The most significant change to the U.S. tax code in 30 years was approved by Congress and signed by the President just in time for Christmas 2017. Many of the provisions became effective January 1, 2018, only a few days after being enacted.
SO, WHAT DOES IT CHANGE?
Corporate and Pass Through Entity Income Tax: Permanent
Corporate Tax Rates are reduced from 35% to 21%.
Business Income from Pass Through Entities: provides for a 20% deduction for individuals and trust and estates on domestic qualified business income from pass-through entities.
- Effectively reduces the top tax rate for those eligible to 29.6% (from 37%)
- Wages paid to owners and certain income from specified services business (i.e. attorney and accounting firms) are excluded from the deduction.
Individual Income Tax: Temporary (most)
Individual Tax Top Rate is reduced from 39.6% to 37%
Other Individual Tax Rates are changed as follows:
|Taxable Income Levels||Income Tax Rates|
|Married Filing Jointly (Single Taxpayers)|
|Current||New Tax Law||Old Tax Law||Current New Tax Law|
|Not Over||$18,650 ($9,325)||$19,050 ($9,525)||10%||10%|
|Not Over||$75,900 ($37,950)||$77,400 ($38,700)||15%||12%|
|Not Over||$153,100 ($91,900)||$165,000 ($82,500)||25%||22%|
|Not Over||$233,350 ($191,650)||$315,000 ($157,500)||28%||24%|
|Not Over||$416,700 ($416,700)||$400,000 ($200,000)||33%||32%|
|Not Over||$470,700 ($418,400)||$600,000 ($500,000)||35%||35%|
|Over||$470,700 ($418,400)||$600,000 ($500,000)||39.6%||37%|
Standard Deduction for Single Individuals is increased from $6,500 to $12,000.
Standard Deduction for Married Couples is increased from $13,000 to $24,000.
Personal Exemption is reduced from $4,050 to $0.
For Those Who Itemize:
- State and Local Tax Deduction and Real Property Taxes are capped at $10,000.
- Mortgage Interest Deduction decreases from $1,000,000 to $750,000 (mortgages prior to 2018 are grandfathered under the $1,000,000 limit).
- Home Equity Line (HELOC) interest is no longer deductible, whether new or existing.
- Charitable Contribution Deduction – The AGI limit for cash contributions is increased from 50% to 60%.
- Alimony will no longer be deductible to the payor and not taxable to the payee after 2019. Applies to divorce or separation agreements executed (or modified) after December 31, 2018. This provision does not sunset.
- Many other itemized deductions are disallowed, e.g., unreimbursed employee expenses, investment advisory fees, tax preparation fees, etc.
One last important item to add to this section is regarding the Individual Mandate for Health Insurance: The coverage/penalty requirements are eliminated as of 2019.
There is no full repeal, as the entire estate, gift and GST tax system is left in place. While most of the transfer tax provisions are retained, a few major changes are made.
- Basic exclusion amounts. The Tax Act doubles the Gift/Estate/GST Tax Exemptions by raising the basic exclusion amount from $5 to $10 million.
- For 2018, the inflation adjusted amount will equal around $11.2 million (or $22.4 million per married couple.
- On January 1, 2026, the basic exclusion amount could return to $5 million, as indexed for inflation from 2010 to 2026.
- “Clawback” unlikely
Transfer tax rules have become quite volatile over the last few years. To illustrate the swings we have experienced in the estate tax arena over this very short time period, included below is a chart that shows the federal estate tax exclusion amounts and the top rate of the estate tax from 2001 to 2018.
|Year||Federal Estate Tax Exclusion Amount per individual||Federal Estate Tax Maximum Rate|
|2010||Repealed||Repealed – carry over basis|
WHAT DOESN’T IT CHANGE?
Individual Income Tax:
Long Term Capital Gains and Qualified Dividends is retained at 0%, 15% and 20% (top rate)
Net Investment Income Tax is retained at 3.8%
Gain on Sale of Principal Residence – Exclusion still allowed for gain up to $250,000 (single) and $500,000 (joint) on sale of principal residence.
The Alternative Minimum Tax (AMT) was not repealed.
Transfer Tax rate (Gift, Estate and GST) is retained at 40%
Step Up in Basis remaining unchanged. Meaning estate assets will continue to receive an income tax basis step up to the assets fair market value at a decedent’s death.
Many of these changes will sunset in 2026. The corporate changes are permanent.
Sasha A. Klein focuses on private wealth services at Ward Damon and counsels affluent individuals and families in personal tax and estate planning. She advises on structuring wealth to achieve client goals including protecting against risk and minimizing income, estate, gift and generation-skipping transfer taxes. She also advises the firm’s fiduciary litigators on tax, trust and estate matters. For questions about the new tax laws, contact Sasha at Sasha@warddamon.com or call 561-842-3000.