President Trump signed the Tax Cuts and Jobs Act (the “Act”) on December 22, 2017. The Act makes significant changes to the Internal Revenue Code, covering a broad range of income, corporate, and estate taxes. Most of the changes to the Code are effective as of January 1, 2018. Because of Senate rules requiring limits on legislation that increases the federal deficit, many provisions of the Act, including the estate, gift, and generation-skipping transfer (GST) tax provisions, will expire after December 31, 2025.
From an estate-planning perspective, some key takeaways are:
- The federal estate, gift, and GST taxes have not been eliminated, as some had hoped. Instead, the exemptions have increased making it less likely that such taxes will be imposed on all but the wealthiest individuals. The base federal estate and gift tax exemption has been doubled to $10 million, indexed for inflation, for tax years 2018 through 2025. The effect is that a single person may now transfer, during life or at death, a total of approximately $11.2 million (the inflation-adjusted figure), or $22.4 million for a married couple. The GST tax exemption has also increased to a like amount.
- The tax rates on transfers of asset value in excess of the exemptions remains at 40%.
- The unused estate and gift tax exemption of a predeceased spouse (the “deceased spouse unused exclusion,” or DSUE) continues to be available for the use of the surviving spouse provided a proper “portability” election is made by filing a timely federal estate tax return at the first spouse’s death.
- The annual exclusion for gift tax purposes, that is, the amount that a person may give to individual donees each year without using the larger gift and estate tax exemption, is now $15,000, or $30,000 for a married couple.
- Even with the larger gift and estate tax exemption, the cost basis of inherited assets will continue to receive a step-up under section 1014 of the Code. This limits the capital gain on inherited assets.
- As of January 1, 2026, the increased transfer tax exemptions revert back to the lower amounts as of December 31, 2017, as increased for inflation. Therefore very wealthy individuals should consider large gifts of appreciating assets prior to 2026.
- There were many changes to the tax treatment of pass-through entities, including a new deduction of 20% of qualified business income for taxpayers who own partnerships, S corporations, or LLC’s, and new limitations on deducting losses from these businesses against taxable income from other sources.
Individual income tax provisions:
- Tax rates: There are now 7 income tax brackets for individuals, ranging from 10% to 37%. There are 4 brackets for estates and trusts, ranging from 10% to 37%; the top bracket for estates and trusts begins at taxable income of $12,500.
- The Alternative Minimum Tax (AMT) on individuals operates only where taxable income exceeds $1 million. The AMT exemption amounts were also increased: $109,400 for married taxpayers filing jointly; $70,300 for single taxpayers; and $54,700 for married taxpayers filing separately.
- The personal exemption has been eliminated.
- The standard deduction has increased for tax years beginning after December 31, 2017 and before January 1, 2026: For 2018, it is $24,000 for married taxpayers; $18,000 for heads of household; and $12,000 for single taxpayers.
- The child care credit is doubled to $2,000 per child, and is available unless taxable income exceeds $200,000, or $400,000 on a joint return.
- A deduction for mortgage interest remains, subject to a limitation of interest on the first $750,000 of loan amount, down from $1 million. The lower limitation applies only to new indebtedness incurred after December 16, 2017. For indebtedness acquired prior to that date, former law continues to apply. The deduction for home equity loan interest is eliminated.
- 529 Plans: Elementary and secondary school expenses of up to $10,000 per year are qualified expenses and may be withdrawn from 529 accounts. This change applies to both secular and religious schools.
- The charitable deduction for cash donations to public charities has increased. It had been limited to 50% of adjusted gross income (AGI); it is now 60% of AGI.
- The Act suspends all miscellaneous itemized deductions that had been subject to the 2% floor on itemized deductions.
- State and local sales, property, and income tax (SALT) deductions: Limited now to $10,000 per year.
- Alimony: For divorce agreements executed or modified after December 31, 2018, alimony will no longer be deductible for the payor, nor be included in the gross income of the payee.
- The individual mandate (the requirement that individuals comply with the insurance coverage provisions of the Affordable Care Act, or pay a penalty) is permanently repealed for months beginning after December 31, 2018.
Corporate tax highlights:
- The maximum corporate tax rate is 21%, effective January 1, 2018. This change is permanent, in other words, it does not sunset in 2026.
- The corporate AMT has been eliminated.