Making Taxes Great Again: Tax Reform the Trump Way and What Advisors Need to Know for Year End Tax Planning Purposes Martin S. Finn, JD, LL.M., CPA/PFS Founding Partner Lavelle & Finn, LLP Latham  Saratoga  Oneonta, NY marty@lavelleandfinn.com 518.869.6227

Alan Greenspan on PBS, September 24, 2010 “And I must say that the Republicans, I think, have been cutting taxes with borrowed money, and the Democrats have been spending with borrowed money. They agree only on the borrowed money.” Alan Greenspan on PBS, September 24, 2010 © 2017 Lavelle & Finn, LLP

“Unified Framework For Fixing Our Broken Tax Code” Issued September, 27 2017 – Joint Republican effort from the Trump Administration, two top Congressional leaders and the chairs of the House and Senate tax writing committees As modified by the “Tax Cut and Jobs Act (H.R.1)” introduced by the House of Representatives on November 2, 2017 © 2017 Lavelle & Finn, LLP

Individual Provisions Increase the “Zero Tax Bracket” Double the standard deduction to $24,000 for married taxpayers filing jointly and $12,000 for single filers Eliminate personal exemptions TCJA - same, but $24,400 for married taxpayers filing jointly and $12,200 for single filers in 2018 © 2017 Lavelle & Finn, LLP

Individual Provisions (cont.) Individual Tax Rate Structure Consolidate tax brackets to 12%, 25% and 35% There may be additional top rate on highest income taxpayers No indication of what new income thresholds for new tax brackets will be TCJA has brackets Use more accurate measure of inflation TCJA - CPI-U rather than CPI TCJA – adds back the 39.6% bracket and provides phase out of 12% bracket through surtax No mention of capital gains rates House proposal had top rate of 16.5% TCJA – retains current bracket structure and retains 3.8% Medicare surtax Effective 0%, 15%, 18.8% and 23.8% rates NOT simple!! © 2017 Lavelle & Finn, LLP

Individual Provisions (cont.) Enhanced Child Tax Credit and Middle Class Tax Relief “Significantly” increase the Child Tax Credit Continue to allow the first $1,000 to be refundable TCJA – increase credit to $1,600 but only $1,000 refundable Increase income levels at which Child Tax Credit phases out Eliminate the marriage penalty that currently exists Dependent Care Credit Annual $500 non-refundable credit for non-child dependent care costs TCJA – basically same but provides higher phase outs “Family Flexibility Credit” © 2017 Lavelle & Finn, LLP

Individual Provisions (cont.) Repeal Individual Alternative Minimum Tax (“AMT”) TCJA – same and mechanism provided for releasing Minimum Tax Credit carryforwards © 2017 Lavelle & Finn, LLP

Individual Provisions (cont.) Itemized Deductions Eliminate all itemized deductions except the charitable contributions deduction and the home mortgage interest deduction Elimination of state and local tax (“SALT”) deductions would have significant impact on high tax states (NY, CA, NJ) TCJA Preserves real property deduction up to $10,000 per year Mortgage interest deduction limited to $500,000 of acquisition debt for one primary residence (proposed effective date 11/2/17!) Existing acquisition debt is grandfathered Home equity loan interest deduction is eliminated Most miscellaneous (2% of AGI) deductions eliminated Financial advisory fees retained – but still subject to 2% AGI floor © 2017 Lavelle & Finn, LLP

Individual Provisions (cont.) Work, Education and Retirement Intends to retain tax benefits that encourage work, education and retirement security – no proposals Past ideas: Consolidation of various types of plans Loss of deduction for high-income taxpayers for contributions to IRAs Compulsory conversion of some or all traditional defined contribution plans to ROTH-like plans “Five-year” rule – IRAs over a certain amount to be distributed within 5 year period Recent “chatter” – limits on 401(k) deductions TCJA – eliminate many employee fringe benefits Education credits combined into American Opportunity Tax Credit © 2017 Lavelle & Finn, LLP

Source: The Tax Foundation TAX FACT: In 2016, Americans were expected to spend 8.9 billion hours and $409 billion complying with tax code. Source: The Tax Foundation © 2017 Lavelle & Finn, LLP

“Death” and Generation-Skipping Transfer (“GST”) Taxes Repeal estate and GST tax No mention of repeal of gift tax Likely will maintain gift tax as back stop to federal income tax to prevent shifting income to taxpayers in lower tax brackets No mention of basis implications if estate tax is repealed TCJA – Estate and gift tax exemption doubled to $11.2 million ($22.4 million for married couple) Estate and GST tax repealed in 2024 Gift tax remains with inflation-indexed $11.2 million exemption and $15,000 annual gift tax exclusion Basis step-up remains © 2017 Lavelle & Finn, LLP

Business Provisions Tax Rate Structure for Small Businesses “Business” income of sole proprietorships, partnerships and S Corporations taxed at maximum 25% rate Adopt measures to prevent recharacterization of personal income TCJA – basically same but with specific rules to ensure personal service income does not take advantage of preferential rate © 2017 Lavelle & Finn, LLP

Business Provisions (cont.) Corporate Tax Rate Structure Corporations will be taxed at a maximum 20% rate Repeal corporate AMT Consider methods to reduce double taxation of corporate earnings TCJA – flat 20% corporate tax rate © 2017 Lavelle & Finn, LLP

Business Provisions (cont.) Expensing of Capital Investments Allow businesses to immediately write off new investments in depreciable assets Only provision that is clearly intended to be retroactive (9/27/17) TCJA - $5.0 million limitation, adjusted for inflation, for 2018 – 2022 © 2017 Lavelle & Finn, LLP

Business Provisions (cont.) Interest Expense Deduction for net interest expense incurred by C corporations will be partially limited TCJA – excess over 30% of AGI limited Preserved Business Credits Research and development (“R&D”) and low-income housing will be preserved All other business credits and loopholes are on the chopping block © 2017 Lavelle & Finn, LLP

Legislative Timing of Tax Reform First: House & Senate pass a budget resolution, setting the maximum revenue reduction for the next 10 years Second: House & Senate each pass their tax bills Third: House & Senate work on reconciling their bills Fourth: Final votes in House and Senate © 2017 Lavelle & Finn, LLP

Year End Tax Planning Strategies “Traditional” year end tax planning concepts may still apply Consider changes in income and personal circumstances Consider potential tax law changes Need to know which tax brackets currently in (2017) and likely to be in (2018) © 2017 Lavelle & Finn, LLP

Year End Tax Planning Strategies Defer Income Why? Deferred payment of taxes plus Potential lower tax rates next year Accelerate (Prepay) Deductions Deferred payment of taxes plus- Potential higher tax rates this year = more valuable deductions plus Potential complete loss of certain tax deductions means only value in this year © 2017 Lavelle & Finn, LLP

Year End Tax Planning Strategies Defer year-end bonus Consider deferred compensation plan Retirement Plans Defer first year required minimum distribution (“RMD”) Delay Roth conversions If five-year rule is enacted, consider: Roth conversions Naming a charitable remainder trust as beneficiary Naming multiple beneficiaries to disperse income and tax burden Postpone US Savings Bonds redemptions © 2017 Lavelle & Finn, LLP

Year End Tax Planning Strategies Postpone sale of appreciated assets Ordinary income v. capital “Harvest” capital losses to offset capital gain Up to $3,000 to offset ordinary income Beware of wash sale rule Wait 31 days to sell or repurchase Buy securities of a different company or mutual funds in same industry Buy a bond of similar quality and duration from a different issuer Net Investment Income Tax (“NIIT”) – consider possible repeal Defer or consider installment sale of real estate or closely held business interests Fiduciary Fees Defer executor’s and trustee’s commissions if possible © 2017 Lavelle & Finn, LLP

Year End Tax Planning Strategies Investment Assets Consider what type of investment is appropriate Be careful of year end mutual fund investments Dispose of disappointing small business stock – section 1244 ordinary loss deduction Make effort to collect bad debts – bad debt deduction in 2017 Free up passive losses by disposing of passive activity © 2017 Lavelle & Finn, LLP

Year End Tax Planning Strategies Itemized Deductions Prepay state income and property taxes Consider AMT Consider bunching itemized deductions Medical expenses – 10% of AGI floor Health and long term care insurance premiums, medical and dental services, prescription drugs, mileage Miscellaneous expenses – 2% of AGI floor Professional fees, tax planning and return preparation, investment fees, unreimbursed business expenses © 2017 Lavelle & Finn, LLP

Year End Tax Planning Strategies Charitable deductions Make any planned gifts this year Mail check before 12/31 Credit card payment – get miles and a deduction Fund charitable trusts Fund donor advised fund Consider charitable gifts with appreciated securities Avoid capital gain Deduct FMV of securities Start early Consider charitable rollover from IRA Gift of property before year end Obtain appropriate documentation © 2017 Lavelle & Finn, LLP

Year End Tax Planning Strategies Disaster Tax Relief Act (September 29, 2017) Charitable contributions targeted for hurricane relief made before 1/1/2018 No AGI or itemized deduction limitations apply Written acknowledgment must specify © 2017 Lavelle & Finn, LLP

Year End Tax Planning Strategies AMT Utilize any deferral items State Residency Possible elimination of state and local tax (“SALT”) deductions Consider benefits of changing domicile Review state residency and document days in and out of each state Use carry forward investment interest expense deduction Generate investment income Fund deductible retirement plans Make maximum annual contribution allowed At a minimum, contribute amount necessary to obtain employer match Fund Section 529 College Savings Plan Fund health savings account (“HSA”) Prepay education expenses © 2017 Lavelle & Finn, LLP

Year End Tax Planning Strategies Business Planning Delay billings/collections Prepay currently deductible business expenses Pay all outstating accounts payable Pay year end bonuses before year end Prepay health insurance premiums Set up a retirement plan by 12/31 and fund next year © 2017 Lavelle & Finn, LLP

Year End Tax Planning Strategies Business Planning (cont.) Charitable gifts Corporate AMT Utilize all available deferred deductions/credits before corporate AMT is repealed Buy needed equipment Consider proper year to purchase capital assets Cost segregation study may be valuable Interest expense Utilize net interest © 2017 Lavelle & Finn, LLP

Year End Tax Planning Strategies Utilize other business deductions IRC §199 domestic production activities deduction Re-examine entity choice S-Corp v. LLC v. C-Corp Always conduct annual meetings and memorialize in writing business decisions Ratify tax planning decisions Helps secure entity level liability protection Revisit regularly partnership and shareholder agreements © 2017 Lavelle & Finn, LLP

Year End Tax Planning Strategies Miscellaneous Planning Strategies to Consider Fund flexible spending account (“FSA”) Income tax payment planning Adjust tax withholdings before year end if estimated tax payments are not sufficient to avoid penalties Consider eligible rollover from qualified plan before year end Planning with kids Consider transferring appreciated securities to adult child in 0% capital gain tax bracket Beware the “Kiddie Tax”! Can avoid 20% capital gain rate and NIIT Hire child/grandchild and contribute to traditional or ROTH IRA © 2017 Lavelle & Finn, LLP

Year End Tax Planning Strategies Estates and Trusts Carefully select year-end for fiduciary tax returns Consider tax rate changes Brackets will likely remain compressed January 31st fiscal year end may be even more valuable Loss of Section 691(c) deduction Consider accelerating income that gave rise to deduction © 2017 Lavelle & Finn, LLP

Year End Tax Planning Strategies Estate Planning Potential repeal of estate tax should NOT cause people to delay implementing a proper estate plan For many, estate taxes are already not an issue 2018 estate tax exemption - $5.6 million Personal goals and objectives emphasized More income tax and basis planning Flexible drafting even more critical © 2017 Lavelle & Finn, LLP

Year End Tax Planning Strategies Benefits of a solid estate plan: Proper distribution of wealth Name individuals to implement and monitor estate plan (e.g., executor, trustee, guardian) Protect estate heirs/beneficiaries from inability, disability, creditors and predators by using trust planning Provide for charitable interests Consider benefits of simplifying the process of distributing wealth “Probate avoidance” © 2017 Lavelle & Finn, LLP

Year End Tax Planning Strategies Estate Tax Reduction Planning Estate tax repeal may only last for 10 years Assumptions about life expectancy become important Life insurance trust probably still relevant <10 year grantor retained annuity trust (“GRAT”) Dynasty trust planning with repeal of GST 10 year qualified personal residence trust (“QPRT”) Make annual gift tax exclusion gifts Pay tuition and medical expenses – unlimited exclusion amounts October 4, 2017 Treasury department cancelled proposed Section 2704 regulations – too burdensome Current Chapter 14 regime stays in place , including Section 2704 And there is still a NYS Estate Tax to plan for! © 2017 Lavelle & Finn, LLP

“It’s tough to make predictions, especially about the future” Yogi Berra © 2017 Lavelle & Finn, LLP

Martin S. Finn, JD, LL.M., CPA/PFS Founding Partner Latham  Saratoga  Oneonta, NY marty@lavelleandfinn.com 518.869.6227 © 2017 Lavelle & Finn, LLP