Year-End Tax Planning & Tax Reform Update

1. Year-End Tax Planning& Tax Reform Update Presented by: Mike Fitzgerald, CPA Principal, Scheffel Boyle CPAs

2. Tax Cuts & Jobs Act individual CHANGES BUSINESS CHANGES ESTATE & GIFT CHANGES

3. New Tax Rates These changes are temporary (generally through 12/31/28)

4. Individual Changes • Personal Exemptions Eliminated

5. Individual Changes • Standard Deduction Increased

6. Individual Changes • State, Local, & Real Estate Tax Limited • Married Filing Separate: $5,000 combined limit • Married Filing Jointly, Single, Head of Households: $10,000 combined limit

7. Individual Changes • Mortgage & Home Equity Interest Limited • OLD LAW • $1 million of debt, plus home equity debt of $100,000 • Home equity could be used for any purpose • NEW LAW • $750,000 of debt which includes any home equity loans • Home equity loans must be used to buy, build, or substantially improve the taxpayer’s home

8. Individual Changes • Charitable Donations • Remain fully deductible • Limit on 50% of AGI increased to 60% of AGI

9. Individual Changes • Casualty & Theft Loss Deduction • Eliminated in new law • Exception for losses in federally • declared disaster area

10. Individual Changes • Moving Expense Deduction • Moving Expense Deduction and Income Exclusion for qualified moving reimbursements eliminated. • Exception for members of armed forces on active duty.

11. Individual Changes • Miscellaneous Itemized Deductions Subject to 2% Limit Eliminated • Examples: • Union Dues • Investment Fees • Safe Deposit Fees • Professional Dues • IRA Fees

12. Individual Changes • Alimony Deduction and Income Inclusion Repealed • For divorces or separation agreements executed AFTER 2018 (or modified after 2018) • No longer deduction for alimony paid • AND • Recipient does not include alimony in income

13. Individual Changes • Alternative Minimum Tax

14. Individual Changes • 529 Plans (Qualified Tuition Programs) • OLD LAW • Allowed for tax-free distribution of earnings for college, vocational schools, and post secondary • NEW LAW • Allows for above PLUS up to $10,000 per tax year at elementary and secondary (public, private, or religious) • These distributions are taxable in Illinois if previously deducted on IL-1040

15. Individual Changes • Child Tax Credit • Increases from $1,000 to $2,000 ($1,400 of this is refundable) per qualifying child under age 17 • Phase Out Updates:

16. Individual Changes • Nonchild Tax Credit • New law adds a $500 credit for qualifying dependents • Child 17 or older • Parent • Grandparent • other

17. Individual Changes • Affordable Care Act Individual Mandate Repealed • For months beginning AFTER 2018, there is no penalty for people without health insurance.

18. Individual Changes • Kiddie Tax Modified • OLD LAW • Unearned income of child over $2,100 was taxed at parents’ tax rate (children under 18 and full-time college students under 24) • NEW LAW • First $1,050 of unearned income has no tax. Second $1,050 is taxed at child’s rate and all unearned income in excess of $2,100 is now taxed at trust rates ORDINARY INCOME TAX RATES CAPITAL GAINS AND QUALIFIED DIVIDEND RATES

19. Individual Changes • Example #1 • John and Mary Taxpayer have 2 kids, Billy who is 17 and Jane who is 14. They have the following expenses: • State Tax Withholding: $6,575 • Real Estate Taxes: $5,200 • Mortgage Interest: $6,350 • Charitable Donations: $2,350

20. Individual Changes • Example #1

21. Individual Changes • Example #2 • John and Mary Taxpayer file jointly. John is 72 and Mary is 70. John is receiving IRA RMD and they have the following expenses: • Medical: $11,300 • Sales Tax : $976 • Real Estate Taxes: $5,200 • Mortgage Interest: $6,350 • Charitable Donations: $7,500

22. Individual Changes • Example #2

23. Individual Changes • Example #3 • John and Mary Taxpayer file jointly. John is 72 and Mary is 70. John is receiving IRA RMD and they have the following expenses: • Medical: $11,300 • Sales Tax : $976 • Real Estate Taxes: $5,200 • Mortgage Interest: $6,350 • Charitable Donations: $7,500 • *But in this example, John pays his • donations directly from his IRA RMD.

24. BUSINESS CHANGES C CORPS S CORPS PARTNERSHIPS Sole proprietor MAKE BUSINESS GREAT AGAIN

25. Business Changes • C Corp Tax Rates: Permanent

26. Business Changes • Dividend Received Deduction

27. Business Changes • Corporate AMT • New law repeals corporate AMT for years after 2017

28. Business Changes • Section 179 Deduction

29. Business Changes • Bonus Depreciation • New law allows immediate expensing of either new or used property

30. Business Changes • Section 199A Deduction • For tax years 2018-2025, individuals generally may deduct 20% of Qualified Business Income (QBI) from the income of a Qualified Trade or Business (QTB) operating as a partnership, s corp, or sole proprietor. • The 20% deduction will NOT reduce AGI, but will be a deduction in computing taxable income. • Limitations will be based on type of business involved, taxable income of the individual, W-2 wages paid by business, and/or property owned.

31. Business Changes • Section 199A Deduction: Limitations • A QTB generally includes any trade or business except a Specified Service Trade or Business (SSTB) • An SSTB includes any business involved in the fields of: • Health • Law • Accounting • Actuarial Sciences • Performing Arts • Consulting • Professional Athletics • Financial services, brokering services, investing and investing management • Or a business where principal asset is the reputation or skill of one or more of its employees or owners

32. Business Changes • Section 199A Deduction: Limitations • The SSTB exclusion does not apply for taxpayers with taxable income of less than $315,000 (MFJ) and $157,500 (S, MFS, HOH) • Phase out of exclusion from • 315,000 – 415,000 for MFJ • 157,000 – 207,500 for S, MFS, HOH

33. Business Changes • Meals & Entertainment • Old law limited deduction for meals and entertainment to 50% of expenditure • New law allows 50% for meals in course of business, BUT no deduction for any entertainment expenses • Ball tickets • Concert tickets • Hunting clubs

34. Business Changes • Interest Expense Limitation • Certain businesses will be subject to net interest disallowance • Net interest expense in excess of 30% of company’s adjusted taxable income will be disallowed • Adjusted taxable income defined as taxable income adding back depreciation, amortization, and depletion • Only applies to businesses with average annual gross receipts for prior 3 years of more than $25 million • Exception for auto dealers

35. Business Changes • Like Kind Exchanges • New law limits like kind exchange rules to only apply to real property that is not held primarily for sale

36. Business Changes • Net Operating Losses • New law generally repeals the 2 year carryback for NOL’s. • NOL’s can now be carried forward indefinitely. • Use limited to 80% of taxable income

37. GIFT & ESTATE

38. Gift & Estate • OLD LAW • Unified credit for estate and gift purposes was $5.6 million ($11.2 million for married couple) • NEW LAW • For decedents dying or gifts made after 2017 and before 2026, the estate and gift unified credit has been increased to $11.2 million ($22.4 million for married couple) • ILLINOIS • Only $4 million exclusion

39. Questions? Mike Fitzgerald, CPA Office: 618.465.4288 mike.fitzgerald@scheffelboyle.com Follow us on… www.scheffelboyle.com