President Trump Signed the Tax Cuts and Jobs Act Today

Just moments ago, President Trump signed the Tax Cuts and Jobs Act.  Following are highlights of some of its key provisions that may affect you.  All changes will take effect beginning with the 2018 tax year unless indicated otherwise below. 

Estate and Gift Tax

The estate, gift and generation-skipping transfer tax exemption amounts are doubled to $11.2MM per person and $22.4MM per couple, and these amounts will further increase annually for inflation.  The estate tax rate remains at 40% for estates that exceed the exemption amounts.

However, the doubling of these exemption amounts is scheduled to sunset in 2025.  Accordingly, it may be prudent for taxpayers with large estates to consider using some or all of their increased exemption amounts before then. 

The new Tax Bill can also benefit taxpayers with smaller estates.  For example, consideration should be given to amending or terminating trusts with appreciated assets that were previously established for estate tax planning reasons.  This could pull those assets into the taxpayer’s estate so the assets receive an income tax basis step-up upon the owner’s death.  Assets owned personally can also get a step up in basis if those assets are transferred to a trust that is designed to be included in the estate of a person who has a short life expectancy.

Personal Income Tax Rates

Personal ordinary income tax brackets are reduced to 10%, 12%, 22%, 24%, 32%, 35%, and 37%, as illustrated here: http://www.willmslaw.com/documents/tax-cuts-and-jobs-act-tax-rates-and-brackets.pdf

The additional 0.9% tax on earned income and 3.8% surtax on net investment income for certain high-income taxpayers remain.

The standard deduction amount is increased to $12,000 for a single person and $24,000 for a married person.  This will eliminate the need for many taxpayers to itemize their deductions. Such taxpayers may want to accelerate deductions into 2017.  One way to do so is to make 2018 charitable donations in 2017.

The child tax care credit is increased to $2,000 per qualifying child (phased out if income exceeds $200,000 for an individual or $400,000 for a married filer).

The AMT exemptions were increased to $70,300 for single taxpayers and $109,400 for married taxpayers.  The thresholds for phaseout of the AMT exemption were also increased to $500,000 for single taxpayers and $1,000,000 for joint filers. 

Long-term capital gains will still be taxed at rates of 0%, 15%, or 20%, and short-term gains will continue to be taxed as ordinary income.

The following applies to taxpayers who will still itemize their deductions:

The deduction for state income taxes and property taxes is limited to a total of $10,000 annually.

The limitation on cash charitable contributions is increased from 50% to 60% of adjusted gross income.

Interest is deductible for mortgages up to $750,000 if incurred after December 15, 2017, or up to $1,000,000 if incurred on or before December 15, 2017.  

All miscellaneous itemized deductions are disallowed. 

C-Corporation Tax Rates

The top corporate tax rate is reduced from 35% to 21%.

The corporate AMT is repealed.

Pass-Through Income

Qualified Business Income (“QBI”) is non-wage income from a pass-through business such a sole proprietorship, partnership, LLC or S-Corporation. 

20% of QBI may be deducted from taxable income (the “QBI Deduction”).  This deduction sunsets in 2025.

The 20% QBI deduction is limited to 50% of the W-2 wages paid by the business.

Anti-abuse provisions begin to phase out the QBI Deduction for certain service providers (i.e. consultants, accountants, lawyers) who earn more than $157,500 for an individual or $315,000 for a joint filer.

Repeal of Health Insurance Individual Mandate 

Beginning in 2019, the Affordable Care Act’s insurance requirement is repealed. 

Please let us know if you have any questions about the topics discussed in this post.  We would be pleased to assist you.