2016 FEDERAL TAX UPDATE SAMUEL A. DONALDSON GEORGIA STATE UNIVERSITY COLLEGE OF LAW ATLANTA, GA

T AXABLE I NCOME EXCEEDING 2016 F EDERAL I NCOME T AX R ATES FOR I NDIVIDUALS Single Joint Ordinary Income Adjusted Net Cap Gain & Qualified Dividends Medicare Surtax on Earned Income (including 1.45% employer contrib.) Medicare Surtax on Net Investment Income $0 10% 0% 2.9% 0% $9,275$18,55015% $37,650$75,30025% 15% $91,150$151,90028% $190,150$231,450 33% AGI over $200,000 AGI over $250, % 3.8% $413,350 35% $415,050$466, %20% 2016 INDIVIDUAL INCOME TAX BRACKETS

PROTECTING AMERICANS FROM TAX HIKES ACT OF 2015 (SIGNED DECEMBER 18, 2015)  22 PERMANENT EXTENSIONS  4 FOUR-YEAR EXTENSIONS (THROUGH 2019)  30 ONE-YEAR EXTENSIONS (THROUGH 2016)  VARIOUS OTHER PROVISIONS

PROTECTING AMERICANS FROM TAX HIKES ACT OF 2015 (SIGNED DECEMBER 18, 2015) 22 PERMANENT EXTENSIONS  Deduction for state and local sales tax  Special rules for qualified conservation contributions  Charitable rollovers  Charitable contributions by S corporations  Exclusion of gain on qualified small business stock

PROTECTING AMERICANS FROM TAX HIKES ACT OF 2015 (SIGNED DECEMBER 18, 2015) 22 PERMANENT EXTENSIONS (cont.)  Increased expensing limits for “§179 property” 4 FOUR-YEAR EXTENSIONS (THROUGH 2019)  50% bonus depreciation rules

PROTECTING AMERICANS FROM TAX HIKES ACT OF 2015 (SIGNED DECEMBER 18, 2015) 30 ONE-YEAR EXTENSIONS (THROUGH 2016)  Exclusion of discharged debt on principal residence  Mortgage insurance treated as mortgage interest  Above-line deduction for higher education expenses  Shorter recovery periods for selected assets, industries

BASIS REPORTING AND DUTY OF CONSISTENCY  §6035(a)(1) requires executors of estates required to file a federal estate tax return to provide “a statement identifying the value of each interest in” property included in the decedent’s gross estate  Must be furnished within 30 days after Form 706  Failure to give statement to IRS and beneficiary triggers $250 penalty  §1014(f) says the basis in property acquired from a decedent cannot exceed the final value that has been “determined” for federal estate tax purposes.  New rules apply to property “with respect to which an estate tax return is filed” after July 31, 2015.

BASIS REPORTING AND DUTY OF CONSISTENCY Proposed Regulations (March 4, 2016)  §1014(f) applies to property that actually increases the estate’s liability for federal estate taxes  Provisions for “omitted property”  No §6035 reporting where Form 706 filed solely to make portability election or GSTT exemption allocation  Assets exempt from §6035 reporting: cash, IRD, tangible personal property for which an appraisal is not required, and property that will not be distributed to a beneficiary because of disposition by the estate in a taxable transaction

FEDERAL ESTATE AND GIFT TAXES TODAY  $5,000,000 exclusion, adjusted for inflation  $5,250,000 in $5,430,000 in 2015  $5,340,000 in 2014-$5,450,000 in 2016  40% flat transfer tax rate  45% from 2007 – 2009  0% in 2010  35% in 2011 and 2012  Portability election now permanent  Deceased spousal unused exclusion (“DSUE”) amount “ports” to surviving spouse if deceased spouse’s estate timely files Form 706 9

SORTING COUPLES BY CUMULATIVE NET ESTATE BUCKET ONEBUCKET TWOBUCKET THREE

SORTING COUPLES BY CUMULATIVE NET ESTATE BUCKET ONE Up to $5.45 million BUCKET TWOBUCKET THREE

SORTING COUPLES BY CUMULATIVE NET ESTATE BUCKET ONE Up to $5.45 million BUCKET TWO $ $10.9 million BUCKET THREE

SORTING COUPLES BY CUMULATIVE NET ESTATE BUCKET ONE Up to $5.45 million BUCKET TWO $ $10.9 million BUCKET THREE $10.9+ million

SORTING COUPLES BY CUMULATIVE NET ESTATE  TRUST OR NO TRUST?  STEPPED-UP BASIS FOR EVERYTHING  Outright gift  Trust with general power of appointment  QTIP trust  PROTECTIVE PORTABILITY ELECTION BUCKET ONE Up to $5.45 million

SORTING COUPLES BY CUMULATIVE NET ESTATE  TRUST OR NO TRUST?  If NO TRUST (outright gift)  All to surviving spouse  Disclaimed amounts pass to credit shelter trust  If TRUST  Clayton QTIP  Clayton v. Commissioner, 976 F.2d 1486 (5 th Cir. 1992) BUCKET TWO $5.45 – 10.9 million

SORTING COUPLES BY CUMULATIVE NET ESTATE  KEEP CALM AND CARRY ON  Valuation discount planning  Charitable planning  BUSINESS SUCCESSION PLANNING FOR PASS-THROUGH ENTITIES BUCKET THREE $10.9+ million