By now, taxpayers with high state tax burdens are all too well aware of the impact the federal Tax Cuts and Jobs Act of 2017 has had in limiting state and local tax deductions to $10,000.  We also know states have been proactive in fighting back.  For example, New York State has gone as far as enacting legislation enabling local governments and school districts to establish charitable funds so that residents can make “contributions” and receive a tax credit towards the local tax obligation.  In other words, through the alchemic magic of the tax law, converting now-capped SALT deductions to much less restricted charitable contributions.

New York State has demonstrated their commitment to make this work and has even established a web link to provide local governments with guidance in setting up the charitable funds[1].  Yet the IRS has been warning of their intention to issue regulations that are likely to undermine the plan.

Converting a traditional IRA to a Roth IRA can provide tax-free growth and tax-free withdrawals in retirement. But what if you convert your traditional IRA — subject to income taxes on all earnings and deductible contributions — and then discover you would have been better off if you hadn’t converted it?

Before the Tax Cuts and Jobs Act (TCJA), you could undo a Roth IRA conversion using a “recharacterization.” Effective with 2018 conversions, the TCJA prohibits recharacterizations — permanently. But if you executed a conversion in 2017, you may still be able to undo it.

Reasons to Recharacterize

Generally, if you converted to a Roth IRA in 2017, you have until October 15, 2018, to undo it and avoid the tax hit.

Here are some reasons you might want to recharacterize a 2017 Roth IRA conversion:

• The conversion combined with your other income pushed you into a higher tax bracket in 2017.
• Your marginal income tax rate will be lower in 2018 than it was in 2017.
• The value of your account has declined since the conversion, so you owe taxes partially on money you no longer have.

It may be difficult to contemplate, but funeral arrangements are a critical component of your estate plan. Failing to clearly communicate your wishes for the disposition of your remains can lead to tension, disputes, and even litigation among your family members during what is already a difficult time.

Issues to Address

The methods for expressing these wishes vary from state to state, and may include a provision in your will, language in a health care proxy or power of attorney, or a separate form specifically designed for this purpose.

Whichever method you use, it should, at a minimum, state:

• Whether you prefer burial or cremation,
• Where you wish to be buried or have your ashes interred or scattered (and any other special instructions), and
• The person you’d like to be responsible for making these arrangements. Some people also request a specific funeral home.

Rightfully so, we have all been occupied with the U.S. Supreme Court decision in Wayfair, but that doesn’t mean we should forget about the basics of sales tax planning.  As has always been the case, a simple change in a transaction’s structure or the check of a box (or not) can either be a big money saver or a huge unexpected cost.

Case in point is a recent New York State Advisory Opinion[1]. The Petitioner asks the Department of Taxation and Finance whether the rental of a truck to a customer, where the customer is using the truck for a project performed for an organization that is exempt from sales tax, will require the Petitioner to collect the tax from its customer.  The customer provided the Petitioner with a Contractors Exempt Purchase Certificate and checked box “A” indicating tangible personal property (“TPP”) is purchased for use as part of a project for an organization exempt from tax.

There was talk of repealing the individual alternative minimum tax (AMT) as part of last year’s tax reform legislation. A repeal wasn’t included in the final version of the Tax Cuts and Jobs Act (TCJA), but the TCJA will reduce the number of taxpayers subject to the AMT.

Now is a good time to familiarize yourself with the changes, assess your AMT risk and see if there are any steps you can take during the last several months of the year to avoid the AMT, or at least minimize any negative impact.

AMT vs. Regular Tax

The top AMT rate is 28%, compared to the top regular ordinary-income tax rate of 37%. But the AMT rate typically applies to a higher taxable income base and will result in a larger tax bill if you’re subject to it.

If you are charitably inclined, consider the benefits of a charitable gift annuity. It can combine the advantages of an immediate income tax deduction and a lifetime income stream. Moreover, it allows you to support a favorite charity and reduce the size of your future taxable estate.

What is a Charitable Gift Annuity?

A charitable gift annuity is an arrangement in which you make a gift of cash or other property to a charity in exchange for a guaranteed income annuity for life. This is similar to buying an annuity in the commercial marketplace, except that you potentially can claim an immediate charitable deduction for the excess of the value of the property over the value of the annuity.

Way before the advent of streaming video, 4k, 1080p, 720p, and basic color TV, unbelievably readers, existed the black and white TV set.  Weighing in at least fifty pounds, these behemoths of information were our only means of receiving our prime-time entertainment.  Selecting channels meant getting off the couch and turning a knob, usually by the youngest member of the family present at the time.  Occasionally, someone, usually the senior family member, had to adjust the horizontal or vertical hold and if that didn’t help stabilize the picture, a good rap on the side of the TV usually did the trick.

The stone age of TV watching wasn’t all-bad.  As the screen had no color, we had no red and blue states.  A quick scan of the internet tells me that color-coded state maps weren’t used during TV news coverage of elections until 1976.  To eliminate inconsistency and confusion, the story goes that ABC was the first in 1990 to assign red to the GOP and blue to the Dems. 

In the past, some parents and grandparents would attempt to save tax by putting investments in the names of their young children or grandchildren in lower income tax brackets. To discourage such strategies, Congress created the “kiddie” tax back in 1986. Since then, this tax has gradually become more far-reaching. Now, under the Tax Cuts and Jobs Act (TCJA), the kiddie tax has become more dangerous than ever.

A Short History

Years ago, the kiddie tax applied only to children under age 14 — which still provided families with ample opportunity to enjoy significant tax savings from income shifting. In 2006, the tax was expanded to children under age 18. And since 2008, the kiddie tax has generally applied to children under age 19 and to full-time students under age 24 (unless the students provide more than half of their own support from earned income).

What about the kiddie tax rate? Before the TCJA, for children subject to the kiddie tax, any unearned income beyond a certain amount ($2,100 for 2017) was taxed at their parents’ marginal rate (assuming it was higher), rather than their own likely low rate.

Even though you can’t physically touch digital assets, they’re just as important to include in your estate plan as your material assets. Digital assets may include online bank and brokerage accounts, digital photo galleries, and even email and social media accounts.

If you die without addressing these assets in your estate plan, your loved ones or other representatives may not be able to access them without going to court — or, worse yet, may not even know they exist.

Virtual Documents in Lieu of Hard Copies

Traditionally, when a loved one dies, family members go through his or her home to look for personal and business documents, including tax returns, bank and brokerage account statements, stock certificates, contracts, insurance policies, loan agreements, and so on. They may also collect photo albums, safe deposit box keys, correspondence and other valuable items.

Today, however, many of these items may not exist in “hard copy” form. Unless your estate plan addresses these digital assets, how will your family know where to find them or how to gain access?

The Tax Cuts and Jobs Act (TCJA) provides a valuable new tax break to noncorporate owners of pass-through entities: a deduction for a portion of qualified business income (QBI). The deduction generally applies to income from sole proprietorships, partnerships, S corporations, and, typically, limited liability companies (LLCs). It can equal as much as 20% of QBI. But once taxable income exceeds $315,000 for married couples filing jointly or $157,500 for other filers, a wage limit begins to phase in.

Full vs. Partial Phase-In

When the wage limit is fully phased in, at $415,000 for joint filers and $207,500 for other filers, the QBI deduction generally can’t exceed the greater of the owner’s share of:

• 50% of the amount of W-2 wages paid to employees during the tax year, or
• The sum of 25% of W-2 wages plus 2.5% of the cost of qualified business property (QBP).