Articles Posted in Gifts

The New Tax Bill

At the end of last year, Congress passed the most significant tax reform since 1986 and unsurprisingly, it aroused many controversies. Its supporters are convinced that the bill is a big success for workers, pointing out positive changes already in effect, such as Wal-Mart raising its employee’s hourly rate. On the other side of the barricade, the opponents fear that the bill will have quite the opposite effect —that it will better benefit the company shareholders rather than its employees (numerous buybacks were announced in December). In the following months, we may witness attempts on the state level to mitigate some of the effects of the new federal law. While it is too soon to evaluate whether the bill will bring about the desired economic growth long-term, it is the right time to get acquainted with the most significant changes. Importantly, none of these changes will affect the 2017 taxes.

Individuals:

The provisions applicable to individuals are temporary and will expire at the end of 2025, at which time the brackets will return to the old rates, unless Congress extends this period. The rates will still be distributed into seven brackets based on income. Rates for six of the brackets have been lowered and accordingly, most of us will benefit from this. However, some who were in the 33% bracket may now find themselves in the 35% bracket.

Old rates: 10% 15% 25% 28% 33% 35% 39.6%

 

New rates: 10% 12% 22% 24% 32% 35% 37%
Income from (Individuals): $0 $9,526 $38,701 $82,501 $157,501 $200,001 $500,001
Income from (Couples): $0 $19,051 $77,401 $165,001 $315,001 $400,001 $600,001

 

Another benefit is that the personal deductions were nearly doubled to: $12,000 for single filers, $18,000 for head of households, and $24,000 for married couples filing jointly. On the other hand, the $4,450 deduction you could claim for yourself, your spouse, and each of your dependents, was eliminated. In sum, this may completely negate the new benefits for some families. Deductions for the elderly and for those who are blind stay in place and the tax credit for children under 17 was doubled to $2,000. The new law also allows parents to take a $500 credit for each non-child dependent they’re supporting.

The deductions for state and local income and property taxes will be newly capped to $10,000 and foreign real property taxes will no longer be deductible at all. Also, the deductions for itemized interest expense from mortgage debt (to acquire a first or second residence) were lowered from $1 million to $750,000. This change will not affect old mortgages that will be refinanced under the new law, as long as the old loan balance is not exceeded at the time of refinancing. The current up to $100,000 deduction for the interest on home equity loans will no longer be allowed.

Corporations and Businesses

As opposed to the changes affecting individuals, most of the corporate provisions are permanent. The corporate tax rate has been slashed from 35% to 21%. This deduction will not apply to some specific service industries, such as health, law, and professional services. However, single filers with income below $157,500 and joint filers with income below $315,000 can claim this deduction fully on income from service business. This provision is, like in the case of individual tax rates, only temporary.

American corporations will no longer be required to pay corporate taxes on money earned abroad if the corporation stays abroad. Once the income is brought back to the United States, it will be taxed at a new, considerably lower, rate of 15.5% on cash assets and 8% on non-cash assets.

Pass-through businesses such as S corporations and limited liability companies will benefit from the tax deduction as well. This might motivate people to either incorporate their businesses or to disguise their personal income as business income. However, the incorporation may not be the right choice for everyone and people should be cautious, as the bill incorporates some provisions to prevent income mischaracterization. If the owner or partner in a business will draw salary from it, it would be subject to ordinary income tax. Moreover, the bill also limits the income, which qualifies for the deduction. Nevertheless, it seems that the system will not be bullet-proof and will benefit the passive owners over the active ones.

If you are interested in learning how the new tax bill may affect you or your estate please do not hesitate to contact the attorneys at Chepenik Trushin LLP, who are ready, willing, and able to assist you with your estate planning needs. Bart Chepenik, 305-613-3548. Brad Trushin, 305-321-4946. Offices 305-981-8889.

Other Sources

Introduction:

https://www.cnbc.com/2018/01/17/how-democrats-can-neutralize-gop-tax-law-commentary.html

https://www.politico.com/agenda/story/2018/01/15/tax-law-bonuses-wages-trump-000617

Individuals:

https://www.forbes.com/sites/robertberger/2017/12/17/the-new-2018-federal-income-tax-brackets-rates/#fd26309292a3

http://money.cnn.com/2017/12/15/news/economy/gop-tax-plan-details/index.html?iid=EL

http://money.cnn.com/2017/12/20/news/economy/republican-tax-reform-everything-you-need-to-know/index.html

https://www.marketwatch.com/story/10-things-you-need-to-know-about-the-new-tax-law-2017-12-20

Corporations:

https://www.forbes.com/sites/kellyphillipserb/2017/12/22/what-tax-reform-means-for-small-businesses-pass-through-entities/#68335fd66de3

https://www.fool.com/taxes/2018/01/03/heres-who-got-the-biggest-tax-rate-break-from-corp.aspx

https://www.marketplace.org/2018/01/16/business/ive-always-wondered-tax-bill-2017/corporations-pay-effective-rate-corporate-tax

https://www.vox.com/2017/12/20/16790040/gop-tax-bill-winners

https://www.inc.com/zoe-henry/final-tax-bill-impacts-businesses-2017.html

https://hbr.org/ideacast/2017/12/breaking-down-the-new-u-s-corporate-tax-law

Estate Planning: Income Tax Strategies

            Law firms have had to take a spike in income tax rates, a decline in the estate tax rate, and an increasing annual estate tax exemption threshold into account in devising estate planning strategies. There has been a decreasing gap between the income tax rates and estate tax rates: estate tax has moved to a maximum rate of 40% and a $5.45 million exclusion in 2016, from a 55% percent tax rate and a $675,000 exclusion in 2001; the maximum tax rate on ordinary income is 39.6%, up from a low of 35 percent in 2003; the maximum long-term capital gains tax rate increased to 20% from 15% in that same time frame. Furthermore, in 2013 an additional 3.8% surtax was added for net investment of individuals, estates, and trusts over statutory threshold amounts in certain cases. While these numbers might make you think that estate planning is only necessary for the super wealthy, financial planners advise that it is not. Taxes are just one consideration of estate planning: it is critical to plan for an orderly transfer of assets or for other circumstances such as incapacitation.

The capital gains tax rate – the long-term rate of 20% plus the 3.8% surtax – is significant because it affects the basis of assets. When a decedent dies, her beneficiaries get the benefit of a step-up in basis, which is appreciated assets held in the decedent’s estate are readjusted to fair market value at the time of inheritance. Through this mechanism, the beneficiary receives an income tax advantage because she is not liable for the capital gains tax on any appreciation that occurs up to the point she inherits the asset.