Tax Cuts and Jobs Act
Chambliss Estate Planning Legal Update
The Tax Cuts and Jobs Act (the “Act”) has been passed by both the House and Senate under a modified title and was signed into law by President Trump on December 22, 2017.
What does it mean now that the Act is law?
Lower income tax rates. Beginning in 2018, the Act reduces income tax rates for many individuals and businesses. Due to lower rates in 2018, it may be beneficial for some individuals to defer 2017 income into 2018. Some possible deferral opportunities might include:
- If you are an employee who believes a bonus is coming your way before year end, consider asking your employer to delay payment of the bonus until next year.
- If you are thinking of converting a regular IRA to a Roth IRA, consider postponing your conversion until next year to have it taxed at lower income tax rates.
- If you run a business that renders services and operates on the cash basis, the income you earn is not taxed until your clients or customers pay. Consider delaying your billings until next year (or until so late in the year that no payment can be received this year) in order to have such revenue taxed at lower income tax rates.
- The reduction or cancellation of debt generally results in taxable income to the debtor. If you are contemplating a deal with your creditors that involves debt reduction, consider postponing finalizing the deal until next year in order to have such cancellation of debt income taxed at lower income tax rates.
Disappearing income tax deductions/large standard deduction. Beginning next year, many popular income tax deductions are repealed or reduced in exchange for a larger standard deduction. Some possible action steps might include:
- Although the itemized deduction for charitable contributions is retained, charitable contributions made after 2017 may not yield a tax benefit to many taxpayers because their total charitable contributions and other permitted itemized deductions are less than the new increased standard deduction. Consider accelerating your charitable giving to take advantage of the 2017 itemized deduction rules.
- If you owe any state and local taxes for 2017, consider paying such taxes in 2017 since the Act provides caps on the itemized deduction for state and local taxes. If your combined state income taxes and property taxes were greater than $10,000 in 2016, we recommend paying in your remaining 2017 state income tax estimates before December 31, 2017. Please see attached instructions (titled State Income Tax Payments) for making these payments.
- With the Act eliminating the miscellaneous itemized deduction for unreimbursed business expenses, tax preparation fees, and certain other expenses that exceed 2% of adjusted gross income, consider incurring and paying such expenses in 2017 while the miscellaneous itemized deduction is still available.
Other year-end income tax strategies. Some other year-end income tax strategies to consider include:
- The exercise of an incentive stock option (ISO) can result in alternative minimum tax (“AMT”) complications. Consider delaying the exercise of your ISO until after year-end to take advantage of the increases in AMT exemption and AMT phase out threshold.
- Alimony payments have generally been an above-the line deduction for the payor and included in the income of the payee. Under the Act, alimony payments arising under a divorce decree or separation agreement executed after December 31, 2018 will generally no longer be deductible by the payor or taxable income to the payee. Consider taking action to finalize or delay the effective date of your divorce decree or separation agreement based on the change in alimony taxation.
- The Act repeals the deduction for moving expenses after year-end (except for certain members of the Armed Forces). Consider accelerating moving expenses before year-end if you are about to embark on a job-related move.
Estate, gift, and generation-skipping transfer taxes. For estates of decedent’s dying and gifts made after December 31, 2017, the Act doubles the estate, gift, and generation-skipping transfer tax exemptions to $11.2 million (2018) for individuals or $22.4 million (2018) for married couples. The exemption amounts continue to be adjusted for inflation in subsequent years. The increased exemption amounts expire at the end of 2025, after which such exemption amounts will revert to their pre-Act amounts ($5.6 million (indexed for inflation) for individuals or $11.2 million (indexed for inflation) for married couples). Estate planning considerations after the Act becomes law include:
- In light of the risk that the increased exemption amounts under the Act are reduced either to their pre-Act amounts at the end of 2025 (or the possibility of sooner changes as part of future tax legislation), consider making lifetime gifts to take advantage of the Act’s increased exemption amounts while they are available.
- In the past, many estate plans included so-called “formula dispositions” in an amount equal to the federal or applicable state estate tax exemption amount, or other tax influenced dispositions. For example, estate plans which call for a “credit shelter disposition” (often defined by a formula based on the maximum amount that could pass at death free from estate tax) to a “credit shelter trust” that included children as beneficiaries, with the balance of the estate passing to or in trust for a surviving spouse. With the increased exemption amounts under the Act, such a disposition could result in unanticipated consequences, including significantly reduced assets being available to the surviving spouse if the surviving spouse is not a named beneficiary of the credit shelter trust. Individuals should consult with their advisors to determine whether their estate planning documents contain provisions likely to result in such unanticipated consequences.
- Although it is too soon to predict how particular states might change their state level taxes in light of the Act, individuals should periodically consult with their advisors to evaluate the impact of any such changes and revise their estate plans as appropriate.
We have described only some of the possible year-end moves you may wish to consider in light of the Act. If you would like more details about any aspect of how the Act may affect you, please do not hesitate to call us.
Following are some of the provisions of the Act which take effect in 2018 (many of which sunset at the end of 2025): click below for the full report.