Passive and Real Estate Activities
65
If you are an owner of a business in which you do not materially of an owner If you are participate, activity rules can limit your ability to deduct the passive even if you materially participate,even unless you qualify estate as a real
losses. And, if you hold rental real estate investments, the losses are passive passive are the losses investments, estate real And, if you hold rental losses. professional. Income from passive activities including rental real estate may estate real activities including rental passive from Income professional.
also be subject to the 3.8% Medicare Contribution Tax on net investment income. on net investment Tax Contribution be subject to 3.8% Medicare the also
RETURN TO TOC RETURN TO
Passive and Passive
Activities Estate Real EisnerAmper 2020 Personal Tax Guide deduct inthecurrent year, theselosses youcancarry the activity. Ifyouhavepassivelossesthatcannot offset thelosses,orwhenyoucompletelydisposeof that youhaveincomefrom otherpassiveactivitiesto Passive activitylossesare deductibleonlytotheextent • • • • limitation rules,are if: business activity, andthereby avoidthepassiveactivity ina ways youare deemedtomateriallyparticipate Themostcommon you donotmateriallyparticipate. A passivelossisafrom abusinessactivityinwhich | Whatare Passive Losses? year inallsuchactivities. several activities,totallingmore per than500hours You workmore peryearineachof than100hours or owners, includingnon- and notlessthananyotherperson, You workmore peryearintheactivity than100hours intheactivity,participation Your constitutessubstantiallyallof the participation during theyear, You more intheactivity than500hours participate This very favorableresult isduetothe factthatthesuspended This very January 1,2018),whereas thelong-term capitalgainfrom thesale January As anexample,assumeyouhavesuspendedpassivelossesof $300,000 from an activitythatyouhaveheldformore thanone taxes. Infact,youmayactuallyreduce yourtaxesdespitethegain. to disposeof apassiveactivityatgainandnothavetopayany year. You disposeof theactivityin2019 and realize acapitalgain well asreceiving theproceeds from thesale. If youhavesuspendedpassiveactivitylosses,maybeable of $340,000.You wouldactuallysavefederaltaxes of $43,000 as losses reduce your ordinary incomeata37%rate (beginningon losses reduce yourordinary Tax Tip Passiveto Activity CapitalGains 13. Use Release SuspendedOrdinary Losses 66 The taxsavingswouldbereduced bythe3.8%Medicare $340,000). If you have a net capital loss carryover thatyoumight $340,000). Ifyouhaveanetcapitallosscarryover Contribution Tax intheamount of $1,520 (3.8%of $40,000,which therefore reduce yourtaxby$111,000(37%of $300,000), butthe would betaxedatnomore than20%.Thesuspendedlosswould benefit of theloss(buta reduced carryover). be abletoutilize,yoursavingswouldevengreater sincethe ordinary loss). ordinary capital gainwouldonlyincrease yourtaxby$68,000(20%of is thedifference betweenthe$340,000 capitalgainand$300,000 gain could be offset by the carryover loss,giving you thefulltax gain couldbeoffset bythecarryover participation. are specificrulesastowhatkindof workqualifiesas inseveralactivities.Moreover,they participate there activity,they spendonaparticular especiallywhen Taxpayers shouldkeepdetailedrecords astothetime passive lossrulesandlimitations. tothefollowingyear,forward subjecttothesame income trapdiscussedinTax Tip14. illustrates. Butyoumustalsobeaware of thephantom a gainonthesale,youcanstillsavetaxesasTax Tip13 (subject tocapitallosslimitations).Evenifyourealize activity issold–includinganylossonthedisposition party. Thelossesbecomefullydeductiblewhenthe passive lossesthrough abonafidesaletoanunrelated Sell anypassiveactivitywithcurrent orsuspended Dispose of theactivity losses intotax-savingdeductiblelosses: thedisallowed are thingsthatyoucandotoconvert passive lossesthatare subjecttoadisallowance,there testsandyouhave If youfailthematerialparticipation | Convert Passive Convert Losses RETURN TORETURN TOC Passive and Real Estate Activities Income Trap Income The Phantom The Phantom 14. Tax Tip Tax Losses fr (“LLCs”) and Limited Liability Partnerships and Limited (“LLCs”) (“LLPs”) Investment and trading partnerships, S corporations that only generate portfolio income, such asand LLCs not passive and dividends, are capital gains, interest activities, even if you do not participate in the activity. your income cannot offset the investment Therefore, passive losses. to fund your expense on money borrowed Interest as an investment in a passive activity is treated additional passive activity deduction, subject to the same disallowance rules. and dividends, from income, such as interest Portfolio the passive losses from a passive activity cannot offset the activity. Identify Your Actual Passive Losses Actual Passive Identify Your Companies Liability om Limited disposition of real estate. This results from prior deductions based prior deductions from results estate. This real disposition of underlying property remains unsold. However, to the extent your prior underlying property However, unsold. remains if you dispose of your interest in the pass-through activity, even if the activity, in the pass-through your interest if you dispose of on indebtedness. Therefore, you may have deducted losses and/or you may have deducted on indebtedness. Therefore, Income in excess of your net proceeds can be triggered upon the can be triggered proceeds your net Income in excess of than your greater cash distributions in prior years that were received negative capital. | to limited partners presumed an LLP are of Generally, not be materially participating in the business, and thus | When identifyingtake into your net passive losses, account the following: • • • Phantom income to the extent of your negative capital can also occur your negative capital Phantom income to the extent of year’s passive losses were suspended, you would have an ordinary suspended, you would have an year’s passive losses were loss to offset this income. As Tax Tip 13 demonstrates, this can actually be Tax Tip 13 demonstrates, a this income. As to offset tax savings opportunity. actual investment in the property. This is sometimes referred to as This is sometimes referred property. actual investment in the 67 RETURN TO TOC RETURN TO Utilize Your Passive Losses Passive Utilize Your Invest in income-producing passive activities passive in income-producing Invest trade or Consider investing in an income-producing business that you will not materially participate in. This to you which can be offset passive income creates other your passive losses from until you utilize all of in the This may result passive activities. unrelated to the extent Contribution Tax additional 3.8% Medicare by passive losses. that the income is not fully offset Decrease your participation in income activities your Decrease participateFor an activity in which you materially that is your participationgenerating non-passive income, limit the activity to less than 500 hours, Therefore, if feasible. use the income tomay become passive and you can you that make sure your passive losses. However, offset active under the other tests. This not still considered are Contribution in the additional 3.8% Medicare may result to the extent that the income is not fully offset Tax by passive losses. If you or your spouse have been materially participating the activity for five out of in the last ten years, you will be deemed to be materially even if you do not participating year, in the current participate year. at all in the current If you have passive losses from activities that you If you have passive losses from cannot convert into “material participation” activities taking theas discussed above, you should consider losses: following steps to utilize your passive | Increase the hours you participate the hours in realIncrease you property trades or businesses estate activities, increase in real engaged If you are test professional estate your hours to meet the real estate professional, a real If you are (discussed below). as passive no longer treated losses are estate your real to deduct them in full. losses, allowing you Increase your participation loss activities in your Increase losses, consider that is generating For an activity your participation the testsincreasing meet one of to to a you will not be subject if possible, so listed above, for the activity in that year. passive loss limitation EisnerAmper 2020 Personal Tax Guide Under the passive activity loss rules contained in IRC Under thepassiveactivitylossrulescontainedinIRC Corporations Limitation onLossesforTaxpayers OtherThan of themember.the participation thenature andextentof must beexaminedtoascertain in theseactivities.Rather, thefactsandcircumstances for purposesof determining theirmaterialparticipation arehave heldthatsuchmembers notlimitedpartners of anLLC. AlthoughtheIRSdoesnotconcur, cases interests alsoapplytomembers to limitedpartnership haveaddressed whethertherulesthatapply The courts interest. passive lossruleswithrespect tothelimitedpartnership general partner. canavoidthe Inthiscase,suchperson anda asbothalimitedpartner a limitedpartnership where anindividualholdsinterest in participation is anexceptiontothepresumption of nomaterial these activitieswouldbeconsidered passive.There Tax Tip our Gain Using the Installment our GainUsing 15. the installment sale method, you will defer $290,000 of federal tax to future years as the mortgage ispaiddownbythebuyer.the installmentsalemethod,youwilldefer$290,000of federaltaxtofuture asthemortgage years before of 2020.Byusing theendof from paymentduein thebuyerforbalance,withfirst theyearandreceiveJanuary amortgage ($2,000,000 lessthecostof $600,000plustheaccumulateddepreciation of $400,000).You willreceive a20%downpaymentof $400,000 improvements). At thetimeof thesale,youhadaccumulateddepreciation of $400,000.Therefore yourtaxablecapitalgainis$1,800,000 In 2019,yousellanonresidential buildingfor$2,000,000,netof closingcosts,whichyouboughtin1998for$600,000(includingsubsequent gain andrelated interest. Note: The3.8%Medicare Contribution Tax onnetinvestment income,whichisnotreflected intheabove illustration,mayapplytothe future installmentsare years’ expectedtoincrease. out”(“FIFO”) method.Also,thismethodmaynotbeadvantageouswhen thetaxrates infirst ona“first deductions onreal of property Caution: ratio of 90%. Thegross profit ratioisthetaxablegain of $1,800,000dividedbythetotalproceeds of $2,000,000. Federal taxcostthisyear Taxable gaininyearofsale The taxablegainusingtheinstallmentsalemethodiscomputedby multiplyingthedownpaymento Deferred tax Defer Y Sale Method You are of subjecttoataxrate of thegainthatisattributabletoprevious 25%onthe portion non-accelerateddepreciation Full paymentincurrentyear 68 trade orbusinessoverthesumof aggregate gross deductions of thetaxpayerattributabletohisorher an excessbusinesslossastheof aggregate December31,2017.TheTCJAbeginning after defines business loss”limitation,effectivefortaxableyears entities otherthanCcorporations,calledan“excess businesslossfromadditional limitationonataxpayer’s The TCJA amendsandaddstoIRCSec.461an income. income, includingearned income orordinary passive andare availabletooffset allcategoriesof derived from real estateactivitiesare notconsidered the taxpayerisareal estateprofessional, thelosses in whichtheyare notmateriallyinvolved.However, if using lossesincurred from income-producing activities level. Thepassivelossrulesprevent from taxpayers incomeattheindividualtaxpayer income orordinary passive activity, thepassivelosscouldnotoffset earned Sec. 469,ifataxpayerhasflow-through lossfrom a $ 1,800,000 380,000 f $400,000bythegr Installment salemethod $ 360,000 290,000 90,000
RETURN TORETURN TOC oss profit Passive and Real Estate Activities If you fail either test and you have real Perform more than 50% of your personal services than 50% of more Perform propertyin real trades or businesses in which you materially participate, and service than 750 hours of Have more in these businesses. Real Estate Professional Rules Professional Estate Real activity. This special allowance is reduced, but not below but not is reduced, special allowance This activity. the taxpayer’s amount by which the AGI 50% of by zero, when AGI phased out It is completely exceeds $100,000. $150,000. reaches | you can deduct estate professional, a real If you are not subject you are estate losses in full since real rental must you qualify, limitations. To to the passive loss annually: • • In addition, you must materially participate in the to be for that activity activity in order estate real rental estate broker nonpassive. For example, a real considered who owns one or two apartments might be a for rent to not be considered but might estate professional real materially participate activity. in the rental professional estate the real a joint return, In the case of at least one of and only if, satisfied if, are requirements In requirements. the spouses separately satisfies both material participation to the regards though, work test performed by a taxpayer’s spouse in a trade or business as work performedis treated the taxpayer. by not subject to the 3.8% are Real estate professionals investment income, on net Contribution Tax Medicare estate activities in real rental including capital gains, from which they materially participate. Observation: estate losses, try service your hours of to increase to meet test, estate professional the real the tests. For purposes of estate their real all of a taxpayer can elect to aggregate material participation. to determine activities rental Once the election is made, it continues unless the IRS consents to its revocation. 69 RETURN TO TOC RETURN TO P Real Estate Activities Estate Real ActivityCredits assive Real estate activities are passive by definition, unless Real estate activities are of Regardless you qualify estate professional. as a real or not, there estate professional a real whether you are the gain on the sale the tax from ways you can defer are A separate estate properties, real as discussed below. of losses each rule allows you to deduct up to $25,000 of year if you actively participate estate real in a rental | Tax credits from passive activities, such as rehabilitation activities, such as rehabilitation passive from credits Tax your can reduce and low-income housing credits, for properties placed into However, tax liability. regular service limited to the are prior to 2008, these credits tax attributable to your net your regular amount of your to reduce passive income, and cannot be used the qualified investments, both For post-2007 AMT. as well as the low-income credit Rehabilitation Tax AMT to tax and both regular can offset housing credit your tax attributable to passive activity the extent of loss, theincome. If you have a net overall passive carried forward are disallowed credits and can be used years. If you have net your taxes in future to offset limited because of are passive income but the credits you can carry forward your the credits to offset the AMT, not in the AMT. years when you are tax in future regular | income or gain for the taxable year plus a threshold year plus a threshold gain for the taxable income or filing jointly for married taxpayer $500,000 amount of for all other taxpayers.or $250,000 threshold The and inflation every will be adjusted for amounts year, afterthis limitation expires 2025. Any December 31, as an NOL carryforward treated are amounts residual the following yearsfor the taxpayer in in accordance the NOL has amended The TCJA with IRC Sec. 172. carryforward be indefinite and limits the NOL to income for a given taxable taxable of deduction to 80% in subsequent When applying the NOL deduction year. years, will need to follow the ordering the taxpayer rules per IRC Sec. 172. EisnerAmper 2020 Personal Tax Guide on like-kind exchanges for assets that included on like-kindexchangesfor assetsthatincluded Previously, IRCSec.1031alloweddeferral of gain | uponthereceiptfirst of principalpayments. of 20%),theunrecaptured IRCSec.1250gainisreported rate of 25%)andregular capitalgain(maximumtaxrate both unrecaptured IRC Sec.1250gain(maximumtax deferred gainonthesaleof real estateisattributableto or 751isrecognized immediately. whenthe Furthermore, sale, anyrecapture incomeunderIRCSecs.1245,1250, Caution: tax (assessedasanadditionaltax)willapply. exceeds $5million,aninterest charge onthedeferred of allinstallmentreceivables youownatDecember31 the instalmentmethod.However, ifthefaceamount you holdaninterest iftheentitydoesnotelectoutof through anentityinwhich if youownedtheproperty received. You canusetheinstallmentsalemethod even incomewhen interest paymentsare taxableasordinary payments onseller-financed orloans.The mortgages deferred payments.You mayalsobeentitledtointerest for theinterest elementifinterest isnotstatedonthe infuture willalsobelong-term except years reported that issoldhadalong-term holdingperiod,thegain character aswhenitwassold.Therefore, ifproperty infuture retains years 15). Thegainyoureport thesame of thesalespricebyafullyear(seeTaxthat portion Tip one paymentuntilnextyear, youcandeferthetaxon as youreceive principalpayments.Bysimplydeferring gainonly The installmentmethodallowsyoutoreport doing so,youcandefermuchof thetaxtofuture years. thegainoninstallmentsalemethod.By report theyearofafter thesalesothat youare eligibleto consider agreeing toreceive oneormore payments Ifyouareyears. contemplatingasaleof real estate, to deferagainonthesaleof real estateforfuture tax-efficientmethod An installmentsalecanbeavery | Like-Kind Exchanges Benefits Installment SaleReporting Evenifnopaymentsare received intheyearof 70 Your apositioninwhichyour specificfactpattern mustsupport 24 months and in each of the two 12-month periods immediately after 24 monthsandineachof thetwo12-monthperiodsimmediatelyafter 2008-16, whichincludesasafe-harborruleunderitsaidwould vacation property orsecondhome wasinfactheldforrental, vacation property foranother,vacation/investment property you cannotimmediately safe harbor, foratleast youmusthaveheldtherelinquished property substantiate that the property was held, treated and reported as rental was held,treated and reported substantiate thatthe property allowed tomoveinimmediately. In2008theIRSissuedRev. Proc. tax-deferred exchangetreatment. the dwellingunitcannotexceedgreater of 14daysor10%of the the exchange:(1)youmustrent thedwellingunittoanotherperson you have converted ittoaninvestmentproperty.you haveconverted Thisconversion Like-kind exchanges for vacation homes that are converted torental Like-kind exchangesforvacationhomesthatare converted was converted andheld forrental orinvestment.Themore youcan was converted Caution: for afairrental for14daysormore; useof and(2)yourownpersonal Like-kind exchange reporting isnotelective.Consider Note: Like-kindexchangereporting home, youare not for isintendedtobeanewsecondorprimary business useactivity, thestronger thefactswillbethatproperty kind exchange. wasacquired inthe1031like- beginning withthedateproperty residence, theexclusionwillnotapplyduringfive-yearperiod residence inthelike-kind exclusion.Ifyouacquire property primary number of daysduringthe12-monthperiodthatdwellingunit forpurposesofproperty alike-kindexchange. Inorder tomeetthis not challengewhetherareplacement dwellingqualifiedasinvestment property. Forexample,ifyoustopusingyourvacationhome,rent it are tricky,property Itispossibleforyouto butcanbeworthwhile. must support such a conversion. In addition, if the property swapped Inaddition,iftheproperty suchaconversion. must support or investmentproperty, thebetter yourpositionwillbetosupport asyourprincipal exchange andlaterattempttosellthatproperty homeandtakeadvantageof the$500,000 ittoyourprimary convert estate andconducttherental of thatreal estateasabusiness,then out forasubstantialperiodof timeandthenexchangeitforotherreal could allow for a like-kind exchange. Of course, thetimingandfacts could allowforalike-kindexchange.Ofcourse, like-kind exchange. investment, orbusinessuseandwouldtherefore fortax- qualify is rented successfullyswappingone atafairrental. Inaddition,after considerations). not engaginginalike-kindexchange ifataxableeventisthe better approach (e.g.,whenyouhaveexpiringlosses,orstatetax deferred exchangetreatment. Themore rental, investment,or do alike-kindexchangeifyouturn avacationhomeintorental Tax Tip 16. The saleof fora yourprincipal residence doesnotqualify Like-Kind Vacation Homes Exchanges for RETURN TORETURN TOC Passive and Real Estate Activities as a partnership, proprietorship. corporation or sole S allowed for a taxpayer’s deduction is also The 20% traded qualified publicly REIT dividends and qualified partnershipas all domestic QBI is defined income. than investment income (e.g.,business income other REIT dividends), investmentdividends other than capital gains, long-term short-term income, interest currency gains and foreign capital gains, commodities compensation include reasonable gains. QBI does not made to the taxpayer. or guaranteed payments For taxpayers the limits whose taxable income is above 20% deduction is not allowed the mentioned below, service a “specified trade from if the QBI is earned A specified service trade or business is or business.” defined, in part, as any trade or business (other than involving the performance or engineering) architecture accounting, servicesof health, law, in the fields of actuarial science, performing arts, consulting, athletics, financial services, services, brokerage or any trade or such trade or the principal asset of business where its of one or more or skill of business is the reputation employees or owners. For specified service above, the 2019 businesses, noted filersjoint for out phases deduction incometaxable with for individualbetween $321,400 and $421,400, and filers between $160,700 and $210,700. earning that are below this income threshold Taxpayers engaged in non-specified service businesses may above this income that deduct the 20%. Taxpayers businesses may still engaged in non-specified are subject to a cap (the “wage deduct the 20% but are limitation test”). The 20% deduction is limited to the the W-2 wages paid with respect (a) 50% of of greater to the qualified trade or business or (b) the sum of to the qualified with respect the W-2 wages 25% of the unadjusted basis, trade or business plus 2.5% of immediately after all qualified property. acquisition, of For this purpose, qualified property is generally defined as tangible property under IRC subject to depreciation Sec. 167, held by a “qualified trade or business” and qualified business income of used in the production 71 RETURN TO TOC RETURN TO Pass-Through Tax Treatment Tax Pass-Through For taxable years beginning after December 31, allows a January2017 and before 1, 2026, the TCJA a taxpayer’s domestic qualified 20% of deduction of a partnership, taxed business income (“QBI”) from LLC The TCJA made significant changes to the tax made significant The TCJA for entities pass-through income from of treatment activities. both investment and noninvestment related an individual taxpayer generally law, Under pre-Act to apply their individual income tax rate, was required taxable depending on their tax bracket, to their regular income. | Like-kind exchanges typically are used when selling Like-kind exchanges typically are estate and can yield substantial tax benefits. Even real like-kind property allowsthough the definition of as permitting such for a certain flexibility, amount of held land for a building if both are an exchange of complex rulesfor investment purposes, specific and a like-kind exchanges. These rules include govern any receive cannot directly that you requirement identifycash or other consideration and must the propertyreplacement with the qualified intermediary holding the funds within 45 days after the sale. If you exchange real propertyIf you exchange real a like- for property of or character), you do not realize kind (same nature exchange, except up to the time of taxable gain at the (such any cash or other boot received the amount of as unlike property). like-kind exchange rule gives The you the opportunity to defer taxes until you sell the property in the exchange. you receive that tangible and intangible personal property. Personal Personal and intangible personaltangible property. property and boats vehicles, furniture, can include gain on of limits the deferral art The TCJA collectibles. afterexchanges completed like-kind 31, December property 2017, to only real for resale. not held primarily property in mind only U.S. real is eligible and Keep propertyreal the U.S. is not eligible. located outside property allowed a deferral will no longer be Personal gain. of EisnerAmper 2020 Personal Tax Guide • • • must bemet: forthesafeharbor,qualify thefollowingrequirements business forQBIdeductionpurposes.Inorder to the real estateactivitieswillbetreated asatradeor which provides safeharborguidelinesunderwhich deduction. Inresponse, theIRSissuedNotice2019-07 whether real estaterental activityqualifiesforthe This provision raisedmanyquestionsrelating to income. AGI butinsteadisallowed asadeductiontotaxable The 20%deductionisnotallowedincomputing asanemployee. business of services performing trade orbusiness(definedabove)the business isanyotherthanaspecifiedservice periodsunderADS).Aqualifiedtradeor recovery without regard toIRCSec.168(g)(whichlistsapplicable underIRCSec.168 that wouldapplytotheproperty period of thelastfullyearinapplicablerecovery thatdateor(2)thelastday after the datetenyears andendingonthelaterof (1) placedinservice first is is theperiodbeginningondateproperty depreciable periodwithrespect toqualifiedproperty has notendedbefore thecloseof thetaxableyear. The (land isnotincluded)thedepreciable periodforwhich owners. ofemployees, agentsorindependent contractors the and/or byowners maybeperformed Rental services rentalconsidered activities. qualifying real estateorlong-term capitalimprovements are not management, timespenttravelingtoandfrom the property, financialmanagement, investment However, andsub-contractors. contractors procuring of employees, management andsupervision tenant application,rental collections,operations, include leasenegotiations, Rental services mustmeetthe250-hourrequirement.years 2022,anythree outof after For years fiveconsecutive 1,2023. priortoJanuary annually fortaxableyears areAt of performed least250hours rental services 72 taking theQBIdeduction. the safeharbordoesnotnecessarilyprevent youfrom Note: • • • • limit is effective in 2018 and applies to existing debt. limit iseffectivein2018and appliestoexistingdebt. IRS and,oncemade,isirrevocable. Thenew interest is madeatatimeandin mannerasprovided bythe as definedunderthepassiveactivityrules.Theelection from tradeorbusiness thelimitationanyreal property rules. Specifically, theelectioncanbemadetoexclude desire toelectoutof thenewinterest disallowance tax may owners deductions), butinvestmentproperty chapter onbusinessownerissuesanddepreciation net interest expense(asexplainedmore fully inthe cancontinuetodeduct owners Investment property deductions. chapter onbusinessownerissuesanddepreciation 179. Bonusdepreciation mayalsobeavailable.Seethe off newinvestments underIRCSec. thecostof certain new taxadvantagewiththeabilitytoimmediatelywrite willreceive owners a Someproperty business owners. 1,2018impactingreal estate beginning January The TCJA alsomakesadditionalchangestotaxlaw | OtherConsiderations for thesafeharbor. the taxes,insuranceandmaintenance,donotqualify Triple of netleases,where thetenantpaysaportion of forthesafeharbor. theyeardoesnotqualify part Real estateusedasaresidence bytheownerforany beginning in2019andshouldinclude: Contemporaneous records mustbemaintained each rental activity. Separate booksandrecords mustbemaintainedfor • • • Who performs theservices Who performs performed ofDates andhours theservices performed Description of services This isasafeharbor. Notmeetingthecriteriaof RETURN TORETURN TOC Passive and Real Estate Activities 73
RETURN TO TOC RETURN TO State and local taxes paid with respect to carryingState and local taxes paid with respect to the related on a trade or business, or in an activity deductible. income, continue to remain of production property rental a can deduct owner Accordingly, property associated with a business asset, such taxes The current depreciation rules for real estate continue. for real rules depreciation The current property owners the real electing to use However, depreciate limit must the interest estate exception to propertyreal recovery under slightly longer periods 30 years for property, 40 years for non-residential of and 20 years for qualified property, rental residential Propertyinterior improvements. owners will need to schedules the longer depreciation take into account to the estate exception the real if they elect to use in covered rules are depreciation limit. The interest detail in the chapter on business owner issues more deductions. and depreciation The interest limit, and the real estate election, applies at election, applies estate and the real limit, The interest level. the entity as any type of rental property. rental as any type of
Principal Residence Sale and Rental
75 A principal residence may be one of the most tax-efficient investments you investments the most tax-efficient may be one of residence A principal can own since you can exclude as much as $500,000 of the gain on its sale. as much as $500,000 of you can exclude since can own
RETURN TO TOC RETURN TO
Sale and Rental Sale and Principal ResidencePrincipal EisnerAmper 2020 Personal Tax Guide pro-rata exclusionisgenerallyequaltoafraction, the unforeseen circumstances The andnaturaldisasters. same pregnancy, divorce orlegalseparation,other from the in employment,healthreasons, multiplebirths tests asaresult of ahardship, whichincludesa change A pro-rata exclusionisallowedifyoufailtheabove will becountedasperiodsof use. absences, isrented during suchtemporary the property such asforvacationorotherseasonalabsences,even if absences, the residence temporary isrequired. Short With regards totheprincipalresidence, occupancyof • • • • meet allof thefollowingconditions: To forthefullamountof qualify theexclusion,youmust | office orrental useisnoteligiblefortheexclusion. of thegainattributabletoahome gain). Anyportion canexcludeupto$250,000of(other taxpayers the married filingjointlyandmeetthetestslistedbelow exclusion of capitalgainupto$500,000,ifyoufileas The saleof yourprincipalresidence iseligibleforan ass TheseTests andExclude Up to past fiveyears. exchange (alsoknownasa1031exchange)duringthe Did notacquire yourhomethrough alike-kind last twoyears. Did notexcludethegainonahomesalewithin period endingonthesaleenddate. intheaggregate,least twoyears, duringthefive-year Have usedthehomeasyourprincipalresidence forat the exclusionof atleast$250,000. inorder tobenefitfromonly onespouseneedqualify full monthsor730days.Ifyouare filingajointreturn, condominium. Thetwo-yearrulemayconsistof 24 or houseboat, mobilehome,cooperativeapartment Youryears. principalresidence canbeahouse, Have ownedyourprincipalhomeforatleasttwo $500,000 of Your Gain P 76 all tests: example foramarriedcouplefilingjointlyandmeeting the maximumexclusionamountallowed.Here isan have topaytaxestheextentthatanetgainexceeds ago (in1997,tobeexact).Undercurrent law, youwill of theoldhome.Thatlawwasrepealed manyyears a newhomethatcostsmore thanthesellingprice gain from thesaleof aprincipalresidence iftheybuy Many peoplemistakenlythinkthatyoucandefera | 25% capitalgainrate. previously deductedanditwillbetaxedataspecial taxable gainwhichequalstheamountof depreciation the rental orbusinessuse.Regardless, there willbea residence, unlessthere wasaseparatestructure for in connectionwiththerental orbusinessuseof the May6,1997 that anydepreciation wastakenafter A reduction of theexclusionisrequired totheextent andthedenominatoris24. the pasttwoyears and ownedthehouseasyourprincipalresidence within numerator of whichisthenumberof monthsyouused this tax. excludable gain($250,000/500,000)isnotsubjectto Contribution taxonnetinvestmentincome.The The taxablegainwillbesubjecttothe3.8%Medicare See thechapteronstatetaxissues. Notes: Contribution Tax onnetinvestment income gain rate andthe3.8%Medicare Federal taxatmaximum20%capital Taxable gain Allowable exclusion onsaleofNet gain home Tax basis (includingcapitalimprovements) Net proceeds onsale
Sell Your HouseTax-Free Do NotAssumeY This gain may be subject to state income taxes. This gainmaybesubjecttostateincometaxes.
ou Can Always ou CanAlways
RETURN TORETURN TOC $ $
(500,000) 2,000,000 1,400,000 6 9 2 00,000 00,000 00,000 14,200
Principal Residence Sale and Rental
f Your Home f Your Know Y Loss on the Sale o Sale b Both you and your spouse must meet the two-year and your spouse Both you meets the test, theIf only one spouse use test. is limited to $250,000. exclusion spouse must meet the “noBoth you and your two years”exclusion in prior test. This can be an home, claimed an exclusion of issue if you sell your $250,000, marry and then jointly sell a homeowner two years.that home within If the spouse meeting the still be eligible he or she will test is the homeowner, and the spouse failing thefor the $250,000 exclusion, unless the exclusion, for a pro-rated test is not eligible as discussed above. rule applies, hardship Basis our Tax y Surviving Spouse Based on historical evidence, you would expect your if after it. However, home to appreciate you purchase you only hold it for a short time, or if unusual market to lose money on it is possible conditions prevail, especially after your principal residence, the sale of | your taxable gain, you will want to minimize To and have thehave the highest tax basis possible, basis calculation.documentation to substantiate the including to maintain accurate records, So be sure closing on your original cost (including information costs) and subsequent capital improvements. deferrals of by any pre-1988 Basis must be reduced gain (i.e., when the law allowed taxpayers to defer tax costing more by buying a new principal residence | • • | A surviving and sells spouse who has not remarried the date within two years from a principal residence gain $500,000 of his or her spouse died can exclude rather than $250,000. their principal residence). of than the net proceeds 77
eration for Those Who RETURN TO TOC RETURN TO Special Consid No Ex File Joint Returns Use of PropertyUse of Any other period of temporaryAny other period of to absence (not two years) due to period of exceed an aggregate employment, health conditions, or such change of as may be specified circumstances other unforeseen by the IRS. Any period (not to exceed an aggregate period of ten period of Any period (not to exceed an aggregate servingyears) spouse are during which you or your of extended duty as a member on qualified official servicesthe uniformed services or foreign the of the intelligence United States, or as an employee of community. Any portion the five-year period ending on the of the sale that is after the last date you (or yourdate of spouse) use the property as a principal residence.
Nonqualified for Allowed clusion If you are married filing jointly, things can get a little married filing jointly, If you are want to be eligible for the complicated if you more $500,000. While either you or maximum exclusion of your spouse can meet the two-year ownership test, the following rules apply to the use test and “no exclusion in prior two years” test: | • • • A period of nonqualified use does not include: A period of Total nonqualified use during period of ownership after nonqualified use during period of Total ownership. 2008, divided by total period of Generally, nonqualified use means any period after nonqualified use means Generally, used the neither you nor your spouse 2008 where the figure property To as a principal residence. portion that is allocated to the period of the gain of multiply the gain by the followingnonqualified use, fraction: Beginning with sales or exchanges of your principal of with sales or exchanges Beginning afterresidence will no December 31, 2008, you exclude gain allocated to periods of longer be able to the property. nonqualified use of | EisnerAmper 2020 Personal Tax Guide days ayearor10%of thetotalnumberof daysitis fornomorefamily members) thanthegreater of 14 useyourvacation home (including If youpersonally Rental expensesdeductible infull 1,2026. January December 31,2017andbeginningbefore beginningafter married filingseparately)fortaxyears taxesupto$10,000($5,000for income, orproperty the TCJA todeductsales, allowsindividualtaxpayers improve theresidence thatsecured theloan.Further, proceeds are usedtobuy, buildorsubstantially 1,2026unlessthedebt 31, 2017andbefore January December beginningafter is suspendedfortaxyears the debtwasincurred. Interest onhomeequityloans backto$1millionregardlesslimitation reverts of when December31,2025,the beginningafter For taxyears December15,2017. $750,000 fordebtincurred after limitation withrespect toacquisitionindebtedness The TCJA interest deduction reduces themortgage to limitations). deductions onyour2019taxreturn (subject interest andreal estatetaxesasitemized mortgage you are stilleligibletodeducttheamountof qualifying thisincome, Even thoughyoudonothavetoreport tax-free, regardless of theamountof rent youreceive. for 14daysorlessduringtheyear, therental incomeis If yourent yourvacationhomeorprincipalresidence Tax-free rental income Proper planningcanhelpyoumaximizetaxsavings. planning torent outyourvacationorsecondhome. You shouldconsiderthetaxconsequencesifyouare | loss. business lossratherthanapersonal deductible, subjecttovariouslimitations,sinceitisa willbe business, thelossattributabletothatportion of yourhomewasrented part orwasusedforyour you donotgainataxbenefitfrom theloss.Butif on thesaleof residence apersonal isnotdeductible, factoring inclosingandimprovement costs.Sincealoss ental of Vacation orSecondHome R
78 chapter onpassiveandreal estateactivities for more may besubjecttothepassive lossrules.Seethe uselessthan10%or 14days)losses estate (personal To qualifiesasrental real theextentthatproperty • your deductionsmaybelimited,asfollows: case),itisconsidered residence apersonal and Court of daysitisrented (oravailableforrental, underaTax than thegreater of 14daysor10%of thetotalnumber useyourvacationhomeformoreIf youpersonally Rental use expenseslimited bypersonal a more detaileddiscussion. See thechapteronpassiveandreal estateactivitiesfor the rental activityisconsidered tobeapassiveactivity. your income,deductiblelossmaybelimitedsince income youreceive. However, ifyourexpensesexceed maintaining thehomeare deductibleagainsttherental expensesof rental property, andnecessary allordinary residence. ratherthanapersonal a rental As property isconsideredactually rented tobe out,theproperty • • • • the year. of daysrented dividedbythe totalnumberof daysin deductible asrental expensesbasedonthenumber interest andreal estatetaxesare mortgage Qualifying sale. in future includingagainonthe years, the property andavailableforuseagainstincome from forward residence are not currently allowablebutare carried Net overalllossesfrom therental of use apersonal costs)are deductibleinfull. income oradvertising itself (suchasbroker commissionsontherental Expenses directly attributabletotherental activity purposes. of wasusedforrental andpersonal daystheproperty wasrented overthetotalnumber days theproperty and repairs, are deductiblebasedonaratioof the Other rental expenses,includingdepreciation, utilities to thenewlawunderTCJA. interest are deductibleasitemizeddeductions,subject The balanceof thereal estate taxesandmortgage RETURN TORETURN TOC Principal Residence Sale and Rental 79 RETURN TO TOC RETURN TO R Lik You have a loss and you received Form 1099-S. Since Form have a loss and you received You you 1099 to your return, the IRS matches all Forms on the return would want to show the sale proceeds is no gain on the sale. Remember and that there not deductible. personal losses are You have a gain on the sale. You would typically show have a gain on the sale. You You your tax return gain on the Schedule D of the entire your gain by the excludible portion.and then reduce eporting Requirements Home forVacation Exchanges e-Kind • • | your principal would typically report the sale of You your personal income tax D of on Schedule residence you do not have to report the sale However, return. on your income tax return your principal residence of unless: See Tax Tip 16 in the passive and real estate activities estate real the passive and Tip 16 in See Tax on a planning opportunitychapter for information for vacation homes. using like-kind exchanges information. |
Charitable Contributions
81
gift you make, while fulfilling your philanthropic objectives. gift while fulfilling your philanthropic you make, Your ability to control when and how you make charitable contributions contributions charitable you make when and how ability to control Your can lower your income tax bill, effectively reducing the actual cost of any of any cost reducing the actual bill, effectively tax your income can lower
RETURN TO TOC RETURN TO
Charitable Contributions EisnerAmper 2020 Personal Tax Guide • • • You cansavesubstantialtaxesbysimply: |
make overacoupleof intooneyearinorder years Bunching thecontributionsthatyouwouldnormally year whenyourtaxbracketwillbehigher. Timing yourcontributionssothattheyare madeina charitable contributions. tofundyour Using long-term appreciated property Basic Planning Tax Tip ou Really Receiving aCharitable 17. 1. order: certain of givenina property of thatare deductible,youwouldhavetoanalyzeeachcategory In order thegifts todetermine theportion be deductibleonyourreturn determined asfollows: is$100,000and$30,000carriedoverforfiveyears, withafairmarketvalue ofproperty $50,000andataxbasisof $40,000toaPC.Your 2019AGI is$200,000.Thetotalamountthatwill (PC); (2)a$20,000cashdonationtoyourfamily’s privatenon-operatingfoundation(PF)and(3)adonationof short-term capitalgain You tocharityhelpoffset desire tomakethefollowinggifts your2019taxliability:(1)a$70,000cashdonationtopubliccharity benefit of thefull$120,000(whichis 60% of the foruptofiveyears. AGI), andtheothercontributions of $60,000willbecarriedforward For example,assumethesamefactsas above,butinsteadof donatingcashtoPCsof $70,000,youdonate$120,000. Inthatcaseyouwouldreceive the actually apply. are contributionssubjecttothenew60%limitation.Onlyifyourcash donationstoPCsisequalorexceeds60%of yourAGI, willthe60%limitation It isclearfrom thisexamplethatthedeductionforcharitablecontributionsallowedonreturn isactuallylimitedto50%of AGI, eventhough there Carryforward toSubsequentYears Percentage ofAGI Total Deductible Cash toPF(30%) Short-Term CapitalGainPropertytoaPC( Cash toPC(60%) (Applicable ThresholdPercentage) Description ofPropertyGiven 3. t-term islimitedtotheAGI amountof capitalgainproperty $200,000multipliedby50%andthenreduced bythe$70,000 2. entire $70,000isdeductible. Cash contributionstopubliccharitiesar Cash contributionstoPFsar Shor amount already beingdeductedand50%of AGI). Noneof the$20,000cashdonationisdeductibleon2019incometaxreturn. income taxreturn. amount already deducted.$30,000of the$40,000amountisdeductible(thelowerof thefairmarketvalueorbasis)on2019 Are Y Deduction at 60% of AGI?Deduction at60% Ideas e limitedtothelesserof $60,000(30%of AGI) and$0(thedifference betweencombined$100,000
e limitedto60%of AGI. Sincethe$70,000cashcontributedislessthan60%of theAGI, the 50%) 82 return. incometax as anitemizeddeductiononyourpersonal Note: Total Gift eliminated orlimited. andmanyitemizeddeductionshavebeen prior years standard deductionhasincreased substantiallyfrom as aresult of theTax CutsandJobsAct,wherein the year. Thisplanningideahasgainedmore importance to exceedthestandard deductionthreshold inthat $30,000 $70,000 40,000 20,000
You canonlyclaimyourcharitabledeductions Deductible Amount $100,000 $70,000 30,000 50%
0 RETURN TORETURN TOC Charitable Contributions
erm Appreciated Propertyerm Appreciated Use Long-T New for 2019
| traded publicly should always use appreciated You than one securities that you have held for more rather than cash, to fund significant charitable year, | Certainty and Disaster the Taxpayer The enactment of 2019 temporarily suspends current Relief Act of The for “qualified contributions.” limitations AGI “qualified contributions” means any charitableterm period beginningcontribution that is paid during the on January is 1, 2018 and ending on the date which the Act the enactment of 60 days after the date of efforts relief (December 20, 2019) and is made for in The taxpayer must qualified disaster areas. one or more obtain contemporaneous written acknowledgement that the contribution was used or the organization from efforts.will be used for relief The Act specifies that this does not apply to contributions to 509(a)(3) provision asupporting or to the establishment of organizations fund. an existing, donor-advised or maintenance of new, of the overall charitable deduction to be disallowed in deduction to the overall charitable of amount news is that any The good year. the current forward can be carried disallowed and potentially years, succeeding five used in the upon depending to the particular these limitations application of tax years Planning for future in that year. circumstances do not want to find yourselfis imperative as you in not used excess contributions are the situation where lost (see ultimately period, and are with the five-year tax tip 17). funds donor-advised this provision, For purposes of foundations qualifyand private operating as public non- a contribution to a private charities. Further, under theoperating foundation which qualifies or conduit rules as a pass-through out-of-corpus contributionfoundation also qualifies for the 60% base for cash contributions. 83 RETURN TO TOC RETURN TO I Contributions onCharitable theTCJA of mpact There are limitations on the amount of contributions on the amount of limitations are There based on your AGI, that you can deduct in a given year charity property donated and the type of the type of the donation, as Chartreceiving 6 indicates. For cash the 50% threshold increased contributions, the TCJA to 60% starting 2025). The 60% (and through in 2018 limit only applies to cash gifts made to public charities. law the way in which this new because of Unfortunately, the 60% limitation was insertedprovision in existing law, gifting donors are will not be available in cases where to both public charities and private foundations, or are both cash and noncash items, such asmaking gifts of securities and artwork. Sec. 170, which discusses IRC of charitable contributions, is a complicated provision and the way in which these various categories the law, donations interact with one another causes more of | More sophisticated planning techniques are discussed sophisticated planning techniques are More funds, using donor-advised including in this chapter, trusts, to help youprivate foundations, and charitable goals. combine tax planning with your charitable While the TCJA restricted and even eliminated a good and even restricted While the TCJA 2018 to 2025), the (from many itemized deductions In intact. contributions remains deduction for charitable on itemized deductions which limitation fact, the Pease itemized deductions by 3% for in past years reduced every taxable income over certain dollar of threshold their itemized deductions and ultimately up to 80% of a dollar-for- will receive Taxpayers has been repealed. if they itemize. dollar deduction for their contributions In order to claim a deduction on your personal a deduction on to claim In order be made can only contributions return, income tax Contributions charitable organizations. to U.S.-based “Friends apply. do not generally charities to foreign as U.S. domestic typically set up of” are organizations charities, and supportCharitable charities. foreign deductible. are organizations contributions to such exceptions may apply. Treaty-based EisnerAmper 2020 Personal Tax Guide rules willapplyandpenaltiesmaybeimposed. private foundation,theself-dealing privatefoundation realized onthedeemedsale.Ifitisabargain saletoa share of liabilitiestreatedthe partner’s astheamount adeemedbargain sale,with contribution andinpart charity, acharitable thetransaction isconsidered in part interest withliabilitiestoa contributes apartnership not considered qualifiedappreciated stock.Ifapartner Caution: above. asdescribed forthenextfiveyears, be carriedforward a highceilingandanydisallowedcontributionscan generally limitedto30%of yourAGI, thisisstillusually remains unchangedunderthenewtaxlawandis While acontributionof long-term appreciated property gains taxontheappreciation (seeTax Tip18). (as ifyoucontributedcash)andavoidpayingcapital the fullfairmarketvalueof thesecurityorproperty double taxbenefitof receiving adeductionequalto can givetoamuseum.Bydoingso,yougetthe eligible appreciated property, thatyou suchasartwork, contributions. You shouldalsoconsiderusingother donating thestockratherthancashwouldbe: littlefuture growth potential.Insteadofthat itmayhavevery sellingthestock,you donateittoyourfavoritecharity. Your taxsavingsby hasappreciatedA stockthatyouhaveownedformanyyears to$100,000from itsoriginalpurchase priceof $60,000.You havedecided Net federaltaxsavings Capital gainstaxifstockwassold ($40,000at23.8%*in2019) Tax savingsoncontribution($100,000at37%in2019) *Includes 3.8%Medicare ContributionTax onnetinvestmentincome. Tax Tip 18.
Units of a publicly traded partnership are are Units of apubliclytradedpartnership The BenefitofContributingLong-T Appreciated Securities RatherThanCash
84 consider deferringcontributionstonextyearinorder your taxratewillincrease nextyear, youmightwantto tax deduction.Ontheotherhand,ifyouexpectthat and desired) togaintheadvantageof acceleratingthe prepay your charitable contributions this year (if feasible If youexpectyourtaxratetobethesamenextyear, receive manydonationswithsmallamounts. Manycharitiesmaybeimpactedasthey for thegift. foritemization,andthussecure sometaxbenefit qualify charitable contributionsintoasingleyearinorder to contribution. Theymayconsiderbunchingtheir since theymaynolongergetataxbenefitforthe individualstomakecharitablecontributions, for certain suspended through 2025. This may create a disincentive itemizeddeductionsare temporarily time, certain At both singleandmarriedfilingjointfilers. thesame The TCJA doublestheamountpreviously allowedfor through 2025istheincrease inthestandard deduction. financial events.Anotheraspecttoconsiderin2019and Your significantlyinayearof unusual taxratemayvary before years decidingwhentomakeyourcontributions. Always consideryourtaxrateforthisyearandfuture | Cash DonationfromProceeds our Contributions Time Y (9,520)
$ 27,480 $ 37,000 erm Stock Donation 0
$ 37,000 $ 37,000 RETURN TORETURN TOC Charitable Contributions property includes inventory property items and subject recapture. to depreciation personal property Tangible market value as a full fair get the property’s To propertydeduction, the appreciated must qualify for and had it been sold capital gain treatment long-term property must use this the charitable organization (such as a painting given to ain its exempt function museum). Otherwise, your deduction will be limited fair market the property’s your basis or to the lesser of value. Furthermore, if the charitable organization the property years, the donor within three disposes of to include as ordinarywill be required for the income between the the disposition the difference year of if charitable deduction and the donor’s basis. However, certifiesthe organization to the IRS, in writing, that the to its was, or was intended to be, related use property’s would not apply. exempt purpose or function, this rule Vehicles does not use the vehicle If the charitable organization the vehicle (forin its exempt function, but instead sells will be limitedover $500), your charitable deduction the sale by the from received proceeds to the gross not the appraised value. charity, Fractional interest an a gift of contribution consists of A fractional interest undivided portion property to a charity that uses the of property in connection with its exempt purposes (e.g., in artworkan interest that is contributed to a museum). In this situation, your initial charitable deduction will be the property multiplied by thethe fair market value of contributed. fractional interest a say you donate the use of As an example, let’s painting valued at $400,000 to a museum for three painting for the remaining the months and you retain charitable deduction would be nine months. Your the painting at the value of $100,000 based on 25% of the year). months of (three the contribution the time of the same painting next year forIf you gift the use of months or additional 25%) six months (additional three 85
RETURN TO TOC RETURN TO Contrib Rather Than Fair Market Value Market Than Fair Rather OnlyatCostutions Deductible Securities with a fair market value less than value Securities with a fair market Securities held for 12 months or less have held for 12If you contribute securities that you is equal tomonths or less, your charitable deduction in the the fair market value or your basis the lesser of the you lose the deduction for any of stock. Therefore, the security. of appreciation Other ordinary income property The charitable deduction for ordinary income property the fair market value or is limited to the lesser of even if you have held the your basis in the property, property than 12 months. Ordinary more income Certain a property will not avail you of types of fair charitable deduction equal to the appreciated contributing So, before the property. market value of and other options consider its eligibility property, Theseavailable to fund your charitable contributions. property include: types of cost your Never use these securities to fund your contributions since your deduction will be limited to the lower fair lose and you will permanently the stock market value of had you sold the benefit that you would have received these securities at a capital loss. | The year that you can take the deduction is the year the can take the deduction is the year The year that you make Therefore, the property. charity actually receives for you satisfy that sure the legal transfer requirements securities or other property that youcontributions of is by having One way to do this make prior to year-end. your brokerage from directly the securities transferred year- account before brokerage account to the charity’s accelerating the process. end, thereby to secure more tax savings at the higher rate. Also, tax savings at the more to secure excess of deductions in to have itemized you will need of to get the benefit in order deduction the standard charitable contributions. increased EisnerAmper 2020 Personal Tax Guide perpetual conservation easement is given to a qualified easement isgiventoaqualified perpetual conservation can bedoneonortotheland. Inthetypicalcase,a enjoyment of the land. The easement only restricts what control,The donordoesnotgiveupownership, or perpetual restriction ontheuseof thereal property. interestA real forthispurposeincludesa property purposes. the easementexclusivelyforconservation interest toacharitableorganizationproperty thatuses easementisacontributionof areal A conservation easement Conservation (deathofconveyance occurs thedonor). untiltheconditionofnot receive theproperty the a current deductioneventhoughthecharitydoes takes titletotheproperty. Therefore, youreceive contractually conveyed,notwhenthecharityactually intheyearthatremainder interestthe property is based onthepresent valueof theremainder interest in organization. You willreceive acharitablededuction her lifeandleavearemainder interest toacharitable can havefulluseof throughout hisor theproperty The ownerof real estate,such asavacationhome, Remainder interest inreal property penalty of 10%of theamountof theincomeinclusion. the return fortheyearof the deductionuntilpaidanda deducted plusinterest runningfrom theduedateof period fallsandisintheamountthatwaspreviously of anincomeinclusionintheyearwhichspecified of yourdemise(“specified period”).Recapture consists fromyears theinitialfractionalcontributionordate donee onorbefore theearlierof thedatethat’s ten all of tothesame yourremaining interest intheartwork thenfailtocontribute fractional contributionof artwork, Beware that“recapture” willoccurifyoumakeaninitial or thevalueonadditionalcontributiondate. the valueattimeof theinitialfractionalcontribution donation of islimitedtothelesserof thesameproperty would be$100,000sinceasubsequentfractionalinterest the valueof thepaintingwhencontributed.Instead,it based on25%of additionalcontributionmultipliedby to $440,000,yourcontributionwouldnotbe$110,000 and thefairmarketvalueof thepaintinghasincreased 86 organization are notdeductible. onbehalfof acharitable ofthe performance services considered andnotspecificallyincurred personal in are deductibleaswell.Expensesthatare services charitable while “awayfrom home”inperforming per mile.Reasonableexpensesformealsandlodging or carinsurance.Alternatively, youcandeduct14¢ maintenance of thecarsuchasdepreciation, repairs and parkingfeesbutnotexpensesconnectedwith deduct expensesof operatingyourcarincludingtolls are are deductible.You performed services can Travel expensestoandfrom theplacewhere the theseservices. expenses incurred whileperforming organization, youmaydeductincidentalunreimbursed onbehalfof performed acharitable for services Although youcannotgetacharitablededuction expenses Unreimbursed provisions. (“PATH”) reinstated andmadepermanent these Protecting Americansfrom Tax HikesActof 2015 applies.The limitation andfive-yearcarryover contributions.’ Rather, the50%contributionbase individuals didnotapplyto‘qualifiedconservation by limitation ondeductionsorcapitalgainproperty December31,2014,the30%contributionbase after beginning for contributionsmadeintaxableyears provision thathadterminated Under atemporary which thedeductionisbased. often givestheIRScausetoscrutinize thevaluationon qualified appraisal.Thistypeof charitablecontribution withandwithouttheeasementrequiresproperty a equal tothedifference inthefairmarketvalueof the organization. Thecharitabledeductionis conservation charities tax-free while satisfying all or a portion of their alloraportion charities tax-free while satisfying of theiraccountstoqualifying older totransferportions age70½or which allowsIRAandinherited IRAowners The provision forqualifiedcharitabledistributions, | RA Distributions as Charitable RA Distributions asCharitable Contributions I RETURN TORETURN TOC Charitable Contributions
Donor Foundations vs.Private Funds -Advised | fund or a to either a donor-advised Contributing a tax deduction (subject to offers private foundation limitations), but they have their differences. different less costly fund is the simpler and The donor-advised you a private foundation requires Using alternative. subject a legal entity with annual tax filings, to create net investment income and otherto an excise tax on (see the discussion below). Yet, potential excise taxes can the private foundation despite these disadvantages, if substantial amounts alternative still be a preferable involved, so consider the following similarities and are these options: when evaluating either of differences charitable deduction in theObtain a large year current and a private foundation fund Both a donor-advised capital gains taxallow you the ability to avoid paying than marketable securities held more on appreciated one year when such property is donated. However, is limited tofunding a private foundation with securities donation to a donor- while a similar your AGI, 20% of your AGI. 30% of limitation of advised fund has a larger tax foundation is subject to Private For tax years beginning after December 20, 2019, a 1.39% excise tax of private foundation is subject to a flat capital realized on its net investment income, including propertygains on the appreciated The contributed. Certainty by the Taxpayer excise tax rate was lowered 2% the previous 2019 from and Disaster Relief Act of rate, which will still apply for the calendar year 2019 private foundations. The new legislation also eliminated a 1% tax rate to apply in that allowed the provision the 2% rate if a private foundation met certainplace of Net investment income distribution requirements. income, dividend income, is defined to be interest by certain income, reduced income and royalty rental in connection with the production expenses incurred such income. An income tax will be assessed on of business income as well as unrelated a foundation’s the foundation is involved excise tax if an onerous 87 RETURN TO TOC RETURN TO How t of Future Contributions and Meet and Contributions Future of Goals Philanthropic Charitable Trusts Private Foundations Donor-Advised Funds Donor-Advised Benefit theTax o Accelerate • • • Certain allow you to accelerate charitable vehicles into the current contributions future the tax benefit of over when such practical control year while retaining actually made to your intended contributions are The most common charitable planning vehicles charity. include: | This technique has additional benefits since, unlike aThis technique has additional benefits is not includedtaxable distribution, the distribution impact the Medicare may therefore This in AGI. the on net investment income, Contribution Tax for itemizing medical expenses, the 7.5% threshold Social Security benefits, the amount deductibility of you pay as well as the premiums B Medicare Part of on a based which are many tax credits allowance of can this provision In addition, threshold. modified AGI public charitiesbe a tax efficient way to donate to the TCJA. especially in light of In order to qualify, the charitable distribution must be the charitable distribution to qualify, In order to a donor-advised Payments charity. made to a public fund, supporting foundation do or private organization not qualify. According to the provision, if you are age 70½ or older, or older, age 70½ are if you provision, to the According from distributions to charity you can make tax-free These distributions year. up to $100,000 per an IRA of neither are to the charity and must be made directly nor deductible as an itemizedincludible as income tax returns. deduction on your required minimum distributions, was made permanent was made minimum distributions, required PATH. of as a result EisnerAmper 2020 Personal Tax Guide Excise taxes will be assessed on foundations that Excise taxeswillbeassessed onfoundationsthat of theaverage valueof itsnon-charitable useassets. an annualdistributiontocharities equaltoatleast5% A privatefoundationissubjecttoarulewhichrequires Make minimumdistributions distributions foryourdonor-advised fund. your children theabilitytorecommend charitable it inyourfamily’s name.Itisalso possibletogive from onegenerationtoanother, perpetuallykeeping responsibilities of thefoundationcanbepasseddown the family’s overallcharitabledesires. Themanagement decisions andformulating amissionstatementtosatisfy having theresponsibility of makingmanagement Yourphilanthropic effort. familycanbenefitfrom inacollaborative by involvingfamilymembers A privatefoundationcanprovide intangiblebenefits Involve familymembers and resources tomaximizetheassetsinfoundation. decisions, allowingyoutouseyourinvestmentexpertise foundation. You retain fullcontrol overallinvestment This canbeoneof themajoradvantagesof theprivate foundation’s investments Maintain managementcontrol of theprivate accomplished. goals andensure thatyourcharitableobjectivesare sometimes makeiteasiertoachieveyourinvestment generally givesyoumore direct control, whichcan legally obligatedtodoso.Theprivatefoundation follow yourcharitablepreferences, thoughitisnot future charitabledistributions.Typically, thefundwill them inanaccount(whichcanbearyourname)for contributions toapubliccharitythatwillretain The donor-advised fundpermits youtomakeyour payment of future contributions charitable Retain control of thetiming,amountand penalty taxesifconductingprohibited transactions. to theunrelated businessincometaxandonerous excise tax on its net investment income. It can be subject transactions. Adonor-advised fundisnotsubjecttoan in variousactsof self-dealing orotherprohibited 88 market value,whichnecessitatesannualvaluations. is basedonafixedpercentage of thetrust’s annualfair sinceit value. Theunitrustpaysanannuitythatwillvary that isbasedonafixedpercentage of theinitialtrust unitrust. Theannuitytrustpaysafixeddollar (“CLTs”). You cansetupeither asanannuitytrustora remainder trusts(“CRTs”) andcharitableleadtrusts There are twotypesof charitabletrusts— • • • A charitabletrustcanprovide thefollowingbenefits: | funds donothaveaminimumgrantdistributionsrule. than the5%minimumdistribution.Donor-advised appreciation of theassetsinfoundationare greater Typically, althoughnotalways,theactualearnings and fail todistributetherequired minimumdistribution. as youreceive annuitypayments,asdiscussed below. on thesecurities’fairmarket value.You willbetaxed market risk,butyouwillalso receive anannuitybased andreduceYou yourportfolio willnotonlydiversify sell themwithoutincurringacurrent capitalgains tax. concentrated positioninlowbasisstock,theCRTcan highly appreciated securitiestoaCRT, suchasa charitable desires (seeTax Tip19).Ifyoucontribute increase yourannualincomestream whilesatisfying and yourportfolio A CRTcanhelpyoudiversify | •
deduction islowerthaninthepast. with thepresent lowinterest rateenvironment, this by usingacharitableremainder trust.However, present valueof aremainder tocharities interest left Obtain acurrent-year charitabledeductionforthe a charitableleadtrust. Pass appreciation ontoyourbeneficiariesbyusing Diversify your portfolio anddefercapitalgainstax. yourportfolio Diversify intoanannuity. appreciated property Convert Charitable T Charitable R rusts emainder Trusts RETURN TORETURN TOC
Charitable Contributions
Trusts T”). to your desire By doing so, you can combine Charitable Lead The term of the trust cannot exceed 20 years the and of The term trust must be irrevocable. to the beneficiaryThe annual annuity income payout than 50% of must be at least 5%, but not greater to an annuity trust either the initial amount transferred the assets market value of fair or the annual year-end for a unitrust. to the charity must interest the remainder The value of initial fair market value. the trust’s be at least 10% of
• • • | The annuity the CRT. of is basically the reverse The CLT is paid to the charity and you or your beneficiaries the trust’s at the end of interest the remainder receive complex the income tax implications are But term. only allowed a charitable deduction because you are as a grantor trust (with you is structured if the CLT reporting the annual income and charitable deduction). If the trust is set up as a non-grantor trust, you don’t also not a charitable deduction but you are receive taxed on the income the trust earns. To qualify as a CRT, the trust must satisfy the following qualify a CRT, as To rules: 89 emainder annuity trust (“CRA emainder annuity trust
and Provide Yourself with an Annuity with an Yourself and Provide Use 19. Portfolio toDiversify Your a CRAT Tax Tip Tax RETURN TO TOC RETURN TO diversify your portfolio the gain at the time of sell the stock and pay no tax on the $600,000 charitable giving intentions. The trust can with your long-term capital gains tax rate of 23.8% (inclusive of the Medicare Contribution Tax on net investment income) based on the undistributed gain of on net investment income) based on the undistributed gain of Contribution Tax the Medicare 23.8% (inclusive of capital gains tax rate of long-term like to diversify the capital gains tax. portfolio your to do so because of but you have been reluctant your overall portfolio in the trust. interest an annuity allocation since you retain though, that the family loses the remainder value since it will pass to charities at the end of the trust’s term. the trust’s since it will pass to charities at the end of value though, that the family loses the remainder One option you might want to consider is establishing a charitable r want to consider is establishing a charitable One option you might sale since the trust is a tax-exempt entity. The trust can then use the proceeds from the sale to purchase other investments which, in turn, diversifiesother investments which, in turn, the sale to purchase from The trust can then use the proceeds tax-exempt entity. sale since the trust is a You can choose to have the annuity paid to your You but you must consider yourself, beneficiaries instead of gift tax consequences since you will have made a gift to value. present your beneficiaries equal to the annuity’s the transfer to theThe gift amount is set at the date of in lower overall gift this may result and Typically, CRT. theestate taxes if the IRS tables used for determining at a rate that are the annuity payouts value of present rate experienced by the is lower than the actual growth overall family income taxes if can also reduce You CRT. lower than your tax rates. tax rates are the beneficiary’s The CRT’s assets grow tax-deferred because it is not tax-deferred grow assets The CRT’s on the annuitysubject to tax and you only pay tax the CRT them. Therefore, payouts as you receive stock that you can immediately sell the appreciated out the tax on the gain over the contributed and spread full the annuity (you may never actually pay the life of the annuity is based on the of tax). The taxable nature at year-end, undistributed accumulated income trust’s at the rules. The assets remaining subject to the ordering go to your designated charities. term the trust’s end of The annuity you receive will probably exceed the will probably The annuity you receive the contributed from receiving currently income you are appreciation future securities (but you will be foregoing the annuity). in excess of $600,000. You will also receive a current-year charitable contribution for the present value of the remainder interest going to charities. Remember, to charities. Remember, going interest the remainder value of charitable contribution for the present a current-year will also receive $600,000. You Assuming you choose a 10% payout rate, you will receive an annuity of $100,000 for the term of the trust, much of which will be eligible for the net which the trust, much of of $100,000 for the term an annuity of will receive Assuming you choose a 10% payout rate, you As an original shareholder in a company that went public, you now own stock that is worth $1,000,000 with a tax basis of only $400,000. You would public, you now own stock that is worth in a company that went As an original shareholder You only $400,000. with a tax basis of $1,000,000 EisnerAmper 2020 Personal Tax Guide in order toreceive theremaining assets. However, theywillhaveto waituntilthetrustterm ends low.which hasrecently been very valuing thepresent valueof theremainder interest, be greater thantheearnings rateintheIRStables for will enjoytheexcessappreciation sincethegrowth will If thestockvaluegrows significantly, yourbeneficiaries an earlystagecompany, taxes. andpaylittleornogift amuchgreater interestto gift inassets,suchasstock remainder interest youare givingaway. Thisallowsyou taxonlyonthepresent value ofsubject togift the andestatetaxplanningtoolbecauseyouare gift Despite thesecomplexities,aCLT canbeaneffective Chart is limited, you can carry the disallowed contributions forward for five years, subjecttothesameannualpercentage forfiveyears, limitations. thedisallowedcontributionsforward is limited,youcancarry However, seethediscussionaboveandnotesbelowforwaystoincrease someof thelimitationamounts.To theextentthatyourdeduction The maximumdeductionyouare allowedforyourcharitablecontributionsissubjecttoalimitationbasedonAGI, asnotedbelow. 6. ordinary income property), the60%deductibilitylimitisnotavailable.Seetaxtip17. incomeproperty), ordinary ***The TCJA forthe60%threshold. provides Ifanycontributionsare thatonlycashcontributionstopubliccharitiesqualify otherthancash(suchas tax-exempt purposes. organizations thatdevotemostof**Private operatingfoundationsare non-publiclysupported theirearnings andassetstotheconductof theirown *Donor-advised fundsare treated aspubliccharities. • • These ceilingamountscanbeincreasedinthefollowingways: Private OperatingFoundations** Nonoperating PrivateFoundations Public Charities* that youwillbenefitfromthecarryoverinfuture. by electingtoreduceyourcontributiontheproperty’scost.Thisisonlyadvisableifcontributionswouldotherwisebelimitedanditunlikely The 30%limitationforappreciatedcapitalgainpropertydonatedtopubliccharitiesandprivateoperatingfoundationscanbeincreased50% and the20%limitationforappreciatedcapitalgainpropertyincreasesto30%. to 100%ofthecontributionsitreceivedduringthatyear,30%limitationforcashandordinaryincomepropertyincreases50%(or60%***), If anon-operatingprivatefoundationmakesqualifyingdistributionsoutofitscorpuswithin2½monthsaftertheendtaxableyearequal Adjusted GrossIncome Charitable ContributionLimitationsBasedon Contributions MadeTo 90 50% or60%***forcash 50% or60%***forcash Cash andOrdinary IncomeProperty if thecontributionis$250 or more. Thewritten cancelled checkisnolonger sufficientsubstantiation yourcashcharitabledonations.A to support documentation must makesure to obtainthenecessary and thevalueof anybenefittoyou.Therefore, you contribution wasmade,theamountof thecontribution the nameof thedoneeorganization, thedate communication from thedoneeorganization showing be substantiatedwithabankrecord orwritten cash donationstocharitableorganizations must Regardless of theamountof thecontribution, | stantiate Your CashCharitable Contributions Sub 30% AGI Limitation
Appreciated Capital Gain Property 20% 30% 30% RETURN TORETURN TOC
Charitable Contributions and regularly prepares appraisals for which he or for which appraisals prepares and regularly verifiable education or demonstrates she is paid, property being type of in valuing the and experience appraised. Contributions of similar items of property with an of similar items Contributions of to the subject value exceeding $5,000 are aggregate For example, if you contribute same requirements. $3,000 to one charity and yourclothing valued at clothing valued at $2,500 to anotherspouse contributes qualified appraisals you would need to obtain charity, The appraisal requirements for both contributions. traded cash, publicly of do not apply to contributions worthsecurities or non-publicly traded stock less than $10,000. not satisfied, no charitable are If these requirements the received deduction is allowed, even if the charity property the value is not in dispute. and on net investment Contribution Tax Medicare income Charitable gifts not deductible for the purpose are on net Contribution Tax calculating 3.8% Medicare of high income taxpayers. investment income of 91 ution Appraisal A qualified appraisal must meet certain criteria RETURN TO TOC RETURN TO Noncash Contrib Requirements and Limitations and Requirements Artwork appraised at $20,000 or more. Easements on buildings in historic districts. Any item, or group of similar items, for which you of Any item, or group than claiming a charitable deduction greater are $500,000. The appraiser must be an individual who has either a recognized from an appraisal designation earned has met certain appraisal organization, professional minimum education and experience requirements, The appraisal must be made no earlier than 60 days date you contribute the property the before and before your tax return the due date (including extensions) of on which the deduction is claimed.
• • • • • A complete copy of the signed appraisal must be the signed appraisal must A complete copy of the if you contribute any of attached to your tax return following: If you contribute property worth than $5,000, more appraisal. Also, to obtain a qualified required you are 8283, Noncash and attach Form you must complete to Summary, Charitable Contributions Appraisal must include the qualified This form your tax return. and an authorized person from appraiser’s signature, must complete, sign and the charitable organization indicating the the form, section of date the appropriate the contribution and whether the property isdate of exempt purpose. being used for the charity’s | acknowledgement must explicitly state whether any state whether must explicitly acknowledgement servicesgoods or the in connection with received were deduct your ability to This rule eliminates donation. gatherings made at religious contributions weekly cash the substantiation rules. unless you can meet Caution: to be acceptable:
Interest Expense
93 depends on how the proceeds from the debt are used. the debt are from the proceeds depends on how
Interest expense may reduce your tax liability, but deductibility but deductibility liability, your tax may reduce expense Interest
RETURN TO TOC RETURN TO Interest Expense Interest EisnerAmper 2020 Personal Tax Guide or substantialimprovement of yourprincipalresidence This isdebtincurred on theacquisition,construction Acquisition debt debtare: mortgage interest, subjecttolimitations.Thetwotypesof qualified improve yourhome isdeductibleasqualifiedresidence debtusedtoacquire or Interest paidonmortgage | debt sothatyoucanloweryourtaxes. debt generatingnon-deductibleinterest withother review yourdebttodetermine whetheryoucanreplace the interest youwillpayonthedebt.Also,periodically options availabletoyougetthebesttaxresult from Before incurringanynewdebt,youshouldconsiderthe expense dependsonhowyouusedthedebtproceeds. many rulesandlimitations.Deductibilityof interest Your abilitytodeductinterest paymentsissubjectto | Qualified Residence Interest Deductibility Chart 7. Note: Education loans Passive activities Business activities Trading activities Tax-exempt investments Taxable investments Personal orconsumer Qualified residence(includingasecondhome) Interest ExpenseDeduction Other rulesmaylimityourabilitytodeducttheinterestexpensein full. Nature ofDebt Deductible 94 Not • • $1,000,000 for tax years after December31,2025. after $1,000,000 fortaxyears back to December 15,2017.Thelimitation reverts of acquisition indebtednessfordebtincurred after on $750,000($375,000ifmarried filingseparately) interest deductiontointerestreduces themortgage incurred onorbefore December15,2017.TheTCJA million ($500,000ifmarriedfilingseparately)fordebt be secured bythe residence andislimitedintotalto$1 purposes).For2019,thedebtmust if usedforpersonal and/or yoursecondhome(aso-calledvacation deductions. summarizes thenature of thedifferent typesof interest 7 itemized deductions(orseverely limitthem).Chart local incometaxbill,sincemanystatesdonotallow can especiallybesignificantinreducing yourstateand deductions willyieldabettertaxresult. Thisdifference itemized deduction.Generally, above-the-lineinterest (also knownas“abovethe-line”deductions)oran whether theinterest isdeductibleagainstyourAGI Once deductible,there are alsorulesthatcategorize Nature ofDeduction Deduction Itemized • • Above-the-Line Deduction RETURN TORETURN TOC • • • •
Interest Expense
Nondeductible Nondeductible Debt into Deductible Debt Margin Convert Convert Keep loan proceeds totally separate from other funds Keep loan proceeds totally separate from other 20. Tax Tip Tax Personal or Consumer Debt or Personal deductible margin debt. Rather than using the proceeds from the sale deductible margin debt. Rather than using the into deductible investment interest (assuming no other limitations into deductible investment interest (assuming of securities to buy other securities, use the proceeds to pay off your of securities to buy other securities, use the personal debt. You can then use margin debt, to the extent available, personal debt. You can then use margin debt, nondeductible interest remain the same, but you will have converted Caution: whenever possible. This can avoid reallocation by the IRS, and may whenever possible. This can avoid reallocation the rate on consumer debt. to buy new securities. Your total debt and your total stock portfolio to buy new securities. Your total debt and your apply). And the interest rate on margin debt is typically lower than apply). And the interest rate on margin debt | personal (or consumer) debt expense from Interest paid on debt is nondeductible. This includes interest used to pay personal expenses, buy consumer goods Tip 20 for (including cars), or satisfy tax liabilities. See Tax a method to convert personal debt into investment debt. a passive arising from expense If you have interest activity that is being limited because you have excess If the loan is to refinance your principal residence or a your principal residence If the loan is to refinance over the lifesecond home, points must be deducted you may deduct early, the loan. If the loan is paid off of deducted in the year in which any points not already the loan is paid off. the overall limitation on itemized suspends The TCJA deductions for tax years beginning after December 31, January2017, and before 1, 2026. save important tax deductions. You can reduce or eliminate your personal debt by converting it into You can reduce or eliminate your personal debt 95
RETURN TO TOC RETURN TO Your loan is secured by your principal residence. loan is secured Your The amount is clearly shown in the closing statement as points. The points were stated as a percentage of the of stated as a percentage The points were indebtedness. You use the loan to buy or build your principal You residence. • • • or substantially improve the residence that secured that secured the residence or substantially improve • Home Equity Debt Cuts and Jobs Act suspends the interest The Tax for taxdeduction on home equity indebtedness Points may be fully deductible in the year paid, or they Points to the loan. In order may be deducted over the life of some be deductible in the year paid, the following are criteria that must be met: Under the Further Consolidated Appropriation’s Act, Under the Further Consolidated Appropriation’s the cancellation of up to $2 million from income of a mortgage is tax-free. on a principal residence years beginning after 31, 2017 and before December build January 1, 2026, unless the debt is used to buy, the loan. What if you desire to purchase a particular to purchase What if you desire home and finance it with a mortgage, but need to act immediately can buy the residence the acquisition? You to secure place within 90with cash and then put the debt into the acquisition. days of Acquisition debt also includes debt from a refinancing of of refinancing a debt from debt also includes Acquisition principal but only up to the acquisition debt, an existing plus any the refinancing of debt at the time that of your residence. improve used to substantially proceeds that is used to substantially improve A home equity loan as acquisition debt. Qualified qualifies your residence paid on does not include interest interest residence if your such as your parents, individuals, loans from for the debt and the debt is nothome is not security agency (for government at the appropriate recorded office). clerk’s example, the county EisnerAmper 2020 Personal Tax Guide and bond funds, are subject to ordinary income tax incometax and bondfunds,are subject toordinary dividends received from moneymarket mutualfunds forthisrate,including dividends notqualifying of theinvestmentinterest expenselimitation.However, rate isnottreated asinvestmentincomeforpurposes married filedjointly($496,600in2020))preferential tax separately ($248,300in2020),and$488,850for ($441,450in2020),$244,425formarriedfiled filers for the15%(20%ifAGI exceeds$434,550forsingle For 2019,qualifieddividendincomethatiseligible adequate netinvestmentincome. be deductedinalateryear, totheextentthatthere is andcan for theregular taxorAMTiscarriedforward not netlong-term capitalgains).Anydisallowedinterest discussed below)andnetshort-term capitalgains(but dividends(as includes taxableinterest, nonqualifying amount of yournetinvestmentincome.Generally, this Investment interest expenseisonlydeductibleuptothe expense asnondeductible. oftax-exempt income,rendering theinterest aportion you are required toallocateinterest expensetothe thanyouwouldexpect.AsTaxfurther Tip21illustrates, tax-deductible. Butbecareful, sincethisrulecanreach tax-exempt income,suchasmunicipalbonds,isnot Interest ondebtusedtobuysecuritieswhichgenerate paid theinterest. debt istreated inthesamemannerasifyoupersonally corporation). Theinvestmentinterest expenseonthis LLC,by apass-through orS entity(partnership, debt isthepro ratashare of investmentdebtincurred investment debt.Anothertypicalsource of investment to buysecuritiesisthemostcommonexampleof assets thatare heldforinvestment.Margin debtused Investment interest isinterest ondebtusedtobuy | Tax Tip20. investment debtinthesamemannerasdiscussed passive losses,considerreplacing thisdebtwith Investment Interest 96 net investmentincome. can helpreduce the 3.8%Medicare ContributionTax on Additionally, theinvestment interest expensededuction all, orsome,of youritemizeddeductions. state of residency allowsyouto reduce yourincomeby drops by$20,000.Plus,youwillsavestatetaxesifyour expense ($100,000at37%).Therefore, yournettax income islowerbytheadditionalinvestmentinterest However, yousave$37,000of taxsinceyourtaxable than 20%). ($100,000 of electedgainstaxedat37%rather you payanextra$17,000of taxonthecapitalgains income, $500,000 long-term capitalgainsasordinary gains of $500,000.Byelectingtotreat $100,000of the investment income.You alsohavenetlong-term capital of investmentinterest expenseinexcessof yournet the maximumtaxrateof 37%andyouhave$100,000 As anexample,assumein2019youare subjectto income taxrates. interest expenseyoudeductatthehigherordinary your taxableincomebytheincreased investment dividend taxrateof 15%or20%,butyougettoreduce you losethefavorablelowercapitalgainsandqualified can deductinthecurrent year. Bymakingthiselection, the amountof investmentinterest expensethatyou inthenearfuture. Thiselectioncanincrease carryover to beableutilizeanyof theinvestmentinterest this electionshouldonlybeusedifyoudonotexpect dividend incomeasinvestmentincome.Generally, of yournetlong-term capitalgainsandqualifying an electionisavailabletoallowyoutreat anyportion If youhaveaninvestmentinterest expenselimitation, rates andtherefore asinvestmentincome. qualify the interest expensereduces yourAGI, which inturn treated asanitemized deduction.Thisisbecause your AGI givesyouagreater taxbenefitthaninterest Interest expensedeductible “above-the-line”against | Above-the LineDeductions RETURN TORETURN TOC
Interest Expense
Tax-Exempt Debt Debt Tax-Exempt Can Limit Your Interest Deductible Indirect 21. Tax Tip Tax deduction will be limited because of an IRS ruling that requires you to that requires an IRS ruling deduction will be limited because of exempt municipal bonds and a separate account that holds mostlyexempt municipal bonds and a separate account exempt account. Therefore, before you borrow against your securities, against your you borrow before exempt account. Therefore, you will be paying. the interest cost of after-tax consider the real It is common to have one investment account that holds mostly tax- It is common to have one investment account holding taxable investments to purchase additional stock. Even though additional holding taxable investments to purchase ruling was designed to prevent a taxpayer from reaping a double tax reaping a taxpayer from ruling was designed to prevent your accounts as one account and deems you benefit, and thus treats you are not using margin in your tax-exempt account, your interest in your tax-exempt account, your interest not using margin you are taxable investments (such as stock in publicly traded companies).taxable investments (such as stock in publicly the ratio of your tax-exempt investments to your total investments. This your tax-exempt investments to your the ratio of the debt to maintain your tax- some of borrowed to have indirectly allocate a portion tax-exempt holdings based on the debt to your of to pay the qualified higher education expenses of the expenses of to pay the qualified higher education the taxpayer’s spouse, or an individual who taxpayer, was the taxpayer’s time the debt was dependent at the incurred. amountFor 2019 and 2020, the maximum deductible is $2,500. The student for educational loan interest begins to phase-out for taxpayers whose loan interest joint exceeds $70,000 in 2019 ($140,000 for MAGI is MAGI and is completely eliminated when returns) For 2020, the loan $85,000 ($170,000 for joint returns). begins to phase-out for taxpayers whose MAGI interest and is exceeds $70,000 ($140,000 for joint returns) ($170,000 is $85,000 completely eliminated when MAGI for joint returns). expense activity interest Passive to on debt incurred expense is interest interest Passive whether paid by you fund passive activity expenditures, the capital requirements through or indirectly directly is an The interest business entity. a pass-through of Assume that you want to use your available margin in the account Assume that you want to use your available margin 97 RETURN TO TOC RETURN TO Interest on education loans Interest solely A qualified education loan is any debt incurred In addition, the TCJA limits the deduction for net In addition, the TCJA expenses startinginterest January 1, 2018. Please see the chapter on business owner issues and depreciation deductions. Business interest on debt traced to your business This is interest including debt used to finance the capital expenditures, a partnership, of S corporation, or LLC requirements you materiallyinvolved in a trade or business in which participate. items that you purchase This also includes card. for your business (as an owner) using your credit as additional loans to treated are These purchases the business, subject to tracing rules that allow you to to that relate deduct the portion the finance charges of the business items purchased. Trading interest Trading against taxable on borrowings incurred This is interest actively engaged in the business securities if you are trading personal propertyof (securities), rather than commonly passes This interest simply as an investor. will a trading partnership The interest through or LLC. to you even if you have be classified as trading interest so the entity, of no involvement in the management actively engaginglong as the entity meets the tests for However, trading personal property. in the business of is still subject to the in such a case, the trading interest expense limitation discussed above. investment interest Interest expense eligible for this favorable treatment treatment expense eligible for this favorable Interest includes: reduces, if applicable, the limitation on deductible if applicable, the reduces, by AGI. items affected and other medical expenses taxpayers beneficial for most is that more But even state against your will be deductible the interest nondeductible if you live in aincome, rather than as allow itemized deductions (such state that does not and New Jersey), or limited Connecticut, Pennsylvania a portionin a state that disallows your itemized of California). and as New York deductions (such EisnerAmper 2020 Personal Tax Guide passive andreal estateactivities. the passiveactivitylosslimitations.Seechapteron overall passiveactivityincomeorloss,itissubjectto of since theinterest your expensebecomespart the activity, thereby deductibleagainstAGI. However, additional deductionagainsttheincomeorlossof 98 RETURN TORETURN TOC Retirement Plans
99 Contributing to retirement plans can provide you with financial plans can provide to retirement Contributing adhere to these rules can have severe, adverse tax consequences. tax adverse severe, rules have can to these adhere security as well as reducing and/or deferring your taxes. However, However, and/or deferring your as reducing taxes. as well security
there are complex rules that govern the type of plans available to you, plans available the type of rules that govern complex are there
the amount you can contribute, whether contributions need to benefit your whether contributions the amount you can contribute, employees, and the requirements for taking funds out of the plan. Failure to the plan. Failure funds out of for taking requirements and the employees,
RETURN TO TOC RETURN TO Retirement Plans Retirement EisnerAmper 2020 Personal Tax Guide make for2019and2020. shows themaximumannual contributionsthatyoucan 9 in.Chart that youmaybeeligibleto participate 8showsthedifferent typesofChart retirement plans traditional orRothIRA. their spousesmayalsobeeligibletocontributea fees). Employeesorself-employed individualsand employment activity(suchasconsultingordirectors’ employer, iftheyhaveearned incomefrom aself- to otherplansinadditiontheonesoffered bytheir Employees mayalsobeeligibletomakecontributions employer matchsomeorallof theircontributions. offers, butmaygaintheadvantageof havingtheir contributions basedonthetypeof plantheiremployer are more limitedsincetheywillhavetomake choose planstomaximizecontributions.Employees Self-employed individualshave more flexibilityto retirement plans. inother whether youcontributetoorparticipate whether youare anemployeeorself-employed, and depends onavarietyof includingyourincome, factors, rules. Thespecificplan(s)youcancontributeto available withdifferent contributionanddistribution There are manydifferent typesof retirement plans | current-year taxdeductionforyourcontributions. growth andwithdrawalsinthefuture, butthere isno byproviding fortax-free tax savingsopportunities Roth IRAsand401(k)contributionsoffer different reducing yourcurrent taxes. year’s • Your contributionsare taxdeductible,thereby • Your contributionsgrow tax-deferred untilwithdrawn. advantages: offering Roth401(k)contributions)offer thesetaxsaving Retirement plans(otherthanRothIRAsand | Available Retirement Plans Retirement PlanBenefits 100 • Education • Traditional • Roth individuals, subjectto incomelimitations: Individual Retirement Accounts(IRAs)available to all • • 401(k)Plans employees include: Employer-sponsored deferralplansavailable to salary plan totheexclusionof otheremployeesorpartners. purposes of retirement plansandmaynotsetuptheirownretirement (generallyLLCs) arepartnerships treated asowner-employees for of andowners entitiestaxedas Note: inpartnerships Partners • DefinedBenefitPlans • DefinedContributionPlansincluding401(k) • SIMPLEIRAor401(k)Plans • SimplifiedEmployee Pension (SEP)Plans Retirement plansavailable to self-employed individualsinclude: $57,000 for2020. of their eligible compensationor$56,000for2019and law employeescovered byaSEPisthelesser of 100% the contribution).Thecontributionlimitforcommon or hereligiblecompensation(netof thedeductionfor of aself-employed individualcannotexceed25%of his $57,000 for2020.However, the contributiononbehalf annual contributiontoaSEPis$56,000for2019and contributions ontheirbehalf. Themaximumallowable you haveeligibleemployees,mustalsomake planforyourbenefit.If plan isasingleparticipant employees’ IRAs.Ifyoudonothaveemployees,the to makecontributionsyourownIRAandeligible A SEPplanallowsyou,inyourcapacityasemployer, | • • Simplified Employee Pension Plans Educational, CharitableandReligiousOrganizations 403(b) PlansforEmployeesof PublicSchoolsorTax-Exempt SIMPLE PlansforCompanieswith100orFewerEmployees 457(b) PlansforEmployeesof Government Organizations etirement Plans 8. Chart R RETURN TORETURN TOC Retirement Plans Effective for tax years beginning after December contributions needed to attain that benefit. Because the that benefit. needed to attain contributions may annual contribution driven, the plan is actuarially plans, and is other types of allowable for exceed those annual income age, average the employee’s based on benefit (limited to the maximum and annual desired benefit). The maximum allowableallowable annual $225,000 in 2019 and lesser of annual benefit is the income. earned or 100% of $230,000 for 2020 a defined contribution or aWhether you choose your plan must be in place bydefined benefit plan, which you want to make the year for December 31 of to the plan. As long astax deductible contributions you can make taxthe plan is in existence on that date, contributiondeductible plan contributions to a defined that year’s tax income plan as late as the due date of extensions (as late as October 15, or including return, partnerships,September 15 for sole proprietors, LLCs defined benefit or corporations). For calendar-year by September 15,plans, contributions must be made until October 15. an extension to file of regardless Note: deadline for31, 2019, the SECURE Act modifies the and definedadopting qualified defined contribution New for 2020. benefit plans. See above section entitled conversions In-Plan Roth Employees can elect under certain conditions to convert certain some or all of amounts that were basis into a Roth contributed to a plan on a pre-tax the plan. This is known as an account inside of after-tax “in-plan” Roth conversion. Both 401(k) plans and 403(b) such a conversion,plans may permit but the plan for the in-plan conversion. documents must provide plans and participantsApplication to plan participant or former Any current who has an account balance in the plan and who is eligible to distribution (“ERD”) can make an eligible rollover receive the Roth conversion election. The election is available to surviving spouses, but not non-spouse beneficiaries. for or filing status restriction is no income limit There this election. The conversion may be applied to any 101 RETURN TO TOC RETURN TO Qualified Defined Benefit Plans Benefit Defined Contribution and Defined A qualified defined benefit plan sets a future annual A qualified defined benefit plan sets a future pension benefit and then actuarially calculates the A qualified defined contribution plan can be a profit- pension plan, or a sharing plan, a money purchase benefit pension plan. The maximum contribution target to a defined contribution plan for each employee is $56,000 in 2019 and $57,000 for 2020 or the lesser of his or her compensation. For self-employed 100% of individuals, the maximum contribution will generally be limited in the same manner as for SEPs unless 401(k) included in the plan. are provisions | New for 2020 The Setting Every for Retirement Community Up 2019 (“SECURE Act”) modifies Enhancement Act of plan for all the deadline for adopting a retirement qualified plans (except for 401(k) provisions). types of the date of Plans can now be adopted by the due including any extensions plan sponsor’s tax return This gives plan and be effective for the prior tax year. sponsors a SEP plan, which to adopting an alternative could plan that of until this change was the only type the plan sponsor’sbe adopted after taxable the end of This change year. year and still be effective for the prior yearsis effective to plans adopted for tax beginning after December 31, 2019. There are several advantages of a SEP compared to a a SEP compared of several advantages are There plan (e.g., a profit-sharing defined contribution qualified must plan, which a defined contribution plan). Unlike can be set 31, a SEP plan by December be established for the tax return to the due date of up any time prior entity (including the sponsoring of year the current can still deduct contributionsextensions) and you made even though on your prior year’s tax return, is that SEPs do Another advantage in the next year. same documentation as defined the not require to be 5500 required nor is Form contribution plans, filed annually. EisnerAmper 2020 Personal Tax Guide Similar provisions applyfor403(b)and457(b) plans. deferral plan. even ifyouhavemore thanoneemployerorsalary This annuallimitappliestoyourtotalcontributions $26,000 respectively age50andover). fortaxpayers 2019 is$19,000andfor2020$19,500($25,000 employee electivecontributionthatcanbemadefor compensation contributedtotheplan.Themaximum of their toelect tohaveaportion participants A 401(k)planisaprofit sharing planthatallows | are:for conversion pre-tax 401(k),403(b),and457(b) as anERD. Contributiontypesthatwouldbeeligible that are currently distributableandwouldbetreated type of vestedcontributions(andearnings thereon) y Deferral Plans (401(k), 403(b) and y DeferralPlans(401(k),403(b) and 457(b) Plans) Salar Chart etirement PlanMaximumAnnualContributionLimits 9. *This isthemaximumannualbenefitthatcanbeprovidedforbyplan,basedon actuarialcomputations. • SIMPLEs • Traditional andRothIRAs • 401(k),403(b)and457(b)plans Catch-up contributionsforindividualsage50orolder SIMPLE plans(savingsincentivematchplanforemployees) SEP Plans Traditional andRothIRAs Defined-benefit plan* Defined-contribution planincludingsalarydeferralamountsabove deferrals 401(k), 403(b),salary Type ofPlan 457(b) salary deferralstostateandlocalgovernment andtax-exemptorganization plans 457(b) salary R 102 than 1% in two out of every fiveyears. than 1%intwooutof every the matchingcontribution tolessthan3%butno the employermaychoosetoreduce For aSIMPLEIRA, at amaximumof 3%of theemployee’s compensation. generally required tomatchemployeecontributions age50andover)withtheemployer for taxpayers $13,500 for2020($16,000and$16,500respectively employees tocontributeup$13,000for2019and the form of anIRAora401(k)plan.Bothplansallow sponsored retirement plan.ASIMPLEplancantake the employerdoesn’tmaintainanyotheremployer- preceding yearcan establishaSIMPLEplanaslong who earned $5,000ormore of compensationinthe An employerthathadnomore than100employees | may berolled overtoanin-planRothaccount. after-taxcontributions. Inaddition,certain contributions deferrals; matchingcontributions;andprofit sharing le Plans Simp Maximum AnnualContribution 2019 $ 19,000 225,000 56,000 56,000 19,000 13,000 6,000 6,000 3,000 1,000 2020 $ 19,500 230,000 RETURN TORETURN TOC 57,000 57,000 19,500 13,500 6,500 6,000 3,000 1,000
Retirement Plans 7.1 9.1 8.1 7.6 6.7 9.6 8.6 14.1 11.4 12.7 10.8 10.2 12.0 14.8 13.4 Period Distribution able 91 87 97 85 92 93 86 88 89 90 95 96 98 99 94 Age 17.1 18.7 17.9 21.2 19.5 16.3 15.5 27.4 20.3 26.5 25.6 24.7 23.8 22.9 22.0 Period Distribution Uniform Life T Uniform 71 81 77 70 78 79 72 73 75 76 74 80 82 83 84 Age Chart 10. If you are either unmarried, or married but your spouse is either not the either unmarried, or married but your If you are you sole beneficiary than 10 years younger than yourself, is not more or minimum distribution by using this table. can compute your required plans, retirement 73 years old and your qualified Assuming you are 2017, you end of valued at $2,000,000 at the were in the aggregate, $80,972 in 2018 minimum distribution of to take a would be required 24.7). a distribution period of ($2,000,000 divided by The two most common types of IRAs are Roth IRAs and IRAs are The two most common types of significant differences are traditional IRAs. While there also common rules that are between these IRAs, there can contribute up to $6,000 them. You apply to both of for 2019 and $6,000 for 2020 ($7,000 if at least age be 50) to either IRA account, or both combined. To deductible as a contribution for a traditional IRA (Roth year, not tax deductible) in the current contributions are April 15 you must make the contribution on or before 103
You can make only one rollover from an IRA from can make only one rollover You If you have three traditional IRAs (IRA-1, IRA-2If you have three The benefit of a SIMPLE plan is that it is not a SIMPLE plan is of The benefit RETURN TO TOC RETURN TO I Rollovers from traditional to Roth IRAs (“conversions”) traditional to Roth IRAs (“conversions”) Rollovers from they generate tax revenue). not limited (because are Trustee-to-trustee transfers between IRAs are not transfers between IRAs are Trustee-to-trustee a physical check limited because you do not receive the originating IRA to deposit to the new IRA. from a rollover the transfer is not considered Therefore, electronically by the IRS. The assets and/or cash are the old IRA trustee to the new IRA from transferred trustee. (IRAs) Accounts Retirement ndividual • • Reminder: 12-month period,to another (or the same) IRA in any The one- IRAs you own. the number of of regardless all limitation is applied by aggregating rollover-per-year IRAs, IRAs, including SEP and SIMPLE an individual’s of effectively treatingas well as traditional and Roth IRAs, the limit. Please note them as one IRA for purposes of this rule: from exempted are that the following rollovers | A taxpayer may roll over amounts from an employer- over amounts from A taxpayer may roll plan (e.g., a 401(k) plan) to a retirement sponsored that the plan has existed for SIMPLE plan, provided Caveat: Caveat: and other qualification non-discrimination subject to generally rules, which are the top-heavy rules, including that you The downside is to qualified plans. applicable to any other employer-sponsored cannot contribute limit is plan and the elective contribution retirement the employee, plans. For types of lower than for other the mandatory can matching requirement employer the limited. For the employer, be attractive, though not discretionary. contributions are at least two years. Example: and IRA-3), and you took a distribution from IRA-1 onand IRA-3), and you took a distribution from January it over into a check) and rolled 1, 2020 (received IRA-2 the same day (must be within 60 days), you could over any other 2020 IRA distribution unless the not roll the above exceptions. meets one of rollover EisnerAmper 2020 Personal Tax Guide • • meet oneof theseexceptions: plan anddeductyourownIRAcontributionsifyou can stillmakecontributionstoanemployer-sponsored ofretirement theyear. planforanypart However, you inanemployer-sponsoreddo notactivelyparticipate to atraditionalIRAifyou(oryourspouse,married) Youyears. canonlymaketaxdeductiblecontributions no longermakecontributionsinthatyearorfuture distribution. Also,onceyoureach age70½,youcan incometaxratesatthetimeof subject toordinary income, distributions willbefullytaxableasordinary contributions loweryourcurrent taxes,butfuture year’s contributions andtheearnings grow tax-deferred. The A traditionalIRAallowsacurrent taxdeductionforyour 2019. December31, beginningafter effective fortaxyears rules stillapplytosuchcontributions.Thischangeis phase-out of thecontribution’s deductibilityand other traditional IRA.Therequirements regarding income, of 70½formakingdeductiblecontributionstoa Note: | alimony isconsidered earned incomeforIRApurposes. or greater thantheIRAcontributionamount.Taxable youmusthaveearned incomeequalto to eitherIRA, does notextendthisdate.To beeligibletocontribute of thefollowingyear. Anextensiontofileyourtaxreturn raditional IRA: Current Tax Deduction in 2020). combined MAGI reaches $203,000in2019($206,000 deductible contributioncan bemadeuntilthe can makeadeductibleIRA contribution.Apartially ($196,000 in2020).Onlythenon-activeparticipant combined MAGI doesn’texceed$193,000in2019 inanemployer-sponsoredparticipates planandyour You are married,butonlyoneof youactively reaches $74,000in2019and$75,000for2020. deductible IRAcontributionisalloweduntilyourMAGI $64,000 in2019and$65,000for2020.Apartially You are singleandyourMAGI doesnotexceed T The SECUREActeliminatestheagerequirement 104 Roth IRAoffers theseadvantagesoveratraditionalIRA: basis, butyourwithdrawalsare generallytax-free. A because yourcontributionsare madeonanafter-tax from A RothIRAdiffers atraditionalIRAprimarily | • • • • • • • oth IRA: NoTaxes onDistributions attain age70½. in anemployer-sponsored planupuntil theyearyou irrespective of theincomelimitationsorparticipation You canalwaysmakeanon-deductiblecontribution and $124,000in2020. contribution untilyourMAGI reaches $123,000in2019 in 2020.You deductibleIRA canmake apartially MAGI doesnotexceed$103,000in2019and$104,000 in employer-sponsored plans,butyourcombined Both youandyourspouse(iffilingjointly)participate Contributions to a Roth IRA can be made even if Contributions toaRothIRA canbemadeevenif sufficient earned incomeand/oralimony. youreach age70½,aslongyouhave plan after Your contributionscancontinuetobemadethe distributions beginningatage70½—orever. designated beneficiariesare notrequired totake andtheir spouseswhoareOriginal accountowners distributions. plus anadditional10%penaltyasnonqualified contributions are subject toregular incometax, However, amountsthatexceedyouraccumulated to withdrawfundscoverfinancialemergencies. they are nottaxed.Thisgivesyoumore flexibility these distributionsdonotexceedyourcontributions, taxable return of yourcontributions. To theextent nonqualified distributions)are treated first asa non- Distributions before reaching age59½ (andother age59½(withafewexceptions). must bemadeafter opened more agoandthedistribution thanfiveyears tax-free distribution,theRothIRAmusthavebeen you takeonlyqualifieddistributions.To asa qualify You neverpayanyincometaxontheearnings if R RETURN TORETURN TOC Retirement Plans Under the SECURE Act, effective for required Act, effective for required Under the SECURE If you turned or will turn 70½ during the year, you 70½ during the year, or will turn If you turned R Rules (“RMD”) MinimumDistribution equired High income individuals whose spouses are much spouses are individuals whose High income to take the need and who do not anticipate younger a conversion should consider distributions Roth to a own the Roth IRA as her spouse may take since the until the second not be required and distributions will spouse passes. | Note: made afterminimum distributions 31, 2019 to December qualified plan participants or IRA account holders who will attain age 70½ after December 31, 2019, the age to from minimum distributions is increased begin required age 70½ prior who attained 70½ to age 72. Participants to continue taking to December 31, 2019 will be required their minimum under the old rules. must generally start your taking RMDs from You or traditional IRA by April 1 plan qualified retirement age the year following the year in which you reach of must the RMD amount 70½. For each year thereafter, a If you are that year. be taken by December 31 of your current participant plan of in a qualified retirement or to the plan document refer you should employer, when you must consult with your employer regarding the plan as some distributions from begin receiving to take distributions until you you plans do not require your employment even if you have already terminate For leaving your employer. age 70½ before reached the employer and example, if you own 5% or less of employer at 70½, the plan still employed by the are document may allow you to defer taking distributions This exception the plan until you actually retire. from does not apply to SEPs or SIMPLE IRAs. Note: can either take a distribution in that year or defer the If you elect to defer, distribution until the following year. you must take two distributions the following year (the first December 31). by April 1 and the second by your if you fail to take an RMD from Generally, 105 Effective for tax years after31, 2017, December RETURN TO TOC RETURN TO What are some planning ideas for high-income some planning What are taxpayers? Who should make a conversion to a Roth IRA? a Roth to a conversion make Who should Those individuals who have many years to go before the to recover and who should be able retirement atax dollars lost on the conversion may benefit from those whoconversion. Others who may benefit are anticipate being in a higher tax bracket in the future and those able to pay the tax on the conversion from account assets. non-retirement your MAGI is too high for a traditional IRA or youhigh for a traditional is too your MAGI plan. The an employer-sponsored by covered are are Roth IRA contributions limits for making AGI married in 2020) if you are in 2019 ($196,000 $193,000 in 2020) or $122,000 in 2019 ($124,000 filing jointly, household (with partial single or head of if you are reaches your AGI until contributions permitted ($206,000 in 2020), if married filing$203,000 in 2019 in 2019 ($139,000 in 2020) ifjointly and $137,000 household). single or head of High-income individuals can make nondeductible contributions to a traditional IRA this year and in years can be converted so that the amounts future to the extent an individual to Roth IRAs. However, also has a traditional IRA funded with pre-tax contributions, the conversion is deemed to be made each IRA. rata from pro • • If you already have a traditional IRA in place, you may If you already part the balancewant to consider rolling or all of is that this rollover into a Roth IRA. The advantage of into tax-free you convert growth future tax-deferred the The disadvantage is that the amount of growth. IRA is taxable, as if you the traditional from rollover over anything, you roll the distribution. Before received growth the tax-free evaluate the potential benefit of on the tax you pay to the lost earnings compared the rollover. because of Note: a of rules allowing recharacterization repealed the TCJA traditional IRA contributions to a conversion of previous the subsequent tax year. Roth IRA by October 15 of EisnerAmper 2020 Personal Tax Guide Note: • penalty unlessyoumeetoneof thefollowingexceptions: 59½ youare alsosubjecttoa10%earlywithdrawal incometaxrate.Iftakenbefore reaching age ordinary qualified plansandIRAaccountsare taxedatyour Generally, withdrawalsfrom employer-sponsored | compute yourRMD. 10withanexampleofis reproduced howto inChart Uniform LifetimeTable, themore commonlyused table, is more youngerthantheindividual.The thantenyears and and isusedwhenthespousesolebeneficiary ExpectancyTabletable istheJointLifeandLastSurvivor youngerthantheindividual.Theother than tenyears orisnotmore spouse iseithernotthesolebeneficiary individuals, oramarriedindividualiftheindividual’s the Uniform LifetimeTable andisusedbyunmarried for determining thedistribution period.Oneiscalled period determined bytheIRS. There are twotables the prioryearanddividingthatsumbyadistribution all yourqualifiedretirement plansatDecember31of RMD iscomputedbytakingtheaggregate valueof had topayonthedistribution,aswellapenalty. The theincometaxthatyouwouldhave effectively covers have totakeacatch-updistributionsincethepenalty Ifyouare subjecttothepenalty,shortfall. youdonot reach 70½,youare subjecttoa50%penaltyonthe qualified retirement you planortraditionalIRAafter void EarlyWithdrawal Penalties separation of service. from anemployeeplan,paymentsmustbegin after (orbeneficiaries). Ifearlydistributionsare beneficiary expectancies) of theindividualanddesignated life (orexpectancy)orthejointlives payments (madeatleastannually)fortheindividual’s of aseriesof as part substantiallyequalperiodic the employer. Thesedistributionsmustbemade at thetimeyouterminate youremploymentwith as earlyretirement) andyouare old atleast55years You takedistributionsbecauseof jobseparation(such A This exceptiondoesnotapply toIRAaccounts. 106 • • • • • • to trustee. If you personally receiveto trustee.Ifyoupersonally thefunds,20%of plan aslongthetransfer isdonedirectly from trustee be rolled overtax-free intoanIRAoranotherqualified Amounts distributedfrom aqualifiedretirement plancan | intheretirementbeen left account. against thelossof thetax-deferred growth hadthefunds make sure youcompare thebenefitof thereduced rate take distributionstoadvantageof alowtaxbracket, distributions are taxableintheyearwithdrawn.Ifyou are notsubjecttotheearlywithdrawalpenalties, to takethemifyourtaxbracketislow. Thoughyou to takethemmeetexpensesoryoumaywant between theagesof 59½and70½,youmayneed Even thoughyouare notrequired totakedistributions | • -Sum (or Other Eligible) -Sum (orOtherEligible) ution Between Age 59½and 70½ purchase (limitedto$10,000). You usethedistributiontomakeafirst-time home youreach age59½. year after andthelastpaymentisreceived least fiveyears ina equal periodicorannuitypaymentsforaperiodof at You takedistributionsintheform of substantially deductible. the amountnototherwise You usedistributionsformedicalexpenses,limitedto participant. You ontheaccountof adeceased are thebeneficiary You disability. haveaqualifying separation ordivorce). toacourt-orderedrelations order (pertaining You receive distributionsunderaqualifieddomestic children oryourgrandchildren. education expensesforyou,yourspouse, You usethedistributiontopayforqualifiedhigher Distributions Lump Distrib RETURN TORETURN TOC Retirement Plans If allowed under the terms of the plan document, the plan of under the terms If allowed qualified participant’s a deceased from distributions over into an rolled to be permitted plan are retirement spouse, beneficiaryIRA for a not the decedent’s who is in must be The rollover the deceased. such as a child of transfer to an IRA trustee-to-trustee a direct of the form an as The IRA is treated the beneficiary. for the benefit of beneficiaryinherited IRA so the will not have the ability However, over the IRA to another IRA in the future. to roll the beneficiary now be allowed to take funds out will her life expectancy, the inherited IRA over his or of rather death, afterbeginning in the year the decedent’s than fully within five years (as noted below). not your plan does If the plan document governing an inherited IRA, to for non-spouse rollovers provide the of as children then non-spouse beneficiaries such over a decedent’s not eligible to roll deceased are plan or IRA.qualified plan balance into their own the minimumThey must take distributions based on if he or shedistribution method used by the decedent 70½, or within five years after reached thehad already not yet begun death if the decedent had decedent’s distributions. minimum taking required IRA will have A non-spouse beneficiary a decedent’s of in the yearto commence taking RMDs beginning the IRA account holder’s death following the year of the oldest beneficiarybased on the life expectancy of than one primary(if more beneficiary is named). This is takingtrue whether the IRA account holder was already beginning or her required his RMDs or died before account holder died before if the IRA date. Alternatively, beginning date, the beneficiaryhis or her required (or still using the five-year beneficiaries) have the option of the any distributions from rule, which does not require account until the year containing the fifth anniversary of the in that year, the IRA account holder’s death. However, distributed. account must be entire 107
Distributions from qualifiedDistributions from The SECURE Act modifies the rules below. Effective The SECURE Act modifies the rules below. RETURN TO TOC RETURN TO Nonsp Sur ouse Beneficiaries Rules Distribution viving Spouse for distributions with respect to plan participantsfor distributions with respect or IRA account holders that die after December 31, 2019, the the account holder will have balance of account entire to be distributed to non-spouse beneficiaries by the end the tenth year following the year the account holderof whether the account of died. This rule applies regardless beginning date or afterholder dies before their required minimum distributions.for required Note: Note: | IRA would not be required until he or she reached IRA would not be required that time, the RMD rules discussed above age 70½. At would apply. Upon the death of a participant/owner a qualifiedUpon the death of of or IRA, plan retirement a surviving spouse can make an distribution into his or her own plan or eligible rollover plan or the survivingIRA. Distributions from spouse’s | plans that are not made from a designated Roth a designated not made from plans that are to a Roth IRA. Under directly over account may be rolled taxes to pay income be required these rules, you will be subject to the distribution, but will not in the year of the mandatory 20% tax withholding or the 10% early age 59½. younger than distribution penalty if you are Roth designated only distributions from Previously, over to rolled be directly qualified plans could accounts of income limitation. a Roth IRA without being subject to the Special Planning Note: Note: Special Planning the distribution is required to be withheld for federal to be is required the distribution state income tax also require (some states income taxes the of the full amount over If you fail to roll withholding). days tax) within 60 any withholding (before distribution plan, you will also qualified retirement to another IRA or tax and possibly early withdrawalbe subject to income age 59½. under if you are penalties on the distribution
Estate and Gift Tax Planning
109
On January 1, 2013, Congress enacted the American Taxpayer On January enacted the American Taxpayer 1, 2013, Congress Trusts and estates can benefit from proper income tax planning. income proper can benefit from and estates Trusts Relief Act of 2012 (“ATRA”). This law created certainty and provides certainty This law created and provides (“ATRA”). 2012 Act of Relief for planning opportunities to reduce tax cost of transferring your assets your assets transferring for planning opportunities of cost tax to reduce to your beneficiaries. On December 22, 2017, President Trump signed the 22, 2017, President to your beneficiaries. On December Tax Cuts and Jobs Act (“TCJA”), which impacted estate and gift estate which impacted planning. tax Cuts and Jobs Act (“TCJA”), Tax
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Planning Gift Tax Gift Estate and Estate EisnerAmper 2020 Personal Tax Guide 2020 lifetimeexclusionis$11.58 million.Theincreased 2019 lifetimeexclusionwas $11.40millionandthe inflation amount,usinganew “chained” CPI.The from $5millionto$10million,indexedforanadjusted transfer, taxexclusionamountisdoubled andgift beginning in2018,theestate,generation-skipping As aresult of theTCJA, andeffectivefortaxyears Impact of theTCJA taxprovisions. enacted estateandgift between 35%and55%marginal taxratesof previously maximum taxrateof 40%.Thisratewasacompromise adjusted forinflation,hasbeenmadepermanent witha provisions. Asaresult of ATRA, the$5millionexclusion, andgeneration-skippingtransfertax estate, gift, and ATRA permanently extendedandmodifiedfederal 1,2013,thefinalcompromise wasreached On January million foramarriedcouple). ($10.24 adjustment madethis$5.12millionperperson federal transfertaxesin2011.For2012,aninflation couples whoseassetswere $10millionorlesstoavoid 31, 2012.Theseprovisions allowedestatesof married skipping transfertaxprovisions through December andgeneration- modified thefederalestate,gift, sunset provisions of EGTRRA. ThisActextendedand Relief Act—atemporary, two-yearreprieve from the In December2010,Congress enactedthe2010Tax for thesetaxestobeginin2010(orearlier). transfer taxesor, more likely, enactamodifiedregime permanently repeal theestateandgeneration-skipping believedthatCongress wouldacttoeither everybody rates (andwiththeexclusions)ineffect2001.Almost and areinstatement of2010atthetax thesetaxesafter 2002 through 2009,eliminationof thesetaxesfor2010, generation-skipping transfertaxesduringtheyears a phasedreduction inthemaximumrateof estateand of 2001(“EGTRRA”) provided, amongotherprovisions, The EconomicGrowth andTax ReliefReconciliationAct Background | e, Gift, and Generation-Skipping and Generation-Skipping e, Gift, Transfer Taxes (“GST”) Estat 110 Also consider utilizing during 2020 all or a portion Also considerutilizingduring 2020alloraportion Use your lifetimeexclusion 2019 to$157,000in2020. non-citizen spousehasincreased from $155,000in to a The federalannualexclusionamountforgifts without usinganyof taxexclusion. yourlifetimegift up transferringsubstantialamountsoutof yourestate any numberof yourrelatives orfriends,youcouldend annually to remains $15,000for2020.Bymakinggifts exclusion $30,000 asamarriedcouple).Theannualgift upto$15,000perindividual(or make tax-free gifts exclusionallowedyouto For 2019,theannualgift Make annualgifts assets: consider toreduce oreliminatetheestatetaxonyour Here are someeffectivestrategiesthat youshould to transfersignificantwealthfamilymembers. transfer, taxexclusionsprovide anopportunity andgift the TCJA. Theincreased estate, generation-skipping especially trueinlightof therecent changesunder that canbetransferred toyourbeneficiaries.Thisis Estate planningwillhelpyoutomaximizethewealth Where doyou begin? assets tobeneficiaries. todecrease taxcost of still opportunities transferring For estatesinexcessof exclusionamounts,there are alternative valuationdate. of decedent’s deathor, ifelected,theFMVonan will beatthefairmarketvalue(“FMV”)ondate acquiredappreciated from property adecedent in basisforthedepreciated assets.Thebasisof in basisfortheappreciated assetsora“step-down” The TCJA retains theIRCSec.1014(a)fora“step-up” new chainedCPI. and willbeadjustedforpost-2011 inflationusingthe backtotheamountof exclusion willrevert $5million maximum estate,generation-skippingtransfer, andgift exclusion sunsetsonDecember31,2025,andthe RETURN TORETURN TOC
Estate and Gift Tax Planning NO NO NO NO NO NO NO NO NO NO NO Credit State Tax
GST $5,120,000 $5,000,000 $5,000,000 $5,250,000 $5,340,000 $5,430,000 $5,450,000 $5,490,000 $11,180,000 $11,580,000 $11,400,000 ax Rates Estate $5,120,000 $5,000,000 $5,000,000 $5,250,000 $5,340,000 $5,430,000 $5,450,000 $5,490,000 $11,180,000 $11,580,000 $11,400,000 Exemptions million estate tax exclusion) of their assets from federal from their assets of tax exclusion) million estate their estates after imposed on transfer taxes both died. exclude couples could in 2011, married Commencing millionfor 2019 and $23.16 ($22.80 million $10 million federal transfer taxes their assets from for 2020) of about separately titlingwithout being as concerned accomplished by a concept knowntheir assets. This is as “portability.” married first-to-die of estates The executors of or afterdecedents dying on January 1, 2011 may elect exclusion to the survivingto transfer any unused by the surviving received spouse. The amount is spouse 111 (Cumulative Tax-Free Transfers) Gift $1,000,000 $5,120,000 $5,000,000 $5,250,000 $5,340,000 $5,430,000 $5,450,000 $5,490,000 $11,180,000 $11,580,000 $11,400,000 Tax 35% 35% 35% 40% 40% 40% 40% 40% 40% 40% 40% Maximum Rates Gift, Estate, and GST
Maximum Gift, Estate, and GST T Maximum Gift, Estate, and Exemptions
Year 2010* 2011 The following chart 2020 and thereafter: shows the rates and exemptions for the tax years 2010 through 2012 2013 2014 2015 2016 2017 2018 2019
2020 and thereafter** 11. *Unless carryover basis and no estate tax is chosen. revert doubled and will be adjusted for inflation, using a new chained CPI. In 2026, the exclusion will back to the exclusions are the TCJA, of a result **As the new chained CPI. inflation, using $5 million plus adjustments for post-2011 Chart
RETURN TO TOC RETURN TO Consider portability exclusion the lifetime of Act, married couples had Relief Prior to the 2010 Tax and maintain separately owned planning to do careful had a $3.5 to exclude $7 million (each assets in order of your remaining $11.58 million lifetime exclusion. If$11.58 million lifetime your remaining of ability your spouse the this gives you and married, (adjusted annually up to $23.16 million to transfer during CPI) tax-free using chained for inflation, is in addition to your annual giftyour lifetimes. This See Chart 11 for the previously. exclusions mentioned see 2020. Also, for 2010 through rates and exemptions Tip 22. Tax EisnerAmper 2020 Personal Tax Guide The benefit of utilizingalltaxexclusionisasfollows of yourlifetimegift You taxexclusionimmediately shouldconsiderusingyourlifetimegift $61,450,375 hadyoutransferred theassets now. which willbeavailabletoyourbeneficiaries $61,450,375 in20years, ($61,450,375 lessthe$23,160,000 at anassumedtaxrateof 40%).Your (assuming a5%compoundedannuallyafter-tax growth rate): surviving spouse’ssurviving death. Asaresult of TCJA, ifyouandyourspouse subject toestatetax,eitheratyourdeath,or, ifmarried,typicallyatyour none of thedeceasedspouse’s $11.58millionexclusion assets andthere isanunlimitedmaritaldeduction,and spousereceives allof the die becausethesurviving estate taxwouldbeduefrom theestateof to thefirst has $5millionof hisorherownassets).Nofederal spouse(who and leavesitalloutrighttothesurviving calendar year2020withataxableestateof $18million As anexample,assumethatonespousediesin atdeath. and transfers arisingfromtaxable transfers subsequentlifetimegifts estate of hisorherlast-deceased spouseagainstany spouse canapplytheDSUEamountreceived from the or portability, of theDSUEamount,surviving federal estatetaxreturn (form 706)andelectstransfer, amount. Iftheexecutorof thedecedent’s estatefileda called theDeceasedSpousalUnusedExclusion(“DSUE”) time of your surviving spouse’stime of yoursurviving death,theestatetaxon assetsthat you did not transfer during your lifetime may be as high as $15,316,150 you didnottransferduringyourlifetime maybeashigh$15,316,150 will haveacombinedestateinexcessof theestatetaxexclusionat free of andestatetaxes.Iftheappreciated assetsremaining gift inyour have not yet used your exclusions, you can make gifts of have notyetusedyourexclusions,youcanmakegifts $22.80million remain inyourestatewithallfuture incomeandappreciation thereon beneficiaries will receive thenetbalance of $46,134,225, ratherthanthe If youtransfer$23.16millionin2020,thewillgrow to in 2019 or $23.16 million in 2020 (in addition to the annual exclusion in 2019or$23.16million2020(inadditiontotheannualexclusion thetransferred assetsmay if youhaven’talready doneso.Otherwise, gross estatepasstoyourbeneficiaries,assumingyouandspouse ofgifts $15,000in2020toeachdoneefrom eachof you). Tax Tip Your Lifetime 22. Use Now Gift Tax Exclusion 112 is ontheamountof totalassetsandnottheamount the estatetaxis“taxinclusive,” whichmeansthatthetax time valueof money.) Thisdifference arisesbecause ($3,571,429 less$3,000,000). (Thisexampleignores the yourbeneficiarieswillreceiveyears, anextra$571,429 forthree ($3,571,429 atthe40%rate)andsurvive taxesof is the$5millionamountlessgift $1,428,571 However, of ifyoumakeanetgift $3,571,429,which rate, yourbeneficiarieswillonlyreceive $3,000,000. Ifyouhave alarge estateatthe40%tax to gift. amount andyouhaveanother$5millionthatwish that youhavepreviously usedyouravailableexclusion available foryourbeneficiaries.Forexample,assume taxeswilloften increase theamount paying gift exclusion andcanafford totransferadditionalassets, for thosepeoplewhohaveuseduptheiravailable Although there taxes, isareluctance topaygift Make taxablegifts • • • of a“bypasstrust.” Theseinclude: spousetodie,whichoften necessitatesthecreationfirst advantages tousingtheexclusioninestateof the tax planningformanycouples,there are stillsignificant of theexclusionsimplifiesestate Although portability made permanent. to thatdate).Asaresult of ATRA, hasbeen portability prior 2026 andnochangeinthetaxlegislationoccurs 1, spousediespriortoJanuary (assuming thesurviving only $840,000willbesubjecttothefederalestatetax spouse has$24millionof assetsonhisorherdeath, from future federaltransfertaxes.Ifthesurviving exclusion (disregarding theinflationindexing)available spousewillhaveacombined$23.16million surviving to transfertheunused$11.58millionexclusion, would beused.Ifthedeceasedspouse’s executorelects the surviving spouseremarries). the surviving children andgrandchildren (e.g.,inasituationwhere of theassetsforfirst-to-diePreservation spouse’s Protection of theassetsfrom potentialcreditors. transfer taxes. Removal of future incomeandappreciation from RETURN TORETURN TOC Estate and Gift Tax Planning
Connecticut is the only state which imposes 1.60 % if the term of the loan is three years or less the loan is three of 1.60 % if the term (short-term). years and less than three is more 1.69 % if the term than nine years (mid-term). is nine years2.07 % if the term or longer (long-term). Direct payment of educational and medical expenseseducational and medical of payment Direct medical institution or the educational to the qualified and provider, bank/securities accounts trust (pay-on-death) Totten • • • • to be repaid) and properly documented. and properly to be repaid) Note: These rates are low by historical standards and standards low by historical These rates are an excellent opportunityprovide to use loans to your beneficiaries as a technique for transferring wealth free you need to make gift estate taxes. However, and of fide (i.e., you intend for it that the loan is bona sure • costs medical and education Pay and medical pay unlimited tuition can directly You gift taxes. This of personexpenses for any free to the annual giftexclusion is in addition exclusion. insurance premiums can include health Payments and tuition for elementary graduate school through to the directly must make these payments school. You qualifying or medical provider. educational organization rather than giftsUse loans is a viable optionLending money to your beneficiaries your lifetime gift to avoid current taxes or the use of gift can then use your annual tax gift exclusion. You exclusion to enable your beneficiary to pay the interest due and/or part the debt principal each year. of JanuaryFor the month of 2020, the minimum interest on loans with by the IRS to be charged rates required to as referred to be compounded annually, interest are: applicable federal rates (“AFR”), gift tax. Use trusts and other family entities for Entities and trusts that should be considered 113
RETURN TO TOC RETURN TO IRC Sec. 529 college savings accounts, IRC Sec. 2503(c) trusts for the benefit of persons IRC Sec. 2503(c) trusts for the benefit of age, under 21 years of Life insurance trusts, Discretionary trusts, • Other methods for transferring assets to minors • It is important that the person who gifts to make sure the propertyserve does not as a custodian under the If to that property. UTMA for the minor with respect the donor is serving the and dies before as a custodian the minor reaches (e.g., before UTMA status terminates 21), the property held under the UTMA willthe age of be included in the donor’s for estate tax taxable estate can be avoided with this result purposes. Fortunately, advance planning. For example, if a spouse proper transfers his or her his or her property for the benefit of child and his or her spouse servesas custodian under the UTMA, the property would not be included in the taxable estate should he or she deceased spouse’s the UTMA status terminates. die before (or for their benefit of) include: Gifts minors to making gifts to the common methods of One of 21 is to of under the age and grandchildren children the assets to be held by an arrange for ownership of for the minor under a state’s individual as custodian This type of to Minors Act (“UTMA”). Transfers Uniform Gifts under the Uniform ownershipwas previously to Under the UTMA, the custodian Minors Act (“UGMA”). the property to transfer to the minor upon is required minor’sthe minor attaining age 21, or to the estate it is age 21. However, upon the minor’s death before age 18 at possible for the custodianship to terminate ownership contains, in substance, if the designation of the phrase “until age 18.” actually going to the heirs.actually going Furthermore,if the grantor his orsurvives from removed years, taxes are the three her estate. • • EisnerAmper 2020 Personal Tax Guide • • taxinclude: minimal ornogift transferring future appreciation outof yourestateat members) (seeTaxmembers) Tip24). (typicallyfamily of distributionstothepartners investment decisionsandthetimingamount at adiscountedvalue,whileyouretain control of you totransferassetsyourbeneficiaries,typically some complicationsandrisks).Theseentitiesallow estate taxplanningvehicles(thoughnotwithout and effectivegift companies (“FLLCs”) canbevery (“FLPs”)andfamilylimitedliability limited partnerships Family and LLCs: limited partnerships attractive option(seeTax Tip23). With theIRSratesrelatively low, theGRAT isan appreciation willpasstax-free toyourbeneficiaries. 2020),theexcess used bytheIRS(2.0%inJanuary assets appreciate inexcessof theinterest rate the assetstransferred totheGRAT. Ifthetransferred pays youanannuityatafixedrateinexchangefor Grantor Retained Trust Annuity (“GRAT”): Tax Tip ransfer Appreciation with aGRAT Free 23. Value of shares transferred to beneficiaries($9pershare) Shares remainingattheendof GRAT’sterm Shares usedtopayannuities: Shares transferredtoGRAT the GRAT doesnotholdanyliquidassets,youwillneedtousethestockpayyourannuity, asfollows: $1,030,078. Assumethestockappreciates to$8pershare attheendof yearand$9attheend thefirst of thesecondyear. Since on thetransfer. You wouldreceive anannuitypaymentof $515,039peryear($1,000,000times51.503914%) totallingpaymentsof 2020)youcouldsettheannuityat51.503914%toeffectivelyzero outthe taxremainder interestrate (forJanuary andpaynogift The securitiesare currently valuedat$1,000,000(200,000shares at$5pershare). Asanexample,based ona2.0%IRCSec.7520 You transfersecuritiesinacompany thathasgreat potentialforfuture appreciation toatwo-yeargrantorretained annuitytrust. Year 2($515,039dividedby$9pershare) Year 1($515,039dividedby$8pershare) T of GiftTaxes Family AGRAT 114 • • • • taxes onthepremiums mayreduce thetaxbenefits. beneficiaries. However, paymentof premiums andgift thereby transferringsubstantialwealthtoyour can remove lifeinsuranceproceeds from yourestate, Irrevocable lifeinsurancetrust(“ILIT”): period of timeastheretained interest. the trustwithyourrighttoliveinhousefora your principalresidence astheassetcontributedto (which isagrantorretained interest trust)thatuses Personal residence trust: discussion. on charitablecontributionsforamore detailed with yourcharitabledesires. Seethechapter andcombineestateplanning yourportfolio diversify Charitable trust: states that only allow an exclusion that is less than the states thatonlyallowanexclusionislessthanthe estate taxwhenthesecondspousedies.However, in appreciation ontheassetsinbypasstrustescape assets properly, sothatthefuture incomeand Bypass trust: This trust can help you divide your This trustcanhelpyoudivideyour A charitable trust can help you A charitabletrustcanhelpyou This isaform of aGRIT RETURN TORETURN TOC $ 705,537
200,000 An ILIT AnILIT (64,380) (57,227)
78,393 Estate and Gift Tax Planning C If you should die before the expiration of the the expiration of If you should die before
F Limited Liability Companies Liability Limited Partnershipsamily Limited Family and transferred to the trust less the present value of the value of to the trust less the present transferred the trust during from annuity payments you will receive calculated are The annuity payments term. the GRAT’s is no giftat the IRC Sec. 7520 rate so there tax on and theoretically GRAT) (“zero-out” transfer to the GRAT term. the GRAT no assets should be left of at the end depends on the amount of the GRAT The success of on the assets during and appreciation income earned in Income and asset appreciation term. the GRAT the IRC Sec. 7520 rate (for example 2.0 % excess of used for January 2020 transfers) annuity will cover and remaining the GRAT of payments during the term giftassets will pass to your beneficiaries (see tax-free Tip 23). Tax is taxable to you, so the by the GRAT All income earned not depleted by income taxes. assets are trust’s Note: grossyour in includible be would assets the term, GRAT’s estate, subject to certain limitations. As Tax Tip 24 illustrates, FLPs or FLLCs can be very can Tip 24 illustrates, FLPs or FLLCs As Tax can contribute beneficial estate planning tools. You assets to such an entity in exchange for general partnership and limited partnership (or interests | 115
The Advantages of an FLP or FLL of an FLP The Advantages 24. of 40%), leaving $61,935,749 to your beneficiaries. Thus, there is a potential savings of $25,850,500. is a potential savings to your beneficiaries. Thus, there 40%), leaving $61,935,749 of How much will your beneficiaries receive? The value of their limited partnership interests could grow, free of gift to or estate taxes, free of their limited partnership value receive? The grow, could How much will your beneficiaries interests Let’s assume in 2020 you and your spouse have not yet used any of your lifetime gift exclusions of $23.16 million ($11.58 million each). $23.16 million your lifetime gift spouse have not yet used any of assume in 2020 you and your exclusions of Let’s accumulate in your estate, the estate tax could be as high as $25,850,500 (net of the $23.16 million exclusion assuming a maximum rate the $23.16 million (net of the estate tax could be as high as $25,850,500 accumulate in your estate, assumption that you can sustain a 30% minority and marketability discount on the value of the limited interests). the limited discount on the value of sustain a 30% minority and marketability assumption that you can Tax Tip Tax $87,786,249 in 20 years from the initial amount of $33,085,714 using a 5% after-tax growth rate. By comparison, if the assets were left By comparison, if the assets were rate. to growth a 5% after-tax $33,085,714 using the initial amount of $87,786,249 in 20 years from You can transfer assets valued at $33,085,714 to an FLP or FLLC, in addition to your annual exclusion gifts, free of gift annual exclusion gifts, in addition to your on the taxes (based of free or FLLC, assets valued at $33,085,714 to an FLP can transfer You RETURN TO TOC RETURN TO Grant Utilize Y federal exclusion, it may be appropriate to limit the federal exclusion, it may be appropriate amount going into a bypass trust. Trust Annuity or Retained our GSTExclusion When you create a GRAT, you (as a grantor) have a GRAT, When you create made a gift the assets equal to the fair market value of | The GST exclusion allows you to transfer up to $11.40 to $11.58 the GST tax in 2019 (increased of million free million in 2020). If you have not yet used the full your gift tax exemption, consider makingamount of gifts (or to a trust for their to your grandchildren GST your remaining benefit) up to the amount of is no to do so. There tax exclusion, if you can afford portability for the GST exclusion. between spouses If you transfer assets directly to your children and to your children If you transfer assets directly to their children, they eventually pass the assets down both estate tax will be paid (assuming two levels of the exclusion amounts). If you in excess of estates are or for to your grandchildren, make transfers directly a trust or other entity, their eventual benefit, through persons” two or more (individuals or to other “skip will be subject togenerations younger than you), you law) under current the GST tax (at a 40% estate tax rate in addition to gift or estate taxes. | EisnerAmper 2020 Personal Tax Guide for your beneficiaries. These trusts can be grantor trusts for yourbeneficiaries.Thesetrustscanbegrantor interests create truststoholdthelimitedpartnership An evenmore effectivewaytouseanFLPorFLLC isto estate. donor’s result intheFLP’s entire assetsbeingincludedinthe must beexercised tobesure thatthecontrol doesnot an appraisaltosubstantiatethediscountedvalue.Care amount ofcanbeincreased. You thegift shouldobtain canbediscountedandthecorresponding tax-freegift of marketabilityandlackof control, thevalueof the limited interests are minorityinterests subjecttolack tax.Becausethe exclusions, thereby avoidinggift not inexcessof youravailableannualandlifetime interests, but onlythelimitedpartnership typically gift this control mustbesetupcarefully). You would of theinvestmentanddistributiondecisions(though This interest allowsyoutoretain managementcontrol the managingmemberof alimitedliabilitycompany). interest (orremain typically keepthegeneralpartner member interest ifaFLLC). You and/oryourspouse Chart Note: California andFloridahavenoestatetax.InFlorida,there maybeaneedtofileotherforms toremove theautomaticFloridaestate taxlien. taxed atamargin ratesbetween 7.8%and12%. option.Thetaxableestateexceeds theexemptionamountwillbe taxexemption.CTdoesn’thave theportability tion willmatchthefederalestateand gift taxexemptionincreased from***Beginning 2019,theCTestateand gift $3.6millionto$9.1in2022.In2023 andbeyond,theConnecticutexemp EstateTax 1,2018,theNewJersey ** EffectiveJanuary wasrepealed. However, Inheritancetaxwasnotrepealed. theNewJersey amount, theentire estateissubjecttotax, notjusttheamountinexcessof theexemptionamount. 1,2020through December31,2020willbe$5,850,000.IftheNYtaxableestateis105%more*The exemptionamountfrom thantheexemption January (b) (a) tate EstateTax RatesandExemptions 12. New York Pennsylvania Connecticut State New Jersey sibl An inheritancetaxwillbeentir An inheritancetaxo ings andotherbeneficiaries.Thetaxwillbeassessedtothebeneficiariesor transfer S f 4.5% is imposed on transfers to direct descendants and lineal heirs, 12% on transfers to siblings and 15% on other taxable transfers. tosiblingsand15%onothertaxabletransfers. todirect 12%ontransfers f 4.5%isimposedontransfers descendantsandlinealheirs, Maximum EstateTaxRate ely exempt on transfers todirect andamaximuminheritancetaxrateofely exemptontransfers descendantsandlinealheirs, to 16%ontransfers 12% 16% (b) (a) 116 Maximum GiftTaxRate method, thetrustcanreceive theincomefree of taxes, from theannualincome.Byusingthisgrantortrust typically distributions tothetrustfrom thepartnership, that youare required toreceive wouldcomefrom be adequatelycapitalized).Theinstallmentpayments installment basis(subjecttoarulerequiring thetrustto to purchase theinterests, thesalewouldbedoneonan their benefit.Sincesuchatrustusuallyhaslimitedfunds beneficiaries istoselltheinterests toagrantortrustfor another waytotransfertheinterests toyour interests, thelimitedpartnership Rather thangifting distributions from thetrust. even thoughyoumaynotbeabletoreceive anycash allow youtocontinuepayingalltheincometaxes this, youshouldmakesure yourfinancialpositionwill are Before makinganadditionaltax-free doing gift. FLLC, allowingthetrusttogrow tax-free. Ineffect,you pay allthetaxesonincomeearned bytheFLPor all of theincomeof thetrustonyourtaxreturn. You for taxpurposes,requiring you,asgrantor, toinclude None None None 12% ees. $3,600,000/$5,100,000*** $5,850,000* Exemption None** None RETURN TORETURN TOC - Estate and Gift Tax Planning Life I Gift sufficient funds to a grantor-type trust so it can trust so it Gift sufficient funds to a grantor-type nsurance (or a trust for their benefit) will own the residence. They will own the residence. for their benefit) (or a trust you to allow value rent you a fair market must charge pay you and the rent using the residence, to continue will furthernot estate. If you do your taxable decrease home and your beneficiaries dointend to live in the the trust can sell the house and not want to live there, either case, the funds in other investments. In reinvest no additional gift is there terminates. tax when the QPRT the lost if you die before the benefits are However, the residence because the full value of ends QPRT term estate. your gross will be includible in • | Life insurance can serve an important your function in your beneficiaries estate plan because it can provide if the value of liquidity to pay estate taxes, especially assets) represents your business (or other non-liquid a significant portion your estate. Life insurance of immediate funds to help your can also provide living and for other of family maintain their standard left are in your taxable purposes. But if the proceeds the proceeds reduce estate, the federal estate tax could avoid To by as much as 40% for 2019 and beyond. your life of that the proceeds this tax, you must ensure not payable to either you or your insurance policies are any you possess estate, and that neither of spouse’s ownership in the policy at death. incidence of life insurance ILIT can remove structured A properly your estate, if the trust is both the from proceeds The trust can also owner and beneficiary. policy’s surviving income to your provide spouse and principal (or other beneficiaries) upon your to your children death. In addition, the trustee can properly spouse’s for future manage and invest the insurance proceeds growth. the following funding methods, you If you use any of the insurance policy can make the trust the owner of without being deemed to have any incidence of ownership: 117 RETURN TO TOC RETURN TO Qualified Trust Residence Personal The value of the house at the end of the QPRT’s term the QPRT’s the house at the end of The value of additional gift or of will go to your beneficiaries free your children expires, estate taxes. When the QPRT term A qualified personal residence trust (“QPRT”)A qualified personal residence is a form a GRIT that allows you to transfer your personal of benefit) to a trust (typically for your children’s residence even though you continue to live in the home during hold an income (e.g., ten years). term You the QPRT’s value of in the home based on the present interest the QPRT. of the term during your right to live there Gift the house tax applies to the fair market value of (as actuarially income interest by the retained reduced rates). computed using IRS interest | In August 2016, the IRS issued proposed regulations regulations In August 2016, the IRS issued proposed limitations onunder IRC Sec. 2704 that imposed in family- interests valuation discounts for transfers of would have limited entities. These regulations controlled discounts and would have control or eliminated lack of On Octoberhad an impact on marketability discounts. Department a final released 4, 2017, the U.S. Treasury under report regulations stating that the proposed as they would hurtIRC Sec. 2704 would be withdrawn valuation discountsfamily-owned businesses by limiting families to transferand made it difficult and costly for their businesses to the next generation. While FLPs and FLLCs can be effective estate planning be effective estate can and FLLCs While FLPs fully structured, be carefully vehicles, they must death occurs, before implemented substantially fide, nontax purpose. In addition,and have a bona should be accounting records tax and the proper and giftmaintained, income should be tax returns and all transactions should conform prepared carefully are Unless these precautions to the legal documents. may not be upheld in the eventtaken, the arrangement a challenge by the IRS. of thereby increasing the annual cash to fund repayment to fund repayment the annual cash increasing thereby installment note. on the interest the principal and of EisnerAmper 2020 Personal Tax Guide in exchangeforyouroldpolicy onatax-free basis. possible tofindamore favorablepolicyandobtain it or thedeathbenefitcanbeincreased. Itissometimes the policytoseeifpremiums canbelowered and/ for atleastthree itmay prove years, beneficialtoreview If youhavealifeinsurancepolicythathasbeeninforce income taxreturns willgenerallynotberequired. and youpaytheannualpremiums through gifts, However, ifthetrustonlyholdslifeinsurancepolicy insurance trustsare almostalwaysgrantor-type trusts. if thetrusthasassetsgeneratingtaxableincome.Life commissions. Also,incometaxreturns mayberequired specificrules,andthere maybetrustee to satisfy trustinstrumentisneeded since acarefully drafted will besomeadditionalcosts:You willincurlegalfees but theycanbeminimizedwithproper planning.There There are somedisadvantagestolife insurancetrusts, requirement. toproperly complywiththisadministrative important are notifiedinwritingof theirrightof withdrawal.Itis withdrawal (Crummey)powerandthebeneficiaries is onlyavailableifthetrustdocumentincludesa The government’s positionisthattheannualexclusion taxexclusion. exclusion andanyremaining lifetimegift taxiftheamountexceedsavailableannual gift existing policythathasvalue.You willonlyincura to purchase thepolicy, paypremiums ortransferan funds Be careful of taxissuestotheextentyougift gift • • first depositingtheminatrustaccount. first owned bythetrusteitherpayingthemdirectly or tothetrustannualpremiums onapolicy Gift inclusion inyourtaxableestate. at leastthree before years yourdeathtoavoid premiums. However, thetransfermustbecompleted futureAssign acurrent policytothetrustandgift future premiums. buy theinsurancepolicyandpayallcurrent and
118 • thefollowingdates: dying onorafter are thebasicexclusionamounts(“BEAs”)fordecedents 1, 2021thebasicexclusionamountis$5,850,000.Below 1,2020andbefore January January $5.25 million.After 2017, reached the2013federalestatetaxexclusionof exclusion amountgraduallyincreased andbyApril1, taxes. UndertheBudgetLegislation,estate $1 millioninassetswere subjecttoNewYork estate Prior tothislegislation,NewYork estatesabove April1,2014. after tax provisions are ineffectfordecedentsdyingonor tax ratesandestateexclusionamounts.Thenew known astheBudgetLegislationwithnewestate On April1,2014,NewYork Statepassedlegislation Changes to estate taxes inNewYork paid toastate. when there isnofederalestatetaxcredit fortaxes (e.g.,Florida)imposenosuchtax estate tax.Others estate orinheritancetaxevenifthere isnofederal state. Someof thesestatescontinuetoimposetheir locatedinthe domiciled inthestateorhaveproperty whoarean estateorinheritancetaxonpersons You shouldkeepinmindthatmanystatesalsoimpose | taxable amountisover105% of thecurrent BEA. exclusion amountisfullyphased outoncetheestate’s theestate’sthe BEAineffectatthattime.Furthermore, to phaseoutoncetheestate’s taxablevalueexceeds Unfortunately, theabovebasicexclusionamountsstart • • • • • tate Estate Tax Considerations January 1,2020andbefore Jan.1 2021: January 1,2019andbefore Jan.1 2020: January April 1,2017andbefore Jan. 1,2019: April 1,2016andbefore April1,2017: April 1,2015andbefore April1,2016: April 1,2014andbefore April1,2015: S
RETURN TORETURN TOC $5,850,000 $5,250,000 $2,062,500 $5,740,000 $4,187,500 $3,125,000
Estate and Gift Tax Planning Do you have adequate creditor protections included protections Do you have adequate creditor in your planning? grandchildren what age do you want your children, At or other beneficiaries to have full access to inherited assets? Do you have a power-of-attorney and is it current? Do you have a power-of-attorney will current? and/or living proxy Is your health care your for care for long-term Have you provided spouse and yourself? your qualified the designated beneficiaries of Are policies in plans and life insurance retirement desires? with your present accordance children, Does your estate plan include new etc.? grandchildren, for your guardians Have you named appropriate be deceased parents should both minor children minors? remain while the children Has anyone mentioned in your will died? Will your assets be preserved for your family in the a divorce? case of Who are your executors and trustees? Who are Non-Tax Considerations Non-Tax • • • • • • • • • • | your estate to review many non-tax reasons are There documents. plan and the related estate plan to your review It is advisable to periodically wishes with your current it is in conformity make sure should include nontax This review law. and current considerations, such as: • Decedent and distributing Schedules A to beneficiaries. and distributing Decedent confirmed December 2016 issued in Final regulations that no further June 30, 2016 would beyond extensions initial reportingapply to going forward and that the rule 706. filing Form within 30 days of is to file the form 119
RETURN TO TOC RETURN TO Consistent Basis Reporting for Estates Consistent Impact on Certain Impact Organizations Exempt Under the Surface Transportation and Veterans Health and Veterans Under the Surface Transportation introduced 2015, IRC Sec. 6035 Choice Act of Care that a beneficiary’s assure to reporting requirements basis in certain a decedent be property from acquired the property for estate taxconsistent with the value of not prepared purposes. Because many executors were the IRS to comply with the new reporting requirements, 8971, Informationextended the due date for filing Form Acquiring Property Beneficiaries a Regarding from | As a result of PATH, the gift tax will not apply to the PATH, of As a result money or other property to a tax-exempttransfer of described in IRC Sec. 501(c)(4) (generally, organization IRC Sec. 501(c)(5) organizations), social welfare or labor and agricultural organizations) (generally, | IRC Sec. 501(c)(6) (generally, trade associations and IRC Sec. 501(c)(6) (generally, business leagues). On January 15, 2019, The New York Governor’s Fiscal On January New York 15, 2019, The would and was released Executive Budget 2020 Year provisions the “clawback” extended have retroactively residents for certain gifts taxable New York made by decedents on death for estates of years of within three or after January January before 16, 2019, and 1, 2026. Another new change in the New York estate tax is that in the New York Another new change qualified terminable a New York the tax law requires election be made on a New propertyinterest (QTIP) on or for decedents dying directly estate return York after New York surviving April 1, 2019. The spouse’s a allowed from estate must include any QTIP gross marital deduction whether allowed New York previously election was made on the transferring the QTIP or on a federal estate tax return New York spouse’s For estates of decedents dying on or after JanuaryFor estates of 1, January2019, and before no addback is 16, 2019, there taxable gifts.of was required. return if no federal return forma pro EisnerAmper 2020 Personal Tax Guide reap taxsavings,ifplanned forproperly. planning. Thetimingof incomeanddeductionscan Choosing thefiscalyear-end of anestateinvolvesmore provide anoverall taxsavings. and receiving ataxabledeductionatthetrustlevel may making distributionstocurrent incomebeneficiaries for 2020(amuchlowerthreshold thanindividuals), income taxrateoncetaxablereaches $12,950 distributions. Asthetrustissubjecttotopordinary income taxliabilitiesthrough themeansof beneficiary and determination of theabilitytopotentiallyreduce trusts shouldconsidertherespective taxbrackets Planning surrounding incometaxationof estatesand and estateshavechangedtothefollowing: As aresult of theTCJA, theincometaxratesfortrusts | • • • ncome Tax Planning forTrusts Taxable receiving interests inthebusiness? where onlychildren workinginthebusinessare Do youneedtoequalizeamongstyourchildren succession planforthebusinessbeenputintoplace? the beneficiarieswhowillreceive thatinterest? Hasa If there isafamilybusiness,are yousatisfiedwith educational organization? Do youwishtoleavealegacycharitableor want toprovide for? withspecialneedsthatyou Do youhaveabeneficiary income income $12,750 I and Estates $9,300 $2,600 over $0
But not But not $12,750 $9,300 $2,600 2019 over
Rate 24% 35% 37% 10%
Taxable income income $12,950 $9,450 $2,600 over $0
But not But not $12,950 $9,450 $2,600 2020 over
Rate 24% 35% 37% 10%
120 RETURN TORETURN TOC Tax Credits
121 but all are subject to complex limitations based on income on income based limitations subject to complex but all are
and whether or not you are subject to the alternative minimum tax. subject to the alternative and whether or not you are There are many credits available to reduce your federal tax liability, liability, tax your federal to reduce available credits many are There
RETURN TO TOC RETURN TO Tax Credits Tax EisnerAmper 2020 Personal Tax Guide • children areQualifying definedas: refund evenifyoudon’toweanytax. Child Tax Credit. Arefundable taxcredit maygiveyoua childastheAdditional refundable foreachqualifying 2025).Upto$1,400ofand after thecredit canbe beginningbeforetax liability($1,000foryears 2018 childisavailabletooffset $2,000 perqualifying your Beginning in2018through 2025,aChildTax Credit of Child Tax Credit that hasaninvestmentinaforeign entity. orotherpass-through entity interest inapartnership investment accountsorfrom anunderlyingownership foreign taxesthrough securitiesthat are heldinyour commontoincur pass-through entities.Itisvery corporations andbusinessincomeearned byforeign of foreign taxesincludedividends paidbyforeign common forms of incomethatresult inthepayment Themost tenyears. carried backoneyearandforward utilized inthecurrent yearduetolimitationsmaybe tax credit allowed.Anyforeign taxcredits notfully in adifference betweenyourregular andAMTforeign foreign taxcredits allowedeachyearwhichcouldresult year.in aparticular There isaseparatecalculationof of foreign taxcredits anindividualmaybeabletotake income subjecttotax.There are limitsontheamount tax liability, whereas adeductionisreduction of a dollar-for-dollar offset U.S.income tothetaxpayer’s U.S. Ingeneral,acredit ismore advantageousasitis imposed byforeign countriesandpossessionsof the its residents eitheracredit ordeductionfortaxes limitations,theU.S.allows taxation, subjecttocertain subject totaxinforeign jurisdictions.To avoiddouble including foreign-source incomewhichmaybealso The U.S.taxesitsresidents ontheirworldwideincome Foreign Tax Credit most taxpayers: The followingisadiscussionof thecredits thatimpact | ax Credit Overview A son,daughter, stepson,stepdaughter, ora T 122 The 35%credit Once isforlower incometaxpayers. applicable credit percentage rangingfrom 20%to35%. the allowablecredit is based onyourAGI, with the dependent care assistanceprogram. Theamountof any paymentsreceived through anemployer-provided care expenseseligibleforacredit mustbereduced by individuals.Theamountof qualifying thedependent individualor$6,000fortwomore one qualifying on whichyoucancalculatethecredit is$3,000for The maximumamountof dependentcare expense more thanhalfof theyear. incapable of self-care andwhohadlivedwithyoufor tax yearoradependentwhowasphysicallymentally dependent whowasunderage13atthecloseof the individualcanincludea individual. Aqualifying andforthecare of aqualifying household services expensesincludepaidfor Qualifying the credit forchildanddependentcare expenses. totake can workorgotoschool,thenyouqualify sothatyouandyourspouse persons other qualifying If youpaysomeonetotakecare of yourchildren or Child andDependentCare Credit or U.S.resident alien. dependent mustbeaU.S.citizen,national, Thequalifying person. up to$500perqualifying Dependents. Thisisanon-refundable taxcredit of youfortheCreditCredit forOther maystillqualify Dependents whocan’tbeclaimedfortheChildTax of MAGI abovethethreshold amount. $1,000,orfractionthereof,is reduced by$50forevery Thetaxcredit widowers. filing separatelyandqualifying unmarried individuals,headof household,married reaches and$200,000for $400,000forjointfilers, The ChildTax Credit beginstophaseoutwhenMAGI • stepsister, oradescendantof suchrelative. descendant of suchchild;abrother, sister, stepbrother, or national,aresident of theU.S. end of thetaxyearandwhoiseitheraU.S.citizen A childwhohasnotattainedtheageof 17bythe RETURN TORETURN TOC
Tax Credits
Small wind energy property, Small wind energy and heat pump property, Geothermal Fuel cell property. In the case of property placed in serviceIn the case of after JanuaryDecember 31, 2016, and before 1, 2020, 30%. property placed in serviceIn the case of after JanuaryDecember 31, 2019, and before 1, 2021, 26%. property placed in serviceIn the case of after JanuaryDecember 31, 2020, and before 1, 2022, 22%. 10%. 2022 onwards, and completely phased out at $254,520. phased out and completely Efficient Property Energy Credit Residential The Bipartisan 2018 extends the Budget Act of efficient property allowed energy credit residential property. qualified energy the cost of up to 30% of fuel capacity of for each half kilowatt of The credit cell property applied This credit is limited to $500. energy for the following qualified to expenditures and placed in serviceequipment installed through December 31, 2021: • • • for solar electric propertyThe credit water and solar for property is available however, heating property, placed in service December 31, 2021, based through The applicable on an applicable percentage. are: percentages • • • • out ratably for taxpayers with MAGI over $214,520 for taxpayersout ratably with MAGI For 2020, the credit allowed is $14,300 and phased allowed is $14,300 the credit For 2020, Vehicle Credit Vehicle allowed for individuals who The maximum tax credit vehicles is $7,500, and if plug-in electric purchase the vehicle did not have battery at least 5 capacity of $2,500 applied. of kilowatt hours, the minimum credit qualify vehicle as a plug-in electric drive vehicle, the To must: Qualified Plug-In Electric Drive MotorQualified Plug-In Electric Drive 123
RETURN TO TOC RETURN TO For U.S. adoptions, you may be able to claim the credit For U.S. adoptions, you may be able to claim the credit and if you adopt a the adoption is finalized before special needs child you may qualify for the full amount the credit. of Adoption Credit up to $14,080 of credit For 2019, a nonrefundable expenses. Themay be claimed for qualified adoption is phased out ratably for taxpayers with MAGI credit is allowed for taxpayers over $211,160 and no credit adoption Qualified or higher. over $251,160 with MAGI and necessaryexpenses include reasonable adoption fees, court fees and other expenses costs, attorney an to the legal adoption of related directly which are eligible child. An eligible child is an individual who has the adoption 18 at the time of not attained the age of caring for or who is physically or mentally incapable of a special for the adoption of A credit himself or herself. the actual qualified of needs child is allowed regardless expenses. PATH has made the American Opportunity Credit PATH permanent. the chapter on education incentives. American Opportunity and Lifetime Learning Credits the American credits: two education-related are There is a modified which Opportunity (“AOC”), Credit These Credit. and the Lifetime Learning Hope Credit, tuition who incurred available to individuals are credits expenses pursuing degrees college or graduate allows taxpayers a or vocational training. The AOC $2,500. The per eligible student of maximum credit allows a taxpayer to take Credit Lifetime Learning A more $2,000 per taxpayer. of a maximum credit can be found in these credits detailed discussion of on the number of qualifying individuals. on the number of These percentages entitle you to a credit of of you to a credit entitle These percentages based $1,050/$2,100, respectively, $600/$1,200 and your AGI exceeds $43,000, the maximum rate allowed $43,000, the maximum exceeds your AGI is 20%. EisnerAmper 2020 Personal Tax Guide incurred thatexceeds 50%of theaveragequalified was equalto14%of thequalifiedresearch expenditures permanent asaresult of PATH. Ingeneral,thecredit improved business component.Thiscredit ismade application wasforuseindevelopinganewor research thatwas technologicalinnature andwhose This isacredit for expenditures paidorincurred for Qualified Research Credit greater thanorequal to2.5kilowatt-hours. capacitywithinthevehiclesmust be at $2,500).Battery capable, two-wheeledplug-inelectricvehicles(capped extends through 2019andisa10%credit forhighway- For two-wheeledplug-inelectricvehicles,theprovision the UnitedStates. usedpredominantly outsideofis allowedforproperty No qualifiedplug-inelectricdrivemotorvehiclecredit credit isallowed. of thephase-outperiod.Thereafter, quarters fourth no credit amount.Thecredit iscutto25%forthethird and phase-out period,thecredit iscutto50%of thefull of the twoquarters 200,000th unitissold.Forthefirst inwhichthe followingthecalendarquarter quarter phase-out periodbeginswiththesecondcalendar have beensoldforuseintheUnitedStates.The 200,000vehicles The credit beginstophase-outafter • • • • • • of electricity. capable of beingrecharged from anexternal source capacity of andthatis notlessthan4kilowatthours witha motor thatdrawselectricityfrom abattery be propelled toasignificantdegree byanelectric 14,000 pounds, have agross vehicleweightratingof notmore than of theCleanAirAct, be treated asamotorvehicleforpurposesof TitleII have itsoriginalusecommencingwiththetaxpayer, be acquired foruseorleasebutnotresale, be madebyamanufacturer, 124 Opportunity Credit are utilized. PreparersOpportunity will be and AdditionalChildTax Credit, andtheAmerican the Earned IncomeCredit, theChildTax Credit attach Form 8867tothereturn inthosecases where Paid preparers willberequired tocomplete and Due DiligenceChecklist individuals (thoseunemployedfor27weeksormore). whohireto employers qualifiedlong-term unemployed PATH alsoextendsthecredit beginningin2016toapply ormore.employed 400hours and40%forthose butfewerthan400hours 120 hours qualified first-year wagesforthose employedatleast wages are cappedat$6,000.Thecredit is25%of the yearoffor thefirst employment.Ingeneral,qualified credit isbasedonqualifiedwagespaidtotheemployee 1,2020.The beginningonorbeforeyears January toemploymentthroughsignificant barriers taxable target groups whohaveconsistentlyfaced certain forhiringindividualsfromavailable toemployers taxcredit isafederaltaxcredit The workopportunity CreditWork Opportunity a more detaileddiscussion. the exercise of ISOs.Seethechapter ontheAMTfor depreciation adjustmentsandthetaxpreference on AMT liabilityisderivedfrom “deferral items”suchas year. You foranAMT credit ifanyof qualify your to ataxcredit againstyourregular taxinasubsequent If youpaytheAMTinoneyear, youmaybeentitled AMT Credit if itgeneratedgross receipts priorto2015. tax year).So,fora2019return, abusinessisnoteligible any taxableyearbefore endingwiththe thefiveyears receipts of $5millionorlessandnogross receipts for businesses(gross liabilities isavailableforcertain Further, thecredit payroll againsttheemployers’ tax receipts) mayclaimthecredit againstAMTliability. eligible smallbusinesses($50millionorlessingross December31,2015, beginningafter for taxableyears research expensesforthethree Inaddition, prior years. RETURN TORETURN TOC
Tax Credits 125 RETURN TO TOC RETURN TO Family Medical Leave Tax Credit Tax Leave Medical Family to those a new tax credit businesses affords The TCJA leave to paid family and medical companies that offer chapter on business owner issuestheir employees. See deductions. and depreciation required to maintain copies of the documents that were that were the documents copies of to maintain required the qualifying eligibility of to determine upon relied taxpayer.
Education Incentives
and certain expenses. other educational 127
Tuition funding programs, tax credits and education expense and education expense credits tax funding programs, Tuition deductions are available to help many families fund the cost of college college of fund families the cost to help many available deductions are
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Education Incentives EisnerAmper 2020 Personal Tax Guide • • • • following benefits: regardless of theirincome.Theseplansoffer the tuition program), sinceitisavailabletoalltaxpayers funding methodisanIRCSec.529plan(qualified Probably themostpopulartaxincentivecollege | • • include: The taxincentivesavailabletohelppaycollegecosts tax issueschapterforadditionalincentives. incentives thatmaybeavailabletoyou.Seethestate to phaseoutsbasedonAGI, thereby limitingthe butsomeoffor yourfamilymembers, themare subject to assistyouinfundingthecostof acollegeeducation There are educationincentivesthatprovide taxbenefits | IRC Sec.529Plan Education Incentives Available educational institution.Allowable computersoftware isenrolled ataneligible thebeneficiary any years andthe beneficiary’s familyduring by thebeneficiary expenses, solongasthecomputerisusedprimarily computer, computersoftware andeveninternet room andboard expenses,books,supplies, a Distributions canbeusedtopayfortuition,certain United Statesaswellmanyschoolsabroad. technicaltrainingschoolsinthe colleges andcertified university, orgraduateschoolandmostcommunity education expensesatanyaccredited college, Distributions are tax-free ifusedtopay qualified federal andstatetaxes. the earnings from theplanare tax-deferred for are notcurrently taxdeductibleonthe federallevel, Although thecontributionstoIRCSec.529plans Education deductions,includingstudentloaninterest. Credit. Credit andLifetimeLearning American Opportunity IRC Sec.529plans. 128 the five years, beginningwiththeyearofthe fiveyears, contribution. of thecontributionineach of exclusion toaportion period. Theelectionallows youtoapplytheannual individual asifyouhadmadeitratablyoverafive-year $75,000 ($150,000ifmarried)of thecontributionforan 2020. For2019and2020,youmayelecttotreat upto exclusion amountof $15,000perdoneefor2019and tostaywithintheannual to limitothertax-free gifts exclusion tofundanIRCSec.529plan,youwillhave However, totheextentyouusedyourannualgift from yourestate,there taxconsiderations. are gift tax purposes.Althoughtheplan’s assetsare excluded benefit of are anotherperson forgift considered agift Funds depositedintoanIRCSec.529planforthe • • • taxable ifnotusedforqualifiededucationpurposes. representing incomeearned withintheplanwillbe have accesstothefunds.However, anydistributions ifafinancialemergencyto yourself requires youto college.You after canalsochangethebeneficiary college, orexcessfundsremain inonechild’s account doesnotgoto another childiftheoriginalbeneficiary any reason. You to maychangethebeneficiary owner tochangebeneficiariesatanytimeandfor reaches legalage,permitting theaccount beneficiary the evenafter account owner(notthebeneficiary), Control of thefundsremains inthehandsof the public, private,orreligious school. orsecondary expenses” (tuition)forelementary maybeusedfor“qualified designated beneficiary is excluded.Distributionsof upto$10,000per orhobbies software designedforgames,sports must bepredominantly educationalinnature, so options andpossiblyhighercontributionceilings. funds toanewplan.Thisgivesyoumore investment 12monthsandroll overplan choice of planevery state youlivein.Inaddition,canchangeyour You are notlimited tojusttheplansoffered bythe incentive educationplans. account ownerorbeneficiary, unlikeothertax Age andincomerestrictions donotapplytothe RETURN TORETURN TOC Education Incentives
A $2,500 annual A $2,000 annual credit per A $2,000 annual credit ortunity Lifetime and Emp American Opp American Assistance Learning Credits Learning and other limitations. American Opportunity Tax Credit. Credit. American Opportunity Tax per student is available for the first four yearscredit on with enrollment education post-secondary of leading to a basis in a program at least a half-time up to $1,000 as a receive you can Generally, degree. no taxes. However, even if you owe credit refundable not be allowed to an will credit the refundable kiddie taxindividual if he or she is subject to the Credit. Lifetime Learning years taxpayer is available for an unlimited number of graduate, or certain other courses post-secondary, of is your job skills. The credit or improve to acquire qualified expenses, the first $10,000 of equal to 20% of $2,000. up to the maximum amount of Educational loyer-Provided
| Under a qualified educational assistance plan, up to the benefits will not be included in the gross $5,250 of • | Credit Opportunity/HopeThe American Scholarship Tax available are Credit Learning and Lifetime (“AOTC”) education tuition and related if you pay qualified courseexpenses, which includes materials such as equipment. Room and board books, supplies and expenses do not qualify either credit. for income limitations which have these credits However, is phased The AOTC credits. phase out the available $80,000 and $90,000 between out ratably with MAGI household and $160,000 and if single or head of 2019. The Lifetime$180,000 if married filing jointly for is phased out ratably with MAGI Credit Learning ($59,000 andbetween $58,000 and $68,000 for 2019 and household of $69,000 for 2020) if single or head and $138,000$116,000 and $136,000 for 2019 ($118,000 for 2020) if married filing jointly. • 129
The Tax Increase Prevention Act of 2014 Act of Prevention Increase The Tax
RETURN TO TOC RETURN TO PATH modified IRC Sec. 529 rules to treat any modified IRC Sec. 529 rules to treat PATH an IRC Sec. 529 account as coming distribution from all of that account, rather than aggregating from individual makingthe accounts. This is so even if the than one account. the distribution is operating more with amounts tuition paid of a refund Additionally, an IRC Sec. 529 account is treated distributed from Observation: a premature distribution from a retirement account. a retirement from distribution a premature are as a qualified expense if those amounts to an IRC Sec. 529 account within re-contributed 60 days. included the Achieving a Better Life Experience (“TIPA”) Act, which allows states to establish and (“ABLE”) disabled individuals Severely operate an ABLE program. (under age 26) would be able to open an IRC Sec. 529 savings account and make annual contributions up $15,000 for 2019 andto the gift tax exclusion limit of 2020, adjusted annually for inflation. The account may abe used to meet qualifying disability expenses of Any distribution that exceeds designated beneficiary. incomequalified disability expenses is included in gross 10%. and subject to an additional tax of IRC Sec. 529 plans also have their disadvantages.IRC Sec. 529 plans choices limited to the plan’s are Investment options even though you can investment vehicles. Also, of qualified higherwithdraw funds for uses other than pay income tax andeducation expenses, you’ll have to to similar an additional 10% penalty on the earnings, Private institutions can offer a prepaid tuition program tuition program prepaid a can offer Private institutions Distributions if they satisfy requirements. IRC Sec. 529 plans used for qualified education these private from be tax-free. expenses will also Also, if your state of residence allows a deduction for allows residence state of Also, if your only be you will generally to the plan, the contributions for one year’s take the deduction allowed to in amount the plan. year that you fund the initial EisnerAmper 2020 Personal Tax Guide higher educationfor2019and2020. gross incomeof upto$2000fortuitionandfees married filingjointlystatus)cantakeadeductionfrom individuals withMAGI of upto$80,000($160,000for ConsolidatedAppropriations Act, Under theFurther | $85,000 ($170,000ifmarriedfilingjointly). jointly) andiscompletelyeliminatedwhenMAGI is when MAGI exceeds$70,000($140,000ifmarriedfiling For 2019and2020,themaximumdeductionisreduced subject toaphaseoutthateliminatesthededuction. of interest paidonqualifiededucationloansannually, can taketheabove-the-linedeductionof upto$2,500 limitations, includinginterest oneducationloans.You computing againstyourfederalAGI, subjecttoincome educationexpensesare deductiblein Certain | TaxOpportunity Credit andLifetimeLearning Credit. other deductionorcredit, includingtheAmerican your employerunderthisplanasthebasisforany any of thetax-free educationexpensespaidforby includible ingross income.Further, youcannotuse of completingacourse retain instructionare after provided toolsorsuppliesthattheemployeemay books; suppliesandequipment.However, employer- expenses includetuition,feesandsimilarpayments; educational assistancebejob-related. Educational income of theemployee.There isnorequirement that uition Feesand Deductions nterest onEducation Loan I T 130 parents isalive. Tax of AmericanOpportunity portion Credit aslong asoneof the Please notethatachildunderage24cannotclaimtherefundable a maximumof $2,000. lifetime learning credit toreduce hisorherowntaxliability, youwillsave on theirtaxreturns instead.Ifyourchildcanclaimthefullamountof the Lifetime Learning Credit, youmayhaveyourchildren claimthecredit Taxprevent you from takingtheAmericanOpportunity Credit or If youpayqualifiedexpensesforyourchildren butincomelimitations Tax Tip GI Too Highto 25. A Take it Have Your Child a Credit? Claim RETURN TORETURN TOC International Tax Planning and Reporting Requirements
bank accounts and other financial investments. and other financial accounts bank
131 required for U.S. persons owning foreign assets including assets foreign owning persons for U.S. required
Foreign-earned income exclusions and foreign tax credits can credits tax and foreign exclusions income Foreign-earned
income and help to avoid double taxation. Complex reporting Complex double taxation. is and help to avoid income significantly reduce the U.S. tax liability incurred on foreign-source on foreign-source tax liability incurred U.S. the reduce significantly
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International
Requirements Tax Planning Tax and Reporting EisnerAmper 2020 Personal Tax Guide income wasincludedintheU.S.shareholder’s 2017 whichever periodhasthegreater amount,andthe as of November2,2017orDecember31,2017; tax bracket.Therepatriation amountwasdetermined rate willultimatelydependontheU.S.shareholder’s a 55.7%reduction forcashamounts.Theeffectivetax allowed a77.1%deductionfornon-cashamountsand the applicablepercentage. U.S.shareholders willbe of theforeignportion earnings are taxablebasedon have notpreviously beentaxedintheU.S.Onlya their share of theoffshore earnings andprofits which in aspecifiedforeign entityare required toinclude All U.S.shareholders withatleast10%ownership (or willimpact)calendar2017andFYE2018taxpayers. earnings heldinaspecified foreign entitythatimpacted one-timerepatriation of offshoremandatory foreign international taxarena. Mostnotably, there wasa The TCJA hashadasignificantimpactinthe | Impact of theTax CutsAndJobs Act The maximum2019foreign earned incomeexclusion is$105,900, Your companysentyoutoworkinDubai2019forseveralyears, As youcansee,yourforeign housingexclusionmightbelimiteddependingonwhere youlive.Inorder toseethedifferences inlimitsfor Tax Tip subject totax:$478,870dividedby $625,000is76.62%). so you qualify asabonafide resident so youqualify of the UAE in2019.Assume you earn $500,000peryearandyourcompanyreimburses you would beabletoexcludethefollowingincomefrom yourU.S. for $125,000of housing costswhichare taxabletoyou.You Although the UAE does not impose an income tax, in this example, if you paid income tax to a country thatimposesatax,you Note: AlthoughtheUAE doesnotimposeanincometax,inthisexample,ifyoupaidtaxtoacountry taxes willbeallowableasaforeign taxcredit thatcanoffsetyour U.S.incometax(i.e.,only$478,870 of thetotal$625,000 of incomewillbe housing exclusion is based on which country andcityyouare housing exclusionisbasedonwhichcountry regardless youare of workingin.The whichforeign country income taxreturn: housing deductions in 2019, see Chart 13onthenextpage. housing deductionsin2019,seeChart may alsobeeligibletoreceive aforeign taxcredit againsttheU.S.taximposedonremaining income.However, only76.62%of these ax Benefits of theForeign-Earned ax BenefitsIncome 26. • $40,230of the housingexpensereimbursements. • $105,900of yoursalary. T and HousingExclusions 132 Therefore, youwillbetaxedintheU.S.on$478,870related $146,130). $125,000 housingcostreimbursements lesstheexclusionsof ($57,174 -$16,944).Whenaddedtoyourforeign earned income annual housingexclusionamountis$57,174.Ofthisamount, to youremploymentinDubai($500,000compensationplus you are not eligibletoexclude$46.42perday, or$16,944fora Dubai isconsidered tobeanexpensivecitylivein,sothe full year. Therefore, your2019housingexclusionwillbe$40,230 cities). exclusion of $105,900,youcanexcludeatotalof $146,130. living in (see Chart 13forsomeof themoreliving in(seeChart commonforeign entities. Ifaforeign (whichincludesindividuals, person requirement forforeign-owned U.S.disregarded withthe2017taxyear,Starting there isafiling | inclusion does not occur sooner than expected. inclusion doesnotoccursoonerthanexpected. be aware of various“triggering”eventstoensure the until theentire inclusionhasbeensatisfied.Onemust of taxwillneedtokeeptrackof thisforthefuture, qualified tomakethedeferralelectionforpayment withaninclusionandwho time event,alltaxpayers believedthistobeaone- Although manytaxpayers tax canstillbepaidoveraneight-year period. to U.S.shareholders. At theelectionof thetaxpayer, the additional repatriation of offshore earnings andprofits foreign corporations(i.e.,FYEin2018)there maybean tax return. Pleasenote,thatforfiscalyearspecified OtherRecent Developments RETURN TORETURN TOC International Tax Planning and Reporting Requirements
71,200 71,800 57,174 39,219 56,124 93,200 47,900 69,200 43,000 114,300 108,000 $ 50,200 Exclusion Maximum Annual Housing Maximum Annual Housing mainstream. Many taxpayers are discovering that Many taxpayers are mainstream. subject to taxation and/or reportingthey are in both Not all U.S. citizens and jurisdictions. U.S. and foreign their obligation to report of aware aliens are resident the U.S. their worldwide income to the IRS. As a result, continues to pursue U.S. persons who fail to report income and file certain These complex tax forms. on an overseas issues not only impact you if you are but have broad- abroad, assignment or retired if you have never left implications even reaching the U.S. For instance, these issues arise if you invest in hedge funds, private equity funds, and other entities operating businesses or in foreign that own interests retirement securities or have foreign invest in foreign bank can trigger plans. Even holding cash in a foreign a reporting requirement. 133 City Toronto Hong Kong Beijing Paris Berlin New Delhi Rome Tokyo Moscow Zurich Dubai London
China France Germany Japan Russia Switzerland United Arab Emirates Country Canada India Italy United Kingdom Foreign Housing Exclusions Foreign Housing
The amount of foreign housing exclusions costs that you can exclude from your 2019 U.S. income tax return depends on both the your 2019 U.S. income tax return you can exclude from housing exclusions costs that foreign The amount of the country cities, before common foreign maximum amounts you can exclude for some listed the Below are living in. and city you are for a full year. or $16,624 $45.55 per day, living cost of adjustment for the daily 13. Chart RETURN TO TOC RETURN TO Foreign Tax Issues Tax Foreign Multinational clients with cross-border income Multinational clients with cross-border in today’s employment and investments are from | partnerships a U.S. and corporations) owns 100% of Such as disregarded. it will effectively be treated LLC, 1120 Form forma to file a pro now required entities are 5472 attachment. This filing requirement with the Form 1120 forma The pro 1120-F. is in addition to filing Form due April 15, 2020 It is cannot be filed electronically. and can be extended. Reportable transactions between owner include contributions and its foreign the U.S. LLC and distributions between the two, and would certainly are There LLC. the of include the setup and closure penalties for non-filing. onerous EisnerAmper 2020 Personal Tax Guide • • • more specialtaxbenefits: if youare foroneor workingabroad, youmay qualify to U.S.citizensorresidents livingintheU.S.However, income taxandreturn filingrequirements thatapply resident whoisworkingabroad issubjecttothesame In general,theworldwideincomeof aU.S.citizenor | responsibilities. additional reporting institutions of foreign nationswillhavesignificant compliance regime, banksandotherinvestment greater globaltaxtransparency; similar totheFATCA regime, theU.S.hasinspired amovementtowards section below. Through thecreation of theFATCA foreign financialaccountinformation. SeeFATCA U.S. taxauthoritiesgreater accessintoU.S.taxpayers’ foreign financialinstitutionsplayakeyrole inproviding Act, alsoknownasFATCA. FATCA requires thatcertain the HIREactisForeign AccountTax Compliance entities setupinforeign jurisdictions.Thisprovision of requirementsthe reporting foroffshore accountsand and tightened income earned bynon-U.S. persons Act”) imposedaU.S.withholdingregime forU.S. Significant legislationenactedin2010(the“HIRE employment andinvestments. requirements, andelectionsinvolvingforeign the incomeexclusions,foreign taxcredits, reporting of This chapterisintendedtoprovide anoverview eign-Earned Income Exclusion and deduction forthetaxespaid. country, orifmore beneficial,takeanitemized for incometaxesyoupayor accruetoaforeign Claim aforeign taxcredit againstyourU.S.taxliability orself-employmentsalary earnings). of having anyhousingcostspaid(i.e.,fortaxpayers orall, reimbursements youreceive or(b)deductpart, orall,of anyhousingincome Either (a)excludepart, 2019 and$107,900in2020. Exclude upto$105,900of foreign-earned incomein Foreign Housing Exclusion/ Deduction For 134 in thecurrent yearsothatalarger amountof foreign may result inalowerutilization of foreign taxcredits You shouldconsider whetherforegoing the exclusion exclusion isclaimed. offset bytheforeign taxcredit regardless of whetherthe U.S. taxontheforeign-earned incomewillbecompletely at ahighereffectiveratethantheU.S.,itislikelythat the On theotherhand,ifforeign jurisdictionimposestax more beneficial. effective taxrate,claimingtheexclusionwillgenerally be tax rateintheforeign jurisdictionislowerthantheU.S. Planning Tip: calendar-year period. consecutive 12-monthperiod,butnotnecessarilya foratleast330fulldaysina a foreign country This testrequires youtobephysicallypresent in Physical presence test to return totheforeign country. resident, aslongthetripsare briefandthere isintent willnotriskyourstatusasabonafide foreign country includes anentire calendaryear. Brieftripsoutsidethe foranuninterruptedperiodthat in aforeign country To underthistest,youmustestablish residency qualify Bona fideresidence test fide residence orphysicalpresence test,definedbelow: andmeeteitherthebona home inaforeign country foreign housingexclusions,youmustestablishatax To fortheforeign-earned incomeandthe qualify • • income. pay U.S.SocialSecurityandMedicare taxonsuch coverage forthesamework.You willberequired to cover socialsecuritytaxes”designedtoeliminatedual Totalization Agreements are essentially“treaties that Agreement theU.S.haswithforeign country. tax intheforeign country, basedonaTotalization If eligible,claimexemptionfrom payingsocialsecurity the U.S.haswithforeign countries. Reduce youroveralltaxliabilityundertreaties that If you pay no foreign tax or the effective If youpaynoforeign taxortheeffective RETURN TORETURN TOC International Tax Planning and Reporting Requirements Taxes paid to the countries that participate in certain Taxes boycotts. international corporations foreign U.S. persons controlling of Taxes and partnerships if certain annual international not filed. are returns Certain and mineral, oil-related, taxes paid on foreign oil and gas extraction income. Taxes paid on income excluded from U.S. gross U.S. gross paid on income excluded from Taxes income exclusion or a income (e.g., foreign-earned position taken). return treaty-based • • • • foreign tax credits include dividends paid by foreign paid by foreign include dividends tax credits foreign paid on your behalf including those corporations, business income fund, and foreign a mutual through entity. by a flow-through earned an or either a tax credit entitled to claim are You countries. for taxes paid to foreign itemized deduction is typically the case, the tax credit Though not always U.S. federal tax your since it can reduce beneficial more basis. liability on a dollar-for-dollar taxes qualify income only foreign for the Generally, and real foreign Other taxes, such as tax credit. foreign personal property taxes, do not qualify. This deduction is virtually eliminated for 2018 (and Cuts and Jobs Act. 2025) under the Tax through for the full amount of ability to claim a credit Your is limited based on a ratio taxes paid or accrued foreign taxable income to your total your foreign-source of taxable income. This ratio is applied to your actual tax on net Contribution Tax (excluding the 3.8% Medicare the to determine the credit investment income) before you can claim. If that the credit maximum amount of the credit not able to claim the full amount of you are you must carry the excess back to year, in the current tax year and if not utilized the immediately preceding is carried forward credit the remaining in the prior year, for the next ten tax years, subject to a similar limitation in those years. 135 For Americans residing overseas, the foreign- For Americans residing RETURN TO TOC RETURN TO For Credit Tax eign | may be claimed by U.S. citizens, tax credit A foreign aliens, and in certainresident cases by nonresident taxes to not allow foreign states do aliens. Typically state income tax liabilities. An exception to this offset for allows a credit State, which includes New York certain income taxes. Unlike the Canadian provincial exclusions discussed above, you do not need to live or countrywork in a foreign to claim the foreign in order if you may be eligible for the credit You tax credit. Common taxes in the tax year. paid or accrued foreign income that may generate foreign-source examples of Note: Note: when income exclusion is not considered earned the 3.8% for either calculating the applicable thresholds investment income or on net Contribution Tax Medicare income. on earned Tax the .9% Additional Medicare Claiming the exclusion is a binding election. Once youClaiming the exclusion to exclusion, you will be required have claimed the the years. If you revoke continue to claim it in all future the exclusionelection, you will not be allowed to claim revocationagain until the sixth tax year after the year of the IRS. If you have from permission unless you receive revoking benefit of claimed the exclusion in the past, the the possiblethe exclusion must be weighed against the exclusion for re-elect being unable to ramifications of the exclusion forgoing of is no downside five years. There if you have never claimed it in the past. Otherwise, in certain it may be more circumstances, claiming in favor of the exclusion beneficial to forego tax credit. foreign only a greater tax credits can be carried back or forward can be tax credits for utilization whether the also consider should in other years. You exclusion exclusion and housing income foreign-earned to the extent tax burden mitigate your state election will worldwide income in the taxable on that you remain residency. state of EisnerAmper 2020 Personal Tax Guide • security isgiventotheIRS. Deferred compensation death,ifsooner)providedtaxpayer’s abondor other the deemedsaleuntil asset isactuallysold(orthe apply. Anelectioncanbemadetodeferthetaxon taken intoaccountandthewashsalerulesdonot immediately taxed(“mark-to-market tax”).Losses are of afloorof $725,000 for2019($737,0002020)is the exittax.Anygainondeemedsaleinexcess in thecaseof a“covered expatriate”whoissubjectto Contribution Tax onnetinvestmentincomemayapply expatriation date.The3.8%additionalMedicare at theirfairmarketvalueonthedaybefore the gains rateasthoughyouhadsoldallof yourassets expatriate,” youwillpayanincometaxatthecapital status (“Green Card”) andare considered a“covered relinquishing yourU.S.legalpermanent residency If youplanongivingupyourU.S.citizenshipor | • determining theallowablecredit: is generallyclassifiedintotwodifferent basketsfor an activetradeorbusiness.Foreign-source income or than foreign taxespaidonincomefrom salary paid ondividendsare subjecttoaseparatelimitation foreign-source income.Inotherwords, foreign taxes The credit iscalculatedforeachseparatetypeof foreign-source underanincometax treaty. U.S. source incomeunderU.S.taxlaw, buttreated as treaty. Thisprovision appliestoincomeclassifiedas in whichincomeisresourced underanincometax foreign taxcredit limitationbasketforeachcountry In addition,youare required tomaintainaseparate atriation Exit Tax trade orbusiness. is incomeearned from salary, pensionsoranactive andgenerally the passiveseparatelimitationcategory income from foreign sources whichdoesnotfallinto General limitationincome: interest, rents, royalties, andannuities. Passive income: Exp This category includes dividends, includesdividends, Thiscategory This category includes includes Thiscategory 136 the highest rate on taxable gifts, whichiscurrently 40%. the highestrateontaxablegifts, covered byanexceptionistaxabletotherecipient at or charitabledeductions.Thevalueof atransfernot forthemarital tax return thatqualify ortotransfers taxreturn orestate onatimelyfiledgift is reported 2019 and2020).Thetaxdoesnotapplyifthetransfer taxexclusion($15,000for is withintheannualgift orbequestduringtheyear to theextentthatgift June17,2008.Thetaxdoesnotapply expatriated after orbequestreceived fromgift anindividualwhohad A U.S.citizenorresident willhavetopaytaxona • graduated tax rates much the same as a U.S. citizen. A graduated taxratesmuch the sameasaU.S.citizen.A Resident aliensare taxedonworldwideincome at Residents are taxeddifferently thannonresidents. | • • regime ifthey: and allU.S.citizensare subjecttotheexpatriation Card foranytimeduringeightoutof thelast15years Former long-term residents whoheldaU.S.Green apply). the expatriationdate(earlydistributionpenaltiesdonot if theywere completelydistributedonthedaybefore othertax-deferred accountsare treatedand certain as withholding taxondistributionstotheexpatriate.IRAs subject tothetaxbutare generallysubjecttoa30% items andinterests innon-grantortrustsare not ncome Taxation of Nonresident which is$168,000for2019and$171,0002020; termination of residency inexcessof anannualceiling, endingbeforefive years thedateof expatriationor Had averageannualnetincometaxliabilityforthe five tax years precedingfive taxyears thedateof expatriation. Statement, withallU.S.federaltaxobligationsforthe onForm 8854,InitialandAnnualExpatriation perjury compliance underpenaltiesofFailed tocertify citizenship orresidency ended;or of $2millionormore Had anetworth when Individuals U.S. I RETURN TORETURN TOC International Tax Planning and Reporting Requirements If you qualify to exclude days of presence in the presence If you qualify exclude days of to
a medical condition or medical problem that arose that arose problem condition or medical a medical in the U.S. were while you Days you were an exempt individual (e.g., foreign (e.g., foreign an exempt individual were Days you or trainee, individual, teacher government-related competing in a athlete student or a professional charitable sporting event). You were present in the U.S. for fewer than 183 days in the U.S. present were You during the calendar year in question, you had a establish that during the calendar year, You and country, tax home in a foreign you had establish that during the calendar year, You countrya closer connection to one foreign in which unless you hadyou had a tax home than to the U.S., countries. a closer connection to two foreign Note: (other than an exempt individual were U.S. because you or because individual) government-related a foreign you must or medical problem, a medical condition of Individuals and 8843, Statement for Exempt file Form In addition, thereIndividuals with a Medical Condition. certainare who move elections available to nonresidents taxation. to the U.S. that could minimize global Even though you may otherwise the substantial meet as a U.S. resident test, you will not be treated presence and: card for 2019 if you do not have a green • • • 5. You will be considered to have a closer connection to a to have a closer will be considered You countryforeign to the U.S. if you or the IRS other than significant establishes that you have maintained more countrycontacts with the foreign than with the U.S. 8840, Closer Connection Exception StatementIRS Form for Aliens, will need to be submitted with your U.S. for the year in which you income tax return nonresident exempt test and you are meet the substantial presence it because you also meet the closer connection test. from a nonresident considered you may be Alternatively, your home if you also would qualify of as a resident an income clause of jurisdiction under the tie breaker with the U.S. tax treaty 137
RETURN TO TOC RETURN TO Days you were unable to leave the U.S. because of leave the U.S. because of unable to Days you were a day. Days you were temporarily in the U.S. as a regular in the U.S. as a regular temporarily Days you were vessel engaged in a foreign member of crew transportation the U.S. and a foreign between country the U.S. unless you or a possession of otherwise engaged in trade or business on such Days you were in the U.S. for less than 24 hours in the U.S. Days you were traveling between two places outside when you were the U.S. Days you regularly commute to work in the U.S. from commute to work in the U.S. from Days you regularly in Canada or Mexico. a residence Lawful permanent residence (Green Card test); or Card (Green residence Lawful permanent test. Substantial presence 4. 3. 2. 1. Except as noted below, you are treated as being treated you are Except as noted below, physically in the U.S. on any day that you are present in the countrypresent at any time during the day. U.S. for theExceptions include days spent in the following circumstances: • • in the U.S. for If an individual is physically present spent at leastat least 31 days during 2019 and has 2017 2019, 2018, and 183 days during the period of in 2019, physical presence the days of counting all of 2018, in presence the days of of but only one-third days in 2017, the number of and only one-sixth of for U.S. tax the individual will be deemed a resident purposes. A foreign national is generally deemed a resident alien resident national is generally deemed a A foreign is met: the two following tests the U.S. if one of of nonresident alien, however, is taxed at graduated rates at graduated is taxed however, alien, nonresident with a U.S. connected that is effectively only on income 30% rate on U.S.-source business or at a flat trade or a U.S. connected with is not effectively income that rate (unless a lower income tax treaty trade or business specifically exempt taxpayers are applies). Nonresident on net Contribution Tax the 3.8% Medicare from investment income. EisnerAmper 2020 Personal Tax Guide is a U.S. person, a Form 1099 would be issued instead; aForm 1099would beissuedinstead; is aU.S.person, 15 of the followingyear. Iftherecipient of theincome This form isnormally distributednolaterthanMarch paid andanytaxeswithheld. yourname, address, amountandtypeofreport income the annualinformation return prepared bythepayorto from U.S.sources, youwillreceive Form 1042-S.Thisis If youare anonresident of theU.S.andreceive income 1042-S Form accounts (seebelow). entities (e.g.,Forms 8621,5471,and8865) andfinancial interests inforeign include applicableforms toreport will berequired tofileForm 1040NR/1040NR-EZand undertheprovision ofof atreaty anothercountry Note: period. 2012mayhaveafive-yearexpiration ITINs issuedafter types of incomesubjecttowithholding(e.g.,pensions). whohavecertain andforpersons personnel military agency. exceptionsforfamiliesof There are certain bytheissuing documents thathavebeencertified orcopiesof these certificates) andbirth (e.g., passports ITINs whenapplicationsincludeoriginaldocumentation Identification Number(“ITIN”).TheIRSwillonlyissue number are required toobtainanIndividualTaxpayer under U.S.lawandare noteligibleforasocialsecurity whohavefilingorpaymentobligations taxpayers Foreign nationals,nonresident aliensandother one ormore states. subject tostateincometaxontheearned in to theU.S.Treasury. AU.S.nonresident mayalsobe excess of paymentsmadeduringtheyearisremitted liability fortheyeariscomputedandanytaxduein payor orthrough estimatedtaxpayments.TheU.S. of U.S.tax,madeeitherthrough withholdingbythe U.S.-source income andthepayments annually report This form isusedbynonresident aliensof theU.S.to 1040NR/1040NR-EZ Form | eporting Requirements eporting for Nonresident Aliens U.S. R When reporting asaU.S.nonresident, residents When reporting 138 • forms are: tax elections.Someof themostcommonof these in substantialpenaltiesandthelossof beneficial income taxreturn. Failure todosocouldresult amount of information youmustincludewithyourU.S. These requirements placeanadditionalburden onthe requirementsor hedgefund,yourreporting increase. pass-through entity suchasaninvestmentpartnership companies, whetherhelddirectly byyouorthrough a valuable toyou.Ifyouhaveinvestmentsinforeign holdings andtomakeelectionsthatcouldprove and attachedtoyourtaxreturn todiscloseforeign There are manyIRStaxforms thatmustbecompleted | correspondence from theIRS. (andavoidable) you willlikelyreceive unnecessary Caution: benefits of anincometaxtreaty. this form shouldalsobecompletedtoclaimthe status asbeneficialownerof theincome.Ifapplicable, therecipient’sits foreign statustoapayorcertify This form isprovided byaforeign entitytodocument W-8BEN-E Form tax treaty. also becompletedtoclaimthebenefitsof anincome owner of theincome.Ifapplicable,thisform should therecipient’sto certify residency statusasbeneficial This form isprovided byanonresident alientoapayor W-8BEN Form residence. of to thetaxauthoritiesinrecipients’ country Information onForm 1042-S mayalsobereported 31of thefollowingyear. nolaterthanJanuary persons Forms 1099are generallyduetobereceived byU.S. eign Reporting Requirementseign Reporting for Accounts. of Foreign Form 114,Report BankandFinancial U.S. CitizensAndResidents For If you give the payor the wrong form Ifyougivethepayorwrong form RETURN TORETURN TOC
International Tax Planning and Reporting Requirements In previous years the maximum penalty was theIn previous as long as they have a document granting them that granting them they have a document as long as the prior BSA an FBAR filing, If amending authority. the original from be provided number must Identification filing. include banks, securities, derivatives,Financial accounts mutual funds or other financial accounts foreign demand, checking, deposit,(including any savings, other than term or life insurance contract annuity, account maintained with a financialinsurance or other continues to suspend the reportinginstitution). The IRS hedge funds commingled funds, such as offshore of funds. and private equity in an account includes being the A financial interest if acting or having legal title, even record owner of capacity onas an agent, nominee, or in some other who have signatory a U.S. person. Taxpayers behalf of othersauthority over accounts owned by (e.g., minor also reportable. are etc.) A financial parents, children, also includes an account held by a corporation interest than more or indirectly, in which you own, directly a shares; the total voting power or value of 50% of than partnership more of in which you own an interest or a trust as to which 50% in the capital or profits; beneficial you or any other U.S. person has a present receives the assets or of than 50% in more interest income. the current than 50% of more to file the FBAR, the a nonwillful failure In the case of $10,000 per IRS may impose a maximum penalty of issued by the IRS in 2015 limit the account. Procedures is willfulness. there maximum penalty imposed where The memo specifically instructs examiners to calculate a single penalty for all years combined and then the The single penalty is 50% of allocate it to each year. the years under in any of balance highest aggregate examination. Criminal penalties could also be assessed for willful violations. Note: the highest balance in the $100,000 or 50% of of greater account during the year. 139
eport Bank Foreign of The requirement for submission of both new for submission of The requirement RETURN TO TOC RETURN TO and Financial Accounts (“FBAR”) and Form 114 — R Form 8938, Statement of Foreign Financial Assets. Foreign 8938, Statement of Form Form 3520-A,Form Foreign of Return Annual Information With a U.S. Owner. Trust Form 3520, Annual Return To Report Transactions Report Transactions To 3520, Annual Return Form Certain and Receipt of Foreign Trusts With Foreign Gifts. Form 5471, Information Return of U.S. Persons With U.S. Persons of Return 5471, Information Form Certain Corporations. Foreign Respect To Form 8865, Return of U.S. Persons With Respect to U.S. Persons of 8865, Return Form Certain Partnerships. Foreign Form 926, Return by a U.S. Transferor of Property to a of Transferor by a U.S. 926, Return Form Corporation. Foreign Form 8621, Return by a Shareholder of a Passive a Passive of by a Shareholder 8621, Return Form (PFIC) or Qualified Investment Company Foreign (QEF). Electing Fund
Note: Note: and amended filings for all years must be done online their clients on behalf of can file FBAR forms and CPAs The FBAR must be filed on an annual basis if you have authority over one in or signature a financial interest country in a foreign financial accounts or more with an $10,000 at any time during value exceeding aggregate Beginning with the 2016 FBAR and forward, the year. the following is April 15 of the due date for this form this deadline may be year and a six-month extension of granted. FinCEN automatically extended the due date for all FBARs until October 15 for the 2019 returns. If you are a U.S. person (including a corporation, If you are partnership, trust or estate) and exempt organization, authority over a in or signature have a financial interest financial account, you may be subject to FBAR foreign reporting. | • • • • • • • EisnerAmper 2020 Personal Tax Guide (“excess distributions”).Also ifneitherof thesetwo distributionsfrom thePFIC investment oroncertain made theywillpaytaxon gains from thesale of the a QEFelectionormark-to-market (“MTM”)electionis is aPFICare PFICregime. subjecttotheharsh Unless whoinvestinaforeignU.S. persons corporationwhich | act promptly. intheSFCPprogram should benefit from participating whocan but cancloseatanytime.Thus,taxpayers program, ifneeded.TheSFCPprogram remains open, recommended toseekoutsidecouncilregarding either against criminalliabilityorsignificantcivilpenalties.Itis OVDP, donotreceive taxpayers automaticprotection Resolution FrameworkforWillfulViolations.Unlikethe 28, 2018.Ithassincebeenreplaced withaNewCivil Note: both intheU.S.andabroad. in taxpayer-friendly residing waystoincludetaxpayers in theOVDP, andexpandedtheoriginalSFCPprogram participating potentially higherpenaltiesfortaxpayers Specifically, theIRSimposedstricterrequirements and changestobothprograms. announced important may alsoavoidcriminalprosecution. In2014theIRS penalty atall.Inthecaseof theOVDP, the individual while payingareduced penaltyor, insomecases,no foreign incomeandfile information returnsunreported and disclose to come forward for taxpayers opportunity Procedure (“SFCP”).Bothprograms provide an (“OVDP”) andtheStreamlined FilingCompliance are theOffshore Voluntary Disclosure Program programs whichfocusondisclosure of foreign assets foreign incomeorassets. Twounreported of the disclosepreviously tovoluntary designed fortaxpayers Since 2009theIRShasoffered variousprograms | e Voluntary Disclosure Programs (“QEF”) (“PFIC”) OrQualifiedElecting Fund a Passive Foreign Investment Company Offshor Form 8621,R The OVDP program was closed on September The OVDPprogram wasclosedonSeptember eturn by aShareholder of 140 required tofileForm 8621regardless of whetheran trusts,andestates)owningPFICsare partnerships, (i.e.,individuals,corporations, U.S. persons income or loss. ordinary or otherdispositionof thePFICstock,are treated as MTM election,aswellgainorlossontheactualsale Amounts includedinincomeordeductedunderthe If theelectionismade,PFICrulesdonotapply. income thatwasincludedinprevious years). of thetaxyear(thedeductionislimitedtocumulative adjusted basisoveritsfairmarketvalueattheclose basis inthestock;ordeductsexcessof thePFIC’s close of thetaxyearovershareholder’s adjusted any, of thefairmarketvalueof thePFICstockasof the income eachyearanamountequaltotheexcess,if If theelectionismade,shareholder includesin MTM electiononForm 8621formarketablePFICstock. Alternatively, ashareholder of aPFICmaymakean thus avoidingtheonerous PFICtax. gains of thecorporation,whetherornotdistributed, pro ratashare earnings andnetcapital of theordinary 8621 are required toannuallyincludeinincomethe U.S. shareholders whomaketheQEFelectiononForm interest, dividends,andcapitalgains. income. Passive incomeincludes, butisnotlimitedto, than 50%of thecorporation’s assetsgeneratepassive the corporation’s incomeispassiveorwhenmore when75%ormoreClassification asaPFICoccurs of (ergo, “harsh”). situations,thistaxcanexceed100%of thegain certain from theperiodtowhichsuchgainisallocated.In charge isalsoimposedonthetax,andbeginsrunning capital gainsrateintheyearof disposition.Aninterest involved,ratherthanthebeneficiallong-term the years incomeineffectforeachof highest rateonordinary which theshares were heldandthatgainistaxedatthe a ratableallocationof during anygainovertheyears PFICruleswillalsoapply.the harsh Theserulesrequire distributions(“excessPFIC stockorcertain distributions”) elections ismade,upondispositionof allorsomeof the RETURN TORETURN TOC International Tax Planning and Reporting Requirements eturn of U.S. Persons with U.S. Persons eturn of eturn by a U.S. Transferor of of U.S. Transferor a eturn by Form 8865, R Form 926, R Form 926, Respect to Certain to Partnerships Foreign Respect Property Corporation a Foreign to If the transferor is a partnership, If the transferor the U.S. partners the partnership, are of the partnership not itself, to reporton 926 based the transfer on Form required the partner’s the transferred proportionate of share property. is reportableIf the transfer includes cash, the transfer 926 if immediately afteron Form the transfer the the 10% of at least or indirectly, person holds, directly the foreign of total voting power or the total value by cash transferred corporation, or the amount of corporation during the the person to the foreign the transfer12-month period ending on the date exceeds $100,000.
| to report with information is required 8865 Form partnerships, foreign to controlled transfersrespect to partnerships,foreign and or acquisitions, dispositions, partnershipchanges in foreign ownership. A separate along with the applicable schedules, is 8865, Form partnership. for each foreign required four categories which define who is required are There must be and how much information to file the form are: The categories provided. | to report 926 is used Form certain tangible transfers of or intangible property corporation. While to a foreign certain are there to the filing, generally the exceptions apply to reportablefollowing special rules transfers: • • The penalty for failure to comply with the reportingThe penalty for failure the value of the fair market is 10% of requirements limited to $100,000 transfer, the property time of at the to comply was not due to intentional if the failure disregard. 141
RETURN TO TOC RETURN TO A limited filing exception applies for certainA limited filing exception applies for owned in a PFIC to an interest with respect shareholders is subject to PFIC tax where for which the shareholder The exceptionno QEF or MTM election is in effect. is not subject to PFIC tax applies only if the shareholder to any excess distributions or gains treated with respect as excess distributions and either (a) the aggregate at the owned by the shareholder all PFIC stock value of exceed does not the shareholder the tax year of end of $25,000 ($50,000 for joint filers), or (b) the PFIC stock is another PFIC, and through owned by the shareholder proportionate of the shareholder’s share the value of PFIC does in the lower-tier PFIC interest the upper-tier not exceed $5,000. U.S. persons who are beneficiaries of foreign estates foreign beneficiaries of U.S. persons who are non-grantor trusts that have made QEF and foreign to file, while those required or MTM elections are only domestic estates or trusts are beneficiaries of or trust fails to file the form. to file if the estate required to report in any case in required U.S. beneficiaries are which the beneficiary an excess distribution or receives as excess distributions. gains treated recognizes U.S. owners of domestic or foreign grantor trusts that domestic or foreign U.S. owners of own PFIC stock. Ownership of PFIC stock through another U.S. taxpayer PFIC stock through Ownership of may also trigger reporting in certain instances. U.S. an amount in to include required persons are who PFIC stock for QEF or MTM regimes income under the not required U.S. taxpayer are another held through the U.S. which through to file if another shareholder person the PFIC stock timely files. The filing holds estates, non-grantor trusts andapplies to domestic excess distribution has occurred or an election has has occurred excess distribution who own U.S. shareholders This applies to been made. at the lowest tier who are and indirectly directly shares companies. a chain of of EisnerAmper 2020 Personal Tax Guide • IRS hassentoutanotification of thefailure toreport oncethe Furthermore, of each foreign partnership. prescribed. Thispenaltyisappliedforeach tax year furnish therequired information withinthe time A penaltyof $10,000canbeassessedforfailure to • • • aeoy 3: Category 2: Category 1: Category aeoy 4: Category certain requirements arecertain met. if may berequired underthiscategory toreport disposed of interest orhadachangeinproportional partnership. inthe remainedwhile theU.S.person apartner disposedof suchproperty if theforeign partnership required thattransferunderIRCSec.6038B, toreport andwas tothepartnership appreciated property thatpreviouslyalso includesaU.S.person transferred not berequired thetransfer. toreport 3 Category willgenerally respect tothecontribution,itspartners alltherequiredand properly reports information with However, filesForm 8865 ifthedomesticpartnership totheforeign partnership. contributed property shareto havetransferred of aproportionate the are considered thepartners a foreign partnership, to contributesproperty If adomesticpartnership orrelatedby suchperson exceeds$100,000. person contribution, orthevalueof contributed theproperty the immediatelyafter in theforeign partnership owned directly orindirectly atleasta 10%interest either ifthatperson for aninterest inthepartnership, person’s inexchange taxyeartoaforeign partnership duringthat whocontributedproperty person, 2filer. willbeconsideredperson aCategory 1fileratanytimeduringthattaxyear,Category no owing atleast10%interest. However, ifthere wasa wascontrolled each byU.S.persons partnership whilethe 10% orgreater interest inthepartnership owneda the taxyearof theforeign partnership during thepartnership’s taxyear. atany time a 50%interest inaforeign partnership A U.S. person, includingarelated AU.S.person, whoatanytimeduring AU.S.person A U.S. person whohadacquired AU.S.person or A U.S. person whoownedmoreA U.S.person than 142 • following tests: be required tofilethisform ifyoumeetoneof the foreign corporations. Youshareholders incertain will whoarefor U.S.persons officers, directors, or requirement thereporting Form 5471isusedtosatisfy | • • • continues, uptoamaximumof $50,000foreachfailure. be assessedforeach30-dayperiodthatthefailure the information, anadditional$10,000penaltycan •
less than the 10% stock ownership requirement.less thanthe10%stockownership in theforeign corporation toreduce yourinterest to You are whodisposesof aU.S.person sufficientstock respect totheforeign corporation,or requirementmeeting the10%stockownership with You are while whobecomesaU.S.person aperson aeoy 1: Category aeoy 3: Category 2: Category corporation, or requirementownership withrespect totheforeign regard tostock already owned,meetsthe10%stock any stockownedonthedateof acquisitionorwithout stock inaforeign corporationwhich,whenadded to outstanding stockof theforeign corporation. or acquired anadditional10%ormore of the 10% ownerwithrespect totheforeign corporation, hasacquiredperson stockthatmakeshim/hera or director of aforeign corporationinwhichaU.S. U.S. Tax Filers). Sec. 965Transition Tax” applicableto2017&2018 hasbeenreinstated sincethe“IRC (This Category on thelastdayinthatyearwhichitwasanSFC. of theforeign corporation,and whoownedthatstock corporation (“SFC”)atanytimeduringtaxyear corporation thatisanIRCSec.965specifiedforeign Corporations Persons withRespect Foreign to Certain Form 5471,I You are whoacquires aU.S. person You are whoisanofficer aU.S. person Includes aU.S.shareholder of a foreign nformation Return of U.S. RETURN TORETURN TOC
International Tax Planning and Reporting Requirements
eturn to Reporteturn to The look-through rule for related parties rule for related The look-through Proposed regulations under IRC Sec. 956 have regulations Proposed Form 3520, Annual R Transactions with Foreign Trusts and Trusts with Foreign Transactions Certain of Gifts Foreign Form and Receipt 3520-A, of Return Annual Information with a U.S. Owner Trust Foreign
Observation: PATH. of extended as a result permanently has been is an (“GILTI”) Intangible Income Taxed Global Low income offshore designed to capture additional regime that Subpart a CFC are of F does not. U.S. shareholders gross into their GILTI of to include their share required tax international of new area is a complex income. GILTI law with very exclusions. little rule under the Subpart F Another oft-encountered in investment which limits the CFC’s is the rule regime a loan if a CFC extends provision the U.S. Under this or a partyto its U.S. shareholder U.S. to its related the loan is deemed a dividend for U.S. shareholder, certain a loan are taxpayers. Included in the definition of as well as using the CFC as collateral trade receivables loan in the U.S.or as a guarantor to obtain a bank Note: rules in which abeen issued by the IRS discussing new received the dividend Corporation would benefit from 956 inclusion.deduction in computing their IRC Sec. this benefit will not apply to individuals. However, Form 3520. Form as a trust in which either a trust is defined A foreign primarycourt the U.S. is able to exercise outside of supervision the trust or one over the administration of non-U.S. persons have the authority to control or more the trust. all substantial decisions of must be filed in connection with return The information cash or transfer of trust, the a foreign of the formation | trust, receive a foreign U.S. persons who either create gifts trust, or receive or a foreign distributions from to file required persons are foreign bequests from 143 You are a U.S. shareholder who owns who shareholder a U.S. are You You are a U.S. shareholder who owns a U.S. shareholder are You Certain constructive ownership rules apply in RETURN TO TOC RETURN TO stock in a controlled foreign corporation (“CFC”) at corporation (“CFC”) foreign stock in a controlled owns the stock on the last day of any time and who corporation A CFC is defined as a foreign that year. with (counting only those that has U.S. shareholders the that own on any day of at least a 10% interest) than 50% corporation more the foreign tax year of all classes of the total combined voting power of of the of the stock its voting stock, or the total value of corporation. more than 50% of the total combined voting power combined voting the total of than 50% more than vote or more stock entitled to all classes of of the stock in a foreign value of the total 50% of the annual accounting period of corporation during corporation. the foreign Category 5: Category 4: Most notably, Subpart F was designed to tax the Most notably, income that could be easily moved into low types of rents tax jurisdictions, such as dividends, interest, The anti-deferral rules aim to subject and royalties. such income to federal tax in the year in which the rule provides subsidiary it. The CFC look-through earns that certain and royalties rents dividends, interest, parties the paid between related excluded from are the look-through Accordingly Subpartcalculation of F. the global effective tax rate for rule operates to reduce many multinational companies. One of the issues faced by U.S. multinationals is that One of be subsidiaries can often by foreign earned profits even if the cashsubjected to U.S. federal income tax, This is not repatriated. those earnings that represents anti-deferral rules the wide variety of of is the result over the years. by Congress introduced The same penalties that apply for failure to file Form The same penalties that apply for failure the discussion in the 5471 (see 8865 also apply to Form to properly required section). The information previous times 5471 can be extensive and at complete Form difficult to obtain. determining stock ownershipdetermining for these purposes. Note: Note: • • EisnerAmper 2020 Personal Tax Guide owners andbeneficiariesofowners thetrust. information totheIRSandother furnishes certain responsible forensuring thattheforeign trustannually benefit of AstheU.S.owner, aU.S.person. youare corpus of thetrustcanbepaidoraccumulatedfor that undertheterms of theagreement, noincome or considered agrantor trustunlessyoucandemonstrate and is trust ispresumed tohaveaU.S.beneficiary toaforeign or indirectly trust,the property transfers a grantortrust.Ifyouare whodirectly aU.S.person with atleastoneU.S.ownerandwhichisconsidered which isanannualinformation return of aforeign trust Information Return of Foreign Trust WithaU.S.Owner, there Annual isalsoarequirement tofileForm 3520-A, In additiontothefilingrequirements of Form 3520, (not toexceed25%of thegift). goesunreported foreachmonthwhichthegift gifts from thetrust,or5%of foreign theamount of certain 35% of thegross valueof thedistributionsreceived the gross valueof transferred tothetrust, anyproperty failure todosomaysubjectyouapenaltyof 35%of individual incometaxreturn, includingextensions.The Form 3520mustbefiledbytheduedateof your onForm 3520. are alsoreported foreign partnership 2019 ($16,649for2020)from aforeign corporationor inexcessof than $100,000annuallyandgifts $16,388in foreign estate)thatisvaluedintheaggregate atmore from anon-residentor property alien(includinga orbequeststhatyoureceive intheform ofGifts money use withinareasonable timeframe. makes apaymentequaltothefairmarketvalueof such loan isrepaid withamarketrateinterest ortheuser will notbeconsidered adistributiontotheextent Theuseorloanofand mustbereported. trustproperty equal tothefairmarketvalueof theuseof theproperty treated asadistributiontothegrantororbeneficiary a U.S.grantor, U.S.beneficiary, oranyrelated is person by (e.g.,real property) estateorpersonal trust property from aforeign trust.Anyuncompensateduseof foreign and thereceipt of anydistributionsbyaU.S.beneficiary other assetsbythesettlororgrantortoaforeign trust, 144 Noncompliance with these rules for any tax year Noncompliance withthese rulesforanytaxyear information returns. oncertain assets reported exceptionforforeignthere financial isareporting is more threshold thantheappropriate and reporting aggregate valueof thespecifiedforeign financialassets tax yearare notrequired tofileForm 8938evenifthe not required tofileaU.S.incometaxreturn forthe Also,individuals (or $200,000forsingletaxpayers). U.S. thefilingthresholds are increased to$400,000 For U.S.citizensorresident alienslivingoutside of the the taxyear. last dayof thetaxyearor$75,000atanytimeduring the totalvalueof thoseassetsexceeds$50,000onthe assets (specialdomesticentities)mustfileForm 8938if holding, directly orindirectly, specifiedforeign financial considered formed oravailedof forthepurposeof andtruststhatare corporations, partnerships, domestic December31,2015,certain Beginning after income taxreturn, whereas theFBARisfiledseparately. of theannual Form 8938is part to theFBARreporting. year threshold ismet.Thisrequirement isinaddition a filingobligationregardless of whethertheend-of- in foreign assetsatanytimeduringtheyearalsohave filing jointlywhohold$150,000(or$75,000forsingle) about thoseassetsonForm 8938.Thosetaxpayers by aforeigner) willberequired information toreport or contractheldforinvestmentthatisandissued interest inaforeign entity, oranyfinancial instrument foreign assets(e.g.,aforeign financialaccount,an incertain $100,000 (or$50,000forsingletaxpayers) hold, attheendof theyear, anaggregate of more than U.S. citizensorresident aliensfilingjointreturns who | Form 7004. trust. Asix-monthextensioncanberequested onIRS foreign trust’s taxyear, inthecaseof acalendar-year the Form 3520-Amustbefiled byMarch 15after
Financial Assets Form 8938,S tatement of Foreign RETURN TORETURN TOC International Tax Planning and Reporting Requirements information to the IRS. Those institutions that do not institutions that to the IRS. Those information participate account owners and provide unwilling to tax to a 30% withholding will be subject information on certain interest, payments including U.S.-source securities. of the source from dividends and proceeds 145 The definition of a reportable foreignThe definition of RETURN TO TOC RETURN TO For — FATCA Act Compliance AccountTax eign Beginning July 1, 2014, foreign financial institutions are financial institutions are Beginning July 1, 2014, foreign to report to the IRS certain directly required information about financial accounts held by U.S. taxpayers, or U.S. taxpayers entities in which hold aby foreign a comply, properly To substantial ownership interest. to enter into was required financial institution foreign with the IRS by June 30, 2014. A a special agreement participating to implement will be required institution certain prior to opening due diligence procedures an account, identify U.S. account holders who have opened accounts or after the the effective date of and have certain for pre- agreement, procedures existing accounts. The U.S. account holder will need to W-9 to identify a Form the institution with provide the status as a U.S. person and the institution will report the | Observation: rules and than under the FBAR asset is much broader equity hedge funds, private in offshore includes interests estate holding companies. funds, and real For tax returns filed after 18, 2010, the statute For tax returns March to cross- with regard limitations for assessing tax of or for certain transactions border assets will foreign the date certain years from be extended for three reportinginformational to the is submitted related to report asset if the failure transaction or the was cause and not willful omission. If due to reasonable to a foreign $5,000 related an omission is in excess of extendedbe will limitations of statute the asset, financial years to six years and would not begin to three from disclosing the run until the taxpayer files the return reportable asset. foreign could result in a failure-to-file penalty of $10,000 and $10,000 of penalty failure-to-file in a could result up to $50,000. to file penalties failure continuing a 40% understatementIn addition, penalty for a transaction of as a result tax of underpayment financial asset specified foreign involving an undisclosed penalties may also apply. can be assessed; criminal
State Tax Issues
147
New York, New Jersey, Connecticut, Pennsylvania, and California Pennsylvania, Connecticut, New Jersey, New York, either limit or exclude the itemized deductions you the itemized claimed on your either limit or exclude
federal return. Florida does not impose income taxes on individuals. taxes income Florida impose does not return. federal Texas also does not impose income taxes, but does impose a margins margins a but does impose taxes, income not impose does also Texas tax most of the income subject to federal income tax, but all five states states but all five tax, income subject to federal the income most of tax tax based on gross receipts on most businesses, including partnerships. on most businesses, receipts on gross based tax
RETURN TO TOC RETURN TO State Tax Issues State EisnerAmper 2020 Personal Tax Guide invested. California is basedonthepercentage of assetsso tax. Theamountof incomethatcanbeexcludedfrom “exempt-interest dividends”tobeexempt from California California oritsmunicipalobligations inorder forany assets investedintax-exemptU.S.obligationsand/or in own. Amutualfundneedstohaveatleast50%of its municipal bondsissuedbyanystateotherthantheir Pennsylvania andCalifornia taxtheinterest incomefrom Caution: • California donottaxthefollowingitemsof income: New York, NewJersey, Connecticut,Pennsylvania and | relating toincomeexclusions,whichare quitesimilar. states from eachother, weshouldpointouttherules But before thatdistinguishthese wediscussthefactors Florida norTexas incometax. imposesapersonal Jersey, Connecticut,Pennsylvania andCalifornia. Neither you ifworkorliveinthestatesof NewYork, New of thestateincometaxesthatmayimpact summary subject totax.Thischapterisdevotedproviding a depending onthestatejurisdictionsinwhichyouare different has specifictaxlawssotheimpactcanbevery typesof income.Eachstate which youderivecertain in thestateorstateswhere youworkorlive,from situation untilyouconsidertheimpactof incometaxes You donotgetacompletepicture of tax yourpersonal | Interest onobligationsof: Income Exclusions Introduction 1. 3. 2. (e.g., U.S.Treasury billsandbonds), Rico The U.S.anditspossessions,suchasPuerto such interest earned through bondfunds. residents of NewYork andNewJersey, including Port Authorityof NewYork for andNewJersey your stateof residence, and Governmental agenciesandmunicipalitieswithin New York, NewJersey, Connecticut, 148 For 2019,themaximumNYS taxrateisapplicableformarriedfilingjoint • the 80%testismet. exempt from taxirrespective NewJersey of whether attributable tointerest from federalobligationsare invested. However, distributionsfrom mutualfunds isbaseduponthepercentageJersey of assetsso amount of incomethatcanbeexcludedfrom New dividends” tobeexemptfrom tax.The NewJersey its municipalobligationsinorder for“exempt-interest or in tax-exemptU.S.obligationsand/orNewJersey A mutualfundneedstohaveatleast80%of itsassets • (2018)) decisionhasimpacted taxationof e-commerce. Wayfair, Inc.,DocketNo.17-494(6/21/2018), 585U.S. The U.S.Supreme Court’s Wayfair (SouthDakotav. | • taxpayers isscheduledtobe6.85%forincomeabove$323,200. taxpayers the toprateis6.85%.For2020-2024,highesttaxforsuch withincomeover$2,155,350.Forunder$2,155,350, taxpayers tain pensionandretirement benefits,subjectto AnUpdate on considered. the ageof therecipient, andwhichstateisbeing various limitations,includingthepayorof thepension, income taxes). allow adeductionforpaymentsof stateandlocal Cer Social Securitybenefits. State andlocalincometaxr Chart 14. New YorkCity New YorkState State orCity New York Tax Rates 2019-2020 Maximum Wayfair efunds (since they do not efunds (sincetheydonot Maximum TaxRates 3.876% 8.82% RETURN TORETURN TOC
State Tax Issues
Wayfair Wayfair
Filing monthly sales tax returns across the country; across sales tax returns Filing monthly and The prospect of increased audits. increased of The prospect Effective December 1, 2018, marketplace facilitators required at least $250,000 are sales of with retail their sales tax on behalf of to collect and remit effective July 1, 2019, marketplace sellers. Further, sales sellers that make at least 200 retail remote in Connecticut and have at least $100,000 in gross Connecticut sales must collect and remit from receipts sales tax. Under California’s provisions, effective April 1, 2019, provisions, Under California’s a remote retailer is required to collect and remit tax in to collect and remit is required retailer a remote calendar or previous during the current if, California exceed $500,000. California its sales to California year, local tax rates which must be of has literally hundreds taken into account. Florida California Connecticut Florida has not yet enacted any economic nexus or marketplace facilitator provisions.
• • For some smaller companies, these burdens could companies, these burdens For some smaller costs of The increased literally be a backbreaker. the country across requirements complying with these $50,000. Consider as an example:can easily exceed average sale is $20 could meet theA company whose having $4,000 in a state with only transaction threshold for compliance cost of sales in that state. Thus, the of evenly sales, if spread $1 million of companies with a the be enough to force could the country, across company to close its doors (or website). the economicThe below paragraphs summarize selected states. of provisions, nexus, and related to our please refer information, For more eisneramper. Hub on our website at: https://www. com/knowledge-center/articles/wayfair-hub-folder/ wayfair-hub/ • 4. 5. 149 the Supreme Courtthe Supreme RETURN TO TOC RETURN TO Numerous registrations just to get on the tax rolls just to get on the tax rolls registrations Numerous and obtain a tax account; Updating systems to be able to track and obtain the necessaryinformation returns; to file the required Keeping current on the over 10,000 sales tax rates on current Keeping the countryacross and implementing these rates with sale system; their invoicing/point of 3. 2. 1. Some of the issues companies must now deal with the issues companies Some of include: overturned the physical presence requirement and overturned requirement physical presence the by enacted nexus provisions found that the economic and were constitutional muster, South Dakota withstood in question the provisions valid. Specifically, therefore responsibility imposed a sales tax collection and filing sellers that had either $100,000 in remote on remote into the state.sales, or 200 separate transactions, The Court the were didn’t rule that these thresholds sufficient. As a result, minimum, just that these were those that mirror many states have enacted provisions with a general all states South Dakota. Currently, of have some typesales tax except Florida and Missouri sales tax, regarding economic nexus provision of for marketplace sellers, and including requirements (which may have a much lower reporting requirements all sizes, many companies, of As a result, threshold). sales array of now find themselves subject to a vast Many companies the country. across tax requirements in only one had filing requirements which previously struggling toor two jurisdictions, now find themselves in keep up with new collection and filing requirements over 40 states, plus local jurisdictions. Prior to this decision, states could generally only could generally decision, states Prior to this if it had someseller to sales tax out-of-state subject an term in that state. The “physical presence” type of to mean misinterpreted was often physical presence In physical establishment. permanent some type of through could be established physical presence reality, visits, and/or the presence agents, affiliates, employee such as or software online marketing agreements of In Wayfair, in a state. “cookies” EisnerAmper 2020 Personal Tax Guide • • • • ork sey 1, 2019through December 31,2019,thesinglelocal Single LocalUseTax Rate. 01-799, the Comptroller’s office of theirelectionbyfilingForm elect tocharge asinglelocalrate.Theymustnotify varies bymunicipality;however, remote may sellers twelve calendarmonths.TheTexas salestaxrate more than$500,000 inTexas revenue inthepreceding a permit andcollectremit salestaxiftheyhave Effective October1,2019,remote mustobtain sellers Texas definitive guidance. is effective,andhasyettoissueFAQs oranyother New York isnotclearonexactlywhenthisprovision in theimmediatelypreceding foursalestaxquarters. 100 separatetransactionsdelivered intoNewYork retroactive toJune21,2018)andhadmore than they havemore than$500,000insales(effective remote mustcollectandremit sellers salestaxif Under NewYork’s economicnexusprovisions, reporting requirementsreporting were effectiveMarch 1,2018. requirements.onerous notificationandreporting These required toeithercollectandremit tax,orcomplywith more than$10,000butless$100,000insalesare thathave andonlinesellers marketplace facilitators requirementsreporting forremote Specifically, sellers. the calendaryear. NotethatPennsylvania alsohas July 1,2019.Thesethresholds are measured by now register, collectandremit salestaxstarting have more than$100,000inPennsylvania salesmust andremoteMarketplace facilitators who sellers New Y New Jer Pennsylvania Jersey invariouscircumstances.Jersey collect salestaxonthetheyfacilitateintoNew Further,customers. must marketplace facilitators more than200separatetransactionswithNewJersey exceeds$100,000,ortheyhave customers New Jersey collect andremit salestaxiftheirgross revenue to Effective November1,2018,remote must sellers
Remote Seller’s Intent to Elect or Revoke Use of IntenttoElectorRevokeUseof Remote Seller’s
Fortheperiodof October
150 advisor forthelateststate guidance. return(s), werecommend thatyouconsultyourtax consideration. Thus,priorto filingyourstatetax may bestatelegislativechangesthatare under of deemedrepatriation/GILTI income.Further, there have beenslowtoissueguidanceonthetreatment in selectedstatesissubjecttochangeassome incometaxtreatmentThe personal of suchprovisions elect topaythetaxonsuchincomeovereightyears. shareholders) or, inthecaseof individuals, theycan specified triggeringevent(thisappliesforScorporation to deferthetaxliabilityonIRCSec.965incomeuntila a taxpayercanelect,forfederalincometaxpurposes, cases, federal taxrateonrepatriation income.Incertain IRC Sec.965(c),whichisadeductionthatreduces the exemption” under income are alloweda“participation specified foreign corporations.Taxpayers such reporting time transitiontaxontheuntaxedearnings of certain generally requires U.S.shareholders topayaone- to theactualreceipt of suchincome. IRCSec.965 requires torecognize taxpayers deemedincomeprior December31,2017.Inbothcases,theTCJAor after beginningon applicablefortaxyears generally first on their2017federalincometaxreturn whileGILTI is formost taxpayers Sec. 965incomewasreportable consider thestatetaxtreatment of suchincome.IRC incometaxreturntheir federalpersonal mustalso underIRCSec.965and/orGILTIreported incomeon A taxpayerthathadorwillhaveincome/deductions | date ontheState Treatment if end of thecalendaryear. continue tocollectthesinglelocaltaxrateuntil year. Noteifyouchangeyourelection,must theComptroller byOctober1ofnotify thecurrent year electionthatwillautomaticallyrenew unlessyou 6.25%, foratotalof salestaxof 8%.Thisisacalendar tax ratewillbe1.75%,inadditiontothestateof Intangible LowTaxed Income (“GILTI”) Deemed Repatriation Income and Global An Up RETURN TORETURN TOC State Tax Issues New Y dividend is received) while New Jersey is following theis received) dividend that raises a concern and timing federal recognition AsNew Jersey in its interpretation. may be mistaken that taxpayers consult with theirrecommend such, we Incometax advisors New Jersey prior to paying Gross on IRC Sec. 965 income. Tax The New York City Department Finance issued of The New York a memorandum advising that unincorporated net amount of businesses generally must include the BusinessIRC Sec. 965 income in their Unincorporated the and that the options for deferring Returns Tax for Newfederal tax on such income do not apply City tax purposes. While the Department of York for Unincorporated GILTI Finance has not addressed is purposes, our initial interpretation Business Tax This is that the City will follow the federal treatment. conformity Tax’s due to the Unincorporated Business with federal taxable income as the starting point for no are there the tax computation and that, currently, such income. modifications allowing for a deduction of ork | Rates Tax Chart tax rates imposed by 14 shows the maximum These rates apply to City. State and New York New York does not have lower income since New York all types of capital gains or qualifyingtax rates for net long-term dividend income. Deduction Adjustments allow taxpayers to and NYC Beginning in 2018, NYS • With respect to GILTI, the Division of Taxation (“Division”) Taxation the Division of to GILTI, With respect (“GIT”) purposes, Income Tax advised that, for Gross be reportedsuch income must in by a shareholder the same year and in the samean S corporation in purposes. For other GIT taxpayersamount as for federal and partners(including individuals in partnership), the should be reported when the Division advised that GILTI and profits earnings income is actually distributed from in the category income. dividend 151 RETURN TO TOC RETURN TO The New Jersey Division of Taxation has addressed IRC has addressed Taxation The New Jersey Division of Sec. 965 income in various notices. In January 2019, reported under the Division advised that “dividends IRC Section 965 must be included in New Jersey gross income in the same tax year and in the same amount Additionally, as reported for federal tax purposes.” the Gross the notice explained that, for purposes of 965(c) deduction is no IRC Sec. there Income Tax, allowed for individual taxpayers, sole proprietorships allowed S corporations are or partnerships. However, similarities are an IRC Sec. 965(c) deduction. There personal between New Jersey and Pennsylvania’s what including their definition of income tax regimes constitutes a dividend. Thus, the fact that Pennsylvania does not tax IRC Sec. 965 income (until an actual The Pennsylvania Department Revenue has of The Pennsylvania Sec. 965 andissued guidance indicating that IRC not taxable for personal income are income GILTI tax (“PIT”) purposes; the rationale being that only or current actual cash or property distributions, out of taxable under are and profits, accumulated earnings cash or property when an actual Importantly, the PIT. PIT and profits, earning distribution is made out of taxpayers must report taxable dividend income it as a Form receive whether or not they of regardless to such distribution. 1099-DIV with respect Connecticut and New York State both use federal State both York Connecticut and New income as the startingadjusted gross point to income. As such, both statesarrive at state taxable net IRC Sec. 965 income and the same recognize that an individual taxpayer reports income GILTI gross income tax income for federal in their adjusted gross nor New York neither Connecticut purposes. However, payment of State allow a taxpayer to elect to defer any portion the tax associated with IRC Sec. 965 of income. California has not adopted the TCJA changes to IRC changes adopted the TCJA has not California 951A. in IRC Sec. provisions or the GILTI Sec. 965 deductions income nor the neither the Accordingly, reportableare personal on California tax income returns. • • • • EisnerAmper 2020 Personal Tax Guide NYAGI of at least$40,000butnotmore than$300,000 credit of $350availablefor NewYork residents with 2014throughFor taxyears 2019,there isarefundable Tax“Circuit Breaker” Credit been updatedtoreflect thesechanges. Form IT-213,ClaimforEmpire StateChildCredit, has based onthe2017federalcredit amountsandincome. New York. Your Empire Statechildtaxcredit willnowbe used tocomputeyourEmpire Statechildcredit for additional childtaxcredit amountmaynolongerbe The current federalchildtaxcredit taxyear’s or Change to theEmpire State ChildTax Credit depreciation deductionschapter. expense, asdiscussedinthebusinessownerissuesand to thefederalrulesregarding IRCSec. 179depreciation bonus depreciation rules.NewYork Statedoesconform your NewYork depreciation withoutapplying the through entity, youwillneedtoseparatelycompute on yourfederalreturn, eitherdirectly orfrom apass- To theextent you takeadvantageof bonusdepreciation ofHouston Street CanalStreet. andnorth andthe“Resurgence Zone,”to theEastRiver; southof Zone,”Manhattan —the“Liberty southof CanalStreet depreciation isallowedinlimitedareas of Lower The exceptiontothisruleisthatfederalbonus chapter. business ownerissuesanddepreciation deductions regarding bonusdepreciation, asdiscussedinthe New York Statedoesnotconform tofederalrules Bonus Depreciation limitations. subject tocertain a deductionforsomequalifiededucationexpenses, each dependent.Inaddition,NewYork Stateallows New York Stateallowsadeductionof $1,000for to thefederalTCJA. based onthefederalrulesastheywere ineffectprior purposes. Itemizeddeductionsshouldbecomputed itemized theirdeductionsforfederalincometax itemize theirdeductionswhetherornotthetaxpayers 152 based upon the amount of quarterly payroll. based upontheamountof For quarterly rate between0.11%and0.34% appliestoemployers Suffolk, Dutchess,andWestchester. Agraduatedtax counties of Nassau,Rockland,Orange,Putnam, within thefiveboroughs of NewYork Cityandthe and self-employed individualsengagedinbusiness Beginning in2009,ataxwasimposedonemployers Tax (“MCTMT”) Metropolitan Commuter Transportation Mobility computed basedonasinglereceipts factor. theUBTwillbe beginning in2018andforward, Foryears its slowtransitiontoasinglesalesfactor: New York Cityhasconcludedtheprocess of ending is limitedto23%of theUBTpaid. your incomereaches $142,000,atwhichpointthecredit taxable incomeis$42,000orless,graduallydecliningas Thecredit is100%of theUBTpaidifyour partnership. by them,includingtheirshare of theUBTtaxpaidbya of NYC theUBTpaid incometaxforaportion personal New York Cityresidents canclaimacredit againsttheir income) anda$5,000exemption). of $10,000(limitedto20%of UBT services taxpayer’s themaximumallowancefor exceeds $85,000(after if theirtotalunincorporatedbusinessgross income subject toa4%UnincorporatedBusinessTax (“UBT”) Self-employed workinginNewYork persons Cityare New York CityUBT York incometax return. Statepersonal to claimtheECEPwagecredit whenfilingtheirNew maybeeligible employers Employees of participating in wagesandcompensationNewYork State. they haveemployeesthatearn over$40,000annually Expense Tax canelecttopayif (ECET)thatemployers establishes anoptionalEmployerCompensation The EmployerCompensationExpenseProgram (ECEP) Employer CompensationExpenseProgram tax liabilitythatwasequaltoorgreater thanzero. the ageof 17onthelastdayof thetaxyearandhada who claimedoneormore dependentchildren under RETURN TORETURN TOC State Tax Issues
New Jer First $250,000 – 5.675%. Over $5 million - $427,887.50 + 10.9% of the excess Over $5 million - $427,887.50 + 10.9% of over $5 million. $250,001 - $1 million - $14,187.50 + 6.52% of the $250,001 - $1 million - $14,187.50 + 6.52% of excess over $250,000. the $1,00,001 - $5 million - $63,087.50 + 9.12% of excess over $1 million. sey at elementary or secondary or religious public, private, withdrawal. schools is a nonqualified York State. Therefore, any withdrawal from a from any withdrawal Therefore, State. York to pay account used 529 college savings New York or attendance connection with enrollment tuition in • • • | New for 2020 to Election Entity Tax New Jersey Enacts Pass-Through Cap. Combat $10,000 SALT Introduction On January 13, 2020 New Jersey Phil Murphy Governor Business signed into law SB3246, the “Pass-Through With this legislation, New Act.” Income Tax Alternative Jersey Rhode joins Connecticut, Louisiana, Oklahoma, entity type of Island and Wisconsin in enacting some entities (“PTEs”) in an effortlevel tax on pass-through the $10,000 federal cap on individuals’ to work around taxes.itemized deductions for state income Overview For tax years starting on or after January 1, 2020, PTEs tax based onmay elect to pay an entity level income the partners. of the distributive shares The the sum of each partners’tax is based on the sum of “distributive this summary as follows (for purposes of proceeds” “partner”the term in an S includes a shareholder corporation): • The partners for their pro credit can claim a refundable the tax paid on their personal return. of rata share 153 RETURN TO TOC RETURN TO For New York purposes, a withdrawal is nonqualified if For New York the withdrawal is actually disbursed in cash or in-kind State 529 college savings account a New York from for the higher education of not used and the funds are Higher education generally the designated beneficiary. or proprietary post- means public or private, non-profit secondary educational institutions, in or outside New New York opted not to follow changes made by the New York allowed withdrawals that are to the types of TCJA account (“QTP”) Program a Qualified Tuition from purposes, established under IRC Sec. 529. For New York withdrawals for kindergarten 12th grade school through not qualified withdrawals under the New tuition are 529 college savings account program. York In addition, a tuition credit or itemized deduction is In addition, a tuition credit State resident a full-year New York available if you were whom you take anand your spouse or dependent (for at student enrolled exemption) was an undergraduate and higher education or who attended an institution of not claimed on are paid qualified tuition expenses, and may be as much The credit return. another person’s up to qualified expenses as $400 per student; 4% of the maximum tuition deduction $10,000. Alternatively, or the may claim the credit is $10,000 per student. You deduction, but not both. College Savings Program, Credits and Expenses Credits Program, College Savings that allows you to make State has a program New York Sec. 529 plans as discussed in detailcontributions to IRC State New York in the chapter on education incentives. if marriedallows a deduction up to $5,000 ($10,000 IRC Sec. 529 plan. filing jointly) if paid to a New York quartersafter beginning on or payroll April 1, 2012, a calendar quarter than $312,500 in greater must be The tax also applies tax applies. the employer before including partners individuals, in to self-employed treated that are partnerships LLCs and members of as partnerships from earnings based on their net The tax does to the MCTD. allocated self-employment self- from net earnings not apply if the allocated $50,000 or less for the year. employment are EisnerAmper 2020 Personal Tax Guide Note: dividendincome. or qualifying not havelowertaxratesfor netlong-term capitalgains applies toalltypesof does incomesinceNewJersey $5,000,000 orlessincomeremains at8.97%.Thisrate with filing status.Themaximumtaxratefortaxpayers have incomeinexcessof $5,000,000regardless of that is10.75%fortaxpayers imposed byNewJersey 1,2019,themaximumtaxrate Effective January Tax Rates offset thisremainingwill atleastpartially liability. Presumably, the credits fortaxespaidtootherstates credits fortaxespaidtootherstates)of $5,107.50. rate) =$5,675.Thisresults inanettaxdue(before taxratemirrors (assuming theirNewJersey thePTE tax ontheirentire distributiveshare: $100,000x5.675% resident, New Jersey income theywilloweNewJersey share (50%)=$567.50.However,proportionate asa residentNew Jersey willonlygetacredit of their this entityis$200,000x10%5.675%=$1,135.The allocation percentage is10%.ThePTEtaxrelated to are $200,000,andthepartnership’s NewJersey distributiveproceeds assume thesumof thepartners’ andwhichmakesthiselection.Further in NewJersey whichisdoingbusiness inapartnership a 50%partner By wayof resident illustration,assumeaNewJersey is proceeds). distributive wouldbetheentire residentfor NewJersey partners distributive proceeds (which “taxed”byNewJersey allocationfactor),asopposedtothe the NewJersey (presumably thedistributiveproceeds multipliedby the distributiveproceeds derivedfrom NewJersey as thetax,andcorresponding credit, are basedon may beproblematic resident forNewJersey partners the Divisionof Taxation tothecontrary, thislanguage source income..” Pending guidancefrom further due .Foranonresident, thismeansNewJersey within theState,anduponwhichtaxisimposed Income Tax “derived from orconnectedwithsources various classesof incomesubjecttoNewJersey’s Gross The term “distributive proceeds” isdefinedasthePTE’s For NewJersey, themarginal tax rateforsingle 154 federal incometaxpurposes oryoureceived wages If youare considered aself-employed individualfor • • • • • • deductions toreduce yourtaxableincome: allowsthefollowing noted above,NewJersey income” state.Inadditiontotheincomeexclusions isa“grossitemized deductionssinceNewJersey Except asnotedbelow, nodeductionisallowedfor Deduction Adjustments marginal rateof 8.97%. jointly withincomesover$500,000are subjecttoatop filing taxpayers Single andmarried/civilunionpartner income inexcessof $150,000butlessthan$500,000. filingjointlyaretaxpayers subjecttothe6.37%rateon less than$500,000is6.37%.Married/civilunionpartner withtaxableincomeinexcessof taxpayers $75,000but are allowedanadditional$1,000exemption. dependentsattendingcollege or disabled,andcertain of ageoroveratthecloseof thetaxableyear, blind, for federalincometaxpurposes).Taxpayers 65years or otherdependent(whoqualifiesasyour exemptionforeachdependentchild $1,500 personal allowsa NewJersey spouse (ordomesticpartner). Personal exemptionsof $1,000eachforyouandyour on 18%of therent paidduringthe year. Tenants taxdeductionbased are allowedaproperty residence.personal taxesuptoamaximumof Property $15,000paidona deduction. travelandentertainment impact ontheNewJersey Therecent federalchangeshaveno in apartnership: andpartners employed individuals,businessowners, expensesforself-Business travelandentertainment income. Medical expensesinexcessof 2%of gross NewJersey recipient lives). gross incomeof therecipient (regardless of where the payments totheextenttheyare includibleinthe Alimony, separatemaintenance,orspousalsupport RETURN TORETURN TOC State Tax Issues The requirements The requirements Under the terms of the State Budget for FY 2020 of Under the terms Have met the income limits for the base year andHave met the income limits for the including thefor each succeeding year up to and claiming the reimbursement. year for which you are marital/civil-union of These limits apply regardless or in a married who are applicants status. However, bothcivil union must report combined income of spouses/civil-union partners. Have been age 65 or older OR receiving federal or older OR receiving Have been age 65 benefits; Social Security disability JerseyHave lived in New for at least ten consecutive years a homeowner or renter; as either lived in your home for at least three Have owned and consecutive years; the property taxes dueHave paid the full amount of each succeedingon the home for the base year and which you are year up to and including the year in and claiming the reimbursement; • • • • • between the amount of property taxes paid for thethe amount of between applying for which you are and the amount base year the must meet Applicants for a reimbursement. Freeze eligible for a Senior conditions to be following property tax reimbursement: Note: Note: applicants whosefor application year 2018, only those and whoseincome for 2017 did not exceed $87,268 will be eligibleincome for 2018 did not exceed $89,013 they met for 2018 provided reimbursements to receive Freeze The Senior requirements. all the other program is expected to continue in 2020 for propertyProgram taxes paid in 2019. Benefit Program: Homestead have slightly different, for the Homestead Benefit are not age-based. and are filings deadlines different It is possible to be eligible for both the Homestead (Property Senior Freeze and the Tax Benefit Program benefits but the amount of Reimbursement) program, property taxes cannot exceed the amount of received paid on their principal residence. 155 The Senior Freeze Program Program The Senior Freeze RETURN TO TOC RETURN TO Senior Freeze Program: Senior Freeze New Jersey Senior Freeze (Property Tax New Jersey (Property Freeze Senior Tax Benefit and Homestead Reimbursement) Programs property for amounts provide tax relief These programs paid on a principal residence. the difference of for a reimbursement provides College Savings Program for a college savingsNew Jersey does not provide or deduction. credit IRC Sec. 179 Expense IRC New Jersey 179 deduction of a limited IRC Sec. permits than $25,000. If you have more up to a maximum of you may not deduct or profession, one business, farm IRC Sec. 179 costs for all $25,000 of than a total of more the extent higher IRC Sec. 179 deductions activities. To you will need to taken for federal purposes, were separately compute your New Jersey deduction. Bonus Depreciation New Jersey to federal rules has not conformed See the chapter on bonus depreciation. regarding deductions. business owner issues and depreciation from an S corporation in which you were a more- which you were S corporation in an from amount you may deduct the you shareholder, than-2% yourself, insurance for the year for health paid during partner/domesticyour spouse/civil-union partner, the deduction The amount of and your dependents. income, your earned amount of may not exceed the income tax purposes, derivedas defined for federal under which the insurance plan was the business from any amounts paid for may not deduct established. You for any month during thehealth insurance coverage eligible to participate were year in which you in any by your (or your spouse’s/ subsidized plan maintained civil-union partner’s/domestic partner’s) employer. you may be able toNote that for federal tax purposes, for any childdeduct amounts paid for health insurance 2019. 27 at the end of yours who is under the age of of Jersey for New purposes, you may deduct However, your dependent. such amounts only if the child was EisnerAmper 2020 Personal Tax Guide is $45,000for2018andwill increase to$75,000 in2020. $50,000 in2020,andfora singletaxpayer, theexclusion the exclusionis$30,000for 2018andwillincrease to filingseparately,$100,000 in2020.Foramarriedperson exclusion willcontinuetoincrease untilitcapsoutat is $64,000,andwillincrease to$80,000in2019. The The 2018retirement incometaxexclusionforjointfilers Retirement IncomeTax indicated below. federal credit taxableincomeas basedonNewJersey individuals.Thecredit isapercentagequalifying of the individualor$1,000fortwomore one qualifying is non-refundable. Thecredit cannot exceed$500for care individual.Thecredit isconsidered aqualifying year andisphysicallyormentallyincapableof self- who livedwiththetaxpayerformore thanhalfof the A childundertheageof 13oraspouse/dependent individualbasedonthefederalcredit. a qualifying allowsachildanddependentcareJersey credit for beginningin2018andthereafter,For taxyears New Child andDependentCare Credit to 40%in2020andthereafter. equal to39%of thefederalcredit. Theratewillincrease earned incometaxcreditThe NewJersey for2019is IncomeTaxEarned Credit repealed. estatetaxwas 1,2018,theNewJersey Effective January Estate Tax communities. that are residents incontinuingcare retirement discharged veteranswasextendedtoinclude taxdeductionforhonorably the annual$250property Veteran’s Tax Property Deduction: $50,001 -$60,000 $40,001 -$50,000 $30,001 -$40,000 $20,001 -$30,000 Not over$20,000 NJ Taxable Income
Amount o 40% o 20% o 30% o 50% o 10% o Beginning in 2019, Beginning in2019, f theNJcredit f federalcredit f federalcredit f federalcredit f federalcredit f federalcredit 156 to $15,000 per year starting in2018. to $15,000peryearstarting year. real TheNewJersey estate taxdeductionislimited IRCSec.179expenseto$25,000per limits ataxpayer’s doesnotadoptbonusdepreciation New Jersey and increased IRCSec.179expenseshouldnotapply as bonus depreciation underIRCSec.168(k)andthe federaldeductions.Further,taxpayer’s theTCJA’s 100% deductionsthatare notbasedona its ownstatutory through has entities,does notapplysinceNewJersey pass- in2018forcertain deduction, allowablestarting Similarly, thefederal20%qualifiedbusinessincome GITliability. NewJersey have noimpactonataxpayer’s etc.should deductibility of mealsandentertainment, of exemptiondeductions,limitingthe personal taxandincome tax,removal deductions forproperty interest, reduced limits ondeductionsformortgage income taxrates,doublingof thestandard deduction, federal lawchangessuchastheloweringof individual income inthestatetaxablecalculation.Thus, federal adjustedgross incomeorfederaltaxable Revenue Codenordoesitadoptoruseataxpayer’s GITActdoesnotadopttheInternal The NewJersey based onthefederaltaxsystem. “Grosstaxes sincetheNewJersey IncomeTax” isnot income personal minimal ornoimpactonNewJersey changes containedintheTCJA are expectedtohave unlikely,appears mostof incometax thepersonal conforming legislation,which Without NewJersey Tax Cuts andJobsActImpact with yourtaxreturn. return forwhichyouare claimingtheexemptionor Submission Form mustbesubmitted priortothefirst of ReleaseorDischarge andtheVeteran Exemption the exemption,acopyof Form DD-124,Certificate residentsJersey andnon-residents. Inorder toclaim veteran. TheexemptionisavailabletobothNew isalsoanhonorablydischarged civil unionpartner) $3,000 exemptioncanbeclaimedifyourspouse(or for anadditional$3,000exemption.An ortheNationalGuard are eligible inthemilitary service Veterans whoare honorablydischarged from active Veterans’ Exemption RETURN TORETURN TOC
State Tax Issues Filing status is Single or Married filing separately: IfFiling status is Single than $200,000. is more Connecticut AGI If Connecticut AGI household: of Filing status is Head than $320,000. is more Filing status is Joint or Qualifying If widow(er): than $400,000. more is Connecticut AGI Connecticut income tax liability using the applicable tax using the applicable income tax liability Connecticut afterrates, and provision, the 3% phase-out applying tax as of amount to add the recapture is required tax is the recapture of The result below. indicated is taxed at the highest AGI entire essentially that the graduated rates. the benefit of income tax rate, without • • • Deduction Adjustments allowed for itemized deductions, as No deductions are state, as modified by income” Connecticut is a “gross the income exclusions noted above. individual taxpayers’ Connecticut allows resident estate and personal property for real income tax credits on theirtaxes paid to Connecticut political subdivisions primary or privately owned or leased motor residences $200 cannot exceed of vehicles. The maximum credit phased out are credits These your personal tax liability. for higher income persons. years For taxable through 2020, the property will only be allowed for credit tax the the close of who is 65 or older before a resident 157
R The maximum tax rate for Connecticut is 6.9%The maximum tax 27. esidency Caution Tax Tip Tax RETURN TO TOC RETURN TO Connecticut Filing status is Joint or Qualifying Widow(er) with over $500,000 but not Connecticut taxable income of over $1,000,000. Filing status is Head of Household with Connecticut Household Filing status is Head of but not over over $400,000 taxable income of $800,000. Filing status is Single or Married filing separately withFiling status is Single over $250,000 but not Connecticut taxable income of over $500,000.
partial day in New York is considered a full day spent in New York with minor exceptions. Also, a day working at your home in Connecticut will with minor spent in New York a full day is considered partial in New York day income it a day working in Connecticut. Therefore, while Connecticut will consider to be a day working in New York, by New York be considered New York for more than 183 days. You are a statutory resident of both New York State and New York City for tax purposes. As a result, Connecticut, City for tax purposes. As a result, State and New York a statutory both New York are of resident than 183 days. You for more New York tax. of this additional some your income. A partial is available to offset City would tax all of credit State, and New York New York allocated to these days will be taxed by both New York State and Connecticut with no offsetting credit. Be sure to maintain substantiation to Be sure credit. State and Connecticut with no offsetting allocated to these days will be taxed by both New York Recapture Tax Amount for Taxpayers In Higher Amount for Taxpayers Tax Recapture Income Brackets exceeds the income A taxpayer whose Connecticut AGI after computing his or her specified below, thresholds If your taxable income is more than these thresholds, than these thresholds, If your taxable income is more the maximum tax rate is 6.99%. • • • Note: Note: for the following individuals: | Rates Tax rate imposed by individual tax The maximum This rate applies to all types of Connecticut is 6.99%. does not have lower tax ratesincome since Connecticut or qualifying capital gains for net long-term dividend income. support New York. the days in and out of Your principal residence is in Connecticut but you work in New York City and maintain an apartment there. During the year you were present in City and maintain an apartment present During the year you were there. York is in Connecticut but you work in New principal residence Your City apartment. By statute, a days or less or by eliminating the New York State for 183 in New York can eliminate this tax by being present You EisnerAmper 2020 Personal Tax Guide offsetting credit againsttheir respective incometax. of theeffectedbusinessentitiesare entitledtoan business entity, butindividualsandcorporatemembers through entities.This taxappliesandispaidbythe Tax” whichimposesan“income”taxonpass- (“PET”), Connecticut haspassedthe“Pass-Through Entity Tax CutsandJobsActImpact adoption andthere are noincomelimitations. thechild’s is12months after or to participate birth enrolled Thedeadline CHETaccountwithinfouryears. family andfriendsaddatleast$150tothechild’s account. Aseconddepositof $150willbemadeif willdeposit$100intoaCHET CHET BabyScholars 1,2015, January children born oradopted onorafter $250 toward anewborn’s future collegecosts.For programThe “CHETBabyScholars” provides up to made. theinitialcontributionwas after forfiveyears forward maximum allowablecontributionsmaybecarried Amountsinexcessofand $10,000forjointfilers. the from federalAGI, upto$5,000forindividualfilers to theConnecticutHigherEducationTrust (“CHET”) maydeductcontributions Connecticut taxpayers College SavingsProgram chapter. business ownerissuesanddepreciation deductions IRC Sec.179depreciation expenseasdiscussedinthe Connecticut doesconform to thefederalrulesregarding IRC Sec.179Expense issues anddepreciation deductions. corporations. Seethechapteronbusinessowner bonus depreciation, withtheexceptionof C Connecticut hasconformed tofederalrulesregarding Bonus Depreciation claiming oneormore dependents. income taxfortheapplicabletaxableyearvalidly applicable year, orwhofilesareturn underthefederal
158 See chart 16forPhiladelphiarateof taxwithheldonForm W-2. See chart or qualifying dividendincome. or qualifying have lowertaxratesfornetlong-term capitalgains to alltypesof incomesincePennsylvania doesnot from another. Thesingleflattaxrateof 3.07%applies one bucketmaynotbeusedtooffset income/loss categories (buckets)of income,andincome/lossfrom 15).Pennsylvaniarate of 3.07%(seeChart haseight Pennsylvania imposesaflattaxonallincomeat Tax Rates | sales factorbaseduponmarket sourcing. methodof asingle the corporatetaxapportionment from method, baseduponcostof differs performance, Note: cost of method. performance three-factor method, andthesalesfactorutilizesa Personal IncomeTax purposesisanequalweighted formula forPennsylvaniaincome. Theapportionment However, theirbusiness apportion mosttaxpayers has booksandrecords tosubstantiatetheallocation. The defaultmethodisspecificallocationifthetaxpayer business” bothwithinandoutsideof Pennsylvania. totheextentbusinessis“doingapportionment Income from abusinessissubjecttoallocationand Pennsylvania Chart 15. Philadelphia Pennsylvania State orCity The Pennsylvania three-factor apportionment Rates Pennsylvania Tax 2019-2020 Maximum Maximum TaxRates (eff July1,2018and subsequent years) 3.8712% 3.07% RETURN TORETURN TOC
State Tax Issues
3.4481% 3.4567% Nonresident partnerships, associations and corporations. Rental to be business activities. usually considered activities are for the BIRT was amended at the The nexus standard Wayfair start 2019 to follow the nexus guidance of of and as such, starting January 1, 2019 Philadelphia applicablebegan imposing BIRT nexus upon all from annual receipts taxpayers with at least $100,000 of Philadelphia customers. Law 86-272 still applies Public for the income tax portion the tax. The BIRT is the of gross two taxes; one on income and one on sum of tax rate receipts For 2019 and 2020, the gross receipts. is 6.25% on netis 0.1415%, and the income tax rate taxtaxable income. For the 2019 and subsequent years, the income tax apportionment methodology The sales factor and taxable is a single sales factor. on determined tax are receipts for the gross receipts performance method for most businesses.a cost of companies use market-based software Notably, receipts. of sourcing Philadelphia imposes the NPT on the net profits a trade, business, profession, the operation of from enterprise or other activity conducted by individuals, partnerships,LLCs, associations or estates and trusts. any of net profit The tax is imposed on the entire Philadelphia of person who is a resident self-employed the business. It is also the location of of regardless imposed on businesses conducted in Philadelphia by not subject to this tax. are Corporations nonresidents. partnership,Also, the proportionate amount of LLC, 159 3.8712% 3.8809% Resident ax Withheld on Form W-2ax Withheld Period
Philadelphia Rate of T Philadelphia For Wages
Effective July 1, 2018
Effective July 1, 2019 16. Chart RETURN TO TOC RETURN TO Philadelphia imposes the BIRT (f/k/a the Business (“BPT”)) upon all persons engaged in Privilege Tax includes individuals, “Persons” business within the City. Philadelphia imposes an unearned income tax, knownPhiladelphia imposes an unearned of upon all residents as the “School District Income Tax,” The tax rate for 2019 and subsequent years is the City. income taxable unearned 3.8712%. Some examples of dividends, certain S corporation are and royalties, rents (held for six months distributed income, and short-term income that is otherwiseor less) capital gains. Earned subject to the Philadelphia Business Income and (“NPT”) or Wage Tax (“BIRT”), the Net Profits Receipt Tax is not subject to the School Income Tax. Tax Philadelphia imposes a Wage Tax on compensation Tax Philadelphia imposes a Wage the City and on nonresidents of by residents earned may be adjusted The tax rate who work within the City. City the annual mid-year with the implementation of during the firstBudget. As such, wages earned half rate than for the the year may be tax at a different of The School District Income Tax a year. second half of Tax the Wage the same as rates are Tax and Net Profits However, to change mid-year. also subject rates and are these returns the filing of the rate in place at the time of tax period. The tax is the rate applied to the entire rate for compensation paid after 1, 2019 is 3.8712% July However, and 3.4481% for nonresidents. for residents may apportionnonresidents their income based upon Philadelphia. City of duty days spent working within the EisnerAmper 2020 Personal Tax Guide federal bonus depreciation. For property placed in placedin federal bonusdepreciation. Forproperty Pennsylvania requires addbackthe that taxpayers Bonus Depreciation Pennsylvania liability. deduction, etc.shouldhavenoimpactonataxpayer’s theQBI the deductibilityof mealsandentertainment, removal of exemptiondeductions,limiting personal taxandincometax, reduced deductionsforproperty interest, deduction, limitsondeductionsformortgage rules underIRCSec.965,doublingof thestandard individual incometaxrates,thedeemedrepatriation Thus, federallawchangessuchastheloweringof taxable incomeinthestatecalculation. federaladjustedgrossa taxpayer’s incomeorfederal the Internal RevenueCodenordoesitadoptoruse The Pennsylvania incomedoesnotadopt personal tax system. incometaxisnotbasedonthefederal personal in theabsenceof legislation,becausethePennsylvania in theTCJA are expected to haveminimalornoimpact, most of incometaxchangescontained thepersonal For Pennsylvania incometaxpurposes, personal (1)(a). adjusted byPennsylvania law. Pa. Stat.Ann.72§7401(3) changes intheTax CutsandJobsActunlessspecifically as currently amended,andtherefore conforms tothe deductions, Pennsylvania generallyconforms totheIRC before netoperatinglossdeductionandspecial corporate taxableincomeisfederal pointforcomputingPennsylvaniaBecause thestarting Tax Cuts andJobsActImpact by theincomeexclusionsnotedabove. as Pennsylvania isa“gross income”state,asmodified No deductionsare allowedforitemizeddeductions, Deduction Adjustments rate is3.4481%for2019andsubsequentyears. andfornonresidents and subsequentyears, theNPT residents, theNPTrateis3.8712%for2019 isexemptfrom ormembers theNPT.partners For and otherassociationincomeattributabletocorporate
160 income. dividend for netlong-term capitalgainsorqualifying income sinceCalifornia doesnothavelowertaxrates for the2019taxyear. Thisrateappliestoalltypesof California’s topmarginal incometaxrateis12.3% Tax Rates | federal annual gift exclusion. federal annualgift taxable income.Thedeductionamountistiedtothe non-Pennsylvania 529planincomputingPennsylvania if marriedfilingjointly)for2019toanyPennsylvania or federal annualexclusionamountof $15,000($30,000 Pennsylvania allowsadeductionof uptothemaximum College SavingsProgram depreciation deductions. will needtoseparatelycomputeyourPennsylvania 179 deductionswere takenforfederalpurposes,you 179 costsforallactivities.To theextenthigherIRCSec. not deductmore thanatotalof $25,000of IRCSec. more thanonebusiness,farm orprofession, youmay maximum of $25,000usingIRCSec.179.Ifyouhave Pennsylvania permits alimiteddeductionof uptoa IRC Sec.179 sevenths rulehistoricallyprovided inPennsylvania. provision generallygetsataxpayerbacktothethree- IRC Sec.168,butnotunder168(k).Thisnew depreciation deductionunderIRCSec.167and/or depreciation butmayagaincontinuetotakeordinary the taxpayerisrequired toaddbackthefederalbonus September27,2017, after placedinservice property isdepreciated forfederaltaxpurpose.For property subtraction maybeclaimedinthelastyearthat disallowed depreciation notclaimedasaresult of the entire amountof theaddbackhasbeenclaimed.Any untilthe be claimedinsucceedingtaxableyears deduction underIRCSec167.Themay depreciation sevenths of ordinary thetaxpayer’s may continuetosubtractanamountequalthree- before September27,2017,thetaxpayer service California RETURN TORETURN TOC State Tax Issues There are limits on the use of the prior year’s the tax safe use of limits on the are There to make estimated required who are Individuals harbor. than is more AGI California and whose tax payments, filing separately), (or $75,000 for married $150,000 of 90% of estimated tax based on the lesser must figure year’s their prior tax year’s tax or 110% of their current year’s California with current Taxpayers including AMT. $1,000,000 (or $500,000 for than equal or greater AGI estimated tax must figure married filing separately) year. the current their tax for based on 90% of CarryoversNet Operating Loss attributable to taxable yearsNet operating losses beginning on or after January and before 1, 2015 January 1, 2019, can be carried back in full. A taxpayer carryback the entire may elect to relinquish period with If to a net operating loss for any taxable year. respect the carrybackthe taxpayer elects to relinquish period, the net operating loss is carried forward only to the years carryover eligible under the applicable period. For tax years after net operating December 31, 2018, losses may only be carried forward. Benefits Child and Dependent Care deduction of does not allow the pre-tax California wage W-2 of benefits as a reduction dependent care benefits dependent care income. The amount of by the taxpayer is added back to California deferred wages. income as a separate adjustment to Exchanges Sec. 1031 Like-Kind IRC Effective January 1, 2014, taxpayers that exchange a propertyCalifornia for a property outside the state gain upon the eventual will be taxed on the deferred The taxpayer must property. the replacement sale of 3840 for each year as long as they own the file Form the filing is to The purpose of property. out-of-state notify that the taxpayer continues to hold the California property replacement and acknowledges the deferred of regardless The annual filing is required liability. whether the taxpayer has any need to otherwise file a in any year. tax return California Cuts and Jobs Act Impact Tax with a few federal tax law has only conformed California 161 9.3% 11.3% 10.3% 12.3% Between $590,746 and $708,890 Between $590,746 and $1,181,484 Between $708,890 and Over $1,181,484 Taxable Income: $590,746 Between $115,648 and RETURN TO TOC RETURN TO You are to remit all payments electronically once you all payments electronically to remit are You make an estimate or extension payment exceeding with a total liability $20,000 or you file an original return over $80,000 for any taxable year that begins on or after January 1, 2009. Once you meet the threshold, amount, tax of all subsequent payments regardless electronically. type, or taxable year must be remitted will be subject Individuals who do not pay electronically to a 1% noncompliance penalty. Estimated Tax Payments Tax Estimated annual the required Installments due shall be 30% of the 40% of installment, payment for the first required for the second required annual payment required annual payment the required installment, and 30% of for the fourth installment. No payment is required installment. for the third required IRC Sec. 179 Expense IRC of law only allows a maximum deduction California amount maximum expensing $25,000. The California qualified dollar by the amount of dollar-for is reduced expensing-eligible property placed in service during $200,000 $200,000. California’s the year in excess of is not adjusted for inflation. phase-out threshold Bonus Depreciation to the federal bonus did not conform California provisions. depreciation There is an additional Mental Health Services Tax of 1% of is an additional Mental Health Services There Tax $1,000,000. for taxable income in excess of The tax rates and brackets for 2020 have not yet beenThe tax rates and released. The following table shows the 2019 marginal tax rates in tax rates the 2019 marginal table shows The following taxpayers: married filing joint effect for EisnerAmper 2020 Personal Tax Guide of 2017. and afewotherprovisions of theTax CutsandJobsAct application of like-kindexchangestoreal estateonly, the federallimitationonexcessbusinesslosses, 1,2019,California hasconformed with Effective January blind individuals. Florida also provides property tax tax blind individuals.Floridaalso provides property whohavenotremarriedand widowers andtolegally taxavailabletowidows $500 exemptionsfrom property In additiontothehomesteadexemption,there are from allnon-schooltaxes. fully taxable,andthethird $25,000of valueisexempt school districttaxes.Thesecond$25,000of valueis residence taxes,including isexemptfrom allproperty of thevalueof primary, ataxpayer’s permanent Florida homestead exemptionprovides $25,000 thatthefirst of taxes.The exemption from Floridaproperty aportion mayreceive owners Florida resident an property TaxProperty Exemptions incometax. Florida doesnotimposeapersonal Tax Rates | • • • • • • exceptions are thefollowing: California taxableincome.These nonconforming the TCJA are nottakenintoaccountindetermining deductions thathavebeendisallowedorlimitedunder changes since2015.Mostimportantly, manyitemized Florida Non-meal entertainment expensesare deductible Non-meal entertainment under IRCSec.199A California doesnothavea20% incomededuction Miscellaneous itemizeddeductionsare noteliminated Real estatetaxesare notlimitedto$10,000peryear Second homeinterest isstilldeductible deduction of interest Personal residence debtlimitisstill$1.1millionfor 162 qualified business assets. qualified businessassets. and notpermit immediateexpensingof certain from thenewfederallawrelated tobonusdepreciation presumed thatFlorida willlikelycontinuetodecouple taxable incomewasincreased bytheaddition.It is amount equaltoone-seventhof theamountbywhich mustsubtractfromtaxpayers thistaxableincomean year andforeachof thesixsubsequenttaxableyears, 1,2021.Forthetaxable 31, 2007,andbefore January December after placedinservice 169, forproperty toIRCSec.167,168(k)and pursuant purposes asbonusdepreciation forthetaxableyear 100% of anyamountdeductedforfederalincometax must add-backtotaxableincomeanamountequal related toregular andbonusdepreciation. Taxpayers Florida decouplesfrom thefederalIRCprovisions C corporationsare taxedinFlorida. Bonus Depreciation TCJA amendments. exceptions whichgenerallyremain unchangedbythe 1,2019wasadopted,butwithspecific effect onJanuary again in2019.TheIRC(withtheTCJA amendments)in to adopttheIRCasamendedannuallyanddidso For corporateincometaxpurposes,Floridacontinues Tax CutsandJobsActImpact parent. separate corporationsorentitiesfrom theScorporation Qualified subchapterSsubsidiariesare nottreated as income isnottaxed. incometax,otherScorporation not haveapersonal and passiveinvestmentincome.BecauseFloridadoes taxable Scorporationsisimposedonlyonbuilt-in gains whentheyarefor years liableforfederaltax.Tax on and doesnotimposetaxonScorporationsexcept Florida recognizes thefederalScorporationelection S Corporations deployed duringtheprevious calendaryear. members veteransandmilitary exemptions formilitary RETURN TORETURN TOC State Tax Issues
2020 0.75% 0.375% $390,000 and 2021 $1,180,000
2018 0.75% 0.375% $370,000 and 2019 $1,130,000 Total revenue minus $1 million (effective January minus $1 million revenue 1, Total 2014). federal obligations; from Dividends and interest Schedule C dividends; under IRC Sec. 78 and dividends royalties Foreign and IRC Secs. 951-964; Certain funds; and flow-through Other industry-specific exclusions. Total revenue multiplied by 70%; revenue Total (as defined Goods Sold minus Cost of revenue Total below); (as defined minus Compensation revenue Total below); or Item Due Threshold No Tax or wholesale) (retail Rate Tax Tax Rate (other than retail or wholesale) retail Rate (other than Tax Limit Compensation Deduction The taxable margin is based on total revenue and may is based on total revenue The taxable margin ways: the following of be calculated in one • • • • • • • • • Total revenue starts revenue amounts that with those revenue Total reportedwere which for federal income tax purposes following statutoryis then adjusted by subtracting the exclusions: Goods Sold deduction does not Costs of The Texas For although it is similar. the federal deduction, mirror Goods Sold generally includes purposes, Costs of Texas acquisition and production to the those costs related tangible personal property property. of and real entities that only sell services typically will not Taxable goods sold deduction. Note that other have a cost of allowances may be available for specific industries. 163 -
- RETURN TO TOC RETURN TO Texas ships (except single member LLCs), general partnershipsships (except single member LLCs), natural person, by a single trustsowned directly qualified under IRS Sec. 401(a), trusts exempt except under IRS Sec. 501(c)(9), unincorporated passive enti Franchise tax rates, thresholds and deduction limits varyFranchise tax rates, thresholds to the the rate that corresponds Use by report year. filing: year for which you are This tax is generally not imposed on sole proprietor This tax is generally not imposed on part an affiliatedNote that taxable entities that are of engaged in a unitarygroup business must file a using the same method combined franchise tax return all members. for to compute margin Texas Margins Tax Margins Texas on an entity’s a franchise tax based is, however, There imposed on most business entities. These margin entities generally include partnerships, limited lability certaincompanies, S corporations, C corporations, corporations and associations, trusts, professional certain and various other legal banks, joint ventures, entities. ties, certain natural persons grantor trusts, estates of unincorporated political committees and and escrows, certain companies. REIT and insurance | Rates Tax is no state income tax on individuals or There businesses. the TCJA related to expensing certain to expensing related depreciable the TCJA business assets. IRC Sec. 179 Expensing Sec. IRC JanuaryFor tax years beginning before 1, 2015, Florida taxpayers that incomeadd back to taxable required $128,000 of deductions in excess IRC Sec. 179 100% of addback each year for the of and deduct one-seventh seven years. placed in service For assets after 2014, for IRC Sec. 179 deductions. required no addbacks are January to the IRC as of conforms 1,Florida currently adopted the changes made by2018, and so it has EisnerAmper 2020 Personal Tax Guide claim anadditionalexemption of $10,000.Similarto Persons whoare atleast65orwhoare disabledmay may opttoallowthededuction aswell. tax,althoughothertypesof property taxingdistricts is typicallyonlyavailableagainsttheschooldistrict value from taxation. Note,however, thatthisexemption residence property least $25,000of theirtotalprimary toexemptat exemption, whichallowshomeowners The mostcommonexemptionisthehomestead taxes. property receive of oneormore exemptionsfrom their aportion Texas maybeeligibleto owners resident property country. taxinTexas Theproperty averagesalmost2%. Texas hassome of taxesinthe thehighestproperty TaxProperty Exemptions rehabilitation historicstructures. of certified development, cleanenergy projects, andforcertified including credits related toqualifiedresearch and There are severalcredits availableagainstthistax, deductions orcredits. goods soldorcompensationtakeanyothermargin method, thetaxpayermaynottakedeductcostof at arateof 0.331%.However, byelectingtheEZ the franchisetaxusingEZComputationmethod revenue of $20millionorless mayelecttocompute Alternatively, taxableentitieswithannualizedtotal payroll taxespaidbytheemployer. Note thatcompensationdoesnotinclude1099laboror retirement related benefits. compensationandmosthealthcareworkers’ and deductible forfederalincometaxpurposes,including are provided totheextenttheyare toallpersonnel This deductionalsoincludesthosebenefitsthat above. chart the taxableentity, subjecttothewagelimitnotedin andemployeesof officers, directors, partners owners, of Medicare ontheW-2for wagesthatare reported The Compensationdeductionisbasedontheamount 164 repealed. 1,2005,theTexasEffective January estatetaxwas Estate Tax locatedinaGovernor-declaredproperty disasterarea. taxexemptionof property provides atemporary taxrelated Constitutionalamendmentthat property On November5,2019,Texas approved voters a • • • • the state.Also,saleof locatedina real property a formula comparingdaysworkedwithinandoutside andotherearned income,using an allocationof salary state. Theincomesubjecttotaxisgenerallybasedon other statesasnonresidents are taxedbythatother Jersey, NewYork, Pennsylvania orTexas workingin Residents of California, Connecticut,Florida, New Nonresident Taxation for useinfuture years. credit,year’s theexcesscredit canbecarriedforward lacks sufficienttaxliabilityinanyyeartofullyutilizethat interest paidonthebondeachyear. Ifthebondholder bondholder anon-refundable taxcredit of 35%of the Build AmericaBonds(taxcredit type)provide the Bonds Build America | also available for certain military personnel: military also availableforcertain taxexemptionsandbenefitsare The followingproperty required tooffer thisexemption. the homesteadexemption,onlyschooldistrictsare OtherConsiderations military personnel. military Penalty forlatepaymentsmadebyactiveduty waivers and veteran’sExemptions related tocertain organizations; their survivors; disabledveteransand exemptionforpartially A partial spouses; surviving A totalexemptionforfullydisabledveteransandtheir RETURN TORETURN TOC State Tax Issues Other state tax credits are allowed for California allowed are tax credits Other state Note: Note: (not to another state income taxes paid for net residents alternative to California’s any tax comparable including California subject to the tax) on income also minimum if the other state allows is allowed income tax. No credit taxes paid to for net income a credit residents California include Arizona, states credit reverse These California. and Virginia. Indiana, Oregon Caution Residency in one jurisdiction, a residence Individuals who maintain in also have a residence but City, such as New York must be veryanother jurisdiction to avoid the careful both of resident strict rules that could make them a Generally, Tip 27). jurisdictions for tax purposes (see Tax abode in New place of if you maintain a permanent and Connecticut or Pennsylvania New Jersey, York, than 183 days in that state, you will be spend more that state even if your primary of taxed as a resident applies a similar is in another state. California residence unless you test using nine months as the threshold, that the time spent in the state was due to can prove a temporary or transitory In addition, the purpose. or York New of you as a resident domicile test treats New Jersey spend as little as 30 days even if you only there. in the state if you continue to be domiciled place which is“Domicile” is generally defined as the a facts using most central to your life and is determined test. and circumstances Or Inheritance Estate Taxes State Connecticut and Pennsylvania New Jersey, New York, impose an estate or inheritance tax on persons who are domiciled in the state or have property located in the state. Prior to 2018, New Jersey imposed both an Estate was eliminated The Estate Tax and Inheritance Tax. Tax do not starting Florida and Texas in 2018. California, have an estate or inheritance tax. See the chapter on estate and gift tax planning for a further discussion. Connecticut is the only state in the country that imposes a state gift tax. The gift tax is imposed if the Connecticut taxable gifts made amount of aggregate on or after January 1, 2005 is $2,000,000. For 2019 165 While Texas has no state income tax, its neighbor, has no state income tax, its neighbor, While Texas Pennsylvania has signed reciprocal agreements signed reciprocal has Pennsylvania New York State treats days worked at home for days worked treats State New York RETURN TO TOC RETURN TO Arkansas, does impose personal income tax on Texas Arkansas, does impose personal income tax on Texas exception. with one narrow who work there, residents have a Texas Arkansas and Texarkana, Texarkana, Exemption. Under this exemption, income City Border is exempt Arkansas Texarkana, of by residents earned by income tax and income earned Arkansas from working in the city of Texas, Texarkana, of residents Arkansas Arkansas is also exempt from Texarkana, Arkansas from Any other income earned Income Tax. is taxable to Arkansas. sources Note: Note: Note: Note: Ohio, Virginia,with Indiana, Maryland, New Jersey, will not under which one state Virginia and West to employertax employee compensation subject apply agreements withholding by the other states. These to employee compensation only and not to income from partnershipssole proprietorships, and other entities. New York taxes certain by a income received New York to a business, trade, profession related nonresident York, carried on within New or occupation previously income includes,whether or not as an employee. This not to to covenants but is not limited to, income related agreements. to termination compete and income related Note: Note: in the employee as days worked the convenience of qualify a day worked outside New York, as To New York. legitimate business was a that there you must prove state, such as you to be out of that required reason should keep a You or customer. meeting with a client diary your activities and with supporting of or calendar (e.g., airplane your whereabouts documents proving statements, bank statements and card tickets, credit your passport). nonresident state by a nonresident is typically subject to is typically by a nonresident state nonresident the gain on This includes state. nonresident tax by the apartment a cooperative the sale of by a nonresident to reduce allowed you are However, State. New York of based on the amount tax by a credit state your resident to limitations. state, subject tax paid to the nonresident EisnerAmper 2020 Personal Tax Guide 2019. 2019. or decedentwillberequired topayis$15millionfor The maximumamountof orestatetaxthatadonor gift match thefederalexemptionasfollows: through 2023andafter, itwillgraduallyincrease to this threshold increases to$3,600,000,andfor2020 2023+ –Sameasfederalexemption 2022 –$9,100,000 2021 –$7,100,000 2020 –$5,100,000 166 RETURN TORETURN TOC
Appendices 167 Appendicies RETURN TO TOC RETURN TO EisnerAmper 2020 Personal Tax Guide January 15,2021 January July 31,2020 June 15,2020 15,2020 January April 13,2020 April 1,2020 April 15,2020 September 30,2020 September 15,2020
October 15,2020 October 12,2020 December 31,2020 Note: There are additional filing requirements ifyouhave householdemployeesorifyouare abusinessowner andyoupayemployees Date and/or independentcontractors. Appendix A.
Individual Taxpayers 2020 FederalT
• • • • • • • • • • • • • • • • • • • • • Deadline T Treasury byOctober15,2020ifonextension. Pay finalinstallment of 2020estimatedtaxes. Take required IRAminimumdistributionfor2020. atraditionalIRA to aRothIRA. Convert Establish aKeogh ordefinedbenefitplanfor2020. Accelerate incomeifyouare inalowertaxbracket2020thanyouexpecttobe2021. Prepay expenses deductibleonyour2020return, ifapplicable,andyouwillbeinalowertaxbracket Make 2019profit-sharing Keogh plancontributionsandSEPcontributions,ifyourtax return isonextension. taxreturns, ifonextension. incometaxandgift File 2019individual File electronically 2019Foreign BankandFinancialAccounts(FBAR)intimetobereceived bythe taxreturnFile 2019income fortrusts,ifonextension. Make 2019money-purchase anddefinedbenefitplancontributions. estimatedtaxpaymentfor2020. Make third quarter (Form 5500)orextensionrequest.File Keogh planreport estimated taxpayment for2020. Make secondquarter File incometaxreturns fortrusts(orextensionrequests) andpaybalanceof 2019taxesdue. estimatedtaxpaymentfor2020(forindividualsandtrusts). quarter Make first Make 2019IRAcontributions. taxreturns (orextensionrequests)File individualincometaxandgift andpaybalanceof 2019taxesdue. ofFile electronically Foreign 2019Report Bankand Financial Accounts(FinCEN114)intimetobe Take IRA first required minimum distributionifyou reached age70½ Pay finalinstallment of 2019estimatedtaxes. received bytheTreasury byApril15,2020. in 2021,andtakecapitallossestooffset capitalgains. o ax Calendarfor 168 in2019.
RETURN TORETURN TOC
Appendices er 9,700.00 9,700.00 13,850.00 19,400.00 78,950.00 39,475.00 52,850.00 39,475.00 84,200.00 84,200.00 84,200.00 160,700.00 160,725.00 306,175.00 160,725.00 510,300.00 510,300.00 612,350.00 204,100.00 168,400.00 321,450.00 204,100.00 204,100.00 408,200.00 $ 0.00 $ 0.00 $ 0.00 $ 0.00 Of The Amount Ov
+ 12% 12% 10% 10% 10% 12% 10% 12% 37% 37% 37% 35% 32% 35% 22% 32% 22% 22% 32% 35% 24% 24% 24% 37% 22% 32% 35% 24%
+ + + + + + + + + + + + + + + + + + + + + + + + + + + + ax Is The T Single
169 Head of Household Head of 970.00 970.00 1,385.00 1,940.00 6,065.00 9,086.00 4,543.00 4,543.00 12,962.00 31,322.00 Married Filing Separately 14,382.50 14,382.50 45,210.00 93,257.00 28,765.00 32,748.50 32,748.50 82,354.75 65,497.00 46,628.50 46,628.50 153,798.50 152,380.00 164,709.50 $ 0.00 $ 0.00 $ 0.00 $ 0.00 ax Rate Schedule ax Rate Married Filing Jointly or QualifyingMarried Filing Jointly Widow(er)
er 78,950.00 39,475.00 39,475.00 52,850.00 84,200.00 84,200.00 84,200.00 $ 9,700.00 $ 9,700.00 160,700.00 160,725.00 160,725.00 306,175.00 612,350.00 510,300.00 510,300.00 204,100.00 204,100.00 204,100.00 321,450.00 168,400.00 408,200.00 $ 13,850.00 $ 19,400.00 But Not Ov
er Ov 9,700.00 9,700.00 13,850.00 19,400.00 78,950.00 39,475.00 39,475.00 52,850.00 84,200.00 84,200.00 84,200.00 160,700.00 160,725.00 306,175.00 160,725.00 510,300.00 510,300.00 612,350.00 204,100.00 204,100.00 204,100.00 168,400.00 321,450.00 2019 Federal T 2019 Federal 408,200.00 $ 0.00 $ 0.00 $ 0.00 $ 0.00 B. Appendix If Taxable Income Is: Income If Taxable
RETURN TO TOC RETURN TO EisnerAmper 2020 Personal Tax Guide
If Taxable IncomeIs: Appendix C. $ 0.00 $ 0.00 $ 0.00 $ 0.00 622,050.00 326,600.00 207,350.00 207,350.00 207,350.00 2020 FederalT 518,400.00 518,400.00 414,700.00 163,300.00 163,300.00 163,300.00 311,025.00 171,050.00 85,500.00 85,525.00 85,525.00 80,250.00 53,700.00 40,125.00 40,125.00 19,750.00 14,100.00 9,875.00 9,875.00 Ov er
But NotOv $ 19,750.00 622,050.00 326,600.00 207,350.00 207,350.00 207,350.00 $ 14,100.00 518,400.00 518,400.00 414,700.00 163,300.00 163,300.00 163,300.00 $ 9,875.00 $ 9,875.00 311,025.00 171,050.00 85,500.00 85,525.00 85,525.00 80,250.00 53,700.00 40,125.00 40,125.00 er
Married Filing Jointly or Qualifying Widow(er) Married FilingJointlyorQualifying ax RateSchedule $ 0.00 $ 0.00 $ 0.00 $ 0.00 154,793.50 156,235.00 167,307.50 66,543.00 45,926.00 83,653.75 47,367.50 47,367.50 97,735.00 14,605.50 14,605.50 Married FilingSeparately 31,830.00 33,271.50 33,271.50 13,158.00 29,211.00 9,235.00 6,162.00 4,617.50 4,617.50 1,975.00 1,410.00 987.50 987.50 Head of Household 170
Single The T ax Is + + + + + + + + + + + + + + + + + + + + + + + + + + + +
24% 24% 24% 24% 32% 35% 22% 22% 35% 22% 22% 32% 35% 32% 32% 35% 37% 37% 37% 37% 12% 10% 12% 10% 12% 10% 12% 10% +
Of TheAmountOv $ 0.00 $ 0.00 $ 0.00 $ 0.00 RETURN TORETURN TOC 326,600.00 622,050.00 207,350.00 207,350.00 207,350.00 518,400.00 518,400.00 414,700.00 163,300.00 163,300.00 163,300.00 311,025.00 171,050.00 85,500.00 85,525.00 85,525.00 80,250.00 53,700.00 40,125.00 40,125.00 19,750.00 14,100.00 9,875.00 9,875.00 er Appendices A P 31% 27% 38% 35% 25% 29% 23% 23% 40% Resident 3.07%(e)
NJ 31% 31% 37% 33% 39% 35% 48% 42% 43% ax on net investment income. Resident 10.75%(d)
CT 31% 27% 27% 39% 29% 35% 33% 42% 44% e Contribution T Resident 6.99%(c) s and 37% or 35% federal income tax rate and MAGI s and 37% or 35% federal income tax rate and MAGI
(b) CA 41% 37% 50% 35% 33% 39% 33% 48% 45% 13.3% Resident 171
C 41% 37% 50% 35% 33% 39% 33% 48% 45% NY 12.696% Resident s with taxable income of more than $800,000, the maximum tax rate is 6.99%. more s with taxable income of
S 31% 41% 37% 35% 29% 33% 29% 46% 44% NY Resident 8.82%(a)
f 10.75% for New Jersey applies to taxable income in excess of $5,000,000. If your taxable income is less f 10.75% for New Jersey applies to taxable income in excess of 37% 35% 32% 28% 26% 20% 22% 20% 24% AR% nia rate includes the 1% Mental Health Service Tax. The top rate for married filing jointly taxpayers with nia rate includes the 1% Mental Health Service Tax. V Federal dinary exceeds income (“MAGI”) income tax rate for federal is 37%, 35%, or 32% and modified adjusted gross
2019 Maximum Effective Rates Effective 2019 Maximum
exceeds $200,000 for single, you may be subject to an additional 3.8% Medicar for Philadelphia residents and 3.4481% for nonresidents. and for Philadelphia residents taxable income of more than $1,145,960 is 12.3%. more taxable income of than $5,000,000, your maximum tax rate is 8.97%. The maximum Califor For Connecticut married filing jointly taxpayer The maximum tax rate o The P For NY If the maximum or Similarly, if you meet these MAGI thresholds, long term capital gains may be taxed at 23.8%. long term thresholds, if you meet these MAGI Similarly, $250,000 for married filing joint, $125,000 for married filing separate taxpayer $2,155,350, the rate is 6.85%. D.
Appendix
Effective Tax Rates If Not In The AMT OrdinaryTax Rates Income Effective These effective tax rates do not include payroll and self-employment taxes or the 4% New York City Unincorporated Business Tax. York City Unincorporated Business taxes or the 4% New and self-employment These effective tax rates do not include payroll Note: Long-Term Capital Gains And Qualifying Dividends If In The AMT Long-Term Effective Tax Rates If In The AMT Ordinary If In Tax Rates Income Effective Long-Term Capital Gains And Qualifying Dividends If Not In The AMT Long-Term Maximum Tax Rates
(b) (c) (d) (e) 3.8712% incomeof taxonwagesandself-employment Philadelphia ennsylvania maximumratedoesnotincludetheCityof (a) Iftaxableincomeisunder taxableincomeover$2,155,350formarriedfilingjointly. S, themaximumtaxrateisapplicablefor 26% Bracket 20% Bracket 20% Bracket* 28% Bracket 24% Bracket 22% Bracket 32% Bracket* 37% Bracket* 35% Bracket* * RETURN TO TOC RETURN TO EisnerAmper 2020 Personal Tax Guide * 32% Bracket* 35% Bracket* 37% Bracket* 28% Bracket 20% Bracket* 22% Bracket 24% Bracket 20% Bracket 26% Bracket ennsylvania maximumratedoesnotincludetheCityofennsylvania Philadelphiataxon wagesandself-employment incomeof 3.8712% (e) (d) (c) S, themaximumtaxrateisapplicablefortaxableincomeover$2,155,350married filingjointly. Iftaxableincome isunder (b) (a)
Long-Term DividendsIf InTheAMT CapitalGainsAndQualifying Effective Income Tax Rates IfInTheAMTOrdinary Long-Term DividendsIf NotInTheAMT CapitalGainsAndQualifying Rates Maximum Tax Note: Theseeffectivetaxratesdonotinclude payroll andself-employment taxesorthe4%New York CityUnincorporated Business Tax. Effective Income Tax Rates IfNotInTheAMTOrdinary
Appendix
E. $2,155,350, therateis6.85%. $250,000 formarriedfilingjoint,$125,000separate taxpayer Similarly, ifyoumeettheseMAGI thresholds, longterm capital gainsmaybetaxedat23.8%. If themaximumor The P The maximumtaxrateo For Connecticutmarriedfilingjointlytaxpayer The maximumCalifor For NY than $5,000,000,yourmaximumtaxrateis8.97%. taxable incomeof more than$1,145,960is12.3%. for Philadelphiaresidents and3.4481%fornonresidents. exceeds $200,000forsingle,youmaybesubjecttoanadditional3.8% Medicar
2020 MaximumEffectiveRates
dinary incometaxrateforfederalis37%,35%,or32%andmodifiedadjustedgross income(“MAGI”) exceeds dinary Federal V nia rate includes the 1% Mental Health Service Tax.nia rateincludesthe1%MentalHealthService with Thetoprateformarriedfilingjointlytaxpayers AR% 24% 20% 26% 28% 20% 22% 32% 35% 37% f 10.75% for New Jersey appliestotaxableincomeinexcessoffor NewJersey f 10.75% $5,000,000.Ifyourtaxableincomeisless
8.82%(a) Resident NY 44% 46% 29% 35% 29% 33% 37% 41% 31% S
s withtaxableincomeof more than$800,000,themaximumtaxrateis6.99%. Resident 12.696% NY 45% 48% 33% 39% 33% 35% 50% 37% 41% C
172 Resident 13.3% 45% 48% 33% 39% 33% 35% 50% 37% 41% CA (b)
s and37%or35%federalincometaxrateMAGI 6.99%(c) Resident e ContributionT 44% 42% 33% 35% 29% 39% 27% 27% 31% CT
10.75%(d) Resident ax onnetinvestmentincome. 43% 42% 48% 35% 39% 33% 37% 31% 31% NJ
3.07%(e) Resident 40% 23% 23% 29% 25% 35% 38% 27% 31% P RETURN TORETURN TOC A Appendices A A N/A P N/A SAF N/A P N/A Apr 15 SAF N/A N/A SAF N/A N/A Sept. 30 July 14 Sept. 15 N/A SAF May 15 Apr 15 N/A
months after the
½
N/A NJ N/A SAF N/A NJ N/A Apr 15 SAF N/A N/A SAF N/A N/A Sept. 15 SAF Oct. 15 N/A Apr 15 SAF Apr 15 N/A
. 2 . 2
N/A FL N/A SAF N/A FL N/A Apr 1 N/A N/A N/A N/A N/A N/A N/A Nov Nov Dec. 1 N/A May 1 May 1 June 3
. 16 . 30
N/A CT N/A SAF N/A CT N/A SAF SAF N/A N/A SAF N/A N/A Sept. 16 Nov SAF Nov SAF May 15 SAF SAF
N/A CA N/A SAF N/A CA N/A SAF SAF N/A N/A SAF N/A N/A Oct. 15 Oct. 15 SAF SAF SAF SAF SAF SAF
N/A NY N/A SAF N/A NY N/A SAF SAF** N/A N/A SAF** N/A N/A SAF Oct. 15 Oct. 15 SAF SAF SAF SAF SAF
tate Tax Returns Returns tate Tax 173
ch 16 ch 16 ch 16 f the fourth month following the close of the tax year. For C corporations with fiscal years ending f the fourth the tax year. month following the close of Federal October 15 September 15 October 15 Mar July 31 Federal April 15 No extensions available October 15 October 15 September 15 April 15 Mar April 15 September 30 October 15 September 15 November 16 April 15 Mar May 15 April 15
date is the 15th date of the fourth month after the year-end. The extended due date is 5 The extended due date the fourth date is the 15th date of month after the year-end. tic six-month extension, easing the administrative burden on exempt organizations by simplifying on exempt organizations the process tic six-month extension, easing the administrative burden eturns, FBARs do not have a next-business-day rule if the deadline falls on a Saturday, Sunday, or legal holiday. Sunday, rule if the on a Saturday, deadline falls FBARs do not have a next-business-day eturns,
Due Dates* 2019 Federal and S 2019 Federal
F. Appendix
month extension. of extending the Form 990 returns, and eliminating the need to request a second extension after months. and eliminating the need to request three 990 returns, extending the Form of until 2026. Corporations will be allowed an automatic six-month extension, except the five-month extension until on June 30, this change is deferred original due date. Trusts are always on a calendar-year basis. always on a calendar-year are original due date. Trusts P Note that unlike tax r The extension will be a single, automa For fiscal year estates, the original due For C corporations, the due date is the 15th day o 2026. September 15 will remain for calendar year corporations until 2026, and corporations with a June 30 year-end will get a seven-month extension until 2026, and corporations with a June 30 year-end for calendar year corporations until September 15 will remain
Information Returns (i.e., W-2 and 1099s) Returns Information Individual Information Returns (i.e., W-2 and 1099s), Forms W-2 and certain Returns Information to IRS/SSA January 1099-MISC due due to date they are 31 (same Individual Return Type Return Not on Extension (Assuming calendar year-end for all entities) calendar year-end (Assuming Not on Extension Type Return Extension Requested (Assuming calendar year-end for all entities) (Assuming calendar year-end Requested Extension Form 5500 Form FBAR (a) Partnership (e) Form 5500 Form FBAR (a) Partnership (e) the taxpayer). All other Forms 1099 due Februarythe taxpayer). All other Forms 31 if filed electronically. 28; March C-Corporation (d) C Corporation (d) (e) andwillhaveamaximumsix of theirtaxyear, monthafterof thethird theclose bythe15thday returns artnerships tofiletheir willberequired (a) (b) (c) (d) S-Corporation S Corporation 3520-A 3520 3520-A 3520 Tax-Exempt (b) Tax-Exempt Trust & Estate (c) Trust Tax-Exempt (b) Tax-Exempt Trust & Estate (c) Trust *Revised due dates resulting from the Surface Transportation & Veterans Health Care Choice Improvement Act of 2015 Act of Choice Improvement Health Care & Veterans the Surface from Transportation *Revised due dates resulting due date. due date is the same as the federal return **”SAF” means the state return RETURN TO TOC RETURN TO EisnerAmper 2020 Personal Tax Guide Thomas Earley Thomas Cardinale Jeffrey Chazen Jay Bakst Jordan Amin Jeffrey Parker Jack Meola Jeffrey Kelson Jeffrey Hess Ana Hung Alan Goldberg Arthur Cohen Angela Chen Tax andPrincipals Partners Gerard O’Beirne Gary Bingel Walter Pagano Steve Kreinik Stephanie Hines Simcha David Stanley Barsky Carolyn Dolci Christopher Colyer Christian Bekmessian Christopher Loiacono Murray Alter Frank Pileggi Robert Mirsky Peter Michaelson Lester Marks Brent Lipschultz Robert Levin Michael Laveman Lisa Knee Howard Klein Brian Kelleher Eric Kea Michael Hadjiloucas Karen Goldberg David Gibson Miri Forster Paul Dougherty Dane Dickler Katie Brandtjen Paul Bleeg Marie Arrigo Peter Alwardt Appendix G.
Services Partners andPrincipals EisnerAmper T
PARTNERS AND PRINCIPALS EISNERAMPER TAX AND PRIVATE BUSINESS SERVICES (215) 881-8883 (732) 243-7457 (212) 891-4146 (732) 243-7302 (732) 243-7937 (212) 891-4062 (212) 891-6097 (212) 891-6880 (212) 418-8427 (212) 891-6825 (212) 891-4078 (732) 243-7306 (732) 243-7288 (212) 891-4188 (212) 891-8043 (212) 891-4236 (732) 243-7304 (212) 891-4056 (732) 243-7281 (212) 891-4049 (786) 866-3525 (212) 891-6046 (212) 891-8050 (347) 735-4724 (732) 243-7301 (732) 243-7298 (212) 891-4162 (732) 243-7289 (212) 891-4005 (212) 891-4150 (732) 243-7308 (732) 243-7287 (732) 243-7834 (415) 357-4228 (415) 357-4221 (212) 891-4232 (212) 891-6022 (212) 891-6092 (215) 881-8812 +44 203-608-4649 (212) 891-4164 (212) 891-4083 (212) 891-8094 (212) 891-4004 (212) 891-8750 (212) 891-4015 ax andPrivateBusiness
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[email protected] [email protected] [email protected] [email protected] [email protected] [email protected] [email protected] [email protected] [email protected] [email protected] [email protected] [email protected] [email protected] [email protected] [email protected] [email protected] [email protected] [email protected] [email protected] [email protected] [email protected] [email protected] [email protected] [email protected] [email protected] [email protected] [email protected] [email protected] [email protected] [email protected] [email protected] [email protected] [email protected] [email protected] [email protected] [email protected] [email protected] [email protected] [email protected] [email protected] [email protected] [email protected] [email protected] [email protected] [email protected] [email protected] RETURN TORETURN TOC Appendices [email protected] [email protected] [email protected] [email protected] [email protected] [email protected] [email protected] [email protected] [email protected] [email protected] [email protected] [email protected] [email protected] [email protected] [email protected] [email protected] [email protected] [email protected] [email protected] [email protected] [email protected] [email protected] [email protected] [email protected] [email protected] [email protected] [email protected] [email protected] [email protected] [email protected] [email protected] [email protected] [email protected] [email protected] [email protected] [email protected] [email protected] [email protected] [email protected] [email protected] [email protected] [email protected] [email protected] [email protected] 175
ax and Private Business Business ax and Private (212) 891-4098 (347) 735-4607 (347) 735-4609 (516) 864-8811 (215) 881-8867 (215) 881-8806 (215) 881-8871 (732) 243-7294 (732) 243-7790 (212) 891-4135 (732) 243-7271 (516) 864-8886 (215) 881-8107 (347) 735-4602 (732) 243-7303 (732) 243-7559 (305) 371-6200 (415) 357-4227 (212) 891-4048 (732) 243-7305 (212) 891-4235 (516) 864-8848 (212) 891-4070 (415) 357-4220 (516) 864-8855 (305) 371-6200 (212) 418-8445 (347) 735-4671 (786) 866-3534 (732) 243-7998 (212) 891-4022 (212) 891-4069 (215) 881-8108 (732) 243-7201 (212) 891-4075 (609) 250-4821 (212) 891-4054 (212) 891-4064 (305) 371-6200 (305) 371-6200 (732) 243-7560 (732) 243-7291 (732) 243-7292 (212) 891-4087 EISNERAMPER TAX AND PRIVATE BUSINESS SERVICES SERVICES BUSINESS PRIVATE AND TAX EISNERAMPER PRINCIPALS AND PARTNERS
EisnerAmper T EisnerAmper Services Partners and Principals Partners Services
G. Appendix Private Business ServicesPrivate Partners and Principals Matthew Shmanske Lisë Stewart Evan Waxman Mark Meinberg Mulhearn Kelly Edward Opall Dawn Rosoff Dan Heller Brian Karnofsky Edward Lifshitz David Fields Daniel Gibson Harold Goldman Barry Gould Mike Aversa Lois Clinco Davis Roger Neil Tipograph Michael Torhan Weissenberg Kenneth Michael Sadler David Sloan Murray Solomon Barbara Taibi Laura Ross Curt Rosner Carey Gertler Sol Zimmerman Steve Schaeffer Steve Stephen Farbish Stephen Scott Testa Sidney Schwartz William Timlen Gary Master Gerard Abbattista Vijay Shah Tax Partners and Principals Tax Arthur Unger Jeffrey Holt John Horvath Jon Zefi Joel Zbar Tim O’Rourke Tony Faugno Tony Timothy Speiss RETURN TO TOC RETURN TO | 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.
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