The Tax Cuts and Jobs Act: Trust & Estate Planning Considerations
This week was supposed to be the week Republicans passed a tax bill. It’s unclear what exactly will happen in the immediate future, or if we’ll have to wait for the New Year to see any type of tax reform. If or when we do get tax reform, the new law under the current Administration will be called the Tax Cuts and Jobs Act.
So how will this affect estate planning?
If either the U.S. Senate or House manage to pass their respective bills (both branches of Congress will need to sign off on one, cohesive plan), we could see big changes in the future.
Here’s a look at how potential tax reforms could affect individuals and married couples under each Congressional proposal.
Regarding Income Taxes
a.) Tax Brackets
HOUSE: Raises individual tax rates, but cuts tax brackets from seven to four. The new brackets would be changed to 12, 25, 35 and 39.6 percent.
SENATE: Keeps the current seven individual tax brackets, but lowers the rates for some of these. The revised rates will be 10 (same as current), 12, 22, 24, 32, 35 (same as current) and 38.5 percent.
b.) Standard Deductions
HOUSE & SENATE: The House and the Senate envision raising the standard deduction from the current $6,350 (single)/$12,700 (married) to $12,000/$24,000. One difference between the proposals is for the Head of Household deduction, currently capped at $9,500. The House plan raises this amount to $18,300, while the Senate plan raises it to $18,000.
HOUSE & SENATE: Each chamber decided to repeal the Alternative Minimum Tax, which basically ensures the wealthier filers pay a minimum amount of tax no matter how many deductions they take.
HOUSE: House Representatives plan to repeal the State and Local Tax Deduction (specifically income and sales tax deductions), and sets a cap on property tax deductions at $10,000.
SENATE: The Senate’s plan aims for a full repeal of this deduction.
e.) Pass-through Income
HOUSE: Income “passing through” sole proprietorships, partnerships, S-Corporations, etc., and currently taxed at individual income tax rates, will be taxed at 9 percent on the first $75,000 earned, and capped at 25 percent maximum. The current maximum rate is 39.6 percent. Certain personal service providers (law, accounting, brokerages, performing arts, etc.) would not be eligible for the lowered rates under this plan.
SENATE: In contrast, the Senate plan offers a 17.5 percent deduction rather than a lowered tax rate.
f.) Child Tax Credit
HOUSE: The Representatives’ plan raises this credit to $1,600, plus a $300 credit for each parent and dependent who is NOT a child. The child tax credit goes away for married couples making $230,000 or more per year.
SENATE: The credits are slightly higher at $2,000, plus a $500 credit for each dependent child. It is phased out for married couples earning $500,000 or more annually.
Regarding Estate Tax
HOUSE & SENATE: Currently, there is a 40 percent tax levied on assets valued at over $5.49 million, per individual. Both the branches of Congress would double the basic exclusion. However, the House of Representatives included plans to repeal the tax after 2024, while the Senate will not repeal estate taxes.
Regarding Charitable Gifts Tax
HOUSE & SENATE: Certain tax reforms such as the significant rise in standard deductions and a possible repeal of estate taxes, could have negative consequences for nonprofits. If more taxpayers choose the standard deduction rather than itemizing their returns for example, there will be less incentive to give to charity.
We anticipate there will be considerable “chopping” to both proposals with a compromise that leaves us with most of the proposed items for individuals intact, but potentially revised timelines for repeal rules. Stay tuned, as we will summarize the final reform tax bill when passed.
Kira S. Masteller is a Shareholder in our Trusts & Estate Planning Practice Group.