New Opportunities Under Tax Cuts and Jobs Act
By Hoffman & Associates
As you are likely aware, Congress has passed and President Trump has signed into law the Tax Cuts and Jobs Act, effective January 1, 2018. Although continued study of the new provisions will undoubtedly reveal additional opportunities that we can share with you and your family, we wanted to provide some of our immediate impressions so you can get a head start on tax planning for 2018.
New Opportunities for Dynasty Planning and Discounted Gifting
Under the new law, the estate, gift, and GST tax exemptions have doubled to $10.2 million per individual taxpayer, $22.4 million per married couple, adjusted for inflation every year after 2011. This expansion offers a significant opportunity for you to protect and transfer more assets than ever to future generations without tax consequences. In 2017, the IRS also withdrew its proposal to significantly limit the discounting provisions of the Section 2704 regulations for closely-held businesses. These two changes open the door for significant wealth transfers using dynasty trusts, family partnerships, discounted gifts, and other strategies that could shield entire fortunes from transfer taxes.
We should also note that the while the estate tax and GST tax exemption doubled on January 1st, it is set to sunset December 31, 2025 and will revert back to $5 million per person and $10 million per married couple (still adjusted for inflation). Though you may be tempted to wait, as seven years may feel like plenty of time to plan, this tax legislation is likely to be heavily modified if the political pendulum swings in the other direction. (The clock is already ticking steadily towards the 2018 midterms and 2020 Presidential election.) Of course, we have tools that can build flexibility into your plan, including trust protectors, decanting powers, and other strategies to deal with future changes. These strategies only work to preserve options if we implement plans while the exemption is available.
With the estate tax exemption levels as high as they are now, it is critical to also plan for income taxes. As always, clients’ estate plans should be reviewed and revised to make sure they take advantage of the step up in basis at death. The current basis step up under Code Section 1014 for inherited property remains in place in the new tax law. This step up in basis can result in significant income tax savings for your family after your death. For clients with estates less than the estate tax exemption amount of $10.2 million ($22.4 million for a married couple), it should be a priority to review your plans this year to ensure it captures the step up in basis to the extent possible.
If you have any concerns about how these changes tax will impact your family, give us a call so we can maximize the opportunities afforded by the new bill.
Significant Changes to Business Taxation
There are sweeping changes to the taxation of businesses under the new tax law, including a temporary deduction for pass through businesses, a reduction in the tax rate for C Corporations and several changes to the limit of deductions and exclusions that apply to businesses of all types.
If you own a business or are thinking about starting one, give us a call. Many of the new, business-oriented deductions have specific rules in order to qualify, and many of the old rules and deductions have been removed or modified. Relying on old rules of thumb or ignoring this monumental change in business taxation as you make business plans could mean paying unnecessary taxes.
Choice of entity (partnership, LLC, S corporation, C corporation) and ownership structures (whether domestic or international) should be also revisited in light of these significant changes to ensure your business’s tax exposure is as low as possible.
Changes to Individual Income Taxes
The standard deduction for individual income taxes has increased to $12,000 for individuals, $18,000 for heads of household, and $24,000 for married couples filing jointly, and some above-the-line deductions (e.g. moving expenses and alimony) have been removed. These changes were intended to simplify tax filings. Additionally, the law retains the deductions for 529 plans, IRAs, 401(k)s, and Health Savings Accounts (HSAs), offering several opportunities to reduce your taxes while building financial security for the future if you choose to save and invest some of the tax savings.
The changes provide no reduction in personal capital gains rates (which remain 20% for most assets and taxpayers) and no repeal of the 3.8% net investment income tax. Charitable planning remains an excellent option to help reduce these taxes. If you are considering making a significant charitable gift, a charitable remainder trust, lead trust, private foundation, or other strategy may be an excellent option to save income and estate taxes while benefiting a cause you care about.
The new law limits the deduction for payment of state and local taxes to $10,000 ($5,000 for a married individual filing separately). It also doubles the child tax credit from $1,000 to $2,000 per child under age 17, though it is phased out for joint filers with incomes over $400,000 and single filers with incomes over $200,000. Like the doubling of the estate and gift tax exemptions, these increases sunset at the end of 2025.
Final Considerations and Next Steps
Planning to minimize income and estate taxes is always a balancing act. Stay tuned to our website and newsletter for updates and planning strategies in the coming months to keep you abreast of the latest estate planning opportunities.
We are available to answer your questions about these tax reforms and work with you to take full advantage of the opportunities. Now is a great time to review your plan, so schedule a meeting with us so we can ensure your plan takes advantage of these changes.
We look forward to hearing from you. Contact us at 404-255-7400 or info@hoffmanestatelaw.com.
