The “Tax Cuts and Jobs Act” was approved by Congress and signed into law by President Trump right before Christmas, serving as the most drastic change to the Internal Revenue Code in recent memory. So as we focus in on fulfilling our New Year’s resolutions and trying to keep our heads above the snow here in West Michigan, it is a good time to take stock of the key changes in the law and what they will mean for most Americans.
One of the major changes that will affect numerous business clients is the corporate tax rate cut and the introduction of a pass-through entity deduction. The corporate tax rate cut for businesses taxed as C corporations is from a maximum 35% rate to a new 21% rate. As for pass-through entities (i.e. S corporations and LLCs), a new 20% deduction will apply to the owners’ allocable share of income. However, there are various phase-outs, limitations, and exceptions to this deduction, so consulting your accountant is a must before making any major decisions with your business’ tax election, distribution schedule, etc. (especially those in certain professional service industries, as you may be prohibited from claiming the deduction).
Personal Income Tax
The same amount of income tax brackets will remain, but across the board, the rates drop on average two to four percent for each bracket. Additionally, the standard deduction is nearly doubling, while many itemized deductions are being eliminated along with personal exemptions (although an increased child tax credit will help offset that to an extent). There is also a major caveat with these changes, as they are not permanent and set to expire in 2025. So while “simplicity” was promised in this area (and may be accomplished in many cases), we still recommend consulting with an accountant if you are in the middle or upper income tax brackets and have questions about personal tax planning for the coming year. This is especially true for those clients going through the divorce process, as one of the major changes is the shift of the tax burden from the recipient to the payor for divorce or separation agreements signed after December 31, 2018.
Estate and Gift Tax
A few months ago, I previously wrote about how the 2018 estate tax exclusion amount – before these changes –was set to increase from $5.49 million to $5.60 million, while the annual gift exclusion would increase from $14,000 to $15,000 per recipient. Now, the estate tax exclusion amount is essentially doubled to $11.20 million per person (and $22.40 million per married couple, factoring in additional planning and filed tax returns), while the gift tax increase to $15,000 will remain unchanged. Like some of the other changes, there is also an expiration date to these changes in 2025, when the estate tax exclusion amount reverts back to the current rates in the mid-$5 million range.
So overall, what do these changes mean to you? As I highlighted above, some of the key groups of clients that will be most affected (good or bad) include S Corporation and LLC owners (talk to your accountant as soon as possible!), those going through a divorce, and wealthy individuals and families previously at or near the estate tax exclusion amount. For estate planning in particular, now may be the time to review your existing plan and consider whether it still accomplishes your objectives (especially if simplification is a goal). If I can provide any assistance on these matters, please let me know.