Presented By: Tracy Monroe, CPA, MT

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1 Presented By: Tracy Monroe, CPA, MT

2 Tax extenders for individuals Tax planning Ohio update

3 On December 18, 2015 the President signed the Protecting Americans from Tax Hikes (PATH Act): Extended many expired individual & business provisions through the end of 2016 Many provisions made permanent First significant tax bill since American Tax Relief Act of 2012

4 Permanent extension of: State and local sales tax deduction American Opportunity Tax Credit Refundable Child Tax Credit Teachers Classroom Expense Deduction Charitable Distributions from IRAs

5 Two year extensions of: Qualified tuition/related expense deduction Mortgage debt exclusion Mortgage insurance premium deduction

6 After 6 months and two extensions, the Senate Finance s five tax reform working groups presented their reports on July 8, 2015 to panel chair Orrin Hatch (R-UT) and top Democrat Ron Wyden (D-OR) For the most part, they reached no consensus on either specific reforms or a broad design for overall reform

7 Here is a brief summary of the Individual Group report: Individual tax reform: Based upon both ideological differences and individual priorities, there is considerable division among members of Congress about how individual tax reform should be approached.

8 General concept: Simplify! Broaden the base and reduce the rate Reduce the amount of tax brackets to 2, maybe 3 at the most Larger standard deduction Larger Child tax credit Repeal AMT Consolidate/Simplify education incentives Undercurrent of will itemized deductions be included

9 Hillary Clinton plans to: Provide tax relief for families by cutting taxes for hard working families Unleash small business growth by expanding access to capital and providing tax relief and help small businesses bring their goods to new markets Create a New College Compact that will invest $350 billion so that students do not have to borrow to pay tuition at a public college in their state while also cutting interest rates on student loans

10 Hillary Clinton plans to: Ensure more workers share in record corporate profits by enacting a 15% tax credit for companies that share profits with workers Reform the tax code so the wealthiest pay their fair share by ending the carried interest loophole and enacting the Buffett Rule Put an end to quarterly capitalism by revamping the capital gains tax to reward farsighted investments that create jobs

11 Donald Trump plans to: His plan has 4 goals Tax relief for middle class Americans Simplify the tax code Grow the American economy Don t add to our debt and deficit The tax plan to achieve these goals: Singles earning less than 25,000 and married couples filing jointly earn less than 50,000 will not owe any income tax All other Americans will get a simpler tax code with 4 brackets-0%, 10 %, 20% and 25% and will eliminate the AMT and the marriage penalty

12 Donald Trump plans to: No business of any size will pay more than 15% of their business income in taxes No family will pay the death tax To make the plan revenue neutral Those within the 25% bracket will keep fewer deductions, however, charitable deductions and mortgage interest deductions will remain unchanged Accelerating the phase out of PE and Pease limit, phases out tax exemption for life insurance for high income earners, end carried interest loophole There will be a new 15% rate on flow through business income so all business income is taxed at the same rate regardless of how the entity is organized

13 One time deemed repatriation of corporate cash held overseas at a 10% tax rate End deferral of taxes on corporate income earned abroad Eliminate deductions and loopholes made unnecessary because of new lower corporate rates

14 American Tax Relief Act of 2012 Makes permanent for 2013 and beyond the Bush era tax cuts for everyone except individuals with taxable income above 400,000 and 450,000 of taxable income for married filing joint Ordinary income above these levels will be taxed at 39.6% Capital gains and dividends will be taxed at 20% above these levels Trusts hit 39.6% rate at taxable income of $11,950

15 Rate Based on Taxable Income Single Married, filing jointly 20% Capital Gains Rate $406, % $457,600+ $406, % $457,600+ $405,100 33% $405,100 $186,350 28% $226,850 15% Capital Gains Rate $89,350 25% $148,850 $36,900 <$9,075 0% Capital Gains Rate 15% 10% $73,800 <$18,150

16 Phase-out of personal exemptions (PEP) and limitations on itemized deductions (Pease) as income rises above the following threshold amounts Single taxpayers $254,200 Head of households $279,650 Married filing jointly or surviving spouse $305,050 Married filing separately $152,525 Amounts are indexed for inflation

17 PEP reduces personal exemptions by 2% for- Every $2,500 of income above the threshold amount for single taxpayers Every $1,250 of income above the threshold amount for married taxpayers filing separately

18 Pease cuts itemized deductions by 3% of AGI above the threshold amounts Up to a maximum of 80% Deductions not included: Investment Interest Medical Expenses Casualty, theft and wagering losses

19 Additionally, the passage of the Healthcare Act imposes new taxes in % additional employee Medicare tax on W-2s exceeding $200,000 for individuals and $250,000 for families 3.8% Medicare surtax on net investment income if modified adjusted gross income exceeds $200,000 or $250,000 levels Surtax applies to trusts with 2013 taxable income at $11,950

20 Items subject to Medicare surcharge Interest, dividends, annuities, rents, royalties not in the ordinary course of business Passive activity income Net gain from the disposition of property, other than property held in a trade or business Doesn t apply to S corps, proprietorships, partnerships However, W-2 from S corp and self-employment income will be subject to 0.9% Medicare tax

21 Review status under 469 There are 7 tests to determine if someone materially participates or not: 500 hours Substantially all activity conducted by taxpayer over all other individuals More than 100 hours test and no other individual participates more hours Significant participation activity, tp participates more than 100 hours and annual participation in all spa s is more than 500 hours Prior year material participant 5 out of 10 years Personal service activity Facts & circumstances

22 Remember deductions available to reduce the NII State income taxes Investment fees to the extent they exceed 2% of AGI Self charged interest not subject to NII

23 Gross income from non passive rental activities Both the gross income and the gain from disposition of the property are deemed earned in the ordinary course of a trade or business and are not subject to the tax Safe Harbor for Real Estate professionals Participates in one or more rental real estate activities for more than 500 hours in the year will be deemed in the ordinary course of business Self Charged Rental Income deemed in the ordinary course of business

24 Capital gains from sales of stock or partnership interests, look through provision Sale of stock not necessarily subject to the tax If taxpayer is active in the T or B, an analysis must be done to see how much pro rata gain the taxpayer would have if the business sold its assets and that share of the gain will not be subject to the tax Safe harbor available in the regs

25 Tax exempt income is not subject to the tax, may want to re evaluate investments Are gain on home sales subject to the tax? They may be but many hurdles The first 250K/500K gain is not subject to tax Any gain over these amounts will be subject to the tax if the other thresholds are met

26 Retirement plan distributions The income is not subject to the tax However, the income from IRA or plan distributions (including conversions to ROTH IRAs) create modified adjusted gross income

27 Convert Regular IRA to Roth IRA Great opportunity to convert at a low value and take tax-free income in the future Income limits for conversions are removed for 2010 and forward Must convert by 12/31 but can always use hindsight and reverse conversion Also a useful estate planning tool as taxes paid reduce the estate

28 American Taxpayer Relief Act Permanently provides for a maximum 40% estate tax rate 5 million annually inflation adjusted, 5.43 million in 2015 for estates and gifts Annual exclusion 14,000 for 2015 Portability now permanent

29 GST Tax 40% GST rate 5 million exemption Many GST provisions extended Deemed allocation and retroactive allocation provisions Clarification of valuation rules with respect to the determination of the inclusion ratio Qualified severance of a trust for purpose of the GST tax Relief from late GST allocation and elections

30 The Stopgap Highway bill included significant changes to the due dates of returns, including form 1041 For trust years ending after 12/31/15, there will be a 5 ½ month extension, making the 2016 calendar year trust return due 9/30/17 The bill also requires consistency between estate tax value and income tax basis of assets acquired from a decedent

31 For 2014 returns, Ohio continues the small business deduction for individuals 3/4 of Ohio sourced income up to 250,000 can be excluded W-2 income for more than 20% owners is considered small business income Related party add backs need to be considered Income needs to be apportioned, even if the Ohio resident is paying tax on all of the income

32

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