What Do You Need to Know About the Tax Cut and Jobs Act?

Major tax legislation generally only happens around once a decade. The last time we had a major re-write of the tax code was in 2003. Just like that round of legislation, most of the individual provisions in the Tax Cut and Jobs Act of 2017 (TCJA) are not permanent and will roll back in 2025. Legislators have indicated that they want to revisit the permanency of those provisions if fiscal indicators show that the bill is not adding to the deficit. Focusing on individual tax laws, we will look at the most common and impactful changes.

Beginning with income deductions, TCJA will remove personal exemptions from the tax code. In 2017, the value of this deduction was $4,050 per individual claimed on the tax return. This deduction was effectively collapsed into the standard deduction, which is currently $6,350 for a single person and $12,700 for a couple filing jointly. The new standard deduction will be $12,000 for a single person and $24,000 for a couple filing jointly. This creates a higher threshold for those seeking to utilize an itemized deduction. To make matters worse, many of the allowable itemized deductions have been either limited or fully eliminated. One sore spot for those taxpayers living in high tax states is a deduction cap of $10,000 on property taxes and state income Taxes. This limitation is an aggregated cap of these deductions. Miscellaneous itemized deductions have also been eliminated. The most common of which include tax preparation fees, investment management fees, and various unreimbursed employee expenses.

The mortgage interest deduction is also another itemized deduction that has come under scrutiny. The deductible limit of a new mortgage after December 15th, 2017 is $750,000 – a reduction from the current limit of $1 million. In addition to this, home equity interest will no longer be an allowable deduction on the Schedule A and there is no grandfathering of this rule. Charitable giving deductions were maintained, as well as medical expense deductions, with a lower threshold for two years. However, with the reduction of taxes paid deductions, removal of miscellaneous deductions, limitation of mortgage interest, and raising of the standard deduction; it will become more difficult to meet the threshold of itemized deductions going forward. This is especially true for retirees with paid off homes.

Now for some good news – tax rates are headed down. There will still be 7 tax brackets, but the rates are going down by 2-3% in each of the brackets. There are some adjustments to the income limits of each bracket, but the top bracket is reduced by 2% to 37%. Another sigh of relief for many taxpayers is that the Alternative Minimum Tax (AMT) will no longer affect taxpayers with under $500,000 of income for a single person, and $1,000,000 of income for a couple. In addition to raising the income limit, the exemption was also expanded. Additionally, those with minimum tax credits will be eligible to carry them forward and utilize them in future tax years. The relief on the tax rate and AMT front should help soften the blow of the lost deductions for many.

For those with children or grandchildren, the next two sections are important. With the loss of personal exemptions for dependents, this could have created a tax burden for families with more than two children. However, there was an expansion of the child tax credit, including an increase in the credit from $1,000 to $2,000, and an increase in the income phase out to $200,000 for a single person and $400,000 for a couple. As a result, a family with 4 children and income under $400,000 would receive an $8,000 tax credit. It is also important to note that there is a new tax credit for dependents who are not qualifying children, which could include college age students or even dependent parents or siblings.

The new law makes an important-to-note change to how kiddie taxes are calculated. Currently, unearned income is taxed at either the child’s tax rate, or the parent’s if it is above $2,100. Under TCJA, instead of the additional tax being calculated at the parent’s rate, it will now be calculated at the Estate/Trust tax rate. This is problematic, especially for inherited IRAs with minor beneficiaries because the tax rate hits the top tax bracket of 37% at just $12,500 of income. Fortunately, much of the income being earned by custodial accounts is tax-advantaged qualified dividends and capital gains, which will be taxed at the long-term capital gain rates of 15%, 20%, or 23.8% (where the Medicare Surtax applies). One strategy to reduce future tax rates in custodial accounts is to consider incurring capital gains in 2017 where the capital gain tax rate will be at or below 15% on the parent’s return. This is preferable because the tax brackets for individuals are much larger than the tax brackets for Estates and Trusts. A relatively small amount of income for minors will cause them to be taxed at the highest capital gain rate in 2018 and beyond. 529 plans also received some attention in the new law. The qualified usage of 529 dollars was expanded to include a $10,000 per student per year tax-free distribution for private elementary and secondary schools.

For those looking for additional estate planning options, TCJA has resulted in an expanded estate tax exemption of $11.2 million per person. This results in a maximum exemption of $22.4 million for a married couple utilizing both exemptions. The law continues to have a tandem gift tax exemption, tied to the amount of the estate tax. This means an individual is able to give away up to $11,200,000 without incurring any gift taxes.

There were a few notable new provisions, including a 20% deduction to “pass through” business income (excluding service based businesses like attorneys, medical professionals, and accountants, unless their total income is less than certain income limits), future alimony treatment, the repeal of the moving expense deduction, and changes to the Roth re-characterization rules. Additionally, corporate tax rates have been reduced to 21%, the new inflation measure for tax purposes will be Chained CPI, and the individual insurance purchase mandate has been repealed. These three provisions are permanent and will not rollback after 2025.

There were also a number of provisions floated in either the House or Senate bills along the way that never made it into the final bill. A few of these items are the removal of the student loan deductions, removal of the medical expense deduction, changing to “FIFO” or First in, First Out accounting method for selling stock, and changes to the capital gains exclusion for selling your primary residence.

It may be beneficial to defer income into 2018 as much as possible, and incur deductions in 2017 where possible.   If you have questions about increasing charitable giving prior to the end of the year to take advantage of 2017’s lower standard deduction, reach out to your advisor as soon as possible. Our custodians work on a best effort basis as we near the end of the year. Those utilizing a Qualified Charitable Distribution from IRAs as their sole charitable giving mechanism are not affected by the changes to the standard deduction. With all of these changes, we continue to stay on top of optimal tax planning strategies both for end of year purposes, as well as looking forward into 2018.

Tax Cut and Jobs Act “Cliff Notes” Version

  • Tax Rates:
    • Overall, they are down, with 7 brackets continuing and rates of: 10%, 12%, 22%, 24%, 32%, 35%, 37%
  • Exemptions/Deductions
    • Personal exemptions are going away
    • Standard deduction rising to $12,000 for a single person and $24,000 for a couple
    • State, property, and sales tax deductions are aggregated and capped at $10,000
    • Medical deductions remain, and AGI limitation reduces for next two years
    • 2% miscellaneous itemized deductions are eliminated
    • Mortgage interest deduction is limited to mortgages up to $750,000 and home equity debt is no longer eligible for deduction
  • AMT
    • AMT remains, but with much higher exemptions and income phase-in limits of $500,000 for a single person and $1,000,000 for a couple
  • Child Tax Credit
    • Has been increased from $1,000 to $2,000 per qualifying child and income phase-outs are raised to $200,000 for a single person and $400,000 for couples
  • Kiddie Tax
    • Will now be subject to fiduciary (Trust/Estate) tax rates
    • Includes inherited IRA income
  • 529 Plans
    • Now allow for up to $10,000 per child, per year tax-free distribution for private elementary and secondary education expenses
    • Also now includes up to $10,000 per year tax-free distribution for home school expenses
  • Estate Tax and Gift Tax Exemption
    • Has been increased to $11,200,000 per person with portability of exemption between spouses
  • Business pass-through rules
    • Preferential tax deduction for pass through entities, not in the service industry. However, Engineers and Architects are able to take advantage of this deduction.
    • Of pass through income, 20% is eligible to be taken as a deduction from income
    • For those in service based fields, namely physicians, accountants, attorneys, etc, deduction is still eligible for MFJ taxpayers with less than $315,000 income
  • Proposed Changes that did not make the final bill
    • First in, First out recognition of capital gains for appreciated securities
    • Removal of the student loan deduction
    • Removal of medical expense deduction

 

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Get Ready for Tax Season

Regardless of whether you prepare your own tax return or hire a professional to do it for you, you are still responsible for collecting the information necessary to complete it.  Well-organized records can make the process significantly easier and potentially save money with your CPA who typically charges by the hour.

One way to tackle this chore is to create a checklist of the documents and information needed to complete your return.  As you gather the documents, start to organize them in a file by the following categories and check them off the list.

Prior Year’s Tax Return

Use last year’s tax return as a starting point to create your checklist.  Although you may have new sources of income or different deductible expenses for the current year, this is usually a fairly comprehensive list of needed documents such as Form 1099 or 1098.  It will also serve as a reminder of information you may need to determine from bank statements or receipts such as medical expenses.

Sources of Income

This category generally includes wages, dividends, interest, partnership distributions, retirement and rental income.  You may receive a Form W-2, 1099, or K1 that indicates the amount of income reported to the IRS.  For other types of income, such as alimony received, you may need to determine the amount to report from bank statements.

Adjustments to Income

These are direct reductions to taxable income that commonly include deductible IRA contributions, alimony paid, Health Savings Account (HSA) contributions, SEP, SIMPLE or other self-employed pension plan contributions,  and self-employed health insurance payment records.

Deductible Expenses

If you itemize deductions rather than taking the standard deduction, you may need to collect source documents indicating the amount of mortgage interest paid (Form 1098), real estate and personal property taxes paid, medical expenses, and charitable contributions to be reported on Schedule A.

Tax Credits

Tax credits are a direct reduction of your tax bill so take a few minutes to research available 2017 credits.  You may be able to claim the American Opportunity Credit if you have a child in college or a Residential Energy Credit if you have made any “green” home improvements.

Basis of Property

This is also a good time to review and update the basis of property if necessary.  Home improvements made during the year may have increased the basis so collect and file those valuable receipts.

Taxes Paid

Federal and state taxes you have already paid may be found on your W-2 but if you pay quarterly estimated taxes you may need to collect records of payment.

While this is not a comprehensive list of every possible tax document needed to complete a tax return, it is a starting point from which you can develop your own, one that reflects your unique life circumstances.  Start organizing now and maybe tax season won’t be your least favorite season of the year.

Nancy Blackman - Parsec Financial Corporate Headshots
Nancy Blackman – Portfolio Manager
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Happy Donating!

As we approach the end of the year and the holiday season, we seem to be bombarded with opportunities for charitable giving. Happily, many of us answer this call and donate generously to our favorite charitable organizations. Your generosity may also be beneficial at tax time if you remember a few IRS guidelines for charitable contributions.

  • You must itemize deductions on Schedule A to deduct a charitable contribution.
  • Donate before year end to claim a deduction for 2017. Please remember if you are making a stock donation, to submit the request a few weeks before the end of the year. This will allow your custodian enough time to fulfil the request in time for the deadline.
  • Verify that the charity is tax-exempt (sometimes called 501 (c) (3) organizations) or qualified. The IRS considers the following types of organizations qualified for charitable donation purposes.
    1. A state or possession of the United States, or the United States for public purposes
    2. A community chest, corporation, trust, fund or foundation of the United States organized for charitable, religious, educational, scientific, or literary purposes or for the prevention of cruelty to children or animals
    3. A church, synagogue or other religious organization
    4. A war veterans organization
    5. A nonprofit volunteer fire company
    6. A civil defense organization
    7. A domestic fraternal society if the contribution is used for charitable purposes
    8. A nonprofit cemetery company if the funds are used for the perpetual care of the entire cemetery

More information about qualified organizations can be found in IRS Publication 526, Charitable Contributions. You can also verify the tax-exempt status of an organization on the IRS.gov website.

  • When making your donation of cash or goods, be sure to get a receipt. The IRS requires a receipt for donations greater than $250.
  • Large donations may be limited in the current year to 50% of AGI for public charities or 20-30% for private charities. Any excess donations can be carried forward for five tax years. When planning a large gift, talk to your tax professional to develop the most beneficial giving strategy.
  • Lastly, many employers will match gifts made by their employees, so remember to check your company policy and do twice as much good!

Nancy Blackman - Parsec Financial Corporate HeadshotsNancy Blackman, Portfolio Manager

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(Tax loss) Harvest Season is Almost Here!

The kids are back in school, the leaves are changing colors, and pumpkin spice lattes – the age-old harbingers of harvest season – are everywhere. At Parsec, we are preparing for the harvest…of tax losses.

Every year, beginning in late October/early November, Parsec’s portfolio managers will scour clients’ taxable accounts for meaningful losses, which we can use to offset realized gains created from trading throughout the year. These tax-efficient trading strategies provide value to clients by minimizing their tax burden while keeping the portfolio aligned with their financial planning goals.

You might see trades from one security into another one that is similar, but not exactly the same – we do this so that you can recognize a loss while maintaining exposure to the same industry or sector, yet avoid incurring a wash sale. According to IRS publication 550, “a wash sale occurs when you sell or trade stock or securities at a loss and within 30 days before or after the sale, you buy substantially identical stock or securities,” either in the same account or in another household account, including IRAs and Roth IRAs. Stocks of different companies in the same industry are not considered “substantially identical,” nor are ETFs that track the same sector but are managed by different companies (like a Vanguard Emerging Markets ETF vs. an iShares Emerging Markets ETF).

Sometimes it makes sense to place a loss-harvesting trade and leave the proceeds in cash for 31 days, then repurchase the same security. We may do this for clients who have cash needs during the holiday season, with the intention of placing rebalancing trades in January when there is no more need for liquidity. When liquidity is not an issue, however, we prefer to keep the funds fully invested in another high-quality name. We may later choose to reverse the trade, once the wash sale period has expired, or we may leave the trade in place if we think it is appropriate and suits the clients’ needs.

Sarah DerGarabedian, CFA
Director of Portfolio Management

 

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Time to Update your Estate Plan?

Now that we have started a new year, it’s a good time for many of us to stop putting off getting an estate plan created or updated.

Under current tax law, most people do not have a concern with estate tax.  The current Federal estate tax exemption is $5.49 million per person. If properly elected, any unused exemption is portable between spouses.  Therefore, a married couple with an estate of $10.98 million or below could pass their entire estate to heirs without any Federal estate tax liability.

While much attention is focused on the tax aspects, estate planning is more a matter of organizing and simplifying your affairs so that your heirs are not burdened with additional stress at the same time they are grieving for the loss of a loved one. We recommend that you engage the services of a qualified attorney to guide you and create the appropriate documents.

Your estate plan should include a will and possibly living or revocable trusts. Advanced directives and incapacity planning are other items that are typically addressed as part of your estate plan. This includes having documents prepared such as a durable power of attorney, health care power of attorney and living will.

As part of your estate plan, you should review your beneficiary designations. By filling out a beneficiary designation form, individuals can bypass the probate process and pass specific assets upon their death directly to their heirs. Many types of assets such as IRAs, qualified retirement plans, life insurance policies and commercial annuities pass via beneficiary designation rather than through your will. In addition, beneficiary designations can be added to taxable investment accounts (known as Transfer on Death or “TOD”) and bank accounts (known as Payable on Death or “POD”). Note that while the assets passing by beneficiary designation bypass the probate process, they are still included as part of the decedent’s estate for calculating any potential estate tax liability.

There is talk that the estate tax may be changed or even eliminated this year. For most people that shouldn’t be a deterrent to getting their estate plan done, since few are affected by the estate tax in the first place. Having an updated estate plan gives you peace of mind and helps prevent additional stress on your heirs. Once you have a plan in place, it can always be modified as tax laws and your personal circumstances change.

William S. Hansen, CFA
President
Chief Investment Officer

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2016 IRA Contribution Rules

The deadline to make IRA contributions for tax year 2016 is April, 18 2017. The maximum contribution is $5,500 per individual ($6,500 if age 50 or over) or 100 percent of earned income, whichever is less.

There are income limits which determine whether you can deduct your Traditional IRA contribution or if you qualify to make a Roth contribution. The following table gives the phase-out range for the most common circumstances.

Do you qualify to deduct your Traditional IRA contribution?
If your income is less than the beginning of the phase-out range, you qualify. If your income is over the phase-out range, you do not. If your income falls inside the range, you partially qualify.

Modified Adjusted Gross Income Phase-Out Range
Tax Filing Status For 2016 Contributions For 2017 Contributions
Single, participates in an employer-sponsored retirement plan: $61,000 – $71,000 $62,000 – $72,000
Married filing jointly, participates in an employer-sponsored retirement plan: $98,000 – $118,000 $99,000 – $119,000
Married filing jointly, your spouse participates in an employer-sponsored retirement plan, but you do not: $184,000 – $194,000 $186,000 – $196,000

Do you qualify to contribute to a Roth IRA?

Modified Adjusted Gross Income Phase-Out Range – Roth
Tax Filing Status For 2016 Contributions For 2017 Contributions
Single: $117,000-$132,000 $118,000-$132,999
Married, filing jointly: $184,000-$194,000 $186,000-$195,999

If your filing status differs from those listed above, please contact your advisor and he or she can help you determine whether you qualify.

Harli Palme, CFA, CFP®
Partner

Harli Palme

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The Perfect Gift? Ideas…From a Planning Perspective

December is here and 2016 is drawing to a close.  As we enter the holiday season, we scramble to pick the perfect gift for our family members, our friends, teachers… the list goes on.

At Parsec, we work with clients to create gifting strategies that fit into their overall financial plan.

This December we encourage you to think about giving and its potential longer term impact on both your family (children and grandchildren) and your taxes.  Let’s first review a powerful gifting strategy to younger family members: the custodial Roth IRA.

As long as there is earned income, which can come from mowing lawns, housework, babysitting etc., contributions to a custodial Roth IRA can be made up to the amount of the earned income but not over $5,500*.  For example, your 9 year old grandchild earned $1,000 over the summer through his lawn mowing business.  You can open a custodial Roth IRA for him and deposit a matching gift of $1,000. Let’s say he continues to mow lawns each summer for the next 10 years and you continue to match his earnings with a $1,000 holiday gift.  Assuming a 7% return each year, your gifts will grow to over $15,000 at the end of 10 years.  Remember this is only the beginning, the approximate $5,000 earnings in this example will continue to compound over time and ALL earnings are tax free upon withdrawal later in life.  Rewarding your grandchild’s hard work through Roth contributions is a holiday gift that offers valuable lessons on many levels.

Let’s switch gears to philanthropy.  Each year Parsec’s client service team processes hundreds of charitable gift requests from our clients.  These gifts of course offer tax advantages in various forms.  For many of our clients, the qualified charitable distribution or QCD brings the most formidable tax savings.  How does it work?  If you are over 70 1/2, up to $100,000 of your required minimum distribution (RMD) can be given directly to charity through a QCD.  The result: your AGI will be reduced dollar for dollar by the amount of the QCD.  A simple, yet impactful strategy:  on not only your charity of choice but also on your tax dollar.

As we enter this holiday season we hope that you reach out to your financial advisor to talk about gifting strategies that may be appropriate for you and your family.  Happy Holidays!

Betsy Cunagin, CFP®

Senior Financial Advisor

*$5,500 is the IRA contribution limit for 2016 and 2017.  

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Land Trust

Individuals who are large landowners often face challenges in planning their estates. The land may have a value that causes the estate to exceed the federal estate tax exclusion limit. Currently the limit is $5,450,000 per person. In many cases, the landowner may not want the land to be sold to cover estate taxes, but would rather see the land continue to be used as a farm, ranch, or preserved for its natural beauty. The landowner may want to consider a conservation easement.

A conservation easement is a voluntary legal agreement that benefits landowners and the public, as it protects land while leaving it in private ownership. The uses of the property are then limited to those uses that are consistent with the landowner’s and the conservation easement holder’s objectives. Conservation easements are individually tailored, but in general they benefit landowners by protecting the features of the property they wish to preserve. They potentially receive significant tax relief, and they maintain ownership of the land. The land provides public benefits by conserving open lands, farms, forests, and other natural resources.

The tax benefit to the landowner is realized at the time the conservation easement is placed on the land. The landowner basically sells the right to develop the land to a land trust. The value of the land for property tax purposes becomes the much lower highest and best use in conservation value. The conservation easement rides with the deed of the land, therefore the intent of the original owner for the use of the land is protected in perpetuity.

For our clients in southeastern North Carolina, the offices of Sandhills Area Land Trust (SALT) are located on Southwest Broad Street in Southern Pines, next door to Parsec’s Southern Pines office. They are a community-based, 501(c)(3) non-profit organization that works to preserve and protect land and its environs in Moore, Richmond, Scotland, Hoke, Cumberland, and Harnett counties.

SALT was founded in 1991. Since that time, it has worked with private landowners to negotiate conservation easements on their property, and more than 13,000 acres of working farms, water supplies, endangered ecosystems, and urban-space have been permanently protected. The North Carolina Sandhills is a region of rolling hills with sandy soil located between the Piedmont and the Coastal Plain. This area is home to the largest contiguous stands of long leaf pine forest in North Carolina, and many wetlands and dozens of rare plants and animals, which all need to be protected. With this goal in mind, SALT cultivates partnerships among landowners, local businesses and government agencies.

If you have any questions pertaining to the use of land conservation easements in your estate planning process, please contact your Parsec Financial Advisor.

Wendy S. Beaver, AAMS®

 

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2015 IRA Contribution Rules

The deadline to make IRA contributions for tax year 2015 is April, 15 2016. The maximum contribution is $5,500 per individual ($6,500 if age 50 or over) or 100 percent of earned income, whichever is less.

There are income limits which determine whether you can deduct your Traditional IRA contribution or if you qualify to make a Roth contribution. The following table gives the phase-out range for the most common circumstances.

Do you qualify to deduct your Traditional IRA contribution?
If your income is less than the beginning of the phase-out range, you qualify. If your income is over the phase-out range, you do not. If your income falls inside the range, you partially qualify.

Modified Adjusted Gross Income Phase-Out Range

Tax Filing Status For 2015 Contributions For 2016 Contributions
Single, participates in an employer-sponsored retirement plan: $61,000 – $71,000 $61,000 – $71,000
Married filing jointly, participates in an employer-sponsored retirement plan: $98,000 – $118,000 $98,000 – $118,000
Married filing jointly, your spouse participates in an employer-sponsored retirement plan, but you do not: $183,000 – $193,000 $184,000 – $194,000

Do you qualify to contribute to a Roth IRA for 2015?

Modified Adjusted Gross Income Phase-Out Range – Roth

Tax Filing Status For 2015 Contributions For 2016 Contributions
Single: $116,000-$131,000 $117,000-$132,000
Married, filing jointly: $183,000-$193,000 $184,000-$194,000

If your filing status differs from those listed above, please contact your advisor and he or she can help you determine whether you qualify.

Harli Palme, CFA, CFP®
Partner

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