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© Wipfli LLP Individual Estate and Financial Planning After Tax Reform
© Wipfli LLP
Individual Estate and Financial Planning After Tax Reform
Presenters
Ryan Laughlin, CPA, MST, JD
Partner
Wipfli LLP
Mark Albers, CPA, MST, CFP®
Principal
Wipfli Financial Advisors, LLC
Major Areas
• Individual changes
• Estate, gift and GST changes
• Business changes
Individual Changes*
*Subject to sunset after 2025
Individual – Selected Major Changes
• Summary of major changes
• Filing status, rate comparisons and AMT
• Education incentives and credits
• Retirement savings modifications
• Kiddie tax changes
• Affordable Care Act
Not Included in Law Change
• Changes to the exclusion of gain on the sale of a principal residence
• Elimination of the specific identification method in favor a FIFO basis
accounting for marketable securities
• Reduction of the capital gain rates or changes to the taxation of
interest income
• Elimination of the “step-up” in basis
• The “five-year rule” for inherited IRAs
Require balances in most inherited IRAs and 401(k) plans to be
distributed within five years of a saver's death
Individual Deductions
Deduction 2018
Alimony paid • Eliminates the deduction for agreements entered
into or modified after 12/31/18.
Moving expenses • Eliminated
Personal exemptions • Eliminated (see next slide)
Standard deductions • Roughly doubled (see next slide)
• Approximately 85% of all taxpayers will no longer
itemize! Consider state and local tax limitation
also.
PEASE limitation • Eliminated, but fewer deductions to limit!
Individual Provisions
Standard Deduction
Year Single MFJ MFS HOH
2017 $6,350 $12,700 $6,350 $9,350
2018 $12,000 $24,000 $12,000 $18,000
Exemptions
Year Personal Exemptions
2017 $4,050
2018 $0
Individual Deductions
Deduction 2018
Medical expenses • 7.5% AGI limitation for 2017 and 2018; 10% 2019
State and Local Taxes (SALT) • Schedule A deduction limited to $10,000
• Specifically disallowed prepayment of 2018 taxes
paid in 2017
Mortgage interest deduction • Existing mortgages grandfathered; generally
deductible on new loans up to $750k; Limited to
two qualified residences
• Acquisition indebtedness incurred before
12/15/17 grandfathered under prior $1 million
• No deduction for (most) home equity debt
Individual – Home Equity Indebtedness
• Acquisition indebtedness: Incurred in acquiring,
constructing or substantially improving a qualified
residence and securing the residence
• Home-equity indebtedness: Other than acquisition
indebtedness secured by qualified residence
• Planning: Review outstanding balances – decision to pay off, what
are current interest rates, etc.; may still be receiving WI itemized
deduction tax credit
Individual Deductions
Deduction 2018
Charitable contributions • Increased cash contribution limits to 60% of
AGI. Will we see more direct IRA dollars to
charity?
Personal casualty losses • Repealed except for federally declared
disaster areas
Miscellaneous itemized deductions • Eliminated; includes tax prep fees, investment
advisory, and legal fees
Unreimbursed employee business expenses • Eliminated
Individual Deductions – Example
2017 2018
State income tax $8,000
Property taxes $4,000
Total taxes $12,000
Mortgage interest $7,000
Charity $3,500
Misc. deductions* $1,000
Total $23,500
Standard deduction $12,700
State income tax $8,000
Property taxes $4,000
Total taxes (max) $10,000
Mortgage interest $7,000
Charity $3,500
Misc. deductions** N/A
Total $20,500
Standard deduction $24,000
*After 2% floor. **Disallowed.
Individual – QCD and IRAs
• Increased QCDs due to standard deduction and limits of
itemized deductions
• Requirements: 70 ½, $100,000 limit, substantiation
• Qualifying charities do not include:
• Private foundations
• Supporting organizations
• Donor-advised funds
Donor-Advised Funds (DAFs)
• Nothing new, but will become more popular
• What is it?
• Charitable giving account where individuals can donate cash, securities
and other assets to their causes without the high costs and logistical
complexities associated with traditional private foundations
• Deduction on front end, at time of transfer
• Funds donated over time to charities
• Why it works:
• DAFs aggregate multiple donors and processes high number of
charitable transactions, lowering cost barriers.
• Community foundations
• Public foundations
• Institutional foundations
• IRA QCD rules don’t apply to DAFs
Donor-Advised Funds (DAFs)
Filing Status Comparisons
Rate Single Married Head of Household
10% >$0 >$0 >$0
12% >$9,525 >$19,050 >$13,600
22% >$38,700 >$77,400 >$51,800
24% >$82,500 >$165,000 >$82,500
32% >$157,500 >$315,000 >$157,500
35% >$200,000 >$400,000 >$200,000
37% >$500,000 >$600,000 >$500,000
Return of marriage penalty…
Individuals–Capital Gain Rates
Rate Single MFJ MFS HOH T&E
0% $38,600 $77,200 $38,600 $51,700 $ 2,600
15% $425,800 $479,000 $239,500 $452,400 $ 12,700
20% > $425,800 > $479,000 > $239,500 > $452,400 > $12,700
Alternative Minimum Tax
Filing Status 2017 2018
Exemption
Single/HOH $54,300 $70,300
MFJ $84,500 $109,400
Phase-out begins
Single/HOH $120,700 $156,300
MFJ $160,900 $208,400
Full phase-out
Single/HOH $337,900 $500,000
MFJ $498,900 $1,000,000
Individual Family Credits
Year Per Child Tax
Credit/(Refundable)
Non-Child Dependents Phase-Out Begins
(MFJ)
2017 $1,000 ($1,000) $0 $110,000
2018 $2,000 ($1,400) $500 (nonrefundable) $400,000
Education Incentives
• Allows Section 529 accounts to be used for up to $10,000 of
elementary and secondary school tuition
• Excludes from income student loan discharges for death or
disability until the end of 2025
• Allows rollovers from Section 529 plans into ABLE accounts
and increases contribution limit for ABLE accounts until end
of 2025
• Exclusion for home schoolers was removed from final bill
Wisconsin 529s - Contributions
• Wisconsin income tax deduction of up to $3,200 per beneficiary for
contributions from WI residents (indexed for inflation; carries forward)
• Can elect to spread a gift over 5 years
• Qualified rollovers from other state plans can receive tax deduction
for amount of the prior contributions
• Employer Contribution Credit: may be able to receive credit of
25% of contributions to employee accounts, up to $800 per employee
(adjusted for inflation)
Wisconsin 529s - Planning
• No income tax consequences for transfers between family
• Must transfer to appropriate beneficiary before withdrawals
• Still have gift implications if changing generations
• Income tax deductions are recaptured for outgoing rollovers and
non-qualified withdrawals
• No deduction on amounts withdrawn within 365 days
• FAFSA implications
• Parent/child-owned: 5.64% asset
• Grandparent-owned: withdrawal is income at 50%
Retirement Savings
• Repeals a special rule that allows an individual to recharacterize a
contribution to a traditional IRA as a contribution to a Roth IRA and vice
versa, with some exceptions
• Recharacterization cannot be used to unwind a Roth conversion made
on or after January 1, 2018, but it may be used with respect to other
contributions (e.g., unexpected-income situations)
• A Roth IRA conversion made in 2017 may be recharacterized if done by
October 15, 2018
• Extends period of time during which a plan participant may roll over a plan
loan in the event an employee separates from service or the plan terminates
while a loan is outstanding. The time period would be extended from 60
days to the due date of the employee’s tax return.
Roth Conversions – Market Timing
Dow Jones Industrial Average:
12/29/17: 24,719.22 • 2/9/18: 23,360.29 • 5.5% decline
2017 conversion could have been recharacterized.
Source: https://finance.yahoo.com, February 2018.
Roth Conversions – Market Timing
01/26/18: 26,616.71 • 02/09/18: 23,360.29 • 12.2% decline
2018 conversion cannot be recharacterized.
Dow Jones Industrial Average:
Source: https://finance.yahoo.com, February 2018.
Kiddie Tax Changes
• Apply estate and trust brackets (below) to net unearned income of
child; child’s brackets apply to earned income
• Tax calculations no longer tied to parents’ return
Estates and Trusts
< $2,550 10% of the taxable income
> $2,550 but < $9,150 $255 plus 24% of the excess over $2,550
> $9,150 but < $12,500 $1,839 plus 35% of the excess over $9,150
> $12,500 $3,011.50 plus 37% of the excess over $12,500
Affordable Care Act
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• Penalty to maintain health insurance coverage (individual
mandate) is repealed for 2019 and forward
• However, still in effect for 2017 and 2018
• 2017 penalty:
• Higher of 2.5% of yearly household income, or
• $695 per person ($347.50 per child under 18)
Estate, Gift, and GST*
*Subject to sunset after 2025
Transfer Tax Updates
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• Doubles basic exclusion amount from $5 million to $10 million
(adjusted for inflation occurring after 2011)… about $11.18 million
• Per person, so $22.36 million per couple!
• Effective January 1, 2018 – December 31, 2025
• Exemptions would revert back to $5 million (indexed for inflation)
after December 31, 2025
• No repeal of estate tax or “death” tax
• Maximum tax rate does not change: 40%
• Portability is retained
• Basis adjustment (step up/down) of § 1014 is retained
Basic Exclusion Amounts
Exclusions 2017 2018
Basic exclusion amount$5,490,000
$11,180,000
Annual exclusion amount for gifting $14,000 $15,000
Annual exclusion to
non-citizen spouses$149,000 $152,000
Tax Brackets for Estates and Trusts
Taxable Income 2017 2018
$0 – $2,550 15% 10%
$2,550 – $6,000 25% 24%
$6,000 – $9,150 28% 24%
$9,150 – $12,500 33% 35%
> $12,500 39.6% 37%
• Do not have standard deduction (with a minimal exemption)
• Tax-rate changes are minimal
Deductions:
• Code Sec. 67 imposes a 2% floor on all miscellaneous itemized deductions
• Code Sec. 67(e) exception to the 2% floor when computing the AGI of a
trust or estate, if the deduction is for costs which would not have been
incurred if the property were not held in a trust or estate, “fiduciary specific
expenses”
Deductions – Impact to Trusts and Estates
• NEW IRC 67(g) simply states that “no miscellaneous itemized
deductions shall be allowed” for tax years 2018–2025
• Does IRC 67(e)’s exclusion of fiduciary-specific expenses mean
those expenses are NOT miscellaneous itemized and they would
get a deduction
• If IRC 67(e)’s exclusion of fiduciary-specific expenses is to the
application of the 2% floor and not the exclusion from the definition
of miscellaneous itemized deductions, they would not receive a
deduction
Deductions – Impact to Trusts and Estates
• Other deductions may or may not:
• Tax Preparation Fees for 1041
• Legal fees: administration of trust/estate
• SALT over $10,000 related to federally-taxable investment
• Administrative fees: appraisals, accounting, etc.
More Guidance …
Deductions – Impact to Trusts and Estates
Tax Planning for Estates and Trusts
• Deduction for state income taxes limited (e.g., individual
taxpayers); trustees should focus on state tax reduction
• 65-day rule for estates and complex trusts
• 1041-T allocations and filing
Business Changes
Business Taxes– Select Major Changes
• C-corporation rate reduction
• New 199A 20% deduction for non-corporate taxpayers
• Dividends received deduction
• Depreciation cost recovery (bonus/section 179)
• Accounting method changes
Corporate Rate Reduction
C-Corporation Tax Rates:
Taxable Income 2017 2018
$0 – $50,000 15% 21%
$50,001 – $75,000 25% 21%
$75,001 – $10,000,000 34% 21%
> $10,000,000 35% 21%
Corporate Tax Rate – Additional Considerations
• Tax rate applies for tax years beginning after December 31, 2017
• No change to IRC Section 15. Fiscal-year corporate taxpayers will
use a blended rate. Calculate tax for full year based on old and
new rates and pro-rate tax based on number of days before and
after rate change date
• June 30 year-end: July 1, 2017 – December 31, 2017 taxed at 35%
(assumed rate) and January 1, 2018 – June 30, 2018 taxed at 21%.
Blended rate of 28.06%
• Personal Service Corporations are also at 21% (previously taxed
at 35%)
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New 199A Deduction – High Level Overview
• Available for tax years beginning after December 31, 2017 and before
January 1, 2026
• Can be claimed by individuals, trusts and estates
• Generally applies to business income from S-corporations, single member
LLCs, any entities taxed as partnerships and sole proprietorships
• Intended to equalize the results of operating a business in a C-
corporation taxed at a flat corporate rate of 21% versus a pass-thru entity
taxed at a top individual rate of 37%
• If the full 20% deduction applies, the top rate on flow-thru income will
instead be 29.6% (37% x 80%)
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New 199A Deduction – High Level Overview
• Deduction is generally equal to 20% of the following:
Qualified business income (QBI)
Qualified publicly-traded partnership (PTP) income
Qualified REIT dividends
• The total deduction calculated above is then limited to 20% of the
taxpayer’s total taxable income — after reduction for any net capital gain
income which is already taxed at favorable rates under Sec. 1(h):
• Capital gain income — including “regular” capital gains taxed at 20%,
unrecaptured Sec. 1250 gain taxed at 25% and collectibles gain taxed at 28%
• Qualified dividend income — taxed at 20%
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New 199A Deduction – High Level Overview
• Depending upon the taxpayer’s taxable income level, the
deduction for 20% of QBI may also be limited by:
• “W-2 limitation” and
• “Specified Service Business” limitation
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New 199A Deduction: Qualified Business Income (QBI)
QBI Defined:
• QBI generally includes all net income from a business other
than investment income
• Does not include dividends, investment interest income, capital
gains and losses, commodities gains, and foreign currency gains
• QBI includes only income that is effectively connected with the
conduct of a U.S. trade or business
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New 199A Deduction – QBI Defined
• QBI does not include any amount paid to the taxpayer:
• Treated as reasonable compensation (as determined under current law)
• By a partnership that is a guaranteed payment (for services under
section 707(c) or a section 707(a))
• “Specified Service Business” income is generally not QBI
• Exception provided for taxpayers under taxable income thresholds —
$315,000 MFJ, $157,500 for all other taxpayers
• Deduction relating to service business income completely phased out
for taxpayers with taxable incomes — $415,000 MFJ, $207,500 for all
other taxpayers
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New 199A Deduction – Specified Service Business
A “specified service business” includes any trade or business
involving performance of services by owners or employees in:
OR
Any trade or business for which the principal asset is
the skill or reputation of its employees or owners
Health Law Accounting
Actuarial Science Performing Arts Consulting
Athletics Financial Services Brokerage Services
199A Deduction – Specified Service Business Limitation
• The final version of the TCJA excluded from the list of
“Specified Service Business” above:
• Architects
• Engineers
• Architects and engineers were specifically called out as
eligible under the former Sec. 199, the Domestic Production
Activities Deduction (“DPAD”), which this new Sec. 199A
replaced
These professions help “build” things….
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New 199A Deduction
47
NOYES
NO NO
YES
YES
NO NO
YES
YES
Reduced
Deduction
Specified
Service
Business?
Taxable
income > 315k
(MFJ)?
QBI * 20%
Taxable
income > 315k
(MFJ)?
Taxable
income > 415k
(MFJ)?
Taxable
income > 415k
(MFJ)?
No deductionApply W-2
Limits
New 199A Deduction – Wage Limitation
Wage Limitation
• Wage Limitation (also referred to as W-2 limits):
Greater of:
• 50% of W-2 wages paid by the trade or business
OR
• Sum of 25% of W-2 wages paid by the trade or business plus a
“capital component” equal to 2.5% of the unadjusted basis of all
tangible property subject to depreciation
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New 199A Deduction – Wage Limitation
Wage Limitation (continued)
• W-2 limitation is not applicable to low taxpayers
• Not applicable for taxpayers with taxable income less $315,000
(MFJ), $157,500 (others)
• Partially applicable to taxpayers with income between $315,000
and $415,000 (MFJ), $157,500 and $207,500 (others)
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New 199A Deduction – Basic Formula
Basic Formula
Deductible amount for each qualified trade or business is:
• Lesser of:
• 20% of taxpayer's QBI with respect to the trade or business, or
• Wage limitation
• Net QBI from all trades or businesses is further limited by 20% of taxpayer’s taxable income
Determined pre-199A deduction and without capital gains
New 199A – Simple Example
Simple Example
Facts:
Married couple filing jointly
Wage income $200,000
S-corporation income (all QBI) $700,000
Share of S-corporation wages =$800,000
Standard deduction ($24,000)
Taxable income (pre-199A deduction) $876,000
New 199A – Simple Example
Example (continued)
199A Deduction Calculation:
Lesser of:
1) QBI $700,000
x Deduction rate 20%___
$140,000
OR Lesser = $140,000
2) Share of business wages $800,000 (Then limited to 20%
x 50%___ of taxable income)
$400,000
New 199A – Simple Example
Simple Example
Wage income $200,000
S corporation income–all QBI $700,000
Share of S corporation wages = $800,000
Standard deduction ($24,000)
Taxable income (pre-199A) $876,000
IRC 199A deduction ($140,000)
Taxable income (post-199A) $736,000
IRC 199A deduction $140,000
Top marginal tax rate x 37%
Tax savings $51,800
New 199A Deduction – Open Questions/Planning
• Unclear how a “trade or business” is defined and whether
grouping rules will be included in the definition
• How will ordinary income from asset dispositions be treated?
• Clarification on definition of “specified service business”
• Setting “reasonable” compensation and partnership
guaranteed payments
• Several other unanswered questions and possibly
unintended consequences to be sorted out (DPAD IRC 199
regulations were 199 pages!)
New 199A Deduction - Planning
• Mitigate issues created by $315,000 / $415,000 limits
• Retirement plan contributions (IRA, SEP, 401(k), others)
• Depreciation write-offs
• Non-grantor trusts — beware of IRC 643(f)
• Gifts to children or others — beware of new Kiddie Tax
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New 199A Deduction – Miscellaneous
• Deduction does not reduce adjusted gross income
• Can be taken by taxpayers, regardless whether they itemize or
take the standard deduction
• The deduction is not added back in computing individual AMT
• If the combined QBI of the taxpayer for any taxable year is less
than zero, that amount is treated as a loss from a qualified trade
or business in the succeeding taxable year
• The deduction sunsets after December 31, 2025
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Corporate Dividends Received Deduction
• The general 70% limitation is reduced to 50%
• The 80% limitation for “20% owned corporations” is reduced
to 65%
• The FSC dividend deduction is similarly reduced
• Effective for tax years beginning after December 31, 2017
Rate Comparison
Regular Pass-
ThroughService Pass-Through
C Corp With Dividends
— New
C Corp With Dividends
— Old
$100
$(20) 199A
$80
$100
x .21
$ 21
$100
x .35
$35
$80
x.37
$29.6
$100
x .37
$37.0
$79 dividend
x .238
$18.802
$65 dividend
x .238
$15.47
29.6% 37.0% 39.802% 50.47%
Depreciation and Expensing
• The TCJA increases the 50% bonus depreciation under current law
to 100% through 2022 (through 2023 for longer production period
property and certain aircraft)
• First-year additional bonus depreciation is also extended through
2026 (2027 for longer production period property and certain
aircraft) with a phase-down beginning in 2023
• The TCJA removes the requirement that the original use of
qualified property must commence with the taxpayer
• As a result, the TCJA allows the additional first-year depreciation
deduction for new and used property
Period Applicable Percentage
9/27/2017 – 2022 100%
2023 80%
2024 60%
2025 40%
2026 20%
Bonus Depreciation
179 Expensing
• The TCJA increases the Section 179 expensing limit to $1 million
• Both expensing limitation and phase amounts will be indexed for inflation for
tax years beginning after 2018
• $25,000 Section 179 expensing for SUVs indexed for inflation after 2018
• Expands the definition of qualified-improvement property to include
improvements to nonresidential real property placed in service after the date
the property was first placed in service:
• Roofs
• Heating, ventilation, and air conditioning
• Fire protection and alarm systems and security systems
Section 179 Expensing
YearSection 179
Expense LimitationPhase-out Starts At
2017 $510,000 $2,030,000
2018 $1,000,000 $2,500,000
Accounting Method Changes
• Cash vs. Accrual
• Inventory
• Revoke Unicap
• Change from Percentage of Completion method to Exempt-
contact method
• All permitted automatic changes!!!
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Individual Estate and Financial Planning
After Tax Reform
