reflect and redirect: 2016 year -end tax planning...

Webinar | December 1, 2016

Reflect and redirect: 2016 year-end tax planning strategies for individuals

REFLECT AND REDIRECT: 2016 YEAR-END TAX PLANNING STRATEGIES FOR INDIVIDUALS PLANTE MORAN

PresentersEmerson MerkersonWealth Management Tax managerEmerson is a tax manager in the wealth management industry group. He focuses on providing tax planning and consulting to closely held family businesses, their owners, and high net worth individuals. He works closely with clients on estate planning and family tax issues. Emerson holds a bachelor’s degree from the University of Michigan in interdisciplinary studies, a master’s degree in taxation from Wayne State University, and a Juris Doctor degree from Michigan State University College of Law.

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James MinutoloNational Tax Office partnerJames is a tax partner who assists businesses and their owners and managers with structuring and implementing sophisticated tax strategies for the purchase, sale, and operation of their businesses. James has more than 30 years of experience and received his undergraduate degree in American studies from the University of Notre Dame and his law degree from the Vanderbilt University, School of Law.

Melanie PrevostWealth Management Tax senior managerMelanie is a senior tax manager in the wealth management industry group. She has more than 15 years of tax experience, primarily providing tax planning and consulting services to high-net worth individuals, their families, and their closely held businesses. She works closely with clients on tax planning strategies to ensure their tax liabilities are minimized and to preserve their wealth. Melanie holds a degree in accounting from the American University.


Moderator

Jerry JonckheereTax partnerJerry is a tax partner with Plante Moran specializing in providing practical solutions to internationally-active clients. Known for being “fluent in international tax,” he assists clients with the tax challenges that accompany expanding internationally, including transfer pricing, structuring, and foreign tax credit planning. He’s also a founding member of Plante Moran’s National Tax Office, which continuously monitors tax legislation and developing trends.

Jerry is invited to speak at a variety of tax and international tax-related conferences. Most recently, Jerry presented at the Praxity North American International Tax Conference in New Orleans, Louisiana. Jerry has a bachelor’s degree in accounting from Michigan State University and a master’s degree in taxation from Grand Valley State University.

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Administration

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Administration

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Overview of today’s discussion

• Year in review

• Thoughts on post-election tax changes

• Changes to partnership audit procedures

• Identity theft update

• Changes to valuations for estate & gift purposes

• Changes in reporting deadlines

• Best practices for tax projections

• Alternative Minimum Tax primer

• Stock-based compensation

• Investing do’s and don’t’s

• Charitable contributions

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President-Elect Trump’s tax plan• Reduce individual and corporate income tax rates

• Consolidate the current seven individual tax brackets into three (12%, 25%, and 33%)

• Eliminate the head of household filing status, NIIT, and personal exemption

• Allow a deduction for childcare costs (from AGI) up to the average cost of care

• Cap itemized deductions at $100,000 for single filers and $200,000 for married couples filing jointly

• Eliminate the individual Alternative Minimum Tax (AMT)

• Eliminate estate and gift taxes

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Tax fraud – Identity theftTraditional methods of identity theft• Theft of your wallet, purse, mail, or stolen documents

• Information gained while listening for personal information while using your cell and shopping

Non-traditional methods of identity theft• Hiding software on your computer to log your keystrokes

• "Phishing emails" – When you receive bogus emails about problems with an account or phony offers for free goods or prizes

• Targeting organizations that have your personal information (i.e., bank, school, employer, doctor, etc.)

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Tax fraud – Reporting to the IRS

IRS wants you to know about schemes, scams and cons• “If it sounds too good to be true, it probably is!”

Abusive return preparer• While most preparers provide excellent service to their clients,

a few unscrupulous return preparers file false and fraudulenttax returns and ultimately defraud their clients.

• It is important to know that even if someone else prepares your return, you are ultimately responsible for all the information on the tax return.

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Tax fraud – Other items to look for, how to protect yourselfIRS personnel is prohibited from:

1. Requesting personal information through email or calls.

• Personal information may be requested through the IRS.gov website or through regular mail.

• Initial contact will generally be made through regular mail.

Steps to take to combat fraud include:1. Do not email personal information.

2. Do not provide your Social Security number over the phone.

3. Protect your computer with a firewall, anti-virus software, and/or a program that removes spyware.

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Your personal balance sheetUnderstand your personal balance sheet• What is a personal balance sheet?

• It is an overview of your whole financial picture.

• Identifies assets and liabilities for review and analysis

• Three important considerations

• Do you have a desire to transfer anything to anybody?

• Kids

• Grandkids

• Charity

• Other

• Do you feel that you can afford to make gifts to others?

• Are you concerned about the estate tax now or in the future, even if it is repealed?

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Balance sheet approachJohn Jane Joint Total

Cash $150,000 $200,000 $300,000 $650,000

Marketable Securities

2,800,000 2,400,000 5,200,000

Deferred Compensation Plans

500,000 200,000 700,000

Other Assets 200,000 100,000 600,000 900,000

Family Companies, Inc

5,000,000 5,000,000

Real Estate 450,000 450,000

Personal Assets 100,000 100,000

Death Benefits 2,000,000 2,000,000

Total Net Worth $10,650,000 $2,900,000 $1,450,000 $15,000,000

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$15,000,000 Estate = Federal Estate Tax of $1,640,000 in 2016


Gifting overviewGifting to others

• Annual exclusion

• $14,000 per person or $28,000 per married couple (“current” interests only)

• Use your annual exclusion by Dec. 31 – exclusion does not carry over from year to year

• Direct payments

• Tuition and medical payments (directly to provider)

• Choose gifts wisely

• Gift property with the greatest future appreciation potential

• Gift property that hasn’t appreciated significantly while you’ve owned it (but has not lost value)

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IRC Sec. 2704 proposed regulationsProposed regulations issued by the Department of Treasury would result in significant changes to the valuation rules for family-owned businesses

• The proposed regulations reduce the ability to discount the value of transfers of certain business interests for gift and estate tax purposes.

• Discount reduced for lack of marketability

• Discount reduced for lack of control (minority interest)

• Hearing today (Dec. 1, 2016)

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IRC Sec. 2704 proposed regulations

Example:

Jack and Jill own Mom & Pop Real Estate Corp, and they want to gift 20% of the business to their only child, Johnny.

• Under current rules, the gift tax valuation would reflect a value less than 20% of the value of the entire business (to reflect lack of marketability and control, if applicable).

• Under the proposed rules, the discount for lack of marketability and control would be greatly reduced or eliminated.

The result of the new proposed regulations is to increase the estate and gift/estate tax cost of transferring business interests.

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Estate planning – 2704 proposed regulations

When would this be effective?

• Public hearing: Dec. 1, 2016

• 30 days from the public hearing

• If your client is considering implementing a plan to make an intergenerational transfer of all or part of their family-owned business, start planning now.

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Reporting deadlines for W-2s and certain 1099s

• Forms W-2 and 1099 continue to be due to the employee or contractor by Jan. 31st, but

• The forms will also be required to filed with the IRS by Jan. 31st(previously due on Feb. 28th)

• Penalties for businesses missing new deadline

• Trap for the unaware

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Change in tax return due dates (and K-1s)Check your 2016 returns – many tax returns have new due dates or you may get your partnership K-1s earlier to facilitate your filing.

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Entity Type Form Original Due Date Extended Due Date

Individual 1040 April 15 October 15

Partnership 1065 March 15 September 15

S Corporation 1120S March 15 September 15

C Corporation 1120 April 15 September 15

Trust or Estate 1041 April 15 September 30

Employee Benefit Plan 5500 July 31 October 15

Exempt Organization 990 May 15 November 15


General tax planning

This year is a great year to step back and review your tax situation.

• Projections

• Estimated tax strategies

• Alternative Minimum Tax (AMT)

• Executive compensation

• Tax loss harvesting – gain from your losses

• Tax friendly investing tips

• Charitable contributions – documentation and strategies

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Projections

• Year-end projections are still the best way to determine your true tax position.

• Projections assist in knowing your Alternative Minimum Tax (AMT) situation and will help identify strategies that can lower or eliminate AMT.

• Projections assist in identifying effective and marginal tax rates that will assist in analyzing your after-tax returns for your investments.

• Projections assist in determining the best type of IRA or Keogh plan based on your tax situation.

• Projections assist in determining your most efficient year-end charitable contribution strategy.

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Tax planning for Alternative Minimum Tax

• The Alternative Minimum Tax is an alternative tax computation that can result in a hidden, or unexpected, tax

• The AMT has fewer tax brackets and the top rate is 28% (compared to the maximum individual rate of 39.6%).

• The AMT has a standard exemption that phases out at higher income (deductions for exemptions do not apply to AMT).

• AMT adjustments to income generally increase AMT gross income compared to regular tax gross income

• Several regular tax deductions are not deductible for AMT, increasing AMT taxable income compared to regular tax taxable income.

• The AMT computation is based on higher gross income but utilizes a lower tax rate.

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Common adjustments for AMTCommon adjustments for AMTI (Alternative Minimum Taxable Income) include

• Personal exemption and standard deduction are not deductible for AMTI (the AMTI uses a standard exemption that is phased out at higher incomes).

• Property tax deductions are not deductible for AMTI.

• State and local income taxes are not deductible for AMTI.

• Adjustments from partnership investments (like depreciation)

• Adjustments for incentive stock options on exercise (and later, upon subsequent sale of stocks)

• Adding back tax exempt interest from Private Activity Bonds

• IRC § 59(e) addbacks from passive investments

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Year-End Tax planning for AMT• AMT this year, but regular tax expected next year?

• Defer exercising ISOs

• Defer paying state and local income taxes estimates

• Defer paying property taxes

• Accelerate ordinary income items (like bonuses or IRA distributions) to utilize 28% AMT rate

• Regular tax this year, but AMT expected next year?• Exercise ISOs

• Pay state and local taxes estimates before year-end

• Pay property taxes before year-end

• Defer ordinary income items (like bonuses or IRA distributions) to utilize the 28% AMT rate

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Executive compensation

Executive compensation comes in different shapes and sizes:

• Restricted stock

• Understanding the plan and when grants are taxable

• Section 83(b) election

• Incentive stock option (ISO)

• AMT Implications

• Non-qualified stock option plan

• Understanding the plan and when grants are taxable

Withholding on taxable distributions are often lower (28%) than your marginal tax rate (39.6%), which may cause a surprise when your tax returns are filed.

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Case study: Falling stock prices after ISO exerciseJack was granted incentive stock options (ISOs) to buy 50,000 shares of his company’s stock at $15 a share.

• Jack exercised 10,000 shares one year later at the trading price of $25.• Jack could have an AMT liability as high as $28,000.

• AMT Income = 10,000 shares * ($25 trading price less $15 option price) = $100,000 AMTI

• AMT could be as high as $100,000 * 28% = $28,000

• Some shares may need to be sold to generate cash to pay the income tax. The decision must generally be made at the time the options are exercised.

The problem is worsened if the stock price drops after the exercise.• The AMT is due on the value on the date of the exercise.

• If the stocks are sold at a value less than the trading value, Jack would receive a deduction for AMT.

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Tax loss harvesting – Gain from your lossesIf you are facing big capital gains for 2016, you should look for unrealized losses in your portfolio as long- and short-term gains and losses can offset one another.

Wash Sale Rule

• The wash sale rule disallows losses recognized on a security if you buy a “substantially identical” security (or an option to buy such a security) within 30 days before or after you sell the security that created the loss.

• The rule applies to purchases in different portfolios (i.e. you cannot purchase in an IRA after selling in a taxable portfolio).

• Does not prohibit purchases of other companies in the same industry or a different mutual fund.

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Case study: Gifting stocks - 0% capital gains• To avoid a capital gains tax rate of 23.8%, Jimmy and Jenna decide

to transfer appreciated stock to their adult daughter, Jasmine.• Jasmine is just out of college and has taxable income of $25,000

and is in the 15% income tax bracket. Capital gains for taxpayers in a 15% tax bracket are taxed at 0%.

• The 0% rate applies only to the extent that capital gains “fill up” the gap between Jasmine’s taxable income and the top end of the 15% bracket.• In 2016, the 15% bracket for singles tops out at $37,650.

• When Jasmine sells the gifted stock, her capital gains are $20,000. $12,650 will qualify for the 0% rate ($37,650 less $25,000) and the remaining $7,350 will be taxed at 15%.• Jasmine will pay only $1,102.50 of federal tax on the sale ($7,350 *

15%) compared to $4,760 Jimmy and Jenna would have owed had they sold the stock themselves.

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Other investing surprises to avoidMutual funds

• Mutual funds that buy and sell stocks frequently (i.e. holding periods less than one year) can create income that’s taxed at ordinary-income rates.

• Mutual funds often declare capital gains at the end of the year that represent capital gains for the entire year. If you purchase mutual funds late in the year, you may be allocated a full year of taxable capital gains, even if the dividends are reinvested.

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Case study: Tax-exempt or taxable bonds• Working with her financial advisor, Jill decides she needs more bonds in her

investment portfolio. She’s in the 39.6% bracket, so she’s leaning toward municipal bonds. After all, municipal bond interest will be tax-free on Jill’s federal return.

• Tax-exempt investments aren’t automatically a better choice than taxable investments (or private activity bonds). • To determine the best investment, Jill needs to compare the tax-equivalent yield.

• Tax-equivalent yield = actual yield / (1 – Jill’s marginal tax rate)

• For example, a municipal bond with a 4.00% yield has a tax-equivalent yield of 6.62% if Jill is in a 39.6% marginal tax bracket. (4.00% / (1 - .396). The tax equivalent yield decreases if Jill is in AMT (4.00 / 1 - .280) or 5.55% which reflects the lower tax rate that a taxable investment would be subject to.

• Private activity bonds offer slightly higher rates than municipal bonds but PABs are subject to AMT while municipals are not.

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Charitable contributions• Cash contributions – Can be either cash, check, credit card, or payroll

reduction

• Non-cash charitable contributions

• Must be reported on Form 8283

• Appraisal needed if greater than $5,000

• Donation of vehicles depends on how used by charity

• Limitation on deductibility:

• Deduction is limited to 50% of AGI to public charities

• Deduction is limited to 30% of AGI for cash contributions to private foundations

• Deduction is limited to 20% of AGI for capital gains property to private foundations

• Excess contributions can be carried forward for up to five years

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Charitable contributions

• Contemporaneous documentation is required for contributions greater than $250.• The acknowledgment must state the donation amount.

• The acknowledgment must identify whether any goods or services were given in exchange for the contribution.

• Political contributions and raffles are never tax deductible.

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Q&A

Questions?

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Thank you for attending

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Jerry JonckheereTax [email protected]

Emerson MerkersonWealth Management Tax [email protected]

James MinutoloNational Tax Office [email protected]

Melanie PrevostWealth Management Tax senior [email protected]


Thank you for attending

REMEMBERTo obtain your certificate at the end of the session, click on the CPE widget located at the bottom of the your console.

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reflect and redirect: 2016 year -end tax planning...

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