Tag: Tax

Gift Tax Update – Taxable Gifts and the I.R.S. Anti-Clawback Regulation

For 2019, for U.S. citizens, the Federal estate and gift tax basic exclusion amount is $11.4 Million per individual and the Federal gift tax annual exclusion amount is $15,000 per donee, per year.  In 2019, an individual can pass up to $11.4 Million estate and gift tax free; for married couples, the figure is doubled.

Making gifts in excess of the $15,000 annual exclusion amount will chip away at the maximum amount that an individual can give away gift tax-free during life.  If an individual (a “donor”) gifts $15,000 to each of ten donees in 2019 for a total of “taxable” gifts in the amount of $150,000, there will be no gift tax due, and there is no decrease in the donor’s $11.4 Million available estate and gift tax basic exclusion amount. In contrast, if a donor gifts $150,000 to a single donee in 2019, only $15,000 of the gift would be exempt from gift tax, and the donor must file a gift tax return showing an excess gift of $135,000.  The donor will not have any tax due; however, the $11.4 million of available exclusion amount will be reduced by the excess gift of $135,000. Thus, the larger the gifts, the quicker a donor will use up his or her $11.4 Million exclusion amount. Given the sizable exclusion amount in 2019, most people would never come close to using the entire exclusion amount.

The Tax Cuts and Jobs Act of 2017 put the whopping $11.4 Million exclusion amount into effect – but the law is only temporary. The law will sunset and for the year 2026, the exclusion amount will automatically drop to $5 Million (adjusted for inflation) if Congress fails to act by the end of 2025. Many estate planning practitioners believe the exclusion will revert to an amount of approximately $6 Million for 2026.

Planners have raised questions due to the temporary nature of the $11.4 Million exclusion amount. In the event that a gift is made in accordance with the applicable exclusion amount in effect at the time the gift was made, but the exclusion amount decreases by the time of the donor’s death, will the donor’s excess gift be subject to a “clawback” and, accordingly, be included in the donor’s taxable estate for Federal estate tax purposes? In an effort to resolve the question, on November 20, 2018, the IRS released a proposed regulation to eliminate “clawback” for estate and gift tax purposes.

The IRS proposed regulation provides that the donor’s estate can compute its estate tax credit using the higher of the “Basic Exclusion Amount” applicable to gifts made during life or the “Basic Exclusion Amount” that applies on the date of the donor’s death. REG-106706-18, (83 Fed. Reg. 59343).  Therefore, if a donor dies on or after January 1, 2026, but made taxable gifts prior to 2025 relying on a higher exclusion amount and, in the year of his or her death, the applicable lifetime gift tax exclusion amount is lower than the amount gifted prior to 2025, the donor’s estate will have the benefit of using the higher exclusion amount that applied during his or her life. The proposed regulation should inspire large gift planning and year-end gift planning in 2019.  We encourage you to contact us if you wish to discuss gifting as a part of your estate planning.

TAX CUTS AND JOBS ACT (THE “ACT”) – “CLAWBACK”

Prior to the passage of the Act, effective January 1, 2018, the individual exclusion from Federal estate, and gift tax was approximately $5,600,000.00.  Under the Act, the exclusion is doubled to approximately $11,200,000.00, per individual.  That increased exclusion, however, “sunsets” on January 1, 2026, when it will revert to the exemption of $5,600,000.00 in effect prior to January 1, 2018.  This Article will discuss the possibility of a “clawback” of the doubling of the exclusion, when the sunset takes place and the exclusion reverts to the pre-existing $5,600,000.00, i.e. will any gifts made between 2018 and the sunset date be “clawed back” to the taxable estate of the donor who passes away after the sunset date.

Discussion

As a result of the increase in the gift and estate tax exclusions individuals have the opportunity to make gifts utilizing the increased exclusion up to approximately $11,200,000.00 per person, without subjecting those gifts to either life time gift tax, or being included in the individual’s taxable estate upon his death.

Of course, where assets are gifted, those gifts would not be entitled to a step up in income tax basis of those assets upon the death of the donor.  Thus, the advisability of such gifts will continue to require an analysis of the potential income tax cost of the loss of that step up in tax basis in case of a sale of any such assets following the death of the donor.

However, utilizing the increased gift tax exclusion during life time, does raise a question as to whether the death of the donor after the “sunset” of the increased exemption, when the exemption reverts to the pre January 1, 2018 amount, will result in some form of “clawback” or recapture of the benefit of the increased exclusion.  Thus, will the IRS in determining the taxable estate of the donor who dies after the sunset date, apply the exclusion at the time of the gift, i.e. when the Act doubling of the exclusion was still in effect, or will it apply the amount of exemption at the time of death, when the exclusion has been “sunset” back to $5,600,000.00, thus, “clawing back” the benefit of the pre sunset exclusion.

To deal with this question, the Act contains a separate provision, which together with a clarifying Conference Committee Report, directs that the Secretary of the Treasury adopt regulations necessary or appropriate to deal with the difference “between the exclusion amount applicable at the time of a decedent’s death”, and that applicable “at the time of any gifts by the decedent.”

What is not clear is whether that provision directs the adoption of regulations requiring the inclusion in the taxable estate of an individual who passes away after the sunset, of the full amount of the gifts made during life, but only allowing the lower exclusion amount in effect following the sunset, in determining the estate tax due i.e. the “clawback” approach.  That approach could result in an additional estate tax in excess of $2,000,000.00, depending on the amount of gifts made during the pre-sunset period.

On the other hand, the non “clawback” approach would only include in the taxable estate of a donor who dies after the sunset dates, pre sunset gifts in excess of the exclusion in effect at the date of gift, i.e. $11,200,000.00.

A related issue is what, if any, regulations will be adopted to deal with the situation where the donor during the pre-sunset period may not have utilized the then full amount of the gift and estate tax exclusion.  It is possible that, in those circumstances, the donor may still have the unused exclusion amount available for gift tax purposes, even after the sunset indeed even after sunset, the unused portion of the pre-sunset lifetime gift tax might be used in calculating the exclusion amount for estate tax purposes.

Clearly, uncertainly exists as to how the Treasury Department will exercise its statutory authority to issue regulations dealing with the sunset and the change of the exclusion amounts.  The IRS has published a so-called 2017-2018 Priority Guidance Plan, in which it indicates that a near term priority in issuing guidance with respect to the Act is “Guidance on computation of estate and gift taxes to reflect changes in the basic exclusion amount”.  Although no specific date with respect to such guidance has been reported, it is expected sometime in 2018.

Obviously, planning now to take advantage of the current increase in the lifetime exemption to $11,200,000.00, leaves uncertainty as what the effect may be following sunset, and how the Treasury would approach its mandate to deal with the different exclusions existing at the date of the gift and following sunset.

In general where the donor is in a position to take advantage of the increased gift tax and estate tax exclusion, it may still be beneficial to do so.  Even if the IRS were to issue regulations clawingback the amount of the pre sunset exclusion in excess of the post sunset exclusion amount, into the taxable estate, in case of death following sunset, which many do not believe will happen, it would likely be subject to challenge as exceeding its statutory authority. In any event, this will all depend on the structure of the donor’s estate plan, and at a minimum, those individuals in a position to take advantage of the increased exclusion should reexamine their current estate plan.

Charitable Donations in Exchange for Real Property Tax Credits in New Jersey

On May 4th, 2018, New Jersey Governor Phil Murphy signed Senate Bill No. 1893 permitting municipalities to issue property tax credits to property owners who donate to one or more charitable funds created by the municipality where the taxpayer’s property is located.

New Jersey property owners may donate up to 90% of their tax bill to their municipality’s charitable fund(s). If the tax credits that result from a charitable donation exceed the taxpayer’s annual real property tax owed, the unused amount of tax credit may be carried forward to subsequent tax bills not to exceed five years.

Under the new law, a municipality establishes a charitable fund or funds, each with a specific public purpose, through an ordinance or resolution of its governing body. Charitable funds may also be used to satisfy property taxes, pay for the cost of establishing the fund and for the tax collector’s ongoing administrative expenses.

The purpose of S-1893 is to potentially allow for a larger itemized deduction on a New Jersey taxpayer’s federal income tax return that exceeds the $10,000 cap on deductions for state and local taxes imposed by President Trump’s tax overhaul bill. It is unclear whether an individual’s potential tax savings resulting from S-1893 will pass muster with the Internal Revenue Service because the taxpayer’s donation may not qualify as a charitable donation under the Internal Revenue Code. Accordingly, there is the potential for back taxes, penalties and interest at the federal level if the taxpayer’s deduction taken pursuant to S-1893 is not accepted. In light of this uncertainty it is best to contact a tax or accounting professional for advice with respect to the application of S-1893.

Offshore Tax Evasion – IRS to End Offshore Voluntary Disclosure Program

In Information Release – 2018-52, the Internal Revenue Service announced on March 13, 2018, that it will shut down and end its Offshore Voluntary Disclosure Program (“OVDP”) on September 28, 2018.  Thus, taxpayers with undisclosed foreign financial assets have time to utilize the OVDP before the program closes, but need to act ASAP and consult with experienced tax controversy counsel so that a complete filing submission is made by September 28, 2018.

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Budget Proposal Announced By New Jersey Governor Phil Murphy

On March 13, 2018, Governor Murphy presented his budget address for Fiscal Year 2019.  It has been said no one would eat a sausage if you watched it being made.  The same can be said of the legislative process.

Between this address and July 1st when the budget for Fiscal Year 2019 is to be in place, there may a number of changes to what was presented.

First, a quick comment upon what was not said.  Even though Candidate Murphy had stated that he would not modify New Jersey’s decision to rescind its Estate Tax, some had speculated it might reappear in some form.  While no one expected to see the exemption revert to the $675,000 level effective for persons who died before December 31, 2016, some adjustments were anticipated.  That still may occur, but was not a point raised in the Governor’s address.

The Governor has proposed a budget of $37.4B.  He has proposed an increase in school related funding.  A goal is to expand pre-K funding statewide.  As a first step in plans to make community college tuition free for all students, over the next year Governor Murphy proposed an additional investment of $50M in community colleges.

The Governor has proposed raising the state property tax deduction from its current level of $10K to $15K.  He has proposed creation of a new Child and Dependent Care Tax Credit for middle class and working families.

The budget also contains other proposals for new programs or expansion of existing programs.

The Governor has proposed reinstating the sales tax rate in New Jersey at 7%.  On the revenue side, the Governor has proposed a “millionaire’s tax” upon those who have taxable income in excess of $1M.  He contemplates such a tax would raise approximately $765M.  He also proposed closing a “loophole” which benefits hedge fund managers.  He believes that doing so will generate an additional $1M.

The Governor also favors legalization of marijuana.  It is not clear that the Legislature will support this concept or, if legislation is enacted the amount of the revenue which might be realized.

In concluding, the Governor declared as his goal the desire to build a stronger and fairer New Jersey.

Pass Through Deduction Under Tax Cuts and Jobs Act (the “Act”)

General

A.  Under the Act a new deduction is introduced effective for tax years beginning after December 31, 2017, available to individuals, trusts, and estates. The deduction is equal to 20% of “qualified business income” from income earned directly by the taxpayer, and income from so-called pass through entities.  Pass through entities are essentially defined as partnerships (including limited liability companies or other entities treated as partnerships for tax purposes) and S corporations, where the taxable income or loss of the entity is generally reported by its partners or shareholders.  Qualified business income also includes certain dividends from real estate investment trusts and other defined entities (including certain cooperatives and publicly traded partnerships).  Unless it is extended by Congress, the deduction expires for tax years beginning after December 31, 2026.

B.  In general, the pass through deduction is limited to 20% of the taxpayer’s taxable income with certain adjustments. Thus, where a taxpayer has reduced taxable income through other adjustments, the benefit of the pass through deduction may be limited.

C.  The benefit of the 20% “flow through” deduction obviously depends upon the taxpayer’s tax bracket. For example, for a taxpayer in a 35% bracket the 20% deduction in effect reduces the tax rate on the taxpayer’s qualified business income, from 35% to 28%.

Qualified Business Income – Exclusion for Services

A.  As indicated, the 20% deduction relates to qualified business income. Generally, qualified business income means income from any trade or business, but it excludes certain service trades or businesses.  Disqualified service trades or businesses include any trade or business in accounting, health, law, consulting, athletics, financial services and brokerage services.  Service trades or businesses also include any business, if the principal asset of the business is the “reputation or skill of one or more of its employees”.

B.  The exclusion for services income is phased in based upon the taxpayer’s taxable income. Taxpayers with income below a certain level are not subject to the exclusion – for a single taxpayer the limitation on services income does not apply unless the taxable income of the individual is in excess of $157,500, and in the case of a joint return, the limitation does not apply, unless the taxable income on the joint return is in excess of $315,000.  For taxpayers with taxable income in excess of those amounts, the exclusion for services income is phased in, so that the deduction is eliminated entirely for single taxpayers with taxable income in excess of $207,500, and married taxpayers with taxable joint return income in excess of $415,000.

Calculation of the Deduction

A.  As noted, for each qualified trade or business, the deduction is equal to 20% of the qualified business income from that trade or business. However, except for taxpayers with taxable income below certain levels, as discussed below, the deduction is limited under two methods.  The first method, defines qualified business income as 50% of W2 wages paid with respect to the business.  The second method provides that qualified business income is equal to 25% of the W2 wages paid with respect to the business, and a portion of the tax basis of the business, in depreciable property owned by the business.  Thus, for capital intensive businesses, the second method would typically produce better results.

B.  The limitations on the pass through deduction based on W2 wages, or W2 wages and tax basis in depreciable property as discussed above, are phased in, in the same manner as the exclusion of service trades or businesses, depending on the level of the taxpayer’s taxable income. Thus, if a single taxpayer has taxable income not in excess of $157,500, or a married taxpayer has joint return income not in excess of $315,000, the pass through deduction is 20% of qualified business income, without any limitation based on W2 wages or tax basis in depreciable assets.

C.  In determining the 20% deduction, qualified business income does not include investment income, such as capital gains, dividends and interest.

Open Questions and Planning Possibilities

A.  A number of questions with respect of the application of the pass through deduction will need to be clarified. Indeed, the Treasury Department recently advised that guidance with respect to rules for determining whether a pass through entity generates income qualifying for the pass through deduction, is a high priority area.  One area which is likely to receive attention, relates to the exclusion of certain specified service businesses from the benefits of the deduction.  In particular, the treatment as service businesses, if the principal asset of the trade or business is the “reputation or skill of one or more of its owners or employees”, will need to be clarified.

B.  Depending on the nature of the business, to the extent the limitations on the pass through deduction, based upon W-2 wages, or based upon W-2 wages and capital investment, may apply, planning may be available to maximize the deduction. For example, it may be appropriate to increase the amount of W-2 wages paid, by converting independent contractor relationships to employee relationships.

C.  There has been some discussion as to the benefits of operating a business as a C Corp rather than as a pass through S corporation, to take advantage of the new low corporate tax rate – 21% – under the Act, which may be lower than the S corporation shareholders, individual tax rate. However, in many cases the benefit of the lower corporate tax rate may be offset by the pass through deduction available to S corporations shareholders (which is not available to C Corps or their shareholders) and of course, by the additional tax, which may apply, when a C Corp makes distributions to its shareholders.

D.  Obviously, the particular circumstances would need to be examined to determine if operating as a C Corp rather than an S corporation, may be beneficial.

The Taxation of Crypto Virtual Currencies – IRS Enforcement Initiative

Data from CoinMarketCap.com shows that the market capitalization for all crypto virtual currencies is currently at approximately 300 billion dollars.  Of that amount Bitcoin’s market share represents about 158 billion dollars, and the second largest cryptocurrency, ethereum/ether has about a 50 billion dollars market share.  Furthermore, virtual currency (ex. Bitcoin, ethereum/ether) trading and the related block chain trading technology platforms have been dominated by retail investors which has played a significant role in pushing cryptocurrencies to record highs in 2017.  In that regard, Coinbase, the world’s largest on line crypto wallet, adds about 100,000 new users every week.

It is estimated that millions of U.S. taxpayer Bitcoin/transactions have occurred, yet the IRS has stated that only 800 to 900 taxpayers had reported their Bitcoin gains from 2013 through 2015 by electronically filing IRS Form 8949 – the IRS form used for reporting sales and other dispositions of capital assets. (https://www.thestreet.com/story/14257905/1/bitcoin-investors-must-report-gains-to-the-irs.html)

Taking notice of what appears to be widespread tax noncompliance, the IRS is pursuing enforcement actions, and the IRS Criminal Investigation Division believes that virtual currency has increasingly become a tax evasion issue.  Consequently, the tax defense community can expect more enforcement actions in the future.

In that regard, on November 29, 2017 the IRS in connection with its investigation of allegedly underreporting of income and failure to pay taxes on crypto currency transactions caused the U.S. District Court for the Northern District of California U.S. v. Coinbase 17-01431 to issue an order enforcing a “John Doe Summons” to the Coinbase virtual currency exchange.  Coinbase, as one of the world’s largest platforms for exchanging virtual currencies, has approximately 5.9 million customers and has facilitated approximately $6 billion exchanged to Bitcoin. The Coinbase summons seeks a wide variety of records including, for example, taxpayer identities for all of its customers who have bought, sold, sent or received crypto currency worth $20,000 or more in any tax year from 2013 to 2015, transaction logs, and correspondence.  Accordingly, taxpayers using virtual currency transactions involving Coinbase who are not in tax compliance should consult experienced criminal tax counsel as soon as possible for advice.

With respect to the substantive tax aspects of crypto virtual currency, the IRS addressed emerging issues of the growing digital economies and how existing fundamental U.S. federal income tax principles apply to transactions using virtual currency to pay for goods or services, or held for investment when it issued IRS Notice 2014-21.

IRS Notice 2014-21 begins by acknowledging that virtual currency that has an equivalent value in real currency, or that acts as a substitute for real currency, is referred to as convertible virtual currency.  Bitcoin is one example of a convertible virtual currency – Bitcoin can be digitally traded between users and can be purchased for, or exchanged into, U.S. dollars, Euros, and other real or virtual currencies.

The Notice goes on to state that in general, the sale or exchange of convertible virtual currency or the use of convertible virtual currency to pay for goods or services in a real-world economy transaction has tax consequences that may result in a tax liability.

Specifically, the IRS has taken the position for federal tax purposes, that virtual currency should be characterized as property, not as a foreign currency recognized by any government.

Accordingly, when using Bitcoins for example, to purchase products, if the Bitcoin appreciated in value since it was acquired, there may be tax owed on the gain if the fair market value of property received in exchange for virtual currency exceeds the taxpayer’s adjusted basis of the virtual currency.

The character of the gain or loss depends on whether the virtual currency is a capital asset in the hands of a taxpayer.  A taxpayer generally realizes capital gain or loss on the sale or exchange of virtual currency that is a capital asset in the hands of the taxpayer.  For example, stocks, bonds, and other investment property are generally capital assets.  A taxpayer generally realizes ordinary gain or loss on the sale or exchange of virtual currency that is not a capital asset in the hands of the taxpayer.  Investors and other property held mainly for sale to customers in a trade or business are example of property that is not a capital asset.  Thus, since characterized as property, normal tax consequences flow.  Therefore, if an employer pays an employee in virtual currency the employee must report the fair market value of the virtual currency measured in U.S. Dollars as compensation income as of the date of the virtual currency payment and the employer must report that value on a Form W-2.  Moreover, the fair market value of virtual currency paid as wages is subject to federal employment taxes paid by the employer and income tax withholding (FICA) and FUTA.  Similarly, if virtual currency is received by a business in exchange for goods or services, then any such payments received are reportable as ordinary income.

When a taxpayer successfully “mines” virtual currency (for example, uses computer resources to validate Bitcoin transactions and maintain public Bitcoin transaction ledger), the fair market value of the virtual currency as of the date of receipt is includible in gross income.

Also, if a taxpayer’s “mining” of virtual currency constitutes a trade or business, and the “mining” activity is not undertaken by the taxpayer as an employee, the net earnings from self-employment resulting from those activities constitute self-employment income and are subject to the self-employment tax.

As to crypto currency and information reporting requirements, payments made in virtual currency appear to be subject to the same information reporting requirements as payments made in property, real currency or instruments denominated in real currency.  For example, gains and losses attributable to virtual currency transactions may need to be reported on Form 8949 which is attached to Schedule D of Form 1040; payments made by a person engaged in a trade or business to an independent contractor using a virtual currency for the performance of services may require reporting of such payments to the IRS and to the payee on Form 1099 MISC.

Many questions though remain unanswered such as for example, whether virtual currencies need to be reported on FBARs foreign bank account reports – a U.S. taxpayer’s accounts at a foreign binary Bitcoin options exchange or a foreign Bitcoin options exchange could be reportable on an FBAR as a foreign financial account, and on IRS Form 8938, and whether the exchange of crypto currencies can qualify as Section 1031 like exchanges.

Unfortunately, the IRS has not issued any further guidance up to date beyond IRS Notice 2014-21, but instead is pursing enforcement actions.  Furthermore, State tax authorities will no doubt adopt the IRS’ characterization of crypto currency as property with resultant state tax consequences and concerns.

If you have invested in, traded, and/or spent convertible virtual currency, we encourage you to contact the Firm.

 

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.