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This presentation is a brief overview of the Tax Cuts and Jobs Act and

it also discusses tax issues pertinent to Individual Retirement

Accounts (IRAs).

Due to time constraints:

• This is only an overview, not an in-depth discussion,

• The issues discussed are for general educational purposes,

• The information provided is not individual tax or financial advice,

• You should discuss your individual situation with a qualified

financial advisor before making any transactions or other actions.

• Biggest tax change in 30 years

• Effective with 2018 income

• Law does not affect 2017 income taxes

• Except medical expense exclusion

• Changes generally expire effective 2026

• 90%+ Americans will have a simpler tax return

• Most, but not all, Americans will get a tax cut

Tax Cut • People who usually take the Standard Deduction (about 2/3 of taxpayers)

• People who usually Itemize Deductions, and those deductions are under

$8,000 (single), $20,000 (MFJ)

• Corporations and most small businesses

No Tax Cut • People who usually Itemize Deductions and

• Those deductions exceed $8,000 (single), $20,000 (MJF), and

• Pay over $10,000 in state and local taxes

• People with annual income $200K-500K (single), $400K-600K (MFJ)

• Hollywood actors/actresses and rich athletes

• There are exceptions to all of the Generalities above !

Standard Deduction • Almost doubled

• Single: from $6350 to $12,000

• Married: from $12,700 to $24,000

• Bonus if 65+: add $1600 (single), $2600 (married)

Personal Exemptions • Eliminated !

• 2017: $4050 per person

Marriage Penalty • Eliminated except for couples making $600,000 +

• See new tax brackets

Itemized Deductions • Limit on total itemized deductions suspended

Child Tax Credit • Doubled to $2000 per child

Kiddie Tax • Tax reduced

• Disregard income of parents

• Apply trust/estate tax rates on unearned income of children

Alternate Minimum Tax (AMT) • AMT effectively eliminated for the middle class

• Exemption increased to $70,300 (single), $109,400 (MFJ)

• Exemption phases out at $500,000 (single), $1 million (MFJ)

Obamacare (ACA) • Individual mandate penalty repealed starting in 2019

• Additional Medicare tax unchanged

• Additional tax on net investment income (3.8%) unchanged

• Employer mandates unchanged

Tax Rates • Lower in most brackets

• Higher rate if: $200K-500K income (single), $400K-600K (MFJ)

Income Tax Rate Income Levels for Those Filing As:

2017 2018-2025 Single Married-Joint

10% 10% $0-$9,525 $0-$19,050

15% 12% $9,525-$38,700 $19,050-$77,400

25% 22% $38,700-$82,500 $77,400-$165,000

28% 24% $82,500-$157,500 $165,000-$315,000

33% 32% $157,500-$200,000 $315,000-$400,000

33%-35% 35% $200,000-$500,000 $400,000-$600,000

39.6% 37% $500,000+ $600,000+

529 Plans • Can now be used for K-12 tuition (not just higher education)

• Up to $10,000 annually for K-12 tuition

• California does not comply, tax and penalties for California income tax

Medical expense deductions • Obamacare changed disallowance from 7.5% to 10% of AGI

• New law:

• Disallowance drops from 10% to 7.5% for 2017-2018

• Disallowance returns to 10% to 2019 & after

Deductions for state and local taxes (SALT) • Limited to $10,000

Phase-outs of Itemized Deductions for higher income tax payers

• Phase-outs eliminated

Interest Deductibility • Existing mortgages

• Not affected (existing $1 million debt limit applies)

• Refinance of existing mortgage

• Not affected

• New mortgages (after December 14, 2017)

• Limited to first $750,000 of debt combined

• Primary and secondary residence

• Home equity loans - HELOC (up to $100,000)

• Deductible if used to improve, buy, or build home

• Not deductible if used for any other purpose

• If used to both improve and for another purpose: allocate

• No grandfathering for existing HELOCs

• “Other purpose” old HELOCs: no longer deductible

• Previously: $100,000 loan limit for deductibility

• Form 1098, Mortgage Interest Statement

• Box 1 “Mortgage Interest”

• Footnote for Box 1 on reverse side: “Such amounts are deductible by

you only in certain circumstances”

• Thus: Box 1 amount is not necessarily deductible

Miscellaneous Deductions: Most are eliminated

• Revenge on Hollywood ?

• Actors can no longer deduct their agent’s fees

• Also applies to rich athletes

• Examples of deductions eliminated:

• Labor union dues

• Unreimbursed job expenses & employee moving expenses

• Military can still deduct

• Tax preparer fees

• Theft & Casualty Losses

• Exception: Presidentially-declared disaster area losses

• Reimbursable employee work expense accounts

• A qualified employer reimbursement plan still works

• Reimbursements by employer are tax free

• Reimbursements are deductible by employer

Will the California Income Tax be modified to conform to TCJA ?

• Sacramento politicians:

• Focused on “working around” $10,000 limit on SALT deduction limit.

• Recent IRS guidance makes such “work arounds” doubtful

• “Federal law controls the proper characterization of payments

for federal income tax purposes.”

• General income tax concept: you can’t get a charitable deduction if

you get an equal value benefit from the “charity”

• Little evidence of interest in California conformity to Federal law

• Non-conformity will cause great complexity and confusion when doing

California tax returns

• You better have a good computer program !

• Non-conformity also makes tax planning much more difficult

Investments

• Investment management & financial advice fees no longer deductible as

Miscellaneous Deductions:

• Flat fees, periodic fees

• Percent of Assets Under Management (AUM)

• Commissions for buying & selling securities are still deductible

• Increases cost of security, reduces taxable proceeds upon sale

Strategy: Switch to commission fee structure for investment management?

IRA fees

• If you pay fee directly to IRA custodian: not deductible

• If deducted from your IRA: effectively deductible

• If IRA custodian pays investment advisor fee directly from IRA:

effectively deductible (IRS Letter Ruling 8951010)

Strategy: Pay IRA fees directly from IRA

Investments

Taxable Accounts

• Capital gains

• Long Term gains continue to get lower rates (0%, 15%, 20%, or 23.8%)

• Short Term gains continue to get ordinary rates

• Qualified Dividends continue to get lower rates (0%, 15%, 20%, or 23.8%)

• Obamacare investment surcharge continues

• 3.8% if MAGI $200K+ (single), $250K+ (MFJ)

Personal residence sale exclusion continues ($250K single, $500K MFJ)

Traditional IRAs, 401k, Pensions

• Deductible contributions are still available, itemizing or not

Tax-free like-kind exchanges

• Eliminated, except real estate exchanges OK

Charitable Contributions

• Overall AGI limit increased from 50% to 60%

• New higher Standard Deduction • Might deter some from making charitable contributions

• Were some people making contributions just to get a deduction?

• Deductibility depends on amount of other Itemized Deductions

• Might lead you to change your contribution strategy

Charitable Contributions Strategies to Consider:

• Contribution Stacking

• Discontinue annual contributions

• Make large contributions every second or third year

• Large contributions can be tax deductible

• “Donor Advised Funds”

• Many large financial organizations have these available

• Use with Contribution Stacking

• Disbursements can be annual; does not affect deductibility

• Contributions of property instead of cash

• Avoids income tax on capital gains

• You get a deduction for full market value

• Charitable Remainder Trusts

• You get an upfront deduction for property donated to trust

• You can get annual tax-free income on earnings of trust

• Remainder in trust upon death goes to charity

Traditional IRAs (TIRA)

• Contributions

• Must have “earned income”

• Must be under age 70 ½

• Can be tax-deductible

• Tax law limits

• Contributions: $5500 or $6500 if age 50+

• If in a pension plan, MAGI: $63,000 single or $101,000 MFJ

• After-tax contributions, are not tax-deductible

• No income limits, same contribution limits

• Earnings are tax-deferred

• Rollovers

• From another TIRA

• From an employer pension plan

• From a 401k plan

• Withdrawals

• Taxable, at ordinary income tax rates

• RMDs beginning at age 70 ½

Roth IRAs (RIRA) • Contributions

• Must have “earned income”

• Maximum contribution: $5500 or $6500 if age 50+

• Cannot contribute if you exceed tax law limits on MAGI *

• $135K single, $199K MFJ

• Contributions are not tax-deductible

• Rollovers

• From another RIRA or an employer plan that has a Roth account

• Conversions

• From a TIRA

• Amount converted is taxable

• Back Door Contributions

• TIRA after-tax contributions can be transferred to Roth tax-free

• Not subject to income limits applicable to Roth contributions *

• Withdrawals

• Tax-free

• No RMDs

• Family beneficiaries get same tax advantages

IRAs – Keeping Track

• IRS Form 8606

• Should file each year if you have after-tax or Roth contributions

• Report & record end of year FMV of IRAs

• Report & record “after-tax” contributions in your TIRA

• You recover those contributions tax-free

• But only if you can prove they’re after-tax

• Report & record Roth IRA transactions

Required Minimum Distributions (RMDs) begin at “age 70 ½ “

69 ½ = 70 ½

?

Required Minimum Distributions (RMDs) - TIRAs

• Starts in year you become age 70 ½

• RMD is mandatory

• Penalty for not doing is severe = 50% of RMD, plus income tax

• First distributions each year are RMDs

• Even if you are just 70

• RMD is based on prior year end IRA value, divided by an age factor

• Example: age 70 ½ = 27.4 factor

• Last year’s value was $1,000,000 divide by 27.4 = $36,496 RMD

• Caution: age at end of year determines divisor factor

• First RMD can be delayed until April 1 of year following age 70 ½

• Factor for age 71 = 26.5 = $37,736 RMD

• Plus RMD for age 72 (two RMDs in second year)

RMD strategies (TIRAs)

• Qualified Charitable Distributions (QCDs) • Contribute a portion or all of annual RMD to charity

• Amount contributed counts towards RMD requirement

• QCD amount is not taxable

• QCD amount is not a tax deductible Itemized Deduction

• This will save you income taxes

• May lower your federal and state top tax rate

• May lower taxes on your Social Security

• May avoid increased Medicare premiums

• May avoid deduction phase-outs

• Tell your tax preparer that you made a QCD or it will be taxable

• IRA custodian does not tell IRS of QCD

• Total IRA distribution on Line 15a, Taxable amount Line 15b

• QCD notation must be made on Line 15

• Must be age 70 ½ + to make a QCD (different rule than RMD)

RMD strategies (TIRAs)

• Qualified Longevity Annuity Contracts (QLACs) • Transfer IRA funds to a life insurance annuity contract

• Maximum QLAC transfer is lesser of:

• $130,000 single, $260,000 couple, or

• 25% of IRAs’ value

• Can delay RMDs until age 85

• QLACs can provide “guaranteed” lifetime income and can provide high

return fixed-rate income for your portfolio

• Insurance company guarantees a fixed rate of return

• Insurance company assumes market risk

• Insurance company is your guarantor

• Can provide benefits for your survivors

RMD Strategies

• Roth IRA Conversions (short term pain, long term pleasure) 1. Moves IRA funds from tax-deferred to tax-free status

2. Upfront taxation of amount converted

3. All earnings within the Roth are tax-free

4. Withdrawals are tax-free

5. Tax-free Roth earnings and withdrawals may:

• Reduce taxes on your Social Security

• Avoid higher Medicare premiums

• Avoid AMT

• Avoid phase-outs of deductions

6. No RMDs during your lifetime

7. Your family can inherit your Roth and they will save taxes

• Earnings and withdrawals are tax-free

• Money can remain in Roth for decades (“Stretch IRA”)

• Heirs will have RMDs based on their life expectancy

8. Tax cuts scheduled to expire in 2026: but Roth IRAs are still tax-free

9. Recharacterizations eliminated for 2018 & after Conversions

RMD strategies

• Annual Timing • Late in year

• Provides a longer period for tax-deferred investing

• Tax withholding: year-end withholding can satisfy all quarterly

estimated tax payment requirements

• 90% of current year or 100% of prior year

• Early in year

• Avoids last minute mistake if disabled or distracted

• Allows for Roth Conversion

• Avoids mistake of converting RMD amount

• Allows for an IRA rollover

• Avoids rolling over RMD amount

• Avoids failure if death occurs (death is no excuse)

• Beneficiaries may not realize need for your RMD

• Beneficiaries may not have time to get authorization

• Failure = 50% penalty

Post Death Issues

Who gets your IRA? • Beneficiary Designations

• Person(s) designated on the custodian’s form determines

• Wills usually do not affect IRAs

• Trusts usually do not affect IRAs

Stretch IRAs • If structured properly, can minimize RMDs for your survivors

• Spouses get the most choice

• 5 year rule

• Their own life expectancy rule

• Children and others

• Their life expectancy, if IRA split

• Oldest beneficiary’s life expectancy, if not split

• Trusts

• Can limit “stretch”

Gifts • Annual exclusion

• $15,000 per person

• No gift tax, no gift tax return

• If over $15,000: no gift tax but a gift tax return required

• Lifetime limit (combined with estate tax)

• $ 11,180,000 single (indexed)

• $ 22,360,000 married (indexed)

Estate Tax • Exclusion: same as above, combined with Gifts

Strategy / Planning • New exclusion amounts expire after 2025

• Should you die before then ?

• Should you gift large amounts in 2025, before limits go down ?

• Should you set up irrevocable trusts in 2025 ?

• Step up in basis may be worth more

1. Roth IRAs – the best investment vehicle

2. Traditional IRAs

• Defers taxation but eventually taxed

3. Taxable Accounts (securities & real estate)

• Reduced tax rates for LTCG and qualified dividends

• Not selling = no tax

• Heirs get a step-up in basis & reduced or no tax upon sale

• Donation of appreciated property to charity

• Capital gains not taxed, deductions for charitable contributions

4. Life insurance & annuity plans

• Opportunities for tax-free & tax deferred investments

5. 529 Plans

• Tax-free investing for self and family education expenses

6. Tax-free municipal bonds

• Opportunities for tax-free interest

7. Small Business

• Opportunities for tax-advantaged pension, medical, life, accident

insurance plans

The New Tax Law & IRA Strategies © is a copyrighted presentation. Duplication or alteration of this presentation is not

authorized without the written permission of the author, Herb Farrington, herbf76@msn.com, (714) 904-5825

The issues discussed in this presentation are for general educational purposes only.

The information is provided is not individual tax or financial advice. You should discuss

your individual situation with a qualified financial advisor who is familiar with your own

financial facts before making any transactions or taking any actions.