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GEARING UP FOR FILING SEASON: INDIVIDUAL TAX PLANNING Wednesday, November 30, 2016; 11 am

The following program is authored by Barbara Weltman and is designed to provide accurate and authoritative information in regard to the subject matter covered. It is distributed and sold with the understanding that ADP and Smart. Pros Ltd. are not engaged in rendering legal, tax, accounting, investment or other expert advice. If expert assistance is required, the services of a competent professional should be sought. The views and conclusions expressed herein are those of the speaker and not necessarily those of ADP and Smart. Pros Ltd. Copyright 2016 © Smart. Pros (A Kaplan Company) 3

Gearing Up for Filing Season • Individual Tax Planning – Today • Business Tax

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EXPERT COMMENTATOR: Barbara Weltman, J. D. President, Big Ideas for Small Business Copyright 2016

Introduction • Program agenda – – Tax rules for 2016: certainty for now New developments impacting 2016 returns General tax planning strategies Prospects for upcoming tax reform Copyright 2016 © Smart. Pros (A Kaplan Company) 8

Tax Certainty • Permanent provisions under the PATH Act − − − − American opportunity credit Enhanced child tax credit Enhanced earned income tax credit Direct transfers from IRAs to public charities for those age 70 -1/2 and older Parity for transportation fringe benefits Educator expenses (plus deduction for professional development expenses) Itemized deduction for state and local sales tax Enhanced deduction for conservation easement contributions Copyright 2016 © Smart. Pros (A Kaplan Company) 9

Tax Certainty • PATH Act extensions through 2016 − − Credit for certain home energy improvements Tuition and fees deduction Exclusion of income from home mortgage cancellation Deduction for mortgage insurance premiums Copyright 2016 © Smart. Pros (A Kaplan Company) 10

COLAs for 2016 • Standard deduction amounts (Rev. Proc. 2015 -53): − − − Joint filers/surviving spouses: $12, 600 Heads of households: $9, 300 Singles: $6, 300 Married filing separately: $6, 300 Dependents: greater of $1, 050 or sum of $350 + earned income − Additional amounts for age/blindness • Married/surviving spouse: $1, 250 • Unmarried: $1, 550 Copyright 2016 © Smart. Pros (A Kaplan Company) 11

COLAs • Personal exemption: − $4, 050 − Phase-out limits increased slightly • Kiddie

COLAs • Medical expenses: − Itemized threshold: 10%-of-AGI (2016 is last year for 7. 5% for those 65+) − Long-term care premiums increased − FSAs: • Salary reduction contributions limited to $2, 550 − Premium tax credit Copyright 2016 © Smart. Pros (A Kaplan Company) 13

COLAs • AMT for 2016 − Exemption amount adjusted for inflation: • • Joint filers: $83, 800 Unmarried: $53, 900 Married filing separately: $41, 900 Phase-out thresholds increased − 28% rate applies to excess taxable income over: • Joint filers/unmarried: $186, 300 • Married filing separately: $93, 150 Copyright 2016 © Smart. Pros (A Kaplan Company) 14

COLAs • Tax credits changed: − Adoption credit increased to $13, 460 − Lifetime learning credit’s MAGI eligibility limits − Earned income credit amounts • Tax credits unchanged: − Dependent care credit − Child tax credit − American opportunity credit Copyright 2016 © Smart. Pros (A Kaplan Company) 15

COLAs • IRAs and qualified retirement plans (Notice 2015 -75) − IRA/Roth IRA contribution limits unchanged; some changes in MAGI limits − 401(k) contribution limits unchanged Copyright 2016 © Smart. Pros (A Kaplan Company) 16

COLAs • Estate/gift/GST rates and applicable amounts − Lifetime exemption amount for 2016: $5. 45 million • Check state law exemptions, which may be lower − Annual gift tax exclusion for 2016: $14, 000 • Transfers to 529 plans: $70, 000 (5 x $14, 000) Copyright 2016 © Smart. Pros (A Kaplan Company) 17

New Developments • Expanded reporting on Form 1098 for mortgage interest: − Address or description of the property securing the mortgage − Outstanding mortgage principal as of January 1, 2016 − Mortgage origination date − Mortgage insurance premiums of $600 or more Copyright 2016 © Smart. Pros (A Kaplan Company) 18

New Developments • Basis consistency for inherited property (Surface Transportation Act of 2015): − Heirs use basis reported for estate tax − Executors report basis to IRS/heirs on Form 8971 (Schedule A is for heirs) Copyright 2016 © Smart. Pros (A Kaplan Company) 19

New Developments • FBAR reporting: – Due date for 2016: April 18, 2017 – 6 -month extension – Certain online gambling not subject to FBAR (Hom, CA-9, 7/26/16) Copyright 2016 © Smart. Pros (A Kaplan Company) 20

New Developments • Identity theft against taxpayers − IP PINs (Identity Protection Personal Identification Numbers): • Who can get one? – Must if taxpayer receives CP 01 A Notice, had an IP PIN before, or had an e-filed return that was rejected for a missing IP PIN – May if taxpayer receives an IRS letter inviting “opt in” or files in District of Columbia, Florida, or Georgia • New IP PIN tool using “Secure Access Steps” (same tool used for online Get Transcript) Copyright 2016 © Smart. Pros (A Kaplan Company) 21

New Developments • Identity theft against tax professionals − IRS issued various warnings − Tax professionals should: 1. Follow FTC standards for safeguarding customer information rule, which requires action by tax professionals 2. Review computer settings 3. Run a security scan for viruses and malware 4. Strengthen passwords for both computer and software 5. Review software used by employees to remotely access network Copyright 2016 © Smart. Pros (A Kaplan Company) 22

New Developments • Casualty/disaster losses − − Change in time for electing to deduct disaster losses on prior year returns; 6 months after the due date of the return (without extension) for the disaster year (Rev. Proc. 2016 -53; T. D. 9789, 10/13/16) Check list of federally-declared disasters at FEMA. gov Leave-based donations for Louisiana flood/Hurricane Matthew areas not taxed (Notice 2016 -55; Notice 2016 -69) Collapsed wall not a casualty loss for co-op shareholder because it resulted from gradual deterioration (Alphonso, TC Memo 2016 -130) Copyright 2016 © Smart. Pros (A Kaplan Company) 23

New Developments • Homes − − Prorated home sale exclusion allowed for sale after second child before 2 -year ownership/use (Letter Ruling 201628002) Mortgage interest limits apply per taxpayer, so unmarried co-owners each have $1. 1 million combined limit (Voss, CA-9, 8/7/15, IRS acquiesces, AOD 2016 -02) Copyright 2016 © Smart. Pros (A Kaplan Company) 24

New Developments • Retirement plans − − Self-certification procedure for waiver of 60 -day rollover limit (Rev. Proc. 2016 -47) Purported rollover to an account called “Business Owner’s Retirement Savings Account (BORSA)” was a taxable distribution because there was no proof of a valid retirement plan (Powell, Fed Cl. , 3/15/16) Distribution from SEP was not a rollover where taxpayer had control over funds (Vandenbosch, TC Memo 2016 -29) No distribution from self-directed IRA for wired funds used to buy stock (Mc. Gaugh, TC Memo 2016 -28) Copyright 2016 © Smart. Pros (A Kaplan Company) 25

New Developments • Marital dissolutions − Sale of business interest to ex-spouse not taxable (Belot, TC Memo 2016 -113) − Noncustodial parent with Form 8332 gets dependency exemption (Chief Counsel Memorandum 201602009) Copyright 2016 © Smart. Pros (A Kaplan Company) 26

New Developments • Miscellaneous developments − Earned income credit cannot be based on disability income (Vellai-Palotay, Ct. Fed. Cl. , 7/13/16) − Wellness program payments taxable compensation (Chief Counsel Memorandum 201622031) − Employee’s settlement not capital gain; goodwill (if there was any) was not sold (Duffy, CA-FED, 1/8/16) − Olympic gold is tax free (P. L. 114 -239) Copyright 2016 © Smart. Pros (A Kaplan Company) 27

Planning • Income tax strategies: deferral or acceleration? − Usual strategy: defer income when possible. • Defer bonuses before year-end if expected to be in a lower bracket when they are received in the future (factor in possible tax reform discussed later). – Note: This won’t save the 0. 9% additional Medicare tax for high earners. Copyright 2016 © Smart. Pros (A Kaplan Company) 28

Planning • Special concerns for high-income taxpayers − Top rate is 39. 6% (and 20% on capital gains and qualified dividends) − Phase-out of personal exemptions and itemized deductions − Additional Medicare taxes on earned income and net investment income − For seniors: additional premiums for Medicare Parts B and D (based on MAGI 2 years prior) Copyright 2016 © Smart. Pros (A Kaplan Company) 29

Planning • Strategies for high-income taxpayers − Deferred compensation plans (but consider looming tax reform) − Like-kind exchanges − Optimizing charitable contributions Copyright 2016 © Smart. Pros (A Kaplan Company) 30

Planning • Optimize savings plans: − Roth IRA conversions • Build tax-free income for the future • Factor in the impact of increasing MAGI for purposes of the 3. 8% additional Medicare tax – Conversion income is not treated as investment income but it does boost MAG. − − My. RAs (mini-Roth IRAs) ABLE accounts (now live in 5 states) Copyright 2016 © Smart. Pros (A Kaplan Company) 31

Planning • Capital gains and losses − Harvest gains and losses before year end? • Take advantage of current low/no tax rates on capital gains • Reset basis for appreciated assets (no wash sale rule for gains) • Determine capital gain distributions • Remember unlimited capital loss carryforward (watch wash sale rule for losses) − Important: Keep financial considerations paramount and factor in looming tax reform for 2017 Copyright 2016 © Smart. Pros (A Kaplan Company) 32

Planning • Other income planning − Stock options: • Exercise stock options • Consider making Sec. 83(b) elections (don’t have to file copy with return) − IRA rollovers • Watch one-rollover-per-year rule Copyright 2016 © Smart. Pros (A Kaplan Company) 33

Planning • ACA planning: − Play or pay: penalty* in 2016 is the greater of: • 2. 5% of household income in excess of filing threshold for taxpayer’s filing status • $695 per adult/$347. 50 per child; no more than $2, 085 *Annual cap: $223 per month/per individual; $1, 115 family of 5 • Play or pay: penalty* in 2017 is the same as in 2016, but the annual cap is yet to be announced − CMS audits • Challenging premium tax credit claims for 2016 – Beware: employee’s employer can contest a claim − Coverage for 2017: Open Marketplace enrollment to 12/15/16 Copyright 2016 © Smart. Pros (A Kaplan Company) 34

Planning • Deductions planning − General strategy: Accelerate deductions. • Charitable giving: – – Donations of appreciated property Substantiation requirements Last minute gifting (charging by credit card; mailing by Dec. 31) Accelerate giving by high-income taxpayers because of looming tax reform • Make discretionary medical costs where appropriate • Prepay mortgage interest/state and local property and estimated tax – Don’t prepay if such to the AMT Copyright 2016 © Smart. Pros (A Kaplan Company) 35

Planning • Deductions planning (cont. ) − “Bunching deductions” still important. • General bunching: itemize one year/take standard deduction the next (or vice versa) • Apply bunching strategy to medical costs in light of the AGI floor Copyright 2016 © Smart. Pros (A Kaplan Company) 36

Planning • AGI/MAGI planning − Why it’s important: • MAGI impacts additional Medicare taxes in 2016 on earnings and NII • MAGI in 2016 impacts Part B Medicare premiums in 2018 • Affects eligibility for various tax breaks/opportunities. − What to do: • Optimize salary reduction contributions in 401(k)s and similar plans in in medical/dependent care FSAs • Make HSAs contributions (only need coverage in an HDHP for December to make a full year’s contribution) (HDHP is typically the bronze plan, but check) • Make deductible IRA contributions if eligible Copyright 2016 © Smart. Pros (A Kaplan Company) 37

Planning • Education planning − Pre-pay tuition for 2017 to use the American Opportunity credit in 2016 − Take withdrawals for elementary and secondary school from Coverdell ESAs Copyright 2016 © Smart. Pros (A Kaplan Company) 38

Planning • Make last minute changes to wage withholding • Adjust fourth quarter estimated

Coming Tax Reform • New administration and new Congress likely will advance tax reform

Coming Tax Reform • Changes likely will be a combination of Trump plan, Ways and Means Blueprint, and Democrats’ input: − Across-the-board tax rate cuts • • − − 3 brackets for individuals Owners of pass-thrus taxed at corporate for business income Increased breaks for childcare (large above-the-line deduction and new savings account) End to AMT Copyright 2016 © Smart. Pros (A Kaplan Company) 41

Coming Tax Reform • Other possible changes: − − − Eliminate 3. 8% NII tax Eliminate personal exemptions Eliminate head of household filing status Greatly increase standard deduction but cap itemized deductions for high-income taxpayers Repeal and replace Obamacare (e. g. , expand HSAs) Repeal estate tax Copyright 2016 © Smart. Pros (A Kaplan Company) 42

Conclusion • Meet with clients as soon as possible to discuss planning options in the time remaining • Monitor actions by Congress • Reminder: Renew your PTIN Copyright 2016 © Smart. Pros (A Kaplan Company) 43