The Tax Cuts and Jobs Act Headed to President Trump’s Desk

Today, the U.S. House of Representatives and the U.S. Senate passed Tax Cuts and Jobs Act, sending the bill to President Trump’s desk for his signature.  We call your attention to some of the key provisions in the law and encourage you to contact the Firm to discuss best practices for incorporating its provisions into your business, estate, and tax planning, along with any questions you may have about how the law impacts you.

Corporate Rate: The corporate rate is cut to 21 percent starting January 1, 2018.

Taxation on Pass-Through Entities: Pass-through entity owners that meet certain conditions are eligible for a 20 percent deduction on their business income. Pass-through owners who file jointly and earn at least $315,000 in business profits are subject to limitation on the deduction. The restriction is based on how much the pass-through pays in wages or invests in equipment and machinery. Service businesses, such as law and accounting firms, are eligible for the deduction if owners are under the threshold. The deduction would expire in 2026.

Individual Rates: The top individual rate is 37 percent for individuals earning $500,000 and above, and joint filers earning at least $600,000. There are seven tax brackets total: 10, 12, 22, 24, 32, 35, and 37 percent. The law doubles the standard deduction to $24,000 for a couple filing jointly. The rates and standard deduction expansion expire in 2026.

Interest Deductibility: The law limits the interest deduction to 30 percent of a company’s earnings before interest, tax, depreciation, and amortization (EBITDA) for four years. After that, the law limits the deduction to 30 percent of earnings before interest and taxes (EBIT).

Business Expensing: Full expensing of new and used capital investments is permitted for five years.

Corporate Alternative Minimum Tax: The corporate AMT is repealed.

Individual Alternative Minimum Tax: The individual AMT is increased to apply to individual filers earning more than $500,000 or joint filers earning $1 million.

Estate Tax: The exemption is doubled to estates worth $11 million for individuals, $22 million for couples. The exemptions would revert to current levels after 2025.

State and Local Tax Deduction: Taxpayers can deduct up to $10,000 of state and local taxes paid—property taxes and either income or sales taxes.

Mortgage Interest Deduction: The law preserves the deduction for existing mortgages and caps it at $750,000 for newly purchased homes starting Jan. 1, 2018.

Child Tax Credit: The child tax credit is increased to $2,000 per child with up to $1,400 of it being refundable.

Why Estate Planning is Still Important in Light of the Tax Cuts and Jobs Act

Last week, we covered some of the important provisions in the Tax Cuts and Jobs Act passed by the U.S. House of Representatives and Senate.  Under the House and Senate versions, the individual estate tax exemption amount is doubled to $10.98 million in 2018, and the House version would completely repeal the estate tax for individuals dying after 2023.  Because this means married couples can effectively leave up to $22 million to beneficiaries tax-free, you may believe estate planning is no longer necessary.  However, estate planning is still important to ensure your assets are properly managed, and here are a few reasons why:

  • Federal Income Tax Remains Under the Law: Income taxation affects potential beneficiaries and heirs to your estate.  Upon death, your assets’ basis is “stepped-up”.  The step-up basis of assets that occurs is an important tax planning technique that affects beneficiaries’ income.  In order to ensure your beneficiaries are not negatively impacted by the step-up basis, proper estate planning is required.
  • Planning for potential disabilities or illness: There may come a time where you become disabled or fall ill. It is best to put documents in place, such as a power of attorney, in advance of such circumstances. Further, you may lack the required mental capacity to appoint persons to handle your affairs in the future. If a valid power of attorney does not exist, a court may appoint a legal guardian to control your assets, who may mismanage your affairs or may not act in your best interest.
  • Asset Protection and Control: Asset protection is another important reason to consider implementing an estate plan. The use of a last will & testament and trusts allow you to maintain control of your assets for future generations to enjoy.

ο  Transferring assets outright to your beneficiaries allows them to take direct ownership of the assets, which exposes the assets to creditors, divorcing spouses, as well as bad decisions of those beneficiaries. Placing the assets into a trust, however, does not allow the beneficiaries to unilaterally draw down on the assets for their own desires (e.g., extravagant purchases, gambling, addictions). Further, the trusts generally provide protection from the beneficiaries’ creditors and divorcing spouses. Moreover, if properly structured, the assets can be placed in a trust that is domiciled in a state that affords asset protection benefits against your creditors.

ο  While providing these protections, trusts typically are structured to provide the beneficiaries to access funds for lifetime needs (e.g., health, education, maintenance, support) upon the approval of a trustee. Additionally, a trust may allow for distributions outright to the beneficiaries when they reach an appropriate age or circumstance (e.g., lack of creditors, existence of prenuptial agreement, no addictive behavior)

  • Protecting Familial Relationships: Estate planning decisions can cause some hard feelings within families.  Careful thought and consideration must be given to how your assets are transferred, and having a discussion with family members about wealth-planning decisions often leads to better outcomes.  An experienced estate planner can offer their advice and expertise, ultimately making sure your assets are transferred smoothly.

Tax Law Client Alert: How the Tax Cuts and Jobs Act Affects You

In November, the U.S. House of Representatives passed the Tax Cuts and Jobs Act, sending the bill to the U.S. Senate.  This past Saturday, the Senate passed its version of the Tax Cuts and Jobs Act.  There are many differences between the House and Senate bills, including the individual tax brackets and how pass-through entities are taxed.  We call your attention to some of the key provisions in the House and Senate bills, along with how the bills change the current tax code.  Now that the Senate has passed its version, the bills need to go through the reconciliation process before they are sent to President Trump’s desk to sign into law.  If the Tax Cuts and Jobs Act is signed into law, we encourage you to contact the Firm to discuss best practices for incorporating the changes into your business and tax planning, along with any questions you may have about how the law impacts you.

Provision Current Law House Tax Cuts and Jobs Act Senate Tax Cuts and Jobs Act
Income Tax Rates 10%, 15%, 25%, 28%, 33%, 35% and 39.6% Would create four personal tax rates of 12%, 25%, 35%, and 39.6% that generally would kick in at higher thresholds than current law, effective in 2018. Would retain seven tax brackets that would apply to higher tax brackets. The proposed brackets are 10%, 12%, 22%, 24%, 32%, 35%, and 38.5%

 

Standard Deduction and Personal Exemption $12,770 for married couples filing jointly; $9,350 for head-of-household; $6,350 for all other taxpayers $24,000 for married couples filing jointly; $18,000 for head-of-household; $12,000 for all other taxpayers. The personal exemption is eliminated.

 

$24,000 for married couples filing jointly; $18,000 for head-of-household; $12,000 for all other taxpayers. The personal exemption is eliminated.
SALT Deductions Currently, taxpayers may deduction state, local and property taxes. Eliminates individual state and local income tax deduction, but retains property tax deduction with cap of $10,000.

 

Eliminates individual state and local income tax deduction, but retains property tax deduction with cap of $10,000.
Taxation of Pass-Through Businesses Currently taxed at the applicable individual income tax rate. The tax rate applied to business-related income from partnerships, limited liability companies and S corporations would be 25% for active participants in the business operations.  Passive investors who do not materially participate in the business would be subject to a 9% tax rate.

 

Permits individuals to deduct 23% of qualified domestic business income, equating to a 29.6% maximum rate, effective in 2018.
Estate Tax For an individual who dies during the 2017 calendar year, the estate tax exemption is $5.49 million. The estate tax exemption amount would be doubled in 2018.  The estate tax would be repealed completely for individuals dying after 2023. The estate tax exemption amount would be doubled in 2018, however the estate tax will be retained going forward.

 

Welcome

Welcome to the new MDM&C Estate Planning and Tax Controversy Blog!  Through this medium we hope to deliver valuable information relevant to private client services including but not limited to trusts and estates, wills, estate administration, and tax controversy.