Tax Planning Guide

2016 - 2017 TAX PLANNING GUIDE

YEAR-ROUND STRATEGIES TO MAKE THE TAX LAWS WORK FOR YOU For tax planning, the only certainty is uncertainty

Last December, many valuable tax breaks were made permanent by the Protecting Americans from Tax Hikes Act of 2015 (the PATH Act). As a result, tax planning in 2016 is a little easier than it has been in recent years.

But there are some tax breaks that the PATH Act only temporarily extended, in many cases only through Dec. 31, 2016. And, even though many tax law provisions are now “permanent,” this simply means that they don’t have expiration dates. With tax reform still on Congress’s agenda and a new President entering the White House in 2017, some major changes could be on the horizon.

So in your 2016 planning, don’t count on the tax regime remaining the same indefinitely. In other words, the only certainty in tax planning is uncertainty.

What does this all mean? Tax planning in 2016 is as important as ever. This guide provides an overview of some key tax provisions you need to be aware of and offers a variety of strategies for minimizing your taxes. But there isn’t space to touch on all of the available tax-saving opportunities. So please contact your tax advisor to learn exactly which strategies will work best for you.

Contents INCOME & DEDUCTIONS...... 2 FAMILY & EDUCATION...... 6 INVESTING...... 10 BUSINESS...... 14 RETIREMENT...... 22 ESTATE PLANNING...... 26 TAX RATES...... 30 Timing income and deductions to your tax advantage

sually it makes tax sense to accelerate as many deductible expenses into the current tax year as you can and defer income to Uthe next year to the extent possible. This can reduce current-year tax, deferring tax to future years. In some cases it may even permanently lock in tax savings. But there are also situations where this strategy could be costly. To time income and deductions to your tax advantage, you must consider the potential impact on your particular situation.

Alternative minimum tax When timing income and deductions, first consider the AMT — a sepa- rate tax system that limits some deductions and disallows others, such as:

n State and local income tax deductions, n Property tax deductions, and n Miscellaneous itemized deductions subject to the 2% of adjusted gross income (AGI) floor, including investment advisory fees and unreimbursed employee business expenses.

It also treats certain income items differently, such as incentive stock option exercises. You must pay the AMT if your AMT liability exceeds your regular tax liability. See Chart 7 on page 31 for AMT rates and exemptions, and work with your tax advisor to project whether you could be subject to the AMT this year or next. You may be able to time income and deductions to avoid the AMT, or at least reduce its impact.

Home-related breaks INCOME & DEDUCTIONS Consider both deductions and exclusions:

Property tax deduction. Before paying your bill early to accelerate this itemized deduction into 2016, review your AMT situation. If you’re subject to the AMT this year, you’ll lose the benefit of the deduction for the prepayment.

Mortgage interest deduction. You generally can deduct interest on up to a combined total of $1 million of mortgage debt incurred to purchase, 2 build or improve your principal residence and a second residence. Points paid related to your principal residence also may be deductible.

Home equity debt interest deduction. Interest on home equity debt used for any purpose (debt limit of $100,000) may be deductible. So consider using a home equity loan or line of credit to pay off credit cards or auto loans, for which interest isn’t deductible and rates may be higher. Warning: If home equity debt isn’t used for home improvements, the interest isn’t deductible for AMT purposes.

Mortgage insurance premium deduction. This has been extended through Dec. 31, 2016. If you can afford to make additional principal payments this year so you won’t have to maintain mortgage insurance next year, you may want to do so.

Home office deduction. If your use of a home office is for your employer’s benefit and it’s the only use of the space, you generally can deduct a portion of your mortgage interest, property taxes, insurance, utilities and certain other expenses, and the depreciation allocable to the space. Or you may be able to use the simplified option for claiming the deduction. (Contact your tax advisor for details.) For employees, home office expenses are a miscellaneous itemized deduction, and you’ll enjoy a tax benefit only if these expenses plus your other miscellaneous itemized expenses exceed 2% of your AGI. (If you’re self-employed, see page 21.)

Rental income exclusion. If you rent out all or a portion of your principal residence or second home for less than 15 days, you don’t have to report the income. But expenses directly associated with the rental, such as advertising and cleaning, won’t be deductible.

Home sale gain exclusion. When you sell your principal residence, you can exclude up to $250,000 ($500,000 for married couples filing jointly) of gain if you meet certain tests.Warning: Gain that’s allocable to a period of “nonqualified” use generally isn’t excludable.

Home sale loss deduction. Losses on the sale of any personal residence aren’t deductible. But if part of your home is rented out or used exclusively for your business, the loss attributable to that portion may be deductible.

Debt forgiveness exclusion. This break for homeowners who received debt forgiveness in a foreclosure, short sale or mortgage workout for a principal residence is scheduled to expire Dec. 31, 2016.

Energy-related breaks. A wide variety of breaks designed to encour- age energy efficiency and conservation have been extended through Dec. 31, 2016. Consult your tax advisor for details.

Charitable donations Donations to qualified charities are generally fully deductible for both regular tax and AMT purposes, and they may be the easiest deductible INCOME & DEDUCTIONS expense to time to your tax advantage. For large donations, discuss 3 with your tax advisor which assets to give and the best ways to give them. For example:

Appreciated stock. Appreciated publicly traded stock you’ve held more than one year can make one of the best charitable gifts. Why? Because you can deduct the current fair market value and avoid the capital gains tax you’d pay if you sold the property. Warning: Donations of such property are subject to tighter deduction limits. Excess contributions can be carried forward for up to five years.

CRTs. For a given term, a charitable remainder trust pays an amount to you annually (some of which generally is taxable). At the term’s end, the CRT’s remaining assets pass to one or more charities. When you fund the CRT, you receive an income tax deduction. If you contribute appreciated assets, you also can minimize and defer capital gains tax. You can name someone other than yourself as income beneficiary or fund the CRT at your death, but the tax consequences will be different.

Tax-advantaged saving for health care You may be able to save taxes by contributing to one of these accounts:

HSA. If you’re covered by qualified high-deductible health insurance, you can contribute pretax income to an employer-sponsored Health Savings Account — or make deductible contributions to an HSA you set up yourself — up to $3,350 for self-only coverage and $6,750 for family coverage for 2016. Plus, if you’re age 55 or older, you may contribute an additional $1,000. HSAs can bear interest or be invested, growing tax-deferred similar to an IRA. Withdrawals for qualified medical expenses are tax-free, and you can carry over a balance from year to year.

FSA. You can redirect pretax income to an employer-sponsored Flexible Spending Account up to an employer-determined limit — not to exceed $2,550 in 2016. The plan pays or reimburses you for qualified medical expenses. What you don’t use by the plan year’s end, you generally lose — though your plan might allow you to roll over up to $500 to the next year. Or it might give you a 21/2-month grace period to incur expenses to use up the previous year’s contribution. If you have an HSA, your FSA is limited to funding certain “permitted” expenses.

Medical expense deduction If your medical expenses exceed 10% of your AGI, you can deduct

INCOME & DEDUCTIONS the excess amount. Eligible expenses may include:

n Health insurance premiums, n Long-term-care insurance premiums (limits apply), n Medical and dental services, and n Prescription drugs.

Mileage driven for health care purposes — at 19 cents per mile for 2016 — also can be deducted. 4 Case Study I Benefiting from the sales tax deduction

Luke tells his tax advisor that he’s thinking about buying a new car. He asks if there’s any tax advantage to doing so this year. His tax advisor explains that the PATH Act permanently extended the break, allowing taxpayers to take an itemized deduction for state and local sales taxes in lieu of state and local income taxes. The deduction is always valuable to those who reside in states with no or low income tax, and it can also benefit taxpayers in other states who purchase a major item, such as a car or boat. But because the break is now permanent, there’s no urgency to make a large purchase this year to take advantage of it.

Luke’s advisor estimates that Luke’s state and local income tax liability for 2016 will be $3,000 and that, based on what he expects to spend on his car, the sales tax would also be $3,000. That may sound like a wash, but the advisor reminds Luke that, if he elects to deduct sales tax, he can deduct all of the sales tax he pays during the year, not just the tax on the car purchase. His deduction, other than the amount for the car, can be determined by using an IRS sales tax calculator.

Consider bunching nonurgent medical procedures (and any other services and purchases whose timing you can control without negatively affecting your or your family’s health) into one year to exceed the 10% floor. Taxpayers age 65 and older enjoy a 7.5% floor through 2016 for regular tax purposes but are subject to the 10% floor for AMT purposes. These taxpayers might particularly benefit from bunching expenses into 2016 to take advantage of the lower floor before it expires.

If one spouse has high medical expenses and a relatively lower AGI, filing separately may allow that spouse to exceed the AGI floor and deduct some medical expenses that wouldn’t be deductible if the couple filed jointly.

Limit on itemized deductions If your AGI exceeds the applicable threshold, certain deductions are reduced by 3% of the AGI amount that exceeds the threshold (not to exceed 80% of otherwise allowable deductions). For 2016, the thresholds are $259,400 (single), $285,350 (head of household), $311,300 (married filing jointly) and $155,650 (married filing separately).

If your AGI is close to the threshold, AGI-reduction strategies (such as contributing to a retirement plan or HSA) may allow you to stay under it. If that’s not possible, consider the reduced tax benefit of the affected deductions before implementing strategies to accelerate or defer deductible expenses. The limitation doesn’t apply, however, to deductions for medical

expenses, investment interest, or casualty, theft or wagering losses. ❖ INCOME & DEDUCTIONS 5

aising children and helping them pursue their educational aising children and helping own — can be highly rewarding. But goals — or pursuing your of tax breaks can a variety Fortunately, it also can be expensive.

offset some of the costs. IRAs can be perfect for teenagers because they likely will have many years to let their accounts grow tax-deferred or tax-free. The 2016 contribution limit is the lesser of $5,500 or 100% of earned income. IRAs for teens IRAs for A teen’s traditional IRA contributions typically are deductible, but A teen’s distributions will be taxed. Roth IRA contributions aren’t deductible, but qualified distributions will be tax-free. Choosing a Roth IRA is Child care expenses Child care child care costs: A couple of tax breaks can help you offset these credit. For children under age 13 or other qualifying dependents, Tax of your dependent careyou may be eligible for a credit for a percentage for one dependentexpenses. Eligible expenses are limited to $3,000 reduce the creditand $6,000 for two or more. Income-based limits (See Chart 1.) percentage but don’t phase it out altogether. employer-sponsored an to pretax $5,000 up to can contribute You FSA. The plan pays orchild and dependent care Flexible Spending Account. reimburses you for these expenses. Tax credits reduce your tax bill dollar-for-dollar, so make sure you’re dollar-for-dollar, credits reduce your tax bill Tax child under age 17 at taking every credit you’re entitled to. For each may be able to claim a $1,000 child credit. you the end of the year, credit — or If you adopt in 2016, you may qualify for an adoption assistance for an income exclusion under an employer adoption These Warning: program. Both are up to $13,460 per eligible child. taxpayers. (See Chart 1.) credits phase out for higher-income Child and adoption credits raising kids less costly kids less raising tax breaks make make breaks tax Family and education and education Family R

FAMILY & EDUCATION 6 in linewithwhatyou’dpaynonfamilyemployeesforthesamework. other taxbenefitsmayapply. Warning: Thechildrenmustbepaid hiring them.Asthebusinessowner, youcandeducttheirpay, and If theydon’thaveearnedincomeandyouownabusiness,consider eligible tocontribute.Butkeepthegifttaxinmind.(Seepage26.) earned money, considergivingthemuptotheamountthey’re If yourchildrenorgrandchildrendon’twanttoinvesttheirhard- at averylowrate,sotheRothwilltypicallystillbebetteranswer. IRA contribution.Evenabovethatamount,theteenprobablyistaxed or shewilllikelygainnobenefitfromtheabilitytodeductatraditional standard deduction($6,300 for 2016 for single taxpayers), because he typically ano-brainerifteendoesn’tearnincomethatexceedsthe Keep thisinmindbeforetransferringincome-generatingassetstothem. parents’ marginalrate,ifhigher, ratherthantheirowntypicallylow rate. tax, anyunearnedincomebeyond$2,100(for2016)istaxedattheir of theirownsupportfromearnedincome).Forchildrensubjecttothe students underage24(unlesstheprovidemorethanhalf The “kiddietax”appliestochildrenunderage19andfull-time “Kiddie tax” Are you eligiblefor these2016tax breaks? CHART 1 2 1 Child credit one eligiblechild. Assumes onechild.Thephaseoutendis higherforfamilieswithmorethan above $43,000. out altogether, buttheminimum creditpercentageof20%applies toAGIs The phaseoutisbased onAGIratherthanMAGI.Thecredit doesn’tphase contribution ESA Adoption credit credit Opportunity American care credit dependent Child or Learning credit Lifetime deduction loan interest Student Tax break

2 1 $ $ $ $ $ $ $ 201,920 15,000 75,000 95,000 80,000 55,000 65,000 Single filer – – – – – – – Modified adjustedgross income phaseoutrange $ $ $ $ $ $ $ 110,000 241,920 43,000 95,000 90,000 65,000 80,000 $ $ $ $ $ $ $ 110,000 190,000 201,920 160,000 111,000 130,000 15,000 Joint filer – – – – – – – $ $ $ $ $ $ $ 130,000 220,000 241,920 180,000 131,000 160,000 43,000

7 FAMILY & EDUCATION

A special break for 529 plans allows you to front-load five years’ A special break for 529 to a $70,000 worth of annual gift tax exclusions and make up your spouse). contribution (or $140,000 if you split the gift with You can control the account, even after the child is of legal age. can control the You The plans usually offer high contribution limits, and there are no The plans usually offer income limits for contributing. or no beneficiary age limit for contributions generally There’s distributions. Although contributions aren’t deductible for federal purposes, any aren’t deductible Although contributions do offer breaks for contributing.) (Some states growth is tax-deferred. You can make tax-free rollovers to another qualifying family member. can make tax-free You mandatory fees, books, supplies, computer equipment, software, books, supplies, computer mandatory fees, income-tax-freeboard) are and room generally, and, Internet service typically for state purposes as well, thusfor federal purposes and a permanent savings. making the tax deferral Distributions used to pay qualified expenses (such as tuition, used to pay qualified Distributions

The biggest downsides may be that your investment options — and The biggest downsides may be that your investment when you can change them — are limited. If you have children in college now, are currently in school yourself or are If you have children in college now, paying off student loans, you may be eligible for a credit or deduction: American Opportunity credit. The tax break covers 100% of the first $2,000 of tuition and related expenses and 25% of the next $2,000 of expenses. The maximum credit, per student, is $2,500 per year for the first four years of postsecondary education. Education credits and deductions Education credits ESAs to 529 savings Coverdell Education Savings Accounts are similar federal purposes, plans in that contributions aren’t deductible for used to but plan assets can grow tax-deferred and distributions One of the pay qualified education expenses are income-tax-free. aren’t limited biggest ESA advantages is that tax-free distributions and secondary to college expenses; they also can fund elementary want to fund such school costs. ESAs are worth considering if you how and where expenses or would like to have direct control over your contributions are invested. phased out based on it’s and But the $2,000 contribution limit is low, in an ESA when theincome. (See Chart 1 on page 7.) Amounts left within 30 days,beneficiary turns age 30 generally must be distributed 10% penalty. and any earnings may be subject to tax and a n n n n n n n If you’re saving for college, consider a Section 529 plan. You can can You 529 plan. a Section college, consider saving for If you’re or tuition rates current to secure tuition program a prepaid choose college expenses: savings plan to fund a tax-advantaged 529 plans

FAMILY & EDUCATION 8 tax treatment is similar to that of Section 529 college savings plans. who becameblind ordisabledbeforeage26.Forfederal purposes, advantaged wayto fundqualifieddisabilityexpenses forabeneficiary Achieving aBetterLifeExperience (ABLE) accountsofferatax- ABLE accounts child can’ttaketheexemption). you mustforgoyourdependencyexemption forhimorher(andthe child mightbeeligible.Butifyourdependent childclaimsthecredit, Chart 1onpage7.)Ifyourincomeistoohighforyoutoqualify, your Warning: Income-basedphaseoutsapplytothesebreaks.(See may beabletodeducttheinterest.Thelimitis$2,500pertaxreturn. Student loaninterestdeduction.Ifyou’repayingoffstudentloans,you a credit.Thisdeductionhasbeenextendedthrough2016. of qualifiedhighereducationtuitionandfeeswillsavemoretaxthan Tuition andfeesdeduction.Insomecases,deductingupto$4,000 Learning credit(upto$2,000pertaxreturn). expenses beyond the first four years, you may benefit from the Lifetime Lifetime Learningcredit.Ifyou’repayingpostsecondaryeducation $163,800 $90,000 education expenses. free, aslongalldistributionsareusedtopayforqualified And the$73,800ofgrowthinherplanwillbecompletelytax- When Sophieturnsage18,herplanwillbeworth$163,800. on herbirthdayeachyearthroughage17. with a$5,000contribution,andtheyputinanother When Sophieisborn,herparentsfunda529savingsplan They canbe—especiallyifyoustartearly: tax-deferred growthandtax-freedistributionsreallyworthit? tions, andtheplanscomewithalotofrestrictions.Aretheir 529 savingsplansdon’tofferafederaldeductionforcontribu- Tax-free savings for education addup Case StudyII of futureresults.Thefigurespresumea6%ratereturn. Note: Thisexampleisforillustrativepurposesonlyandisn’taguarantee Total contributionsmadebyparents Balance atage18

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9 FAMILY & EDUCATION

ax planning for investments demands careful thought. You demands careful thought. You ax planning for investments of your investments as you must consider the tax consequences investment your propel concerns tax let not but sell, and buy

decisions. Your investment goals, time horizon, risk tolerance, factors goals, time horizon, risk tolerance, factors investment decisions. Your charges that apply to related to the investment itself, and fees and Nevertheless, into play. buying and selling securities also should come a look at what you need to know. tax factors are important. Here’s 12 months. The applicable rate depends on your income level and12 months. The applicable rate depends on your the type of asset. (See Chart 2 on page 13.) it more than a year Holding on to an investment until you’ve owned are some other may help substantially cut tax on any gain. Here tax-saving strategies related to timing: determine capital gains tax Use unrealized losses to absorb gains. To gains are netted against any realized capital realized capital liability, can offset onelosses. Both long- and short-term gains and losses in some big gains during the year and want If you’ve cashed another. before year end look for unrealized to reduce your 2016 tax liability, to offset your gains.losses in your portfolio and consider selling them wash sales. If you want to achieve a tax loss with minimal change Avoid asset allocation, keep in mind the wash sale rule. It in your portfolio’s prevents you from taking a loss on a security if you buy a substantially identical security (or an option to buy such a security) within 30 days can then before or after you sell the security that created the loss. You recognize the loss only when you sell the replacement security. Capital gains tax and timing gains tax Capital to long-term investmentAlthough time, not timing, is generally the key the tax consequencessuccess, timing can have a dramatic impact on gains rate might be as long-term capital of investment activities. Your ordinary-income rate.much as 20 percentage points lower than your held for more thanThe long-term gains rate applies to investments investments: What What investments: Tax planning for your your for planning Tax know need to you T

INVESTING 10 ized bythefundbeforeyouownedshares.(SeeCaseStudyIII.) on thefulldistributionamountevenifitincludessignificantgainsreal- If youownthesharesondistribution’s recorddate,you’llbetaxed Such fundsoftendeclarealargecapitalgainsdistributionatyearend. Finally, bewareofbuyingequitymutualfundshareslateintheyear. funds acquiredduringthetaxyear. required totrack(andreporttheIRS)yourcostbasisinmutual more gainthanrequiredwhenyousellthefund.Brokeragefirmsare investment advisorincreasesyourbasisaccordingly, youmayreport Also payattentiontoearningsreinvestments.Unlessyouoryour because ofthelowerlong-termrates. that provideprimarilylong-termgainscansaveyoumoretaxdollars create incomethat’s taxedatordinary-incomerates.Choosingfunds Mind yourmutualfunds.Mutualfundswithhighturnoverratescan you achieveataxlosswithvirtuallynochangeineconomicposition. because thebondsaren’tconsideredsubstantiallyidentical.Thus, from adifferentissuer. Generally, thewashsaleruledoesn’tapply then immediatelybuyanotherbondofsimilarqualityandduration Swap yourbonds.Withabondswap,yousellbond,takelossand want tosellataloss,andthenwait31daystheoriginalportion. security, youcanpurchaseadditionalsharesequaltothenumber days torepurchasethesamesecurity. Alternatively, beforesellingthe that holdssecuritiesmuchliketheonesyousold.Or, youcanwait31 of adifferentcompanyinthesameindustryorsharesmutualfund achieve yourgoals.Forexample,youcanimmediatelybuysecurities Fortunately, therearewaystoavoidtriggeringthewashsaleruleandstill now atalowerper-share value. fund. Itsimplyincreases thenumberofsharesheowns, yet the distributionitselfdoesn’tchange Hector’s valueinthe distributions fromthemutualfund are reinvestedinthefund, Why? Thedistributionitselfisataxable event.Ifcapitalgains he reinveststheproceedsbackinto thesamefund. or evendecreasedsinceHectorpurchased them,orwhether matter whethertheactualvalueofshareshasincreased gains of$3,000,reportableonhis2016return.Itdoesn’t distribution of$15pershare.Hectorendsupwithcapital $20,000. Thenextweek,thefundmakesacapitalgains Dec. 1,2016,at$100pershare,foratotalinvestmentof Hector purchases200sharesofanequitymutualfundon capital gainsdistributions Watch outfor mutual fund Case StudyIII 11 INVESTING Corporate bond interest is fully taxable for federal and state purposes. Interest on state and local government bonds is excludable on federal returns. If the bonds were issued in your home state, interest also may be excludable on your state return. interest from certain private-activity municipal bonds Tax-exempt can trigger or increase the AMT (see page 2) in some situations. Interest on U.S. government bonds is taxable on federal returns Interest on U.S. government bonds is taxable on but exempt by law on state and local returns.

n n n n Beyond gains and losses Beyond tax consequences With some types of investments, you’ll have more to consider than just gains and losses: Dividend-producing investments. Qualified dividends are taxed at than at your the favorable long-term capital gains tax rate rather higher ordinary-income tax rate. Interest-producing investments. Interest income generally is taxed dividends may at ordinary-income rates. So stocks that pay qualified investments, such as be more attractive tax-wise than other income be considered as CDs and taxable bonds. But nontax issues must diversification. well, such as investment risk, rate of return, and treatment varies: Bonds. These also produce interest income, but the tax Loss carryovers carryovers Loss gains, you can deduct only $3,000 ($1,500 forIf net losses exceed net separately) of the net losses per year againstmarried taxpayers filing (such as wages, self-employment anddividends or ordinary income business income, and interest). Loss carryovers excess losses indefinitely. can carry forward You tool in future years if you have a large can be a powerful tax-saving held business investment portfolio, real estate holdings or a closely that might generate substantial future capital gains. remember that capital gains distributions from mutual funds Finally, can also absorb capital losses. The 0% rate applies rate applies rate. The 0% for the 0% qualifies a loved one See if based on 10% or 15% be taxed at that would gain to long-term in children have adult rate. If you ordinary-income the taxpayer’s assets transferring appreciated tax brackets, consider one of these This and enjoy the 0% rate. can sell the assets to them so they the if you’d be subject to be even more powerful strategy can gains 20% long-term capital page 13) and/or the 3.8% NIIT (see the assets. rate if you sold age 24 on Dec. 31, first make If the child will be under Warning: subject to the “kiddie tax.” (See page 7.) sure he or she won’t be consequences. (See page 26.) Also, consider any gift tax

INVESTING 12 (see page22)— could alsohelpyouavoidorreduce NIITliability. ❖ reduce yourMAGI —suchasmakingretirementplan contributions because thethreshold fortheNIITisbasedonMAGI, strategiesthat your investmentscanalsohelpyou avoidordeferNIITliability. And Many ofthestrategiesthatcanhelp yousaveordeferincometaxon somewhat complex,soconsultyour tax advisorformoreinformation. dividends, interestandotherinvestment-related income.Therulesare applicable threshold.Netinvestment incomecanincludecapitalgains, investment incomeortheamountbywhichyourMAGIexceeds already discussedhere.TheNIITequals3.8%ofthelesseryournet rately) mayowethenetinvestmentincometax,inadditiontoothertaxes per year($250,000forjointfilersand$125,000marriedfilingsepa- Taxpayers withmodified adjustedgrossincome(MAGI)over$200,000 3.8% NIIT n liability. Heorshecanhelpyouplanaccordingly. about thecomplicatedrulesthatmaytriggerregulartaxorAMT or sellingstockpurchasedviaanexercise,consultyourtaxadvisor Stock options.Beforeexercising(orpostponingexerciseof)options What’s themaximum capital gainstax rate? CHART 2

1 (married filingseparately). and headsofhouseholds),$250,000(marriedfilingjointly)or$125,000 that modifiedadjustedgrossincome(MAGI)exceeds$200,000(singles In addition,the3.8%NIITappliestonetinvestmentincomeextent 12 monthsorless(shortterm) of priordepreciationonrealproperty Long-term gainattributabletocertainrecapture and antiques Long-term gainoncollectibles,suchasartwork Some keyexceptions More than12months(longterm) must paytaxonit. though thebondsdon’tpaythisinterestannually—andyou considered toearnaportionofthatinterestannually—even build up“interest”astheyrisetowardmaturity. You’re generally Bonds (exceptU.S.savingsbonds)withoriginalissuediscount n n n

10% or15%ordinary-incometaxbracket tax bracket 25%, 28%,33%or35%ordinary-income 39.6% ordinary-incometaxbracket Assets held ordinary-income ordinary-income Taxpayer’s tax rate 2016 25% 28% 15% 20% 0% 1

13 INVESTING Projecting your business’s income for Projecting your business’s this year and next can allow you to time income and deductions to your generally — but not advantage. It’s always — better to defer tax, so consider: If your Deferring income to next year. business uses the cash method of

unning a profitable business these days isn’t easy. You have to these days isn’t easy. unning a profitable business respond swiftly to market aggressively and operate efficiently, challenges. But even when you do all competitive and financial

of that, taxes may drag down your bottom line more than they should. bottom line more than down your of that, taxes may drag like these — and work with your tax steps Don’t let that happen. Take advisor — to make your tax bill as small as possible. Projecting income Projecting a robust tax plan tax a robust statement, implement implement statement, For an enviable financial an enviable For

accounting, you can defer billing for products or services at year end. accounting, you can defer billing for products products or If you use the accrual method, you can delay shipping delivering services. If you’re year. Accelerating deductible expenses into the current 31, you may pay business expenses by Dec. a cash-basis taxpayer, Both cash- and so you can deduct them this year rather than next. on a credit card and accrual-basis taxpayers can charge expenses when the credit deduct them in the year charged, regardless of card bill is paid. business Don’t let tax considerations get in the way of sound Warning: decisions. For example, the negative impact of these strategies on your cash flow might not be worth the potential tax benefit. likely you’ll be in a higher tax the opposite approach. If it’s Taking accelerating income and deferring deductible bracket next year, expenses may save you more tax over the two-year period.

BUSINESS 14 Depreciation can expense those costs and take an immediate deduction. But costs can expensethose costsandtakeanimmediatededuction. Butcosts ble property, suchasbuildings,machinery, equipmentandvehicles, Tangible propertyrepairs.Abusinessthathasmaderepairs to tangi- Dec. 31,2014.However, ithas nowbeenmadepermanent. improvement, restaurantandretail-improvement propertyexpired period of15years—ratherthan39 years—forqualifiedleasehold- Accelerated depreciation.Thebreakallowingashortenedrecovery property doesn’thavetobeleased. improvement property. Beginningin2016,thequalifiedimprovement off-the-shelf computersoftware,waterutilitypropertyandqualified period of20yearsorless(suchasofficefurnitureandequipment), Qualified assetsincludenewtangiblepropertywitharecovery through 2019.However, itwilldropto40%for2018and30%2019. qualified assetsexpiredDec.31,2014,butithasnowbeenextended 50% bonusdepreciation.Thisadditionalfirst-yeardepreciationfor beginning in2016,thefullSec.179expensinglimitapplies. been madepermanent.For2015,a$250,000limitapplied,but, improvement, restaurantandretail-improvementpropertyhasalso The breakallowingSection179expensingforqualifiedleasehold- from a“tradeorbusiness,”nottoreduceitbelowzerocreateloss. units tothelist.You canclaimtheelectiononlytooffsetnetincome property. And,beginningin2016,itaddsairconditioningandheating includes off-the-shelfcomputersoftwareonthelistofqualified and, still,$500,000for2016.Additionally, thenewlawpermanently amounts areannuallyadjustedforinflation,andthey’re$2.01million levels of$500,000and$2million,respectively, for2015.Nowthese the taxyearexceeded$200,000—butCongressrevived2014 begin tophaseoutdollar-for-dollar whentotalassetacquisitionsfor expensing limitfor2015hadbeen$25,000—andthebreakwasto eligible neworusedassets,suchasequipmentandfurniture.The than depreciateoveranumberofyears)thecostpurchasing Section 179expensingelection.Thisallowsyoutodeduct(rather Other depreciation-relatedbreaksandstrategiesmaybeavailable: depreciation deductionsintheyearofpurchase. midquarter convention.Carefulplanningcanhelpyoumaximize the lastquarter, youcouldbesubjecttothetypicallylessfavorable But ifyoumakemorethan40%oftheyear’s assetpurchasesin of anasset’s life. other methodsbecauseyou’llgetlargerdeductionsintheearlyyears Accelerated CostRecoverySystem(MACRS)willbepreferableto depreciate thecostoveraperiodofyears.Inmostcases,Modified For assetswithausefullifeofmorethanoneyear, yougenerallymust 15 BUSINESS

The Section 199 deduction, also called the “manufacturers’ deduction”The Section 199 deduction, also called the “manufacturers’ 9% of the lesser ofor “domestic production activities deduction,” is income. The deductionqualified production activities income or taxable that are wages paid by the taxpayer is also limited to 50% of W-2 allocable to domestic production gross receipts. The deduction is available to traditional manufacturers and to businesses engaged in activities such as construction, engineering, architecture, computer software production and agricultural processing. It isn’t allowed in determining net self-employment earnings and generally can’t reduce net income below zero. But it can be used against the AMT. Section 199 deduction Business-related vehicle expenses can be deducted using the Business-related vehicle cents per mile driven in 2016) or the mileage-rate method (54 out-of-pocket expenses for fuel, insurance, actual-cost method (total expenses, plus depreciation). repairs and other vehicle for Sec. 179 vehicles may be eligible Purchases of new or used Vehicle-related deductions Vehicle-related For example, the many rules and limits apply. expensing. However, limit generally applies to vehicles with anormal Sec. 179 expensing pounds. A $25,000 limitgross vehicle weight rating of more than 14,000 than 6,000 pounds.applies to vehicles (typically SUVs) rated at more passenger rated at 6,000 pounds or less are subject to the Vehicles 2016, the first-yearautomobile limits. For autos placed in service in be deducted underdepreciation limit is $3,160. The amount that may 179 for the first yearthe combination of MACRS depreciation and Sec. is limited under the luxury auto rules to $11,160. personal purposes,In addition, if a vehicle is used for business and must be allocatedthe associated expenses, including depreciation, and nondeductible personal use. Theuse business deductible between is less than 100%. Ifdepreciation limit is reduced if the business use 179 expensing or thebusiness use is 50% or less, you can’t use Sec. method. accelerated regular MACRS; you must use the straight-line tangible property must be property or improve tangible produce to acquire, incurred distinguish in late 2013 released IRS regulations Final depreciated. small harbors for safe and include improvements repairs and between and The final regs are complex and routine maintenance. businesses your tax advisor for details. interpreted, so contact are still being a buildingor built recently purchased you’ve If study. Cost segregation It study. a cost segregation existing space, consider or are remodeling faster, can be depreciated much components that identifies property qualify include assets that deductions. Typical increasing your current equipment, parking lots and landscaping. decorative fixtures, security

BUSINESS 16 avoid theriskofpenalties. employer and,ifso, whetherthey’reofferingsufficient coverageto and howemployerscandetermine whetherthey’rea“large” The IRShasissueddetailedguidance onwhatthesetermsmean Employee benefits meet certainincomerequirements—butonlyif: plan throughagovernment-runHealthInsuranceMarketplaceand credits areavailabletoemployeeswhoenrollinaqualifiedhealth full-time employeereceivesapremiumtaxcredit.Premium Care Act(ACA)imposesapenaltyon“large”employersifjustone Play-or-pay penaltyrisk.Theplay-or-pay provisionoftheAffordable avoid payrolltaxaswell. deduction fortheportion,ifany, ofthebenefititpaysandtypically included inemployeeincome.Yet theemployercan stillreceivea has madeparitypermanent)andhealthinsurance—aren’t pooling (alsoupto$255permonthfor2016,becauseCongress per person),parking(upto$255month),masstransit/van discounts, groupterm-lifeinsurance(upto$50,000annually Fringe benefits.Somefringebenefits—suchasemployee contribute toanHRA. can becarriedforwardtothenextyear. Butonlytheemployercan HSA, noHDHPisrequired.UnlikeanFSA,anyunusedportion for medicalexpensesuptoamaximumdollaramount.Unlikean HRAs. AHealthReimbursementAccountreimbursesanemployee (See page6.) expenses, considerofferingFSAsforchildanddependentcare. care. (Seepage4.)Ifyouhaveemployeeswhoincurdaycare you provide,canofferFlexibleSpendingAccountsforhealth Savings Accounts.Regardlessofthetypehealthinsurance deductible healthplan(HDHP),youcanalsoofferthemHealth HSAs andFSAs.Ifyouprovideemployeeswithaqualifiedhigh- plan. (Seepage19.) small employersmayalsobeeligibleforacreditwhensettingup information onthebenefitstoemployees,seepage22.)Certain a taxdeductionforyourcontributionstoemployees’accounts.(For profit-sharing, SEPand401(k)plans,aswellSIMPLEs. You take Qualified deferredcompensationplans.Theseincludepension, the bestemployees,butalsomaysavetax: Offering avarietyofbenefitsnotonlycanhelpyouattractandretain n n

“minimum value.” The employercoverageofferedis“unaffordable” ordoesn’tprovide employer, or They don’thaveaccessto“minimumessentialcoverage”fromtheir 17 BUSINESS

The now-permanent research research The now-permanent tax savings can net significant credit development”The research credit (often called the “research and businesses anor “research and experimentation” credit) gives — and nowincentive to step up their investments in research WHAT’S NEW! WHAT’S it’s here to stay. it’s threat of Businesses have long complained that the annual critical extinction to the credit deterred them from pursuing But the PATH research into new products and technologies. Act permanently extends the credit. businesses with $50 million or less Plus, beginning this year, And liability. in gross receipts can claim the credit against AMT certain start-ups (in general, those with less than $5 million in gross receipts) that haven’t yet incurred any income tax liability can use the credit against their payroll tax. While the credit is complicated to compute, the tax savings can prove significant.

NOLs Tax credits reduce tax liability dollar-for-dollar, making them particularly reduce tax liability dollar-for-dollar, credits Tax the research credit Act has made permanent PATH beneficial. The New!” below) and extended but not made permanent (see “What’s New!” Opportunity credit (see “What’s the Work other credits, including at right) and the following: certain urban andEmpowerment Zones. Empowerment Zones are and other taxpayers qualify for specialrural areas where employers zone wages” up totax incentives, including a 20% credit for “qualified tax incentive expired$15,000, for a maximum credit of $3,000. The Dec. 31, 2016. Dec. 31, 2014, but it has been extended through New Markets credit. This credit has been extended through 2019. in certainIt gives investors who make “qualified equity investments” a seven-year period.low-income communities a 39% tax credit over Tax credits Tax A net operating loss occurs when a C corporation’s operating expenses operating corporation’s C a when occurs loss operating net A an Generally, its revenues. exceed for the year deductions and other loss not to generate a refund. Any carried back two years NOL may be years to offset income.carried forward up to 20 absorbed is But you can needed influx of cash. an NOL may provide a Carrying back be more the entire loss forward may the carryback if carrying elect to forgo to increaseyou expect your income might be the case if beneficial. This the prior two years or tax rates to go up.substantially compared to

BUSINESS 18 taken before 2014don’tcount, however.) be takenforonly two years,andtheymustbeconsecutive. (Credits Program (SHOP) generally isrequired.Inaddition,the creditcan for thecredit,onlineenrollmentin the SmallBusinessHealthOptions and averageannualwagesoflessthan $51,800.Warning: To qualify available onaslidingscaletobusinesses withfewerthan25FTEs annual wagesoflessthan$25,900 peremployee.Partialcreditsare 10 orfewerfull-timeequivalentemployees (FTEs)andaverage premium. For2016,thefullcredit is availableforemployerswith it contributesatleast50%ofthetotalpremiumorabenchmark group healthcoveragepremiumspaidbytheemployer, provided Small-business healthcarecredit.Themaximumcreditis50%of qualified startupcosts. a $500creditperyearforthreeyears.Theislimitedto50%of or feweremployees)thatcreatearetirementplanmaybeeligiblefor Retirement plancredit.Smallemployers(generallythosewith100 Two potentiallyvaluable creditsthatneverexpiredare: developers andbusinessowners. American CommunitySurvey. Flexiblefinancingisprovidedtothe projects in“distressed”communities,usingdatafromthe2006–2010 projects getfunded—oftenconstructionorrehabilitationrealestate Certified CommunityDevelopmentEntities(CDEs)determinewhich must berequestedwithin28daysaftertheemployeebeginswork. Agency beforeyoucanclaimthecredit.Thecertificationgenerally is atargetgroupmemberfromtheappropriateStateWorkforce Bear inmindthatyoumustobtaincertificationanemployee that qualify, thecreditcanbe10timeslistedamount. individuals theycanhire.Thatis,ifthereare10 Employers aren’tsubjecttoalimitonthenumberofeligible to asmuch$9,600forcertainveterans. credit canbehigherformembersofcertaintargetgroups,up target groupisgenerally$2,400peradultemployee.Butthe maximum taxcreditthatcanbeearnedforeachmemberofa that personworkedduringthefirstyearofemployment.The group, thewagespaidtothatpersonandnumberofhours The sizeofthetaxcreditdependsonhiredperson’s target individuals who’vebeenunemployedfor27weeksormore. Starting thisyear, theactalsoexpandstargetgroupstoinclude group” hasbeenextendedthrough2019,thankstothePATH Act. The Work Opportunitycreditforemployersthathirefroma“target Work credit Opportunity reliable through 2019 WHAT’S NEW! 19 BUSINESS -

, and the top rate 1 C corporation on qualified dividends is 20%. business is taxed on income, taxedare shareholders then and on any dividends they receive. Losses remain at the corporate level. The top corporate tax rate is generally 35% Two levels of taxation: The Two Flow-through entity or sole proprietorship Losses flow through to the owner(s). The top individual tax rate is 39.6%. One level of taxation: The income flows business’s through to the owner(s). See Chart 6 on page 30 for exceptions.

1 CHART 3 based on business structure differences Income tax

Business structure Business tunities, such as differences related to salary vs. distributions/dividends: tunities, such as differences receive as S corporations. Only income that shareholder-employees taxes and, if applicable, the additionalsalary is subject to employment generally applies to taxpayers with earned0.9% Medicare tax, which (See thresholds as those for the NIIT. income exceeding the same your salary reduce these taxes, you may want to keep page 13.) To — low and increase your distributionsrelatively — but not unreasonably aren’t taxed at theof company income, because distributions generally tax or the 3.8% NIIT. corporate level or subject to the 0.9% Medicare receive as C corporations. Only income that shareholder-employees the 0.9% salary is subject to employment taxes and, if applicable, take more income Medicare tax. Nevertheless, you may prefer to level) as opposed to as salary (which is deductible at the corporate level, yet are still dividends (which aren’t deductible at the corporate to the 3.8% NIIT) taxed at the shareholder level and could be subject you would be less. if the overall tax paid by both the corporation and of corporate The IRS is cracking down on misclassification Warning: so tread carefully. payments to shareholder-employees, Income taxation and owner liability are the main factors that differentiate main factors are the owner liability taxation and Income the tax compare Chart 3 to (See from another. structure one business flow-through combine that entities choose businesses Many treatments.) (LLCs) limited liability companies namely limited liability, taxation with and S corporations. rate than the top corporate rate is higher (39.6%) The top individual For business structure decisions. which might affect (generally 35%), change may be beneficial in certain tax or other reasons, a structure may be unwelcome tax consequences. situations, but there also structures may provide tax planning oppor Some tax differences between

BUSINESS 20 Sale oracquisition from your self-employment income.❖ And youmaybeable todeducthomeofficeexpenses (seepage3) Security taxand1.45% forMedicaretax)isdeductible abovetheline. on yourself-employmentincome.The employerportion(6.2%forSocial You payboththeemployee andemployerportionsofemploymenttaxes plan (seepage22)and,ifyou’reeligible, anHSA(seepage4)foryourself. take anabove-the-linedeductionforcontributions madetoaretirement deduction islimitedtoyournetself-employment income.You alsocan for yourself,yourspouseanddependents.Thisabove-the-line If you’reself-employed,youcandeduct100%ofhealthinsurancecosts The self-employed n n an installmentsalecanbackfireontheseller. Forexample: triggering the3.8%NIITor20%long-termcapitalgainsrate.But beneficial ifitwouldallowthesellertostayunderthresholdsfor spread thegainoveranumberofyears—whichcouldbeespecially An installmentsalealsomaymakesenseifthesellerwishesto or paysacontingentamountbasedonthebusiness’s performance. structured asaninstallmentsaleifthebuyerlackssufficientcash Consider installmentsales,forexample.Ataxablesalemightbe success orfailure. the taxconsequencescanhaveamajorimpactontransaction’s Whether you’resellingyourbusinessoracquiringanothercompany, erations whenplanningasaleoracquisition. Of course,taxconsequencesareonlyoneofmanyimportantconsid- transfer orataxablesale. another importantquestioniswhetheritshouldbeatax-deferred structured asanassetsaleorastocksale.Ifischosen, With acorporation,keyconsiderationiswhetherthedealshouldbe

If taxratesincrease,theoverallcouldwindupbeingmore. sale, nomatterhowmuchcashthesellerreceives. Depreciation recapturemustbereportedasgainintheyearof 21 BUSINESS

hatever your age, you must plan carefully to help ensure yourhatever your age, you must true. This means building tax savingsretirement dreams come starting contributions early caninto your planning. For example,

Plan assets can grow tax-deferred — meaning you pay no income Plan assets can grow tax-deferred — meaning tax until you take distributions. contributions. employer may match some or all of your Your Contributions are typically pretax, reducing your taxable income. Contributions are typically pretax, reducing your

Chart 4 shows the 2016 employee contribution limits. Because ofChart 4 shows the 2016 employee contribution sooner rathertax-deferred compounding, increasing your contributions size of your nest eggthan later can have a significant impact on the make “catch-up”at retirement. Employees age 50 or older can also So if you didn’t contribute much when you contributions, however. allow you to partially make up for lost time. this may were younger, If your employer offers a match, at minimum contribute the amount miss out on that necessary to get the maximum match so you don’t “free” money. More tax-deferred options tax-deferred More In certain situations, other tax-deferred saving options may be available: may be able to set a business owner or self-employed. You You’re up a plan that allows you to make much larger contributions than plan as an employee. You you could make to an employer-sponsored n n n 401(k)s and other employer plans 401(k)s and other employer defined contribution Contributing to a traditional employer-sponsored plan is usually a good first step: your retirement planning retirement your Build tax savings into savings into Build tax make a big difference because of tax-deferred compounding. Choosingmake a big difference because

the right retirement plan for your situation is also important — is onethe right retirement plan perhaps youfree savings better for you? Or that offers tax-deferred or tax- but certainly not least,should contribute to both types of plans. Last, with required minimumavoiding early withdrawals and being tax-smart lifestyle. distributions can be key to living your desired retirement W

RETIREMENT 22 reduced byanyRothIRAcontributionsyoumakefortheyear. deadline forindividuals.Your annualcontributionlimit(seeChart4)is can make2016contributionsuntiltheApril2017income-tax-return-filing limited ifyourspouseparticipatesinanemployer-sponsored plan.You You canlikelydeductyourcontributions,thoughdeductionmaybe Your employerdoesn’t offeraretirementplan.ConsidertraditionalIRA. tax returnforthatyear. late astheduedate(includingextensions)ofyourbusiness’s income before yearend.SEPplans,forexample,generallymaybesetupas might nothavetomake2016contributions,orevensetuptheplan, n n Whether aconversionmakessensedependsonfactorssuchas: the convertedamountistaxableinyearofconversion. There’s noincome-basedlimitonwhocanconverttoaRothIRA.But growth andtakeadvantageofaRothIRA’s estateplanningbenefits. conversion canallowyoutoturntax-deferredfuturegrowthintofree A you mightbenefitfromconvertingsomeorallofittoaRothIRA. Roth conversions.IfyouhaveatraditionalIRA,considerwhether balance growtax-freeoveryourlifetimeforthebenefitofheirs. to takedistributionsduringyourlifetime,soyoucanlettheentire benefit: Unlikeotherretirementplans,RothIRAsdon’trequireyou ability tocontribute.Butestateplanningadvantagesareanadded Roth IRAs.Anincome-basedphaseoutmayreduceoreliminateyour plans don’treduceyourcurrent-yeartaxableincome: allow tax-freedistributions;thetradeoffisthatcontributionstothese taxes whenyoumakewithdrawalsatretirement.Rothplans,however, A potentialdownsideoftax-deferredsavingisthatyou’llhavetopay Roth alternatives Retirement limitsfor plancontribution 2016 CHART 4 age, Your 2 1 Note: Otherfactorsmayfurther limityourmaximumcontribution. Includes Rothversions whereapplicable. For taxpayersage50 orolderbytheendoftaxyear. 457s andSARSEPs 401(k)s, 403(b)s, Traditional andRothIRAs SIMPLEs bracket ortriggerthe3.8%NIIT(seepage13), Whether theconversionwouldpushyouintoahigherincometax 2

contribution $ 5,500 $ 18,000 $ 12,500 Regular

contribution Catch-up $ 1,000 $ 6,000 $ 3,000 1

23 RETIREMENT Whether you’ll need the IRA funds in retirement. Whether you can afford to pay the tax on the conversion, Whether you can afford to pay the tax on the conversion, in retirement, and tax bracket now and expected tax bracket Your

“Back door” Roth IRAs. If the income-based phaseout prevents don’t have a you from making Roth IRA contributions and you account and making traditional IRA, consider setting up a traditional can then immediately convert a nondeductible contribution to it. You minimal tax impact. the traditional account to a Roth account with Employers may Roth 401(k), Roth 403(b), and Roth 457 plans. tax-deferred version. offer one of these in addition to the traditional, to the Roth plan, may make some or all of your contributions You plan. No but any employer match will be made to the traditional taxpayers income-based phaseout applies, so even high-income can contribute. Early withdrawals be a last resort. With Early withdrawals from retirement plans should are subject to a 10% a few exceptions, distributions before age 591/2 would be due on a penalty on top of any income tax that ordinarily you’ll lose the potential tax-deferred future withdrawal. Additionally, growth on the withdrawn amount. If you must make an early withdrawal and you have a Roth account, withdraw up to your contri- can consider withdrawing from that. You bution amount without incurring taxes or penalties. Another option: If have take a plan loan. You’ll plan allows it, your employer-sponsored to pay it back with interest and make regular principal payments, but you won’t be subject to current taxes or penalties. n n n

RETIREMENT 24 10% penalty — on the difference. 10% penalty—onthedifference. with otherfunds),you’llbesubjecttoincometax—andpotentiallythe don’t rolloverthegrossamount(makingupforwithheld your oldplanmaybenetof20%federalincometaxwithholding.Ifyou Warning: Ifyoudon’tdoadirectrollover, thecheckyoureceivefrom days toavoidtaxandpotentialpenalties. or IRA.Otherwise,you’llneedtomakeanindirectrolloverwithin60 should requestadirectrolloverfromyouroldplantonew or retireandreceivealump-sumretirementplandistribution.You Early distributionrulesalsobecomeimportantifyouchangejobs the distributionrulesthatapplytoyou.❖ If you’veinheritedaretirementplan,consultyourtaxadvisorabout drug charges,or3)affecttaxbreakswithincome-basedlimits. taxable, 2)increaseincome-basedMedicarepremiumsandprescription the distributioncould:1)causeSocialSecuritypaymentstobecome to considerthelostfuturetax-deferredgrowthand,ifapplicable,whether bution) inayearyourtaxbracketislowmaysavetax.Besure,however, because oftax-deferredcompounding.Butadistribution(orlargerdistri- Waiting totakedistributionsuntilage701/2generallyisadvantageous RMD ruleforanon-IRARothplanbyrollingthefundsintoIRA. year, butyou’llhavetotaketwoRMDsthenextyear.) You canavoidthe have withdrawnbutdidn’t.(AnRMDdeferralisallowedfortheinitial comply, youcanoweapenaltyequalto50%oftheamount should IRAs) and,generally, fromyourdefinedcontributionplans.Ifyou don’t required minimumdistributions(RMDs)fromyourIRAs(exceptRoth In theyearinwhichyoureachage701/2,mustbegintotakeannual Required minimum distributions organizations aren’t eligiblerecipients. charity byDec.31, 2016.Donor-advised fundsandsupporting to arrangeadirect transferbytheIRAtrusteetoan eligible contributions tocharitiesonyour2016 taxreturn,you’llneed To takeadvantageoftheexclusionfromincomeforIRA owner’s requiredminimumdistribution. deemed taxableincomeandcanbe usedtosatisfyanIRA or otherdeductiononthecontributions. Buttheamountsaren’t $100,000 pertaxyear. Thetaxpayerscan’tclaimacharitable tions fromtheirIRAtoqualifiedcharitableorganizationsup taxpayers whoareage701/2oroldertomakedirectcontribu- The PATH Actmakespermanenttheprovisionthatallows up to $100,000from theirIRA to charities Taxpayers age70½andupcandonate WHAT’S NEW! 25 RETIREMENT 40% 40% 40% tax rate and GST Estate, gift Indexed GST tax 5.45 million 5.43 million exemption

for inflation $ $

1 Estate Indexed 5.43 million 5.45 million

for inflation and gift tax exemptions $ $

s difficult as it is, accumulating wealth is only the first step to s difficult as it is, accumulating You also secure future for your family. providing a financially you The earlier estate plan. comprehensive develop a need to Year years 2016 2015 Future

Less any gift tax exemption already used during life.

1 CHART 5 and rates exemptions tax Transfer

begin, the more options you’ll have to grow and transfer your wealth in wealth your transfer and grow to have you’ll options more the begin, and leaves the legacy you desire. a way that minimizes taxes Gift tax and rates. (SeeThe gift tax continues to follow the estate tax exemption reduces the estate taxChart 5.) Any gift tax exemption used during life your exemption duringexemption available at death. Using up some of and goals. life can be tax-smart, depending on your situation Estate tax Estate scheduled to remain The estate tax rate is currently 40%, and it’s to $5.45 million at that level. The estate tax exemption increased adjusted annually for 2016 (see Chart 5), and it will continue to be for inflation. review your estate plan in light avoid unintended consequences, To you to make the most of the changing exemption. A review will allow will be distributed of available exemptions and ensure your assets according to your wishes. secure your legacy your secure Estate planning can Estate A

ESTATE PLANNING 26 tax-free gifttohernextyear. you can’tadd$14,000toyour2017exclusionmakea$28,000 don’t makeanannualexclusiongifttoyourgranddaughterthisyear, exclusion doesn’tcarryoverfromyeartoyear. Forexample,ifyou Warning: You needtouseyour2016exclusionbyDec.31.The every fewyears.Itmightgoupagainfor2017.) it increasesonlyin$1,000increments,sotypicallygoesup 2015 amount.(Theexclusionisadjustedforinflationannually, but any ofyourgiftandestatetaxexemption.Thisisthesameas gift withyouoryou’regivingcommunityproperty)withoutdepleting each year($28,000perrecipientifyourspouseelectstosplitthe You alsocanexcludecertaingiftsofupto$14,000perrecipient planning andstateestate tax benefits. as well,suchcreditor protection,remarriage GSTtax exemption toacredit sheltertrustdoes.Trusts offerotherbenefits protect futuregrowth onassetsfromestatetaxlikeapplying the been donebeforethefirstspouse’s death.Butportability doesn’t The portabilityelectionwillprovide flexibilityifproperplanninghasn’t deceased spouse—evenifnotax is due. by manystates.Anditmustbeelected onanestatetaxreturnforthe spouse. Itdoesn’tapplytotheGST taxexemptionandisn’trecognized Warning: Portabilityisavailableonlyforthemostrecentlydeceased spouse tousethedeceasedspouse’s remainingestatetaxexemption. unused athisorherdeath,theestatecanelecttopermitsurviving If onespousediesandpart(orall)ofhisorherestatetaxexemptionis Exemption portability regarding yourparticularstate. it’s criticaltoconsiderstatelaw. Consultataxadvisorwithexpertise To avoidunexpected taxliabilityorotherunintendedconsequences, than thefederalgovernmentdoes. Keep inmindthatsomestatesimposeestatetaxatalowerthreshold A federalestatetaxdeductionisavailableforstatetaxespaid. State taxes transfers tograndchildrenandavoidanytaxattheirchildren’s generation. large estates.Withproperplanning,theycanusetheexemptiontomake with largeestateswhosechildrenalsohave—ormayeventually The GSTtaxexemptioncanbeavaluabletax-savingtoolfortaxpayers and rate.(SeeChart5.) tax due.TheGSTcontinuestofollowtheestateexemption such asyourgrandchildren.Thisisinadditiontoanygiftorestate and atdeath)madetopeoplemorethanonegenerationbelowyou, The GSTtaxgenerallyappliestotransfers(bothduringyourlifetime GST tax 27 ESTATE PLANNING estate tax, gift property with the greatest future income tax, gift property that your beneficiary’s your own income tax, don’t gift property that’s appreciation potential. it. hasn’t appreciated significantly while you’ve owned property so declined in value. Instead, consider selling the proceeds. you can take the tax loss and then gifting the sale Large estates must report fair market values market fair report must estates Large estates executors of large highway funding law, Under the 2015 of the IRS and each to estate tax) must provide (those subject fair market valuestatements identifying the heirs with the estate’s on the estate tax return. property as reported of the inherited resulting from an overstatement of Any underpayment of tax will be subject to a 20% accuracy- basis under this provision related penalty. intended to ensure consistent reportingThese requirements are purposes. The changes apply to anyfor estate and income tax after July 31, 2015. estate tax returns filed WHAT’S NEW! NEW! WHAT’S

To minimize To minimize To minimize

Annual exclusion gifts are Plan gifts to grandchildren carefully. help you preserve generally exempt from the GST tax, so they also gifts to a grandchild your GST tax exemption for other transfers. For you generally must that don’t qualify for the exclusion to be tax-free, tax exemption. apply both your GST tax exemption and your gift Gift interests in your business. If you own a business, you can leverage your gift tax exclusions and exemption by gifting ownership interests, which may be eligible for valuation discounts. So, for example, if the discounts total 30%, in 2016 you can gift an ownership interest equal to as much as $20,000 tax-free because the discounted value doesn’t exceed the $14,000 annual exclusion. n n n Tax-smart giving Tax-smart estate.taxable your of the size will help reduce now assets away Giving Here are some strategies for tax-smart giving: Consider both estate and income tax consequences Choose gifts wisely. to make: and the economic aspects of any gifts you’d like So married couples should still consider marital and credit shelterSo married couples should necessaryextent the to other each to assets transferring and — trusts (during lifeTransfers to a spouse first death. to fully fund them at the assuming he oror at death) are tax-free under the marital deduction, she is a U.S. citizen.

ESTATE PLANNING 28 to gifttaxandmayprovideanincomededuction.(Seepage3.) Make giftstocharity. Donationstoqualifiedcharitiesaren’tsubject or patient,aslongthepaymentismadedirectlytoprovider. without thepaymentbeingtreatedasataxablegifttostudent Pay tuitionandmedicalexpenses.You maypaytheseexpenses scrutinizes FLPs,sobesuretoproperlysetupandoperateyours. FLP andthengiftlimitedpartnershipinterests.Warning: TheIRS discounts istosetupafamilylimitedpartnership.You fundthe Gift FLPinterests.Anotherwaytopotentiallybenefitfromvaluation independent valuationisrecommended. Warning: TheIRSmaychallengethecalculation;aprofessional, your taxableestate. ❖ with properplanning, youcanensureproceedsare excluded from tax. Proceedsare generallyincome-tax-freetothebeneficiary. And in afamilybusiness,orpassleveraged fundstoheirsfreeofestate estate taxes,equalizeassetspassing tochildrenwhoaren’tinvolved n n n n to considerthese: control overwhathappenstothetransferredassets.You maywant Trusts canprovidesignificanttaxsavingswhilepreservingsome Trusts A A A A receive paymentsbackfromthetrustforacertainperiod. principle asaQPRT butallowsyoutotransferotherassets; term) —whileyouretaintherighttoliveinitforacertainperiod. estate atareducedgifttaxcost(providedyousurvivethetrust’s your hometochildrentoday—removingitfromtaxable first asurvivingspouseandthenchildrenfrompriormarriage. estate taxandprovidesadditionalbenefits. grantor-retained annuitytrust(GRAT) worksonthesame qualified personalresidencetrust(QPRT) allowsyoutogive qualified terminableinterestproperty(QTIP)trustcanbenefit credit shelter(orbypass)trusthelpsmarriedcouplesminimize insurance canbeusedtopay family’s financialfuture,life Along withprotectingyour Insurance from yourestate. removing futureappreciation currently highexemptionswhile way topotentiallylockinthe tions, anditcanbeanexcellent your giftandGSTtaxexemp- trust canhelpyouleverageboth Finally, aGST—or“dynasty” 29 ESTATE PLANNING Tax brackets for businesses and individuals in 2016

hether a taxpayer is subject to corporate or individual tax rates, the marginal tax bracket can have a significant impact Won tax liability. The marginal rate is the rate you’ll pay on the next dollar of income, so in your planning it’s important to know what your marginal rate likely will be.

Pay attention to thresholds The taxable income thresholds at which the top rates apply are much different for corporations vs. individuals — as you can see in Charts 6 and 7. Remember, when businesses are structured as flow-through entities, income is taxed at the owners’ individual rates.

And for individuals (see Chart 7), the thresholds also vary significantly based on filing status. Also keep in mind that a marriage “penalty” kicks in at the thresholds for the 28% bracket. In other words, the threshold for married taxpayers filing jointly is significantly less than twice that of the threshold for individuals. There are also AMT rates to consider. (See page 2 for information on when the AMT might apply.)

CHART 6 2016 corporate income tax rate schedule

Tax rate Tax brackets 15% $ 0 – $ 50,000 25% $ 50,001 – $ 75,000 34% $ 75,001 – $ 100,000 39% $ 100,001 – $ 335,000 34% $ 335,001 – $ 10,000,000 35% $ 10,000,001 – $ 15,000,000

TAX RATES 38% $ 15,000,001 – $ 18,333,333 35% Over $ 18,333,333

Note: Personal service corporations are taxed at a flat 35% rate.

30 2016 individualincometax rate schedules CHART 7 1 AMT incomeexceeds thetopofapplicablerange. partial exemptionis available. Theexemptioniscompletely phased outif The AMTincomeranges overwhichtheexemptionphases out andonlya subject tothe“kiddietax.” Note: ConsultyourtaxadvisorforAMTratesandexemptionschildren Exemption Exemption Phaseout Phaseout Tax rate Tax rate 39.6% 39.6% 26% 10% 26% 28% 15% 28% 25% 28% 33% 35% 10% 15% 25% 28% 33% 35% 1 1

$ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ Married filingjointly Married filingjointly 159,700 119,700 190,151 413,351 or survivingspouse 151,901 231,451 413,351 or survivingspouse 37,651 91,151 18,551 75,301 9,276 – Over Over Over Over Single Single 0 0 – 0 0 – – – – – – – – – – – – – – $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ Regular taxbrackets 186,300 186,300 494,900 335,300 186,300 186,300 190,150 413,350 415,050 415,050 151,900 231,450 413,350 466,950 466,950 83,800 53,900 37,650 91,150 18,550 75,300 9,275 AMT brackets

$ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ 119,700 130,151 210,801 413,351 115,726 206,676 Head ofhousehold Head ofhousehold 79,850 13,251 50,401 37,651 75,951 9,276 – Married filing Married filing separately separately Over Over $ Over Over 0 0 – 0 – 0 – – – – – – – – – – – – – $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ 186,300 247,450 335,300 186,300 130,150 210,800 413,350 441,000 441,000 115,725 206,675 233,475 233,475 13,250 93,150 93,150 41,900 53,900 50,400 37,650 75,950 9,275 31 TAX RATES This publication was developed by a third-party publisher and is distributed with the understanding that the publisher and distributor are not rendering legal, accounting or other professional advice or opinions on specific facts or matters and recommend you consult an attorney, accountant, tax professional, financial advisor or other appropriate industry professional. This publication reflects tax law as of July 31, 2016. Some material may be affected by subsequent changes in the laws or in the interpretation of such laws. Therefore, the services of a legal or tax advisor should be sought before implementing any ideas contained in this publication. © 2016