The federal "Tax Cuts and Jobs Act" was signed into law on December 22, 2017.  A myriad of changes to the U.S. Tax Code will be made effective January 1, 2018, some will follow and evolve over the next 8 years, and many of the updates will become most apparent with the individual and entity tax return filings in 2019.  Immediate changes will be apparent in 

W-2 income paychecks issued this month given changes in individual income tax rates.  As with all tax legislation, the changes are complex, extremely lengthy, and are sending tax professionals into overtime in efforts to digest and advise.  

We urge you to reach out to your tax advisor to determine how the new laws will effect your specific tax situation.  For now, we highlight just a few of the changes applicable across our client base.

1)  Estate Tax.

Under the previous law, individuals had an estate tax credit in 2017 of $5,490,000 per person, or $10,980,000 for married couples.  This meant that a person would face no federal estate tax until an estate was worth more than those limits, and any amount exceeding those thresholds was taxed at 40%.  

As of January 1, 2018, the estate tax credit essentially doubled, now approximately $11,200,000 for individuals and $22,400,000 for married couples.  Only amounts exceeding those credits will face the 40% federal estate tax.  It is projected that less than 0.1% of estates will be subject to federal estate tax at this level.

These credit amounts are tagged to inflation and will increase annually over the next 8 years.  At that time, should there be no additional legislation, the credit will regress to the 2017 levels, adjusted for inflation.  

The main concern for estate planning for all estates, facing tax or not, is the structure of current estate planning documents.  In our practice, we craft every estate plan based on the specifics of each client's financial circumstance and intent, and do so with the goal that the Trust document be flexible enough to accommodate changes in tax law.  However, many Trusts have been drafted over the last two decades, when the estate tax credit increased from $625,000 in 1998 to now over $11,000,000 for individuals, with administration terms remaining virtually the same despite the disparity in taxable estates.

Specifically, in their efforts to accommodate married people passing estates to the surviving spouse tax- free, many Trust drafters have required the survivor to set up at least three separate trusts to administer on the death of the first spouse.  While this might have made some sense with a $625,000 taxable estate, this structure for the past few years and  now in particular simply creates  unnecessary administrative burdens and costs for the surviving spouse and beneficiaries.  

Accordingly, while those previously on the verge of estate taxation may be taking a big sigh of relief, everyone with estate plans should review his or her documents to confirm that Trusts are structured appropriately in this new era of reformed estate tax.  Further, those still subject to estate tax should inquire as to what further steps can be taken to reduce or eliminate the tax.

2)  Income Taxes.

The income tax rate on earned income has been primarily slashed across the board; ask your tax advisor how the new rates effect your specific situation.  Many, many deductions have been revised as well.  The standard deduction has increased per person in a fashion that, for better or worse, may for some render itemization useless.  The biggest downside of limitation on deductions for Californians is the new cap on "SALT" - State and Local Taxes.  SALT deductions, which include property tax, are now limited to $10,000 per year.  This is "salt" in the wound of the restriction on mortgage interest deduction for home loans limited to $750,000 taken after December 15, 2017.    For further information, see the following link for a summary of the income tax law:  http://bit.ly/2CF5old

3)  Pass-Through Income.  

Owners of privately held businesses, including S-corporations, partnerships and LLCs, may be eligible to deduct up to 20% of profit from business income.  The calculation of the potential deduction is specific to each taxpayer, is subject to a number of limitations, and will be further determined by rules yet to be published by the IRS.  In general, pass-through business owners should receive some income tax relief.  It is critical that small business owners contact their tax advisors promptly to discuss the application of this development to their specific businesses.

4)  Gift Tax Exemption for 2018.

This is not a part of the new tax law, but please note that the annual gift tax exemption has increased to $15,000 for 2018.  That means that an individual may give up to $15,000 to unlimited recipients without filing a gift tax return, paying gift tax or chipping away at the estate tax credit.