Opportunity Zone Investing Yields Tax Saving Opportunities

Date December 17, 2018
Article Authors
HBK CPAs & Consultants

A provision of the Tax Cuts and Jobs Act (TCJA) of 2018 allows investors to defer taxes on capital gains by investing them in properties and businesses in Qualified Opportunity Zones (QOZs). The purpose is to encourage investment that will revitalize low-income areas. Essentially QOZs allow investors to take capital assets that have appreciated, monetize them, and defer the gain for up to seven years, or through 2026.

A typical investor might be a client selling a stock that has amassed substantial capital gains over time. A QOZ unties the binds that keep that individual from selling by allowing him or her to re-invest the gains tax-deferred in a Qualified Opportunity Fund (QOF).

Qualified Opportunity Zones are designated by state governors and currently all 50 states have designated zones in their respective jurisdictions. Florida’s governor Rick Scott added its name to that list as of April 19, 2018 with his recommendations for zones in 427 communities across every county in the sunshine state. As in the case of TCJA, and most new tax legislation, subsequent regulations will be required to address some unresolved issues, but all QOFs do provide federal capital gains tax benefits. Here’s how it works:

QOFs chart

If a client sells an investment that generates a capital gain before December 31, 2026, and re-invests the gain in a QOF within 180 days, the benefits are:
– Deferred taxes on the initial gain until December 31, 2026
– Elimination after five years of a portion of the deferred gain
– Elimination of more of the gain after 7 years
– Elimination of post-rollover appreciation after 10 years

The following guidelines must be considered for qualified, preferential tax treatment under a QOF:

  • To qualify as a QOF, the corporation or partnership must have 90 percent of its assets invested in QOZ properties or businesses.
  • A QOF investor can be any taxpaying entity: individual, partnership, S corporation, trust.
  • An “unrelated person” is an entity in which the investor does not have an ownership stake of more than 20 percent. The rule would keep the investor from selling the original investment to himself, or an entity in which the investor holds a substantial stake, such as in a current partnership, for example.
  • The provision applies only to capital gains, including 1231 and 1250 gains, but not gains taxed as ordinary income.

To achieve deferral or potentially eliminate the tax on a QOF investment, the investor must commit the capital gain to an investment in a QOF within 180 days of the sale of the original investment. Then:

  • After five years of holding the investment in the QOF, the basis is increased by 10 percent of the initial deferred gain, thereby permanently excluding from income that 10 percent.
  • After 7 years, the basis in the investment is increased by another 5 percent of the deferred gain, thereby permanently excluding that amount from taxable income.
  • After 10 years of holding the QOF investment, the investor can elect to have the basis equal its fair market value when the investment is sold. Because the originally deferred gain will be taxed December 31, 2026, with a corresponding adjustment in basis, the rule has the effect of excluding from tax all post-rollover appreciation.

Even if an investment is not made in time to capitalize on the seven or five-year basis-point increases, there are still advantages to investing in a QOF. Invested capital gains are still eligible for deferral until December 31, 2026. As well, the investor remains eligible for the 10-year rule allowing all post-rollover appreciation to be permanently excluded from being taxed.

One of the requirements for qualification as a QOZ business is that less than 5 percent of the average of the aggregate unadjusted bases of property held by the entity must be attributable to nonqualified financial property (NQFP). Under Section 1397C(e), the definition of NQFP does not include reasonable amounts of working capital held in cash, cash equivalents, or debt instruments with a term of 18 months or less. If documented adequately, capital can be used for expenses, effectively maintaining the investment as a QOF at less than the prescribed 90 percent threshold.

Another round of regulations from the Treasury Department for QOFs is expected by the end of the year. Among the issues that need to be addressed is the requirement that at least half of all receipts from a QOZ business come from their zone of location. That might make sense for a single grocery store or apartment building, but not necessarily for a manufacturer selling its products throughout the country. The sales might be dispersed but the income, jobs and other benefits are clearly local.

Other questions hoping to be answered by the next round of regulations include:

  • What are the federal tax benefits relative to the income generated from this investment?
  • The QOFs will likely own a portfolio of businesses in the zone, but what are the benefits to the operating entities?

We will closely monitor future announcements from the U.S. Treasury Department on this topic and provide updates as soon as they are available. For questions, please contact Anthony Giacalone at agiacalone@hbkcpa.com.

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Tax Cut and Jobs Act – New Tax Legislation May Pass Before Year End

Date December 18, 2017
Article Authors

The Senate and House Conference Committee agreed on the provisions of the Tax Cut and Jobs Act at the end of the day on December 15. The House is expected to vote on Tuesday this week and the Senate on Wednesday. If the law passes, President Trump will sign it into law.

Passage of the Act is not a slam dunk as there are a few Senators who are non-committal and Senator McCain will not be in Washington for the vote. Vice-President Mike Pence has delayed a planned trip to the Middle East in case his vote is necessary to break a tie.

Here are the major provisions of the bill, which for the most part apply after 2017, and sunset after 2026. This means that the tax law before these changes would go back to the law before the law changes:

Individuals Provisions

  • Tax rates: The highest individual tax rate would drop from 39.6% to 37% with seven brackets 10%, 12%, 22%, 24%, 32%, 35% and 37%. The top bracket would apply for single filers at $500,000 and $600,000 for joint filers.
  • Kiddie tax: Unearned income over $2,100 of dependent children under age 24 will be taxed at trust and estate income tax rates rather than the parent’s tax rates. This will generally result in higher income taxes.
  • Capital gain rates: The current 0%, 15% and 20% capital gain rates would not change.
  • Inflation adjustments: The tax brackets and other provisions of the tax law are adjusted each year for inflation. The new law would use a chained CPI index, which is the lower rate of growth than CPI. This would be a permanent law change.
  • Standard deduction: The standard deduction would be increased to $12,000 for single filers, $24,000 for joint filers and $18,000 for head of household filers.
  • Personal exemptions: Would be repealed.
  • Passthrough income deduction: Individuals would be allowed to deduct 20% of “qualified business income” from a partnership, S corporation, or sole proprietorships, as well as 20% of qualified real estate investment trust (REIT) dividends, qualified cooperative dividends, and qualified publicly traded partnership income. A limitation on the deduction will be based on the greater of 50% of W-2 wages paid by the business, or 25% of W-2 wages paid plus 2.5% of the cost of property used in the business. Most service businesses will have additional limitations.
  • Loss limitations: Business losses in excess of $500,000 on joint returns and $250,000 on single returns would not be allowed to offset other sources of income. The excess loss amount would carryover and allowed in future years.
  • Mortgage interest: The limitation on the amount of acquisition debt would be reduced from $1.1 million to $750,000. Mortgages in existence before December 16, 2017 would not be subject to this change. The deduction for interest on home equity debt would be repealed. In addition, mortgage interest on a principal residence and a second home would continue.
  • State and local taxes: Individuals would be allowed to deduct up to $10,000 of state and local income taxes and property taxes. The new law prevents taxpayers from prepaying 2018 state and local income taxes in 2017, but that restriction does not apply to property taxes.
  • Charitable contributions: The current 50% limitation for cash contributions to public charities would be increased to 60%. Donations for college athletic event seating right would be disallowed.
  • Medical expenses: The threshold for the deduction of medical expenses would drop from 10% of adjusted gross income to 7.5% beginning in 2017.
  • Miscellaneous itemized deductions: All miscellaneous deductions subject to the 2% floor would be repealed, including tax return preparation and planning fees, investment advisory fees, employee business expenses and many others.
  • The reduction of itemized deductions for high-income taxpayers would be repealed.
  • Alimony: Alimony received would not be taxable and alimony paid would not be deductible for divorce and separation agreements entered into or modified after December 31, 2018.
  • Moving expenses: Would no longer be deductible and if reimbursed by an employer would be taxable to the employee.
  • Child credit: The allowable child credit would be increased to $2,000 with up to $1,400 being refundable. The income thresholds for the phase-out of the child credit would be increased significantly. Also a new nonrefundable $500 credit for qualifying dependents who are not qualifying children.
  • Section 529 tuition savings plans: Up to $10,000 would be allowed to use for private elementary and secondary school tuition.
  • Alternative minimum tax (AMT): AMT would not be repealed, but the exemption amounts would be increased.
  • Individual health insurance mandate: The mandate would be repealed along with the subsidies.
  • Estate, gift and generation skipping tax: The exemptions would be doubled, so in 2018 the exemptions would be $11.2 million per person.

Business Tax Provisions

  • Corporate tax rate: The corporate tax rate would be reduced to 21% for years beginning after 2017. This would be a permanent law change.
  • Domestic Production Activity Deduction: This deduction, which has amounted to 9% of taxable income from production activities in the U.S., would be repealed. The deduction is repealed for all businesses, regardless of how organized, including C corporations, S corporations, partnerships and proprietorships.
  • Corporate AMT: Would be repealed.
  • Business interest expense: Every business, regardless of form, would be limited by the amount of interest expense it can deduct to 30% of its “adjusted taxable income’. Adjusted taxable income is defined as the business’ taxable income computed without regard to business interest expense, business interest income, net operating losses, depreciation, amortization and depletion. Any disallowed interest expense carries over indefinitely subject to the same limits. Certain businesses are exempt from the limitations, including: (i) any business with less than $25 million in revenue, (ii) dealers of automobiles and trucks, farm equipment, recreational vehicles, motorcycles and boats, (iii) real property businesses, (iv) regulated public utilities
  • Bonus depreciation: Businesses would be allowed to immediately expense 100% of qualified property placed in service after September 27, 2017 and before January 1, 2023. New and used property would be qualified. After 2022, the bonus depreciation amount be reduced by 20% each year thereafter and terminate in 2026. Businesses not subject to the interest expense deduction limitations (other than those with less than $25 million in revenue) would not be allowed bonus depreciation.
  • Section 179 expensing: The current $500,000 expensing limit would be increased to $1 million. Eligible property would also include improvements to nonresidential real property such as roofs, HVAC, fire protection and alarm and security systems.
  • Automobile depreciation: Depreciation deductions for automobiles used in business would be sharply increased.
  • Net operating losses (NOL): For losses arising after 2017, an NOL deduction would be limited to 80% of taxable income. The current 20-year carryover period would be made indefinite and the two-year carryback period would be repealed. NOLs arising in years before 2018 would not be subject to these changes.
  • Like-kind exchanges: After 2017, like-kind exchanges would only be available for real estate, not tangible personal property.
  • Entertainment expenses: No deduction would be allowed for any entertainment, amusement or recreation and membership dues. Currently, 50% of these expenses have generally been deductible.
  • Research and experimental expenses: For years beginning after 2021, these expenses would have to be amortized over a five-year period.

The Conference agreement includes many other provisions and is easily the most significant tax legislation since 1986. There are many opportunities to take advantage of the tax law changes and take action before the end of 2017 to secure certain tax benefits that may no longer be available.

Please contact a member of HBK to discuss how these changes may affect you.

This is an HBK Tax Advisory Group publication.

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2016 Year-End Tax Planning Letter for Individuals

Date December 14, 2016
Article Authors

To Our Clients and Friends: While many of you are making plans for year-end holidays, what should not be overlooked this time of year is year-end tax planning, especially considering the November election results. Every individual can develop a year-end tax planning strategy that reflects his or her situation, while taking into consideration the potential changes that could occur as a result of the election. We can help you prepare such a strategy, and the earlier we get started, the greater the potential maximization of benefits. IMPACT OF THE ELECTION President-Elect Trump proposes significant changes to the tax law including:
  • Cutting individual tax rates from seven brackets with a top rate of 39.6% to three brackets of 12%, 25% and a top rate of 33%
  • Eliminate the individual and corporate alternative minimum tax (AMT)
  • Increase the standard deduction for individuals, to $15,000 for single filers and $30,000 for married filing separate filers
  • Cap itemized deductions at $100,000 for single filers and $200,000 married filing separate filers
  • Eliminate the 3.8% Medicare tax on investment income
  • Cut the corporate tax rate from 35% to 15%
  • Full deductibility of business capital investments
These possible changes need to be taken into account in year-end planning. TRADITIONAL TAX PLANNING As in past years, traditional year-end income shifting techniques may be valuable. Year-end planning includes considering 2016 and 2017 and determining if it makes sense to accelerate or defer income. President elect Trump has made it clear he will focus on tax reform, which may result in a reduction of income taxes in 2017. Therefore, deferring income to 2017, and accelerating deductions to 2016 may be a beneficial strategy for many individuals. The alternative minimum tax (AMT) must be evaluated when accelerating deductions. Taking inventory of income and expenses to calculate whether strategies to accelerate or defer one or the other, before the current year closes, should be employed for year-end 2016 as it has been in the past. Assessing current gains and losses to map out a year-end buy, sell, or hold strategy makes particular sense as markets continue to make adjustments after the election. The following income deferral and deduction/credit acceleration techniques may be used to reduce an individual taxpayer’s income tax liability: Income Deferral:
  • Receive bonuses earned for 2016 in 2017
  • Sell appreciated assets in 2017
  • Offset tax losses against current gains (loss harvesting)
  • Postpone the redemption of U.S. Savings Bonds
  • Declare any special dividends in 2017
  • Defer debt forgiveness income if possible
  • Minimize retirement distributions
  • Execute like-kind exchange transactions
  • Take corporate liquidation distributions in 2017
Deductions/Credit Acceleration:
  • Bunch itemized deductions into 2016/Standard deduction into 2017
  • Accelerate bill payments into 2016
  • Pay last state estimated tax installment in 2016 instead of 2017
  • Minimize the effect of AGI limitations on deductions/credits
  • Maximize net investment interest deductions
  • Match passive activity income and losses
Other common year-end planning techniques include:
  • Maximizing retirement plan contributions
  • Maximizing health savings account contributions
  • Consider Roth IRA conversions to use excess deductions or if in a low tax bracket
  • Harvest capital losses
  • Review flexible spending account decisions for 2017
Charitable Contributions. Taxpayers who contribute cash or property to a qualified organization can claim the contribution as an itemized deduction. Not all nonprofit organizations are qualified organizations for charitable contribution deduction purposes. The IRS provides, and updates monthly, an online search tool that allows users to search for qualified charitable organizations. The IRS’s Exempt Organizations Select Check tool can be accessed via the internet at www.irs.gov. You can generally take a deduction for the fair market value of the cash or property donated. You cannot deduct the value of services you donate to a charity, however, you may be able to deduct charity-related travel and out-of-pocket expenses. Regardless of the type of contribution, you cannot claim a deduction unless you maintain a record of the contribution. This is commonly done by collecting an acknowledgment from the qualified organization stating the date and amount of the contribution. Consider contributing appreciated property (like stock) to qualified organizations. Your deduction will generally equal the fair market value of the property at the date of the contribution and you will avoid paying capital gains tax on the profit. In addition to traditional year-end tax strategies, the following issues may also impact your year-end tax planning: INFLATION-ADJUSTED TAXES AND PHASEOUT AMOUNTS Income tax. The current tax structure includes income tax rates of 10, 15, 25, 28, 33, 35, and 39.6 percent. For 2016, the threshold amounts for these rates are:
  • Married taxpayers filing jointly and surviving spouses: the maximum taxable income for the 10% tax bracket is $18,550; for the 15% bracket, $75,300; for the 25% bracket, $151,900; for the 28% bracket, $231,450; for the 33% bracket, $413,350; and for the 35% bracket, $466,950. Amounts over $466,950 are taxed at 39.6%.
  • Married taxpayers filing separately: the maximum taxable income for the 10% bracket is $9,275; for the 15% bracket, $37,650; for the 25% bracket, $75,950; for the 28% bracket, $115,725; for the 33% bracket, $206,675; and for the 35% bracket, $233,475. Amounts over $233,475 are taxed at 39.6%.
  • Heads of households: the maximum taxable income for the 10% bracket is $13,250; for the 15% bracket, $50,400; for the 25% bracket, $130,150; for the 28% bracket, $210,800; and for the 33% bracket, $413,350; and for the 35% bracket, $441,000. Amounts exceeding $441,000 are taxed at 39.6%.
  • Single filers (other than surviving spouses and heads of households): the maximum taxable income for the 10% bracket is $9,275; for the 15% bracket, $37,650; for the 25% bracket, $91,150; for the 28% bracket, $190,150; for the 33% bracket, $413,350; for the 35% bracket, $415,050. Amounts over $415,050 are taxed at 39.6%.
Additional HI (Medicare) Tax. Higher income individuals are subject to an additional 0.9 percent HI (Medicare) tax on wages received in connection with employment in excess of $200,000 ($250,000 for married couples filing jointly and $125,000 for married couples filing separately). To avoid an underpayment penalty related to this tax, you can instruct your employer to withhold an additional amount of federal income tax from your wages before year end. Itemized Deduction Phase-out (Pease Limitation). The Pease limitation on itemized deductions (named for the member of Congress who originally sponsored the legislation) reduces itemized deductions for higher-income taxpayers. For 2016, itemized deductions are reduced when AGI exceeds the following threshold amounts:
  • $311,300 for married taxpayers filing jointly and surviving spouses;
  • $285,350 for heads of households;
  • $259,400 for single filers (other than surviving spouses and heads of households); and
  • $155,650 for married taxpayers filing separately.
Personal Exemptions. The personal exemption phase-out requires higher-income taxpayers to reduce the amount of their personal exemptions when their AGI exceeds certain threshold levels. The same threshold limits used in the Pease limitation above apply to the personal exemption phase-out. If the personal exemption phase-out kicks in, the total amount of exemptions that may be claimed is reduced by two percent for each $2,500 ($1,250 for married couples filing separately) or portion thereof, by which adjusted gross income (AGI) exceeds the applicable threshold. Kiddie Tax. The net unearned income (in excess of $2,100 for 2016) of certain children under the age of 24 can be taxed at the parent’s marginal tax rate. This tax at the parent’s rate is commonly referred to as the “kiddie tax.” If the child’s unearned income is less than an inflation-adjusted ceiling amount, the parent may be able to include the income on the parent’s return, rather than filing a return for the child. For tax years beginning in 2016, the inflation-adjusted amount used to reduce the net unearned income reported on a child’s return that is subject to the kiddie tax is $1,050. The child’s income can be reported on the parent’s return if the child’s gross income is more than $1,050 and less than $10,500. Having income subject to the kiddie tax can mean that income that would otherwise be subject to no tax (because it is offset by the child’s exemptions or his standard deduction), or to a low tax rate, will be taxed at the highest rates. So, avoiding the kiddie tax can be a real tax saver. One method to avoid the kiddie tax is keeping the child’s unearned income at or below $2,100. This can be done by pushing investment income into future years by investing in growth oriented funds which provide little current income. Parents can also transfer money to qualified tuition plans (also known as 529 plans) which do not generate taxable income. Another way to avoid kiddie tax is to have the child provide at least one-half of their support. If they do, their unearned income will not be subject to the kiddie tax. This can be accomplished by having the child work during the years they are subject to the tax. Parent’s that have a business can hire their children to increase the child’s earned income. TAXES ON INVESTMENT Generally, taxable investment accounts are accounts other than retirement accounts, insurance contracts and annuities. When managing investments held in taxable accounts, the measure of success is the net return after taxes, rather than the gross return. The following taxes must be taken into account in order to achieve that objective: Capital Gains Tax. Capital gains are taxed at a rate of zero percent for taxpayers in the 10 and 15 percent brackets; the 15 percent rate for taxpayers is applicable to those in the 25, 28, 33, and 35 percent brackets; and higher-income taxpayers that are subject to the 39.6 percent income tax rate pay 20 percent. Tax on Dividend Income. Qualified dividends received from domestic corporations and qualified foreign corporations are taxed at the same rates that apply to capital gains. Certain dividends do not qualify for the reduced rates, including dividends paid by credit unions, mutual insurance companies, and farmers’ cooperatives. Net Investment Income Tax (NIIT). The net investment income tax (NIIT) is a Medicare surtax of 3.8 percent imposed on the lesser of net investment income (NII) or modified adjusted gross income (MAGI) above a specified threshold. Distributions from IRAs, pensions, 401(k) plans, tax-sheltered annuities, and eligible Code Sec. 457 plans are excluded from NII and from the NIIT. NII includes the following investment income reduced by certain investment-related expenses, such as investment interest expense, investment brokerage fees, royalty-related expenses, and state and local taxes allocable to items included in net investment income:
  • Gross income from interest, dividends, annuities, royalties, and rents, provided this income is not derived in the ordinary course of an active trade or business;
  • Gross income from a trade or business that is a passive activity;
  • Gross income from a trade or business of trading in financial instruments or commodities; and
  • Gain from the disposition of property, other than property held in an active trade or business.
Individuals are subject to the 3.8 percent NIIT if MAGI exceeds the following thresholds (not subject to inflation adjustment):
  • $250,000 for married taxpayers filing jointly or a qualifying widower with a dependent child;
  • $125,000 for married taxpayers filing separately; and
  • $200,000 for single and head of household taxpayers.
NIIT is not imposed on income derived from a trade or business, nor from the sale of property used in a trade or business when the owner is actively involved in the business. Therefore, you should carefully differentiate income derived from an active business from passive investment income in order to shield the business income from the NIIT. You should also consider if a grouping election can limit your exposure to the NIIT.  Taxpayers can make an election to group activities that constitute an appropriate economic unit. In certain circumstances a grouping election will reclassify passive activities as non-passive and therefore not subject to NIIT. ALTERNATIVE MINIMUM TAX You should not ignore the possibility of being subject to the AMT, as doing so may negate certain year-end tax strategies. For example, if income and deductions are manipulated to reduce regular tax liability, AMT for 2016 may increase because of differences in the income and deductions allowed for AMT purposes. The alternative minimum tax (AMT) exemption amounts are annually adjusted for inflation. For 2016, the AMT exemption amounts are:
  • $83,800 for married taxpayers filing jointly and surviving spouses;
  • $53,900 for unmarried taxpayers and heads of household, other than surviving spouses; and
  • $41,900 for married taxpayers filing separately.
Exemptions for the AMT are phased out as taxpayers reach high levels of alternative minimum taxable income (AMTI). Generally, the exemption amounts are phased out by an amount equal to 25 percent of the amount by which an individual’s AMTI exceeds a threshold level. For 2016, the AMT threshold levels for calculating the exemption phase-out are:
  • $159,700 for married taxpayers filing jointly and surviving spouses (complete phase-out at $494,900);
  • $119,700 for unmarried taxpayers and heads of household, other than surviving spouses (complete phase-out at $335,300); and
  • $79,850 for married taxpayers filing separately (complete phase-out at $247,450).
The AMT rates are 26 percent, and 28 percent on the excess of alternative minimum taxable income (AMTI) over the applicable exemption amount. For tax years beginning in 2016, the taxable excess income above which the 28 percent tax rate applies is $186,300 for married taxpayers filing jointly and unmarried individuals other than surviving spouses; and $93,150 for married taxpayers filing separately. TAX LEGISLATION In 2015, Congress passed the Protecting Americans from Tax Hikes (PATH) Act which permanently extended many tax incentives that were previously temporary. However, not all provisions were extended past 2016. The following is a summary of some of the more common individual provisions. American Opportunity Tax Credit (AOTC). The AOTC is now permanent under the PATH Act. The credit is equal to 100 percent of the first $2,000 of qualified tuition and related expenses, plus 25 percent of the next $2,000 of qualified tuition and related expenses. In order to claim the AOTC, a Form 1098-T must be received. Teachers’ classroom expense deduction. The above-the-line deduction of up to $250 for elementary and secondary-school administrators’ and teachers’ classroom expenses has now been permanently extended under the PATH Act. Eligible teachers may claim this above-the-line deduction in lieu of a miscellaneous itemized deduction. In addition, starting in 2016, professional development expenses (which include courses related to the curriculum in which the educator provides instruction) qualify for the deduction. State and local sales tax deduction. The itemized deduction for state and local general sales taxes is now permanent under the PATH Act. The deduction may be taken in lieu of state and local income taxes when itemizing deductions. Exclusion for direct charitable donation of IRA funds. The exclusion from gross income of qualified charitable distributions from an IRA for individuals aged 70 ½ or older is now permanent. The exclusion covers up to $100,000 (per spouse) in distributions received from either traditional or Roth IRAs. The distribution must be made directly to the charity, and must be completed no later than by December 31, 2016. Other permanent extenders.
  • 100 percent gain exclusion on qualified small business stock
  • Conservation contributions benefits
  • Five-year solar energy property
Extenders expiring at the end of 2016.
  • Tuition and fees deduction for qualified tuition and related expenses
  • Exclusion for discharge of indebtedness on principal residence
  • Qualified mortgage insurance premiums deduction
  • Nonbusiness energy property credit
TAX BENEFITS FOR FAMILIES You should review your family’s situation annually to make sure that you take advantage of any applicable child- or education-driven benefits, such as:
  • Adoption credit
  • Exclusion for adoption assistance programs
  • Child and dependent care (CDC) credit
  • Child tax credit (CTC) and the refundable (additional) CTC
  • Earned income credit (EIC)
  • American Opportunity Tax Credit (AOTC)
  • Coverdell Education Savings Accounts (ESAs)
  • Exclusion for educational assistance programs
  • Scholarship programs
  • Student loan interest deduction
AFFORDABLE CARE ACT No year-end tax plan can ignore the Affordable Care Act (ACA). The ACA, as the past six years has shown, impacts almost every individual, starting with the requirement to have minimum essential health coverage or make a shared responsibility payment, unless exempt. Individuals will still be required to report if they had minimum essential coverage on their 2016 tax returns filed in 2017. Individuals without health insurance coverage for the full year may be liable for a shared responsibility payment. Exemptions to this requirement should be carefully reviewed to see whether any may be applicable. It is also possible to project the amount of any payment. Closely related are changes to the medical expense deduction, health flexible spending arrangements (and similar arrangements), insurance coverage for children, and more. Our office can assist you in both understanding these complex ACA provisions and planning for their impact. ESTATE TAX PLANNING If you’re like most people, you don’t like to think about planning your estate. But it’s an important part of ensuring the financial security of your loved ones. Estate planning is about more than saving taxes. Your plan should consider who will inherit your assets, and how they will inherit your assets. A number of tools can be used to accomplish your planning goals including wills, trusts, powers of attorney, living trusts, and healthcare powers of attorney. One of the most common tax saving tools used in estate planning – and one that everyone should at least give careful consideration to – is a program of giving gifts. A carefully planned gift-giving program can reduce the amount of your estate that is subject to tax while still passing on wealth. The American Taxpayer Relief Act of 2012 (ATRA), passed by Congress on January 1, 2013 and signed into law by President Obama the next day, brought some much-needed certainty to estate and income tax planning. ATRA sets the unified gift and estate tax exclusion at $5 million (indexed for inflation) for 2013 and subsequent years (The basic exclusion amount for an estate of a decedent dying in 2013 is $5.25 million; $5.34 million in 2014; $5.43 million in 2015; and $5.45 million in 2016). The maximum estate and gift tax rate is 40 percent for 2013 and subsequent years. It’s important to review your estate plan in light of these changes. It’s possible the exemption and rate changes could have unintended consequences on your plan. A review will allow you to make the most of available exemptions and ensure your assets will be distributed according to your wishes. Make Annual Gifts to Reduce Your Estate. Whittling your estate down by making annual gifts continues to be a tax-smart strategy. If you have some favorite relatives or unrelated persons, you and your spouse can give each of them up to $14,000 this year and next. You can give up to $28,000 in 2016 and 2017 per recipient per year if you are married and your spouse consents to “split” your gifts. These gifts will reduce your estate tax exposure without any adverse gift tax effects. Making multiple gifts over multiple years can dramatically reduce your exposure to the estate tax. So, the sooner you start an annual gifting program, the better. Paying Another’s Medical and Education Expenses. Another way to further the financial security of others without incurring gift tax is by payment of medical and educational expenses. You can pay an unlimited amount for these expenses tax-free as long as the payments are made directly to the medical services provider or educational institution. The person you benefit does not need to qualify as a dependent for tax purposes. Any medical expenses, however, must not be reimbursed by insurance, to either you or to the beneficiary. ADDITIONAL ASSISTANCE Our affiliated financial services firm, HBKS® Wealth Advisors, works closely with their clients to help create investment portfolios that incorporate many aspects of a tax sensitive investment management structure. HBKS does so by developing a thorough understanding of a client’s financial condition and objectives, collaborate with their CPA where appropriate, and apply the latest advances in wealth management technological and industry processes. This season, we are pleased to invite you, as a client of HBK CPAs & Consultants, to a complementary consultation with an HBKS Financial Advisor to develop financial plans, including tax-efficient portfolios, that address client-specific problems and design solutions specific to clients’ financial needs and goals. Contact us to schedule a time to talk. We look forward to meeting with you. Conclusion The importance of year-end tax planning for 2016 has been heightened by the potential for a reduction in future tax rates.  It is possible your 2016 and 2017 tax liability can still be reduced through careful planning.  At HBK, we can determine how best to maximize your tax savings for 2016 and beyond.  We are available to assist you through each step of this process and we will keep you apprised of any legislative changes impacting your tax circumstance in real time. Please don’t hesitate to contact us with questions, concerns or ideas you about how to reduce your taxes. Established in 1949, HBK CPAs and Consultants (HBK) offers the collective intelligence of hundreds professionals in a wide range of tax, accounting, audit, business advisory, financial planning, and other business operational and support services from offices in four states. HBK professionals deliver industry-specific expertise in manufacturing; healthcare, including long-term care; real estate and construction; automotive dealerships and not-for-profit organizations. HBK combines the technical resources and expertise of a large national accounting and professional consulting firm with the personalized attention of a local company. The firm is ranked in both Accounting Today and Inside Public Accounting magazines’ Top 100, and supports clients globally as a member of BDO Alliance USA. HBK maintains locations in Alliance, Columbus and Youngstown in Ohio; Blue Bell, Erie, Hermitage, Meadville and Pittsburgh in Pennsylvania; Cherry Hill and Princeton in New Jersey; and Fort Myers, Naples, Stuart, and Sarasota in Florida. To learn more about HBK, call 800.733.8613 or visit us at  hbkcpa.com HBKS® Wealth Advisors is not a CPA or legal firm, and does not give tax advice.  Investment advisory services offered through HBK Sorce Advisory LLC, doing business as HBKS® Wealth Advisors. Not FDIC Insured – Not Bank Guaranteed – May Lose Value, Including Loss of Principal – Not Insured by any State or Federal Agency. The foregoing was prepared by Hill, Barth & King LLC, and is not a product of HBKS® Wealth Advisors.  Please remember, the information in this document is intended only as a general discussion of the tax laws.  It does not address your individual facts and circumstances, and can not be considered as tax advice.  If you would like to receive tax advice, please contact a properly licensed CPA or tax attorney. To learn more about HBKS, call 866.536.5776 or visit us at  www.hbkswealth.com

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