Understanding the Impacts of the Tax Cuts and Jobs Act on Individuals and Estates

Individuals & Estates

Chris Davis: Good afternoon. Welcome to the Aprio webinar, Understanding the Impact of the Tax Cuts and Jobs Act. My name is Chris Davis. I’m the Head of the Private Client Services Group here, and with me is an associate, Frank Ciaburri, who’s the Director in the Private Client Services Group. As we walk through today, we’re going to be talking about the new tax law, and how it affects you individually through your individual tax returns.

In this seminar, we’re going to be talking about the general provisions of the new tax law, changes to itemized deductions, the impact to AMT, which is Alternative Minimum Tax, and to state taxes. Talk about various other changes in the law, section 199A, which is this new 20% deduction from pass-through income, and at the end of the presentation, we’ll talk about the change to the estate and gift tax exemptions. By the way, as I move through this presentation, if you have questions, please submit them. At the end of the presentation or a strategic time during the presentation, we will stop to answer questions. Time permitting, we’ll get to as many as we can.

The changes in the tax law, here’s a graph or chart of the tax rates. As you can see in 2017 on the left, is the 2017 rates, and on the right in green are the new 2018 rates. If you were following this law through Congress, you remember at the beginning of the idea for this tax cut, they were hoping to reduce the tax rate from seven different brackets, down to four different brackets. As you can see, that didn’t happen.

We still are left with seven different tax brackets, but we have a reduction in each of those tax brackets. As you can see, the 15% bracket went to 12%, the 25% bracket went to 22%, 28% to 24%, 33% to 32%, 35& and then the new highest income tax bracket under the old law was 39.6%, and the new high bracket is 37% under the new law. This just illustrates the new tax brackets and the level of income each of these rates, which they apply, for the single, married filing jointly, and head of households.

This might be a better illustration of the effect of these new tax rates, not only did the tax rates lower, but the bands in which these tax rates apply, the amount of income that they’re applying against has changed significantly. This illustration shows that. By example, if you look in the 2018 column, the new 24% rate not only replaces the 28% tax bracket, but at least half of the 33% tax bracket. Half of the 33% tax bracket is now 24%, and the entire 28% tax bracket is now 24%.

Same logic applies to the new 35% and 37% bracket in 2018, although in the first slide it didn’t look like there was a change in the 35% bracket, but this illustrates a significant change. You can see that the 35% bracket eats up almost half of what was previously taxed at 39.6%. Then the 37% bracket replaces the remainder of the old brackets. That’s the highest bracket, the 37%.

What we’re illustrating here is in addition to tax rate changes, there was a change at the income levels and each of these brackets will apply, and the result will be significant tax rate changes. In addition to tax rate changes, we also had a doubling of the standard deduction and repeal of the personal exemptions. If we start with the standard deduction, as you can see, it’s either a full doubling or close to doubling of the standard deductions.

Now, for married filing jointly, the new standard deduction is $24,000. As we go on with the program today, you will see that not many elements of this new tax law resulted in simplification. This is one of the few that did. The $24,000 standard deduction for married filing jointly is going to increase significantly the amount of tax returns that are filed using the standard deduction instead of itemized deductions. We’ll also talk about that more when we talk about some of the changes to itemized deductions.

In addition to that, there’s the repeal of the personal exemption. Previously, you could take a personal exemption for yourself, your spouse, and as many children as you had, and in 2017, you got a $4,050 deduction for each one of your personal exemptions. That amount is repealed. We’re no longer going to have personal exemptions. We’ll talk about, later on the presentation, the doubling of the child tax credit. In effect, the repeal of the personal exemption is going to be made up by a doubling of the child tax credit, and a raising of the income limits to which a child tax credit applies.

Don’t be too fearful that you’re losing your personal exemptions. Many of us have our personal exemptions under the old law phased out because of income limits anyway. But even that’s not the case. This new child tax credit is going to make up the loss of the personal exemption. But again, this is a simplification of tax returns.

There were a lot of changes to itemized deductions. As we move through this, it’s important to remember or to realize that the majority of the changes that we’re going to talk about today are not permanent changes. The old law was simply suspended or modified for years 2018 through 2025. If Congress doesn’t act to make these permanent or to otherwise change them, the 2017 law, will come back into play in the 2026 tax year.

We saw this with the Bush tax cuts in the early 2000s. They called it a sunset at the time, and as you might remember, Congress waited till literally the 11th hour to make permanent some of those tax changes or modify them and then make them permanent. For 2018 to 2025, this new law applies.

The first change we’ll talk about to itemized deductions is medical expenses. Historically, we’ve been able to deduct medical expenses in the event that they exceeded 7.5% of your income. If you had $200,000 of income, the first 7.5% of your medical expenses or $15,000 would be disallowed, but everything above that $15,000 mark would be an itemized deduction. That’s going to hold true for 2017 and 2018. But beginning in 2019 through 2025, that medical expense threshold is going to be 10.5% of your adjusted gross income. In my $200,000 example, not $15,000 is limited, the first $20,000 of your medical expenses will be limited.

State and local tax deduction, this was a big change in the law, one that received a lot of attention in the media and was not without controversy. In 2017 and prior years, we were able to deduct state and local taxes. What does that mean? The real estate taxes you paid on your house, the income taxes you pay to your home state or any other states. If you’re a Georgia resident, all the taxes you paid to the state of Georgia and any taxes you paid to any other state were deduction, and some local taxes such as certain sales taxes.

In 2017 and prior years, if I had $10,000 of real estate taxes and $30,000 of taxes I paid to the state of Georgia, I was afforded an itemized deduction of $40,000. The new tax law put the cap on some of those deductions to $10,000, $5,000 if you’re married filing separately. In my example, instead of a $40,000 deduction, I’m only going to enjoy a $10,000 deduction.

In the previous few slides, I showed you that the rates, the brackets were coming down and then also the income to which those brackets were going to apply was increased, but he giveth and he taketh away, and this is an example of a loss of an itemized deduction. Now as we’ll talk about in a few minutes, this certainly affects clients, tax payers in high tax states more than states with lower taxes.

Clients from California, Illinois, New York will potentially be affected by this more than other states. But it’s also important to note, and we’ll talk about this, that many of these old deductions, or many of these deductions under the old law were limited to AMT or Alternative Minimum Tax, so in many cases, the loss of these state and local tax deduction is not quite as impactful as it appears to be on the surface, and we’ll walk through that in a few slides.

In addition, the foreign real property taxes you pay is deductible. If you have a property in British Columbia or some other foreign jurisdiction that you’re paying taxes on, those are no longer deductible, but really the $10,000 limit is what’s going to be more impactful here.

Continuing to talk about changes to itemized deductions, the home mortgage interest, mortgages incurred on or before December 15, 2015, the old law allows us to deducted interest on the first $1 million of acquisition indebtedness. What that means is if I have a $1 million loan for the purchase of my house, I can deduct the interest on that $1 million loan.

But if my loan is in excess of $1 million, I have limitations to that interest deduction. For loans occurring after December 15, 2017, the interest is limited to the first $750,000 of debt. They’ve essentially grandfathered in existing loans, but any new loans made after December 15, you’ll only be able to deduct the interest for the first $750,000.

They also have suspended the ability to deduct the interest on your home equity line. Under 2017 and prior tax law, I could take out $100,000 of home equity line and use it to renovate my house or in a personal fashion, and I could deduct the interest on that $100,000 of home equity line. I cannot do that in the new law. That has been repealed through 2025, no deduction for home equity line or the interest in a home equity line.

Charitable contributions, we didn’t see a lot of change to charitable contributions in the new law, but one change was around the limitations. For 2017 and prior years, there’s been a 50% limitation on cash gifts to public charities. What that means is if you had $200,000 of income in a given year, you are only allowed to deduct 50% of that number, which will be $100,000 in charitable contributions in a given year. Anything above that amount, we carry forward for five years to be deducted in a future year.

They increased that limitation to 60% instead of 50%. My example, instead of $100,000 being able to be deducted in the first few was $120,000. The other change they made to charitable deductions was they’re disallowing the deduction made to purchase university athletic seating rights, after December 31, 2017.

If you are donating to your school in order to get season tickets, previously you were allowed to deduct 80% of this amount, going forward, this deduction will not be allowed. There’s been a lot of discussion of whether education institutions will change the structure, and the manner in which they take charitable contributions?

Casualty and theft loss, in 2017 and prior years, you can claim a deduction for personal casualty or theft losses. Casualty or theft losses are typically defined as an unexpected event, a theft that was unexpected or flood or damage from a hurricane or a tornado. For 2018 through 2025, you’re only going to be allowed to take a casualty loss if your area was declared a federal disaster area.

If it’s not a federal disaster area, no casualty or theft losses are allowed. Remember last fall, during Hurricane Irma, the entire state of Georgia was declared a disaster area. Under the new law, if that happened and you have damaged property, you can potentially take a casualty loss, but otherwise, you will not.

Two percent miscellaneous itemized deductions, this is a big change. What are 2% miscellaneous itemized deductions? I’ve listed them up there, but the concept behind a 2% miscellaneous itemized deduction is some of these deductions are only deductible to the extent that they exceed 2% of your income.

If you have $200,000 of income, the first 2%, or $4,000 is disallowed. The only miscellaneous deductions in excess of that $4,000 would be allowed. If you had $6,000 of total 2% miscellaneous itemized deductions, in my example, the first $4,000 would be limited, and the remaining $2,000 would be deducted as an itemized deduction.

Beginning in 2018, this is repealed. From 2018 through 2025, miscellaneous itemized deductions subject to the 2% floor are suspended. No longer are you going to be able to take a deduction for un-reimbursed employee business expenses, which are expenses that you incurred in nature with your employer that you are not reimbursed, you’re able to deduct those under the old law. No longer.

Tax preparation fees for the preparation of your personal tax return are no longer allowed as a miscellaneous itemized deduction. Preparation fees paid for your business returns or trust returns are still deductible, but not your personal return. Perhaps the biggest miscellaneous itemized deduction we see is investment management expenses. The fees you pay to your investment advisor, your brokerage firm to invest and manage your assets, those have been deductible as a 2% deduction in the past. No longer going forward.

Safe deposit box rental and certain legal fees in association with protection of your income. All of those fees are no longer deductible as 2% itemized deductions. This could have significant impact on certain individuals. However, just as state and local tax deductions were an add-back to Alternative Minimum Tax, so were 2% miscellaneous itemized deductions.

If you were in Alternative Minimum Tax, or these 2% fees threw you into Alternative Minimum Tax, the loss of these deductions will not impact your federal income tax return. They may have an impact on your state returns, but not your federal returns. For majority of people, I would say in my experience, the majority of people are in Alternative Minimum Tax. They have investment management fees, so this may not be as big of a negative as it looks.

The overall limitation on the itemized deduction phase-out. So under old law, there’s an itemized deduction phase-out. We call it the Pease limitation. Basically, it disallowed a portion of your itemized deductions as your income went up. If you had $300,000 of income, 3% of that number, or $9,000 would reduce your itemized deduction.

If you had $50,000 of itemized deductions and $300,000 of income, you were losing 3% or $9,000. In that example, only the next $41,000 would have been a deduction. This tax reform does suspend and repeal this Pease limitation to no more phase-outs of itemized deductions. This is a positive, and certainly a simplification of tax returns.

A couple of other deductions, moving expenses. Moving expenses, if they’ve been attributable to your employer, if you had to move, due to your affiliation with your employer, as a convenience to your employer, in the past this has been a deduction. No longer is this deductible. In fact, if your employer pays your moving expenses for you, it’s taxable income under the new law. These changes do not impact members of the Armed Forces on the act of duty.

The alimony deduction is repealed. Under previous law, if you made alimony payments, you received an income tax deduction. The person receiving the alimony payments picked it up as income, so for divorces effective after December 31, 2018, there’s no longer a deduction for the payment, and the recipient does not have to pick it up as income. But for divorces that settled on December 31 of 2018 or prior, the old law still apply.

We’d want to think, what can I deduct? If they removed a lot of these itemized deductions, what’s left? I can tell you on this list there are several things, but the vast majority of the deductions that remain for most people it’s going to be this $10,000 cap on state and local taxes, the interest on your mortgage, and charitable contributions. I would say for the majority of tax returns, those are three itemized deductions that you’re going to see in a year-over-year basis.

In addition to that, we do still have medical expenses. The limitation is now set to 10% starting in 2019. Investment and interest expense was not changed, so if I borrow money against my workable securities and use those funds to purchase more investments, I can deduct the interest on that loan. That did not change. Charitable contributions, the only thing that changed was the 60% limitation and the change we talked about against the athletic tickets.

Casualty losses are still there, but only if it’s a disaster area. Alimony payments are only deductible if they’re a pre-2019 before settlements. What we call Schedule A, or the itemized deductions, let’s simplify it. The vast majority of those deductions will come from state and local taxes, mortgage interest and charitable contributions. That’s the landscape that we’ll live in going forward, at least until 2025 when they decide whether to make this permanent or go back to the old law.

What does all this mean to me, or you, or all of us? In the beginning, we talked about the changes in tax rates. Each tax bracket was lower across the board. In addition to that, the income bands which these tax rates applied were increased, allowing more of your income to be taxed at lower rates. But then we saw either the removal of certain itemized deductions or a limitation of those itemized deductions, which were negative. What does this mean? All in all, is this a net positive, or a net negative in terms of your tax liability in a given year?

To answer that question, and again, it’s different for everyone, but I put together four scenarios here. These scenarios all had the same fact patterns or assumptions, married filing joint, for dependents, same level of itemized deductions. I assumed that all this income is wage income, so I didn’t factor interest, dividends, capital gains. By the way, the capital gain rates did not change under the new law. Capital gain rates stayed the same, and the 3.8% Obamacare tax, still there.

What does that mean? In Scenario 1, I’ve assumed there was $200,000 of income, Scenario 2, $400,000 of income, Scenario 3, $700,000 of income, Scenario 4 $1 million of income, all ordinary wage income. As you can see in yellow, in Scenario 1, we have total savings of $7,500 or it lowered the taxes, effective tax rate by 3.8%. So, $7,500 savings is significant to $200,000 of income.

With $400,000 of income, those total savings were $20,000, where reduction and your tax rate of 5%. Significant changes to taxes, and this is before we talk about some other potential changes in a few minutes regarding the 20% deduction on flow-through income. This is absent savings that potentially might be there from that.

Scenario 3, when you get to $700,000 of income, interestingly, the savings was reduced to $10,000. You might ask, why would that be? I had a $20,000 savings at $400,000 of income. Why would I only have a $10,000 saving at $700,000 of income? That’s the level in which we see that the loss of some of these itemized deductions that we mentioned, the cap on the state and local taxes, the limitation to miscellaneous deductions, things like that start to have an effect in a bigger way. So your savings on the higher income earners is less than the savings attributable to lower income tax earners, which might be expected.

In the Scenario 3, there’s a $10,000 savings, and Scenario 4, there was a $14,000 savings. Keep in mind that these total savings are a combination of federal and state tax savings. As we’ll talk about in a few minutes, our state taxes might be going up a little bit for various reasons, the majority of which is, there’s no such thing as Alternative Minimum Tax from a state tax return. So you’ve been able to enjoy a lot of the savings under the old law that will not be there through itemized deductions. These effects are net or a combination of the federal and the state tax savings.

Let’s talk about Alternative Minimum Tax for a minute. Alternative Minimum Tax affects a lot of people, I would say well over 60% of the tax returns that we see for our clients have people paying Alternative Minimum Tax. Yes, I just made that number up, but it’s a significant amount. The new law sees an increase in the AMT exemption to $109,400 for married filing joint or surviving spouses, $70,300 for single payers, and $54,700 for married filing separately. This is a significant increase from the old exemption under prior law.

As important, we’ve seen an increase in the level of income it takes to phase out those exemptions, both in the exemption you see in a tax law has a phase-out at some point. If you’re a high income earner, oftentimes you start to get phased out of these exemptions. The AMT exemption increased to $1 million for married filing jointly, 500 for single, and married filing separately.

These are significant increases in the exemption and the phase-outs that by their own accord will result in less people paying Alternative Minimum Tax. By the way, I want to step back for one second and just remind everybody what Alternative Minimum Tax really is. There’s a lot of confusion with Alternative Minimum Tax. Alternative Minimum Tax is a way to disallow certain deductions, if those deductions brought your tax rate below a 26% to 28% tax rate.

If I had real estate taxes and taxes to the state of Georgia and miscellaneous itemized deductions, and the sum of all those deductions brought my tax rate below 26% to 28%, Alternative Minimum Tax would kick in and disallow those deductions and freeze my tax rate at 26% to 28% and not allow it to go below that. That’s basically what Alternative Minimum Tax is, and here’s the exemption and the phase-out exemption as it pertains to that tax.

I’m asking the question, who’s going to pay the Alternative Minimum Tax going forward? The vast majority of the cases, the reason you’re paying Alternative Minimum Tax is in the add back of certain itemized deductions. What kind of itemized deductions are typically an add back? State and local taxes, the real estate taxes you pay, the taxes you pay to the state of Georgia and any other state. Those were add back to AMT, but now they’re capped at $10,000, so much less of effect on AMT.

Your miscellaneous itemized deductions subject to the 2% limitation, those were all add backs to itemized deductions. We know from a few slides ago, the 2% miscellaneous itemized deductions are gone under the new law. Not only did we increase the exemption to Alternative Minimum Tax, we increased the phase-out to which that exemption applies. Now we’ve taken away what I believe to be the two biggest overriding factors that put people in the Alternative Minimum Tax, the state and local taxes and itemized deductions.

Alternative Minimum Tax was not repealed, but it was certainly neutered, if you will. There’s going to be a lot less people, very few people in fact paying Alternative Minimum Tax, and certainly not paying it in a significant way that would need to be planned around. There are other instances where Alternative Minimum Tax is just thrown in.

There’s adjustments to depreciation of old real estate. There is add backs to the exercise of certain types of stock options that still can affect people, but by and large, those of you that are in Alternative Minimum Tax today will not be in Alternative Minimum Tax in 2018 and forward. One interesting aspect with this change in Alternative Minimum Tax is how it could affect incentive stock options. Many employers incentivize their employees with stock options.

Typically, you see non-qualifying stock options and incentive stock options. We’re going to talk about incentive stock options because incentive stock options give an employee the ability to exercise these options, hold the stock a year and then sell it at a capital gain and pay capital gain rates instead of exercising it and cashing out and paying the ordinary income.

Under the old law, however, AMT was a problem. As soon as we exercise these stock options, for the vast majority of people, it threw us into Alternative Minimum Tax, and then it became a much more complicated endeavor to try to get capital gain treatment, you had to pay Alternative Minimum Tax upfront, then wait a year and sell the stock and pay capital gain and then hope you got your Alternative Minimum Tax credit back. It was a real complicated problem that limited the number of the people that were willing to exercise their incentive stock options.

What we believe is going to happen though with the changes in the Alternative Minimum Tax rules, that incentive stock options are going to be back in play. Many people are going to be able to exercise these incentive stock options and not pay Alternative Minimum Tax, at some level of their option exercise anyway. There’s going to be a band in which you’re going to be able to exercise your stock options, not pay any Alternative Minimum Tax, and then hold it a year and truly get a capital gain rate upon the sale, assuming the stock continues to appreciate or stays the same.

That’s something to look forward to. For the last 10 or 15 years, we haven’t seen a lot of incentive stock option transactions because of the AMT rules, but we think that will change with this new law and incentive stock options are back in play. So, significant impact to Alternative Minimum Tax under the new law.

What we’re going to do now is I’m going to turn it over to my associate, Frank Ciaburri. Frank is going to talk about impact to the states, other changes in the law, and then the 20% deduction, the 20% flow-through deduction that everybody has been talking about. But at this time, I’m going to turn it over to Frank.

Frank Ciaburri:  Good afternoon, everyone. To start off, I’m talking about state tax impact. All of us have seen a lot on the news and the newspapers and journals that states are going to be reacting to the Tax Cuts and Jobs Act. Typically, states have to look at how they tax individuals, what the tax basis, what their rates are, and how the Tax Cuts and Jobs Act will affect the revenue that they collect and use to provide state services.

We’re going to see many changes across the country in state taxes. Rather than get into all of that because we don’t want to talk about 45 state tax jurisdictions, we’re going to focus just a little bit on Georgia. Now, Georgia has one of the more straightforward state income tax systems for individuals. Essentially, it’s based on federal taxable income with some adjustments. It can be very straightforward to compute the tax liability for a tax resident of Georgia.

With the Tax Cut and Jobs Act changes, however, if Georgia makes no changes to the tax law and accepts the federal changes, the tax paid for individuals in some cases or in many cases will be higher, because the itemized deductions, as Chris talked about, that we’re not going to have that will affect, reduce our total itemized deductions such as the limit on the state tax deductions, state and local tax deductions, the elimination of all the expenses that are categorized under the 2% miscellaneous category won’t be there anymore.

Some thoughts about that, until Georgia changes its rules, there are some things that might be helpful to look at. Georgia has several state tax credit programs that might be beneficial. We’ve always looked at this in our firm as a way to convert a state tax deduction to a charitable contribution. As Chris explained, in fact, the limit on charitable contributions of cash to public charities is actually rising to 60% of adjusted gross income. These are part of the good deductions, if you will.

In Georgia, we have three programs, the student scholarship program, the public education donation credit, and the rural hospital donation tax credit. All of those are going to be helpful to taxpayers, because the way they operate is if you make a contribution to these funds, the taxpayer or our clients get a charitable contribution deduction on their federal tax return.

On the state tax return, they get a credit for making that payment. That credit is like the payment of income tax. It’s a dollar for dollar reduction in the tax, so it’s as if you paid state income tax. Pretty good deal. I get a full deduction and I get a credit. There’s one small aspect to it, the charitable contribution amount for each of these programs that’s allowed on the federal return is not allowed on the state return, but on the net basis, there’s still a significant benefit.

These other state tax credit programs that are going to get more attention, I put them in the category of state tax programs that allow you to pay your state tax at a discount. Things like the Georgia film credits, low income housing credits, and historical rehabilitation credits. These are property items that you can buy that are used to pay your state tax liability. Typically, these credits are sold at a discount on a dollar, 90 cents, 88 cents. You can satisfy your state tax liability at a reduced cost.

These credits are not new. They’ve been around for a while, but the interest in them will continue and maybe increase as people start to calculate the values of paying their tax at a discount. Another area where Georgia tax has a hold, if you will, or something to look at is the comparison of the standard deduction for federal purposes and the standard deductions in Georgia.

As Chris mentioned, the standard deduction for someone married filing joint will now be $24,000, whereas on your state return, that standard deduction is $3,000. If I have a taxpayer who has $22,000 of itemized deduction in our example, and they use the federal deduction, standard deduction of $24,000 plus the state standard deduction of $3,000, they’ll get a benefit of $5,940.

The federal law, and this is very old school stuff, this is not new law, allows the taxpayer to elect to itemize their deductions instead of using the standard deduction in a situation where their itemized deductions are lower than their standard deduction. If I take the same taxpayer and make the election to instead claim the itemized deductions of $22,000 and use the standard deduction in Georgia of $3,000, on my Georgia return, I’m going to claim more deductions because Georgia follows federal. I’ll be itemizing on my Georgia return, and itemizing on my federal return.

In the example that’s on your board, it looks like that resulted in $600 plus higher benefit by taking that position. This is a bit of speculation. This is something that would be looked at, at the time of tax preparation and Georgia may well change their rules on a go forward basis to address this disparity in the standard deduction. During the course of the year, we’ll be looking at opportunities like this to save tax, and also take into account any legislative changes that Georgia makes.

Next, we’re going to talk about a series of other changes in the law. Chris earlier explained that we’re going to have a change and that personal exemption will no longer be allowed. Instead, it’s going to be replaced by a child tax credit. The child tax credit has been increased to $2,000 for dependent children, and will be refundable up to $1,400 per child. This change came in late in the legislative process and was spearheaded by Marco Rubio of Florida, who insisted that the credit be raised so that it especially positively impacts lower income taxpayers with children, so that they won’t have to pay as much income tax.

Like the former personal exemption, this credit is going to be phased out for higher income taxpayers and the phase-outs are listed on your screen. For individuals who had a phase-out on the old personal exemption, they will get a phase-out on this credit. High income taxpayers won’t be negatively or positively impacted by this change. However, folks at the lower income ranges may well end up with a better benefit with this credit system than the old exemption system.

There’s going to be a separate credit for dependents that are not qualifying children, say an adult member of your family that is a dependent of yours, someone like a parent or an adult brother or sister. For those dependents, there will be a $500 credit and it’s going to be subject to the same phase-out limitations as the qualifying child credit, and on a dependent that is not a child it’s going to be a non-refundable credit. The tax return is going to look a little different, slightly different calculations using a credit instead of a deduction exemption. Other changes, there are two other changes. One is to the kiddie tax and the kiddie tax is a bit of a slang term.

But what that is, is that in 1986, the last major tax reform, Congress felt it was important that children who have unearned income, interest, dividends, capital gains, rental income as annuities, other similar types of income were getting a tax break because parents would gift assets to children and the purpose was to shift the taxable income to children who had a lower rate of tax.

To show up the equity of the tax law so that there was not an unfair advantage for those folks that could gift assets to their children, it was determined that the tax on that type of income was going to be taxed at the parents’ rate. The new law simply, it’s a simplification and possibly a tax increase. What’s changed is that the owner of the income of a child or a dependent child subject to this kiddie tax is going to be taxed at the trust tax rates.

The trust tax rates have the same brackets as the individuals, however, the tax rates increase much deeper than they do for an individual, such that a trust would be taxed at the top 37% tax bracket when they reach $12,000 of taxable income. It’s possible, under the new law, that the tax bill for children could be higher. It’s also possible it would be the same if the parents would otherwise be in the 37% tax bracket. There might be a disadvantage in some cases.

The good of this is that under the old kiddie tax rules, you needed to know the parents’ tax rate in order to determine the child’s tax rate. That could be a bit of a pain because you would have to wait to file children’s tax returns until the parents’ returns were completed, or estimate the parents’ tax bracket to file the child’s return. Now, the child’s returns and the parents’ returns are independent and they can be filed whenever the information is ready and in terms of the child’s return, not waiting until the parents’ returns is completed.

Second major change, although we won’t see this change until next year, is that for individuals who are responsible for obtaining their own healthcare coverage, there is a requirement to do that, and a tax can only impose in the situation where a taxpayer fails to do so, absents their being able to avail themselves of one of the exemptions to the rule.

The current law repeals this individual mandate effective next year, so there no longer will be a penalty for failure to maintain minimum essential coverage starting next year. They’ve also changed the rules having to do with the recharacterization of Roth contributions. A little background on this. The tax law allows you to convert your current IRAs to a Roth, and when you do that, you’ll have to pay tax on that conversion.

The law, when it was originally issued, also contained a safety net that allowed a taxpayer to unwind that transaction at their discretion, provided they did it by the time they filed their personal tax return, which could be the extended due date. In the old rules, if you did that conversion on January 1, you had till October 15 of the next year to unwind that transaction.

So why would you unwind the transactions? Well, there’s lots of situations where that could be a benefit. In some cases, the value of the Roth assets decreased since the time of conversion. After the reconversion, you would pay more tax on the higher value at the time of conversion than the actual asset you ended up with.

Another situation that frequently came up is that there were changes in income the tax year that were anticipated at the time the Roth conversion was made and it made the taxability of that a little bit higher than what was expected. Under the new rules, any Roth, now the new Roth conversions that are made starting this year, that safety net has been taken away. Once you make the conversion, you’re done. You can’t go back and unwind it.

Now, the way this will play out is that if anyone made a Roth conversion in 2017, they’re going to have until October 15 of this year to unwind it when it makes sense for them. It’s not completely gone, but for any Roth conversions that were made this year or in later years, no more safety net.

The next item limitation of business losses is an entirely new concept, and it’s going to change some planning for taxpayers. What these rules say is that if you have business losses in your personal return, they could come from a flow-through entity or they could come from your sole proprietor business, or your rental properties that you own directly. Those losses are going to be limited and on a married filing joint return, they can’t exceed $500,000, and all the filing status is $250,000.

Now, you’ve got to remember that in order to get a business loss on your tax return, you have to jump through a number of what I call tax hoops. You have to have tax basis. You must be at-risk in the activity, and you may be subject to the passive activity rules. This is a new add-on hoop that you have to jump through.

What’s the impact of this? The impact is you’re not going to lose your losses, but they’re going to be limited, and the loss that you’re not allowed to claim, and I’m going to explain that in an example, is going to be carried forward as part of a different type of loss called a net operating loss.

What this means is the government is no longer going to allow you to front load your losses. They’re going to make you spread those out. You still get the tax benefit. It’s perceived as a tax increase, when in fact it’s just a deferral of a tax benefit. It makes the value of that benefit, that loss slightly lower if you look at a cash adjusted present value basis.

Here’s an example. I have a married individual. They have a million five of non-business income in their return, and they have an $800,000 business loss that’s flowing through on their tax return. The $800,000 has jumped through all the previous hoops we talked about and it’s good for us to take.

In this situation, the taxpayer is going to be subject to this new business loss limitation, and instead of being able to claim $800,000 of loss and have income that’s taxable as $700,000, the loss is going to be limited to $500,000 and they’re going to pay tax on $1 million. The remaining $300,000 loss will be carried forward. In talking to our clients that are impacted by this, we’re advising them let’s not focus so much on this limitation. We can’t really change it.

What we can do is focus on the income that’s taxed, and how is it that we’re going to best manage that income to give you the best tax result? That way, we’re going to look at it in a positive way and plan the timing of the receipt of income where it’s possible or the types of income we’re going to receive in loss years so that we can minimize the tax.

It’s important that we do that because in the case of the loss in the example I gave you, that’s a true economic loss that’s passed all the hoops, so you have it allowed on your tax return. We have to manage the rest of the tax liability so that you can better manage your life and have more money available even with the restricted loss.

Like-kind exchanges were also impacted under the new law. Fortunately, the changes here are relatively simple, but a like-kind exchange is when business property of a like-kind, say real property used to trade a business, is exchanged for other real property within a certain timeframe. These transactions resulted that were not treated as sales where a gain was recognized, but instead the gain or loss is deferred and you don’t have to pay on the gain until you sell that other property.

These like-kind exchanges applied in the prior law to real property and personal property in certain types of intangible personal property. Under the new law, the like-kind exchanges were only applied to real property, and any types of personal property or intangible personal property will be treated as a sale. Any like-kind exchanges in process before 2018 that are completed in 2018 will be able to use the old rules, but any other sale of personal property will be treated as tax for sale.

Carried interest is another change. Carried interest is something that has gotten a lot of attention over several presidential administrations about eliminating this so-called loophole in the tax law. What a carried interest is, is a partnership profits interest, and that partnership profits interest allows the holder generally to receive capital gain instead of receiving a fee. It was viewed as a way to convert ordinary income to long-term capital gain.

We see these types of transactions in the investment banking world and in the real estate world very frequently. As this is perceived by some as an equity in the tax system. A new provision was brought in and it essentially says that if you do not own this carried interest for at least three years at the time you receive a gain from it or the time you sell it, then any gain on the transaction will be treated as a short-term capital gain.

As we all know, a short-term capital gain does not get the preferential tax rate that a long-term capital gain does in the effect or the hoped effect is that tax at ordinary income rates will be paid on these types of transactions. The reality in the business world is very often that a three year ownership period or a carried interest is a little more the exception than it is the rule. Most of them last longer than that, five or six years.

The second thing about this rule is that it treats the income as short-term capital gain, and it allows room for planning, because short-term capital gains can be offset by capital losses. In years when this type of transaction is treated as a short-term capital gain, the taxpayer involved in the transaction will have the opportunity to harvest capital losses and possibly offset the tax on this short-term capital gain.

Net operating losses are also going to be changed. Now, a net operating loss for an individual, to oversimplify what that is, happens when an individual’s income is less than all of the deductions in the tax return resulting in an overall loss or a negative taxable income, if you will. Under the prior law, if you had that situation, the net operating loss could be carried back two years and forward 20 years.

The idea behind this was to average high income years and poor income years so that it would average down your effective tax rate. It was a benefit. The government agreed that they would help you in years that you had big losses, and even give some of your prior tax liability back in that situation. The tax reform has turned this on its head, somewhat like the limitation on the business losses, net operating losses now are going to be subject to a limitation based on taxable income. They will not be able to exceed 80% of your taxable income before you consider the NOL.

Second, NOL carry-backs are no longer going to be allowed, except for certain farming businesses. What’s the impact? The impact is that net operating loss benefit will be spread over multiple tax years, and will not reduce taxable income to zero. That’s a huge planning issue for a lot of folks because when they’ve had these economic losses in a tax year, their expectation is they shouldn’t owe any tax.

This has changed it. The government is saying, “We’re not going to let you take that all in the front end. You’re going to still have to pay some taxes, even though you have an NOL. We’ll allow you an unlimited time of carried forward on your NOL until you use it, but you’re not going to get your taxable income to zero through this mechanism.”

In the example that I have for you, I have a taxpayer whose taxable income is $80,000 before considering their net operating loss. In the example, I have a $90,000 operating loss. In the old law, I would not have to pay any tax. I would have negative taxable income of $10,000. In the new law, my NOL deduction is going to be limited to 80% of $80,000, or $64,000. In effect, I’m going to be paying tax on $26,000 even though I have a total economic loss.

Again, what’s our planning? The planning is going to be a lot around how do we deal with the $26,000 of taxable income that I’m going to have, and how can I minimize the tax on that? It’s completely different way of dealing with this area, and our clients are going to have to start to prepare themselves that when they have economic losses, they still can have a tax liability.

Now, the biggest item affecting folks that own small businesses is this new Section 199A deduction, or sometimes called the pass-through deduction. This is going to be in place for eight years, 2018 to 2025. What it is, is if I have a business that is run through a flow-through entity or a pass-through entity such as a partnership, and S-corporation or sole proprietorship, I’m going to get a 20% deduction on my domestic source qualified business income.

What that means is we have a whole new world of how to look at tax returns and flow-through income. A lot of new terminology, a lot of new defined terms, and a different way to calculate a deduction. The reason they brought this in, in part, was to help fuel the economy, because small businesses represent a very large segment of the economy, and they wanted to incent business owners to invest and then grow those businesses. It’s designed to favor income derived from capital investment over income derived from personal services. We’re going to talk about how that works a little bit later.

The second thing it does is it reduces the top income tax rate, an income from flow-through businesses that qualifies for the deduction, from 37% to around 30%. This also dovetails to a certain degree with the new C-corporation rules that implemented a flat 21% tax rate on those types of entities. That was a significant reduction from the tax rate of 21%. When you do the math on this, because we frequently get questions, “Hey, should I convert my flow-through entity to a C-corp to take advantage of that lower rate?”

What people aren’t realizing is that there’s two tiers of tax in a C-corporation. One at the corporation level, and one at the owner level when dividends are paid. Under the old law, if I had a C-corporation when I took into account the tax at the corporation rate, and the tax at the individual rate, that combined tax rate could be as high as 50%. Whereas for an individual in a flow-through entity, just looking at their income tax with the prior highest rate at 39.6% and a phase-out of itemized deductions, the maximum tax rate was slightly over 40%, a 10% advantage to the flow-through entity.

In the new rules after the adjustment of the corporation flat rate tax, corporation and individuals and owners will be subject to a combined tax rate of roughly 40%. As we can see, after this 20% deduction, the maximum rate will be roughly 30%, thus maintaining a roughly 10% differential between the two types of taxpayers. This will, I think, put the brakes on a lot of folks rushing to form corporations, by having this deduction and getting lower overall tax rates.

This will be a completely new deduction item on the Form 1040. It’s going to apply whether you itemize your deductions or claim a standard deduction. It’s going to add a fair amount of complexity to both business returns and individual tax returns. The reason I bring up the complexity on the business tax returns is that information necessary to compute the deduction at the individual tax level, remember this deduction is going to be taken on the individual tax return, not on the business tax return, information from the business needed to compute that deduction is going to have to be passed through to the flow-through owner.

Also, because this deduction is very new, the IRS is going to have to issue significant additional guidance on helping us in determining how these calculations are done. Within the new Section 199A, Congress wrote specifically that the IRS will be needing to issue regulations on several aspects of this. What kind of information do I need to calculate this deduction? Well, for each business entity, each business entity not all of mine and the aggregate, but for each entity, I have to do some work to calculate the deduction attributable to that entity.

A partial list of the information that’s going to be needed, one is what’s the taxable income of the owner? This is very interesting. This is the first time in the tax law that we’ve ever had a deduction that has been partly impacted by taxable income. Most of the things that Chris talked about earlier for itemized deductions are limited based on total income or adjusted gross income. This is limited based on taxable income, which is taking all my income, net out of my standard deduction and using that as the starting point. Very different, very new, and will require us to think about things a little bit differently.

We’re also going to need to understand the type of business, what the qualified business income from the business is, how much in wages were paid by the qualified business, and we’ll also need to know the acquisition cost of tangible property used in that trade or business. Most of our focus when it comes to fixed assets has been on what’s my original cost less depreciation I’ve taken? The result of that is what’s called adjusted tax basis.

Well, we’re going to be looking purely at cost in this transaction, which again, a very different approach. Lastly, for pass-through entities, the allocable share of these items is going to have to be disclosed to the owners, and pass through them on the K-1 or some other method so that they can make their computation of the deduction.

A few terminology things, new terminology that we have to use, one of them is what’s a qualified trade or business? Like a lot of things in the tax code, it doesn’t really tell us what they are. Instead, what we’re told is we’re going to tell you what it’s not and everything else will qualify. Basically, it’s any trade or business, except those in specified trades or businesses, such as businesses that are in the business of investing or investment management, trading or dealing in securities or partnership interest or commodities, they’re out.

Also, services in the fields of health, law, accounting, actuarial science, performing arts, consulting, athletics, financial services, brokerage services, they’re out. Then Congress, in its infinite wisdom, instead of coming up with a new definition, actually borrowed this one from another code section and that other code section has this tail on it that says, “Any trade or business where the principal asset of the trade or business is the reputation or skill of one or more of its employees, those businesses don’t qualify.”

Right now, we don’t have any guidance of exactly what that means. It’s going to be subject to interpretation until the IRS issues us with the guidance. That’s one of the things that we frequently hear is “does my business activity qualify?” Well, it has to be looked at to see if it’s not one of the service type businesses that are excluded. In some cases, there’s not going to be easy or definitive answers.

The other type of trade or business where it doesn’t apply is trade or business of being an employee. If I’m getting a W-2 or I’m getting a guaranteed payment, that doesn’t qualify me to take this deduction. Well, there were a lot of special interest groups when this was released that looked at this and put a lot of pressure on Congress, because they’re powerful, like the accounting folks, the lawyers, the doctors, folks in the consulting industry. So we said, “Look, we’re out. That’s not really fair to us.”

The reason it’s not really fair to us is our businesses aren’t solely a substitute for W-2s. In other words, it’s a business accounting entry that issues me a W-2 each year, and that’s my income. There’s more to it than that. These businesses have to be capitalized. By cutting us out such as the accounting fee, a lot of it isn’t quite fair to us because we have to reinvest our earnings in our businesses after tax to keep them going.

The Senate Finance Committee at the 11th hour made a change to allow certain specified businesses to claim this deduction, provided that the taxpayer’s taxable income falls within a certain range. Someone that’s married filing joint, if their taxable income is $315,000 or lower, or in any other status, $157,500 or lower, they’re going to get the deduction.

For persons in what they call a phase-in range, and that is for married filing jointly between $315,000 and $415,000, and for all other status, those between $157,500 and $207,500, they’re going to get a modified calculation, a slightly reduced 20% benefit. For those that have taxable income above these thresholds, they will get no deduction.

The other part of the change has to do with qualified property. Qualified property was not originally part of the computation, but it was brought in at the last minute, because there were a lot of businesses out there that use property, have heavy capital investment in property, but a small investment in personal service or in employees. Congress decided, we’re going to allow this. We’re going to make a change that allow those types of industries to get this deduction, and so they came up with this new concept of what property can qualify a business for taking this deduction.

Basically, it’s any tangible personal property subject to appreciation that’s used in the business, and it’s held by the business at the close of the tax year and used in the trade or business in the production of qualified income at any point during the year. Again, this is based on the original cost of the property, not the depreciating cost of the property. The only caveat they had is that the property still has to be depreciating in order to use that property in the calculation.

For real property, that’s pretty simple. It usually has a pretty long life, 27.5 years or 39 years, depending whether it’s residential property or commercial property. But for personal property, most of appreciation periods are relatively short. What they said is if you’ve purchased this property within the last 10 years, even if it’s been fully depreciated, you’ll be able to use that property in the calculation. Essentially, any personal property that was purchased in 2008 or later is going to be pulled into the calculation.

The other concept is what’s qualified business income? Generally, that’s the amount of the income from your business less any deductions and losses from that trade or business. But it doesn’t include some items, including qualified REIT dividends, that’s dividends from a real estate investment trust, or certain types of qualified income from a publicly-traded partnership.

It’s qualified that are, as I mentioned earlier, connected to a U.S. trade or business. This income can’t be derived from outside the U.S. and count for the deduction. It includes any deductions or allowed in determining taxable income for the taxable year. It specifically doesn’t include capital gains and losses, dividends or payments in lieu of dividends, certain interest income, and annuities that have been received in a trade or business that aren’t connected with the business, and W-2 or guaranteed payments, a W-2 to employees, or guaranteed payments to owners.

Let’s talk about the nuts and bolts of how the calculation is formed. This is a test of being able to understand words on a paper, sort of like you had in high school when you were doing word problems in algebra. I had to read this a few times so that I could understand this. I had to go slow because it’s counterintuitive.

They say, what is my deduction? It is the lesser of 20% of my qualified business income, so 25% of that new term we just learned, or the greater of under two, the first of the second item. First item being 50% of the W-2 wages with respect to the business, or 25% of the W-2 wages plus 2.5% of the unadjusted basis of tangible personal property or qualified property at the time of acquisition, sometimes called the Corker Kickback. This latter limitation is what is allowing folks in the real estate businesses to claim the deduction. Again, an 11th hour change. The real estate lobby put some pressure on Congress to allow the deductions to real estate folks.

The reason they did that is typically in the real estate world, W-2 wages are not a significant part of the rental business. Oftentimes, property management companies that have employees manage rental properties for a fee, and so W-2 wages typically are not part of the expense parameters that you see in the real estate business. For each qualifying property, we’re going to do this counterintuitive calculation that’s either the lesser of 20% of QBI or the greater of A or B.

The first time I saw that I had to stop and think about it, and put it down on paper, and put it on an Excel spreadsheet until I said, “Aha, I see how that works.” It’s a small matrix. Once you do this calculation for every one of your qualified businesses, and many of our clients have multiple businesses in their individual tax returns, this result is referred to, when you add them all together, as the combined business income amount.

Congress picks terms that make sense to them, but when I was first reading this, I said to myself, “I thought I was working on deductions, not income.” But they needed to give a term to the sum of all your allowed or your calculated deductions or they decided to call it this. Like you, if you’re confused, that’s fine. Congress can make up its own terms. They’re allowed to do that.

The next step is that there’s going to be an overall deduction limitation on this pass-through deduction. You can all read that up there and it’s almost as confusing as the prior calculation, but the purpose of it is to prevent manipulation of this deduction, because there are situations for individual taxpayers where they end up being taxed at the capital gain tax rate on their income, because most of their income is capital gain income.

By putting this limitation in place, it prevents people from taking the pass-through deduction and being taxed at the lowest capital gain tax rate. I decided to do a few examples to test whether you’ve been paying attention and whether I have actually had the chance to master this new calculation. I have a first example. I have an S-corporation and it’s doing very well. It has $800,000 of qualified business income and pays $100,000 in wages to employees including the owner.

Under the rules that we just discussed, the QBI deduction is the lesser of 20% of the QBI or 20% of $800,000, or the greater of 50% of the W-2 limitation or 25% of W-2 wages plus 2.5% of qualified property. When you put this on a matrix, you can see my QBI deduction at 20% is $160,000. My limitation based on 50% of W-2 wages is $50,000. Because the $50,000 is lesser than the $160,000 full deduction, I get a QBI deduction of $50,000.

In my next example, I changed it slightly. I have a taxpayer who also owns an S-corporation and has $1 million of rental income from the business, again, doing very well and has an adjusted basis in property of $10 million. So, nice feel of 10% return on property every year.

In this case, the QBI deduction is either 20% of $1 million, or subject to the greater of the 50% W-2 limitation, which is zero, or the second limitation based on 2.5% of qualified property. When I look at the 2.5% of qualified property calculation, that renders the $250,000 QBI deduction. However, because the 20% of $1 million is the lesser of the two, I get a QBI deduction of $200,000.

Then the last example, I have an S-corporation that has a rental income of $1 million, same as B, except, I also pay $100,000 of wages to employees, including the owner. Here my QBI at 20% of rental income is $200,000, my wage limitation is $50,000 or 50% of $100,000, and to combination of my wage limitation at 25% and 2.5% of my qualifying property renders $275,000. Because the $200,000 is less than greater of $275,000 or $50,000, I wind up with the $200,000 deduction.

What’s going to happen in this area? A lot of extra work. Companies are going to have to change their accounting to derive the information that’s necessary for computing this deduction. If it’s a pass-through entity, it’s going to have to be communicated to the flow-through owners via the K-1s, something we didn’t have to do in the past, and companies may have to change some of their accounting in order to start recording the data that’s necessary to claim the deduction.

The second thing is that over the next six months to a year, we’re going to get guidance from the IRS. We’re not sitting back in our heels and waiting for that. We’re working aggressively with our clients to understand whether they qualify for the deduction and what it might look like. But this process is going to evolve as more guidance is issued by the IRS, so stay tuned. We’re going to be working hard in this area, and for those clients that get this deduction, we’re going to be here to support you.
Chris Davis: Thank you, Frank. This is Chris Davis, again. If anybody had any confusion about whether this was a simplification of the tax law or not, those thoughts are gone. That is very complicated application of this pass-through deduction. We’re going to end this with estate and gift tax exemptions. Before I start on estate and gift tax exemptions, I’m just going to briefly just remind everybody of the current estate law.
The current estate law is the government will tax you on 40%. There’s a 40% tax rate that is applied on the value of your assets the day you pass away. Thankfully, there’s a big deduction and then big exemptions associated with estate taxes. One is you can pass along your assets to your spouse and receive an unlimited deduction, so there’s no tax if you leave your assets to your spouse. Two is there’s large exemptions.
In 2017, each of us had a $5.45 million estate tax exemption. That meant the first $5.45 million of estate tax exemption was not taxed at the 40% rate. If you were worth $10.45 million, you got a $5.45 million exemption, and the remaining $5 million would be taxed at the 40% rate. That was the old law. The new law is quite simple. It’s significant and has a lot of impact, but it’s quite simple. They just took the $5 million exemption and doubled it to $10 million.
With index for inflation for 2018, the basic exclusion or the exemption is $11.2 million per person or $22.4 million for a married couple. That’s a significant increase. Remember, this is effective for tax years from 2018 through 2025, at which time it will expire in the 2017 law and it would revert back to a $5 million exemption index for inflation. Typically, we will see Congress, like I mentioned earlier, I would expect that in the 11th hour, Congress will try to do something to either extend or modify these exemptions at the end of 2025.
As importantly, we retained the basis step-up. What basis step-up is, is when you pass away, regardless of the estate tax imposed, you get a step-up in basis to the value of your asset at the time of death. If you purchased an asset for $100 and it was worth $1,000 the day you pass away, your new basis or the new basis to your heirs is now $ 1 million. We still have basis step-up.
That’s very important. What does this mean? It means that you should revisit your estate plans. If you’re a married couple, a combination of two $5.45 million exemption would give you an $11 million total exemption on old law. If you were between that $11 million and $22.4 million, that before you thought you had an estate issue, you may not, at least for the next seven or eight years. It also means you should reevaluate your estate plan because basis step-up is more important.
For instance, if you are worth say $17 million right now, and you’ve already transferred $10 million out of your estate or you were considering transferring more money out of your estate, that’s great. But any assets that are not in your estate do not enjoy a basis step-up, so careful consideration needs to be made before making gifts or any other estate transactions to make sure that you are optimizing basis step-up.
Again, not a complex change to the estate and gift tax law, but a significant change by doubling the exemption from $5 to $10 million, inflation adjusted is $11.2 million, and for married filing jointly, $22.4 million for married couples. That’s it. We’re going to talk about questions.
Let’s see what we got here, questions, do we have any questions? We’re going to put you on mute just for a second while we look at the questions. Hold on. All right, we did have one question as it pertains to casualty losses. It’s actually a very good question, so I’ll let Frank answer that question.

Frank Ciaburri: What is the question, again?
Chris Davis: I’m going to read the question. That’s a good point, Frank. “If you live in a federally-declared disaster area, can you deduct a theft loss as well as a casualty loss as itemized deduction?”
Frank Ciaburri: That’s a really good question. The way the law is written now is that you can only deduct a casualty loss if you’re in a federally-declared disaster area. There’s a couple of different interpretations of that. One is, those could be considered completely separate based on the facts transactions.
I could have been in a federally-declared disaster area, I could have had damage to my home, and sometime in that process, because we all know as these things happen, you typically have to leave the area, especially in the case of a flood or a fire. Then folks come back later to see how they fared through that problem. These areas sometimes get invaded by looters and other people trying to take advantage of a situation, and they might enter homes that are vacant and steal items.
A lot of times, the looters can get there before the authorities can secure the area, and so the question that would have to be answered is, is the casualty loss a separate event from the theft loss? There’s quite a bit of case law about this, and that’s what I think the focus would be from an IRS perspective, is it one event, or is it two events?
Chris Davis: If they were unrelated, it’s unlikely that you would get a casualty loss for a theft if it was unrelated to the disaster.
Frank Ciaburri: That’s correct.
Chris Davis: To the event creating a disaster.
Frank Ciaburri: Right. However, if that happens say sometime during the time of the disaster or slightly afterwards, that would be the question, are they two separate events, or are they one event? That’s a fact and circumstances determination. I think it would break down to individual cases.
Chris Davis: Right.
Frank Ciaburri: There’s not a cut-and-dry answer for that. In most cases, I think if I looked at it, I might say they’re two separate events and you only get casualty loss and you’ll have to deal with your insurance company for the theft loss.
Chris Davis: Good question. That kind of is another reminder that, whether it’s on this subject or anything else we talked about, the law has been changed but the Treasury Department has not promulgated the regs. They’ll issue regulation that will give us guidance when there’s questions such as these or other questions that come up over the next six months to a year at least, maybe a couple of years, they will be issuing regulations to clarify these laws.
I do want to thank everybody for attending today. Hopefully this gives you a better understanding of the new tax law, and how it affects you personally, whether it be through the tax rate changes, the itemized deduction changes, or this new flow-through of 20% deduction concept. If you have any questions or follow-up questions, please direct them to us, or your other Aprio professional, and we’ll be glad to help. Thank you, and good afternoon.

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