Happy New Year! Ok, so I know that as the last day of January it’s a little late to be saying Happy New Year. But, I’ve had a lot to digest before relaying information to you.
On December 20, 2017, Congress passed a sweeping tax reform bill “The Tax Cuts and Jobs Act” changing the planning landscape for corporations, small businesses, and individuals. Last night we heard the State of the Union from President Trump. During his speech he mentioned the new Tax Cuts and Jobs Act “The Act”. I wanted to provide some of my impressions about the new tax reform.
Significant Changes to Business Taxation
One of the Act’s most sweeping changes is the reform of the tax regime that applies to pass-through businesses—sole proprietorships, partnerships, S corporations, and limited liability companies taxed as partnerships or S corporations. If you own a business or are thinking about starting one, contact us immediately. 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.
- There is a temporary reduction in the effective tax rate of income tax on most pass-through entities from 39.6% to 20%. This deduction has a limited lifespan and will sunset December 31, 2025.
- It is now more important than ever to review business structures for tax efficiency. Any business that is not operating as a pass-through entity should consider doing so to take advantage of the new rules that make pass-through entities even more attractive.
- For “professional service business” clients (like lawyers, accountants, etc.) we must consider transitioning to a new tax structure, reorganizing operations to shift income into other entities, or forming a defined benefit program, among other potential strategies. Note that professional service businesses with income less than $157,500 (for individuals) or $315,000 (for married filing jointly) can use the new, favorable rates generally available to pass-through entities. But, professional service businesses exceeding those thresholds are subject to phaseout and may even be left out of the new, favorable rates if their income is high enough. But there are still opportunities to reduce income taxes for all businesses.
Of course, there are no one-size-fits-all approaches or solutions. Each business has a unique tax status that we’ll need to consider before making any changes
Many of the new, business-oriented deductions have specific rules to qualify. Although, this bill has been the subject of intense media discussion, don’t rely on television programs, blog posts, or press releases. Contact us so we 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) 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 doubled on January 1, 2018, to $10 million per person, this increased exemption expires on December 31, 2025. I know some of you are thinking, I don’t need to worry about this because I’m not a multi-millionaire. Fair enough. But when you win the lotto, come see me.
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.) Of course, we have 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 we implement plans while the exemption is available.
If you have any concerns about how the death tax will impact your family, give us a call today so we can maximize the opportunities afforded by the new bill. And, if in doubt, call now and let’s strategize while there’s still time.
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, give us a call first so we can see whether a non-grantor trust would benefit you. This is a sophisticated strategy, but we are here to assist you with it.
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 time 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. We are available to answer your questions about tax reform and work with you to take full advantage of the opportunities. I know you’re busy, so I want to make it as easy as possible for us to work together. Contact Hurst-Euless-Bedford, Texas Estate Planning Attorney, Antoinette Bone, at (817) 462-5454 or email [email protected].
To comply with the U.S. Treasury regulations, we must inform you that (i) any U.S. federal tax advice contained in this newsletter was not intended or written to be used, and cannot be used, by any person for the purpose of avoiding U.S. federal tax penalties that may be imposed on such person and (ii) each taxpayer should seek advice from their tax advisor based on the taxpayer’s particular circumstances.
Nothing in this message is intended to provide legal advice. This message is for educational purposes only.