It will take months for tax lawyers, accountants and financial advisors to digest the voluminous Tax Cuts and Jobs Act passed by Congress and signed by President Trump on December 22, 2017. At Cipparone & Zaccaro, PC, our attorneys have started digesting the new tax law. Here are some key observations to ponder so far:
#1 Estate, Gift & GST Tax Exemptions Double.
In 2017, the federal estate, gift and generation-skipping tax exemption was $5.49M per person. Under the new tax law, the federal estate and gift tax exemption will be $11.2M per person. The GST exemption will be the same. Thus, a married couple can pass $22.4M to their children and pay no estate or gift tax. This doubling of the exemption means that very few people will need to concern themselves with federal estate taxes at death. Only Connecticut estate tax will be relevant to our clients. By 2020, the Connecticut estate tax exemption is scheduled to equal the federal estate tax exemption. Will the Connecticut General Assembly reconsider its recent increase in the Connecticut estate tax exemption now that the federal estate tax exemption is so high?
#2 Individual Tax Changes Are Temporary.
All of the tax changes that apply to individuals are temporary. Only the corporate tax changes are permanent. The individual tax changes expire in 2025 and our 2017 law will apply once again. Thus, it will be difficult to plan estates and financial transactions because the tax laws will revert back by design in 2025.
#3 Some Itemized Deductions Disappear.
Many itemized deductions no longer exist. Here are some that will be missed:
- Miscellaneous Deductions. Many taxpayers use the miscellaneous deduction to deduct tax preparation fees, legal fees, investment management fees, financial publications and other expenses associated with tax preparation and investing. The 2% floor did not present much of a hurdle. Starting in 2018, the deduction no longer exists.
- Interest on Home Equity Loans. The tax code used to allow up to $100,000 in interest deduction for home equity indebtedness. That deduction disappears under the new tax law. One wonders what effect that will have on home equity loans and mortgage refinancing. Only acquisition indebtedness such as a mortgage for a newly purchased home will qualify now (up to $750,000).
- Alimony. Currently, spouses in a divorce get a deduction for alimony paid. The spouse receiving the alimony must show the deduction on his or her tax return. Starting in 2019, no one gets a deduction for paying alimony or has to declare alimony as income received. This new provision only applies to divorce agreements reached after 2018.
- Casualty Losses. For 2017, you can deduct losses from a fire, flood, or other natural disaster on your income tax return if the loss exceeds 10% of your adjusted gross income. Starting in 2018, you can’t deduct casualty losses unless the loss arises out of a federal disaster declared by the Federal Emergency Management Agency (FEMA).
- Moving Expenses. For 2017, you can deduct job-related moving expenses. Starting in 2018, you can no longer deduct job-related moving expenses unless you are in the military. The income exclusion for moving expense reimbursements is also gone.
#4 Standard Deduction Doubles.
The new federal tax law increases the standard income tax deduction for single filers from $6,350 to $12,000 and for couples from $12,700 to $24,000. Taxpayers over 65 can also take $1,300 per person as an additional standard deduction. Thus, a couple over 65 gets a $26,600 standard deduction. Many couples will simply not bother with itemizing their deductions. How great to not have to document those deductions. It could ruin charitable organizations like small churches and homeless shelters that depend on small donations. You will only itemize your deductions if you have large charitable deductions, state and local tax deductions, medical expense, or interest deductions. The state and local tax deduction for both income taxes and real property taxes was capped at $10,000.
#5 What happened to the personal exemption?
In 2017, each taxpayer and their dependents received a personal exemption of $4,050 per person. The personal exemption reduced adjusted gross income. Starting in 2018, the personal exemption disappears. For large families, this elimination of the personal exemption could seriously increase their taxable income.
#6 A new credit for dependents who are not children under 17.
The Act creates a new $500 credit for dependents who are not children under the age of 17. A credit is better than a deduction because it reduces the tax owed. For instance, if your child is a full-time college student who is your dependent, you can take a $500 credit. If you have a disabled child who lives at home regardless of age, you can take the $500 credit. This credit phases out if your income exceeds $200,000 for single filers and $400,000 for joint filers. In true Trump fashion, the new credit only applies to dependents who are U.S. citizens.
#7 Kiddie Tax Rises.
If your children under 19 receive unearned income (e.g. – income from a trust or Uniform Transfers to Minors Act (UTMA) account), they must pay tax on that income. In 2017, you show the dividends, interest or capital gains on the parents’ return and the income is taxed at the parents’ rate. Starting in 2018, unearned income of a child is taxed at the rate paid by trusts and estates. Parents don’t pay the top tax rate (now 37%) unless their taxable income exceeds $600,000; trust and estates pay the top tax rate (now 37%) if their taxable income exceeds only $12,500. Thus, a child receiving investment income will pay much higher taxes on that money than their parents would pay. It will be interesting to see if the IRS comes out with a separate tax return for children subject to the kiddie tax.
#8 Parents Can Use 529 Plans for Elementary & Secondary Schools.
Starting in 2018, 529 Plans are not just for college. Parents can now use 529 Plans to save for private school before college. Private schools include religious or parochial schools. Students can only use the distributions for tuition and cannot exceed $10,000. Thus, the amount put into 529 Plans for this purpose will be limited.
#9 The New 20% Deduction for Qualified Business Income.
The new tax law gives owners of sole proprietorships, LLCs, partnerships and S corporations a new deduction. The owner must conduct the business in the USA. Reasonable compensation from an S Corporation and guaranteed payments from a partnership or an LLC taxed as a partnership do not count. Thus, it will be better to be self-employed instead of practicing in a group. The deduction reduces the business owner’s taxable income but not the owner’s adjusted gross income. Thus, it will not help with financial aid calculations for college and private schools. The deduction phases out at $157,000 for single filers (over the next $50,000 of income) and $315,000 (over the next $100,000 of income) for joint filers if you are in a service business like law, medicine, etc. For non-service business, above the threshold, the deduction can’t exceed the greater of 50% of W-2 wages or 25% of W-2 wages plus 2.5% of the unadjusted basis of qualified tangible personal property. It is enough to make your head spin. It will take the government and tax professionals years to understand the nuances of this complex deduction so stay tuned.
#10 Charitable Deductions Change.
Congress made a couple of changes that we find interesting:
- Contribution Limit. If you make a large charitable donation, you can’t deduct all of it in one year. In 2017, you can deduct up to 50% of your adjusted gross income (AGI) for donations to churches, schools, colleges, hospitals, governments, and other public charities. In 2018, you can deduct up to 60% of your AGI for cash donations to those charities. The new limit does not apply to gifts of artwork, real estate, and collectibles to charities but would include marketable securities. If the cash contribution exceeds 60% of the individual’s AGI, the taxpayer can carry the deduction forward to future tax years.
- Football and Basketball Tickets. In 2017, you can make a donation to a college in exchange for the right to buy athletic event tickets and receive an 80% charitable contribution deduction. Under the new tax law, no charitable contribution deduction is allowed for the donation. This provision could seriously affect University of Connecticut season ticket sales.
We could go on and on talking about the Tax Cuts and Jobs Act because it was the most fundamental change in tax law since 2001. There are more provisions in the new federal tax law besides these 10 points. Our estate planning attorneys continue to attend webinars and seminars to learn the Act’s many nuances. We may even change our view on some of what we have written in this blog. Stay informed about what we learn about the new federal tax laws by signing up for our newsletter. As you might expect, no taxpayer can avoid tax penalties based on the advice given in this blog. Let’s all just keep learning about this new tax law.