Learn How the Tax Cuts and Jobs Act Affects You

Learn How the Tax Cuts and Jobs Act Affects You

Our Century City and Irvine offices will each be hosting a series of complimentary educational sessions to answer your questions about how the Tax Cuts and Jobs Act might impact you.

If you are unable to attend one of our programs, we strongly recommend that you contact a member of Freeman, Freeman and Smiley, LLP’s Estate Planning group, so we can meet with you to discuss how TCJA affects your personal planning.

Please note that Richard D. Freeman and Jessica Dorman-Davis are now retired.  One of our other attorneys will be happy to answer any questions you have.

TAX CUTS AND JOBS ACT

On December 22, 2017, President Trump signed into law the Tax Cuts and Jobs Act (“TCJA”).  TCJA made changes to several categories of taxes as briefly described below, which can have an impact on estate planning and business planning.

Transfer Taxes (Estate, Gift and Generation-Skipping Transfer (“GST”) Taxes)

By increasing the estate, gift and GST tax exclusions to approximately (depending on the new CPI calculations) $11.18 million per person (from $5.49 million per person), TCJA provides another opportunity for clients to transfer wealth to designated heirs free of transfer taxes.  Therefore, those individuals who have already used up their $5.49 million gift and/or GST tax exclusions on lifetime gifts now have an additional $5.69 million in estate, gift and GST tax exclusions to cover additional gifts.

Clients potentially have only a limited time frame in which to make additional gifts and take advantage of the increased exemptions, since they are scheduled to sunset after 2025.  However, keep in mind that there is nothing preventing this Congress, or any future Congress, from increasing tax rates and/or decreasing exemption amounts prior to the scheduled sunset.

Individual and Trust Income Taxes

The personal exemption for individuals is eliminated, but the standard deduction (for those who do not itemize) is increased to $24,000 for married individuals ($12,000 for single taxpayers).

Taxpayers may now claim a federal income tax deduction for only up to $10,000 in state and local taxes (known as SALT deductions).  This limitation likewise applies to Trusts.

All itemized deductions for individuals are eliminated except for deductions for interest, limited SALT taxes, charitable contributions, medical expenses and estate tax attributable to income in respect of a decedent.  There is still uncertainty as to whether this rule also applies to Trusts.

Taxpayers may claim charitable deductions of cash to public charities up to basically 60% of AGI (rather than 50% of AGI).

Interest on a home mortgage incurred after December 15, 2017 is deductible only up to $750,000 of debt.  No deduction is allowed for home equity loans (regardless of when the debt was incurred).

Alimony paid on a divorce or separation instrument executed after December 31, 2018, and on amendments executed after December 31, 2018 to existing divorce or separation instruments will no longer be deductible to the payor or includable in income by the payee.  This change is permanent (i.e., it does not sunset after 2025).

The income tax rates for a child’s unearned income (Kiddie Tax) now mirror the income tax rates for Trusts (rather than the child’s parents’ rates).  Trusts reach the 37% maximum income tax rate at $12,500 of income (rather than $600,000 of income for married individuals filing jointly).

TCJA allows up to $10,000 per student per year to be taken tax-free from a 529 college savings plan for payment of tuition at public, private or religious elementary or secondary schools. Previously, funds could only be used for post-secondary education expenses.

Business-Related Income Tax

The top income tax rates for “C” corporations is 21%.  This change is permanent (i.e., it does not sunset after 2025).

TCJA includes a complicated provision allowing a 20% deduction to individuals and Trusts for Qualified Business Income from pass-through entities (e.g., sole proprietorships, partnerships, LLCs, “S” corporations) under certain circumstances.  The availability of this deduction depends on a number of factors, including the type of business in which the entity is involved, the amount of taxable wages paid to the entity’s employees, the amount of capital investment in the entity, and the amount of taxable non-wage income reportable to the entity’s owner.

“1031 Exchanges” can now be made only for real property (not personal property).

Impacts on Estate Planning and Business Planning

TCJA presents some tax challenges to be certain, but it also creates some opportunities.  These challenges and opportunities include:

1. A limited opportunity to transfer wealth to future generations by taking advantage of the new $11.18 million estate, gift and GST tax exemptions.
2. The need to review Trust provisions to make sure that TCJA does not cause unintended distributions (e.g., if a Trust provides for distribution of the estate tax exemption amount to children at the first death, this may leave too little for the surviving spouse’s lifetime).
3. A renewed interest in income tax basis planning.  With the increased estate tax exemption, estate taxes may no longer be a concern, but getting a step-up in income tax basis on assets at the deaths of both spouses may be even more important.
4. Creating multiple Trusts to be able to take $10,000 in SALT deductions per Trust.
5. Certain entities may choose to become “C” corporations.
6. Owners of pass-through entities should carefully review the entity’s compensation schedules.