The new tax law and what you need to know from the prospective of an Estate and Business Planning Attorney:
The below changes are generally effective January 1, 2018. The provisions relating to individual taxpayers all sunset after December 31, 2025, with the law reverting to prior law.
Estate & Gift Tax-related provisions:
- The Estate and gift tax exemption is doubled. The basic exclusion amount increases from $5 million to $10 million, adjusted for inflation after 2011. In 2018, the exclusion will be $11.2 million per person. With a properly drafted trust, a couple could pass $22.4 million free from tax.
- The Generation-Skipping Transfer tax exemption is still tied to the Estate and Gift tax exemption. So, it too doubles from $5 million to $10 million with inflation adjustment after 2011. The GST exemption will be $11.2 million in 2018.
Individual Income Tax Provisions:
- Same number of brackets, but some rates are lowering.
Here are the new brackets:
- 10% (income up to $9,525 for individuals; up to $19,050 for married couples filing jointly)
- 12% (over $9,525 to $38,700; over $19,050 to $77,400 for couples)
- 22% (over $38,700 to $82,500; over $77,400 to $165,000 for couples)
- 24% (over $82,500 to $157,500; over $165,000 to $315,000 for couples)
- 32% (over $157,500 to $200,000; over $315,000 to $400,000 for couples)
- 35% (over $200,000 to $500,000; over $400,000 to $600,000 for couples)
- 37% (over $500,000; over $600,000 for couples)
- The personal exemption, which would have been $4,150 per person in 2018, is eliminated. However, the child tax credit doubles from $1,000 to $2,000. Further the credit phases out at $400,000 instead of $110,000 for joint filers under prior law.
- Alternative minimum tax remains for individuals, but the exemption increases. (The AMT is eliminated for corporations.)
- The standard deduction amount for 2018 increases from $6,500 to $12,000 for an individual and from $13,000 to $24,000 for a married couple filing a joint return.
- State and local taxes had been deductible in full. Beginning in 2018, state and local taxes are only deductible up to $10,000 in aggregate. This includes income taxes and property taxes. The limit is the same for individuals and married couples filing jointly. The limit for a married person filing separately is $5,000.
- Interest on a home mortgage for a first or second residence had been deductible up to $1 million in debt (adjusted from inflation). Under the new law, the mortgage must be no larger than $750,000 for the interest to be deductible.
- The penalty for not having health insurance is removed.
- Various amounts in the tax code are indexed for inflation. The method of indexing has been changed to chained-CPI, which will raise levels more slowly than in the past.
- Income from pass-through entities, such as S corporations, partnerships, sole proprietorships, etc., may now qualify for a 20% deduction. However, there are limits and phase-outs. For example, if the income is from a service business, the deduction is phased out if the taxpayer’s income is over $157,500 (or double that if married filing jointly).
- Corporate taxes are changing the most. The rate of taxation for a C corporation changes from 35% to 21%.
- A business may elect to expense property under Section 179 rather than depreciating it over years. The amount of property which could be expensed had been $500,000. Now, the limit for expensing is doubled to $1 million.
- An S Corp shareholder may be an Electing Small Business Trust. Under current law an ESBT beneficiary may not include a non-resident alien. Now it can.