The new Tax Cuts and Jobs Act affects nearly everyone who pays taxes in America. Read on for several important points you should know about right now.
As you may have heard on the news, Congress has just passed, and President Trump is expected to sign, the Tax Cuts and Jobs Act. Although continued study of the bill will undoubtedly reveal additional opportunities for you and your family, we wanted to provide a few of our immediate impressions.
Significant Changes to Business Taxation
If you own a business or are thinking about starting one, you may want to contact an attorney before moving forward. Relying on old rules of thumb or ignoring this monumental change in business taxation as you make business plans could mean paying enormous amounts of unnecessary taxes.
Many of the new, business-oriented deductions have specific rules to qualify. Even though this bill has been the subject of intense media discussion, don’t rely on television programs, blogs from people or organizations who are not tax professionals or attorneys or press releases. Rather, we recommend reaching out to your attorney so they can analyze how to maximize your benefits under the bill.
New Opportunities for Dynasty Planning and Discounted Gifting
The doubling of the estate, gift, and GST tax exemptions to $10 million per person ($20 million per couple before inflation adjustment) opens a significant, once-in-a-lifetime opportunity for you to protect more assets than ever. Combined with the IRS’s withdrawal of the anti-discounting section 2704 regulations earlier in 2017, tax reform opens the door for dynasty trusts, family partnerships, discounted gifts, and other strategies that could shield entire fortunes for your beneficiaries.
Although the estate tax and GST tax exemption doubles on January 1, 2018 to $10 million per person (before inflation adjustment), this increased exemption expires on December 31, 2025. You may be tempted to wait, given that seven years may feel like forever. But remember that 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.) In the meantime, there are tools that can build flexibility into your plan, including trust protectors, decanting powers, and other strategies to deal with future changes. But those future strategies only work to preserve options if they are implemented while the exemption is available.
Changes to Individual Income Taxes
The new cap on state and local tax deductions may mean that you need to consider a special income-tax saving trust called a non-grantor trust. If you have a business, an asset, stock, or anything else that has substantially appreciated in value and that you’re considering selling, contact your attorney first to see whether a non-grantor trust would benefit you.
The bill provides 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 increase in the standard deduction ($12,000 for individuals, $18,000 for heads of household, and $24,000 for married couples filing jointly) and removal of some above-the-line deductions (moving expenses and alimony) may help save you some at tax-time. Plus, the bill retains the deductions for 529 plans, IRAs, 401(k)s, and Health Savings Accounts (HSAs), offering you 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.
Final Considerations and Next Steps
Planning to minimize income taxes is a balancing act and may require a professional to assist with your questions about tax reform and all the opportunities that are available to you.
At Davis Law Group, we will be happy to help our clients review their estate planning portfolios to see if there is anything we should do to help them take advantage of the tax reform while also achieving their long-term goals. The beginning of a new year is a great time to do this, no matter what the recent legal changes may have been. Changes in your own personal life, income and assets can change from year to year as well, and your estate plan should be updated regularly to account for that. If you would like to create or review your estate plan, contact us today!