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Making Large Gifts Now Won’t Harm Estates After 2025

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On November 20th, the IRS announced individuals taking advantage of the increased gift and estate tax exclusion amounts in effect from 2018 to 2025 will not be adversely impacted after 2025 when the exclusion amount is scheduled to drop to levels before 2018.

The Treasury Department and the IRS issued proposed regulations which implement changes made by the 2017 Tax Cuts and Jobs Act (TCJA).  As a result, individuals planning to make large gifts between 2018 and 2025 can do so without concern that they will lose the tax benefit of the higher exclusion level once it decreases after 2025.

In general, gift and estate taxes are calculated, using a unified rate schedule, on taxable transfers of money, property and other assets. Any tax due is determined after applying a credit – formerly known as the unified credit – based on an applicable exclusion amount.

The applicable exclusion amount is the sum of the basic exclusion amount (BEA) established in the statute, and other elements (if applicable) described in the proposed regulations. The credit is first used during life to offset gift tax and any remaining credit is available to reduce or eliminate estate tax.

The TCJA temporarily increased the BEA from $5 million to $10 million for tax years 2018 through 2025, with both dollar amounts adjusted for inflation. For 2018, the inflation-adjusted BEA is $11.18 million. In 2026, the BEA will revert to the 2017 level of $5 million as adjusted for inflation.

To address concerns that an estate tax could apply to gifts exempt from gift tax by the increased BEA, the proposed regulations provide a special rule that allows the estate to compute its estate tax credit using the higher of the BEA applicable to gifts made during life or the BEA applicable on the date of death.

To discuss more about your gift and estate tax situation, contact WFY’s Estates and Trusts Partners, Marisa Alvarado and Kevin Wiest, at info@cpa-wfy.com or (949) 910-2727.

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Senate Tax Plan Outline Released

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The Senate Republican’s tax reform plan was released last week. Several proposals changed from the House Tax bill. The key changes in the plan from the current law are as follows:

Individuals:

  • Current tax rates: Seven brackets from 10% to 39.6%.
  • Proposed tax rates: Seven brackets at 10%, 12%, 22.5%, 25%, 32.5%, 35% and 38.5%.
  • Current standard deduction: $6,350 individuals and $12,700 married filing joint.
  • Proposed standard deduction: $12,000 individuals and $24,000 married filing joint.
  • Elimination of personal exemptions, worth $4,050 per person.
  • Increase child tax credit from $1,000 to $1,650 and add a $500 credit for nonchild dependents.
  • Eliminate most itemized deductions, including property taxes and state and local tax deductions (will keep charitable contributions and medical expense deduction).
  • Continue to exclude from gross income up to $500,000 for joint filers ($250,000 for other filers) on the sale of a principal residence if the taxpayer owned and used the home for five out of the previous eight years (currently two out of five years). The exclusion would be available once every five years  (currently every two years).
  • Repeal of the alternative minimum tax.
  • Double the exemption for the estate tax amount to $10 million (no plan for repeal).

Businesses:

  • Small and family-owned business and flow through entities (Sole Proprietorships, Partnerships and S Corporations) will receive an additional 17.4% deduction of domestic qualified business income (limited to 50% of the W-2 wages of the taxpayer) effective in 2018. Certain professional service businesses are not eligible for the deduction, with a possible exemption if the qualified income is less than $150,000 (joint filers).
  • Proposed C Corporation tax rate 20% effective in 2019 (most other provisions begin in 2018).
  • Imposing a one-time 10% tax on accumulated foreign earnings, reduced to 5% for illiquid assets.
  • Nonresidential and residential rental property tax depreciation reduced to 25 years.
  • Increase Section 179 expensing limitation, deducting the cost of certain property, to $1 million and the phase out threshold to $2.5 million (currently $510,000 expense limitation with $2 million phaseout) and certain nonresidential property improvements would also qualify for Section 179 expense.
  • Limit the deduction for net interest expenses incurred by a business in excess of 30% of the business’s adjusted taxable income and any disallowed interest may be carried forward indefinitely.
  • Eliminate the deduction allowed for Section 199 domestic manufacturing activities after 2018.
  • Disallow deductions for entertainment, amusement or recreation but retain 50% deduction for business related meals.

WFY will update you as the plan progresses into a bill.

Contact us at info@cpa-wfy.com to discuss how to maximize your 2017 tax benefits through comprehensive year-end tax planning.

Unified Framework for Tax Reform

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Republican lawmakers released on Wednesday a “unified framework” for tax reform designed to cut tax rates, simplify the Internal Revenue Code, and provide a more competitive environment for business. The key changes are as follows:

Individuals:

  • Current tax rates: Seven brackets from 10% to 39.6%.
  • Proposed tax rates: Three brackets at 12%, 25% and 35%.
  • Current standard deduction: $6,350 individuals and $12,700 married filing joint.
  • Proposed standard deduction: $12,000 individuals and $24,000 married filing joint.
  • Elimination of personal exemptions, worth $4,050 per person.
  • Repeal of the alternative minimum tax.
  • Repeal of the estate and generation-skipping transfer tax.
  • Eliminate most itemized deductions, including state and local tax deductions (will keep mortgage interest and charitable contributions deduction).

Businesses:

  • Small and family-owned business and flow through entity tax rate reduction (Sole Proprietorships, Partnerships and S Corporations).
    • Current maximum tax rate 39.6%.
    • Proposed maximum tax rate 25%.
  • Current C Corporation tax rate 35%
  • Proposed C Corporation tax rate 20%.
  • Tax U.S. companies only on U.S. income instead of worldwide income.

There is tremendous opportunity this year to plan ahead and create permanent tax saving benefits by structuring a year-end tax plan that fits your situation.

Contact us at info@cpa-wfy.com to discuss how to maximize your 2017 tax benefits from the proposed upcoming changes to the tax law.