2016 INDIVIDUAL TAX UPDATE Saturday January 28 2017

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Agenda Topic Minutes Individual Income Tax Update 10 Legislative Updates & Tax Law Change Proposals 15 Individual & Trust and Estate Planning Strategies 20 Q&A 5 Total 50 © RSM US LLP. All Rights Reserved.

IRS Due Dates changes 2016 2017 Form 1040 – original due date 4/15 Form 1040 – extended due date 10/15 Form 1041 – original due date 4/15 Form 1041 – extended due date 9/15 9/30 Fin. CEN Form 114 (FBAR) – original due date 6/30 4/15 Fin. CEN Form 114 (FBAR) – extended due date n/a 10/15 4 © RSM US LLP. All Rights Reserved.

Income tax rate comparison (assuming maximum tax bracket) 2015 2016 2017* 39. 6% bracket–MFJ $464, 850 $466, 950 $470, 700 39. 6% bracket–Trusts $12, 300 $12, 400 $12, 500 Personal exemption $4, 000 $4, 050 Standard deduction–MFJ $12, 600 $12, 700 Phase-out of itemized deductions–MFJ $309, 900 $311, 300 $313, 800 AMT exemption–MFJ $83, 400 $83, 800 $84, 500 NII 3. 8% tax threshold–MFJ $250, 000 Ordinary income tax (top rate) 39. 6% LTCG and qualified dividend income tax (top rate) 20. 0% Net Investment Income tax 3. 8% Social Security tax 6. 2% Medicare tax (earned–W-2 and SE income) 2. 35% 5 © RSM US LLP. All Rights Reserved.

2016 individual income tax rates Tax rate Single Married filing joint Head of household 10% $0 - $9, 275 $0 - $18, 550 $0 - $13, 250 15% $9, 276 – $37, 650 $18, 551 - $75, 300 $13, 251 - $50, 400 25% $37, 651 – $91, 150 $75, 301 - $151, 900 $50, 401 - $130, 150 28% $91, 151 - $190, 150 $151, 901 - $231, 450 $130, 151 - $210, 800 33% $190, 151 - $413, 350 $231, 451 - $413, 350 $210, 801 - $413, 350 35% $413, 351 - $415, 050 $413, 351 - $466, 950 $413, 351 - $441, 000 39. 6% Over $415, 050 Over $466, 950 Over $441, 000 6 © RSM US LLP. All Rights Reserved.

2016 alternative minimum tax rates Tax rate Single Married Filing Joint 26% $0 - $186, 300 28% Over $186, 300 Exemption $53, 900 $83, 800 Phase-out $119, 700 - $335, 300 $159, 700 - $494, 900 7 © RSM US LLP. All Rights Reserved.

Personal exemption phase out (PEP) and itemized deduction phase-out (Pease Limitation) • PEP and Pease limitations reinstated in 2013 • Personal exemption for 2016 is $4, 050 • 2016 PEP and Pease phase-out thresholds: − − Single - $259, 400 Head of household - $285, 350 Married filing jointly - $311, 300 Married filing separate - $155, 650 8 © RSM US LLP. All Rights Reserved.

Standard deduction Filing status 2016 Single $6, 300 Married filing jointly $12, 600 Married filing separate $6, 300 Head of household $9, 300 Qualifying widow(er) $12, 600 9 © RSM US LLP. All Rights Reserved.

Additional Medicare tax • The 0. 9% additional Medicare tax applies to Medicare wages, compensation, and selfemployment income that are more than: − − Single - $200, 000 Head of household - $200, 000 Married filing jointly - $250, 000 Married filing separate - $125, 000 10 © RSM US LLP. All Rights Reserved.

Net investment income tax • Taxpayers may be subject to Net Investment Income Tax (NIIT). The NIIT is 3. 8% of the smaller of (a) your net investment income or (b) the excess of you modified adjusted gross income over: − − Single - $200, 000 Head of household - $200, 000 Married filing jointly - $250, 000 Married filing separate - $125, 000 11 © RSM US LLP. All Rights Reserved.

Health savings accounts contribution limits 2016 requirements Family Self only HDHP deductible of at least $2, 600 $1, 300 Out-of-pocket expense limit $13, 100 $6, 550 Deductible contribution limit $6, 750 $3, 350 Additional contribution for taxpayer age 55 or older $1, 000/spouse $1, 000 12 © RSM US LLP. All Rights Reserved.

Projected 2017 federal estate and gift tax thresholds 2015 2016 2017* Estate and gift tax lifetime exclusion $5, 430, 000 $5, 450, 000 $5, 490, 000 Annual gift tax exclusion $14, 000 Foreign spousal annual gift tax exemption $147, 000 $148, 000 $149, 000 14 © RSM US LLP. All Rights Reserved.

Expiring individual tax incentives • Provisions for individuals that expired at the end of 2016 include: 16 − Sec. 108(a)(1)(E), which excludes from gross income discharge of qualified principal residence indebtedness income. − Sec. 163(h)(3), the treatment of mortgage insurance premiums as qualified residence interest, which permits a taxpayer whose income is below certain thresholds to deduct the cost of premiums on mortgage insurance purchased in connection with acquisition indebtedness on the taxpayer's principal residence. − Sec. 222, which provides an above-the-line deduction for qualified tuition and related expenses. − Also expiring at the end of 2016 is the 7. 5% adjusted-grossincome floor for deducting medical expenses, applicable to individuals age 65 and older and their spouses, which will rise to 10% in 2017 (Sec. 213(f)). © RSM US LLP. All Rights Reserved.

Individual tax reform – Themes Proposal Donald Trump • Comprehensive tax reform • Lower rates for everyone • Broaden the base by reducing or eliminating tax deductions and credits House Republicans • Comprehensive tax reform • Lower rates for everyone • Broaden the base by reducing or eliminating tax deductions and credits 20 © RSM US LLP. All Rights Reserved.

Individual tax reform – Itemized Deductions Proposal Donald Trump • Cap itemized deductions at $200, 000(MFJ)/$100, 000(Single) • ‘Close special interest tax breaks’ House Republicans • Only mortgage interest and charitable deductions allowed • Repeal state and local tax, medical and miscellaneous deductions 22 © RSM US LLP. All Rights Reserved.

Individual tax reform – Capital gains Proposal Donald Trump • Eliminate 3. 8% tax on net investment income (NII) House Republicans • Eliminate 3. 8% tax on NII • 50% exclusion of gain from tax • Rates • 6% • 12. 5% • 16. 5% 23 © RSM US LLP. All Rights Reserved.

Individual tax reform – Estate tax Proposal Donald Trump • Eliminates • Capital gains held at death subject to income tax with a $5/$10 million exemption (carryover basis for under $5/$10 million? ) House Republicans • Eliminates • Retains step up in basis 26 © RSM US LLP. All Rights Reserved.

What to do now • Manage AGI − Defer or accelerate compensation − Retirement plan contributions, health savings account contributions − Harvest losses, time gains − Examine flow-through/personal businesses • • Accelerate/decelerate bonuses and other expenses Section 179 and bonus depreciation − Calculate AGI to maximize deductions 29 © RSM US LLP. All Rights Reserved.

Planning Strategies – Manage transactions • Installment sales − Holding period with intra-family transactions − Ordinary income • Like-Kind exchange − Defer gain • Charitable giving − Charitable remainder trust (CRT) • Appreciated asset(s) to CRT, CRT sells without tax − − 30 © RSM US LLP. All Rights Reserved. Benefits Rules

Planning Strategies – Manage deductions • Maximize savings from tax deductions − Calculate AGI to identify phaseouts − Properly planned itemized deductions may provide 43. 4 percent federal tax benefit − Accelerate or decelerate deductions based upon AGI − Consider bunching miscellaneous deductions to exceed the 2 percent floor − AMT considerations 31 © RSM US LLP. All Rights Reserved.

Charitable giving • Donating appreciated securities versus cash − Deduction equal to fair market value − Avoid capital gains tax • Qualified charitable transfers from individual retirement accounts (IRAs) • Donor-advised funds • Private foundations • CRTs 32 © RSM US LLP. All Rights Reserved.

What next? Tax-efficient investing • Asset allocation − − • Tax-efficient assets are best held outside of qualified plans and deferred accounts Less tax-efficient assets, hold in qualified plans and deferred accounts Bonds − − • Ordinary income – taxable bond interest, highest tax rate Municipal bond – tax-free (excluding AMT private activity bond) Equities − − • 20 percent + 3. 8 percent top rate (under current law) on long-term gains and qualified dividends (not in deferred account) Zero percent capital gains rate when income is low Real estate − Capital gains and special capital gains rate 33 © RSM US LLP. All Rights Reserved.

Tax-efficient retirement plan • Asset location for retirement plan investments − − • What assets should be in your retirement plan? What is your retirement plan withdrawal strategy? Traditional retirement accounts − − • Contribution deduction and ordinary income distribution Retirement / change of employer – net unrealized appreciation Roth retirement accounts − − − • Taxable now, tax-free distribution Conversions Back-door Roth Tax-free − Insurance 34 © RSM US LLP. All Rights Reserved.

Planning Strategies - Distributions • Timing of estate and trust distributions – 65 day rule • 2016 trust taxable income > $12, 500 will be subject to both the 39. 6 percent bracket AND the 3. 8 percent NII tax − Shift income to beneficiaries in lower tax brackets, as appropriate 36 © RSM US LLP. All Rights Reserved.

The current state of play • 2017 estate, gift and generation-skipping transfer (GST) tax exemptions are $5. 49 million, indexed annually for inflation − The estate, gift and GST tax rates are 40 percent − Exemption not used during lifetime is available at death • Annual exclusion gifts − 2017 annual exclusion gift amount is $14, 000 (no change from 2016) − Do not consume the gift or estate tax exemption − Can be made to as many individuals as you like − But then it gets complicated 37 © RSM US LLP. All Rights Reserved.

The current state of play (cont. ) • Under the concept of ‘portability’ the surviving spouse can add to his or her own exemption, whatever amount of exemption the deceased spouse had not used during lifetime − GST exemption is not portable − Portability may eliminate need for a credit shelter or so -called ‘bypass’ or ‘B’ trust • Marital deduction allows spouses to pass unlimited amounts to their U. S. citizen spouses during lifetime or at death − Marital deduction just defers the tax. It doesn’t reduce it. 38 © RSM US LLP. All Rights Reserved.

The future state of play? • President-elect Trump and the GOP have respective plans for wealth transfer taxes. With variations on theme, we could see these proposals: − Repeal the estate, gift and GST taxes − Establish carryover basis (vs. current stepped-up basis) − Tax unrecognized capital gains at death • • Up to $5 million of gains per decedent ($10 million per married couple) exempt Exceptions for family businesses and farms − Disallow an income tax deduction for contributions of appreciated assets into a private charity established by the decedent or the decedent’s relatives 39 © RSM US LLP. All Rights Reserved.

General rules about estate planning • Once basic estate tax planning is done, the only way to manage the growth of a taxable estate is to remove as much appreciation from the estate as possible by: − Making annual gift exclusion and, if feasible, large taxable gifts − Estate freezing, which includes but is not limited to: • • Intra-family loans • Charitable lead annuity trusts (CLATs) Grantor retained annuity trust (GRATs) and sales to intentionally defective grantor trusts (IDGTs) − Always start with the least invasive, least complicated and least administratively expensive technique 40 © RSM US LLP. All Rights Reserved.

The power of annual exclusion gifts • The annual exclusion is available for gifts of ‘present interests’ − Recipient must have present use and enjoyment of the gift • A direct gift to an individual will usually qualify as a present interest, but gifts in trust will not unless: − Beneficiary has a Crummey power of withdrawal − Gifts to the trust qualify as present interests under Section 2503 • Taxpayers are also allowed to exclude − Payment of tuition or health care expenses, so long as the payments are made directly to the provider − Funding a Section 529 plan 41 © RSM US LLP. All Rights Reserved.

What about larger taxable gifts? • Primary benefit is to transfer out the estate appreciation value from the date of the transfer − Appreciating how discounts reduce the gift tax value of an asset • Gift can be made outright or, more typically, to a trust − Trust can be an IDGT, which gives a multiplier effect to the gifts • Largely for income tax reasons, taxable gifts are not the planning no-brainer they used to be − The difference between carry-over basis for property acquired by gift and stepped-up basis for property acquired by inheritance − All things considered, will the family be better off on a ‘net, net’ basis by planning to favor saving estate tax at the expense of a step-up or favoring a step-up at the expense of the estate tax? − Anybody have a crystal ball or maybe tomorrow’s newspaper? 42 © RSM US LLP. All Rights Reserved.

Discounts and proposed regulations under Section 2704 • Proposed regulations could curtail use of estate and gift tax valuation discounts traditionally taken in the transfer of interests in family-controlled entities − Generally applicable to transfers occurring after the date the regulations are published as final • Public comments accepted through November 2, 2016 − Then presented at a public hearing in early December • Discourse between planning community and IRS subsequent to release of proposed regulations − May not be as draconian as first appear − Not likely to be final until well into 2017 − Impact of the election on the fate of these regulations? 43 © RSM US LLP. All Rights Reserved.

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