income tax planning for high-income individuals: defined...
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Income Tax Planning for High-Income Individuals: Defined
Benefit and Other Plans, Tax Reform OpportunitiesTUESDAY, JULY 30, 2019, 1:00-2:50 pm Eastern
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July 30, 2019
Income Tax Planning for High-Income Individuals: Defined Benefit and Other Plans, Tax Reform Opportunities
Lisa R. Featherngill, Head of Legacy &
Wealth Planning
Abbot Downing
Alex Nahoum, EA, FCA, MAAA, Actuary
Danziger & Markhoff
Notice
ANY TAX ADVICE IN THIS COMMUNICATION IS NOT INTENDED OR WRITTEN BY
THE SPEAKERS’ FIRMS TO BE USED, AND CANNOT BE USED, BY A CLIENT OR ANY
OTHER PERSON OR ENTITY FOR THE PURPOSE OF (i) AVOIDING PENALTIES THAT
MAY BE IMPOSED ON ANY TAXPAYER OR (ii) PROMOTING, MARKETING OR
RECOMMENDING TO ANOTHER PARTY ANY MATTERS ADDRESSED HEREIN.
You (and your employees, representatives, or agents) may disclose to any and all persons,
without limitation, the tax treatment or tax structure, or both, of any transaction
described in the associated materials we provide to you, including, but not limited to,
any tax opinions, memoranda, or other tax analyses contained in those materials.
The information contained herein is of a general nature and based on authorities that are
subject to change. Applicability of the information to specific situations should be
determined through consultation with your tax adviser.
A N E S T A B L I S H E D P A R T N E R
A Wells Fargo Business
© 2019 Wells Fargo Bank, N.A. All rights reserved
Tax Planning for High-Income TaxpayersJuly 30, 2019
Lisa R. Featherngill | Head of Legacy and Wealth Planning, Abbot Downing
Wells Fargo & Company and its affiliates do not provide legal or tax advice. Please consult your tax and legal advisors to determine how this general information
may apply to your own specific situation. Abbot Downing, a Wells Fargo business, provides products and services through Wells Fargo Bank, N.A. and its various
affiliates and subsidiaries. Wells Fargo Bank, N.A. is a bank affiliate of Wells Fargo & Company.
A N E S T A B L I S H E D P A R T N E R
Table of Contents
6
Taxes, Brackets and Rates
Planning for Capital Gains and Losses
Charitable Planning
Defined Benefit and Cash Balance Plans
Retirement Plan Design and 199A
Roth Conversion
Qualified Opportunity Zone Program
State Tax Planning
01
02
03
04
05
06
07
08
Taxes, Brackets and Rates
7
2 0 1 9 I N C O M E TA X B R A C K E T S
8
Source: Keebler and Associates
37%
35%
32%
24%
22%
12%
10%
$612,350+
$408,200
$312,450
$168,400
$78,950
<$19,400<$9,700
$39,475
$84,200
$160,725
$204,100
$510,300+
MarriedSingle
I N D I V I D U A L TA X R AT E S A N D B R A C K E T S
9
Ordinary Income
2017
Ordinary Income
2019
Long Term Capital Gains
2017
Long Term Capital Gains
2019
$0
$100,000
$200,000
$300,000
$400,000
$500,000
$600,000
$700,000+
$9,325$37,950
$91,900
$191,650
$416,700
$418,400
10%15%
25%
28%
33%
35%
39.6%
$37,950
$418,400
$9,700
$39,475
$84,200
$160,725
$204,100
$510,300
$39,375
$434,550
0%
15%
20%
12%
22%
24%
32%
35%
37%
10%0%
15%
20%
Single
Source: IRS 2019 Tax Tables
2 0 1 9 S TA N D A R D D E D U C T I O N
10
Source: IRS 2019 Tax Tables
Standard Deduction
Married/Joint $24,400
Single $12,200
Head of Household $18,350
Dependents $1,100
Married/separate $12,200
Additional Standard Deductions
Married, age 65 or older or blind $1,300*
Married, age 65 or older and blind $2,600*
Single, age 65 or older or blind $1,650*
Single, age 65 or older and blind $3,300*
For dependents with earned income, the deduction is the greater of $of $1,100 or earned income +$350 (up to the applicable
standard deduction amount of $12,200).
2 0 1 9 A LT E R N AT I V E M I N I M U M TA X
11
Source: IRS 2019 Tax Tables
AMT Exemption AMT Rates
Exemption Phased out on excess over
Married taxpayer filing
jointly/surviving spouse
$111,700 $1,020,600
Single Taxpayer $71,700 $510,300
Married taxpayer filing
separately
$55,850 $510,300
Estate and trusts $25,000 $83,500
Married taxpayer jointly income up to
$194,800*26%
Married taxpayer filing jointly income
over $194,800*28%
*97,400 if MFS
2 0 1 9 M E D I C A R E S U R TA X
12
Source: IRS 2019 Tax Tables
The Medicare #% surtax is imposed on certain types of unearned income of individuals, trusts, and estates with income specific thresholds
For individuals, the surtax is imposed on the lesser of the following:
▪ Net investment income for the tax year
▪ The amount by which the modified adjusted gross income (MAGI) exceeds the threshold amount in that year
The Threshold Amounts
Single Filers Married filing jointly Married filing separately
$200,00 $250,000 $125,00
For trusts and estates, the surtax is imposed on the lesser of the following:
▪ The undistributed net investment income for the tax year
▪ The excess (if any) of the trust’s or estate’s adjusted gross income over the dollar amount at which the highest tax bracket begins ($12,750 in 2019)
2 0 1 9 K I D D I E TA X
13
Source: IRS 2019 Tax Tables
Taxable Income
Over But not over
$0 $2,600
$2,600 $9,300
$9,300 $12,750
$12,750
Pay +% on excess Of the amount over
$0 10% $0
$2,600 24% $2,600
$1,868 35% $9,300
$3,075 37% $12,750
Taxable Income
Planning for Capital Gains and Losses
14
2 0 1 9 R AT E S F O R L O N G T E R M C A P I TA L G A I N S ( A N D Q U A L I F I E D D I V I D E N D S )
15
Source: IRS 2019 Tax Tables
Filing status 0% 15% 20%
Single $0–$39,375 $39,376–$434,550 Greater than $434,550
Married filing jointly/ surviving spouse
$0–$78,750 $78,751–$488,850 Greater than$488,850
Married filing separately $0–$39,375 $39,376–$244,425 Greater than$244,425
Head of household $0–$52,750 $52,751–$461,700 Greater than$461,700
Trust/estate $0–$2,650 $2,651–$12,950 Greater than $12,950
R U L E S A N D P L A N N I N G
16
Source: IRS 2019 Tax Tables
Rules
• Net short term gains and losses
• Net long term gains and losses
• Net short term and long term for net capital gain
– Short term = ordinary tax rate
– Long term = preferred tax rate
Planning
• Try to hold investment for 12 months for long term treatment (almost one-half the rate of short term)
• Work with investment advisor to harvest losses if anticipate net gain position
– Watch wash sale rules across all accounts
– Works especially well if net short term gain
• Work with investment advisor to contribute securities with significant gains (see charitable giving)
• Avoid purchasing mutual funds with expected capital gain distributions
• Watch for capital gain distributions from funds even in down years
• Rebalance portfolio regularly
• If anticipate tax bracket increasing in future, harvest capital gain and repurchase security
– Works especially well when security would be sold soon or taxpayer is in a very low bracket currently
– Does not work well if client would otherwise obtain basis step up (death is near term)
• Consider other strategies to defer recognition of gain: Qualified Opportunity Funds, Installment Sales or Charitable Remainder Trusts for example
Charitable Planning
17
T H E P H I L A N T H R O P I C D I A L O G U E
18
Questions to Contemplate
To begin developing or continue refining philanthropic goals, it is important for donors to discover their philanthropic passions by considering some of the following questions…
• What have been the donor’s most meaningful experiences in life?
• What has presented the greatest challenge to the donor?
• Which people and incidents have most shaped the donor’s views and ideals?
• What priorities are important to the donor and donor’s family?
• What are the donor’s most important values (education, culture, physical, recreational, work, spiritual, material)?
• How important is giving back to the community?
• How important is passing on the values of giving to the donor’s children and grandchildren?
• What charities has the donor already given to or been involved with? Why?
• Is the donor currently engaged in charitable giving?
• What are the donor’s charitable passions?
L I F E T I M E G I F T I N G V S . T E S TA M E N TA R Y G I F T I N G
19
A donor’s goals and individual situation will dictate whether one makes charitable contributions during life or through a testamentary estate plan. If one makes charitable gifts during life, donors have the further decision of whether to make a largelump sum contribution or to engage in more of a structured lifetime gifting program. The following chart shows potential advantages and potential drawbacks to each approach. They are general in nature and dependent on the specific charitable technique utilized and the donor’s goals.
1. If a gift is made directly to charity, the charity will generally have immediate use of the funds while the donor will generally not have control over the use of the funds. However, if an outright gift is made to an entity such as a private foundation or donor advised fund, the donor should generally be able to direct the ultimate charitable recipient over time and thus provide an element of control even after the contribution is made. Likewise, the true benefit would not inure to the ultimate charitable recipient until received from the private foundation or the donor advised fund.
2. For lifetime gifts made to a Charitable Remainder Trust, the donor or donee’s family may be able to receive an income stream for a period of time, depending on how such gift is structured.
3. Charitable giving can be structured to be private, if desired.
Lifetime Giving Testamentary GiftingProvision in Estate Plan
Potential Advantages
• Immediate impact to charitable cause1
• Income tax deduction and other tax benefits
• Donor and family witness the impact to charitable cause
• Donor can “test” charity with use of the funds by seeing how the charity puts the funds to use
• Retain control/usage of asset during life2
• Estate tax deduction
Potential Drawbacks
• Loss of control1
• Loss of use of assets and associated cash flow for donor2
• Assets not available for family at death
• May raise family’s or public’s awareness of wealth during life3
• No impact to charity during life
• Cannot “test” the charity with the use of the funds
• Limited flexibility
• No lifetime income tax benefits
C O M PA R I S O N C H A R T: TA X D E D U C T I O N S
20
Gifts Made
During Life
Outright to
Public Charity
Charitable
Remainder
Trust (CRT)1
Charitable Lead
Trust (CLT) -
Grantor2
Charitable Gift
Annuity1
Private Grant
Making
Foundation
Donor Advised
Fund
Income tax
deduction limits
on Cash Gifts
60% AGI Dependent on
named charity
(60% or 30% of
AGI)
30% AGI 60% AGI 30% AGI 60% AGI
Income tax
deduction limits
on Gifts of
Appreciated
Property
30% AGI Dependent on
named charity
(30% or 20% of
AGI)
20% AGI 30% AGI 20% AGI 30% AGI
Carry-over
Available
5 Years 5 Years 5 Years 5 Years 5 Years 5 Years
Gift Value of
Appreciated
Property
Fair Market Value
(FMV)
Dependent on
named charity
Adjusted Basis3 FMV Adjusted Basis3 FMV
Gift and Estate
Tax Deduction
Yes Yes - actuarial
calculation
Yes - actuarial
calculation
Yes - actuarial
calculation
Yes Yes
General Tax Treatment Of Contributions
1. Income tax and charitable gift tax deduction for CRT and Gift Annuity based on actuarial value of charitable interest.
2. Immediate income tax deduction for CLT available for grantor CLTs, subject to adjusted gross income (AGI) limits noted. Non-grantor CLTs do not receive an immediate income tax deduction.
3. For “qualified appreciated stock,” the value of the gift is the fair market value.
O V E R V I E W C H A R T: C H A R I TA B L E G I F T I N G S T R AT E G I E S
21
Gifts Made During Life Outright
Private Foundation
(Non-Operating) Donor Advised Fund (“DAF”)
Description Donor makes an outright
gift to a qualified charitable
organization.
A nonprofit organization created,
funded, and controlled by a
single donor or family, when
donor’s objective is to make
grants to worthy causes.
Fund created by donor via a gift to public
charity. Donor recommends grants.
Most Commonly Used Immediate benefit to charity
when simplicity is desired
In pursuit of a philanthropic
gifting strategy lasting for
multiple generations
In pursuit of a philanthropic gifting strategy
lasting for multiple generations
Use of Funds by Charitable
Organization
Immediately As funds are paid out by
foundation as selected by donor;
a distribution of 5% of net
investment assets is required.
As funds are paid out by foundation as
selected by donor.
Donor Control Loses control once gift to
charity is completed unless
gift is donor-restricted
Donor can retain complete
control over investments and
grant making, subject to IRS
requirements
Donor recommends grants and has control
over investments subject to investment
options; final grant decisions rest with the
sponsoring charity.
Income Stream to Non-Charitable
Beneficiary (e.g., Donor)?
No No No
Remainder Interest/Split-Interest
Trusts
n/a n/a – Foundation can continue in
perpetuity if documents provide
n/a – DAF can continue in perpetuity if
documents allow
O V E R V I E W C H A R T: C H A R I TA B L E G I F T I N G S T R AT E G I E S ( C O N T . )
22
Gifts Made During Life Charitable Remainder Trust Charitable Lead Trust Charitable Gift Annuity
Description Donor gifts assets to a trust in
return for an income stream to one
or more non-charitable
beneficiaries for an express period
of time. A qualified charity receives
the remainder of the trust assets at
the end of the period.
Donor gifts assets to a trust and a
charity receives an income stream
(the “lead interest”) for an express
period of time. The remainder interest
passes to one or more non-charitable
beneficiaries at the end of the period.
Donor transfers assets to a charitable
organization in exchange for the
charity’s promise to make fixed annuity
payments generally to donor or donor’s
spouse for their lifetime.
Most Commonly Used Donor desires to receive an income
stream while obtaining an income
tax deduction; often used to avoid
an immediate capital gains tax on
the sale of highly appreciated
assets.
Estate freeze vehicle that can transfer
wealth to family members at reduced
or no gift and estate tax cost.
Donor desires a fixed income stream
for life while obtaining an income tax
deduction; often used as a tax deferral
tool when contributing appreciated
assets.
Use of Funds by Charitable
Organization
End of trust term Annually – during the term of the trust Immediately but has continued
obligation to make annuity payments to
annuitant
Donor Control Donor may be able to change
charitable remainder beneficiary,
but trust is generally irrevocable
Donor should not retain right to
change charitable beneficiary for non-
grantor and super grantor charitable
lead trusts as it may trigger estate
inclusion.
Donor loses control
Income Stream to Non-
Charitable Beneficiary (e.g.,
Donor)?
Yes, during term specified by trust
(lifetime or period of no more than
20 years)
No Yes, for lifetime
Remainder Interest Charity Non-charitable beneficiary (typically
children or grandchildren)
n/a – Charity receives any remainder
after annuity payments end
Q U A L I F I E D C H A R I TA B L E D I S T R I B U T I O N S ( Q C D )
23
Requirements
• Donor must be at least 70 ½
• QCDs must be payable directly to the charitable organization
• QCDs may be made to multiple charities and may be made at multiple times throughout the year,
however there is a $100,000 limit per year per donor. If filing jointly, a spouse can also make a QCD
from his or her own IRA within the same tax year up to $100,000 (spouse must also be at least 70 ½).
• QCDs may only be made to public 501(c)(3) charities: Private foundations, donor-advised funds,
supporting organizations and split-interest charitable trusts are not eligible.
• QCDs may only be distributed from Traditional IRAs, Inherited IRAs, and IRA Rollovers. SEP IRAs and
SIMPLE IRAs that are no longer receiving contributions must first rollover into an IRA Rollover before
being eligible to make QCDs. A QCD is permitted from a Roth IRA as well, although distributions from a
Roth IRA may already be tax-free.
Considerations
• QCD strategies are generally only beneficial to someone who wants to minimize taxable income and is
planning to make charitable donations regardless of the method.
• An itemized deduction is not allowed for QCDs. Donors should consider whether making the QCD and
lowering Adjusted Gross Income is better than receiving an itemized deduction.
– Instead of a QCD, it may be more beneficial to take the RMD and offset taxable income by
donating low basis securities in order to obtain the itemized tax deduction and avoid capital gains
taxes.
• Tax-Incentivized Savings
- Immediate tax deduction on “traditional” contributions
with tax-deferred growth
- Tax-free growth and withdrawal for “Roth” contributions
• Creditor Protection on Qualified Retirement Plan Assets
• Attraction/Retention Tool For Employees
- Vesting schedule acts as “golden handcuff” for key
employees
Benefits of Qualified Retirement Plans
© 2019 Danziger & Markhoff LLP 26
“The term ‘individual account plan’ or ‘defined contribution plan’
means a pension plan which provides for an individual account
for each participant and for benefits based solely upon the
amount contributed to the participant’s account, and any
income, expenses, gains and losses, and any forfeitures of
accounts of other participants which may be allocated to such
participant’s account” (ERISA Section 3(34))
Defined Contribution Plan
27© 2019 Danziger & Markhoff LLP
Defined Benefit Plan
“The term ‘defined benefit plan’ means a pension plan other
than an individual account plan” (ERISA Section 3(35))
Plan Contribution + Actual Investment Earnings = Retirement Benefit
(Defined by Plan) (Variable) (Variable)
Retirement Benefit – Assumed Investment Earnings = Plan
Contribution
(Defined by Plan) (Defined by Plan) (Variable)
Defined Contribution Plans
28© 2019 Danziger & Markhoff LLP
Defined Benefit Plans
2018
Maximum Benefits Defined Contribution $55,000
401k Maximum Deferral <50 years 18,500
Catch-Up >50 years 6,000
Maximum Benefits Defined Benefit 220,000
Maximum Compensation 275,000
Social Security Taxable Wage Base 128,400
Highly Compensated Employee 120,000
2019 IRS Limits
2019
$56,000
19,000
6,000
225,000
280,000
132,900
125,000
29© 2019 Danziger & Markhoff LLP
• Limits Based On Maximum Annual Annuity Payable At Age 62
($225,000 for 2019)
• Lump Sum Equivalent At Age 62 is $2,887,500
• Limit Phased-In Over 10 Years Of Plan Participation
• Maximum Accumulation of $288,750 Per Year
Defined Benefit Plans
30© 2019 Danziger & Markhoff LLP
Current Age CompensationCash Balance
Contribution
40 $225,000 $96,000
52 225,000 175,000
60 225,000 261,000
Defined Benefit PlanSample Maximums
31© 2019 Danziger & Markhoff LLP
• Coverage Testing
- DB coverage based on total employees
- 2 or fewer employees – need to cover 100%
- otherwise need the lesser of 40% or 50 people
• Investments need to be pooled (no individual direction)
• Vesting generally a 3 year “all or nothing” schedule
Defined Benefit Compliance Points
32© 2019 Danziger & Markhoff LLP
• Cash Balance Design
• Contribution based on current income
• Level Funding (same amount each year)
• Past Service Plans
• Requires prior years of service/pay
• Irregular cash flows (personal injury attorney, etc.)
• Exit strategy applications (e.g. sale of business)
Defined Benefit Plan Design Options
33© 2019 Danziger & Markhoff LLP
Projected Pension Benefit
Based upon your present salary, your Monthly Pension
Benefit at Normal Retirement Age 65 (payable for life):$10,269
Current Accrued Benefit
Portion of Projected Monthly Pension that you
have accrued to date ("accrued benefit"):$1,191
Vested portion of accrued benefit: 40%
Current vested monthly accrued benefit: $476
Sample Participant Benefit StatementDefined Benefit Pension Plan
34© 2019 Danziger & Markhoff LLP
Participant Vested Monthly Benefit Lump Sum Payable*
Age 25 $476 $10,818
Age 35 $476 $17,421
Age 45 $476 $28,055
Age 55 $476 $46,790
Age 65 $476 $75,412
Lump Sum ValuesDefined Benefit Pension Plan
*Based on November 2018 Interest Rates
35© 2019 Danziger & Markhoff LLP
Beginning Balance
Contribution Earnings Ending Balance
$100,000 $50,000 $4,000 $154,000
Current Value of Plan Benefit
Vested Portion of Benefit: 100%
Current Vested Cash Balance: $154,000
Sample Participant Benefit StatementCash Balance Plan
36© 2019 Danziger & Markhoff LLP
• Pay Credit: Employer will contribute on behalf of Participants
• Fixed % of Participant's Salary each year
(e.g., 50% of $280,000 = $140,000)
• Fixed $ amount each year
• Interest Credit: Account will grow at fixed % per year
• Indexed (e.g. 30 Year Treasury Rate)
• Flat rate (e.g. 4% Annually)
• Account Balance: Annual statement shows Account's "Cash
Balance"
Cash Balance Plans
38© 2019 Danziger & Markhoff LLP
Employee Compensation Contribution% of Compensation
% of Total
Dentist [Age 53] $280,000 $62,000
$91,000 - 91%
Spouse [Age 50] 41,000 29,000
Staff [Age 57] 50,000 2,205 [4.41%]
$9,085 - 9%
Staff [Age 40] 49,000 2,161 [4.41%]
Staff [Age 36] 39,000 1,720 [4.41%]
Staff [Age 29] 37,000 1,632 [4.41%]
Staff [Age 25] 31,000 1,367 [4.41%]
39© 2019 Danziger & Markhoff LLP
Cash Balance & New ComparabilityCase Study #1 (Dental Practice)
EmployeeNew Comparability Cash Balance Totals % of Total
Dentist [Age 53] $62,000 $90,000 $152,000$183,500
92%Spouse [Age 50] 29,000 2,500 31,500
Staff [Age 57] 2,500 1,250 3,750 (7.5%)
$15,450
8%
Staff [Age 40] 2,450 1,225 3,675 (7.5%)
Staff [Age 36] 1,950 975 2,925 (7.5%)
Staff [Age 29] 1,850 925 2,775 (7.5%)
Staff [Age 25] 1,550 775 2,325 (7.5%)
Cash Balance & New ComparabilityCase Study #1 (Dental Practice)
40© 2019 Danziger & Markhoff LLP
Employee Compensation Contribution% of Compensation
% of Total
Partner [Age 65] $280,000 $62,000
$180,000 - 87%Partner [Age 62] 280,000 62,000
Partner [Age 49] 280,000 56,000
Assoc. [Age 44] 178,000 5,340 [3.00%]
Assoc. [Age 38] 147,000 4,410 [3.00%]
$27,489 - 13%
Assoc. [Age 37] 147,000 4,410 [3.00%]
Assoc. [Age 35] 140,000 4,200 [3.00%]
Staff [Age 55] 65,000 2,867 [4.41%]
Staff [Age 46] 52,000 2,293 [4.41%]
Staff [Age 31] 46,000 2,029 [4.41%]
Staff [Age 27] 44,000 1,940 [4.41%]
41© 2019 Danziger & Markhoff LLP
Cash Balance & New ComparabilityCase Study #2 (Law Firm)
Employee New Comp Cash Balance Totals % of Total
Partner [Age 65] $62,000 $138,000 $200,000
$546,000
94%Partner [Age 62] 62,000 138,000 200,000
Partner [Age 49] 56,000 90,000 146,000
Assoc [Age 44] 5,340 0 5,340 (3.0%)
$36,990
6%
Assoc [Age 38] 4,410 0 4,410 (3.0%)
Assoc [Age 37] 4,410 0 4,410 (3.0%)
Assoc [Age 35] 4,200 0 4,200 (3.0%)
Staff [Age 55] 4,550 1,300 5,850 (9.0%)
Staff [Age 46] 3,640 1,040 4,680 (9.0%)
Staff [Age 31] 3,220 920 4,140 (9.0%)
Staff [Age 27] 3,080 880 3,960 (9.0%)
Cash Balance & New ComparabilityCase Study #2 (Law Firm)
42© 2019 Danziger & Markhoff LLP
Employee Compensation Contribution% of Compensation
% of Total
Owner [Age 75] $280,000 $62,000
$248,000 - 97%Owner [Age 73] 280,000 62,000
Owner [Age 52] 280,000 62,000
Owner [Age 50] 280,000 62,000
Staff [Age 35] 45,000 1,985 [4.41%]
$8,733 - 3%
Staff [Age 32] 40,000 1,764 [4.41%]
Staff [Age 30] 40,000 1,764 [4.41%]
Staff [Age 27] 38,000 1,676 [4.41%]
Staff [Age 25] 35,000 1,544 [4.41%]
43© 2019 Danziger & Markhoff LLP
Cash Balance & New ComparabilityCase Study #3 (Family Business)
EmployeeNew Comparability Cash Balance Totals % of Total
Owner [Age 75] $62,000 $158,000 $220,000
$880,000
98%
Owner [Age 73] 62,000 158,000 220,000
Owner [Age 52] 62,000 158,000 220,000
Owner [Age 50] 62,000 158,000 220,000
Staff [Age 35] 3,375 0 3,375 (7.5%)
$14,850
2%
Staff [Age 32] 3,000 0 3,000 (7.5%)
Staff [Age 30] 3,000 0 2,850 (7.5%)
Staff [Age 27] 2,850 0 2,100 (7.5%)
Staff [Age 25] 2,625 0 2,625 (7.5%)
Cash Balance & New ComparabilityCase Study #3 (Family Business)
44© 2019 Danziger & Markhoff LLP
• Sole Proprietors / Independent Contractors
• Real Estate Brokers, etc.
• 1099 / Schedule C Income
• Mom & Pops
• Supplemental Incomes
• Director's Fees
• Speaking / Writing Fees
• Consulting Fees
• Executor’s Commissions
• Trustee’s Commissions
• Sale of Business
Defined Benefit Plan Special Applications(No Employees)
45© 2019 Danziger & Markhoff LLP
Current Age CompensationCash Balance
Contribution
401(k) Deferral
+ 6% PS
Total
Contribution
40 $280,000 $96,000 $35,800 $131,800
52 280,000 175,000 41,800 216,800
60 280,000 261,000 41,800 302,800
Single ParticipantCash Balance & 401(k)/6% PS
46© 2019 Danziger & Markhoff LLP
YearCash Balance Plan
Contribution
Past Service Plan
Contribution
1 $100,000 $150,000
2 $100,000 $ 75,000
3 $100,000 $ 75,000
Target Total $300,000 $300,000
Cash Balance Plan vs. Past Service PlanCash Flow Options
Based on November 2018 Interest Rates
47© 2019 Danziger & Markhoff LLP
YearCash Balance Plan
Contribution
Past Service Plan
Contribution
1 $100,000 $200,000
2 $100,000 $ 50,000
3 $100,000 $ 50,000
Target Total $300,000 $300,000
Cash Balance Plan vs. Past Service PlanCash Flow Options
Based on November 2018 Interest Rates
48© 2019 Danziger & Markhoff LLP
YearCash Balance Plan
Contribution
Past Service Plan
Contribution
1 $100,000 $300,000
2 $100,000 $ 0
3 $100,000 $ 0
Target Total $300,000 $300,000
Cash Balance Plan vs. Past Service PlanCash Flow Options
Based on November 2018 Interest Rates
49© 2019 Danziger & Markhoff LLP
• Prospect age 59 – independent contractor
• 1099 income historically $225,000
• 2019 income expected to be $450,000
• 2020 and future income will revert to $225,000 range
Past Service – Case Study
50© 2019 Danziger & Markhoff LLP
Year1099
Income
Defined
Benefit
Contribution
401(k)
Contribution
Taxable
Income
1 $450,000 $400,000 $25,000 $25,000
2 $225,000 $200,000 $25,000 $ 0
3 $225,000 200,000 $25,000 $ 0
TOTAL $900,000 800,000 $75,000 $25,000
Past Service Case StudyReal Estate Broker – Age 59
51© 2019 Danziger & Markhoff LLP
Notes:
— Section 199A - Qualified Business Income (QBI) Deduction
— Will apply on an individual by individual basis
— Focus is ancillary benefits through plan design
Tax Reform and Pension Applications
52© 2019 Danziger & Markhoff LLP
Brief Primer - Qualified Business Income Deduction
• For ”Pass-Through Entities” (S-Corps, Partnerships, Sole
Proprietors, LLCs taxed as any of the above)
• Generally the lesser of 20% of the Business Income
(Schedule C or K-1 income) or 20% of taxable income*
• Specified Service Business**
• Phased out where owner/partner’s taxable income falls between
$321,400 and $421,400 ($160,700 and $210,700 if single)
• Disallowed where owner/partner’s taxable income is $421,400
($210,700 if single) or higher
Tax Reform and Pension Applications
53© 2019 Danziger & Markhoff LLP
Brief Primer - Qualified Business Income Deduction
• *Additional details of 199A will not apply in these examples
• **Specified Service Business defined as:Any business involving the performance of services in the fields of health, law,
accounting, actuarial science, performing arts, consulting, athletics, financial services,
brokerage services, or any trade or business where the principal asset of such trade or
business is the reputation or skill of one or more of its employees or owners, or that
consist of investing, investment management, trading or dealing in securities.
Note: Architects and Engineers specifically excluded from regulations
• Assume for these examples that any other (non-business)
income is offset by the taxpayer’s deductions (either
standard or itemized)
Tax Reform and Pension Applications
54© 2019 Danziger & Markhoff LLP
• S-Corp deduction limit is 25% of total wages
• $56,000 contribution requires $224,000 in wages ($56K x 4)
• 401(k) deferrals in qualified plans do not count toward limit
• Employer deduction is $37,000 ($56,000 - $19,000)
• $56,000 contribution requires $148,000 in wages ($37K x 4)
• $76,000 can be taken as an S-Corp distribution
• Medicare savings of roughly $2,200…big deal.
55© 2019 Danziger & Markhoff LLP
SEP vs. Qualified Plan (S-Corp) - New Tax Law
SEP Qualified Plan
A Business Income $377,400 $377,400
B Shareholder Wages (W-2) $224,000 $148,000
C 401(k) Deferral N/A $ 19,000
D Employer Contribution $ 56,000 $ 37,000
ES-Corp Distribution (K-1)
(A – B – D)$ 97,400 $192,400
F
Net Taxable Income
(Before 199A)
(B – C + E)
$321,400 $321,400
G199A Deduction
(E x 20%)$ 19,480 $ 38,480
H
Net Taxable Income
(After 199A)
(F – G)
$301,920 $282,920
56© 2019 Danziger & Markhoff LLP
SEP vs. Qualified Plan (S-Corp) - New Tax Law
SEP Qualified Plan
A Business Income $377,400 $377,400
B Shareholder Wages (W-2) $240,000 $148,000
C 401(k) Deferral N/A $ 25,000
D Employer Contribution $ 56,000 $ 37,000
ES-Corp Distribution (K-1)
(A – B – D)$ 97,400 $192,400
F
Net Taxable Income
(Before 199A)
(B – C + E)
$321,400 $315,400
G199A Deduction
(E x 20%)$ 19,480 $ 38,480
H
Net Taxable Income
(After 199A)
(F – G)
$301,920 $276,920
SEP vs. Qualified Plan (S-Corp) - New Tax Law
57© 2019 Danziger & Markhoff LLP
(Over 50)
No Retirement Plan Retirement Plan
A Net Schedule C Income $421,400 $421,400
B Plan Contribution N/A $100,000
C
Net Taxable Income
(Before 199A)
(A – B)
$421,400 $321,400
D199A Deduction
((A – B) x 20%)DISALLOWED $ 64,280
E
Net Taxable Income
(After 199A)
(C – D)
$421,400 $257,120
Sole Proprietor – Specified Service Business
58© 2019 Danziger & Markhoff LLP
Pros:
• New Roth balance grows tax-free
• Roth IRAs not subject to Required Minimum Distributions
(Balance can continue growing for the lifetime of the
individual and their spouse)
Cons:
• What if the resulting balance decreases?
• Entire IRA balance is taxable immediately!
Alternatives?
59© 2019 Danziger & Markhoff LLP
Roth ConversionsPros & Cons
Situation A:
• Client over the income threshold – not eligible for Roth IRA
Solution:
• Client funds $6,000 into “non-deductible” IRA
(not deductible, earnings tax-deferred)
• Non-deductible IRA immediately converted to Roth IRA
• Basis = $6,000, taxable amount = $0
• Client has indirectly funded a Roth IRA!
60© 2019 Danziger & Markhoff LLP
Roth Conversion Alternatives“Backdoor” Roth IRA
Situation B:
• Same as Situation A, but the client has a separate IRA with a
balance of $60,000.
Problem:
• All IRAs are treated as one for conversion purposes
• If Client funds/converts $6,000 non-deductible IRA, basis will
only be 10% ($6,000 / $66,000)
• Basis = $600, taxable amount = $5,400
61© 2019 Danziger & Markhoff LLP
Roth Conversion Alternatives“Backdoor” Roth IRA
Situation B:
• Same as Situation A, but the client has a separate IRA with a
balance of $60,000.
Solution:
• Client rolls $60,000 IRA balance into Qualified Plan
• Client funds/converts $6,000 non-deductible IRA, basis is
back to 100%
62© 2019 Danziger & Markhoff LLP
Roth Conversion Alternatives“Backdoor” Roth IRA
Situation C:
• Same as Situation A, but the client has an IRA with a
balance of $60,000 AND an existing non-deductible IRA with
a balance of $18,000 ($9,000 basis/$9,000 earnings)
Solution:
• Client rolls $60,000 IRA balance into Qualified Plan
• Client rolls $9,000 earnings from the existing non-deductible
IRA into Qualified Plan
• Client funds $6,000 non-deductible IRA and is able to
convert the full $15,000
63© 2019 Danziger & Markhoff LLP
Roth Conversion Alternatives“Backdoor” Roth IRA
Can we go higher than $6,000 ($7,000 if 50+)?
Annual 401(k) limit of $19,000 ($25,000 if age 50+) can be
contributed as a Roth 401(k) rather than a traditional (pretax)
401(k).
Roth 401(k) has NO INCOME LIMITATION
64© 2019 Danziger & Markhoff LLP
Roth Conversion AlternativesRoth in Qualified Plans
Voluntary After-Tax Contributions
• Function exactly like non-deductible IRA contributions
(not deductible, earnings tax-deferred)
• Can be converted within a Qualified Plan and rolled out to a
Roth IRA
• Treated as separate and distinct account within the plan so
no aggregation rule
• Annual Addition Limit of $56,000 applies
• $19,000 (or $25,000) 401(k) PLUS $37,000 after-tax
• Potentially $56,000/year Roth contribution!
• *Subject to separate IRS nondiscrimination testing
65© 2019 Danziger & Markhoff LLP
Roth Conversion AlternativesRoth in Qualified Plans
Qualified Opportunity Zone
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O P P O R T U N I T Y Z O N E S – A B R I E F H I S T O R Y
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Source: AD publication “Qualified Opportunity Zones: What the Proposed Regulations Reveal”, eig.org
Investing in Opportunity Act, was introduced in February of 2017 and championed by Senators Tim Scott (R-SC) and Cory Booker (D-NJ) and Representatives Pat Tiberi (R-OH) and Ron Kind (D-WI)
Qualified Opportunity Zones (QOZ) were created in the Tax Cut and Jobs Act of 2017, the tax package passed in December 2017. New Section 1400Z of the Internal Revenue Code provides the tax law related to the program. There is bipartisan support for this program.
The goal of the program is to incent investors via tax benefits to invest capital gains in economically-distressed communities (the defined Qualified Opportunity Zones) in order to spur economic development and jobs creation. Investments can be made in businesses or real estate (Qualified Opportunity Zone Property) through a Qualified Opportunity Zone Fund.
In May 2018 the IRS published the list of approximately 8,700 Qualified Opportunity Zones. They exist in every state and all territories, and are based on 2010 census tracts.
Proposed Regulations were published October 19, 2018 and April 17, 2019 to provide clarification of the law.
Opportunity Zone funds have recently come to market and have been primarily focused on investment in qualified opportunity zone properties.
Q U A L I F I E D O P P O R T U N I T Y Z O N E TA X B E N E F I T S
68
Source: AD publication “Qualified Opportunity Zones: What the Proposed Regulations Reveal” , Novogradac website, eig.org
Potential tax benefits if gain is invested in a Qualified Opportunity Fund within 180 days
Deferral of federal capital gains taxes on realized gains until December 31, 2026
• Any capital gain
• All US taxpayers are eligible: individuals, partnerships, C-corporations, S-corporations, trusts, REITs, estates, and certain other pass-through entities.
• The original gain retains all of its characteristics (including tax rate) until the earlier of the date on which the investment in a Qualified Opportunity Zone Fund is sold or exchanged, or December 31, 2026
Reduction of taxes owed:
• If the investment in a QOZ Fund is held 5 years prior to the end of 2026 then there is a 10% exclusion of the deferred gain (for example, if your tax was based on $100 it is now based on $90)
• If the investment is held another 2 years (total of 7 years) prior to the end of 2026 then the exclusion of the deferred gain becomes 15% (for example, the tax on the $100 is now on $85)
• An investor would need to invest prior to the end of 2019 to potentially realize the full 15% exclusion of deferred gains
Elimination of federal capital gain taxes on the appreciation of the new investment made in the QOZ Fund if it is held for 10 years
• Taxable income could be generated during the holding period (some may or may not be sheltered)
NOTE: 7 states currently do not provide tax benefits (MA, NC, MN, AZ, CA, PA, MS)
Q U A L I F I E D O P P O R T U N I T Y Z O N E T I M E L I N E
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Time line of investing in a QOZ Fund:
Today (2019) 2024 2026 2026 (YE) 2029 to 20465 yrs 7 yrs 10 yrs
Invested capital Eligible for 10% Eligible for 15% Original capital No capital gains tax on
in QOZ Fund basis increase on basis increase on gain tax due QOZ Fund investment
deferred capital gains deferred capital gains (note: QOZ investment appreciation if continue
since held 5 years since held 7 years is still locked up) to hold it
Source: AD publication “Qualified Opportunity Zones: What the Proposed Regulations Reveal”, Novogradac website
**The 2017 Tax Cuts and Jobs Act added Internal Revenue Code section 1400-z.
Q U A L I F I E D O P P O R T U N I T Y F U N D S
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Source: AD publication “Qualified Opportunity Zones: What the Proposed Regulations Reveal”, Novogradac website
To qualify for the tax benefits, gains must be invested in a Qualified Opportunity Fund with 180 days
Requirements:
➢ At least 90% of fund assets must be invested in QOZ Property (Business or Real Estate purchased after 12/31/2017)
• Measured twice a year
➢ “Qualified Opportunity Zone business”
• At least 70% of assets are located in the zone
• At least 50% of revenue is derived from conducting business in the zone
• Can be partnership or corporation
• No “sin” businesses or golf courses
➢ Real Estate Investments in QOZ
• Must be original use of the property or substantial improvement (double investment in real property within 30 months)
➢ The fund has limited time to deploy capital
• Working Capital exception
➢ According to Novogradac, there are almost 200 opportunity funds available as of July 24, 2019. These funds are seeking over $48b of capital. https://www.novoco.com/resource-centers/opportunity-zone-resource-center/opportunity-funds-listing
S O M E Q U E S T I O N S T H E N E W R E G U L AT I O N S A N S W E R E D
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Source: Proposed Regulations and Supplemental Information published by Department of Treasury on April 17, 2019
New Proposed Regulations Issued April 17, 2019
1. Are distributions from a QOF taxable? Yes, to the extent the value of the distribution exceeds the taxpayer’s basis in the Qualified Opportunity Fund.
2. What happens if a property in a QOF is sold within 10 years? Gains from sales of property within a fund will flow to the investor. This creates a natural conflict between the fund sponsor, who may want to maximize the investment return before the 10 year holding period, and the investor who will want to wait 10 years in order to obtain a tax free return of gains. However, investors can sell QOFs and reinvest in another QOF within the 10 year period without triggering gain. Thus, creating separate entities for each project provides maximum flexibility so that the entity may be sold rather than the property. Proposed regulations state that, if a property is sold within a QOF, the fund manager has 12 months to reinvest the cash proceeds in another property.
3. Is there a basis adjustment at death? Is gain accelerated? No basis adjustment but the gain is not triggered either.
4. Does a QOF really only have 180 days to invest capital? According to the new proposed regulations, capital received within 180 days of a testing date will be ignored from the calculation of 90% QOZ investments.
5. What is “original use”? The first time a property is eligible for depreciation, unless it has been abandoned more than 5 years.
6. Can you gift an interest in an Opportunity Zone? Yes, but not without triggering the deferred gain, unless it’s to a Grantor Trust.
State Tax Planning
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P L A N N I N G F O R S TAT E I N C O M E TA X S AV I N G S
73
State taxes have become an important focus in planning, especially now that the Federal deduction is limited to $10,000
Incomplete Gift Non-Grantor Trust (ING)
• The trust must be created in a state that does not tax trust income
• The income from the trust must not be taxable by the grantor’s home state
• The trust must allow discretionary distributions to the settlor without making the trust a grantor trust
• Transfers to the trust must be incomplete gifts for federal gift tax purposes without making the trust a grantor trust
Source: Keebler and Associates
I N G T R U S T S T R U C T U R E - E X A M P L E
74
This example is hypothetical and is provided for informational and educational purposes only.
Donor/Grantor ING Trust
Beneficiaries Distribution Committee
1. Donor, resident of a high-
income tax state, creates an ING
Trust and transfers income-
producing or appreciated assets
with low cost basis to the Trust.
Under federal tax law transfers to
the ING Trust are not completed
gifts, therefore no gift tax return is
required to report the transfer.
2. The ING Trust is established in a state with
no income tax. The ING Trust implements a
corporate trustee which is domiciled in the no-
income tax state. Receipt of income or the
triggering of capital gain within the ING Trust is
attributed to the no-income tax state rather
than the grantor’s state of residence with high
income taxes.
3. The Distribution Committee
determines payout of trust assets
to any named beneficiary.
Typically the grantor and two or
more other beneficiaries of the
ING Trust sit on the Distribution
Committee.
4. The grantor and the grantor’s
children or other friends or family
members are all permissible
beneficiaries. Subject to approval
by the Distribution Committee, the
grantor may receive assets from
the ING Trust.
Income-producing or low-basis
assets likely to be sold.
P L A N N I N G F O R S TAT E I N C O M E TA X S AV I N G S
75
Completed Gift Trusts (non-grantor)
• Utilize temporarily doubled estate/gift/GST (Generation Skipping Tax) exclusion
Changing Residency
• Domicile testing
• Time in and nexus to state leaving
D I S C L O S U R E S
76
Abbot Downing, a Wells Fargo business, provides products and services through Wells Fargo Bank, N.A. and itsvarious affiliates and subsidiaries and has agreed to provide the foregoing materials for educational purposes only.Wells Fargo Bank, N.A. is a bank affiliate of Wells Fargo & Company.
The information in this report is not intended to advise or recommend that any particular investment action be taken.The information contained herein represents estimated hypothetical results, calculated based upon the information andassumptions that you provided or are disclosed including inflation rates and target rates of return. Any use of the terms“Recommend” or “Propose” are based on, and only intended to represent a possible solution based on the disclosedassumptions. Please review the data and assumptions provided in this report for accuracy. The results and proposalsdepend directly on the accuracy and completeness of the information you provided. Financial statements are un-auditedand have not been certified or independently verified. The information does not attempt to address all financial issuesthat may impact you, and is limited to educational information with respect to the specific financial planning topicsprepared for you.
Wells Fargo & Company and its affiliates do not provide legal advice. Please consult your tax and legal advisors todetermine how this information may apply to your own situation. Whether any planned tax result is realized by you,depends on the specific facts of your own situation at the time your taxes are prepared.
All investing involves some degree of risk, whether it is associated with market volatility, purchasing power or a specificinvestment product.
© 2019 Wells Fargo Bank, N.A. All rights reserved. Member FDIC. Confidential.
Thank You
Lisa R. Featherngill, Head of Legacy and
Wealth Planning
Abbot Downing
Alex Nahoum, EA, FCA, MAAA, Actuary
Danziger & Markhoff