2018 personal tax guide

140 Pages·2017·2.96 MB·English

2018 personal tax guide
and tax tips for 2017
Featuring coverage of the Tax Cuts and Jobs Act of 2017 and the Bipartisan Budget Act of 2018
EisnerAmper LLP
Accountants and Advisors
www.eisneramper.com
INTRODUCTION:
2018 IS A YEAR OF CHANGE
In 2017, we were subject to the tax regime resulting from the before January 1, 2026. All miscellaneous itemized deductions
American Taxpayer Relief Act of 2012 (“ATRA”): The top federal that are subject to the 2% AGI limit are repealed for tax years
ordinary income tax rate was at 39.6%, the top federal long-term 2018-2025. Home mortgage interest expense is limited to interest
capital gains tax was at 20% and the top alternative minimum tax on acquisition debt for tax years 2018-2025, with the maximum
rate was at 28%. The top estate and gift tax rate was at 40% and amount that may be treated as acquisition debt reduced to
a $5.49 million gift, estate and generation-skipping tax exclusion $750,000 (from $1 million) and applied to any acquisition debt
was in efect. incurred after December 15, 2017. The $1 million threshold is
reinstated starting in 2026. Interest paid on home equity debt
In addition, the enactment of the Protecting Americans from Tax of any qualifed residence is not deductible except for loans used
Hikes Act of 2015 (“PATH”) extended many of the tax incentives and to buy, build or substantially improve the taxpayer’s home that
credits for individuals and businesses—some on a permanent basis. secures the loan.
The Patient Protection and Afordable Care Act (“ACA”) continued
to impose a 0.9% Health Insurance Tax on earned income for • C haritable deductions remain a viable itemized deduction. The
higher income individuals and a 3.8% Medicare Contribution Tax Act increases the percentage of an individual’s AGI limitation that
on net investment income. The tax is imposed on the lesser of may be deducted for cash contributions to public charities and
(a) net investment income (interest income, dividends, capital other certain other tax-exempt organizations (such as a donor
gains and passive income less expenses directly attributable to the advised fund) to 60%, which is up from 50%. As the law is currently
production of such income and (b) the excess of modifed adjusted written, the 60% threshold applies only to cash contributions.
gross income over a specifed dollar amount ($250,000 for joint Because of the increase in the standard deduction and the
flers or a surviving spouse, $125,000 for married fling separately scaling back of the itemized deductions, many individuals will
and $300,000 for other taxpayers). not be itemizing on their tax returns starting in 2018. The Urban-
Brookings Tax Policy Center believes that the number of taxpayers
On December 22, 2017, the Tax Cuts and Jobs Act of 2017 (the fling returns claiming deductions for charitable contributions will
“Act”) was signed into law by President Trump. The Act is the most drop from about 37 million to about 16 million in 2018. This is an
signifcant piece of tax legislation since the Tax Reform Act of issue that is concerning many exempt organizations, as there is
1986, more than 30 years ago. The Act has broad impact on all now a disincentive to making charitable contributions.
aspects of the American economy and will impact businesses and
individuals alike. It also has a substantial impact on multinationals • T he Act increases the estate, gift and generation-skipping
and international transactions. The Act even impacts not-for-proft transfer tax exclusions from $5 million to $10 million, indexed for
organizations. Most of the provisions are efective for tax years infation. The infation adjusted exclusion for 2018 is $11.18 million
beginning after December 31, 2017. Some of the provisions expire per person, or $22.36 million per married couple. The top estate
after December 31, 2025. and gift tax rate remains at 40%.
Some of the major provisions are as follows: • T he top tax rate for C corporations is now 21%, a decrease from
35% in 2017.
• T he top individual tax rate is at 37%, down from 39.6% in 2017.
The top long-term capital gains tax remains at 20% and there • T here is a new qualifed business income deduction of up to
is no change to the 3.8% Medicare Contribution Tax on net 20% for pass-through entities, such as partnerships, limited
investment income, nor the 0.9% Health Insurance Tax on earned liability companies, S corporations and sole proprietors. The
income for higher income individuals. deduction is generally limited to the greater of (1) 50% of W-2
wages paid by the business or (2) the sum of 25% of the W-2
• T he top rate of 28% for alternative minimum tax for individuals wages paid plus 2.5% of the unadjusted basis of certain property
remains the same. the business uses to produce qualifed business income. Certain
other limitations apply.
• F or individuals, the standard deduction almost doubles, while
itemized deductions are either limited or eliminated. State/local • T he alternative minimum tax for corporations has been
and property tax deductions are eliminated, except for $10,000 permanently repealed for tax years beginning after December
for tax years beginning after December 31, 2017 and ending 31, 2017.
On February 9, 2018, President Trump signed the Bipartisan Budget the investigation of Russia over interference with U.S. election
Act of 2018 (also known as the Honoring Hometown Heroes Act). proceedings, the continued tension between the U.S. and North
The bill is the third in a series that increased spending caps originally Korea, and potential trade wars that may result from the U.S.
imposed by the Budget Control Act of 2011; the frst two were the imposing tarifs on steel and aluminum imports continue to be
Bipartisan Budget Act of 2013 and the Bipartisan Budget Act of signifcant issues.
2015. This Act funds the government for two years and features
some of the largest increases in government ever. Here are some Many families with wealth are very concerned about their children’s
of the highlights: and grandchildren’s future, and wonder what can be done to
sustain and grow their wealth in these uncertain times. Given the
• S pending limits will be raised by about $300 billion over the next impact of new legislation and the current economic and geopolitical
two years. conditions, it is extremely important that you pay attention to your
• D efense spending will be raised by $80 billion in the current fscal fnancial position so that you can achieve your fnancial objectives.
year and $85 billion next year. Specifc goals such as retirement planning, managing cash
• D omestic spending will increase by $63 billion this year and $68 fow, fnancing the cost of your children’s college education and
billion next year. transferring your family’s wealth to the next generation should be
• T he debt limit will be suspended through March 2019, putting the top-of-mind in 2018 and beyond.
next vote on this issue past the 2018 midterm elections.
• $ 20 billion has been designated for infrastructure programs such We have written this guide to provide you with a tool to identify
as surface transportation, rural water and wastewater systems. opportunities to minimize tax exposure, accomplish your fnancial
• $6 billion has been designated to fght the opioid crisis goals and preserve your family’s wealth. This guide includes all
• $ 4 billion has been designated for college afordability programs major law changes through March 15, 2018. The best way to use
for teachers, frefghters and police ofcers. this guide is to identify areas that may be most pertinent to your
• $ 90 billion has been designated for disaster aid for Texas, Florida unique situation and then discuss the matter with your tax advisor.
and Puerto Rico. It is especially important that you check in with your tax advisor
• T here are no funds designated for President Trump’s proposed before proceeding with any tax planning transactions this year.
southern border wall. Because the Tax Cuts and Jobs Act was hastily enacted at the end of
• T here is no legislation addressing Deferred Action for Childhood 2017, we are seeing many areas of the law where further guidance
Arrivals (“DACA”). from the IRS or even a Technical Corrections Act are needed to
• T his Act extends some expiring tax provisions, ofering some tax clarify the application of the law. As always, our tax professionals
relief for families and individuals, including extension of mortgage will be pleased to discuss any of the ideas in this guide or any
insurance premiums treated as qualifed residence interest, above- other planning opportunities which might apply to your personal
the-line deduction for qualifed tuition and related expenses and situation.
credits for certain energy production and conservation.
• T his Act repeals Obamacare’s Independent Payment Advisory
Board, which was designed to limit Medicare costs.
• T his Act extends the Children’s Health Insurance Program for ten
years.
We have included in our tax guide details on both of these acts and Marie Arrigo, CPA, MBA
how they might impact your tax situation. Tax Partner & Co-Leader Family
Ofce Services &
The international arena continues to be of great concern to Leader, Not-for-Proft Tax Services
many individuals and families. The global threat of terrorism, EisnerAmper LLP
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A T B L E O F C O N T E N T S
5 Tax Planning Strategies 87 Estate and Gift Tax Planning
14 Tax Rate Overview 97 Tax Credits
20 Estimated Tax Requirements 101 Education Incentives
24 Alternative Minimum Tax 105 International Tax Planning and Reporting Requirements
30 Business Owner Issues and Depreciation 17 State Tax Issues
Deductions
epA idn ec s
36 Capital Gains and Dividend Income
129 Appendix A: 2018 Federal Tax Calendar for Individual
4 Stock Options, Restricted Stock and Taxpayers
Deferred Compensation
130 Appendix B: 2017 Federal Tax Rate Schedule
52 Small Business Stock
1 3 1 Appendix C: 2018 Federal Tax Rate Schedule
56 Passive and Real Estate Activities
132 Appendix D: 2017 Maximum Efective Rates
63 Principal Residence Sale and Rental
13 Appendix E: 2018 Maximum Efective Rates
67 Charitable Contributions
134 Appendix F: 2018 Federal and State Tax Returns
74 Interest Expense Due Dates
79 Retirement Plans 135 Appendix G: EisnerAmper Tax and Private Business
Services Partners and Principals
Editor-in-Chief Marie Arrigo Contributors Jonathan Acquavella, June Albert, Peter Alwardt,
Ben Aspir, Paul Bleeg, Cindy Feder, Jean Jiang,
Managing Editors Tom Hall, Dan Gibson, William Gentilesco, Matthew Halpern, Joseph Held,
Robert Levin Cindy Huang, Sue Huang, Seth Komitzky, Cindy Lai,
Kevin Sohr, Jeanne Marie Waldman, Holly Wong
Co-Editors Gary Bingel, Angela Chen, Denise DeLisser,
Carolyn Dolci, Stephanie Hines
This tax guide highlights tax planning ideas that may help you minimize your tax liability. This guide does not constitute accounting,
tax, or legal advice, nor is it intended to convey a thorough treatment of the subject matter. The best way to use this guide is to
identify those issues which could impact you, your family, or your business and then discuss them with your tax advisor.
The discussion in this guide is based on the Internal Revenue Code as amended through March 15, 2018. Future legislation,
administrative interpretations, and judicial decisions may change the advisability of any course of action. Because of periodic
legislation changes, you should always check with your tax advisor before implementing any tax planning ideas.
Any tax advice contained in this publication (including any attachments) is not intended for and cannot be used for the purpose
of (i) avoiding penalties imposed by the Internal Revenue Code or (ii) promoting, marketing, or recommending any transaction
or matter addressed herein.
© Copyright 2018 by EisnerAmper LLP. All rights reserved. This book, or portions thereof, may not be reproduced in any form without permission of EisnerAmper LLP.
state tax issues 3
tax planning
strategies
In addition to saving income taxes for the current and future years,
efective tax planning can reduce eventual estate taxes, maximize
the amount of funds you will have available for retirement, reduce
the cost of fnancing your children’s education, and assist you in
managing your cash fow to help you meet your fnancial objectives.
Tax planning strategies can defer some of your current year’s tax
liability to a future year, thereby freeing up cash for investment,
business, or personal use. This can be accomplished by timing
TAX PLANNING GOALS
when certain expenses are paid, or controlling when income is
recognized. Tax planning allows you to take advantage of tax rate
differentials between years. However, if tax rates rise in a subse-
Proper tax planning can achieve the following
quent year, extra caution may be necessary. If monitored properly,
goals:
tax planning can also help you minimize, or even prevent, the
impact of the alternative minimum tax (“AMT”) and preserve the • Reduce the current year’s tax liability.
tax benefit of many of your deductions.
• D efer the current year’s tax liability to future years.
The key things you should understand as you look for ways to
• R educe any potential future years’ tax liabilities.
minimize your taxes are:
• M aximize the tax savings from allowable
• P rior to 2018, residents of states with high income and property
deductions.
taxes, such as New York, California, Connecticut, Pennsylvania and
New Jersey, were most likely subject to the AMT. Beginning after
• M inimize the effect of the AMT on this year’s
December 31, 2017, state income and property tax deductions
tax liability.
are limited to $10,000, thereby making it unlikely that the AMT
will apply to most taxpayers.
• M aximize tax savings by taking advantage of
available tax credits.
• T he current top long-term capital gains tax rate is 20%. Including
the additional 3.8% Medicare Contribution Tax on net investment • M aximize the amount of wealth that stays in
income, the top long-term capital gains rate could be 23.8% and your family.
the top short-term capital gains tax rate could be as much as
43.4% in 2017 and 40.8% in 2018. • M inimize capital gains tax.
• M inimize the Medicare Contribution Tax on net
• U nder current law, the complex netting rules have the potential
investment income.
effect of making your long-term capital gains subject to short-
term rates, so you must carefully time your security trades to
• A void penalties for underpayment of estimated
ensure that you receive the full benefit of the lowest capital gains
taxes.
tax rate.
• I ncrease availability of cash for investment,
• For 2017, there may be limitations on the deductibility of your
business, or personal needs by deferring your
itemized deductions (“Pease” provision) and on the allowable
tax liability.
amount of your personal exemptions provision (“PEP”) based
on your adjusted gross income (“AGI”). Various phaseouts that
• M anage your cash flow by projecting when tax
reduce your deductions and/or exemptions can increase your
payments will be required.
tax liability and your effective tax rate. Beginning after December
31, 2017, many deductions have been eliminated along with the • M inimize potential future estate taxes to maximize
Pease provision. Exemptions are completely repealed and instead the amount left to your beneficiaries and/or
have been consolidated into the standard deduction. charities (rather than the government).
• Consider the impact that the additional Medicare Contribution • M aximize the amount of money you will have
Tax on net investment income will have on your particular tax available to fund your children’s education as well
situation. Certain direct and indirect expenses, such as margin as your retirement.
interest and state taxes, may decrease the surtax and it may
make sense to prepay these expenses before the end of 2018.
• Gift and estate taxes can reduce the amount your beneficia- techniques and strategies available to maximize the amount of
ries will receive by 40% to 50%, depending on which state one wealth that is preserved for your family.
is a resident of at date of death. However, there are planning
EisnerAmper 2018 personal tax guide 6
YEAR-END TAX PLANNING TIPS EXPENSES YOU CAN PREPAY
Tax Tip 1 provides a snapshot of key strategies geared toward Here are the most common deductible expenses you can easily
helping you achieve your planning goals. It includes ideas to help prepay by December 31, if appropriate:
you reduce your current year’s tax as well as any potential future
taxes. While this chart is not all inclusive, it is a good starting Charitable Contributions
point to help you identify planning ideas that might apply to Starting in 2018, you can deduct charitable gifts of cash and
your situation. Keep in mind that many of the strategies involve tangible personal property, such as clothing and household goods,
knowing what your approximate income, expenses and tax rates up to 50% of your AGI (60% if only cash gifts) and charitable gifts
will be for the current and subsequent years and then applying of appreciated capital gain properties up to 30% of your AGI.
the applicable tax law for each year to determine the best path to
follow. Implementation of many of these ideas requires a thorough State and Local Income Taxes and Property Taxes
knowledge of tax laws, thoughtful planning and timely action. Beginning after December 31, 2017, a taxpayer may claim an
itemized deduction of up to $10,000 ($5,000 for married filing
Timing when you pay deductible expenses and when you receive separately) for the aggregate of (1) state and local income taxes
income (to the extent you have control) can permanently reduce and (2) state and local property taxes paid.
your taxes. Timing expenses and income can also defer some of
your tax liability to next year (or even later years) giving you, rather Miscellaneous Itemized Deductions
than the government, use of your money. Beginning after December 31, 2017, all miscellaneous itemized
deductions that are subject to the limitation of 2% of AGI will
To gain the maximum benefit, you need to project, as best you can, be suspended until years beginning after December 31, 2025.
your tax situation for the current and subsequent years. This will
help you identify your tax bracket for each year. Your year-to-date Mortgage Interest
realized long- and short-term capital gains and losses should be Before the end of 2018, consider prepaying your mortgage
included in your projections. Be sure to consider prior-year loss payment for next January in the current year in order to accelerate
carry forwards (if any). Based on these results, you can decide the deduction.
what steps to take prior to year-end. You will be able to decide
whether or not you should prepay deductions and defer income, Margin Interest
defer expenses and accelerate income, realize capital losses, or Before the end of 2018, be sure to pay any margin interest before
lock in capital gains. December 31, since interest accrued at year-end is only deductible
if actually paid. This may also reduce the Medicare Contribution
Tax Tip 2 offers basic guidance for deciding when to prepay or defer Tax on net investment income.
deductible expenses and when to defer or collect taxable income.
Business Equipment
Tax Tip 3 offers steps to follow relating to realized capital gains Before the end of 2018, accelerate the purchases of business
and/or losses, and the type of gains and losses you should trigger. equipment to take advantage of expensing allowances, subject
to certain limitations. To qualify, the property must be placed in
service in the year of the intended deduction.
tax planning strategies 7
tax tip
1 KEY TAX PLANNING STRATEGIES
Situation Planning idea Detailed discussion
Your regular tax rate will be the same or • Prepay deductions. Page 7
lower next year and the AMT will not apply • Defer income. Page 10
in either year.
Your regular tax rate will increase next year • Defer deductions. Page 10
and the AMT will not apply in either year. • A ccelerate income, but only if the tax rate increase
warrants accelerating tax payments.

The regular tax rate applies this year and • C onsider bunching charitable contributions in the Page 27
is higher than the AMT rate that you expect year with the higher tax rate — assuming you can itemize.
will apply next year. • D efer income.
This year you are in the AMT and next you • C onsider bunching charitable contributions in the year with Page 25
will be subject to a higher regular tax rate. the higher tax rate — assuming you can itemize.
• A ccelerate income.
You have net realized capital losses this year • C onsider recognizing capital gains by selling appreciated securities Page 11
or loss carryforwards from last year. to offset realized losses and loss carryforwards, thereby locking
in the appreciation.

You have net realized capital gains this year. • S ell securities with unrealized losses to offset the gains — Page 11
if market conditions justify it.
• U se a bond swap to realize losses. Page 41
• C onsider tax implications of netting rules. Page 38
• A void wash sale rules. Page 41
• C onsider the implications of the Medicare Contribution Tax Page 18
on net investment income.

You are contemplating purchasing new • A ccelerate the purchases into 2018 to take advantage of section 179 Page 31
business equipment. deductions available this year. (Qualified purchases must be placed
in service in 2018.)

A penalty for underpayment of estimated • W ithhold additional amounts of tax from your wages before Page 21
taxes will apply. December 31.
• P repay fourth quarter estimates due January 15 and increase the
payment amount, if necessary.
• H ave withholding taken out of your retirement plan distribution.

You want to diversify a concentrated low- • C onsider using a charitable remainder trust that will allow you to sell Page 71
basis stock position and avoid paying taxes the stock in exchange for an annuity. This will allow you to defer the
currently. tax while benefiting a charity of your choice.

You have incentive stock options that you • C onsider exercising your options to start the long-term holding period, Page 45
can exercise. but only if the spread between the market price of the stock and the
exercise price will not put you into the AMT.

Your passive activity losses exceed your • D ispose of an activity that is generating passive losses in order to Page 57
passive income. deduct the suspended loss on that activity. However, consider the
impact of the Medicare Contribution Tax on net investment income.
EisnerAmper 2018 personal tax guide 8