webinar slides: individual year-end tax planning tips for 2016 and beyond
TRANSCRIPT
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CBIZ & MHM Executive Education Series™
Individual Year-End Tax Planning Tips for 2016 and Beyond Naomi Ganoe & David Levi November 15 and December 1, 2016
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About Us
• Together, CBIZ & MHM are a Top Ten accounting provider • Offices in most major markets • Tax, audit and attest and advisory services • Over 2,900 professionals nationwide
A member of Kreston International A global network of independent
accounting firms
MHM (Mayer Hoffman McCann P.C.) is an independent CPA firm that provides audit, review and attest services, and works closely with CBIZ, a business consulting, tax and financial services provider. CBIZ and MHM are members of Kreston International Limited, a global network of independent accounting firms.
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Before We Get Started…
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• If you have a question during the presentation, please use the Q&A feature at the bottom of your screen.
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CPE Credit
This webinar is eligible for CPE credit. To receive credit, you will need to answer periodic participation markers throughout the webinar. External participants will receive their CPE certificate via email immediately following the webinar.
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Disclaimer
The information in this Executive Education Series course is a brief summary and may not include all
the details relevant to your situation.
Please contact your service provider to further discuss the impact on your business.
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Naomi is a director with CBIZ and has 17 years experience providing
advisory services to individuals and closely held businesses on estate,
fiduciary, gift, business and personal tax planning matters. She is a
trusted advisor to CEOs and high net worth individuals. She is an active
member of CBIZ's Private Client Service technical community and
presenter at the CBIZ National Level Training.
330.668.6500 • [email protected] Naomi D. Ganoe, CPA
Director
Presenters
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David is based in our Minneapolis, MN office and specializes in providing
services to companies in the financial service, law, hospitality, and their
owners, as well as tax and estate planning to individuals. David joined
the organization over 30 years ago.
612.376-1208 • [email protected]
David Levi, CPA, PFS Senior Managing Director
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Agenda
Top Year-End Income Tax Reduction Ideas
02
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03
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Top Estate and Gift Tax Planning Ideas
Navigating the AMT
Reduce Net Investment Income Tax
05 Items to Consider for your Business
06 Landscape for Change in the Wake of the 2016 Election
07 IRS/Admin Matters
08 Questions
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INDIVIDUAL YEAR-END TAX PLANNING TIPS FOR 2016 AND BEYOND
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Tax strategies that consider income tax liabilities and your retirement and estate planning opportunities
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Original and Extended Tax Return Due Dates for Calendar Year Taxpayers Former Original
Due Date Original Due Date 2016+ Tax Years
Former Extended Due Date
Extended Due Date 2016+ Tax Years
1040 April 15 April 15 October 15 October 15
1041 April 15 April 15 September 15 September 30
1120 March 15 April 151 September 15 September 152
1120S March 15 March 15 September 15 September 15
1065 April 15 March 15 September 15 September 15
990 May 15 May 15 November 15 November 153
5500 July 31 July 31 October 15 November 15
FBAR June 30 April 15 N/A October 15
1 For June 30 year-end corporations, the original due date remains September 15 until 2026 tax years, at which time it changes to October 15.
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2 For corporations other than calendar year-end and June 30 year-end, the extension period is six months beginning with 2016 tax years. Calendar year-end corporations will change to a six-month extension period beginning with the 2026 tax year. For June 30 year-end corporations, the extension period will be seven months (e.g., until April 15) until 2026 tax years, at which time it changes to a six-month extension period). 3 This is an automatic six-month extension that replaces the previous two three-month extensions.
Original and Extended Tax Return Due Dates for Calendar Year Taxpayers
• The original and/or extended due dates of several less common forms have also changed
• Form 3520-A – original due date 15th day of third month after trust’s year end; six month extension
• Form 3520 – original due date April 15th for calendar-year filers; six-month extension • Form 4720 – automatic six-month extension • Form 5227 – automatic six-month extension • Form 6069 – automatic six-month extension • Form 8870 – automatic six-month extension
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TOP YEAR-END INCOME TAX REDUCTION IDEAS
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2016 Federal Tax Rates:
Top Marginal Federal Income Tax Rates
Pre-2013 Today % Change
Qualified Dividends
15%
23.8% 59%
Long-Term Capital Gains
15 23.8 59
Taxable Interest 35 43.4 24
Earned Income (including OASDI and Medicare)
40.65 48.15
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Challenges You are Facing Today:
• Uncertainty with the new administration • Higher and More Progressive Tax Rates
• Federal • State(s)
• Longer Time Horizons • Lower Expected Returns • Greater Tax Complexity of Investment Alternatives
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Tax Savings Considerations
• Harvest capital gains to offset recognized capital losses (consider end-of-year mutual fund capital gain dividends)
• Harvest capital losses to offset recognized capital gains (consider wash sale rules)
• Transfer/gift mutual funds to children prior to December dividend record date (consider kiddie tax, gift tax) and consider 529 accounts
• Maximize 401(k) or SEP contributions* • Pay 4th quarter state estimated tax payments and 2016
real estate taxes by Dec. 31 (if not in AMT)
*SEP Contributions can be made well into latter part of 2017 for 2016 deductions
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Tax Savings Considerations
• Pay January mortgage by Dec. 31 • Make charitable donations, especially appreciated
stock, and consider D.A.F. • Bunch miscellaneous itemized deductions to exceed
2% AGI floor (if not in AMT) • Bunch medical deductions to exceed 7.5%/10% floor • Review withholdings, especially if subject to 0.9%
Medicare tax on earned income • Consider IRA Withdrawals/Roth Conversions if
Current year income is low.
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People are Living Longer
65
70
75
80
85
90
95
100
105
Man Woman
HNW - Top 25%Today - Top 25%Today1960
Average Life Expectancy for a 65 Year Old
Source: Social Security Administration, Society of Actuaries, and M Financial Group
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Key Questions
Core Capital: • Are your core assets sufficient to support your
lifestyle? • Can Income Tax Deferral help you meet your
spending goals? • Opportunity to reserve more for Long-Term
Care? Surplus Capital:
• How much will stay in estate without estate tax exposure?
• What are the income tax characteristics of capital earmarked for wealth transfer?
• What are the income tax consequences to the beneficiary upon liquidation?
• Lifestyle Spending
• Personal Reserve
• Extra Spending
• Children and
Grandchildren
• Charity
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Wealth Considerations:
• Financial Goals • Liquid Assets • Illiquid Assets • Spending Requirements • Risk Tolerance • Tax Rates • Time Horizon
• Retirement Date • Future Tax Domicile • Pension Alternatives • Asset Allocation
Personal Profile: Personal Decisions:
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Retirement Tax Deferral
• In order to secure your retirement, you may need to increase your pre-tax savings rate late in your career to make up for earlier years inefficiencies
• Increasing tax deferral through a cash balance or similar plan can significantly increase your savings rate
• State income tax differentials can have a dramatic effect on retirement security
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Other Planning Opportunities
• Private Investments – are they worthless? • Section 1244 rules
• Max out cafeteria plan election • Wages to your children under 18 – fund retirement • Contributions to Roth IRA or Conversion • Contribution to non-deductible IRA and then Convert
to Roth • State Income Tax considerations:
• State of Residency • Non Resident Tax consequences • Consequence of Investments
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TOP ESTATE AND GIFT TAX PLANNING IDEAS
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Estate and Gift Taxes
Item Rate/Threshold
Maximum Gift/Estate Tax Rates 40%
Lifetime Gift/Estate Exclusion (2016) $5,450,000
Annual Gift Exclusion (2016) $14,000
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Estate and Gift Considerations
• Gift directly to educational/medical institutions – are not gifts for gift tax purposes
• Gift annual exclusion amount each year ($14,000 per person for 2016)
• Split gifts with spouse to maximize annual exclusion/lifetime exemption
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Estate and Gift Considerations
• Gift assets with high appreciation potential • Use a grantor retained annuity trust (GRAT) or sale to
intentionally defective grantor trust to remove appreciation from estate
• Use a charitable lead trust to remove appreciation from the estate
• Be aware of potential elimination of the ability to use discounts for Family Limited Partnerships as part of your estate and gift plan
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Estate Planning in the Current Environment
• Potential changes coming from Proposed Regulations issued eliminating certain discounts (2704 Prop Reg)
• Stability of estate transfer tax laws—other than above • Small percentage of population subject to transfer tax • Cannot ignore GST tax • Fear of estate tax uncertainty is no longer driving
clients to estate planners • Increased importance of income tax issues • Traditional credit shelter trust/marital trust needed? • Portability approach has become more predominant • Planning is more difficult for planners
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Estate Planning in the Current Environment
• Transfer planning still important for wealthy families • Be careful before making lifetime gifts of low basis
assets • Grantor trust planning still advantageous • Undoing prior planning strategies • Basis adjustment planning • Trust planning • Estate and trust distribution planning • State estate taxes
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NAVIGATING THE AMT
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Top Expenses NOT Deductible for AMT
• State and local income taxes • Real estate taxes • Personal property taxes • Interest on home equity loan (not used to improve
residence) • Investment expenses • Unreimbursed employee business expenses • Other 2% miscellaneous itemized deductions
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AMT Can Be An Opportunity
• All AMT is not the same. • Items such as depreciation and Qualified (ISO) stock
option adjustments can cause AMT, but also generate credit that can be carried forward.
• Approaching /being subject to the AMT can allow for lower effective tax rate for ordinary income items • Bonuses • Short term capital gains • Exercise of Non Qualified Stock Options • Other Controllable Ordinary Income
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Top Ideas to Reduce Net Investment Income Tax (NIIT)
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Net Investment Income Tax
Rate 3.8% x lesser of:
Net Investment Income, or MAGI in excess of threshold
MAGI Threshold – Single Taxpayer $200,000
MAGI Threshold – Married Filing Joint $250,000
Included in Net Investment Income Interest and Dividends Capital Gains Annuity Distributions Rents and Royalties Income from Passive Activity
NOT Included in Net Investment Income Salary and Wages Self-Employment Income Distributions - qualified retirement plans Gains on sale of active interests Income excluded from federal income
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Net Investment Income Tax Considerations
• Fund a charitable remainder trust with appreciated securities to reduce or avoid NIIT on recognized gains, and spread out investment income to lower income years
• Group passive activities that comprise an appropriate economic unit to qualify them as non-passive
• If current investments generate passive income, consider new investments that generate passive losses
• If you loaned money to your C Corp, then consider reducing interest rate and increase wages (3.8 to .9)
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Net Investment Income Tax Considerations
• Shift investments to tax-exempt bonds, deferred annuities, insurance products.
• Taxpayer’s age 70 ½ or older can donate required
minimum distributions from IRA—can reduce AGI, thus reducing NIIT risk.
• Shift assets to relatives not subject to NIIT (consider
gift tax)
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2016 ITEMS TO CONSIDER FOR YOUR BUSINESS
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Business Considerations for 2016
• Consider capital additions that can be placed in service before December 31.
• 50% bonus depreciation and/or up to $500,000 of Section 179 deduction may be allowed to reduce taxable income. • note that not all states recognize these accelerated
deductions and some state adjustments may be required.
• Over and above bonus/Section 179, new Tangible Property Regulations permit assets purchased for less than $2,500 to be expensed.
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Business Considerations for 2016-Continued
• Consider R&D Credit Opportunities. The credit has been enhanced
• Consider bonus payments for employees and/or owners. • Consider establishing retirement plans.
• Funding for many plans can occur in 2017, but plans likely need to be established in 2016.
• Review business balance sheet to consider disposing of worthless assets (inventory, accounts receivable, etc.) • Business sense should be overridden by possible tax
benefits.
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LANDSCAPE FOR CHANGE IN THE WAKE OF THE 2016 ELECTION
A Peek Ahead under the Trump Administration
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Comparison of the 2016 Presidential Candidates’ Tax Proposal Individual Income Tax 2016~Current Clinton Trump
Rates on Ordinary Income
7 brackets with a top rate of 39.6%
No change on current brackets 4% surtax on adjusted gross income (AGI) over $5 million
3 brackets with a top rate of 33%
Phase Out of Itemized Deductions & Personal Exemptions
Applies to AGI over: $311,300 (married), $259,400 (single)
Cap benefit of most deductions (excluding charitable) to 28% tax rate
Limit on itemized deductions, $100,000 (single), $200,000 (married)
Alternative Minimum Tax
28% minimum rate, with exemption amount of $53,900 (single) $83,800 (married) $23,900 Trusts
In addition to AMT, 30% minimum tax on individuals with an AGI over $1 million – “Buffett Rule”
Eliminates
Rates on Capital Gains/Dividends
Top rate of 20%, 1-year holding period
New category of “mid-term” capital gains with declining rates from 39.6% to 20% over 6-year holding period
Top rate of 20%, 1-year holding period
Surtax on Net Investment Income
3.8%, above $200,000 AGI (single), $250,000 (married) Trusts with income over $12,400
3.8%, above $200,000 AGI (single), $250,000 (married) Trusts with income over $12,400
Eliminates
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Presidential Nominees’ Tax Proposals
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Estate/Gift Tax 2016~Current Clinton Trump
Estate Tax
$5,450,000, as adjusted for inflation, with top tax rate of 40% . $5,490,000 for 2017
$3.5 million exemption (with no adjustment for inflation; Top rates of : 45% - under $10 million 50% - under $50 million 55% - from under $500 million 65% - over $500 million
Eliminates estate tax
Portability of Estate and Gift Tax Exemption
Unused exemption of deceased spouse available (with limitations)
No specific proposal
Eliminates estate and gift tax
Lifetime Gift Tax Exemption
$5,450,000, adjusted for Inflation
$1 million , with no adjustment for inflation
Eliminates gift tax
Basis of Inherited Assets
Stepped up to fair market value at death
Capital gains taxed at death with unspecified exemptions for “middle class families” and “protections and flexibility for small and closely-held businesses, farms and homes, and personal property and family heirlooms”
Capital gains “held until death” taxed, with first $10 million tax-free to exempt small businesses and family farms. “Disallows” contributions of appreciated assets “into a private charity” established by decedent or decedent’s family
Comparison of the 2016 Presidential Candidates’ Tax Proposal
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Estate/Gift Tax 2016~Current Clinton Trump
Gift Tax Annual Exclusion
$14,000 per donee as indexed for inflation. Unchanged for 2017.
No specific proposal
Eliminates gift tax
Other Other Other Other
Comparison of the 2016 Presidential Candidates’ Tax Proposal
Business Taxes 2016~Current Clinton Trump
Corporate Income Tax Top rate of 35%
No specific proposal
Top rate of 15%
Pass-Through Business Income
Top rate of 39.6%
No specific proposal Top rate of 15%
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Tax Policy Center Updated Analysis October 11, 2016
• Trump Plan • By 2025, about 51% of the benefits of Trump's tax plan would
accrue to the wealthiest percentile, saving $317,000 on average each year, increasing their incomes by more than 14%.
• Less affluent taxpayers would also benefit, but less so. A typical family would save a little less than $1,100 a year in taxes -- an increase of 1.5%.
• Families with single parents or multiple children, however, could pay more in taxes under Trump's plan.
• If the government borrowed all of the money to pay for Trump's tax plan, the deficits and the cost of interest would increase the national debt by $7.2 trillion. (Cost of Romney's tax plan four years ago was about $5 trillion)
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IRS/ADMIN MATTERS
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• Record Keeping—will make things easier. • 401K – 2016 and 2017 max $18,000 • 401K catch up (age 50)– 2016 and 2017 max $6,000 • IRA contribution – 2016 and 2017 max $5,500 • IRA catch up (age 50) – 2016 and 2017 max $1,000 • HSA contribution – 2016 $3,350 or $6,750; 2017 $3,400 or
$6,750; catch up (age 55) - $1,000 • Cafeteria Plan election • Social Security Wage Base – 2016 $118,500; 2017 $127,200 • For 2016 Deductible IRAs will phase-out by income • 2017 Lifetime Exemption (Estate and Gift) is $5,490,000
(unless changed by Trump administration).
2016 and 2017 Considerations
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IRS Audit Rates
• Individuals
• Businesses
• IRS Commissioner Koskinen said he anticipates the new rules will increase the number of partnerships examined. The IRS has shed nearly 4,000 enforcement personnel in the past decade tied to hiring freezes and budget cuts.
FY 2015 FY 2014 ChangeOverall 0.84 0.86 (0.02) > $1 million 9.55 7.50 2.05 > $200K 2.61 2.71 (0.10)
FY 2015 FY 2014 ChangePartnerships 0.51 0.43 0.08 S Corps 0.40 0.36 0.04
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New Partnership Audit Rules
• On November 2, 2015 President Obama signed into law the Bipartisan Budget Act of 2015 (BBA).
• The new provisions are generally effective for partnership tax years beginning after December 31, 2017.
• Partnerships may elect however, to apply the new rules to any returns filed for tax years beginning after November 2, 2015. • New “Opt In” regulations were issued August 4 with
requests for comments by October 4 • The BBA provides a fundamental change in the way that
examination and collection of tax from partnerships will be conducted.
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Consequences of the Change
• New rules default to assessment and collection of underpaid taxes, penalties and interest at the partnership level
• Current partners effectively bear the economic burden of such payments, even though
they may not have been partners during the year to which the underpaid taxes relate • Under the “default rule” current law, an adjustment that only moves an allocation from
one partner to another partner still results in underpaid taxes, because the decrease adjustment must be ignored
• Tax computed at the highest rate for individuals or corporations (whichever rate is highest applies to all partners There are two fundamental reasons for the new regime:
• There has been a significant increase in the number of partnership (LLC) returns
that are filed each year. • There were many challenges to administering an IRS examination under the old
rules. • The Joint Committee on Taxation has estimated that the new partnership audit rules
will raise $9.3 billion over the next 10 years. Clearly, Congress is giving a mandate to the IRS to audit more large partnerships.
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Proposed Regs. on Valuation Discounts – Aug. 4 (2704 Proposed Regulations)
• The proposed regulations address restrictions on the liquidation or redemption of interests in family-controlled entities.
• The proposed regulations would treat the lapse of voting or liquidation rights as an additional transfer and disregard certain restrictions on liquidation in determining the fair market value of a transferred interest, thereby eliminating “lack of control/minority interest” discounts for the vast majority of family-controlled entities.
• They add a new class of “disregarded restrictions” that will be ignored if, after the transfer, the restriction will lapse or may be removed—without regard to certain interests held by nonfamily members—by the transferor or the transferor's family.
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? QUESTIONS
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If You Enjoyed This Webcast…
Upcoming Courses: • 11/29 & 12/13: The Combined Benefits of Cost Segregation and Tangible Property, Part 3 –
Compliance Considerations and Partial Asset Dispositions
• 11/30: Accounting for Impairment under the Credit Loss Impairment Rules
• 12/6: Understanding Complex Debt and Equity Transactions
• 12/7 & 12/15: Put Your Best Face Forward - How to Manage and Learn From Your Not-for-Profit's Publicly Facing Data
Recent Publications: • Revenue Recognition Serial: Part 7 – Revenue Recognition and Licensing Arrangements
• Understanding the Leasing Standard: Sale and Leaseback and Other Types of Lease Transactions
• Tax Rates and Inflation-Adjusted Figures Released for 2017
• Expanding Disclosure for New Accounting Standards and Other Updates from the EITF
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