1. Year-end tax planning for 2017 Things to consider
dbbmckennon
Gary Craig
Newport Beach, CA
dbbmckennon.com
Thank you for the opportunity to share some tax planning strategies you can do now to save on your 2017 income taxes.
For 2017 planning, it is important to understand the current tax law while keeping an eye on anticipated changes to come.
There has been much discussion this fall about tax reform. Proposed legislation is in process, but the final result will likely change along the way before it is enacted.
This update covers a few updates and hot topics, as well as some planning tips based on tax law as it stands through the end of the year 2017.

2. Reminder about due dates
March 15
April 17
April 15
April 17
(Extend until Sept. 17)
(Extend until Oct. 15)
(Extend until Oct. 15)
(Extend until Oct. 1)
Form 1065 (Partnership)
Form 1120S (S corporation)
Form 1040 (Individual)
FinCEN Form 114 (Foreign bank reporting)
Form 1120 (C corporation)
Form 1041 (Trust and estate)
These due dates were effective for 2016 returns, but this is just a reminder of the earlier deadline for partnerships, later deadline for corporations, and the adjusted due dates for the FBAR filings.
The extended due date of Form 1041 for estates and trusts is now September 30 (October 1 for 2018) rather than September 15.
The goal of the change in due dates was to establish a more rational flow of information- for example, returns with K-1’s that flow into a 1040 are due earlier than the 1040 itself.
Note to presenter – be sure to get the AICPA due date chart here:

3. Expired provisions (at the end of 2016)
Exclusion of discharge of indebtedness on principal residence
Deduction of mortgage insurance premiums
7.5% AGI floor for medical expenses for taxpayers over the age of 65
Above-the-line deduction for qualified tuition and fees
10% credit for qualified energy property
Legislation at the end of 2015 extended some items only through These are the provisions that are not in effect at this time for 2017.
*Exclusion of discharge of qualified principal residence indebtedness
*Ability to deduct mortgage insurance premiums as mortgage interest
*Tuition & fees deduction covers up to $4,000 of qualified expenses for tuition/fees. It’s important to note that it only applies to amounts that must be paid as a condition of enrollment. This deduction phases out for single filers with $80k AGI and joint filers with $160k AGI.
*Energy credit for 10% of purchase price of nonbusiness energy property
Note to presenter: review the JCT report on expiring provisions for a list of items that expire at the end of 2016 or later -

4. Tax brackets for 2017
Rate
Single
Married (filing jointly)
Head of household
10%
$0–$9,325
$0–$18,650
$0–$13,350
15%
$9,326–$37,950
$18,651–$75,900
$13,351–$50,800
25%
$37,951–$91,900
$75,901–$153,100
$50,801–$131,200
28%
$91,901–$191,650
$153,101–$233,350
$131,201–$212,500
33%
$191,651–$416,700
$233,351–$416,700
$212,501–$416,700
35%
$416,701–$418,400
$416,701–$470,700
$416,701–$444,550
39.6%
$418,401 and up
$470,701 and up
$444,551 and up
For tax year 2017, marginal income tax brackets are adjusted slightly from the 2017 brackets because there has been little inflation. The lowest bracket is 10% and the highest is 39.6%.
[Other 2017 inflation adjusted amounts can be found in Rev. Proc ]
Depending on the outcome of the current tax reform bill, we may see changes to the tax brackets and/or rates in the future.

5. Dividend and capital gains rates unchanged
The top tax bracket for dividends and capital gains is 20% (23.8% if the net investment income tax applies). Here’s the breakdown:
0% for taxpayers in 0–15% tax brackets
15% for taxpayers in middle-income tax brackets
20% for taxpayers in the highest tax bracket (39.6%)
Capital gains rates also stay the same, with the highest income taxpayers paying 20% on capital gains while also facing the net investment income tax of 3.8% on top of that. If you sold stocks or earned dividends, this could affect you.

6. Personal exemptions for 2017
$4,050 per eligible person
Phase-out starts at these AGI levels:
Single: $261,500
Married filing jointly: $313,800
Head of household: $287,650
Married filing separately: $156,900
The personal exemption is provided for the taxpayer, spouse and all eligible dependents, with no limit to the number of dependents you can claim and regardless of whether you itemize deductions.
However, it is key to note that these exemptions phase out for higher-income taxpayers so if your income exceeds the amounts shown here, you won’t be able to take these exemptions. This is based on your adjusted gross income, so the amount isn’t affected by deductions such as charitable contributions or mortgage interest, but could be reduced by self-employed health insurance premiums, student loan interest, IRA contributions or certain other “above-the-line” deductions.

7. Itemized deductions
Limited for high-income taxpayers (note that this is proposed to be repealed)
3% reduction once AGI exceeds the threshold (same threshold as personal exemptions noted on the above slide)
Reduction never goes above 20%
Certain deductions must be over a threshold in order to benefit:
Medical expenses
Investment expenses
Unreimbursed business expenses and other miscellaneous deductions
Casualty or theft losses
Maximizing deductions is a tax reduction strategy, but it’s important to understand that not all deductions are the same. For example, medical expenses must exceed 10% of your adjusted gross income before you receive any deduction (for all taxpayers this year- >65 lower limit goes away for 2017) and investment expenses, legal fees or even tax preparation fees must equal more than 2% of your AGI to be deducted.
Although the currently proposed tax reform legislation includes the removal of certain itemized deductions and an increased standard deduction.
Taxpayers with income above phase-out thresholds will have their itemized deductions limited (medical, investment, gambling, and certain theft/casualty losses do not apply), which negates the benefit of some tax reduction strategies. Note that in proposed legislation, this limit is scheduled to be repealed.
It is important to plan ahead and speak to your adviser before making any big decisions that cannot be undone. There may be alternatives that will provide a better tax outcome. It also is important to ensure that all criteria are met for deducting items, such as proper documentation, rights of ownership, etc. This is especially important if you’re planning a significant gift to charity, particularly if you’re gifting a non-cash item.

8. Affordable Care Act provisions
Fee increase for uninsured
2017: Higher of 2.5% of yearly household income or $695 per person ($ per child under 18)
Premium tax credit
Household income between 100% and 400% of federal poverty line
The fee or penalty for NOT having health insurance is the same for 2017 as it was for 2016, so uninsured individuals will now pay a fine of the higher of 2.5% of income or $695 per uninsured person ($347.5 per child under 18). For future years, the fee will increase with inflation. Open enrollment for 2017 is from November 1 and runs through December 15, 2017.
At this time, the rules are still in effect for having insurance coverage or paying the penalty. This could change based on legislation.
The Premium Tax Credit (or “PTC”) can be claimed by low- and middle-income individuals and families who purchased health insurance through their state-run exchanges and did not have affordable health insurance offered by their employer. The amount varies and can be received in advance to reduce monthly premiums.
Visit healthcare.gov for more information.

9. Review of net investment income tax (NIIT)
• Additional 3.8% tax
Affects individuals, estates and trusts with income above certain thresholds
Capital gains, interest and dividends
Net rental and royalty income
Income from passive activities
The net investment income tax (NIIT) went into effect on Jan. 1, 2013.
The income thresholds for this tax - $200,000 for single or head of household taxpayers and $250,000 for married filing jointly taxpayers - do not adjust with inflation.
If you have income above these thresholds and have certain net investment income, you will be subject to this 3.8% tax on the lesser of net investment income or the excess of income over these thresholds.
Investment income subject to the tax include taxable interest/dividends from stocks and bonds, certificates of deposit and mutual funds and capital gains from the sale of these assets.
If rental income is treated as passive income, then it is subject to this tax. Activities that meet the self-rental and real estate professional rules are not subject to NIIT.
Once again, planning can play a critical role in minimizing tax. Strategies such as installment sales, ROTH IRA conversions, tax-deferred annuities can be implemented to potentially reduce NIIT.

10. Alternative minimum tax (AMT)
Alternative tax system that parallels the regular federal tax (with different rates and rules for deductions)
How does it work?
Adds back certain non-taxable income and removes some deductions
Re-computed income is then multiplied by the applicable rate (26% or 28%) = AMT
Higher of AMT or regular tax is paid
Complex to calculate
Proposed legislation to repeal beginning in 2018
The AMT exists to be sure everyone pays a “minimum” level of tax despite using various exclusions, deductions, and credits to reduce their regular tax.
In computing AMT, individuals do not deduct personal exemptions, state taxes, home equity interest and miscellaneous itemized deductions. Other adjustments also exist, such as exercise of incentive stock options, tax-exempt interest on certain private-activity muni bonds, and adjustments could come from K-1’s received.
2017 exemption amounts: $54,300 – Single; $84,500 – Married Filing Jointly
Once the alternative minimum taxable income is calculated, a two-rate structure applies – 26% and 28%. If the AMT is higher than regular tax, the higher amount is owed.
Because large one-time gains and big deductions that trigger the AMT are sometimes controllable, you may be able to avoid or minimize the impact of AMT by planning ahead. Also, considering the proposed legislation to repeal AMT, planning for 2017 is very important.

11. Retirement planning 401(k)/403(b):
$18,000 ($18,500 for 2018) + $6,000 for 50 and over
IRA:
$5,500 + $1,000 for 50 and over
Roth IRA:
Income limits on contributing, but anyone can convert retirement funds to a Roth
401(k) contribution limits stayed the same for 2017 along with the catch-up amount for taxpayers age 50 and over. For 2018, the contribution limit goes up $500, but the catch-up stays the same.
IRA contribution limits remained the same. Roth IRAs still have income limits on who can contribute to the accounts, but there is a beneficial rule that allows anyone to convert a traditional IRA to a Roth IRA, which allows the funds to grow tax-free and also be withdrawn tax-free.
Remember that if you choose to convert traditional IRA assets or roll a 401(k) into a Roth IRA, you will have to pay income taxes on the amount you converted that year. Remember to consult your tax advisor to help ensure you are maximizing use of tax-favorable retirement plan rules.

12. Estate and gift taxes
2017 estate tax exemption: $5.49 million, each person ($11 million)
Proposed changes and eventual repeal
Top rate is 40%
2017 gift tax annual exclusion: $14,000, each person
New basis reporting rules
Estate planning is more than minimizing estate taxes.
Updating documents
Repurposing insurance
Privacy
Asset protection
The American Taxpayer Relief Act (ATRA) simplified estate taxes for federal purposes, but that doesn’t mean you don’t need to do estate planning if your wealth falls below $5 million. Many states have much lower thresholds and proper planning can alleviate some of the burden.
If you’ve had any significant changes in your family, such as a birth, marriage, divorce or death, it’s important to revisit your estate planning documents to make any necessary changes.
Also note, there are new rules requiring executors to report basis information to the beneficiaries for any estate required to file a return after July The form is scheduled to be due within 30 days of the estate tax return due date, but there were several delays to the original filing deadline, so the due date for this has potential to change.
Even with the proposed repeal of the estate, there are still reasons to ensure you have considered all of the implications to your current estate plan.

13. Education tax benefits
American opportunity tax credit
Up to $2,500 for first four years post-secondary school
Lifetime learning credit
Up to $2,000 for all post-secondary expenses
Section 529 plans
Proposed changes with legislation
The American opportunity tax credit and lifetime learning credit are just that: credits, which are much more favorable than deductions. These provisions reduce the taxes you pay dollar for dollar. The AOTC is even refundable for some individuals, meaning that you could receive up to $1,000 in a refund by using this credit. This credit is now a permanent tax break.
The deduction for qualified tuition and expenses expired at the end of 2016 and has not been extended at this time.
Changes to education benefits are part of proposed legislation.

14. Charitable contribution reminders
Qualified charity
Documentation requirements
Donation by cash or check
Must have proof of payment
Cash or non-cash contributions of $250 or more
Need “contemporaneous written acknowledgment” from the charity
Non-cash contributions over $500
Need details of donee organization, items donated, cost, value and more (see Form )
Non-cash contributions, including non-publicly traded stock worth over $5,000
Need a qualified appraisal
Clothing and household items
Must be in good used condition or better
Every year there are court cases where the IRS has denied an individual’s charitable contributions due to lack of required documentation, improper valuation, or lack of an appraisal if needed.
Be sure that the charity you are considering is a qualified charity to receive tax-deductible contributions. IRS has an online search tool, Exempt Organizations Select Check (
These problems can easily be avoided. If in doubt on what is needed in making a contribution, consult with your tax adviser.
Consider the deduction value of clothing and household items- they should be in good used condition or better and value should be the price a willing buyer would pay for them. Consider the value guides that are published by organizations such as Goodwill or the Salvation Army.
In order to claim a deduction for any donation of $250 or more, you must have a contemporaneous written acknowledgment from the charitable organization. Contemporaneous means you have it when you file the return. The acknowledgement is usually a letter from the charity on the Charity’s letterhead that states the amount of the cash donation, or if non-cash, a description of the item; a statement of whether the done provided anything to the donor such as a meal or DVD in exchange for donation, if something was provided, its value must be stated. Some charities do not provide proper records. Thus, it is important to review letters from the charity and if incomplete, follow up to get a proper documentation.

15. State and local tax issues
Consider state/federal tax differences
Additional filing requirements
Credit for taxes paid in other states
Many states disallow deductions that can be taken on a federal return and may tax income that is exempt from federal tax. For example, some states have more restrictive net operating loss carryover rules than the federal government and do not allow favorable tax treatment for long-term capital gains. Also, many states do not use the higher 179 expensing amounts or allow bonus depreciation. At the same time, states also have their own set of credits and deductions that can help lower taxes.
Due to budget constraints in many states, they are being more aggressive with assessing tax on non-resident individuals and businesses that have a presence in their state. Be aware of situations ( such as providing services, operating a business, selling property in another state, receiving a K-1 with multistate income) that could cause you to have a filing requirement in another state.
If you are required to file in multiple states, you should be able to receive a credit for the taxes paid to other states, subject to limits.

16. Planning now to avoid underpayment penalties
Estimated tax payments/withholding
Preparing for balances due in April
One good reason to discuss tax planning before year is over is to make sure you have a good handle on current year’s tax liability and payments made so far during the year. If you don’t pay enough withholding and estimated tax payments, you may be charged a penalty for underpayment of estimated tax.
In order to avoid, you (should) pay 90% of the current year’s tax liability (generally 25% of that per quarter) or 100%/110% (depending on your level of income) of the prior year’s tax liability. If you determine early enough that you have not paid enough to avoid penalties, consider adjusting withholding from income (salary/pension). Withholding is considered to be paid evenly throughout the year, even if the withholding happens in December.
This is a good first step for tax planning as it can lead to things that can be done (on the next slide) to minimize taxes. Also, it helps to avoid surprises come April 15, or April 17 as is the case this year, which is always a good thing.

17. Planning for tax reform
Changes in rates (business, individual and qualified business income from pass-throughs)
Expensing for depreciable assets
Estate tax repeal
Changes to itemized deductions
Repeal of AMT
So far, we have discussed some of these changes throughout the presentation. Proposed legislation has included changes in tax rates, changes to itemized deductions (medical, state/local, etc.), estate tax exemption changes with an eventual repeal, repeal of the AMT, changes in expensing capital assets, and other potential changes. If and when tax legislation is passed, we will work with you to determine the effects changes will have on your situation.

18. Last-minute planning tips
Consult your tax adviser about accelerating/postponing deductions/income.
Consider 0.9% Medicare tax.
Harvest capital losses.
Maximize retirement savings.
Avoid mutual fund purchases in December.
Contribute appreciated stock held for more than one year.
Consider contributing to a donor-advised fund.
There are some steps you can take before the end of the year that may reduce your taxable income for For example, If you have a tuition bill or state estimated tax payment due in January 2018, consider paying it this year. Be sure to consult with your tax advisor for year-end planning assistance in determining whether it is to your advantage from a tax perspective to prepay or delay payment on certain items for 2017.
There may be circumstances where it may make sense to accelerate income/defer expenses.
If flexibility exists in FICA wages (bonus/stock options/self-employed), but sure you consider the effects of the .9% Medicare tax if greater than $200k single; $250k filing jointly).
And while it’s a poor investment strategy to let the tax be the main driver in your investment decisions, if you are planning to liquidate any taxable securities in the near future, consider selling any that are at a loss if you have gains so far this year.
If you haven’t maxed out your 401(k), call payroll department to make it happen. You also have until April 16th to fully fund your IRA.
Mutual funds are required to pay out capital gains to investors, and even though the payout is considered a return of capital for fund pricing purposes, you do have to pay taxes on this “phantom income.” If you’re thinking about getting into a fund, wait until after that year-end distribution happens to save yourself from a nasty tax surprise.
If you’re planning cash gifts this year to family OR charity, consider transferring appreciated stock instead – this removes the capital gain from your income, and you’ll get the fair market value of the stock as a deduction for the gift if not to a qualified charity. This is especially true if the family member is over age 24 (not subject to kiddie tax), but is in the 10/15% tax bracket and will have a 0% capital gain rate.
If you want to make a charitable contribution, but don’t have an organization in mind at the moment, consider putting some money in a donor-advised fund. You get the deduction in the current year but can disburse the funds in future years.

19. Continued planning tips
Make sure you spend all the funds in your flexible spending account (FSA).
If enrolled in a qualified high-deductible health plan, consider fully funding an HSA.
For self-employed individuals, remember deduction for health insurance costs.
If you participate in your company’s flexible spending account (FSA) program, make sure you spend down any remaining funds. You’re allowed to roll up to $500 into next year, but anything over that is gone forever unless you spend it on qualified expenses AND claim it.
If you are enrolled in a qualified high-deductible plan, consider fully funding an HSA account. This can actually be done prior to the filing of the return. The money can be used to pay for qualifying medical expenses, or it can be used as another form of retirement savings since the funds do not have to be spent down like an FSA.
Contribution limits for 2017 are $3,400 for self-only coverage and $6,750 for family coverage. Also, there is a $1,000 catch up contribution allowed for those age 55 and older.

20. Top issues for small business
Capital equipment/vehicle purchases in service by Dec. 31
Bonus/payroll adjustments
Bad debts
Defer/accelerate income/deductions
Health insurance
Retirement planning
Year-end tax planning for your business with your tax advisor will likely provide you ways to save on your tax bill for 2017.
It will be helpful if your books and records are in good shape going into that planning meeting, so your advisor can help you determine if it makes sense to take steps such as:
purchasing additional equipment to take advantage of the Sec 179 expensing provisions,
paying bonuses to management/employees,
writing off any accounts receivable as bad debts
making a retirement contribution.
Consider effects of deferral/acceleration based on anticipation of 2018 situation and planning for potential rate changes.
As of current law, if your business is subject to ACA, the filing deadlines for information reporting are due to employees by Jan 31 and to the IRS by end of Feb/March (depending on whether filing electronically).
You may qualify for employer health care tax credits if you have fewer than 25 Full-time equivalent employees making an average of less than $50,000 a year indexed for inflation ($52,400 in 2017), and you pay at least 50% of the cost of employee-only health care coverage for each of your employees. This credit is available for only two consecutive years. You must purchase the coverage through the Small Business Health Options Program (SHOP) Marketplace in order to qualify for the credit.
Careful planning that takes into account the effect that these business deductions have both on the business and on the individual owners/partners (depending on the type of entity) can make a big difference when April 17th comes around.

21. Depreciation
Property eligible for 15-year straight-line depreciation — qualified leasehold improvements; restaurant and retail improvements
Section 179: $510K and phase out at $2,030,000 for 2017
HVAC placed in service after is eligible.
Bonus depreciation of 50% of basis of qualifying property
Per current law, percentage phases down in 2018, 2019
The Section 179 limit for 2017 is $510k, and the phase-out is set at $2,030,000. The provision also removed the exclusion of air-conditioning and heating units. Also, qualified real property is eligible to be expensed.
Also, “bonus” depreciation for 2017 is available for qualified property with a 50% allowance.
Careful planning is important because the rules are different for each of the provisions. For example, if the property has been previously used, the taxpayer is unable to utilize bonus depreciation, but may be able to elect Section 179 on the property if the other requirements are met.
Changes in these rules and amounts to be expensed are part of proposed legislation, so careful planning is necessary to obtain the best possible tax benefit given the information on hand at the time.

22. Small business — saving for retirement
Savings Incentive Match for Employees (SIMPLE)
Simplified Employee Pension (SEP) plans
Profit-sharing plans
A variety of 401(k) plans
For new plans — consider small employer pension plan start-up credit.
Qualified retirement plans offer many tax benefits to both employers and employees and can be a valuable tool in retaining employees. With traditional plans, employers get a tax deduction for contributions, and employees may be allowed to make pre-tax contributions and defer taxes on income until distribution.
In Roth plans, employees do not get tax deductions for contributions, but qualified distributions and withdrawals are tax-free. In addition, assets held in qualified plans generally are protected from creditors of both employees and employers. However, these plans are heavily regulated and include different contribution limits and matching requirements. Plans may also have nondiscrimination requirements and top-heavy rules, which require certain tax-filing obligations.
It’s also important to consider whether your business will grow to include more employees when you select your plan as some plans have limits on the number of participants.
50% of plan administration & retirement-related education of employees expenses for the first three plan years (maximum credit of $500 per year) is available for qualifying new small employer plans

23. Protect yourself from identity theft
Individuals
Businesses
Protect your information.
Develop/update security plan.
Shred your mail.
Only collect what you need for as long as you need it.
Don’t be fooled by “phishing” or other phone or scams.
Secure your network.
Check your credit report regularly.
Train and restrict access.
Contact all three reporting agencies as soon as you have a breach.
Audit regularly.
Whether or not you’re a business owner, there is no surefire way to prevent your identity from being stolen – even if you choose not to use online banking, shopping or data storage, your information is out there, as we know from recent news stories on breaches within credit bureaus. The best thing you can do as an individual is learning how identity theft happens, take steps like these listed here and know what to do if it happens to you. The Federal Trade Commission has a very helpful website – - that walks you through what you need to do to report and recover from ID theft.
Business owners, do your best to protect your customer’s information to avoid potential loss of trust should your system be hacked. Only collect and retain the information you need and be sure you dispose of your customer’s data safely as well. Make sure that sensitive personal information is only available to those who need it and that employees are properly trained on the importance of their part in protecting customer information. Make sure you have a plan in place for protecting data and for steps to take in case of a breach.
See IRS Pub 4557 for suggestions on how taxpayers can best protect their data.

24. Thank you
Thank you! I welcome you to contact me with questions anytime at or at
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