Category Archives: Capital gains tax

Congress Passes Tax Cuts and Jobs Act

The Tax Cuts and Jobs Act, which was passed in both houses of Congress earlier this week, was signed into law by President Trump on December 22, 2017. The majority of the provisions contained in the sweeping reform legislation go into effect as of January 1, 2018. Read on for a few recommendations on actions to be taken before the end of 2017 followed by an overview of items included in the act.

Initial Recommendations:

For Individuals

  • Pay state income taxes due before December 31, 2017.
  • Accelerate your charitable contributions into 2017 since all brackets will benefit.
  • If you make charitable contributions to the athletic department of your favorite university in order to be entitled to purchase tickets to athletic events, definitely make those contributions before December 31, 2017.
  • Prepay 2% itemized deductions due (such as investment advisory fees, tax preparation fees, professional licenses, etc.) before December 31, 2017.
  • Prepare for additional estate gifting beginning January 1, 2018.

For Businesses

  • Consider a change of accounting methods for business below $25MM to a cash basis method or completed contract accounting (as opposed to percentage of completion)
  • Consider accelerating equipment purchases for immediate write-offs.
  • Close 1031 exchanges on personal property before 12-31-17
  • Pay for business entertainment in 2017
  • Pay for R&D expenditures in 2017
  • Consider timing of terminated partnerships—technical termination rules go away in 2018
  • Consider choice of business entity.

Items Affecting Individuals:

Tax Rates – The act keeps the seven tax brackets but reduces the rates for five of them. The new bracket rates are 10%, 12%, 22%, 24%, 32%, 35%, and 37%. The maximum rate is for income above $600,000 married filing jointly and $300,000 for singles.

Standard Deduction and Personal Exemptions – The standard deduction is increased to $24,000 for married filing jointly and $12,000 for singles. Personal exemptions are repealed.

Mortgage Interest – The mortgage interest deduction is capped at interest on $750,000 of mortgage debt each for a principal residence and a second home. The deduction for interest on home equity lines of credit is repealed.

Taxes – The act puts a $10,000 cap on deductions in connection with state and local income, property, and sales taxes. It also provides that no deduction will be allowed in 2017 for prepayment of tax for years beginning after December 31, 2017.

Medical Expenses – The threshold for deducting medical expenses is temporarily reduced from 10% to 7.5% (for the 2017 and 2018 tax years only).

Child Tax Credit – The per-child tax credit is doubled, rising from $1,000 to $2,000 per qualifying child. The phase out threshold is increased to $400,000 for married filing jointly and $200,000 for those filing singly.

Credit for Non-Child Dependents – The act temporarily allows parents to take a $500 credit for each non-child dependent whom they support, such as a child 17 or older, an ailing elderly parent, or an adult child with a disability.

Pass-Through Income – The act includes a 20% deduction on Qualified Business Income from sole proprietors, S-Corporations, LLCS, and partnerships (subject to limitations).

Alternative Minimum Tax – The act reduces the number of filers who would be hit by this tax by raising the income exemption levels to $70,300 for singles and $109,400 for married filing jointly.

Affordable Care Act Individual Mandate – The individual mandate is repealed as of 2019.

College Athletic Fund Contributions – These contributions, made in exchange for preferential seating, are no longer deductible.

Alimony Deduction – This is repealed after 2018.

Estate Tax – This tax remains at 40% but the exemption is doubled to $10.98 million per individual.

Miscellaneous Tax Breaks – The act preserves some smaller, but popular, tax breaks, including deductions for student loan interest and classroom supplies bought with a teacher’s own money. It also keeps the tax-free status of tuition waivers for graduate students.

Items Affecting Businesses:

Corporate Tax Rate – The corporate tax rate is reduced from a top graduated rate of 35% to a flat 21%.

Corporate Alternative Minimum Tax – The act repeals this tax.

Full Expensing for Certain Business Assets – The bill provides 100% expensing of qualified property acquired and placed in service after September 27, 2017 and before January 1, 2023. It also increases (tenfold) the Sec. 179 expensing limitation ceiling and phase out threshold to $5 million and $20 million, respectively, both indexed for inflation.

Interest Expense – For tax years beginning after December 31, 2017, every business, regardless of its form, is generally subject to a disallowance of a deduction for net interest expense in excess of 30% of the business’s adjusted taxable income. Farming businesses can elect out of these rules if they use ADS to depreciate any property used in the farming business with a recovery period of ten years or more.

Net Operating Losses (NOL) – For NOLS arising in tax years ending after December 31, 2017, the two-year carryback and the special carryback provisions are repealed, so losses can only be carried forward. However, a two-year carryback applies in the case of certain losses incurred in the trade or business of farming.

Foreign Provisions – The act includes several international tax changes including a repatriation provision—US shareholders owning at least 10% of a foreign subsidiary will include in income the share of the post-1986 historical earnings and profits (E&P) of the foreign subsidiary, to the extent that E&P have not been previously subject to US tax. The portion of E&P attributable to cash or cash equivalents would be taxes at a 12% rate and the remainder would be taxed at a 5% rate.

Farms Property – For property placed in service after December 31, 2017, in tax years ending after that date, the cost recovery period is shortened from seven years to five years for any machinery or equipment (other than any grain bin, cotton ginning asset, fence, or other land improvement) used in a farming business, the original use of which commences with the taxpayer. Additionally, the required use of the 150% declining balance depreciation method for property used in a farming business (i.e., for 3-, 5-, 7-, and 10-year property) is repealed. The 150% declining balance method continues to apply to any 15-year or 20-year property used in the farming business to which the straight-line method does not apply, and to property for which the taxpayer elects the use of the 150% declining balance method.

Cash Method of Accounting – The act increases the cash accounting method applicability threshold for most business up to $25 million in revenue, including businesses with inventory.

Percentage of Completion Requirements – The act increases the percentage-of-completion method applicability threshold to business with average revenue of $25 million or more.

Deduction for Entertainment – This deduction is repealed; previously entertainment was 50% deductible.

Research and Development Expenses – Must be capitalized and amortized over five years.

Technical Termination of Partnership Rules – The act repeals these.

Navigating the Tax Obstacles of Investing in 2014

Michael Blitstein, CJBS

Michael Blitstein, CJBS

by Michael W. Blitstein, CPA

It’s never been easy to navigate the various tax consequences of buying and selling securities and investments. Among the many obstacles investors need to consider in 2014 is the relatively new net investment income tax (“NIIT”). This 3.8% tax may apply to your net investment income if your income exceeds certain levels. And the tax can show up when you least expect it – for example, passive activity and qualified dividend income are subject to the tax. Some other tax issues related to investing should also be considered.

Capital Gains Tax and Timing
Although time, not timing, is generally the key to long-term investment success, timing can have a dramatic impact on the tax consequences of investment activities. Your long-term capital gains rate might be as much as 20 percentage points lower than your ordinary income rate. The long-term gains rate applies to investments held for more than 12 months. The applicable rate depends on your income level and the type of asset sold. Holding on to an investment until you’ve owned it more than a year may help substantially cut tax on any gain.

Remember, appreciating investments that don’t generate current income aren’t taxed until sold. Deferring tax and perhaps allowing you to time the sale to your advantage can help, such as in a year when you have capital losses to absorb the capital gain. If you’ve already recognized some gains during the year and want to reduce your 2014 tax liability, consider selling unrealized loss positions before the end of the year.

Loss Carryovers
If net losses exceed net gains, you can deduct only $3,000 ($1,500 for married filing separately) of the net losses per year against ordinary income. You can carry forward excess losses indefinitely. Loss carryovers can be a powerful tax-saving tool in future years if you have an investment portfolio, real estate holdings or a practice that might generate future capital gains. Also remember that capital gain distributions from mutual funds can absorb capital losses.

Income Investments
Qualified dividends are taxed at the favorable long-term capital gains tax rate rather than the higher, ordinary income tax rate. Qualified dividends are, however, included in investment income under the 3.8% NIIT.

Interest income generally is taxed at ordinary income rates, which are now as high as 39.6%. Stocks that pay qualified dividends may be more attractive tax wise than other income investments, such as CD’s, money market accounts and bonds. Note some dividends are subject to ordinary income rates.

Keep in mind that state and municipal bonds usually pay a lower interest rate, but their rate of return may be higher than the after tax rate of return for a taxable investment, depending on your tax rate. Be aware certain tax-exempt interest can trigger or increase alternative minimum tax.

Mutual Funds
Investing in mutual funds is an easy way to diversify your portfolio. But beware of the tax ramifications. First, mutual funds with high turnover rates can create income that’s taxed at ordinary income rates. Choosing funds that provide primarily long-term capital gains can save you more tax dollars.

Second, earnings on mutual funds are typically reinvested, and unless you keep track of these additions and increase your basis accordingly, you may report more gain than required when you sell the fund.

Additionally, buying equity mutual fund shares later in the year can be costly tax wise.  Such funds often declare a large capital gains distribution at year-end. If you own shares on the distribution record date, you’ll be taxed on the full distribution amount even if it includes significant gains realized by the fund before you owned the shares. And you’ll pay tax on those gains in the current year, even if you reinvest the distribution.

Paying Attention to Details
If you don’t pay attention to details, the tax consequences of a sale may be different from what you expect. For example, the trade date, not the settlement date, of publicly traded securities determines the year in which you recognize the gain or loss. And if you bought the same security at different times and prices and want to sell the high tax basis shares to reduce gain or increase a loss to offset other gains, be sure to specifically identify which block of shares is being sold.

Passive Activities
If you’ve invested in a trade or business in which you don’t materially participate, remember the passive activity rules. Why? Passive activity income may be subject to the 3.8% NIIT, and passive activity losses generally are deductible only against income from other passive activities. Disallowed losses can be carried forward to future years, subject to the same limitations.

The Internal Revenue tax code is ever evolving and recent tax law changes have provided increased complexity. Tax obstacles related to investing is just one reason why it’s important to plan ahead and consider taking advantage of strategies available to you. You should always consult with your tax adviser to determine the best course of action.

Michael W. Blitstein, CPA is a partner with the firm of CJBS, LLC, in Northbrook, Illinois. For more than 30 years, Michael has worked closely with the dental community and is intimately familiar with the unique professional and regulatory challenges of creating, running and maintaining a successful dental practice. Michael advises his clients on tax, business and retirement planning, developing short and long-term strategic plans designed to achieve success for dental practice principals and their businesses.

He can be reached at michael@cjbs.com

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