1. 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

2. 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

3. “Unified Framework For Fixing Our Broken Tax Code”
Issued September, – 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

4. 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
© 2017 Lavelle & Finn, LLP

5. 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

6. 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

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

8. 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

9. 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

10. 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

11. “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

12. 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

13. 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

14. 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

15. 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

16. 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

17. 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

18. 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

19. 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

20. 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

21. 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

22. 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

23. 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

24. 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

25. 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

26. 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

27. 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

28. 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

29. 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

30. 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

31. 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

32. 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

33. 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

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

35. Martin S. Finn, JD, LL.M., CPA/PFS
Founding Partner
Latham  Saratoga  Oneonta, NY
© 2017 Lavelle & Finn, LLP