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Extraordinary Estate Tax Opportunity

By Cheryl J. Schaffer, CPA, MST, AEP®

Estate and Trust Partner

 

January 9, 2018

You may recall that President Trump promised to repeal the Estate and Gift Tax and their cousin, the Generation Skipping Tax.   However, the enacted version of the Tax Cuts and Jobs Act signed just before Christmas 2017, left these three taxes intact.   The outcome is surprising, given that the Republican Party has often condemned these taxes, and given that the House, Senate, and White House are all on the same side of the party divide.   Yet, complete repeal was not accomplished.   Thus, these taxes remain a huge liability for high net worth individuals and families.

What the Act does accomplish is a doubling of the Estate, Gift, and Generation Skipping Tax Exemption.   Starting on January 1, 2018, the exemption is $11,200,000 for individuals and $22,400,000 for married couples, up from $5,490,000 and $10,980,000 in 2017, respectively. On January 1, 2026, the exemption amounts are scheduled to revert to the 2017 levels, adjusted for inflation. The rate remains the same, at 40%.

If you should pass away before 2026, your Estate will benefit from this historic change in the exemption.   Mortality tables show that if you were born after 1947, you have a 50% chance of outliving the 2026 date, when the Estate Tax comes back at full force.   History tells us that if we have a change of parties in power to Democrats, that 2026 date for reducing the exemption might be accelerated.   Thus, it remains critical that high net worth individuals take proactive steps to reduce their exposure to the Estate Tax.

Many tools are at our finger tips to help you reduce your taxable estate through gifting.   The Gift Tax Exemption doubled, allowing an extraordinary opportunity for you to gift substantial appreciating assets without paying a dime of Gift Tax.   Making substantial gifts can be a little frightening: it may bring up issues of control over assets, creating “Trust Babies” who have unrealistic expectations of entitlement, and reducing cash flow.   Careful consideration must be given to these non-tax aspects.   However, these issues can be addressed via strategies involving special types of trusts, such as Dynasty Trusts, Grantor Retained Annuity Trusts, and nontaxable sales to grantor trusts, just to name a few.

You may have noticed that the media has given little mention to the effect of the Act on the income taxation of Estates and Trusts.   Under the new rules, the highest Federal tax rate for a Trust or Estate is 38% on income over $12,500.   Compare this with the highest Federal tax rate for individuals: 35% on $500,000 of taxable income.   Thus, planning distributions to escape the extremely high rate of tax imposed on Trusts and Estates remains critically important.

Since 1916, The Estate Tax Exemption has changed more than 60 times! Despite complete control by Republicans and their repeated aversion to the death tax, the Estate, Gift, and Generation Skipping Tax remains a threat to high net worth families.   Should we have a change in parties over the next few years, what might Democrats do to accelerate that critical 2026 date? One thing you can bet on: Uncertainty is certain!

We have guided our clients through hundreds of Estate Planning transactions resulting in millions of dollars in savings.   We remain ready to point you in the right direction. Please give us a call to see how Wright Ford Young & Co. can help you!

© Copyright 2017. All rights reserved

Bracket Changes and More From the IRS

You haven’t even filed your 2017 taxes yet, but the IRS has already announced changes that will affect your 2018 taxes, which you’ll be filing in 2019. The changes were announced in Revenue Procedure 2017-58, which runs 28 pages, but below are some key points. How do these changes impact you?

Of course, if any meaningful tax reform is passed, anything can be changed. We’ll keep you posted on any developments that affect you.

  • The standard deduction for married filing jointly rises to $13,000 for tax year 2018, up $300. For single taxpayers and married individuals filing separately, the standard deduction rises to $6,500 in 2018, up from $6,350 in 2017, and for heads of households, the standard deduction will be $9,550 for tax year 2018, up from $9,350 for tax year 2017.
  • The personal exemption for tax year 2018 rises to $4,150, an increase of $100. The exemption is subject to a phase-out that begins with adjusted gross incomes of $266,700 ($320,000 for married couples filing jointly). It phases out completely at $389,200 ($442,500 for married couples filing jointly).
  • The bracket changes have not gone up significantly from the previous year. For example, the floor for the 28 percent “married — filing jointly” category is up from $153,101 to $156,151. The details of each bracket are described in the revenue procedure.
  • The Alternative Minimum Tax exemption amount for tax year 2018 is $55,400, and begins to phase out at $123,100 ($86,200 for married couples filing jointly, for whom the exemption begins to phase out at $164,100). The 2017 exemption amount was $54,300 ($84,500 for married couples filing jointly). For tax year 2018, the 28 percent tax rate applies to taxpayers with taxable incomes above $191,500 ($95,750 for married individuals filing separately).
  • The tax year 2018 maximum Earned Income Credit amount is $6,444 for taxpayers filing jointly who have three or more qualifying children, up from a total of $6,318 for tax year 2017. The revenue procedure has a table providing maximum credit amounts for other categories, income thresholds and phase-outs.
  • For tax year 2018, the monthly limitation for the qualified transportation fringe benefit is $260, as is the monthly limitation for qualified parking.
  • For calendar year 2018, the dollar amount used to determine the penalty for not maintaining minimum essential health coverage remains as it was for 2017: $695.
  • For tax year 2018, for participants who have self-only coverage in a Medical Savings Account, the plan must have an annual deductible that is not less than $2,300, an increase of $50 from tax year 2017, but not more than $3,450, an increase of $100 from tax year 2017. For self-only coverage, the maximum out-of-pocket expense amount is $4,600, up $100 from 2017. For tax year 2018, for participants with family coverage, the floor for the annual deductible is $4,600, up from $4,500 in 2017; however, the deductible cannot be more than $6,850, up $100 from the limit for tax year 2017. For family coverage, the out-of-pocket expense limit is $8,400 for tax year 2018, an increase of $150 from tax year 2017.
  • For tax year 2018, the adjusted gross income amount used by joint filers to determine the reduction in the Lifetime Learning Credit is $114,000, up from $112,000 for tax year 2017.
  • For tax year 2018, the foreign earned income exclusion is $104,100, up from $102,100 for tax year 2017.
  • Estates of decedents who die during 2018 have a basic exclusion amount of $5.6 million, up from a total of $5.49 million for estates of decedents who died in 2017.
  • The annual exclusion for gifts increased to $15,000, an increase of $1,000 from the exclusion for tax year 2017.

Contact us at info@cpa-wfy.com, and we’ll explain how they change your tax situation.

© Copyright 2017. All rights reserved.