0. 2016 Individual tax update
Saturday, January 28, 2017

1. Today’s presenters
Alissa Bowers Private Client Services Manager, Houston

2. Agenda Topic Minutes Individual Income Tax Update 10
Legislative Updates & Tax Law Change Proposals 15
Individual & Trust and Estate Planning Strategies 20
Q & A 5
Total 50

3. Individual income tax update

4. IRS Due Dates changes 2016 2017 Form 1040 – original due date 4/15
Form 1040 – extended due date
10/15
Form 1041 – original due date
Form 1041 – extended due date
9/15
9/30
FinCEN Form 114 (FBAR) – original due date
6/30
FinCEN Form 114 (FBAR) – extended due date
n/a 4

5. Income tax rate comparison (assuming maximum tax bracket)
2015
2016
2017*
39.6% bracket–MFJ
$464,850
$466,950
$470,700
39.6% bracket–Trusts
$12,300
$12,400
$12,500
Personal exemption
$4,000
$4,050
Standard deduction–MFJ
$12,600
$12,700
Phase-out of itemized deductions–MFJ
$309,900
$311,300
$313,800
AMT exemption–MFJ
$83,400
$83,800
$84,500
NII 3.8% tax threshold–MFJ
$250,000
Ordinary income tax (top rate)
39.6%
LTCG and qualified dividend income tax (top rate)
20.0%
Net Investment Income tax
3.8%
Social Security tax
6.2%
Medicare tax (earned–W-2 and SE income)
2.35%

6. 2016 individual income tax rates
Single
Married filing joint
Head of household
10%
$0 - $9,275
$0 - $18,550
$0 - $13,250
15%
$9,276 – $37,650
$18,551 - $75,300
$13,251 - $50,400
25%
$37,651 – $91,150
$75,301 - $151,900
$50,401 - $130,150
28%
$91,151 - $190,150
$151,901 - $231,450
$130,151 - $210,800
33%
$190,151 - $413,350
$231,451 - $413,350
$210,801 - $413,350
35%
$413,351 - $415,050
$413,351 - $466,950
$413,351 - $441,000
39.6%
Over $415,050
Over $466,950
Over $441,000 6

7. 2016 alternative minimum tax rates
Single
Married Filing Joint
26%
$0 - $186,300
28%
Over $186,300
Exemption
$53,900
$83,800
Phase-out
$119,700 - $335,300
$159,700 - $494,900 7

8. PEP and Pease limitations reinstated in 2013
Personal exemption phase out (PEP) and itemized deduction phase-out (Pease Limitation)
PEP and Pease limitations reinstated in 2013
Personal exemption for 2016 is $4,050
2016 PEP and Pease phase-out thresholds:
Single - $259,400
Head of household - $285,350
Married filing jointly - $311,300
Married filing separate - $155,650 8

9. Married filing jointly $12,600 Married filing separate
Standard deduction
Filing status
2016
Single
$6,300
Married filing jointly
$12,600
Married filing separate
Head of household
$9,300
Qualifying widow(er) 9

10. Additional Medicare tax
The 0.9% additional Medicare tax applies to Medicare wages, compensation, and self- employment income that are more than:
Single - $200,000
Head of household - $200,000
Married filing jointly - $250,000
Married filing separate - $125,000
No changes from prior year 10

11. Net investment income tax
Taxpayers may be subject to Net Investment Income Tax (NIIT). The NIIT is 3.8% of the smaller of (a) your net investment income or (b) the excess of you modified adjusted gross income over:
Single - $200,000
Head of household - $200,000
Married filing jointly - $250,000
Married filing separate - $125,000
No changes from prior year 11

12. Health savings accounts contribution limits
2016 requirements
Family
Self only
HDHP deductible of at least
$2,600
$1,300
Out-of-pocket expense limit
$13,100
$6,550
Deductible contribution limit
$6,750
$3,350
Additional contribution for taxpayer age 55 or older
$1,000/spouse
$1,000 12

13. Standard mileage rates
2016
2017
Medical/moving
19¢
17¢
Charitable
14¢
Business
54¢
53.5¢ 13

14. Projected 2017 federal estate and gift tax thresholds
2015
2016
2017*
Estate and gift tax lifetime exclusion
$5,430,000
$5,450,000
$5,490,000
Annual gift tax exclusion
$14,000
Foreign spousal annual gift tax exemption
$147,000
$148,000
$149,000 14

15. Legislative updates & Tax Law Change Proposals

16. Expiring individual tax incentives
Provisions for individuals that expired at the end of include:
Sec. 108(a)(1)(E), which excludes from gross income discharge of qualified principal residence indebtedness income.
Sec. 163(h)(3), the treatment of mortgage insurance premiums as qualified residence interest, which permits a taxpayer whose income is below certain thresholds to deduct the cost of premiums on mortgage insurance purchased in connection with acquisition indebtedness on the taxpayer's principal residence.
Sec. 222, which provides an above-the-line deduction for qualified tuition and related expenses.
Also expiring at the end of 2016 is the 7.5% adjusted-gross- income floor for deducting medical expenses, applicable to individuals age 65 and older and their spouses, which will rise to 10% in 2017 (Sec. 213(f)). 16

17. Tax Law Change Proposals
Legislative updates & planning strategies
Tax Law Change Proposals
2016 election & congress - What does the future hold?

18. Tax reform likely… 18

19. Make up of Congress in 2017 114th Congress 115th Congress Change
House
Senate
Republican
247 54
241 52 -6 -2
Democrat
187 44
194 46 +7 +2
Independent 2 19

20. Individual tax reform – Themes
Proposal
Donald Trump
Comprehensive tax reform
Lower rates for everyone
Broaden the base by reducing or eliminating tax deductions and credits
House Republicans 20

21. Individual tax reform – Rates
Proposal
Donald Trump
Three rates
12%
25%
33%
House Republicans 21

22. Individual tax reform – Itemized Deductions
Proposal
Donald Trump
Cap itemized deductions at $200,000(MFJ)/$100,000(Single)
‘Close special interest tax breaks’
House Republicans
Only mortgage interest and charitable deductions allowed
Repeal state and local tax, medical and miscellaneous deductions 22

23. Individual tax reform – Capital gains
Proposal
Donald Trump
Eliminate 3.8% tax on net investment income (NII)
House Republicans
Eliminate 3.8% tax on NII
50% exclusion of gain from tax
Rates 6%
12.5%
16.5% 23

24. Individual tax reform – Dividends and interest
Proposal
Donald Trump
No proposal
House Republicans
50% exclusion from income
Rates 6%
12.5%
16.5% 24

25. Individual tax reform – Alternative minimum tax (AMT)
Proposal
Donald Trump
Eliminates
House Republicans 25

26. Individual tax reform – Estate tax
Proposal
Donald Trump
Eliminates
Capital gains held at death subject to income tax with a $5/$10 million exemption (carryover basis for under $5/$10 million?)
House Republicans
Retains step up in basis 26

27. Individual & Trust and Estate Planning Strategies

28. Individual Tax planning Strategies
Legislative updates & planning strategies
Individual Tax planning Strategies

29. What to do now Manage AGI Defer or accelerate compensation
Retirement plan contributions, health savings account contributions
Harvest losses, time gains
Examine flow-through/personal businesses
Accelerate/decelerate bonuses and other expenses
Section 179 and bonus depreciation
Calculate AGI to maximize deductions 29

30. Planning Strategies – Manage transactions
Installment sales
Holding period with intra-family transactions
Ordinary income
Like-Kind exchange
Defer gain
Charitable giving
Charitable remainder trust (CRT)
Appreciated asset(s) to CRT, CRT sells without tax
Benefits
Rules 30

31. Planning Strategies – Manage deductions
Maximize savings from tax deductions
Calculate AGI to identify phaseouts
Properly planned itemized deductions may provide 43.4 percent federal tax benefit
Accelerate or decelerate deductions based upon AGI
Consider bunching miscellaneous deductions to exceed the 2 percent floor
AMT considerations 31

32. Donating appreciated securities versus cash
Charitable giving
Donating appreciated securities versus cash
Deduction equal to fair market value
Avoid capital gains tax
Qualified charitable transfers from individual retirement accounts (IRAs)
Donor-advised funds
Private foundations
CRTs 32

33. What next? Tax-efficient investing
Asset allocation
Tax-efficient assets are best held outside of qualified plans and deferred accounts
Less tax-efficient assets, hold in qualified plans and deferred accounts
Bonds
Ordinary income – taxable bond interest, highest tax rate
Municipal bond – tax-free (excluding AMT private activity bond)
Equities
20 percent percent top rate (under current law) on long-term gains and qualified dividends (not in deferred account)
Zero percent capital gains rate when income is low
Real estate
Capital gains and special capital gains rate 33

34. Tax-efficient retirement plan
Asset location for retirement plan investments
What assets should be in your retirement plan?
What is your retirement plan withdrawal strategy?
Traditional retirement accounts
Contribution deduction and ordinary income distribution
Retirement / change of employer – net unrealized appreciation
Roth retirement accounts
Taxable now, tax-free distribution
Conversions
Back-door Roth
Tax-free
Insurance 34

35. Estate and Trust Tax planning Strategies
Legislative updates & planning strategies
Estate and Trust Tax planning Strategies

36. Planning Strategies - Distributions
Timing of estate and trust distributions – 65- day rule
2016 trust taxable income > $12,500 will be subject to both the 39.6 percent bracket AND the 3.8 percent NII tax
Shift income to beneficiaries in lower tax brackets, as appropriate 36

37. The current state of play
2017 estate, gift and generation-skipping transfer (GST) tax exemptions are $5.49 million, indexed annually for inflation
The estate, gift and GST tax rates are 40 percent
Exemption not used during lifetime is available at death
Annual exclusion gifts
2017 annual exclusion gift amount is $14,000 (no change from 2016)
Do not consume the gi ft or estate tax exemption
Can be made to as many individuals as you like
But then it gets complicated 37

38. The current state of play (cont.)
Under the concept of ‘portability’ the surviving spouse can add to his or her own exemption, whatever amount of exemption the deceased spouse had not used during lifetime
GST exemption is not portable
Portability may eliminate need for a credit shelter or so-called ‘bypass’ or ‘B’ trust
Marital deduction allows spouses to pass unlimited amounts to their U.S. citizen spouses during lifetime or at death
Marital deduction just defers the tax. It doesn’t reduce it. 38

39. The future state of play?
President-elect Trump and the GOP have respective plans for wealth transfer taxes. With variations on the theme, we could see these proposals:
Repeal the estate, gift and GST taxes
Establish carryover basis (vs. current stepped-up basis)
Tax unrecognized capital gains at death
Up to $5 million of gains per decedent ($10 million per married couple) exempt
Exceptions for family businesses and farms
Disallow an income tax deduction for contributions of appreciated assets into a private charity established by the decedent or the decedent’s relatives 39

40. General rules about estate planning
Once basic estate tax planning is done, the only way to manage the growth of a taxable estate is to remove as much appreciation from the estate as possible by:
Making annual gift exclusion and, if feasible, large taxable gifts
Estate freezing, which includes but is not limited to:
Intra-family loans
Grantor retained annuity trust (GRATs) and sales to intentionally defective grantor trusts (IDGTs)
Charitable lead annuity trusts (CLATs)
Always start with the least invasive, least complicated and least administratively expensive technique 40

41. The power of annual exclusion gifts
The annual exclusion is available for gifts of ‘present interests’
Recipient must have present use and enjoyment of the gift
A direct gift to an individual will usually qualify as a present interest, but gifts in trust will not unless:
Beneficiary has a Crummey power of withdrawal
Gifts to the trust qualify as present interests under Section 2503
Taxpayers are also allowed to exclude
Payment of tuition or health care expenses, so long as the payments are made directly to the provider
Funding a Section 529 plan 41

42. What about larger taxable gifts?
Primary benefit is to transfer out the estate appreciation value from the date of the transfer
Appreciating how discounts reduce the gift tax value of an asset
Gift can be made outright or, more typically, to a trust
Trust can be an IDGT, which gives a multiplier effect to the gifts
Largely for income tax reasons, taxable gifts are not the planning no-brainer they used to be
The difference between carry-over basis for property acquired by gift and stepped-up basis for property acquired by inheritance
All things considered, will the family be better off on a ‘net, net’ basis by planning to favor saving estate tax at the expense of a step-up or favoring a step-up at the expense of the estate tax?
Anybody have a crystal ball or maybe tomorrow’s newspaper? 42

43. Discounts and proposed regulations under Section 2704
Proposed regulations could curtail use of estate and gift tax valuation discounts traditionally taken in the transfer of interests in family-controlled entities
Generally applicable to transfers occurring after the date the regulations are published as final
Public comments accepted through November 2, 2016
Then presented at a public hearing in early December
Discourse between planning community and IRS subsequent to release of proposed regulations
May not be as draconian as first appear
Not likely to be final until well into 2017
Impact of the election on the fate of these regulations? 43

44. Q&A