Single and married/civil union partner taxpayers subject to the 6.37% rate on income in excess of $150,000 but less is 6.37%. taxpayers Married/civil filing union jointly partner are with taxable income in excess of $75,000 but less than $500,000 Note: dividend income. have lower taxratesfornetlong-term capitalgainsorqualifying rate applies to all typesof doesnot income since New Jersey is8.97%.ThisThe maximum taxrateimposedbyNew Jersey TAX RATES JERSEY NEW of therent paidduringthe year. Tenants tax deduction basedon 18% are allowed aproperty residence. taxesuptoamaximumof Property paid onapersonal $10,000 partnership. ina and partners employed individuals,businessowners, expenses thatisdisallowedonyourfederalreturn forself- of businesstravelandentertainment The 50%portion Medical expensesinexcessof 2%of gross NewJersey income. recipient (regardless of where therecipient lives). to theextenttheyare includibleinthegross income of the Alimony, payments separatemaintenance,orspousalsupport college are allowedanadditional$1,000exemption. year, dependents attending blind, or disabled, and certain Taxpayers of 65 years age or over at the close of the taxable qualifies as your dependent for federal income tax purposes). exemption foreachdependentchildorother(who allowsa$1,500personal NewJersey (or domesticpartner). Personal exemptions of $1,000each for youandyour spouse For New Jersey, the marginal tax rate for single taxpayers BONUS DEPRECIATION may deductsuchamountsonlyifthechildwasyourdependent. of 27attheendof However, 2016. purposes,you forNewJersey for healthinsuranceanychildof whoisundertheage yours federal tax purposes, youmay be able to deduct amounts paid employer. partner’s) civil-union partner’s/domestic Notethatfor in anysubsidizedplanmaintained byyour(orspouse’s/ month during the year in which youwere eligibleto participate deduct anyamountspaidforhealthinsurancecoverage under whichtheinsuranceplanwasestablished.You maynot for federal income tax purposes, derived from the business may notexceedtheamountof yourearned income,asdefined partner, andyour dependents. The amount of the deduction insurance foryourself, yourspouse/civil-unionpartner/domestic you maydeducttheamountpaidduringyearforhealth corporation inwhich youwere amore-than-2% shareholder, income taxpurposesoryoureceived wagesfrom anS the difference betweentheamountof taxes paidfor property The SeniorFreeze Program provides forareimbursement of Senior Freeze Program on aprincipalresidence. These programs taxrelief provide foramountspaid property REIMBURSEMENT) PROGRAMS AND SENIOR FREEZE (PROPERTY TAX BENEFIT JERSEYHOMESTEAD NEW deduction. doesnotprovideNew Jersey foracollegesavingscredit or COLLEGE SAVINGS PROGRAM deduction. purposes, you will need to separately compute your New Jersey were deductions extent 179 Section IRC higher for taken federal of $25,000of IRCSection 179costs for allactivities. To the farm orprofession, notdeduct more may you atotal than to amaximum of $25,000.If youhave more than one business, permits alimitedIRCSection179deductionofNew Jersey up IRC SECTION 179EXPENSE depreciation deductions. depreciation. Seethechapteronbusinessownerissuesand hasnot conformed to federalNew rules regarding Jersey bonus the amountof taxespaidontheirprincipalresidence. property program, buttheamountof benefitsreceived cannot exceed Program Tax andtheSeniorFreeze (Property Reimbursement) It ispossibletobeeligibleforboththeHomesteadBenefit different, havedifferent filingsdeadlinesandare notage-based. The requirements for the Homestead Benefit are slightly Homestead BenefitProgram taxespaidin2017. property The SeniorFreeze Program isexpectedtocontinuein 2018 for an applicationfor2017. mailed be will they that ensure and years future in benefits for eligibility their established residents these date, due extended However, by having filed an application by the October 17, 2017 2016. for payments reimbursement receive to eligible not are they that them advising applicants these to notices send will met all the other program requirements. The Division of Taxation they if even 2016, for reimbursements receive not will $87,007 over not but $70,000 over was income 2016 whose Residents requirements.program other the all met they provided 2016 limit was $87,007) will be eligible to receive reimbursements for and whose income for 2016 did not exceed $70,000 (the original those applicants whose income for 2015 did not exceed $87,007 Note: • • • • • taxreimbursement:to beeligibleforaSeniorFreeze property reimbursement. Applicants must meet the following conditions the base year and the amount for which you are applying for a spouses/civil-union partners. combinedincomeofor inacivilunionmustreport both marital/civil-union status.However, applicantswhoare married claiming thereimbursement. Theselimitsapplyregardless of succeeding year upto andincluding the year for which youare Have mettheincomelimitsforbaseyearandeach reimbursement; and to andincludingtheyearinwhichyouare claimingthe the home forthe baseyearandeach succeeding yearup Have paidthefullamountof taxesdueon theproperty Have ownedandlivedinyourhomeforatleastthree years; homeowner orrenter; aseithera foratleasttenyears Have livedinNewJersey disability benefits; Have beenage65orolderORreceiving federalSocialSecurity Under the terms of the State Budget for FY 2017, only 2017, FY for Budget State the of terms the Under is $20,000for 2017andwill increase to $50,000in2020,and filingseparately,in 2020.Foramarriedperson theexclusion will continuetoincrease eachyearuntilitcapsoutat$100,000 $40,000, and will increase to $60,000 in 2018. The exclusion The 2017 retirement is income tax exclusion for joint filers INCOMERETIREMENT TAX The credit isequalto35%of thefederalcredit. INCOMEEARNED TAX CREDIT 1,2018. January million with the estate tax being eliminated altogether after estate tax income exclusion is $2 For the 2017, New Jersey ESTATE TAX of Release or Discharge order to claim the exemption, a copy of Form DD-124, residentsavailable to both New Jersey andnon-residents. In is alsoanhonorablydischarged veteran.Theexemptionis civil unionpartner) (or exemption canbeclaimedifyourspouse eligible for anadditional $3,000 exemption. An additional $3,000 ortheNationalGuard are inthemilitary from activeservice whoare yearthatveterans isthefirst 2017 discharged honorably EXEMPTION VETERANS’ increase to$75,000in2020. for asingletaxpayer, theexclusionis$30,000for2017andwill standard deduction, limits on deductions for mortgage interest,standard deduction,limitsondeductionsformortgage lowering of individualincometaxrates,doubling of the income calculation. Thus,federal law changes such asthe gross incomeorfederaltaxableinthe state taxable federaladjustedCode nordoesitadoptoruse ataxpayer’s GITActdoesnotadopttheInternal RevenueThe NewJersey is notbasedonthefederaltaxsystem. incometaxes sincetheGIT personal no impactonNewJersey in theTax CutsandJobsActare expectedtohaveminimalor unlikely, most of income taxchanges contained the personal conforming legislation,whichappears Without NewJersey JERSEY GROSS INCOMEON NEW TAX (“GIT”) IMPACT OFFEDERAL INCOME TAX REFORM the exemptionorwithyourtaxreturn. Form must be submitted prior to the first return mustbesubmittedpriortothefirst youare claiming andthe Veteran Exemption Submission Certificate Certificate
state tax issues 121 EisnerAmper 2018 personal tax guide 122 maximum taxrateis6.99%. the thresholds, these than more is income taxable your If • • • following individuals: Note: dividend income. have lower taxratesfornetlong-term capitalgainsorqualifying rate appliestoalltypesof incomesinceConnecticutdoesnot The maximumtaxrateimposedbyConnecticutis6.99%.This TAX RATES CONNECTICUT on theirGITreturns. such taxes in2017,those payments would not be deducible 2017, in order to potentially receive a federal deduction for taxes in prepaid advised that if taxpayers their property 2018 GIT purposes. Recently, Division of the New Jersey Taxation Real estate taxes up to $10,000 are deductible for New Jersey GIT. does,however, NewJersey taxactualdividendpayments. from the federal Act should not be subject to the New Jersey Fdeemed dividendincome resulting thatSubpart It appears sec.179expenseto$25,000peryear.and limitsataxpayer’s doesnotadoptbonusdepreciationnot applyasNewJersey sec. 168(k) andthe increased federal sec. 179 expense should Further, thefederalAct’s 100%bonusdepreciation underIRC deductions thatare federaldeductions. notbasedonataxpayer’s hasitsown statutory should notapplysince New Jersey pass-through entities, in2018for certain allowable starting Similarly, thefederal20%qualifiedbusinessincomededuction, GITliability. NewJersey on ataxpayer’s of exemption deductions, etc. shouldhave noimpact personal taxandincometax,removalreduced deductionsfor property taxable incomeof over$500,000 butnotover$1,000,000. Widow(er) withConnecticut Filing statusisJointorQualifying income of over$400,000but notover$800,000. Filing statusisHeadof Householdwith Connecticut taxable $500,000. Connecticut taxableincomeof over$250,000butnot Filing statusisSingleorMarriedfilingseparatelywith The maximum tax rate for Connecticut is 6.9% for the for 6.9% is Connecticut for rate tax maximum The • • • rates. the highestincometaxrate,withoutbenefitof graduated of therecapture tax isessentiallythattheentire AGI istaxedat add therecapture amountof taxasindicatedbelow. result The applyingthe3%phase-out provision, isrequiredand after to Connecticut incometaxliabilityusingtheapplicablerates, thresholds specified below, computing his or her after A taxpayer whose Connecticut AGI exceeds the income IN HIGHER INCOME BRACKETS RECAPTURE TAX AMOUNTFORTAXPAYERS chapter onbusinessownerissuesanddepreciation deductions. depreciation, withtheexceptionof Ccorporations. Seethe Connecticut has conformed to federal rules regarding bonus BONUS DEPRECIATION year validlyclaimingoneormore dependents. a return under the federal income tax for the applicable taxable 65 or older before the close of the applicable year, or who files tax creditthe will property onlybeallowed for aresident who is 2018,1, and 2017, 1, January commencing January taxable years credits are Forthe phasedoutforhigherincomepersons. credit tax liability. amount cannot exceed your personal These or privatelyownedleasedmotorvehicles.Themaximum residences Connecticut political subdivisionsontheir primary credits taxes paidto for real property estate andpersonal Connecticut allowsresident incometax individualtaxpayers’ exclusions notedabove. “gross a is Connecticut income modifiedbythe as state, income” No deductionsare allowed foritemizeddeductions,as DEDUCTION ADJUSTMENTS Filing status is Joint or Qualifying widow(er): If Connecticut Filing status is Joint orQualifying than $320,000. of Head is status Filing AGI IfConnecticut household: more is AGI ismore than$200,000. Filing statusisSingleorMarriedfilingseparately:IfConnecticut AGI ismore than$400,000. the Department of RevenueService. the Department priortoreceiving abillingnoticeorofforward auditfrom tax properly onapreviously filedreturn andvoluntarilycome fullamountof the thatfailedtofileareturntaxpayers orreport of interest related tofailure topayamountsdue.Itapplies December 31,2016.The program will waive penalties and50% fortaxreturns toNovember 30,2018 2017 dueonorbefore during the period fromwith qualified taxpayers October 31, the Tax agreements Commissionertoenterinto“fresh start” The recently passedConnecticutstatebudgetbillwill allow FRESH START PROGRAM income limitations. the child’s12 months after or adoption and there are no birth is Thedeadlinetoparticipate CHET accountwithinfouryears. if family and friends add at least $150 to the child’s enrolled ofdeposit A second account. aCHET into will be made $150 willdeposit$100 2015,CHETBabyScholars 1, January on orafter a newborn’s future college costs. For children born or adopted programThe “CHET BabyScholars” provides upto $250toward theinitialcontributionwasmade. after forfiveyears forward excess of the maximum allowable contributions may be carried Amountsin and$10,000forjoint filers. $5,000 forindividualfilers Connecticut Higher Education Trust from federal AGI, up to maydeduct contributions totheConnecticut taxpayers COLLEGE SAVINGS PROGRAM issuesanddepreciationowner’s deductionschapter. Section 179depreciation expenseasdiscussedinthebusiness Connecticut does conform to the federal rules regarding IRC IRS SECTION 179EXPENSE tax tip You caneliminatethistaxbybeingpresent inNewYorkthe NewYorkor byeliminating days orless Statefor183 Bystatute, Cityapartment. Your principalresidence isinConnecticutbutyouworkNewYork there. Duringtheyearyouwere pres Cityandmaintainanapartment substantiation to support thedaysinandoutof New York.substantiation tosupport Connecticut, New York State, and New York City would tax all of your income. A partial credit is available to offset some of this additional tax. a partial dayinNewYorka partial isconsidered afulldayspentinNew York withminorexceptions.Also,adayworkingatyourhomeinConnecticut will be considered by New York to be a day working in New York, while Connecticut will consider it a day working in Connecticut.There fore, income allocated to these days will be taxed by both New York State and Connecticut with no offsetting credit. Be sure to maintain to sure Be credit. offsetting no with Connecticut Yorkand New State both by taxed be will days these to allocated income fore, ent inNewYork formoreYoudays. than183 resident of are bothNewYork astatutory New York Stateand As aresult, Cityfortaxpurposes. 27 RESIDENCY CAUTION TAX RATES PENNSYLVANIA cost of method. performance weighted three-factor method, andthe salesfactor utilizes a for Pennsylvania Personal IncomeTax purposesisanequal- formula theirbusinessincome.Theapportionment apportion to substantiate the allocation. However, most taxpayers is specificallocationifthetaxpayerhasbooksandrecords both withinandoutsideof Pennsylvania. Thedefaultmethod to the extent the business is “doingapportionment business” Income from abusinessissubject toallocationand dividendincome. qualifying lowertaxratesfornetlong-termnot have gainsor capital 3.07% applies to all types of income since Pennsylvania does to offset income/loss from another. The single flat tax rate of income, andincome/lossfrom onebucketmaynotbeused 15).Pennsylvania(see Chart haseightcategories(buckets)of Pennsylvania imposes a flat tax on all income at a rate of 3.07% See chart 16forPhiladelphiarateof taxwithheldonForm W-2. See chart 2017 MAXIMUM RATES PENNSYLVANIA TAX Philadelphia Pennsylvania State orCity Maximum Tax Rates 3.8907% 3.07% 15 chart - -
state tax issues 123 EisnerAmper 2018 personal tax guide 124 associations or estates and trusts. The tax is imposedonthe tax is The orestatesandtrusts. associations other activityconductedbyindividuals, LLCs, partnerships, operation of atrade,business,profession, enterpriseor Philadelphia imposes aNPT on the net profits from the sourcing of receipts. businesses, notablysoftware companies usemarket-based are determined on acost of method for most performance sales factorandtaxablereceipts forthegross receipts tax methodologyisasinglesalesfactor.tax apportionment The year, tax 2017 Forthe taxableincome. net on theincome receipts taxrateis0.1415%,andtheincome6.35% oneon grosson incomeand receipts. thegross For2017, be business activities. The BIRT isthe sum of two taxes; one and corporations.Rentalactivitiesare usuallyconsidered to City. associations “Persons” includesindividuals, partnerships, engaged in business within the upon all persons (“BPT”)) Philadelphia imposesaBIRT(f/k/atheBusinessPrivilegeTax Wage Tax is not subjecttotheSchoolIncomeTax. Income andReceiptTax theNetProfits (“BIRT”), Tax or (“NPT”) subjecttothePhiladelphiaBusiness income thatisotherwise short-termand Earned gains. capital orless) months forsix (held rents and royalties,certain S corporation distributed income, Some examples of taxable unearned income are dividends, for 2017is3.8907%,andtypicallymatchestheWage Tax rate. “School IncomeTax,” upon allresidents of theCity. Thetaxrate Philadelphia imposes anunearned income tax, known asthe spent workingwithintheCityof Philadelphia. dutydays upon based theirincome nonresidents mayapportion 3.8907% forresidents and3.4654%fornonresidents. However, City. is 2017 July1, Thetaxrateforcompensationpaidafter residents of theCityandonnonresidents whoworkwithinthe Philadelphia imposesaWage Tax oncompensationearned by method of asinglesalesfactorbaseduponmarketsourcing. apportionment tax corporate the from differs performance, of Note: ON FORM W RATEPHILADELPHIA OF TAX WITHHELD July 1,2017andsubsequentyears July 1,2016-June30,2017 July 1,2015-June30,2016
The three-factor apportionment method, based upon cost Period - 2 FOR WAGES Resident 3.9004% 3.8907% 3.9102% income attributable to corporate partners or members is exempt is ormembers partners tocorporate income attributable LLC, amount ofproportionate and other association partnership, nonresidents. Corporations are not subject to this tax. Also, the is also imposed on businesses conducted in Philadelphia by of Philadelphia regardless of the location of the business. It entire netprofit of anyself-employed whoisaresident person be notedthatthisPennsylvania doesnot DORbulletin(2017-02) be addedbacktoPennsylvania taxableincome.Itshouldalso depreciation of under IRCSec. 168(k) must qualified property thatdate,anydeductionfor after placedinservice property of Thismeansthatfor underIRCSec.168(k). qualifiedproperty Pennsylvania will not allow the 100%deduction for depreciation September 27, 2017, after placed in service for property announced bytaxbulletinonDecember22,2017that,effective However, thePennsylvania of Revenue(“DOR”) Department isdepreciated forfederaltaxpurposes. the property a result of thesubtractionmaybeclaimedinlast yearthat has beenclaimed.Anydisalloweddepreciation notclaimedas untiltheentiresucceeding taxableyears amountof theaddback deduction under IRC Sec. 167.The deduction may be claimed in equal tothree-sevenths depreciation of ordinary thetaxpayer’s amount an tosubtract continue may taxpayer the 2017, 27, before September placedinservice depreciation. Forproperty Pennsylvania requires addbackthefederalbonus thattaxpayers BONUS DEPRECIATION income exclusionsnotedabove. Pennsylvania is a “gross income” state, as modified by the No deductionsare allowed foritemizeddeductions,as DEDUCTION ADJUSTMENTS 3.4654% for2017. andfornonresidentsand 3.9004%for2016 theNPTrateis from theNPT. Forresidents, theNPTrateis3.8907%for2017
Nonresident 3.4654% 3.4928% 3.4741% 16 chart taxable incomeinexcessof $1,000,000. TaxThere isanadditional Mental Health Services of 1%for for marriedfilingjointtaxpayers: The followingtableshowsthe2017marginal taxratesineffect dividendincome. or qualifying does nothavelower taxratesfor net long-term capital gains tax year. Thisrateappliestoalltypesof incomesinceCalifornia California’s topmarginal incometaxrateis12.3%forthe2017 TAX RATES CALIFORNIA plan incomputingPennsylvania taxableincome. to jointly) any for 2017 Pennsylvania or non-Pennsylvania 529 annual exclusion amount of $14,000 ($28,000if married filing Pennsylvania allows a deduction of up to themaximum federal deductions. will need to separately compute your Pennsylvania depreciation higher sec. 179deductions were taken for federal purposes,you $25,000 of costsforallactivities.To IRCsec.179 theextent farm orprofession, youmaynotdeductmore thanatotalof $25,000 usingIRCsec.179.Ifyouhavemore thanonebusiness, Pennsylvania permits a limited deduction of up to a maximum of IRC SECTION 179 qualifiedbusinessassets. expensing of certain related tobonusdepreciation andwillnotpermit immediate fully recovered. Pennsylvania will notfollow thenew federallaw to the extent the amount of depreciation claimed hasnot been issoldordisposed ofan additional deduction when the property qualifiedproperty.168(k) Asnotedabove, ataxpayer may take of sec.provide IRC forcostrecovery mechanism additional any COLLEGE SAVINGS PROGRAM Over $1,102,946 $661,769 to$1,102,946 $551,477 to$661,768 $551,476 orless Taxable Income: 12.3% 10.3% 11.3% 9.3% Installments dueshallbe30%of therequired annualpayment ESTIMATED TAX PAYMENTS inflation. California’s $200,000phase-outthreshold isnotadjustedfor during the year in excess of $200,000.placed in service dollar by the amount of qualified expensing-eligible property California maximumexpensingamountisreduced dollar-for- California law onlyallows amaximum deductionof $25,000.The IRC SECTION 179EXPENSE provisions. California didnotconform tothefederalbonusdepreciation BONUS DEPRECIATION suspension rules. for 2010/2011were not affected by the net operating loss with MAGI of lessthan$500,000 for2008/2009and$300,000 suspended the net operating loss deduction. However, taxpayers beginning 2008throughFor taxableyears California 2011, CARRYOVERS OPERATINGSUSPENDED NET LOSS on 90%of theirtaxforthecurrent year. figure must separately) filing married for based tax estimated California AGI equalorgreater than$1,000,000(or$500,000 tax prior including year’s AMT. Taxpayers with current year’s on thelesserof 90%of theircurrent taxor110%of year’s their for marriedfilingseparately),mustfigure estimatedtaxbased and whose California AGI is more than $150,000 (or $75,000 Individuals whoare required tomakeestimatedtaxpayments, There are limits on the use of tax safe harbor. the prior year’s noncompliance penalty. Individuals whodonotpayelectronically willbesubjecttoa1% amount, tax type,ortaxableyearmust be remitted electronically. you meet thethreshold, allsubsequentpayments regardless of 1, 2009. Once January taxable year that begins on or after file anoriginalreturn withatotalliabilityover$80,000forany an estimateorextensionpaymentexceeding$20,000you You are to remit allpayments electronically once youmake No paymentisrequired forthethird installment. required required annualpayment for the installment. fourth payment for the secondrequired installment, and 30% of the requiredfor thefirst installment,40%of therequired annual
state tax issues 125 EisnerAmper 2018 personal tax guide 126 Florida does not impose a personal incometax. Florida doesnotimposeapersonal TAX RATES FLORIDA in anyyear. fileaCalifornia taxreturn taxpayer hasanyneedtootherwise liability. The annual filing is required regardless of whether the andacknowledges thedeferredhold thereplacement property California thatthetaxpayercontinuesto the filingistonotify long astheyowntheout-of-state property. Thepurposeof property. ThetaxpayermustfileForm 3840foreachyearas the deferred gain upon the eventual sale of the replacement outsidethestatewill betaxedon foraproperty property that exchange a California 1, 2014, taxpayers Effective January SECTION 1031LIKE-KIND EXCHANGES back toCalifornia incomeasaseparateadjustmentto wages. of dependentcare benefitsdeferred bythetaxpayerisadded care benefitsasa reduction of W-2wage amountincome. The pretax the allow California not does of deduction dependent CHILD ANDDEPENDENT CAREBENEFITS period. eligibleundertheapplicablecarryover years only to the period, the net operating loss is carried forward year.taxable torelinquish elects taxpayer Ifthe carryback the periodwithrespect toanetoperatinglossforany carryback carried back in A full. taxpayer may elect to relinquish the entire 1, 2015 can be January beginning on or after to taxable years 75% of thenetoperatingloss.Netlossesattributable cannotexceed loss. For2014 netoperatinglosses,thecarryback to anytaxableyearcannotexceed50%of thenetoperating amount net operating losses attributable to the 2013, carryback 1, 2011. For be carried back to any taxable year before January of the preceding A net operating losscannot two taxable years. 1,2013,to be carried back to each January beginning on or after California allowsnetoperatinglossesincurred intaxableyears incurred beginningbefore intaxableyears 2008. three for losses incurred years for losses in 2008; and four years incurredfor losses forlossesincurred twoyears in2010; in2009; period forsuspended2008–2011lossesisextendedbyoneyear operating lossesduringthesuspensionperiod.Thecarryover Taxpayers overnet maycontinuetocomputeandcarry S CORPORATIONS deployed during the previous members calendar year.military veterans and tax exemptionsalso provides for military property who havenotremarried Florida individuals. andtolegallyblind taxavailabletowidowsandwidowers exemptions from property In additiontothehomesteadexemption,there are $500 is exemptfrom allnon-school taxes. $25,000 of valueisfullytaxable,andthethird $25,000of value second The taxes. district school including taxes, property all primary,taxpayer’s permanent Floridaresidence isexempt from exemption provides $25,000of thatthefirst the valueof a of taxes. The homesteadfrom Florida property a portion may receiveFlorida resident owners an exemption property PROPERTY TAX EXEMPTIONS that taxpayers add back to taxable income 100% of add backtotaxableincome100% that taxpayers IRC Sec. 179 Florida required 1,2015, beginning beforeFor taxyears January qualified businessassets. depreciation andnotpermit immediateexpensing of certain continue todecouplefrom thenewfederallawrelated tobonus increased bytheaddition.Itispresumed thatFloridawilllikely one-seventh of the amount bywhich taxable income was must subtract from this taxable income an amount equal to and for each of taxpayers the six subsequent taxable years, 1,2021.For the taxable year31, 2007,andbefore January December after placedinservice forproperty IRC Sec.169, to IRC IRC Sec.167, andSec.168(k) for the taxable year pursuant deducted for federal income tax purposes as bonus depreciation ofto taxableincomeanamountequal100% anyamount regular and bonus depreciation. Taxpayers must add-back fromFlorida decouples provisions thefederalIRC related to C corporationsare taxedinFlorida. EXPENSING BONUS DEPRECIATION ANDSECTION 179 corporations orentitiesfrom theScorporationparent. are Ssubsidiaries subchapter Qualified nottreated separate as corporation incomeisnottaxed. incometax,otherSBecause Floridadoesnothaveapersonal imposed onlyonbuilt-in gainsandpassiveinvestmentincome. they are liableforfederaltax.Tax ontaxableScorporationsis when does notimposetaxonScorporationsexceptforyears Florida recognizes thefederalScorporationelectionand income from sole proprietorships, partnerships and other entities. to not and only compensation employee to apply agreements These states. other the by withholding employer to subject compensation employee tax not will state one which under Indiana, Maryland, New Jersey, Ohio, Virginia, and West Virginia Note: compete andincomerelated totermination agreements. includes, but is not limited to, income related to covenants not to on within New York, whether or not as an employee. This income to a business, trade, profession or occupation previously carried New York taxes certain income received by a nonresident related card statements,bankstatementsandyourpassport). documents proving your whereabouts (e.g., airplane tickets, credit supporting with and activities your of calendar or diary a keep out of state, such as meeting with a client or customer. You should beto requiredyou that reason business legitimate a was there qualify as a day worked outside New York, you must prove that York.New Toin worked days as employee the of convenience Note: the taxpaidtononresident state,subjecttolimitations. to reduce yourresident statetaxbyacredit amountbasedon by anonresident of NewYork State.However, you are allowed This includesthegainonsaleof acooperativeapartment a nonresident istypically subject to tax bythe nonresident state. Also, thesaleof locatedinanonresident real stateby property formula comparing days worked within and outside the state. andother earned income, usinga on anallocation of salary by thatotherstate. Theincome subject to tax isgenerallybased or California workinginotherstatesasnonresidents are taxed Residents of NewYork, New Jersey, Connecticut,Pennsylvania NONRESIDENT TAXATION foruseinfuture years. be carriedforward credit,any yeartofullyutilizethat year’s theexcess credit can eachyear.bond in liability tax sufficient lacks Ifthebondholder a non-refundable taxcredit of 35%of theinterest paidonthe Build AmericaBonds(taxcredit type)provide thebondholder BUILD AMERICA BONDS OTHER CONSIDERATIONS 2014, noaddbacks are requiredafter forSection 179deductions. placed inservice For assets addback eachyearforsevenyears. deductions inexcess of $128,000anddeduct one-seventh of the Pennsylvania has signed reciprocal agreements with agreements reciprocal signed has Pennsylvania New York State treats days worked at home for the for home at worked days treats State York New resident of that state even if your primary residenceresident isinanother of thatstateevenifyourprimary spend more than183daysinthatstate,youwillbetaxedasa in NewYork, NewJersey, ConnecticutorPennsylvania and Tip 27).Generally, ifyoumaintain apermanent place of abode them aresident of bothjurisdictionsfortaxpurposes(seeTax careful to avoid thestrictrulesthatcouldmake must bevery New York City, but also have a residence in another jurisdiction Individuals whomaintainaresidence inonejurisdiction,suchas RESIDENCY CAUTION include Arizona,Indiana,Oregon andVirginia. statescredit reverse These California. to paid taxes income net allowed if the other state allows California residents a credit for is credit No tax. income California the to subject also income on tax) minimum California’salternative to comparable tax any including (not state another to paid taxes income net for Note: to $15million. pay is$20millionfor2018.For2019,thisamount isadjusted orestatetaxthatadonordecedentwillberequiredgift to and for2019,itwillbe$3,600,000.Themaximumamountof is $2,000,000.For2018,thisthreshold increases to$2,600,000 1,2005 January of madeonorafter Connecticuttaxablegifts taxisimposediftheaggregate amount tax.Thegift state gift thatimposesa Connecticut istheonlystateincountry discussion. taxplanningforafurther on estateandgift Florida donothaveanestateorinheritancetax.Seethechapter located in the state. California and the state or have property whoarean estateorinheritancetaxonpersons domiciledin New York, NewJersey, Connecticut andPennsylvania impose STATE ESTATE OR INHERITANCE TAXES using afactsandcircumstances test. as theplacewhichismostcentraltoyourlifeanddetermined continue tobedomiciledthere. “Domicile”isgenerallydefined even ifyouonlyspendaslittle30daysinthestate domicile testtreats youasaresident of NewYork orNewJersey purpose.Inaddition, the ortransitory was duetoatemporary threshold, unless you can prove that the time spent inthe state state. California appliesasimilartestusingninemonthsasthe Other state tax credits are allowed for California residents
state tax issues 127 appendicies appendix January 16,2018 January January 152019 January July 29,2018 June 15,2018 April 17,2018 April 12,2018 April 1,2018 September 17,2018
October 15,2018 October 12,2018 October 1,2018 December 31,2018 Date Note: and/or independentcontractors. A
There are additional filing requirements ifyouhave household employeesorifyouare abusinessowner andyoupayemployees • • • • • • • • • • • • • • • • • • • • • Deadline To 2018 FEDERAL TAX CALENDAR FOR INDIVIDUAL TAXPAYERS Make 2017profit-sharing Keogh plan contributionsandSEPcontributions,ifyourtax return taxreturns, ifonextension. incometaxandgift File 2017individual File electronically 2017Foreign BankandFinancialAccounts(FBAR)intimetobereceived bytheTreasury taxreturnFile 2017income fortrusts,ifonextension. Make 2017money-purchase anddefinedbenefitplancontributions. estimatedtaxpaymentfor2018. Make third quarter (Form 5500)orextensionrequest.File Keogh planreport estimated taxpayment for2018. Make secondquarter File incometaxreturns fortrusts(orextensionrequests) andpaybalanceof 2017taxesdue. estimatedtaxpaymentfor2018(forindividualsandtrusts). quarter Make first Make 2017IRAcontributions. taxreturns (orextensionrequests)File individualincometaxandgift andpaybalanceof 2017taxesdue. ofFile electronically Foreign 2017Report BankandFinancialAccounts(FinCEN114)intimetobereceived Take IRA first required minimum distributionifyou reached age70 Pay finalinstallment of 2017estimatedtaxes. Pay finalinstallment of 2018estimatedtaxes. Take required IRAminimumdistributionfor2018. atraditionalIRA to aRothIRA. Convert Establish aKeogh ordefinedbenefitplanfor2018. Accelerate incomeifyouare inalowertaxbracket2018thanyouexpecttobe2019. Prepay expenses deductibleonyour2018return, ifapplicable,and ifyouwillbeinalowertaxbracket by October15,2018ifonextension by theTreasury byApril15,2018 in 2019,andtakecapitallossestooffset capitalgains. is onextension. 1 / 2 in2017.
appendix 129 EisnerAmper 2018 personal tax guide 130 appendix
If Taxable IncomeIs: B $ 0.00 $ 0.00 $ 0.00 $ 0.00 444,550.00 235,350.00 208,350.00 233,350.00 470,700.00 418,400.00 416,700.00 212,500.00 416,700.00 416,700.00 131,200.00 191,650.00 153,100.00 116,675.00 50,800.00 76,550.00 37,950.00 37,950.00 75,900.00 13,350.00 91,900.00 18,650.00 9,325.00 9,325.00 Over 2017 FEDERAL TAX RATE SCHEDULE But NotOver $ 13,350.00 $ 18,650.00 444,550.00 $ 9,325.00 $ 9,325.00 235,350.00 233,350.00 208,350.00 470,700.00 418,400.00 416,700.00 212,500.00 416,700.00 416,700.00 131,200.00 191,650.00 153,100.00 116,675.00 50,800.00 76,550.00 37,950.00 37,950.00 75,900.00 91,900.00
Married Filing Jointly or Qualifying Widow(er) Married FilingJointlyorQualifying $ 0.00 $ 0.00 $ 0.00 $ 0.00 126,950.00 121,505.25 120,910.25 131,628.00 112,728.00 117,202.50 56,364.00 46,643.75 52,222.50 27,052.50 29,752.50 65,814.00 10,452.50 49,816.50 Married FilingSeparately 14,876.25 18,713.75 26,111.25 6,952.50 5,226.25 5,226.25 1,335.00 1,865.00 932.50 932.50 Head of Household
Single The Tax Is + + + + + + + + + + + + + + + + + + + + + + + + + + + + 39.6% 39.6% 39.6% 39.6% 35% 35% 35% 25% 25% 25% 28% 35% 33% 28% 33% 25% 33% 28% 28% 33% 15% 15% 15% 10% 10% 10% 15% 10% + Of TheAmountOver $ 0.00 $ 0.00 $ 0.00 $ 0.00 444,550.00 208,350.00 235,350.00 233,350.00 470,700.00 418,400.00 416,700.00 416,700.00 416,700.00 212,500.00 191,650.00 131,200.00 153,100.00 116,675.00 9,325.000 50,800.00 37,950.00 37,950.00 76,550.00 75,900.00 13,350.00 18,650.00 91,900.00 9,325.00 appendix
If Taxable IncomeIs: C $ 0.00 $ 0.00 $ 0.00 $ 0.00 400,000.00 500,000.00 200,000.00 300,000.00 200,000.00 500,000.00 200,000.00 600,000.00 315,000.00 165,000.00 157,500.00 157,500.00 157,500.00 82,500.00 51,800.00 82,500.00 82,500.00 38,700.00 38,700.00 77,400.00 13,600.00 19,050.00 9,525.00 9,525.00 Over 2018 FEDERAL TAX RATE SCHEDULE 157,500.00 But NotOver $ 19,050.00 $ 9,525.00 $ 13,600.00 $ 9,525.00 400,000.00 500,000.00 300,000.00 500,000.00 200,000.00 200,000.00 200,000.00 600,000.00 315,000.00 165,000.00 157,500.00 157,500.00 82,500.00 82,500.00 38,700.00 77,400.00 82,500.00 38,700.00 51,800.00
Married Filing Jointly or Qualifying Widow(er) Married FilingJointlyorQualifying 91,379.00 64,179.00 28,179.00 45,689.50 32,089.50 $ 0.00 $ 0.00 $ 0.00 $ 0.00 14,089.50 44,298.00 149,298.00 150,689.50 161,379.00 14,089.50 4,453.50 8,907.00 45,689.50 80,689.50 30,698.00 32,089.50 Married FilingSeparately 12,698.00 952.50 4,453.50 5,944.00 1,905.00 1,360.00 952.50 Head of Household
Single The Tax Is + + + + + + + + + + + + + + + + + + + + + + + + + + + + 37% 37% 37% 37% 24% 24% 24% 24% 35% 35% 22% 22% 22% 35% 22% 35% 32% 32% 32% 32% 12% 12% 12% 12% 10% 10% 10% 10% + 165,000.00 157,500.00 Of TheAmountOver 500,000.00 $ 0.00 $ 0.00 $ 0.00 $ 0.00 200,000.00 400,000.00 200,000.00 200,000.00 500,000.00 300,000.00 600,000.00 315,000.00 157,500.00 157,500.00 82,500.00 82,500.00 51,800.00 9,525.00 82,500.00 38,700.00 38,700.00 77,400.00 19,050.00 13,600.00 9,525.00
appendix 131 EisnerAmper 2018 personal tax guide 132 appendix * 33% Bracket* 35% Bracket* 39.6% Bracket* 20% Bracket 26% Bracket 28% Bracket 20% Bracket* 25% Bracket 28% Bracket (e) (d) (c) (b) (a)
Note: Long-Term DividendsIf InTheAMT CapitalGainsAndQualifying Effective Income Tax Rates IfInTheAMTOrdinary Long-Term DividendsIf NotInTheAMT CapitalGainsAndQualifying Effective Income Tax Rates IfNotInTheAMTOrdinary Rates Maximum Tax D $1,102,946 orlessof taxable incomeis12.3%. $2,155,350, therateis6.85%. $250,000 formarriedfilingjoint,$200,000singleand$125,000 formarriedfilingseparatetaxpayer If the maximum ordinary income tax rate for federal is 39.6%, 35%, or 33%andmodifiedadjustedgross incometaxrateforfederalis39.6%,35%,or income(“MAGI”) exceeds If themaximumordinary The Pennsylvania maximumratedoesnot includetheCityof Philadelphiataxonwagesandself-employment incomeof 3.9004% appliestotaxableincomeinexcessofThe maximumtaxrateforNewJersey $500,000.Ifyourtaxableincomeislessthan$500,000, withtaxableincome For Connecticutmarriedfilingjointlytaxpayers of $1,000,000andbelow, themaximumtaxrateis6.9%. Tax.The maximumCalifornia rateincludesthe1%MentalHealthService with Thetopratefor marriedfilingjointlytaxpayers For NYS, themaximumtaxrateisapplicablefortaxableincomeover$2,155,350marriedfilingjointly. Iftaxableincomeisunder an additional3.8%Medicare ContributionTax onnetinvestmentincome.Similarly, ifyoumeettheseMAGI thresholds, longterm your maximumtaxrateis6.37%. for Philadelphiaresidents and3.4741%fornonresidents. capital gainsmaybetaxedat23.8%.
Theseeffectivetaxratesdonotinclude payroll andself-employment taxesorthe4%New York CityUnincorporated Business Tax. Federal 2017 MAXIMUM EFFECTIVE RATES 39.6% VAR% 20% 26% 28% 20% 25% 28% 33% 35%
8.82%(a) Resident NYS 45% 34% 29% 35% 32% 39% 37% 27% 41% Resident 12.696% NYC 42% 43% 30% 33% 39% 35% 47% 37% 41% Resident 13.3%(b) 44% 42% 48% 33% 39% 35% 38% 41% 31% CA 6.99%(c) Resident 44% 40% 33% 35% 26% 30% 33% 38% 27% CT 8.97%(d) Resident 34% 45% 29% 35% 32% 39% 37% 27% 41% NJ s, youmaybesubjectto 3.07%(e) Resident 23% 29% 22% 30% 35% 27% 37% 41% 31% PA appendix 32% Bracket* 35% Bracket* 37% Bracket* 20% Bracket 26% Bracket 28% Bracket 20% Bracket* 22% Bracket 24% Bracket
Maximum Tax Rates Long-Term DividendsIf InTheAMT CapitalGainsAndQualifying Effective Income Tax Rates IfInTheAMTOrdinary Long-Term DividendsIf NotInTheAMT CapitalGainsAndQualifying Effective Income Tax Rates IfNotInTheAMTOrdinary E 2018 MAXIMUM EFFECTIVE RATES 20% 26% 28% 20% 22% 24% 32% 35% 37% VAR% Federal 29% 35% 37% 29% 31% 33% 41% 44% 46% 8.82%(a) Resident NYS 33% 39% 41% 33% 35% 37% 45% 48% 50% 12.696% Resident NYC CA 33% 39% 41% 33% 35% 37% 45% 48% 50% 13.3%(b) Resident 27% 33% 35% 27% 29% 31% 39% 42% 44% 6.99%(c) Resident CT 29% 35% 37% 29% 31% 33% 41% 44% 46% 8.97%(d) Resident NJ 23% 29% 31% 23% 25% 27% 35% 38% 40% 3.07%(e) Resident PA
appendix 133 EisnerAmper 2018 personal tax guide 134 appendix **”SAF” meansthestatereturn duedateisthesameas thefederalreturn duedate. *Revised duedatesresulting Transportation from theSurface &Veterans HealthCare ChoiceImprovement Actof 2015 Tax-Exempt (b) Trust &Estate(c) Tax-Exempt (b) Trust &Estate(c) 3520-A 3520 3520-A 3520 S-Corporation S Corporation (e) (d) (c) (b) (a) C-Corporation (d) C Corporation(d) Form 5500 (e) Partnership FBAR (a) Form 5500 (e) Partnership FBAR (a) Return Type Extension Requested (Assumingcalendaryear-end forallentities) Return Type Not onExtension (Assumingcalendaryear-end forallentities) Information Returns (i.e.,W-2and1099s) Individual 31(samedatetheyare 1099-MISCduetoIRS/SSAJanuary Information Returns (i.e.,W-2and1099s),Formscertain Individual due to the taxpayer). All other Forms 1099 due February 28;March 31iffiledelectronically.due tothetaxpayer).AllotherForms 1099dueFebruary F September 15willremain forcalendaryearcorporationsuntil2026, andcorporationswithaJune30year-end willgetaseven-monthextensionuntil 2026. Partnerships willberequiredPartnerships tofile their returns bythe15thday theclose of thethird month after of theirtaxyear, andwillhaveamaximumsix- month followingthecloseofFor Ccorporations,theduedateis15thdayof thetaxyear. thefourth ending ForCcorporationswith fiscalyears For fiscalyearestates,theoriginalduedateis15tho The extensionwillbeasingle,automaticsix-monthextension,easingtheadministrative bur Note thatunliketaxreturns, FBARsdonothaveanext-business-day ruleifthedeadlinefallsonaSaturday, Sunday, orlegalholiday on June30,thischangeisdeferred until2026.Corporationswillbeallowedanautomaticsix-monthextension,exceptthefive-monthextension original duedate.Trusts are alwaysonacalendar-year basis. of extendingtheForm 990returns, three andeliminatingtheneedtorequest months. asecondextensionafter month extension. 2018 FEDERAL AND STATE TAX RETURNS DUE DATES* November 15 September 17 October 15 October 1 May 15 March 15 April 17 April 17 September 15 October 15 March 15 April 17 No extensionsavailable October 15 April 17 October 15 September 17 October 15 Federal July 31 March 15 April 15 Federal f the fourth month after theyear-end. monthafter f thefourth Theextendedduedateis5 SAF Oct. 15 Oct. 15 SAF SAF SAF SAF SAF N/A N/A N/A N/A SAF** SAF** N/A SAF N/A NY N/A SAF N/A NY SAF SAF Oct. 15 Oct. 15 SAF SAF SAF SAF N/A N/A N/A N/A SAF SAF N/A SAF N/A CA N/A SAF N/A CA den on exempt organizations by simplifying theprocessden onexemptorganizations bysimplifying SAF SAF Nov. 1 Sept. 15 SAF Apr 15 May 1 SAF N/A N/A N/A N/A SAF SAF N/A SAF N/A CT N/A Apr 16 N/A CT Dec. 1 Nov. 1 Nov. 1 N/A June 1 May 1 May 1 N/A N/A N/A N/A N/A N/A N/A N/A SAF N/A FL N/A Apr 1 N/A FL
N/A Oct. 15 Oct. 15 Sept. 15 N/A Apr 16 SAF Apr 15 N/A N/A N/A N/A SAF SAF N/A SAF N/A NJ N/A Apr 15 N/A NJ 1 / 2 months after the monthsafter N/A Oct. 15 July 14 Sept. 15 N/A Apr 16 May 15 SAF N/A N/A N/A N/A SAF SAF N/A SAF N/A PA N/A Apr 16 N/A PA
EisnerAmper Tax Advisory Services
EisnerAmper Tax Advisory Services is comprised of more than 500 tax professionals practicing across a myriad of tax and accounting disciplines. With one of the nation’s largest tax practices, EisnerAmper brings to its clients a breadth and depth of expertise ranging from international tax to high net worth individuals and closely held businesses, from privately held entities to not-for-profit organizations to public companies and from state and local taxation to tax provisions for large corporate clients.
EisnerAmper tax professionals combine far-sighted tax planning with close attention to detail. Our clients reap the benefit of large-firm competency without losing the personal attention and focus provided by our partner-led teams.
Our personal wealth advisory group focuses on concerns of high net worth individuals, family offices, closely held businesses, trusts and estates and private foundations; and provides advice ranging from year-end tax planning strategies to retirement and estate and succession planning. Our corporate tax group is equally attentive to addressing the concerns of public and private companies, partnerships, and limited liability companies and their principals.
About EisnerAmper LLP
EisnerAmper LLP is one of the premier full-service accounting and advisory firms in the United States and serves clients worldwide. We provide audit, accounting, and tax services as well as corporate finance, internal audit and risk management, litigation consulting, and other services to clients across a broad range of industries. EisnerAmper works with middle-market and Fortune 1000 companies, as well as high net worth individuals, family offices, closely held businesses, not-for-profits, and early- stage companies. Our range of expertise and standing in the profession allows us to leverage our insight and relationships on behalf of our clients. www.eisneramper.com
2018 EisnerAmper Tax Guide © EisnerAmper LLP All rights reserved. This book, or portions thereof, may not be reproduced without permission of EisnerAmper LLP.