hot individual tax topics - ciuni panichi · 20% qualified income deduction example 3 facts:...
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Hot Individual Tax Topics
Jim Komos, CPACiuni & Panichi, Inc.
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Summary1. Donor Advised Fund2. Super seniors - using IRAs to make charitable donations3. Qualifying for the 20% business deduction4. Eldercare Planning5. Planning around the state and local tax deduction limits6. Keep alert for the phase-outs7. Ohio business income deduction8. Charitable donations of appreciated securities9. Opportunity zones10.Tax withholding tables
Donor Advised FundsExample 1
Facts: Couple with $500,000 of earned income - Annual charitable donations of $10,000 - No mortgage, $5,000 real estate taxes
Income taxes
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With DAF No CC2017 2018 2018 2019
Income 500,000 500,000 500,000 500,000 State & local taxes (37,322) (10,000) (10,000) (10,000)Donations (10,000) (10,000) (50,000)3% floor 5,586 Adj. to standard (4,000) - (14,000)Taxable income 458,264 476,000 440,000 476,000
Federal taxes 132,821 105,546 91,546 105,546
Net savings over 5 yearsTaxes without DAF 527,730 Taxes with DAF 513,730 Net savings over 5 years 14,000 2.7%
Bunching deductions. The same concept works with other itemized deductions.
IRA CCExample 2
Facts: Retiree with $100,000 of taxable income - Annual charitable donations of $5,000 - No mortgage, $5,000 real estate taxes
Income taxes
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2017 2018 2018Income 100,000 100,000 95,000 State & local taxes (7,867) (7,867) (7,867)Donations (5,000) (5,000) ‐
Adj. to standard (733) (5,733)Exemptions (4,050) ‐ ‐Taxable income 83,083 86,400 81,400
Federal taxes 16,508 15,026 13,848
Net savings Taxes without IRA CC 15,026 Taxes with IRA CC 13,848 Net savings 1,178 7.8%
20% Qualified Income DeductionExample 3
Facts: Attorney earning $450,000
Income taxes
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Base Defer 50K Addl 50KIncome 450,000 400,000 500,000 Self-employment deduction (13,987) (13,317) (14,656)Donations ‐
Adj. to standard (24,000) (24,000) (24,000)Qualified income deduction (2,688) (41,854) ‐Taxable income 409,325 320,829 461,344
Federal taxes 124,106 93,753 132,660
Net savings over 2 yearsTaxes without IRA CC 248,212 Taxes with IRA CC 226,413 Net savings 21,799 8.8%
Key is to get taxable income into or under the phase-out range.
Eldercare PlanningExample 4
Facts: Mom and dad are slowing down, health issues are getting serious.Children sit down and decide that they need to get involved.
Common plans include:
1. Transfer the home to another family member. Generally done to eventually qualify for Medicaid.Problem: Loss of primary residence exclusion
Loss of step up in tax basis upon death
Example: Value of home 250,000 Tax basis 150,000
Taxable gain:- if parents sell the home -- if their estate sells the home -- if home is gifted to kids and then sold 100,000
Solution: Don't make the transfer unless otherwise economicalIf you do transfer, consider selling the home to a child and then gifting the note.
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Eldercare PlanningFacts: Parents are moved into assisted living.
Rather than keep the home vacant, a grandchild moves into the home.
Problem: Loss of primary residence exclusion after 3 yearsTaxable income with minimal deductions if not rented at fair rental value.
Solution: Keep rental period under three years.Charge a fair rental rate and gift a portion back.
(note IRS does allow a cushion of about 20%)
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Eldercare Planning3. Anxious to avoid probate, the children have a parent make significant gifts just prior to death.
Problem: By gifting, the children lose the step up on tax basis to fair market value that they would have received.Example of taxable income on sale of property, 100,000 value, 50,000 tax basis
Solution: Keep the funds in the parent's name. Avoid probate by making the fundstransferrable upon death (TOD).
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Gifted InheritedSales price 100,000 100,000 Tax basis 50,000 100,000 Taxable gain 50,000 -
Eldercare Planning4. Parents want to leave money to a charity.
Problem: If their Wills are adjusted to leave the funds to a charity - no income tax benefit, generally no estate tax benefit
Solution: If itemizing, the parents should make the gifts while alive. Otherwise, utilize the $15,000 gift tax annual exclusion to make gifts to the children, who then donate the cash. Better yet, do this with appreciated securities.
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Parents WillChild Makes
DonationSales price 100,000 10,000
Tax benefits 0 2,800
State and Local TaxesExample 5
Facts: Young couple just acquired a homeReal estate taxes are not due until January 2019
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PrepayBase RET
Income 200,000 200,000 State & local income taxes (7,399) (7,399)Real estate taxes - (2,601)Mortgage interest (12,000) (12,000)Donations (4,000) (4,000)Adj. to standard (601)Taxable income 176,000 174,000
Federal taxes 30,819 30,339
Net savings 480
Take advantage of the years you may fall under the $10,000 state and local tax limitation.
State and Local TaxesMore aggressive tax strategies:
a. Move to a lower tax state / city / county
b. Create a non-grantor trust and shift real estate into this trust. Such trusts get their own $10,000 state and local tax limitation.
c. Create a non-grantor trust in a no-tax state and shift portfolio assets out of your high tax state.
d. Move real estate out into the name of other family members who have not hit the limit. For example, gift the family vacation home to a daughter living in a no-tax state.
e. Convert investment real estate to rental real estate.
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Phase-outsExample 6
Facts: Young couple just starting outBy making a $500 IRA contribution, they saved $925
Income taxes:
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Original AdjustedHusband's 401(k) deferral 2331 2331Less: excess over maximum -331 -331Wife's IRA contribution - 500 Qualifying contributions 2,000 2,500 Retirement savings credit rate 20% 50%Retirement savings credit 400 1,250
Adjusted gross income 37,460 36,960
Tax savingsRetirement credit 850 Income tax reduction 75 Overall tax savings 925
Phase-outsAreas where significant phase-outs and limitations apply:
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Earned income creditTuition creditsTuition deductionStudent loan interest deduction20% pass-through deductionMedicare premiumsSocial security taxationSelf-employment taxAdditional medicare tax of .9%Tax on net investment income of 3.8%Standard deductionMedical expense AGI threshold State and local tax deductionAlternative minimum tax exemptionAlternative minimum tax exemption phase-outLong-term capital gain - 0% tax rateLong -term capital gain - 15% tax rateChild tax creditHealthcare shared responsibility payment
OhioExample 7
Facts: Five lawyers are owners in their law firm, an LLC. Ownership is as follows:
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A 40%B 15%C 15%D 15%E 15%
They each take a salary of $200,000. Remaining profits of $200,000 flow-through the LLC based on ownership.
OhioIncome taxes - as currently structured:
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A B C D E TotalWages 200,000 200,000 200,000 200,000 200,000 1,000,000 K-1 income 80,000 30,000 30,000 30,000 30,000 200,000 Total 280,000 230,000 230,000 230,000 230,000 1,200,000
Ohio small business exclusion 250,000 30,000 30,000 30,000 30,000 570,000 Ohio small business rate income 30,000 - - - - 30,000
Approximate Ohio income taxes 900 10,000 10,000 10,000 10,000 40,900
OhioIncome taxes - after restructuring ownership and compensation:
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A B C D E TotalNew ownership percentage 20% 20% 20% 20% 20%Wages 250,000 200,000 200,000 200,000 200,000 1,050,000 K-1 income 30,000 30,000 30,000 30,000 30,000 150,000 Total 280,000 230,000 230,000 230,000 230,000 1,200,000
Ohio small business exclusion 250,000 230,000 230,000 230,000 230,000 1,170,000 Ohio small business rate income 30,000 - - - - 30,000
Approximate Ohio income taxes 900 - - - - 900
Tax savings - 10,000 10,000 10,000 10,000 40,000
Why: Ohio's small business deduction is based on pass-through income. But, if the partner / shareholder / memberowns at least 20% of the business entity, that taxpayer can include wages in calculating the deduction.
Appreciated AssetsExample 8
Facts: Donating appreciated assets that have been held for at least 1 year is almost always better than donating cash.
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Standard itemize Standard Itemize Standard Itemize Standard Itemize
AGI 50,000 50,000 150,000 150,000 250,000 250,000 450,000 450,000
Income taxes - $5,000 cash donation:
Benefit from CC deduction - 1,100 - 1,200 - 1,750 - 1,750
Income taxes - $5,000 stock donation, $2,000 tax basis:
Benefit from CC deduction, above - 1,100 - 1,200 - 1,750 - 1,750
Benefit from no capital gain 450 450 450 450 450 450 600 600
Total tax benefit 450 1,550 450 1,650 450 2,200 600 2,350
Appreciated AssetsIncome taxes - $5,000 stock donation, $2,000 tax basis:
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Standard Itemize Standard Itemize Standard Itemize Standard Itemize
Benefit from CC deduction, above - 1,100 - 1,200 - 1,750 - 1,750
Benefit from no capital gain 450 450 450 450 450 450 600 600
Total tax benefit 450 1,550 450 1,650 450 2,200 600 2,350 Capital gain tax rate 15% 15% 15% 15% 15% 15% 20% 20%
When donating appreciated property may not be beneficial:
AGI limitations - donating appreciated property reduces the percentage of AGI that can be deducted in a given year (i.e., from 50% to 30%)
When the taxpayer is in the zero percent capital gain bracket (taxable income less than 38,700 for a single person in 2018)
Opportunity ZoneInitial recommendation:
Tony sets up a meeting with Jason Ice to discuss his planning for his retirement. One of Jason's recommendations is that Tony diversify his investments to reduce his ownership in Bank X.
Tony initially is reluctant due to the anticipated tax implications of diversifying. Jason develops the following strategy to minimize the income tax implications.
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Recommended investment mix: Retirement Taxable TotalBank X stocks 250,000 50,000 300,000 Other stocks 400,000 200,000 600,000 Bonds 350,000 100,000 450,000 Real estate - 150,000 150,000
1,000,000 500,000 1,500,000 Income taxes - as currently structured:
Sales price 350,000 250,000 600,000 tax basis 0 100,000 100,000 Taxable gain n/a 150,000 150,000
Income taxes on stock sale 0 43,200 43,200
Opportunity ZoneBenefits of utilizing an opportunity zone investment:
If Tony takes $150,000 of the taxable Bank X proceeds and invests it into a private placement offering which will qualify as a opportunity zone project, the tax implications become:
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Taxable gain without OZ 150,000
Less taxable gain deferred (150,000)
Current taxable gain -Income taxes on stock sale 0
Summary of tax benefits:
1) The $150,000 gain is deferred until earlier of the date in which the OZ investment is disposed of, or 12/31/2026. 2) Tax $150,000 gain in the Bank X stock is reduced by 10% if the OZ investment is held for at least 5 years, and 15% if
held at least 7 years.3) A permanent exclusion is available on the sale of the OZ itself if it is held for at least 10 years.
Tax WithholdingExample 10
Facts: The new tax rules and resulting IRS withholding tables are resulting in unexpected tax results for a wide range of taxpayers.
I therefore encourage all taxpayers to project out their 2018 tax liability to avoid any surprises when preparing their 2018 tax returns in early 2019.
Here are some actual results that I have encountered:
Situation 1:
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Single taxpayer working on salary, plus commission.Wages 165,000 Adjusted gross income 166,700 Taxable income 154,700
Tax 31,300 Federal withholding 40,500 Tax due (9,200)
In this case, we were able to reduce his withholding on his final bonus, which will be paid in December, getting the taxpayer his overpayment back 4 months early.
Tax WithholdingSituation 2:
Married taxpayer who normally has about a $5,000 overpayment each year with his tax return.
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Since they did have the prior year tax covered, no underpayment interest will apply. The taxpayer has 5 months to plan for the expected additional taxes due. Withholding will be adjusted to avoid this problem in the future.
Wages 185,000 Adjusted gross income 194,400 Taxable income 168,700
Tax 28,700 Federal withholding 23,400 Tax due 5,300
Tax WithholdingSituation 3:
Married taxpayer with a 10% interest in the family's closely held business.
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In this case, the withholding worked out correctly, but only because the business income qualified for the 20% deduction.
Wages 150,000 Adjusted gross income 206,000 Taxable income 168,700
Tax 28,700 Federal withholding 23,400 Quarterly tax estimates 5,200 Tax due 100
