TAX GUIDE PLANNING 2018 2019 - Bernard Robinson & Company
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2018 ‑ 2019
TAX
PLANNING
GUIDE
YEAR-ROUND STRATEGIES TO MAKE THE TAX LAWS WORK FOR YOU
Dear Clients and Friends, No one can tell you exactly what is going to happen in the coming months with the economy, our tax laws and your personal financial situation. However, you can be assured of this; if you want to minimize your taxes, you must have a plan, not only to move toward your goals, but also to know what adjustments to make as things change. Bernard Robinson & Company has provided extensive tax services to our valued clients for 70 years. Our team of dedicated professionals continually stay abreast of existing tax laws, proposed laws, regulations and planning strategies. With economic and legislative uncertainty now a given, it is more important than ever to have experience on your side when reacting quickly to changes to take advantage of new ways to save tax and protect your wealth. To these ends, we’re pleased to present this tax planning guide. It’s designed to help you under- stand what the current tax law situation is, where changes may occur and what steps you might take to minimize your income or estate tax. We encourage you to look through it and note any strategies that seem likely to benefit you. Then let us know how we can help you develop a plan that keeps your income or estate tax liability as low as possible. Also, don’t wait until filing time! Tax planning is a year-round activity. To get the most benefit, you should act now. We would like very much to talk with you about these and other ways to minimize your taxes. Please contact us at your earliest convenience and let us know how we might be of assistance. Best regards, Bernard Robinson & Company Tax Leadership
It’s a new day for tax planning On December 22, 2017, the most sweeping tax legislation since the Tax Reform Act of 1986 was signed into law. The Tax Cuts and Jobs Act (TCJA) makes small reductions to income tax rates for most individual tax brackets, including reducing the top rate from 39.6% to 37%, and substantially reduces the income tax rate for corporations. It also provides a large new tax deduction for owners of pass-through entities and significantly increases exemptions for the individual alternative minimum tax (AMT) and the estate tax. It’s not all good news for taxpayers, however. The TCJA also eliminates or limits many tax breaks, and much of the tax relief provided is only temporary (unless Congress acts to make it permanent). The combined impact of these changes will ultimately determine whether you see reduced taxes. It also will dictate which tax strategies will make sense for you this year, such as the best way to time income and expenses. This guide provides an overview of the most consequential changes under the TCJA and other key tax provisions you need to be aware of. It offers a variety of strategies to help higher-income taxpayers minimize their taxes in the new tax environment. It will be important to work closely with your tax advisor this year. He or she can help you identify which changes affect you and the best strategies for maximizing the new tax law’s benefits and minimizing any negative tax ramifications. Plus, more tax legislation could be signed into law this year, and your tax advisor can keep you apprised of the latest information. Contents YEAR-TO-DATE REV IEW ......... . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2 Click here E XECUTIV E COMPENSATION .. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6 Click here I NV ESTING.......................... . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8 Click here REAL ESTATE.. ...................... . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12 Click here BUSINESS OWNERSHIP . . ........ . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14 Click here CHARITAB LE G IV ING . . .......... . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16 Click here FAMILY & ED UCATION .......... . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18 Click here RETIREMENT . ....................... . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20 Click here ESTATE PLANNING ............... . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22 Click here TAX RATES .......................... . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24 Click here
How does the TCJA
affect your tax strategies?
T
he Tax Cuts and Jobs Act (TCJA) reduces the rates for all individual income tax Finally, in certain situations exercising
brackets except 35% and 10%, which remain the same, and adjusts the income incentive stock options (ISOs) can trigger
ranges each bracket covers. (See Chart 7 on page 24.) These rates apply to significant AMT liability. (See the AMT
“ordinary income,” which generally includes salary, income from self-employment Alert on page 7.)
or business activities, interest, and distributions from tax-deferred retirement accounts.
There are other taxes you need to keep in mind as well, such as the AMT and Avoiding or reducing AMT
employment taxes. If possible, try to control to your tax advantage the timing of your
With proper planning, you may be able
ordinary income as well as your deductible expenses — which might be significantly
to avoid the AMT, reduce its impact
reduced under the TCJA.
or even take advantage of its lower
maximum rate. To determine the right
AMT triggers n Accelerated depreciation adjustments
timing strategies for your situation, work
and related gain or loss differences with your tax advisor to assess whether:
The top alternative minimum tax rate
when assets are sold, and
remains at 28%, compared to the new
top regular ordinary-income tax rate n Tax-exempt interest on certain You could be subject to the AMT this
of 37%. (See Chart 7 on page 24.) private-activity municipal bonds. year. Consider accelerating income
But the AMT rate typically applies to a (For an exception, see the AMT into this year, which may allow you to
higher taxable income base. Alert on page 11.) benefit from the lower maximum AMT
Enhancement! The TCJA substantially
CHART 1
increases the AMT exemptions for
2018–2025, which means fewer What itemized deductions are
taxpayers will have to pay the AMT. also deductible for AMT purposes?
(See Chart 7 on page 24.) There are
now fewer differences between what’s Expense Regular tax AMT For more information
deductible for AMT purposes and regu-
See “What’s new!” on
lar tax purposes, which also will reduce State and local income tax1 ✔ page 4.
AMT risk. However, AMT will remain a
threat for some higher-income taxpayers. See “Home-related
Property tax1 ✔ deductions” on page 12.
So before timing your income and See “Home-related
expenses, determine whether you’re Mortgage interest ✔ ✔ deductions” on page 12.
already likely to be subject to the AMT —
Interest on home equity debt
or whether the actions you’re considering See “Home-related
used to improve your principal ✔ ✔ deductions” on page 12.
might trigger it. Deductions used to residence or second residence
calculate regular tax that aren’t allowed
See “Investment interest
under the AMT (see Chart 1) can trigger Investment interest ✔ ✔
YE A R- TO- DAT E RE VI E W
expense” on page 11.
AMT liability. Some income items also
might trigger or increase AMT liability: See “Health-care-related
Medical expenses ✔ ✔ breaks” at right.
n Long-term capital gains and qualified
Charitable contributions ✔ ✔ See page 16.
dividend income, even though they’re
taxed at the same rate for both regular
1
State and local income tax and property tax deductions in aggregate are limited to $10,000 for
regular tax purposes ($5,000 for married couples filing separately).
tax and AMT purposes,
2
rate. And deferring expenses you can’t
deduct for AMT purposes may allow
WHAT’S NEW!
you to preserve those deductions. If you
also defer expenses you can deduct Dramatic changes to personal exemptions, the
for AMT purposes, the deductions standard deduction and itemized deductions
may become more valuable because
of the higher maximum regular tax For 2017, taxpayers could
rate. Finally, carefully consider the tax claim a personal exemption
consequences of exercising ISOs. of $4,050 each for them-
selves, their spouses and any
You could be subject to the AMT next dependents. For 2018–2025,
year. Consider taking the opposite the Tax Cuts and Jobs Act
approach. For instance, defer income (TCJA) suspends personal
to next year, because you’ll likely pay a exemptions, a change that’s
relatively lower AMT rate. And prepay expected to have minimal
expenses that will be deductible this year effect on higher-income
but that won’t help you next year because taxpayers. That’s because exemptions generally had been partially or fully
they’re not deductible for AMT purposes. phased out in past tax years for higher-income individuals and, when
Also, before year end consider selling any available, were added back for AMT purposes.
private-activity municipal bonds whose
interest could be subject to the AMT. The TCJA also nearly doubles the standard deductions for 2018 to $12,000
for singles and separate filers, $18,000 for heads of households, and $24,000
If you pay AMT in one year on deferral for joint filers. (These amounts will be indexed for inflation through 2025. After
items, such as depreciation adjustments, that, they’re scheduled to drop back to the amounts under pre-TCJA law.)
passive activity adjustments or the tax
preference on ISO exercises, you may be Taxpayers can choose to either itemize certain deductions or take the
entitled to a credit in a subsequent year. standard deduction based on their filing status. With the much higher
In effect, this factors in timing differences standard deduction, fewer taxpayers will itemize — but most higher-income
that reverse in later years. taxpayers will still benefit from itemizing, unless they don’t donate much to
charity or have a mortgage. However, be aware that your itemized deductions
will likely be significantly lower than in the past because of other TCJA
Timing income and expenses
changes. See “What’s new!” on page 4.
Smart timing of income and expenses can
reduce your tax liability, and poor timing
can unnecessarily increase it. When you Whatever the reason behind your Eligible expenses may include health
don’t expect to be subject to the AMT in desire to time income and expenses, insurance premiums, long-term-care
the current year or the next year, deferring you may be able to control the timing insurance premiums (limits apply),
income to the next year and accelerating of these income items: medical and dental services, and pre-
deductible expenses into the current year scription drugs. Mileage driven for health
n Bonuses, care purposes also can be deducted —
may be a good idea. Why? Because it will
defer tax, which usually is beneficial. n Consulting or other self-employment at 18 cents per mile for 2018.
income,
But when you expect to be in a higher When a deduction is subject to a floor,
n U.S. Treasury bill income, and
tax bracket next year — or you expect “bunching” expenses into one year that
n Retirement plan distributions, to normally would be spread over two years
tax rates to rise — the opposite approach
the extent they won’t be subject to can save tax, especially when the floor is
may be beneficial: Accelerating income
early-withdrawal penalties and aren’t scheduled to change. So consider bunch-
will allow more income to be taxed at
required. (See page 21.) ing elective medical procedures (and
your current year’s lower rate. And defer-
ring expenses will make the deductions any other services and purchases whose
Some expenses with potentially
more valuable, because deductions save timing you can control without negatively
controllable timing are mortgage
more tax when you’re subject to a higher affecting your or your family’s health) into
interest, investment interest expense
tax rate. 2018 to take advantage of the 7.5% floor.
and charitable contributions.
The TCJA makes timing income and If one spouse has high medical
deductions more challenging this year, Health-care-related breaks expenses and a relatively lower AGI,
because some strategies that taxpayers Enhancement! Under the TCJA, if filing separately may allow that spouse
have implemented in the past may 2018 medical expenses not paid via a to exceed the AGI floor and deduct
some medical expenses that wouldn’t
YE AR -TO- DAT E RE VI E W
no longer make sense. For example, tax-advantaged account (see page 4)
property tax used to be a popular or reimbursable by insurance exceed be deductible if the couple filed jointly.
expense to time, but with the new limit 7.5% of your adjusted gross income
AMT ALERT! Because the AMT exemp-
on the state and local tax deduction (AGI), you can deduct the excess
tion for separate returns is considerably
(see “What’s new!” on page 4), property amount. This “floor” had been 10%,
lower than the exemption for joint
tax timing will likely provide little, if any, and it’s scheduled to return to 10%
returns, filing separately to exceed the
benefit for higher-income taxpayers. beginning in 2019.
floor could trigger the AMT.
3
Expenses that are reimbursable by $2,650 in 2018. The plan pays or Self-employment taxes
insurance or paid through a tax- reimburses you for qualified medical If you’re self-employed, you pay both
advantaged account such as the expenses. What you don’t use by the the employee and employer portions
following aren’t deductible: plan year’s end, you generally lose — of employment taxes on your self-
though your plan might allow you to employment income. The employer
HSA. If you’re covered by a qualified roll over up to $500 to the next year. portion (6.2% for Social Security tax and
high deductible health plan, you can Or it might give you a 2½-month grace 1.45% for Medicare tax) is deductible
contribute pretax income to an employer- period to incur expenses to use up above the line.
sponsored Health Savings Account — or the previous year’s contribution. If you
make deductible contributions to an HSA have an HSA, your FSA is limited to As a self-employed taxpayer, you may
you set up yourself — up to $3,450 for funding certain “permitted” expenses. benefit from other above-the-line deduc-
self-only coverage and $6,900 for family
tions as well. You can deduct 100%
coverage for 2018. Plus, if you’re age 55
Employment taxes of health insurance costs for yourself,
or older, you may contribute an additional
In addition to income tax, you must your spouse and your dependents, up
$1,000. HSAs can bear interest or be
pay Social Security and Medicare to your net self-employment income.
invested, growing tax-deferred similar to
taxes on earned income, such as You also can deduct contributions
an IRA. Withdrawals for qualified medical
salary and bonuses. The 12.4% to a retirement plan and, if you’re
expenses are tax-free, and you can carry
Social Security tax applies only up eligible, an HSA for yourself. And you
over a balance from year to year.
to the Social Security wage base of might be able to deduct home office
$128,400 for 2018. All earned income expenses. (See page 12.) Above-the-line
FSA. You can redirect pretax income
is subject to the 2.9% Medicare tax. deductions are particularly valuable
to an employer-sponsored Flexible
Both taxes are split equally between because they reduce your AGI and,
Spending Account up to an employer-
the employee and the employer. depending on the specific deduction,
determined limit — not to exceed
your modified AGI (MAGI), which are
the triggers for certain additional taxes
and the phaseouts of many tax breaks.
WHAT’S NEW!
Individual deductions affected by the TCJA Additional 0.9% Medicare tax
Another employment tax that higher-
In addition to the deduction changes impacting many
income taxpayers must be aware of is the
home-related expenses (see page 12), charitable donations
additional 0.9% Medicare tax. It applies
(see page 16) and medical expenses (see page 3), the
to FICA wages and net self-employment
TCJA limits or eliminates other deductions that are valuable
income exceeding $200,000 per year
to many individual taxpayers:
($250,000 if married filing jointly and
$125,000 if married filing separately).
State and local tax. For 2018–2025, your entire itemized deduction for
state and local taxes — including property tax (see page 12) and either
If your wages or self-employment
income or sales tax — is limited to $10,000 ($5,000 if you’re married filing
income varies significantly from year
separately). This will have a significant impact on higher-income taxpayers
to year or you’re nearing the threshold
with large state and local income tax and/or property tax bills.
for triggering the additional Medicare
tax, income timing strategies may help
Miscellaneous itemized deductions subject to the 2% floor. This deduction
you avoid or minimize it. For example,
for expenses such as certain professional fees, investment expenses and
if you’re an employee, perhaps you
unreimbursed employee business expenses is suspended for 2018–2025.
can time when you receive a bonus
If you’re an employee and work from home, this includes the home office
or exercise stock options. If you’re
deduction. (If you’re self-employed, you may still be able to deduct home
self-employed, you may have flexibility
office expenses. See page 12.)
on when you purchase new equipment
Personal casualty and theft loss deduction. For 2018–2025, this itemized or invoice customers. If you’re an
deduction is suspended except if the loss was due to an event officially S corporation shareholder-employee,
declared a disaster by the President. you might save tax by adjusting how
much you receive as salary vs. distribu-
Moving expenses. This above-the-line deduction for work-related moving tions. (See “Owner-employees” at right.)
expenses is suspended for 2018–2025, except for active-duty members of
the Armed Forces (and their spouses or dependents) who move because of a Also consider the withholding rules.
military order that calls for a permanent change of station. An above-the-line Employers must withhold the addi-
deduction is one you can take even if you don’t itemize; it’s subtracted from tional tax beginning in the pay period
YE A R- TO- DAT E RE VI E W
your income in determining your adjusted gross income (AGI). when wages exceed $200,000 for the
calendar year — without regard to an
But it’s not all bad news for tax deductions. Under pre-TCJA law, if your AGI employee’s filing status or income from
exceeded the applicable threshold, certain itemized deductions were reduced other sources. So your employer might
by 3% of the AGI amount over the threshold (not to exceed 80% of otherwise withhold the tax even if you aren’t liable
allowable deductions). For 2018–2025, the TCJA suspends this reduction. for it — or it might not withhold the tax
even though you are liable for it.
4
Estimated payments
WHAT’S NEW! and withholding
You can be subject to penalties if you
Updated tables could cause underwithholding
don’t pay enough tax during the year
To reflect changes under the TCJA — such through estimated tax payments and
as the increase in the standard deduction, withholding. Here are some strategies
suspension of personal exemptions and to help avoid underpayment penalties:
changes in tax rates and brackets — the
IRS updated the tables that indicate how Know the minimum payment rules. For
much employers should withhold from their you to avoid penalties, your estimated
employees’ paychecks for federal income payments and withholding must equal
taxes, generally reducing the amount at least 90% of your tax liability for 2018
withheld. The new tables might cause or 110% of your 2017 tax (100% if your
some taxpayers, such as those who itemize 2017 AGI was $150,000 or less or, if
deductions or are in a two-income house- married filing separately, $75,000 or
hold, to not have enough withheld to pay less). Warning: You may be at a greater
their ultimate tax liabilities under the TCJA. risk for underwithholding this year. See
“What’s new!” at left.
An IRS calculator can help you more accurately estimate how much should
be withheld. (Go to IRS.gov and search “withholding.”) You may find that Use the annualized income installment
you need to increase your withholding by filling out a new Form W-4 and method. This method often benefits
submitting it to your employer. You can modify your withholding at any time taxpayers who have large variability
during the year, or even multiple times within a year. in income from month to month due
to bonuses, investment gains and
losses, or seasonal income (at least if
If you don’t owe the tax but your company income, because distributions it’s skewed toward the end of the year).
employer is withholding it, you can generally aren’t taxed at the corporate Annualizing computes the tax due based
claim a credit on your 2018 income tax level or subject to the 0.9% Medicare on income, gains, losses and deductions
return. If you do owe the tax but your tax or 3.8% NIIT. through each estimated tax period.
employer isn’t withholding it, consider
filing a W-4 form to request additional C corporations. Only income you receive Estimate your tax liability and increase
income tax withholding, which can be as salary is subject to employment taxes withholding. If you determine you’ve
used to cover the shortfall and avoid and, if applicable, the 0.9% Medicare underpaid, consider having the tax
interest and penalties. Or you can tax. Nonetheless, you may prefer to shortfall withheld from your salary or year
make estimated tax payments. take more income as salary (which is end bonus by Dec. 31. Because with-
deductible at the corporate level) as holding is considered to have been paid
opposed to dividends (which aren’t ratably throughout the year, this is often
Owner-employees
deductible at the corporate level yet are a better strategy than making up the
There are special considerations if still taxed at the shareholder level and difference with an increased quarterly
you’re a business owner who also could be subject to the 3.8% NIIT) if the tax payment, which may still leave you
works in the business, depending on overall tax paid by both the corporation exposed to penalties for earlier quarters.
its structure: and you would be less.
Warning: You can incur interest and
Partnerships and limited liability Warning: The IRS is cracking down on penalties if you’re subject to the additional
companies. Generally, all trade or misclassification of corporate payments 0.9% Medicare tax and it isn’t withheld
business income that flows through to to shareholder-employees, so tread from your pay and you don’t make
you for income tax purposes is subject carefully. sufficient estimated tax payments. ❖
to self-employment taxes — even if
the income isn’t distributed to you. But
such income may not be subject to
self-employment taxes if you’re a limited
partner or the LLC member equivalent.
Check with your tax advisor on whether
the additional 0.9% Medicare tax on
earned income or the 3.8% NIIT (see
page 8) will apply.
YE AR -TO- DAT E RE VI E W
S corporations. Only income you
receive as salary is subject to employ-
ment taxes and, if applicable, the 0.9%
Medicare tax. To reduce these taxes,
you may want to keep your salary
relatively — but not unreasonably —
low and increase your distributions of
5
Smart tax planning for your executive
compensation package is crucial
I
f you’re an executive or other key employee, you might receive stock-based But they do offer a limited ability to defer
compensation, such as restricted stock, restricted stock units (RSUs) or stock income taxes: Unlike restricted stock,
options (either incentive or nonqualified), or nonqualified deferred compensation which becomes taxable immediately
(NQDC). The tax consequences of these types of compensation can be complex — upon vesting, RSUs aren’t taxable until
subject to ordinary income, capital gains, employment and other taxes. So smart the employee actually receives the
tax planning is crucial. stock. So rather than having the stock
delivered immediately upon vesting,
Restricted stock There are some potential disadvan- you may be able to arrange with your
tages of a Sec. 83(b) election, employer to delay delivery.
Restricted stock is stock your employer
grants to you subject to a substantial however. First, prepaying tax in the
current year could push you into a Such a delay will defer income tax
risk of forfeiture. Income recognition and may allow you to reduce or
is normally deferred until the stock higher income tax bracket and trigger
or increase your exposure to the avoid exposure to the additional 0.9%
is no longer subject to that risk (that Medicare tax (because the RSUs are
is, it’s vested) or you sell it. When the additional 0.9% Medicare tax. But
if your company is in the earlier treated as FICA income). However, any
restriction lapses, you pay taxes on the income deferral must satisfy the strict
stock’s fair market value (FMV) at your stages of development, the income
recognized may be relatively small. requirements of Internal Revenue Code
ordinary-income rate. (The FMV will be Section 409A. Also keep in mind that it
considered FICA income, so it could might be better to recognize income now
Second, any taxes you pay because of
trigger or increase your exposure to because of the currently low tax rates.
the election can’t be refunded if you
the additional 0.9% Medicare tax. See
eventually forfeit the stock or sell it
page 4.)
at a decreased value. However, you’d Incentive stock options
But you can instead make a Section 83(b) have a capital loss in those situations. ISOs allow you to buy company stock in
election to recognize ordinary income the future (but before a set expiration
Third, when you sell the shares, any
when you receive the stock. This election, date) at a fixed price equal to or greater
gain will be included in net investment
which you must make within 30 days than the stock’s FMV at the date of
income and could trigger or increase
after receiving the stock, allows you the grant. Thus, ISOs don’t provide a
your liability for the 3.8% NIIT. (See
to convert potential future appreciation benefit until the stock appreciates in
page 8.)
from ordinary income to long-term capital value. If it does, you can buy shares at
gains income and defer it until the stock Work with your tax advisor to map a price below what they’re then trading
is sold. out whether the Sec. 83(b) election is for, provided you’re eligible to exercise
appropriate for you in each situation. the options.
The election can be beneficial if the
income at the grant date is negligible ISOs receive tax-favored treatment
E X E C UT I VE C O M PE NS AT I ON
or the stock is likely to appreciate
RSUs but must comply with many rules.
significantly before income would RSUs are contractual rights to receive Here are the key tax consequences:
otherwise be recognized. And with stock, or its cash value, after the award
ordinary-income rates now especially has vested. Unlike restricted stock, RSUs n You owe no tax when ISOs are
low under the Tax Cuts and Jobs Act aren’t eligible for the Sec. 83(b) election. granted.
(TCJA), it might be a good time to So there’s no opportunity to convert n Youowe no regular income tax
recognize income. ordinary income into capital gains. when you exercise the ISOs.
6
n Ifyou sell the stock after holding the
shares at least one year from the
WHAT’S NEW!
exercise date and two years from the
grant date, you pay tax on the sale at The TCJA offers new, but limited, tax deferral opportunity
your long-term capital gains rate. You
The TCJA has created a
also may owe the NIIT. (See page 8.)
new provision that allows
n Ifyou sell the stock before long-term for the deferral of tax on
capital gains treatment applies, a stock-based compensation
“disqualifying disposition” occurs and in certain circumstances.
any gain is taxed as compensation at Generally, it gives taxpayers
ordinary-income rates. (Disqualified the opportunity to match
dispositions aren’t, however, subject the taxation of restricted
to FICA and Medicare tax, including stock and stock options
the additional 0.9% Medicare tax.) with the timing of the sale
of the stock. It’s intended
AMT ALERT! If you don’t sell the
for situations in which there
stock in the year of exercise, a tax
is no ready market for the
“preference” item is created for the
sale of the stock.
difference between the stock’s FMV
and the exercise price (the “bargain The availability of the deferral opportunity is limited, however. It generally
element”) that can trigger the AMT. will apply only if at least 80% of full-time employees are covered by the
A future AMT credit, however, should stock-based compensation plan.
mitigate this AMT hit. Plus, you may
now be at lower AMT risk because
of the higher AMT exemption and
On the negative side, exercising early NQDC plans
exemption phaseout range under
accelerates the need for funds to
the TCJA. (See Chart 7 on page 24.) These plans pay executives in the
buy the stock, exposes you to a loss
Consult your tax advisor because the future for services to be currently
if the shares’ value drops below
rules are complex. performed. They differ from qualified
your exercise cost, and may create
plans, such as 401(k)s, in several
a tax cost if the preference item
If you’ve received ISOs, plan carefully ways. For example, unlike 401(k)
from the exercise generates an
when to exercise them and whether plans, NQDC plans can favor highly
AMT liability.
to immediately sell shares received compensated employees, but plan
from an exercise or hold them. Waiting funding isn’t protected from the
The timing of ISO exercises also could
to exercise ISOs until just before the employer’s creditors. (For more on
positively or negatively affect your
expiration date (when the stock value 401(k)s, see page 20.)
liability for the higher ordinary-income
may be the highest, assuming the
tax rates, the 20% long-term capital
stock is appreciating) and holding on to Some major changes to the taxation
gains rate and the NIIT.
the stock long enough to garner long- of NQDC that had been included
term capital gains treatment often is in original versions of the TCJA
With your tax advisor, evaluate the risks
beneficial. But there’s also market risk would have negatively impacted
and crunch the numbers to determine
to consider. Plus, acting earlier can be such compensation. Fortunately,
the best strategy for you.
advantageous in several situations: those changes didn’t make it into
the final version that was signed
n Exercise early to start the holding
Nonqualified stock options into law.
period so you can sell and receive The tax treatment of NQSOs is
long-term capital gains treatment different from the tax treatment of One important NQDC tax issue is that
sooner. ISOs: NQSOs create compensation employment taxes (see page 4) are
income (taxed at ordinary-income generally due once services have been
n Exercise when the bargain element
rates) on the bargain element when performed and there’s no longer a
is small or when the market price is
exercised (regardless of whether the substantial risk of forfeiture — even
close to bottoming out to reduce or
stock is held or sold immediately), though compensation may not be
eliminate AMT liability.
but they don’t create an AMT paid or recognized for income tax
n Exercise annually so you can buy preference item. purposes until much later. So your
only the number of shares that will employer may withhold your portion
E X E C U TI VE C O M P E NSATI O N
achieve a breakeven point between You may need to make estimated tax of the employment taxes from your
the AMT and regular tax and thereby payments or increase withholding to salary or ask you to write a check
incur no additional tax. fully cover the tax on the exercise. for the liability. Or it may pay your
n Sell in a disqualifying disposition Keep in mind that an exercise could portion, in which case you’ll have
and pay the higher ordinary-income trigger or increase exposure to top tax additional taxable income. Warning:
rate to avoid the AMT on potentially rates, the additional 0.9% Medicare The additional 0.9% Medicare tax
disappearing appreciation. tax and the NIIT. could also apply. ❖
7
Keep taxes from eroding
your investment returns
T
ax treatment of your investments varies dramatically based on factors such New! Because of TCJA-related changes
as type of investment, type of income it produces, how long you’ve held it to the brackets, beginning in 2018 the
and whether any special limitations or breaks apply. And while the Tax Cuts top long-term gains rate of 20% kicks
and Jobs Act (TCJA) didn’t change the long-term capital gains rates, its changes to in before the top ordinary-income rate
ordinary-income tax rates and tax brackets will have an impact on the tax you pay does. (See Chart 2 on page 10 and
on investments. Consult with your tax advisor about developing strategies aimed at Chart 7 on page 24.)
minimizing tax, keeping in mind that taxes, of course, should never be the primary
driver of your investment decisions. Holding on to an investment until you’ve
owned it more than one year may help
substantially cut tax on any gain. Keeping
3.8% NIIT Capital gains tax and timing
it even longer can also make tax sense.
Taxpayers with modified adjusted Although time, not timing, is generally
gross income (MAGI) over $200,000 the key to long-term investment Remember: Appreciation on investments
per year ($250,000 if married filing success, timing can have a dramatic isn’t taxed until the investments are sold,
jointly and $125,000 if married filing impact on the tax consequences of deferring tax and perhaps allowing you
separately) may owe the NIIT on top investment activities. Your long-term to time the sale to your tax advantage —
of whatever other tax they owe on capital gains rate can be as much such as in a year when you have capital
their investment income. The NIIT as 20 percentage points lower losses to absorb the capital gain. Or, if
equals 3.8% of the lesser of your net than your ordinary-income tax rate, you’ve cashed in some big gains during
investment income or the amount even with the reductions to most the year and want to reduce your 2018
by which your MAGI exceeds the ordinary-income rates under the tax liability, before year end look for
applicable threshold. TCJA. The long-term capital gains unrealized losses in your portfolio and
rate applies to investments held for consider selling them to offset your gains.
Net investment income can include more than 12 months. The applicable Both long- and short-term gains and
capital gains, dividends, interest and rate depends on your income level losses can offset one another.
other investment-related income (but not and the type of asset you’ve sold. (See
business income or self-rental income Chart 2 on page 10.) AMT ALERT! Substantial net long-term
from an active trade or business). The capital gains can trigger the AMT.
rules are somewhat complex, so consult
your tax advisor for more information.
Many of the strategies that can help
you save or defer income tax on your
investments can also help you avoid
or defer NIIT liability. And because
the threshold for the NIIT is based
on MAGI, strategies that reduce your
MAGI — such as making retirement
plan contributions (see page 20) —
could also help you avoid or reduce
I NV E ST I NG
NIIT liability.
8Wash sale rule
Case Study I
If you want to achieve a tax loss with
minimal change in your portfolio’s asset How to qualify for the 0% capital gains rate
allocation, keep in mind the wash sale
rule. It prevents you from taking a loss on Faced with a long-term capital gains
a security if you buy a substantially iden- tax rate of 23.8% (20% for the top
tical security (or an option to buy such a tax bracket, plus the 3.8% NIIT),
security) within 30 days before or after Miguel and Pilar decide to give some
you sell the security that created the loss. appreciated stock to their adult
You can then recognize the loss only daughter Gabby. Just out of college
when you sell the replacement security. and making only enough from her
entry-level job to leave her with
Fortunately, there are ways to avoid trig- $25,000 in taxable income, Gabby
gering the wash sale rule and still achieve falls into the 12% ordinary-income
your goals. For example, you can: tax bracket and the 0% long-term
capital gains bracket.
n Sell the security and immediately
buy securities of a different company However, the 0% rate applies only to the extent that capital gains “fill
in the same industry or shares in a up” the gap between Gabby’s taxable income and the top end of the 0%
mutual fund that holds securities bracket. For 2018, the 0% bracket for singles tops out at $38,600 (just
much like the ones you sold, $100 less than the top of the 12% ordinary-income bracket). So if Gabby
n Sellthe security and wait 31 days to sells the stock her parents transferred to her and her gains are $13,600,
repurchase the same security, or the entire amount will qualify for the 0% rate. The sale will be tax-free
vs. the $3,237 Miguel and Pilar would have owed had they sold the
n Before selling the security, purchase
stock themselves.
additional shares of that security
equal to the number you want to
sell at a loss, and then wait 31 days Finally, remember that capital gains And if you bought the same security
to sell the original portion. distributions from mutual funds can at different times and prices and want
also absorb capital losses. to sell high-tax-basis shares to reduce
Alternatively, you can do a bond swap,
gain or increase a loss to offset other
where you sell a bond, take a loss and
0% rate gains, be sure to specifically identify
then immediately buy another bond
which block of shares is being sold.
of similar quality and duration from a The 0% rate generally applies to
different issuer. Generally, the wash sale long-term gain that would be taxed at
rule doesn’t apply because the bonds 10% or 12%, based on the taxpayer’s Mutual funds
aren’t considered substantially identical. ordinary-income rate. However, a very Investing in mutual funds is an easy
Thus, you can achieve a tax loss with small portion of income in the top of way to diversify your portfolio. But
virtually no change in economic position. the 12% brackets won’t be eligible for beware of the tax pitfalls. First,
the 0% rate. mutual funds with high turnover
Warning: You can’t avoid the wash rates can create income that’s taxed
sale rule by selling stock at a loss in If you have adult children in the 10% or at ordinary-income rates. Choosing
a taxable account and purchasing 12% tax bracket, consider transferring funds that provide primarily long-term
the same stock within 30 days in a appreciated assets to them so they can gains can save you more tax dollars
tax-advantaged retirement account. sell the assets and enjoy the 0% rate. because of the lower long-term rates.
(See Case Study I.)
Loss carryovers Second, earnings on mutual funds are
Warning: If the child will be under typically reinvested, and unless you or
If net losses exceed net gains, you can age 24 on Dec. 31, first make sure he your investment advisor increases your
deduct only $3,000 ($1,500 if married or she won’t be subject to the “kiddie basis accordingly, you may report more
filing separately) of the net losses per tax.” (See page 18.) Also consider any gain than required when you sell the
year against other income (such as gift tax consequences. (See page 22.) fund. Brokerage firms are required to
wages, self-employment and business
track (and report to the IRS) your cost
income, dividends and interest).
Paying attention to details basis in mutual funds acquired during
You can carry forward excess losses If you don’t pay attention to the details, the tax year.
until death. Loss carryovers can be a the tax consequences of a sale may
Third, buying equity mutual fund
powerful tax-saving tool in future years be different from what you expect.
shares late in the year can be costly
if you have a large investment portfolio, For example, the trade date, not the
tax-wise. Such funds often declare a
real estate holdings or a closely held settlement date, of publicly traded
large capital gains distribution at year
business that might generate substantial securities determines the year in
end, which is a taxable event. If you
I NV E ST I NG
future capital gains. which you recognize the gain or loss.
9own the shares on the distribution’s proceeds, you can defer the tax on your Keep in mind that all three of these
record date, you’ll be taxed on the full gain until you dispose of the new stock. tax benefits are subject to additional
distribution amount even if it includes The rolled-over gain reduces your basis requirements and limits. Consult your
significant gains realized by the fund in the new stock. For determining tax and financial advisors to be sure
before you owned the shares. And long-term capital gains treatment, the an investment in small business stock
you’ll pay tax on those gains in the new stock’s holding period includes the is right for you.
current year — even if you reinvest holding period of the stock you sold. To
the distribution. be a QSB, a business must be engaged Passive activities
in an active trade or business and must
If you’ve invested in a trade or business
Small business stock not have assets that exceed $50 million,
in which you don’t materially participate
among other requirements.
By purchasing stock in certain small and where income or loss flows through
businesses, you can diversify your Exclusion of gain. Generally, taxpayers to your tax return, remember the passive
portfolio. You also may enjoy preferential selling QSB stock are allowed to exclude activity rules. Why? Passive activity
tax treatment: up to 50% of their gain if they’ve held income may be subject to the 3.8% NIIT,
the stock for more than five years. But, and passive activity losses generally are
Conversion of capital loss to ordinary deductible only against income from
depending on the acquisition date, the
loss. If you sell qualifying Section 1244 other passive activities. You can carry
exclusion may be greater: The exclusion
small business stock at a loss, you forward disallowed losses to the following
is 75% for stock acquired after Feb. 17,
can treat up to $50,000 ($100,000, year, subject to the same limits.
2009, and before Sept. 28, 2010, and
if married filing jointly) as an ordinary,
100% for stock acquired on or after
rather than a capital, loss — regardless To avoid passive activity treatment,
Sept. 28, 2010.
of your holding period. This means you you must “materially participate” in
can use it to offset ordinary income, The taxable portion of any QSB gain the activity, which typically means
reducing your tax by as much as 37% will be subject to the lesser of your you must participate in the trade or
of this portion of the loss. Sec. 1244 ordinary-income rate or 28%, rather business more than 500 hours during
applies only if total capital invested isn’t than the normal long-term gains rate. the year or demonstrate that your
more than $1 million. (See Chart 2.) Thus, if the 28% rate involvement constitutes substantially
and the 50% exclusion apply, the all of the participation in the activity.
Tax-free gain rollovers. If within 60 days (Special rules apply to real estate; see
effective rate on the QSB gain will be
of selling qualified small business (QSB) page 13.) To help ensure your hours
14% (28% × 50%).
stock you buy other QSB stock with the claim will be able to withstand IRS
scrutiny, carefully track and document
CHART 2 your time. Contemporaneous record-
keeping is better than records that
What’s the maximum 2018 capital gains tax rate?
are created after the fact.
Type of gain Rate1
If you don’t pass the material partici-
Taxpayer’s ordinary- pation test, consider:
Short-term (assets held 12 months or less)
income tax rate
Increasing your involvement. If you
Long-term (assets held more than 12 months) 15%
can exceed 500 hours, the activity
Some key exceptions no longer will be subject to passive
Long-term gain of certain higher-income taxpayers 20%2 activity rules.
Most long-term gain that would be taxed at 10% or 12% Grouping activities. You may be able
0%
based on the taxpayer’s ordinary-income rate to group certain activities together
Long-term gain on collectibles, such as artwork and antiques 28% to be treated as one activity for tax
purposes and exceed the 500-hour
Long-term gain attributable to certain recapture of prior
25% threshold. But the rules are complex,
depreciation on real property
and there are potential downsides
Gain on qualified small business (QSB) stock held more to consider.
than 5 years
n Acquired on or before Feb. 17, 2009 14%3 Looking at other activities. If you
have passive losses, one option is
n Acquired after Feb. 17, 2009, and before Sept. 28, 2010 7%4
to limit your participation in another
n Acquired on or after Sept. 28, 2010 0% activity that’s generating income, so
that you don’t meet the 500-hour
In addition, the 3.8% NIIT applies to net investment income to the extent that modified adjusted
1
gross income (MAGI) exceeds $200,000 (singles and heads of households), $250,000 (married test. Another is to invest in another
filing jointly) or $125,000 (married filing separately). income-producing trade or business
The 20% rate applies to taxpayers with taxable income exceeding $425,800 (singles), $452,400
2
that will be passive to you. Under
(heads of households), $479,000 (joint filers) or $239,500 (separate filers).
I NV E ST I NG
both strategies, you’ll have passive
Effective rate based on a 50% exclusion from a 28% rate.
3
income that can absorb some or all
Effective rate based on a 75% exclusion from a 28% rate.
4
of your passive losses.
10Disposing of the activity. This generally
allows you to deduct all passive losses — Case Study II
including any loss on disposition (subject
Tax-exempt or taxable bonds? It’s a question of yield
to basis and capital loss limitations). But,
again, the rules are complex. Working with her financial
advisor, Cheryl decides she
New! Even if you do pass the material
needs more bonds in her
participation test, be aware that your loss
investment portfolio. She’s
deduction might still be limited under the
in the 37% bracket, so she’s
TCJA’s new rules for deducting business
leaning toward municipal
losses. See page 14.
bonds. After all, municipal
bond interest will be tax-free
Income investments on Cheryl’s federal return.
Qualified dividends are taxed at the
favorable long-term capital gains But the fact that an invest-
tax rate rather than at your higher ment is tax-exempt doesn’t
ordinary-income tax rate. necessarily make it a better
choice than a comparable
Interest income, however, generally taxable investment. Municipal
is taxed at ordinary-income rates. So bonds typically offer lower
stocks that pay qualified dividends may yields than comparable corporate bonds. To make a fair comparison, Cheryl
be more attractive tax-wise than other needs to calculate the tax-equivalent yield — which incorporates tax savings
income investments, such as CDs and into the municipal bond’s yield — using this formula:
taxable bonds. But there are exceptions.
Tax-equivalent yield = actual yield / (1 – Cheryl’s marginal tax rate).
Some dividends, for example, are subject
to ordinary-income rates. These include For example, Cheryl considers a municipal bond with a 4.00% yield
certain dividends from: and a comparable corporate bond that offers a 6.25% yield. Because
she’s in the 37% tax bracket, the municipal bond’s tax-equivalent yield is
n Real estate investment trusts (REITs), .04 / (1 – .37) = .0635, or 6.35%. In terms of the amount of income she’ll
n Regulated investment companies get to keep, the municipal bond is a slightly better choice. If the municipal
(RICs), bond is also exempt from state and local taxes, it’s an even better choice.
But Cheryl also needs to consider factors such as risk and how well each
n Money market mutual funds, and
bond will help achieve her overall investment goals.
n Certain foreign investments.
The tax treatment of bond income
varies. For example: AMT ALERT! Tax-exempt interest by other investment expenses. Any
from private-activity municipal bonds disallowed interest expense is carried
n Intereston U.S. government bonds is can trigger or increase AMT liability. forward, and you can deduct it in a later
taxable on federal returns but exempt However, any income from tax-exempt year against net investment income.
by law on state and local returns. bonds issued in 2009 and 2010 (along
n Interest on state and local government with 2009 and 2010 re-fundings of You may elect to treat all or a portion of
bonds is excludable on federal returns. bonds issued after Dec. 31, 2003, and net long-term capital gains or qualified
If the bonds were issued in your home before Jan. 1, 2009) is excluded from dividends as investment income in
state, interest also may be excludable the AMT. order to deduct more of your invest-
on your state return, depending on ment interest expense. But if you do,
that portion of the long-term capital
the state. Investment interest expense
gain or dividend will be taxed at
n Corporate bond interest is fully taxable Investment interest expense — interest ordinary-income rates.
for federal and state purposes. on debt used to buy assets held for
n Bonds (except U.S. savings bonds) investment, such as margin debt Payments a short seller makes to the
with original issue discount (OID) used to buy securities — generally is stock lender in lieu of dividends may
build up “interest” as they rise deductible for both regular tax and be deductible as investment interest
toward maturity. You’re generally AMT purposes. But special rules apply. expense. But interest on debt used
considered to earn a portion of to buy securities that pay tax-exempt
that interest annually — even Your investment interest expense income, such as municipal bonds, isn’t
though the bonds don’t pay this deduction is limited to your net deductible.
interest annually — and you must investment income, which, for
pay tax on it. the purposes of this deduction, Also keep in mind that passive interest
generally includes taxable interest, expense — interest on debt incurred
I NV E ST I NG
Keep in mind that state and municipal nonqualified dividends and net to fund a passive activity — becomes
bonds usually pay a lower interest rate. short-term capital gains (but not part of your overall passive activity
See Case Study II. long-term capital gains), reduced income or loss, subject to limitations. ❖
11The TCJA colors the 2018
real estate tax landscape
T
here are many ways you can maximize the tax benefits associated with owning allowable, without needing to apportion
a principal residence, vacation home or rental property — or maintaining a them between personal and business
home office. Tax planning is also important if you’re planning to sell your use of your home.
home or other real estate in 2018. And the Tax Cuts and Jobs Act (TCJA) changes
the tax picture with new limits on some home-related deductions, enhancements Home rental rules
to depreciation-related breaks and changes to the interest deduction for businesses,
If you rent out all or a portion of your
including real property businesses.
principal residence or second home
for less than 15 days, you don’t have
Home-related deductions TCJA effectively limits the home equity to report the income. But expenses
The TCJA includes many changes interest deduction for 2018–2025 to directly associated with the rental,
affecting tax breaks for home ownership. debt that would qualify for the home such as advertising and cleaning,
Consider these itemized deductions in mortgage interest deduction. won’t be deductible.
your tax planning:
Home office deduction If you rent out your principal residence
New limits! Property tax deduction. For Employees can no longer deduct or second home for 15 days or more,
2018–2025, the property tax deduction home office expenses, because of you’ll have to report the income. But
is subject to the new $10,000 limit on the suspension of miscellaneous you may be entitled to deduct some
combined deductions for state and local deductions subject to the 2% of AGI or all of your rental expenses — such
taxes. (See “What’s new!” on page 4.) floor. (See “What’s new!” on page 4.) as utilities, repairs, insurance and
Higher-income taxpayers owning depreciation. Exactly what you can
valuable homes in high-property-tax If you’re self-employed and your home deduct depends on whether the home
locations will likely see a huge drop in office is your principal place of business is classified as a rental property for
the federal tax benefit they receive from (or used substantially and regularly tax purposes (based on the amount
their property tax payments. to conduct business) and that’s the of personal vs. rental use):
only use of the space, you generally
New limits! Mortgage interest can deduct a portion of your mortgage Rental property. You can deduct
deduction. You generally can deduct interest, property taxes, insurance, rental expenses, including losses,
interest on mortgage debt incurred utilities and certain other expenses, and subject to the real estate activity
to purchase, build or improve your the depreciation allocable to the space. rules discussed at right. Property
principal residence and a second Or you may be able to use the simplified tax attributable to the rental use of
residence. Points paid related to method for calculating the deduction. the home isn’t subject to the new
your principal residence also may $10,000 limit on the state and local
be deductible. For 2018–2025, the Using the simplified option, you can tax deduction. You can’t deduct any
TCJA reduces the mortgage debt limit deduct $5 per square foot for up interest that’s attributable to your
from $1 million to $750,000 for debt to 300 square feet (maximum of personal use of the home. However,
incurred after Dec. 15, 2017. $1,500 per year). Although you can’t you can take the personal portion of
depreciate the portion of your home property tax as an itemized deduction
New limits! Home equity debt interest that’s used as an office — as you (subject to the new $10,000 limit).
deduction. Before the TCJA, interest could filing Form 8829 — you can
RE A L E S TAT E
was deductible on up to $100,000 of claim mortgage interest, property Nonrental property. You can deduct rental
home equity debt used for any purpose, taxes and casualty losses as itemized expenses only to the extent of your rental
such as to pay off credit cards (for deductions to the extent otherwise or other passive income. Any excess can
which interest isn’t deductible). The be carried forward to offset rental income
12in future years. You also can take an item- some negative tax consequences. (See the TCJA, real estate businesses that
ized deduction for the personal portion of “Passive activities” on page 10.) elect to deduct 100% of their business
both mortgage interest and property taxes, interest will be ineligible for bonus
subject to the applicable limits. In some To qualify as a real estate professional, depreciation starting in 2018.
instances, it may be beneficial to reduce you must annually perform:
personal use of a residence so it will be 2. Enhancement! Section 179
n More than 50% of your personal expensing election. This allows you to
classified as a rental property.
services in real property trades or deduct (rather than depreciate over a
businesses in which you materially number of years) qualified improvement
Home sales participate, and property — a definition expanded by
When you sell your principal residence, n More the TCJA from leasehold-improvement,
than 750 hours of service in
you can exclude up to $250,000 of gain restaurant and retail-improvement
these businesses during the year.
($500,000 for married couples filing property. The TCJA also allows Sec. 179
jointly) if you meet certain tests. Gain Each year stands on its own, and there expensing for certain depreciable
that qualifies for exclusion will also be are other nuances to be aware of. If you’re tangible personal property used
excluded from the 3.8% NIIT. (See concerned you’ll fail either test and be predominantly to furnish lodging and
page 8.) To support an accurate tax basis, subject to the NIIT or stuck with passive for the following improvements to
maintain thorough records, including losses, consider increasing your hours nonresidential real property: roofs,
information on your original cost and so you’ll meet the test. Keep in mind that HVAC equipment, fire protection and
subsequent improvements, reduced by special rules for spouses may help you alarm systems, and security systems.
any casualty losses and depreciation meet the 750-hour test. Warning: To help
claimed based on business use. Warning: withstand IRS scrutiny, be sure to keep Under the TCJA, for qualifying property
Gain that’s allocable to a period of “non- adequate records of time spent. placed in service in tax years starting in
qualified” use generally isn’t excludable. 2018, the expensing limit increases to
Depreciation-related breaks $1 million (from $510,000 for 2017),
Losses on the sale of any personal resi- subject to a phaseout if your qualified
dence aren’t deductible. But if part of your Three valuable depreciation-related
asset purchases for the year exceed
home is rented out or used exclusively for breaks are available to real estate
$2.5 million (compared to $2.03 million
your business, the loss attributable to that investors:
for 2017). These amounts will be
portion may be deductible. adjusted annually for inflation.
1. Enhancement! Bonus depreciation.
Because a second home is ineligible for This additional first-year depreciation
3. Enhancement! Accelerated depre-
the gain exclusion, consider converting it is available for qualified assets, which
ciation. This break allows a shortened
to rental use before selling. It can be con- before the TCJA included qualified
recovery period of 15 years — rather
sidered a business asset, and you may improvement property. But due to a
than 39 years — for “qualified improve-
be able to defer tax on any gains through drafting error in the new law, qualified
ment property.” This is a much broader
an installment sale or a Section 1031 improvement property will be eligible for
property category than the one the
exchange. Or you may be able to deduct bonus depreciation only if a technical
break applied to before the TCJA.
a loss, but only to the extent attributable correction is issued, which is expected.
to a decline in value after the conversion. (Check with your tax advisor for the latest
information.) When available, bonus Tax-deferral strategies
depreciation is increased to 100% (up It’s possible to divest yourself of appreci-
Real estate activity rules
from 50%) for qualified property placed ated investment real estate but defer the
Income and losses from investment real tax liability. Such strategies may even
in service after Sept. 27, 2017, but
estate or rental property are passive by help you keep your income low enough
before Jan. 1, 2023. For 2023 through
definition — unless you’re a real estate to avoid triggering the 3.8% NIIT and
2026, bonus depreciation is scheduled
professional. Why is this important? the 20% long-term capital gains rate.
to be gradually reduced. Warning: Under
Passive activity income and losses have Consider these deferral strategies:
Installment sale. An installment sale
WHAT’S NEW!
allows you to defer gains by spreading
The TCJA limits interest deduction them over several years as you receive
the proceeds. Warning: Ordinary gain
Subject to some restrictions and exceptions, under pre-TCJA law interest paid from certain depreciation recapture is
or accrued by a business generally was fully deductible. Under the TCJA, recognized in the year of sale, even if
for tax years that begin in 2018 or later, businesses generally can’t deduct no cash is received.
interest expenses in excess of 30% of “adjusted taxable income.”
Sec. 1031 exchange. Also known as
Taxpayers (other than tax shelters) with average annual gross receipts of a “like-kind” exchange, this technique
$25 million or less for the three previous tax years are exempt from the allows you to exchange one real estate
interest deduction limitation. Some other taxpayers are also exempt, includ- investment property for another and
RE AL E S TATE
ing real property businesses — but only if they elect to continue to fully defer paying tax on any gain until you sell
deduct their interest. And if they make the election, they’re required to use the replacement property. Discuss the
the alternative depreciation system for real property used in the business. limits and risks with your tax advisor. ❖
13You can also read
