The Tax Cuts and Jobs Act of 2017 (“the Act”) was signed into law on December 22, 2017. Most of the changes introduced by the bill will go into effect on January 1, 2018 and will not affect 2017 taxes. The Act creates significant changes to individual and business taxation, opportunities for dynasty planning, discounted gifting and other asset protection strategies to shield assets for your beneficiaries.
Significant Changes to Business Taxation
If you own a business or are thinking about starting one, relying on old rules and ignoring this historic change in business taxation as you make plans for your business could mean paying vast amounts of unnecessary taxes.
Owners of pass-through companies and sole proprietors will be taxed at their individual tax rates less a 20% deduction (which effectively brings the rate lower) for qualified business-related income, subject to certain wage limits and exceptions.
Under the Act, the corporate tax rate for C Corporations is lowered to 21% beginning next year. It was previously 35%.
Note that there are specific rules to qualify for many of the new business-oriented deductions so its important to analyze how to maximize your business specific benefits under the bill.
Asset Protection, Dynasty Planning, Discounted Gifting
The doubling of the estate, gift, and generation skipping transfer tax exemptions to over $10 million per person ($20 million per couple) creates a significant opportunity for you to protect more of your assets than ever before. 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 over $10 million per person, this increased exemption expires on December 31, 2025. It may be tempting 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.) Of course, there are tools that can build flexibility into your plan, including trust protectors, decanting powers, and other strategies to deal with future changes. However, those future strategies only work to preserve options if we implement plans while the exemption is available.
Changes to Individual Income Taxes
The new cap on state and local tax deductions may mean that we 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 that you’re considering selling, let’s see whether a non-grantor trust would benefit you.
The bill does not reduce personal capital gains rates (which remain 20% for most assets and taxpayers) and does not repeal 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 time at tax-time. The bill retains the deductions for 529 plans, IRAs, 401(k)s, and Health Savings Accounts (HSAs), offering several opportunities to reduce taxes while building financial security for the future if you choose to save and invest some of the tax savings.
Planning to minimize income taxes is a balancing act. Now’s a great time to review your estate plan and make sure that anything you do to help take advantage of tax reform still achieves your overall planning goals and not just your tax-saving goals. We are available to answer your questions and work with you to take full advantage of the opportunities created by the Tax Cuts and Jobs Act of 2017.