Tax Season Insights with Ernst & Young - Fidelity Investments€¦ · regulations are complex and...

Tax Season Insights with Ernst & YoungMarch 29, 2019

Disclaimer

Tax Season Insights with Ernst & Young

► EY refers to the global organization, and may refer to one or more, of the member firms of Ernst & Young Global Limited, each of which is a separate legal entity. Ernst & Young LLP is a client-serving member firm of Ernst & Young Global Limited operating in the U.S.

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► This presentation is provided solely for the purpose of enhancing knowledge on tax matters. It does not provide tax advice to any taxpayer because it does not take into account any specific taxpayer’s facts and circumstances.

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► Fidelity does not provide legal or tax advice. The information herein is general and educational in nature and should not be considered legal or tax advice. Tax laws and regulations are complex and subject to change, which can materially impact investment results. Fidelity cannot guarantee that the information herein is accurate, complete, or timely. Fidelity makes no warranties with regard to such information or results obtained by its use, and disclaims any liability arising out of your use of, or any tax position taken in reliance on, such information. Consult an attorney or tax professional regarding your specific situation.

Agenda

► Review and understand major provisions of the new tax law for individuals

► Identify planning opportunities in light of the current landscape


Tax Cuts and Jobs Act


Changing tax rates

Tax Year Tax Rates

2013–2017 10% 15% 25% 28% 33% 35% 39.6%

2018–2025 10% 12% 22% 24% 32% 35% 37%

2026+ 10% 15% 25% 28% 33% 35% 39.6%


2019 tax brackets

Tax BracketSingle

Starting at:Head of Household

Starting at:Married Filing Jointly

Starting at:

10% $0 $0 $0

12% $9,700 $13,850 $19,400

22% $39,475 $52,850 $78,950

24% $84,200 $84,200 $168,400

32% $160,725 $160,700 $321,450

35% $204,100 $204,100 $408,200

37% $510,300 $510,300 $612,350


1926 1936 1946 1956 1966 1976 1986 1996 2006 20262016

20%

40%

60%

80%

100%

Marginal tax rate

The ever-changing tax landscape

Highest rate Lowest rate


Long-term capital gains and dividends

2019 Single AGI* Starting at:

2019 Married Filing Jointly AGI* Starting at:

0% $0 $0

15% $39,375 $78,750

20% $434,550 $488,850

*AGI = Adjusted Gross Income Tax Season Insights with Ernst & Young

Standard deduction – 2019 (through 2025)

Old New

Single $6,500 $12,200

Head of Household $9,550 $18,350

Married Filing Jointly $13,000 $24,400


Itemized deductions 2018–2025

Old New

Overall limitation Up to 80% phased out when AGI exceeds $266,700/$320,000 No limitation

Casualty and theft losses Any eligible property Federally declared disasters only

State and local taxesNo limit on the amount of income (sales) tax, real property tax, or personal property tax, assuming not subject to AMT

Limited to $10,000 for state, local, and property taxes (combined)

Home mortgage interest Limited to interest on $1,000,000 of debt; $100,000 for home equity loan

Limited to interest on $750,000 for debt incurred after 12/15/2017; no home equity loan deduction unless used to buy, build, or improve home

Charitable contributions Up to 50% of AGI 50% of AGI limit raised to 60% for certaincash gifts


Itemized deductions and adjustments 2018–2025

Old New

Medical expenses To the extent expenses exceed 10% of AGI floor

10% of AGI floor reduced to 7.5% for 2017 and 2018; increased to 10% for years after 2018

Job expenses and certain miscellaneous deductions Eligible expenses deductible

Miscellaneous itemized deductions suspended (e.g., tax preparation fees and investment advisory fees)

Moving expenses (adjustment exclusion) Any eligible person Members of the armed forces on active

duty only

Employer-provided bicycle commuter exclusion

Employer reimbursements for qualified bicycle commuting reimbursements up to $20 per month excluded from income

Repealed


Alternative minimum tax (AMT) 2018–2025

Implications: Higher exemption amounts should mean that fewer individuals will be subject to the AMT.

Old (Single/MFJ)

New 2019(Single/MFJ)

MaximumAMT exemption $55,400/$86,200 $71,700/$111,700

Exemption phase-out threshold $123,100/$164,100 $510,300/$1,020,600

26%/28% tax rate threshold $191,500 $194,800


Bonus payments

Supplemental withholding► Employer is required to withhold at the highest rate bracket (37%) if employee’s YTD

compensation exceeds $1 million

► Effective January 1, 2018, through December 31, 2025, highest rate bracket is 37%

► Supplemental wages of up to $1 million — a flat income tax withholding rate of 22%

► Withholding may not cover actual taxes you will owe

► Tax projection would be helpful as the tax rate could potentially be 37% but withholding 22%


Kiddie tax

Old: Unearned income above $2,100 taxed at parent’s rate

New: Unearned income taxed at trust/estate rates

► 37% on income over $12,750


Section 529 Plans► Contributions are after tax

► Growth is tax deferred

► Distributions are tax free if used for qualified education expenses State tax-free status varies by state plan

► Donors not subject to income limitations

► Tax and penalties apply if not used for qualified education expenses

► In 2019, you can contribute $15,000 ($30,000 married) per beneficiary per year without triggering gift tax

► You can use up to $10,000 per year for an elementary or secondary public, private, or religious school tax free (for federal purposes)


Roth IRA considerations► Ability to contribute dependent on filing status

and modified adjusted gross income Single: $122,000–$137,000 MFJ: $193,000–$203,000

► After-tax contribution (no deduction)

► Tax-deferred growth

► Tax-free qualified distribution Account open for 5 years and age 59½


Roth conversions: Point counterpoint

► Owner can pay the tax on conversion from non-account assets

► Assets will pass to non-charitable beneficiaries

► When the investment horizon is longer and/or wealth transfer to heirs is a priority

► Assets will appreciate► When the owner anticipates that their

income tax rates will stay the same or increase

► Owner needs to take a distribution from the IRA to pay tax on conversion

► Assets will be used to fund charitable bequests at death

► When the investment horizon is shorter (e.g., assets will be spent in retirement)

► Assets will depreciate► When the owner anticipates that their

income tax rates will decrease significantly

Conversion makes more sense

Conversion makesless sense


Roth conversions: Point counterpoint

► High bracket taxpayer subject to AMT in year of conversion

► IRA has high cost basis

► When IRA has low basis and owner has NOL, large charitable deductions, or other items that will shelter the income from the conversion

► High bracket taxpayer who may be in AMT in a subsequent year

► IRA has low cost basis creating significant tax liability on conversion

Conversion makes more sense

Conversion makesless sense

► Caution: You can no longer unwind a Roth IRA conversion


Charitable deduction limits

Adjusted gross income limitations

Property donated Public charity ordonor-advised fund

Privatefoundation

Cash, ordinary-income property and unappreciated property 60% 30%

Long-term capital gain property deducted at fair market value 30% 20%

Long-term capital gain property deducted at basis 50% 30%


Giving stocks or other securities

Proceeds of sale $1,000

Tax on $900 long-term capital gain $135

Donate net proceeds $865

Estimated tax benefit $242


Value of donation $1,000

Tax benefit from charitable deduction $280

+ Tax benefit from avoiding capital gain taxation $135

= Total estimated tax benefit $415

Sell stock and donate cash Give stock to charity

Assumes stock held for more than one year and in the 28% tax bracket.

Hypothetical example:

Donor-advised fund

How it works Pros Cons Deduction► You contribute cash or

appreciated securities to a donor-advised fund set up in your name by a public charity (the “parent charity”)

► You make recommendations on grants to be paid from the fund to specified charities

► Contribute on your own schedule

► Assets and growth are removed from your taxable estate

► You have a say as to how donations are to be used

► Once you’ve transferred assets to the fund, the parent charity retains ultimate control

► Investment options may be limited

► Current-year income tax deduction (up to charitable deduction limits)


Earned and unearned income

Other considerations► Switch pretax 401(k) contributions to Roth 401(k) contributions► Consider conversion of IRAs to Roth IRAs

► Revisit contributions to non-qualified deferred compensation plans But don’t forget state tax considerations

► Exercise and hold of incentive stock options may be more advantageous► Revisit investment in taxable versus tax-exempt bonds

Current Tax Law Future Tax Law

Tax rates of 10%–37% Tax rates of 10%–39.6%


Recap — Tax considerations now that tax reform has passed

► Charitable contributions still valuable – consider bunching deductions

► Revisit pretax versus Roth 401(k) analysis

► Fixed income: taxable or tax-exempt bonds

► Review after-tax cost of mortgages on second homes and home equity lines of credit

► Revisit state residency


Q&A


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EY refers to the global organization, and may refer to one or more, of the member firms of Ernst & Young Global Limited, each of which is a separate legal entity. Ernst & Young Global Limited, a UK company limited by guarantee, does not provide services to clients. For more information about our organization, please visit ey.com.

Ernst & Young LLP is a client-serving member firm of Ernst & Young Global Limited operating in the US.

© 2019 Ernst & Young LLP.All Rights Reserved.

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This material has been prepared for general informational purposesonly and is not intended to be relied upon as accounting, tax or otherprofessional advice. Please refer to your advisors for specific advice.

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