On December 22, 2017, President Trump signed the new tax reform, the Tax Cut and Jobs Act (TCJA) into law. This is a significant change in the tax law and will take several months to truly see the full effect of the act.
Most of the individual and estate and gift tax provisions will “sunset” on December 31, 2025 providing a potential window of opportunity to take action before they revert back. As always you should consult a tax professional about your particular situation.
Below, we’ve summarized some of the most impactful provisions to investors and entrepreneurs, and provided practical actions for you to consider.
Individual Income Taxes
|Brackets and Rates. Maintained seven brackets but broadened brackets and lowered rates. Top rate of 37% @ $500,000 for individual and $600,000 for married filing jointly.||Review withholdings to match change in brackets and rates|
|Limitation on State and Local Taxes (SALT) to $10,000 aggregate amount for both state and local income and property tax deduction||Consider converting vacation homes to rental property which would allow deduction of property taxes and mortgage interest.|
|Charitable gift deduction retained. Increase limit of cash contribution from 50% of AGI to 60% of AGI. 5 year carry forward provisions retained.||Consider “bunching’ multiple year charitable contributions into one year in order to exceed the standard deduction hurdle ($12,000/$24,000‡). Using this technique along with a Donor Advised Fund provides for more flexibility in making grants to the charities of your choice.|
|Retained Alternative Minimum Tax (AMT) for individuals but increased exemption amount $73,600/$114,600‡ and increased phase out threshold to $523,600/$1,047,200‡. With these changes and with the loss of a significant amount of deductions it is expected that fewer taxpayers will be susceptible to the AMT.||Consider whether or not this will affect your ability to exercise ISO’s (Incentive Stock Options) without paying AMT. The change in deductions this year may mean many people previously caught by AMT are no longer in AMT.|
|Roth Recharacterization. Elimination of ability to recharacterize Roth conversion for taxable years after 2017.||Consider whether advantageous to recharacterize Roth conversion. You may be able to recharacterize up until the October 2018 return filing deadline.|
Other Individual Income Tax Changes:
- Retained Net Investment Income Tax (NIIT) “Obamacare” surcharge of 3.8%.
- Increase of Standard deduction to $12,550 for individual and $25,100 for married filing jointly. Repealed the personal exemption.
- Increase of Child Tax Credit to $2,000 per child with a phase out beginning @ $200,000/$400,000‡.
- Repeal of most Miscellaneous Deductions (2% of AGI deductions)
Estate and Gift Taxes
|Doubled the Lifetime Estate and Gift tax exemption to $11.7† million for an individual and $23.4† million for a married filing jointly. Portability of unused portion of exemption is retained.||Consider using the increased exemption amount to make gifts to transfer assets out of your estate prior to sunset of increased exemption amount. Consider use of Non-Reciprocal Spousal Lifetime Access Trusts (SLATs) as vehicle for transfers.|
|Retained Stepped-Up Basis for assets transferred at death.||Consider benefits of basis maximization by transferring or “swapping” low basis assets to take advantage of stepped up basis provision at death.|
|Annual gift tax exemption increases from $14,000 to $15,000 per donor per done ($30,000 if split gift for married couple).||Consider review existing estate planning documents on a regular basis. Formula provisions may need to be revised based on new exemption amount. Adjusting 529 plan contributions|
|Generation Skipping Tax (GST) is doubled to $11.7 million for an individual and $23.4 million for married couple. No portability for GST.||Consider review of GST trusts and allocation to take advantage of increased exemption amount.|
Corporate and Business Taxes
|Pass Through Entities. This is a complex provision. Certain pass through entities (LLPs, LLCs, Sub-chapter S corps., Partnerships and Sole Proprietorships) are eligible for a 20% deduction of taxpayer’s “qualified business income”. Personal service entities such as lawyers, accountants, health consulting, financial services and performing arts are subject to an income limitation of $163,300/$326,600‡ (2020 numbers).||Consider/review business entity choice for investments and business structures.|
|Corporate Tax (C Corps) reduced to 21% flat rate. No brackets. Corporate AMT is repealed.||Consider if C Corp is more favorable for entity structure for new businesses.|
Key 2018 Annual Limits Relating to Financial Planning *
|Elective deferrals 401(k), 403(b), etc.
Catch-up contribution (for age 50+)
|IRA or Roth IRA contribution limit
Catch-up contribution (for age 50+)
$1,000 (no change)
|SEP IRA contribution maximum (limited to 25% of income)||$58,000|
|Roth IRA phase out (single)
Roth IRA phase out (married filing jointly)
|Social Security wage base||$142,800|
|Annual gift tax exclusion||$15,000 (up from $14,000)|
|Gift Exclusion to a non-U.S. citizen spouse||$157,000 - 2020, $159,000 - 2021|
|Estate/Gift/GSTT tax lifetime exclusion||$11,700,000
|Maximum estate tax rate||40%|
|Highest marginal fed. income tax rate (37%)—Single||$523,600|
|Highest marginal fed. income tax rate (37%)—Married||$628,300|
|Long term capital gains rates (Jt. Filer: $80,800 /$501,600 />$501,600)||0%/15%/20%|
|Personal exemption||Eliminated in 2018|
|Standard Deduction Single/Married filing Jointly||$12,550/25,100|
|Mortgage interest deduction Limit (principal residence only)||$750,000|
|SALT deduction limitation (state & local taxes)||$10,000 combined|
|Child Tax Credit (phase out at $200,000/$400,000 Individual/Joint)||Fully refundable $3000 per eligible child under 18 ($3600 per child under 6)|
|Itemized deduction phase-out||Repealed|
|Kiddie tax limited standard deduction||$1,100|
|Alternative Minimum Tax (AMT) exemption—Single/Married||$73,600/$114,600|
|Flexible Spending Account||$2,750|
|For California Residents: CA College Access Tax Credit Fund**||50%|
Top of mind for investors this year should be reviewing existing and new entity structures and from a personal point of view taking advantage of the increased gift tax exemption.
Entrepreneurs should re-visit personal taxes and AMT with their tax professional which may allow them to exercise ISOs without additional tax consequences. They should also be aware of the new rules relating to option plans and the ability for employees to defer taxes.
Because of the new tax changes, many traditional planning constructs will need to be rethought. The increase in the exemption amounts does not obviate the need to continue to plan for income taxes, asset protection, divorce, business continuity and potential future changes to income and estate and gift tax law.
These changes can be complicated and we would be happy to work alongside your legal and tax professional prior to making any decisions.
Updated October 2021
The Fine Print
* No change means that there were no changes made for 2021 compared to 2017.
†This amount is subject to adjustment depending on final determination of the inflation factor.
‡ Whenever values are shown with a slash, e.g. $100,000/$200,000, the first value is for an individual tax payer and the second value is for a married couple filing jointly.
Sources based on current tax rates from IRS and College for Financial Planning web sites. California College Access Credit (CATC) is a credit available for individuals and business entities that contribute to the CATC Fund in 2018. Individual tax rates may differ based upon specific tax situation.