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304436 12/16

Examining the Tax Cuts and Jobs Act

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Topics for today

1. Key provisions of the new law

2. Planning considerations and strategies

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Key provisions

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Highlights of the new tax law

• Lower marginal tax rates for individuals, estates, and businesses

• Significant changes to tax deductions while personal exemptions are repealed

• No major changes to retirement and education incentives

• Individual mandate to purchase insurance effectively repealed

• The legislation is projected to cost approximately $1.5 trillion over the next ten years

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A look at the new tax brackets

If taxable incomeis over

Butnot over The tax is

Of the amount over

Married/Filing jointly and qualifying widow(ers)s

$0 $19,050 $0.00 + 10% $0

$19,050 $77,400 $1,905.00 + 12% $19,050

$77,400 $165,000 $8,907.00 + 22% $77,400

$165,000 $315,000 $28,179.00 + 24% $165,000

$315,000 $400,000 $64,179.000 + 32% $315,000

$400,000 $600,000 $91,379.00 + 35% $400,00

$600,000 – $161,379.000 + 37% $600,000

Single

$0 $9,525 $0.00 + 10% $0

$9,525 $38,700 $952.50 + 12% $9,525

$38,700 $82,500 $4,453.50 + 22% $38,700

$82,500 $157,500 $14,089.50 + 24% $82,500

$157,500 $200,000 $32,089.50 + 32% $157,500

$200,000 $500,000 $45,689.50 + 35% $200,000

$500,000 – $150,689.50 + 37% $500,000

Income tax

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Comparing how taxes may differ — individuals

Taxable incomePrevioustax rate

TCJAtax rate Change

$0–$9,525 10% 10% Unchanged

$9,526–$38,700 15% 12% -3.0%

$38,701–$82,500 25% 22% -3.0%

$82,501–$93,700 25% 24% -1.0%

$93,701–$157,500 28% 24% -4.0%

$157,501–$195,450 28% 32% +4.0%

$195,451–$200,000 33% 32% -1.0%

$200,001–$424,950 33% 35% +2.0%

$424,951–$426,700 35% 35% Unchanged

$426,701–$500,000 39.6% 35% -4.6%

Over $500,000 39.6% 37% -2.6%

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Comparing how taxes may differ — married/filing jointly

Taxable incomePrevioustax rate

TCJAtax rate Change

$0–$19,050 10% 10% Unchanged

$19,051–$77,400 15% 12% -3.0%

$77,401–$156,150 25% 22% -3.0%

$156,151–$165,000 28% 22% -6.0%

$165,001–$237,950 28% 24% -4.0%

$237,951–$315,000 33% 24% -9.0%

$315,001–$400,000 33% 32% -1.0%

$400,001–$424,950 33% 35% +2.0%

$424,951–$480,050 35% 35% Unchanged

$480,051–$600,000 39.6% 35% -4.6%

Over $600,000 39.6% 37% -2.6%

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Tax rates on capital gains and dividends remain the same

* Does not include the 3.8% surtax on net investment income, which applies to single filers over $200,000 in modified adjusted gross income (MAGI) and for married couples with more than $250,000 in MAGI.

Individuals Married/filing jointly Tax rate*

$0–$38,600 $0–$77,200 0%

$38,601–$425,800 $77,201–$479,000 15%

Over $425,800 Over $479,000 20%

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Significant changes to deductions

*Certain interest on home equity lines of credit may still be deductible if proceeds were used for home improvement. Consult with a tax professional for more information.

Source: Joint Explanatory Statement of the Committee of Conference

Standard deductionNearly doubled to $12,000 (individuals)and $24,000 (married/filing jointly)

Mortgage interestLimited to $750,000 of indebtedness after 12/15/17, no deduction on home equity lines of credit*

State and local taxes Capped at $10,000 in aggregate

Medical expensesExpanded for 2017 and 2018 with a 7.5% AGI threshold (10% thereafter)

Miscellaneous Repealed

Charitable contributionsDeduction for cash gifted to public charities increased to 60% of AGI (from 50%)

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The Child Tax Credit (CTC) is expanded

• Increased from $1,000 to $2,000 for “qualifying children” under 17 years old at the end of the year– Additional $500 tax credit applies to other qualified dependents who

are not qualifying children (i.e., dependent child age 17 or over)

• Tax credit is phased out as income exceeds $200,000 (individuals) or $400,000 (married/filing jointly)– Previous phaseout amounts were $75,000 (individuals) or $110,000

(married/filing jointly)


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The Alternative Minimum Tax (AMT) remains, but will apply to fewer taxpayers• The AMT exemption is increased to $70,300 for individuals

(from $55,400) and $109,400 for married/filing jointly (from $86,200)

• According to the Tax Policy Center, only 200,000 taxpayers will be subject to AMT going forward, down from roughly 5 million before the law


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Case example: Taxes for a family of four

• Family of four with two children under age 17• 28% marginal tax bracket under previous tax system;

24% TCJA tax bracket• Claiming standard deduction

Previous system TCJA

Adjusted gross income $200,000 $200,000

Standard deduction -$13,000 -$24,000

Personal exemptions -$16,600 $0

Taxable income $170,000 $176,000

Taxes owed $34,335 $30,819

Child tax credit (CTC) $0 -$4,000

Net taxes $34,335 $26,819

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Other items to note• Beginning in 2018, annual inflation adjustments will be based on a

formula that generally results in a lower inflation figure

• The option to recharacterize, or “un-do,” a Roth IRA conversion is eliminated

• Requirement to use FIFO method for calculating taxes on stock sales not in final version

• No more income phaseouts on itemized deductions

• 529 college savings plans are expanded — account owners can utilize up to $10,000 annually to cover K–12 tuition expenses


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Federal gift and estate taxesscaled back

* Subject to change slightly for 2018 due to the inflation adjustment provisions of the Tax Cuts and Jobs Act.

18% to 40% Range of marginal tax rates on estates and gifts in excess of lifetime exemption amount

$11.2 million* Lifetime gift and estate tax exemption

$15,000 Annual gifts to as many recipients without resulting in a taxable gift and reducing the lifetime exemption amount

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Estate planning is more than just the taxesWills, beneficiary designations

Critical to review and update periodically

Revocable living trust Transfers property outside of the probate system

Health-care proxy and advanced medical directive

Facilitate decisions around medical treatment or end-of-life wishes

Power of attorney Assigns decision-making responsibilities in case of unforeseen circumstances

GuardianshipPlanning for minors or other extended family members

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Changes to the way businessesare taxed


Corporate tax rate Reduced from 35% to 21%

New deduction for small business owners

20% deduction on “Qualified Business Income” (QBI), subject to limitations

Enhanced expensing for capital spending

For the next five years, corporations can immediately expense capital investments

Repatriation of overseas profits

Tax rate of 15.5% on cash, 8% on non-liquid assets

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Planning considerationsand strategies

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Five income tax planning strategies to consider1. Invest in municipal bonds to generate tax-free income

– Even with slightly lower tax rates, Municipal bonds may be attractive for taxpayers in high tax brackets and also subject to the 3.8% Medicare surtax

2. Utilize strategies to reduce or avoid taxable income– Retirement plan contributions, flexible spending accounts (FSAs), health

savings accounts (HSAs), deferred compensation– 529 college saving plans now expanded for K–12 tuition expenses– Be mindful of transactions that may drastically increase income– Retirees may consider donating IRA assets tax free to charities

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Five income tax planning strategies to consider3. Consider Roth strategies as a source of tax-free income in retirement

– Consider your current tax bracket to determine if Roth makes sense– Carefully evaluate the conversion decision since the option to recharacterize, or un-do,

a Roth IRA conversion is no longer available

4. Maximize deductions during years when itemizing– Some taxpayers may benefit by alternating between claiming the standard deduction

some years and itemizing deductions other years — “lump” as many deductions (such as charitable contributions) into those years when itemizing

5. Make tax-smart withdrawals in retirement– Draw from tax-deferred accounts while in lower tax brackets, and from taxable and

tax-free accounts when tax bracket is higher

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Estate planning considerations

• Even with the higher lifetime exclusion amount, estate planning remains critical to efficiently transfer wealth and plan for contingencies

• Be mindful of state death taxes

• Plan for low cost-basis property– Ensure stepped-up cost basis is maintained when property is transferred at

death

• Work with an estate planning professional to account for the potential “sunset” of the law in 2026

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New deduction for small business owners• Applies to businesses that are structured as pass-through entities for

taxation purposes (sole proprietorship, LLC, partnership, S Corp)

• 20% on qualified business income (QBI), cannot include compensation or investment income

• At higher income levels, specified service businesses are not allowed to take the deduction– Includes businesses such as law, accounting, finance, and consulting,

but NOT engineering or architecture

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How the QBI deduction works

* The deduction may be subject to a wage limitation based on total wages paid (50% of W-2 wages) or a combination of wages paid and unadjusted basis of property held by the business (25% of W-2 wages plus 2.5% of unadjusted basis of depreciable property).

Taxable income of $157,000 (individuals) or $315,000 (married/filing jointly) or less

20% deduction available (including service businesses)

Over $157,500 but under $207,500 (individuals) or $315,000 but under $415,000 (married/filing jointly)

20% deduction available to non-service businesses subject to a wage limitation*; deduction begins to be phased out for service businesses

At least $207,500 (individuals) or $415,000 (married/filing jointly)

No deduction for specified service business. Other businesses can qualify for a deduction equal to 20% of qualified business income*

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Closing thoughts • The Tax Cuts and Jobs Act represents the most sweeping

changes to the tax code in decades

• Careful attention must be made to determine the impact on your financial situation

• Work with professionals to assess income and estate tax planning strategies

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Putnam Retail Managementputnam.com

All funds involve risk, and you can lose money.

This material is for informational and educational purposes only. It is not a recommendation of any specific investment product, strategy, or decision, and is not intended to suggest taking or refraining from any course of action. It is not intended to address the needs, circumstances, and objectives of any specific investor. Putnam, which earns fees when clients select its products and services, is not offering impartial advice in a fiduciary capacity in providing this sales and marketing material. This information is not meant as tax or legal advice. Investors should consult a professional advisor before making investment and financial decisions and for more information on tax rules and other laws, which are complex and subject to change.

Investors should carefully consider the investment objectives, risks, charges, and expenses of a fund before investing. For a prospectus, or a summary prospectus if available, containing this and other information for any Putnam fund or product, call your financial representative or call Putnam at 1-800-225-1581. Please read the prospectus carefully before investing.

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