2019 Year-End Tax Guide

THE MARCUM 2019 YEAR-END TAX GUIDE | www.marcumllp.com

similar asset (e.g., other marketable stock) which will establish a new stock basis (though a new holding period will begin for the asset). Some individuals may prefer to transfer equal amounts to their favorite charities on an annual basis. In this case, the bunching strategy can be used along with a donor advised fund, which will provide the funds to the charity in the years desired. Qualified Contribution of IRA Required Minimum Distribution to Charity The law permits a taxpayer who is 70.5 or older to direct a transfer of up to $100,000 of deductible contributions and earnings from an IRA to a qualified charitable organization. This amount is not taxable and offsets the required minimum distribution (RMD) the retirement account owner must withdraw for the tax year. This effectively gives the taxpayer a 100% deduction without AGI limits and for which a benefit is provided as a reduction of adjusted gross income – even if the taxpayer utilizes the standard deduction. As we approach year-end and required minimum distributions are being made, this is a strategy which must be considered. STATE AND LOCAL TAX (SALT) DEDUCTION LIMITATION $10,000 Limitation The TCJA limits the SALT deduction for individuals, trusts and estates for non-trade or business activities to $10,000 each year as an itemized deduction. In addition to the direct impact on taxable income, the SALT deduction limitation produces an indirect impact on Net Investment Income Tax (NII). The deductions which are “attributable to investment income” and which would reduce net investment income are decreased. Segregate Personal, Business and Investment Related Activities The statutory language specifically provides that the SALT limitation does not apply to a trade or business or to investment (i.e., Internal Revenue Code section 212) activities. It is important to determine the nature of the property on which property taxes are paid to determine deductibility.

Potential Deduction for Allocated Coop Taxes There is a reasonable textual argument that real property taxes allocated to a “tenant-stockholder” should not be subject to the SALT limitation. The owner is permitted a deduction for the allocable share of coop taxes paid for real estate taxes allowable to the corporation. Since corporations are not subject to this limitation, arguably the individual owner should not be subject to the SALT limit. The problem is that Congressional reports suggest the intention to include these payments within the limitation; however, this may require a legislative fix. Since it may produce an unusually large tax deduction, taxpayers should consider disclosing this position on their filed tax returns. Incomplete Non-Grantor (ING) Trust Historically, non-grantor trusts have been used to avoid state income tax, with trusts having residence in states such as Nevada and Delaware, where trust income is state tax-exempt. This strategy does not work to exempt income from state income tax in states where the residence of a trust is based on the residence of the grantor. Additionally, the trust must avoid “grantor trust,” status whereby income is taxed to the grantor. The TCJA SALT limitation has created new interest in INGs as a mechanism to create multiple taxpayers with separate $10,000 SALT limitation buckets (depending on number of trusts). To be effective, the trust must generate sufficient income to utilize the deductions. Additionally, care must be taken in drafting to avoid the consolidation of multiple trusts by the IRS into a single trust and to avoid grantor trust status.

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