Tax reform: Key provisions of the Tax Cuts and Jobs Act February 21, 2018

Overview of the individual and wealth transfer provisions (for reference)

Alternative minimum tax Summary of provisions Area Summary Brackets and rates Seven tax brackets—10, 12, 22, 24, 32, 35, and 37 percent. The top individual rate of 37 percent will apply at incomes of $500,000/$600,000 . for estates and trusts Condenses the number of tax brackets from seven to four, including 10, 24, 35 and 37 percent brackets Alternative minimum tax Retained with higher exemptions ($70,300/ $109,400); phase-out of exemption increased to $500,000/$1,000,000 Unless otherwise noted, these provisions apply as of January 1, 2018, and expire by the end of 2025, meaning that the rules will revert to 2017 rules. As I go through the provisions, I'll note an observation here and there about the implication of these provisions, some of which extend far beyond the provision itself.   With tax brackets and rates, the new law provides for seven individual brackets. The top is at 37 percent and applies for individuals earning $500,000 and above and joint filers earning at least $600,000. Thus, this appears to be a new form of marriage penalty. The lower rates are welcome, at least at the margin, but given all the other changes, meaning with deductions that we'll talk about but also all the things that they left alone, it's fair to say that whether a given taxpayer wins or loses here depends. For example, what should you be thinking about before deferring a lot of comp for a lot of years, especially if you're going to be an unsecured creditor and you're going to be subject to section 409A? After all, those low rates could sunset well before your deferral day is over. So you'll have to re-examine the variables that go into that decision. Or, from an investment standpoint, you might want to relocate the sweet spot for taxable bonds versus tax-exempts. And you'll certainly want to understand how all these federal changes will impact your state tax position and how that in turn might affect where you put your money for fixed income. The individual AMT was retained. And although taxpayers have more bandwidth to avoid it, it's still there, though the mixture of what puts people into it or not has been affected by changes in deductions, etc. Each individual situation needs to be analyzed in order to assess the impact. 4

Summary of provisions (cont.) Area Summary Personal exemptions Repeals Standard deduction Doubles to $12,000/$24,000; retains additional deduction for blind and elderly Mortgage interest Limits to interest on $750,000 of indebtedness on newly purchased principal and second residences incurred after Dec. 15, 2017; not allowed for home equity loans. There is some good news and bad news here. The standard deduction is doubled, which is the good news. But the bad news is that the personal exemptions are eliminated. This is creates a real sea change. Many people have paid off their mortgage, make small contributions to charity and can no longer deduct their state and local income taxes beyond a certain amount, which will result in a vast new generation of taxpayers taking the standard deduction. This will have a spillover effect on a lot of financial behavior going forward, like on charitable giving in particular. The whole mortgage interest deduction is limited to interest on $750,000 of acquisition indebtedness incurred on newly purchased principal and second homes after December 15. No more deducting interest on home equity loans, regardless of when the loan was obtained.   And with the 3.8 percent net investment income tax being retained and other provisions that remain unchanged, does it make more sense now than ever to accelerate our mortgage payments? Will that give a taxpayer a better after-tax ROI? 5

Summary of provisions(cont.) Area Summary State and local tax deductions Deduction of up to $10,000 for state and local property, income or sales taxes allowed Charitable contributions Preserves deduction and increases the AGI limitation for cash contributions to public charities and certain private foundations from 50 percent to 60 percent 529 plans Up to $10,000 of 529 plans can be used per student for public, private and religious elementary and secondary schools There is now a deduction of up to $10,000 for state and local property, income or sales taxes. Prepayments of 2018 state and local income taxes made during 2017 are not deductible for 2017, and prepayments of 2018 property taxes need to be analyzed on a case-by-case basis to determine deductibility.   The deduction for charitable contributions is preserved with a clear benefit for big givers. There was a change in 529 plans, which will be of interest to some. 6

Summary of provisions (cont.) Area Summary Other deductions Deductions for casualty and theft losses limited to those incurred in a disaster area Alimony paid for divorce after Dec. 31, 2018, not deductible/includible after 2018 . Miscellaneous deductions Eliminates miscellaneous deductions over 2 percent of AGI Alimony is not deductible going forward pursuant to divorce decrees after the end of 2018.   A deduction for miscellaneous itemized deductions over 2 percent of AGI has been eliminated. Those deductions include investment management fees, tax prep fees and some other things. 7

Summary of provisions (cont.) Area Summary Medical expenses Medical expenses exceeding 7.5 percent of AGI deductible for 2017 and 2018; eliminates AMT preference for medical expense deductions for 2017 and 2018. Overall limitation on itemized deductions (Pease limitation) Suspends 3 percent of AGI limit on deductions IRAs Conversion of traditional IRA to a Roth IRA cannot be recharacterized; can still convert traditional IRA into a Roth IRA. The deduction for medical expenses was retained and even enhanced a bit for a couple of years. With respect to IRAs, the conversion of a traditional IRA to a Roth IRA cannot be recharacterized as a contribution to a traditional IRA. In other words, they won't let you unwind. This doesn't prevent conversion to a Roth, only the reversal, the unwinding. 8

Summary of provisions (cont.) Area Summary Estate, gift and GST tax Exemptions are doubled to approximately $11 million, effective January 2018. The estate, gift and GST tax rates remain the same as prior law. Estate and GST tax not repealed Provisions sunset after 2025 Well, some very interesting things happened with estate, gift and generation-skipping taxation, starting with the doubling of the exemptions to approximately $11 million. Indexed for inflation per the statute, the exemption is $11.2 million effective Jan. 1, 2018. The estate tax is not going to be repealed, and we still have stepped-up basis for inherited assets. With the sunsetting after 2025, the exemptions will go back to what they were in 2017. 9

Key provisions of prior law left undisturbed Income tax The 3.8 percent tax on investment income under section 1411 and the .9 percent Medicare tax on compensation Tax rates on capital gains and qualified dividends Exclusion of gain on sale of a residence Ability to identify the securities that an investor is deemed to sell, i.e., the Senate’s proposal for a ‘first-in, first out’ method not included Pre-tax contribution limits (including catch-ups) for 401(k) plans Ability for beneficiaries to ‘stretch’ IRA withdrawals out over their lifetimes Student loan interest deductions, adoption assistance programs, dependent care accounts, tuition waivers, employer paid tuition, teacher supplies deduction and Archer medical savings accounts A lot of the stuff that is most important is not what they changed, it's what they kept. They didn’t get rid of the 3.8 percent tax on investment income, and the impact of the elimination of deductions on the modified adjusted gross income that you have to figure out for purposes of the 3.8 percent tax is likely negative. The continuance of this tax means that investors have to continue to factor it into their investment asset allocation, among other things and may want to give renewed consideration to the types of insurance vehicles that offer deferral on investment earnings.   The exclusion of gain on the sale of a residence was in play but was left alone, and the idea of imposing the first-in, first-out method to determine what securities you were selling did not make it into the final bill. 10

Tax reform resource center Visit our tax reform resource center for more information on how legislation can affect your business and tax planning. 11