The Tax Cuts and Jobs Act
On December 22, 2017, with support of the House and the Senate, President Trump signed the largest tax law change since 1986, titled the Tax Cuts and Jobs Act (TCJA). With promises of simplified rules and index card-sized tax returns, this expansive tax reform has resulted in a broad change to the tax laws including a lowering of rates and a removal of deductions. These changes apply to entities of all shapes and sizes, including individuals, businesses, estates, nonprofits, etc.
Specifically, individual taxpayers will see a reduction in their individual tax rates, however, such benefit may be offset or dulled by the loss or capping of certain deductions including the mortgage interest deduction and state and local tax deductions (which includes property tax).
Business, both corporations and pass-through entities, are also impacted by the TCJA. Corporate tax rates, effective January 1, 2018, were reduced to 21%. In addition, pass-through entities (partnership, S corporations, sole proprietorship) will now receive a 20% deduction for pass-through income limited to the greater of 50% of wage income or 25% of wage income plus 2.5% of the cost of tangible depreciable property for qualifying businesses. Certain exceptions and limitations apply.
Estate and Gift Tax
Although originally contemplated, the TCJA did not repeal the federal gift and estate tax. However, the reach of this tax has greatly been reduced.
Beginning January 1, 2018, the TCJA increased the federal estate, gift and generation-skipping (GST) tax exemptions to $10,000,000 per person, indexed for inflation. For tax year 2019, the Federal estate tax exemption will be $11.4 million for individuals and $22.8 million for married couples. As currently written, the exemptions will revert to their 2017 levels beginning January 1, 2026. The tax rate remains at 40% under the TCJA.
Due to this generous federal exemption, for estates of persons dying after December 31, 2017, and before January 1, 2026, most taxpayers will not have to pay a federal estate tax. However, for those individuals with estates valued in excess of the exemption, proper planning is crucial to proactively and effectively minimize potential estate tax liability. And, for those with estates valued below the federal exemption amount, there are still many reasons to properly structure your estate, including: creditor protection, controlling who will as well as how your beneficiaries will inherit wealth, and for those with states having their own state-level estate tax system (i.e. New York), minimizing state-level estate taxes.
Income Tax Planning
With new tax laws comes new planning opportunities especially with changing tax brackets. You do not want to pay more in federal income tax than you have to. Strategies such as deferring or shifting income, converting a 2nd home to a rental property, changing entity status of a business, and/or prepaying property taxes may be effective ways to decrease federal income tax.
We recommend that you consult with a tax attorney to help you decide what choices are right for your specific situation. A more detailed discussion of the impact of the TCJA on individuals, businesses and estates will be covered in future blog posts.
Estate Tax Planning
Since 1916, the federal government has imposed an estate tax on the value of an individual’s estate upon death. In the late 1970’s, the federal government bolstered this system by linking the estate tax with a gift tax (a tax on gifts made by an individual during their lifetime) and a tax on generation-skipping transfers (GST) (a tax on transfers to recipients who are two or more generations younger than the donor). As a shock to some, many states, including New York, also impose an estate tax on top of the already burdensome federal tax.
Currently, taxpayers who are subject to estate, gift or GST taxes are generally taxed at the top rate of 40%. Because of a historically high exemption, which likely exempts a large portion of our clients’ estate, this tax only burdens those with an estate over $5.49 million ($10.98 million for married couples). However, those with an estate in excess of this exemption may find that a large portion of their estate is diverted to the federal government rather than to their loved ones.
At Russo Law Group, our attorneys have assisted thousands of families to achieve their estate planning goals. Through years of service, our attorneys have acquired deep knowledge of all aspects of estate planning. Whether routine or sophisticated, our goal is to assist our clients in minimizing tax, whether it be estate, gift, or GST taxes.
We assist our clients to efficiently structure their estate using a variety of planning options including:
- Wills and Revocable Trusts
- Irrevocable Life Insurance Trusts (ILITs)
- Grantor Retained Annuity Trusts (GRATs)
- Qualified Personal Residence Trusts (QPRTs)
- Charitable Remainder Trusts (CRTs) and Charitable Lead Trusts (CLTs)
- Sales of Assets to Grantor Trusts
- and many more.
At Russo Law Group, our skilled attorneys advise our clients on the most efficient way to structure their charitable giving. Using a variety of charitable planning techniques, we help our clients achieve their philanthropic goals while also maximizing income tax deductions and reducing the size of their estate.
Charitable trusts, donor-advised funds (DAFs) and private foundations are just a few of the charitable planning strategies that offer valuable income tax and estate planning benefits. Whether it is a gift of cash, stock, or appreciated property, our attorneys are there to advise you on the best option given your charitable and financial goals.