Category: Tax

The New Tax Law – A Good Deal for Estates. . .or Maybe Not so Good

Most of the buzz surrounding the new tax law effective this year has been on corporate income tax rate reductions, treatment of pass through entities, limitations on state and local deductions and other higher profile income-tax related changes.  For estates, the one big change is the increase of the Estate, Gift and Generation Skipping Tax exemption to $10 million, $20 Million for married individuals. This is a good thing for very high net worth families, but for the vast majority of Americans, the $5 million plus exemption already in place worked just fine.  The new tax act, however, has another provision relating to trusts and estates which doesn’t work out so well for anybody, and that’s the suspension of the deduction for miscellaneous expenses subject to the 2% floor.

Heretofore, individuals could take as itemized deductions on their 1040 certain miscellaneous expenses to extent they exceed in the aggregate 2% of the taxpayers adjusted gross income. These expenses include employee business expenses, investment management fees, tax preparation fees and many others. In this group of expenses one relating directly to trusts and estates is excess deductions on termination of estates and trusts that can be passed through to estate and trust beneficiaries.

Estates and trusts are taxpayers and must report and pay tax on net income earned or pass that income through to estate or trust beneficiaries.  To arrive at net income estates and trusts may deduct among other items attorney fees and fiduciary fees like executor and trustee commissions.  In the estate context attorney and fiduciary fees are very often the largest expenses of an estate and can exceed income by a wide margin, especially where there are few income producing assets or they have been sold or distributed during the tax year. If this disparity occurs in the final tax year of the estate, the excess deductions can be passed through to the beneficiaries and added to their other miscellaneous expenses and deducted to the extent they all exceed 2% of AGI.  That is until 2018.

Note attorney and fiduciary fees are also deductible against Federal  Estate Tax as well as against estate income, but not both.  An estate must choose between deducting them on the Estate Tax return, or on the income tax return. In past years, when the many more estates were subject to Federal Estate Tax and the estate tax rates were higher, the choice was more often to deduct against estate tax. Now, with increase in the estate tax exemption to $5 million in 2011 and now $10 million, many more estates will deduct these fees against income.  However, the added tax benefit of excess deductions on termination passed through to estate beneficiaries enjoyed by many more of them in recent years, is now, unfortunately, lost.

The Tax Cuts and Jobs Act is a Major Change to Estate Planning

The Tax Cuts and Jobs Act is a major change to estate planning.  We encourage you to contact the Firm to review and update your estate plan.  We recommend that clients review their estate plan at least every five years, or sooner if there are changes in your financial or personal life, changes in your relationship with your fiduciaries or beneficiaries, or changes in the state or federal estate tax law.

Federal Estate and Gift Taxes.  On January 1, 2018, the federal estate tax exemption doubled to $11.2M per person ($22.4M for married couples).  The exemptions are set to expire and revert back to $5M per person, adjusted for inflation, after 2025.  Your beneficiaries will continue to receive the benefit of a “step up in basis” to the date of death value on assets included in your estate.  If a new administration is elected after the 2020 federal elections it is possible the exemptions may be reduced back to current levels.  Thus, consideration should be given to utilizing the large estate and gift tax exemptions while they are available.  However, clients must also weigh the potential estate tax savings against the loss of a “step up in basis” at death.  The Act provides for regulations to be implemented to prevent the gifts which utilized the additional exemptions from being “clawed back” at death in the event the exemption sunsets (as it is scheduled to do in 2025).

Federal Gift Tax Annual Exclusion.  The federal gift tax annual exclusion is $15,000 per recipient for 2018 (increased from $14,000 due to an adjustment for inflation).  There is an unlimited gift tax marital deduction for U.S. citizen spouses.  The annual exclusion for gifts to non-citizen spouses is $152,000 for 2018.

State Estate and Gift Taxes.  States that impose their own estate tax will not be affected by the Act.  Clients in Connecticut must consider the impact of the state gift tax (the only state with a gift tax).

  • Connecticut Estate and Gift Tax: The Connecticut estate and gift tax exemption rose to $2.6M in 2018.  The exemption is scheduled to rise to $3.6M in 2019 and then match the federal exemption in 2020.   In addition, beginning January 1, 2019, the cap on the maximum estate tax imposed on the estates of decedents dying on or after January 1, 2019, and the maximum gift tax imposed on taxable gifts made on or after January 1, 2019, will lower from $20M to $15M.
  • Massachusetts Estate Tax: The Massachusetts estate tax exemption remains at $1M per person.
  • New Jersey Estate and Inheritance Tax: Effective January 1, 2018, New Jersey eliminated its estate tax, but the inheritance tax remains in effect.  Transfers to spouses, children and grandchildren will remain inheritance tax-free, however, any transfers to a sibling, aunt/uncle, niece/nephew, friend, etc., would be subject to the inheritance tax.
  • New York Estate Tax: The New York Estate Tax exemption is $5.25M for 2018 and it is scheduled to match the federal exemption starting January 1, 2019.

Update Your Estate Planning Documents:  Many estate plans provide for the creation of a Family Trust (or Credit Shelter Trust) upon the first spouse to die.  In older estate plans, the formula for funding that trust may continue to reference funding it with the maximum amount that can pass free of federal estate tax.  The doubling of the federal estate tax exemption could result in significant state estate tax.  In newer plans, the funding formula may have been based upon the maximum state estate tax exemption.  With the larger state estate tax exemptions this may no longer be necessary or a desired result.  Estates below the state and federal exemption may be suitable for a simplified estate plan.  Clients should contact the Firm to review and update their estate plans.

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.

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.