The well-publicized road to tax reform was subject to major speculation, studied prediction, and the expected points of debate. Our tax code has not seen significant change since 1986. The changes enacted with passage of the Tax Cuts and Jobs Act (“Act”) are a departure from both the previous GOP proposal (“A Better Way” – released in June 2016) and the Trump administration’s initial proposal (released in September 2016). I won’t go in to the specifics of the entire Act in this post, but have listed some of the basics below:
- Your 2018 filing (tax year 2017) is not affected; most provisions begin on January 01, 2018.
- The number of income tax brackets has not changed; Americans will continue to be placed in one of seven tax brackets based on their income. But the rates for five of the brackets have been lowered. The new rates are: 10%, 12%, 22%, 24%, 32%, 35% and 37%.
- The personal exemption has been eliminated. For some families, this will negate the promised relief from other provisions of the reform.
- The standard deduction has basically doubled. For single filers, the standard deduction has increased to $12,000; for married couples filing jointly, it’s increased to $24,000.
- The child tax credit has been expanded. The credit has doubled to $2,000 for children under the age of 17. The credit can be claimed by single parents earning up to $200,000 and married couples earning up to $400,000.
- The corporate tax rate has been reduced from 35% to 21%. The alternative minimum tax for corporations has been eliminated completely.
- Most pass-through business owners will be able to claim a 20 percent deduction for qualified business income.
- The Affordable Care Act’s individual mandate (penalty for taxpayers who do not have health insurance) was eliminated; this provision goes in to effect in 2019.
- The state and local tax deduction now has a $10,000 cap (the deduction was previously unlimited).
- Deductions for student loan interest remain the same.
- The mortgage interest rate deduction is available for mortgages up to $750,000 (down from $1 million).
- Recharacterization can no longer be used to unwind a Roth conversion.
- The estate tax rate remains 40%, however, the exemption level has increased from $5 million to $10 million per individual, with additional inflation adjustments as under the previous law. This means the inflation-adjusted exemption amounts are approximately $11.2 million for an individual and a combined $22.4 million for a married couple. The exemption levels are scheduled to revert to the prior $5 million amounts (indexed for inflation) on January 1, 2026.
- The Act does not make changes to the rules that step-up basis at death.
It is worthwhile to note that, because the bill passed the Senate through reconciliation procedures there are “sunsets” for many of the Act’s provisions. This means that many of the individual tax provisions expire January 01, 2026.
If you have questions regarding the impact of the Act on your estate plan, contact one of our attorneys for a complimentary review.
IMPORTANT: If your estate is valued at less than $11.2 million you may be inclined to think you don’t need a plan in place. This is simply not true. Estate tax reduction is only one facet of estate planning and is by no means the most important consideration for the majority of the population. Estate planning is legacy planning. Everyone still needs proper estate planning documents in effect to achieve other goals and to protect loved ones from unnecessary complications. A proper plan can achieve: (1) financial security for yourself; (2) continuing management and caretaking of the estate in the event of your incapacity or death; (3) protection from liabilities, yours and/or liabilities of your ultimate heirs; (4) leaving a legacy to provide for a spouse, children, or others as you wish, in the best manner possible; (5) leaving a charitable legacy; (6) business succession planning; (7) reduction of conflict and litigation among your heirs; and (8) probate avoidance, and the costs and delays thereof. Estate planning involves far more than reducing estate taxes. It is critical to determine your goals and put a plan together with an experienced estate planning attorney to meet those goals, and then review the plan with counsel every few years, and update as needed. Estate planning should be a continual process, and we are here to help you and your family with every facet along the way.
-Andrea Claus, Esq.