Tax law changes are coming so we have some key year-end tax planning tips and summaries of The Tax Cuts and Jobs Act of 2017.
Our focus in this article is this proposed law and the potential major changes to both the income tax laws and the estate and gift tax laws that we can likely expect. See our planning tips below.
Changes to Income Tax Laws – A Summary
- Corporate rates – corporate tax rates are reduced to a flat 20% rate which is 2.5% below the average marginal rate for corporations worldwide. The intention is to make US corporations more competitive in the global marketplace. To partially pay for this, Congress increased the tax rate for C Corporations with taxable income up to $50,000 a year from 15% to 20%, but for most, rates will go down. If your income tax rates will be decreasing, then accelerate income to the current year to take advantage of the lower tax rates while you can.
- The Section 179 expense – This deduction allows expensing the full cost of assets used in a trade or business. It will be increased from a current maximum deduction of $500,000 to a maximum deduction of $5,000,000 through 2022 with a 50% bonus for new property (except for depreciable real property). So, you can buy that jet or a fleet of bulldozers now.
- Section 1031 “like kind” real estate exchanges – If you are contemplating a Section 1031 “like kind” exchange – Complete the transaction as soon as possible as there will be severe limits to the benefits of this section going forward.
Changes to Estate & Gift Tax Laws – A Summary
The Estate & Gift Tax is a tax on the transfer of wealth from one generation to the next. It is a transfer tax (also known as the “death tax”) collected at the time of the transfer of the assets. In our view, this is a voluntary tax because it can be avoided through proper planning. There are four “pillars” of the transfer tax and they are: 1) the gift tax, 2) the estate tax, 3) the GST or generation skipping tax, and 4) the step up in basis at death.
Estate Tax Planning
- Basis Planning – Basis planning is one of the most important planning strategies for assets that have appreciated over the years and have a low-cost basis, including assets in trusts or limited liability companies. It is important that these assets are included in the gross estate to eliminate the income tax on the appreciation. Inclusion in the taxable estate at death will give your beneficiaries a step up in basis to the fair market value of the asset at the time of death and save significant income taxes for your spouse or your children, including elimination of income taxes on deferred gains on 1031 “like kind” real property or long-term appreciation on other assets.
- Federal Estate Tax Planning – The federal estate tax exclusion will be increased, in pre-inflation adjustment terms, from $5,000,000 to $10,000,000 per person or $20 million for a couple.  Adjusted for inflation that would be approximately $22.4 million that a couple can pass on to their children, tax free. The estate and gift tax will be completely repealed in 2024. These changes make federal estate tax planning irrelevant for 99.8% of the population.
- Washington Estate Tax – With the doubling of the federal estate and gift tax exemption amounts, a shift is taking place. We as estate planners now focus on planning for clients to help them avoid the Washington Estate Tax. This tax impacts small to medium size estates in the $2 million to $5 million range, as well as large estates. This tax starts at 9% of the gross taxable estate over $2 million and escalates to 20% for larger estates. Family limited liability companies with marketable securities can no longer be used as a tax advantaged transfer of wealth if the principles retain the benefit of the underlying assets. 
- Consider an Installment Sale and Keep All Options Open – If you have Washington estate tax exposure and you have assets that you expect will appreciate in value over the next 5 to 10 years, then you might consider moving these assets out of your estate or at least freezing the value of these assets. We can help. We recommend considering an installment sale of the assets. This is especially advantageous if interest rates rise. The sale is typically to a defective irrevocable grantor trust set up by the client as both grantors and trustees. The client receives an installment promissory note and receives interest and principal payments on the note. The client also pays income taxes on the income to the trust and on the note interest. This freezes the value of the “asset” in the client’s estate but more importantly, it gives the client the “best of all worlds” with 3 clear options: 1) if the client wants to make an outright gift, the note is forgiven, 2) if client wants to cancel the transaction, the note is called and the transaction is rescinded, or 3) if the client is happy with the transaction, he can do nothing and complete the sale.
If you have any questions or would like to schedule a free consultation, please contact us at (360) 876-6425 or by email.
1. The “exclusion amount” is equal to the amount of assets you can transfer and use “unified credits” to pay the tax. The credits are now portable from one spouse to the other surviving spouse.
2. Families would gift discounted membership units to children while retaining control of the entity and its assets.
New tax cuts are “pending” and investment diversification as an asset protection strategy is more important than ever.
Have you considered diversifying your investments from the stock market to income-producing real estate?
We are seeing increased investment in income producing real estate such as apartments. The investment vehicle of choice for protection of business and personal assets and preferred tax treatment is the single member limited liability company (“LLC”) .
Single member LLCs – This entity is disregarded by the IRS for income tax purposes so all the tax benefits flow through to the member/investor on his or her 1040 personal tax return. The LLC files no tax return. Tax benefits include depreciation and interest deductions to offset the taxable rental income. Depreciation is a valuable non-cash deduction and it is based on the full purchase price excluding the land. The deduction is based on the premise that the improvements have a limited useful life so the investment is returned pro-rata over the useful life of the asset through depreciation deductions. This also lowers the tax payer’s basis in the property which increases the taxable gain on sale. That is where the magic of IRS Section 1031 comes into play.
IRS Section 1031 Like-Kind Exchanges – 1031 exchange tax deferral is available on sale if the net proceeds are reinvested in a qualifying “like kind” replacement property generally within 6 months of the sale. The theory of tax deferral is that it is more of a theoretical gain if the investment continues in similar replacement property. read more…
We offer flat fee services.
You can tailor your estate plan to your needs and your budget. We also offer a free consultation to all prospective clients. All we ask is that you complete our Confidential Estate Planning Questionnaire. Call or email us today for the questionnaire and to make an appointment for a consultation.
Welcome our new associate Maria Therese Fujiye!
Maria Therese is native to the Pacific Northwest and received her Juris Doctorate from Seattle University School of Law in 2016. During law school, Maria Therese worked as an editorial assistant for a small editing company and externed in the legal department at the Allen Institute for Brain Science. She also co-authored a book chapter exploring the utility of certification marks on public health.
Prior to starting her legal career, Maria Therese worked for the University of California, San Francisco, on a psycho-oncology project aimed at reducing fear of cancer recurrence in early stage breast cancer survivors.
Maria’s law practice areas include health care, estate planning, real estate, probate, elder law and bankruptcy.
Health insurance does not necessarily translate into affordable healthcare.
Typically, people use their credit cards to help pay their medical bills, thereby shifting family budgets even further into the negative. Thus, not surprisingly, healthcare cost is one of the primary reasons people declare bankruptcy.
The stress from financial troubles can be just as devastating as coping with the physical and emotional challenges that accompany a serious illness. Between 2011 to 2014, roughly one in five persons under age 65 was in a family that had difficulty paying medical expenses in the past 12 months, and in 2015, the percentage of adults who delayed or did not receive needed medical care for cost reasons increased as the number of diagnostic conditions increased. And among insured with medical bill problems, a 2016 survey found that over 60 percent reported using most of their savings. read more…
When a spouse passes away, having some difficulties is to be expected. With planning, those difficulties can be limited to emotions and not finances.
Upon losing a spouse one of the biggest problems people often face is understanding and handling family finances. This is a particularly acute issue for many older women who have left management of financial matters primarily up to their husbands. It can also be a problem for older men, if their wives handled everything. Regardless of which spouse predeceases, a lack of knowledge about the finances can cause increased emotional and financial stress at the most inopportune time. This is a mostly avoidable problem. read more…
This is Part 2 of a two-part article. Read Part 1 here…
Now that Donald Trump has been in office for several weeks, the expected changes that we discussed in our last newsletter — repeal of the Obamacare surtax, lower corporate income tax rates, lower individual tax rates, taxes on imports, and child care credits — seem to be on track given the rhetoric from the White House and the majority in the house and senate.
“Risky times are ahead.” – Gerald F. Seib
Beginning as early as Spring 2017, the IRS will begin using private debt collectors to collect unpaid federal income taxes.
The selection of private debt collectors was in response to a law passed by Congress requiring the IRS to outsource tax debts if one of three conditions applies:
- more than one year has passed without any interaction between the taxpayer and IRS;
- one-third of the statute of limitations has lapsed and there is no IRS collector assigned; or
- the IRS is otherwise not working the debt due to lack of resources.
Experts have expressed concern that hiring private debt collectors will add to the problem of scam artists who pose as IRS collectors. Currently, the IRS has a policy of never calling to collect without first mailing a notice, and has urged consumers to ignore scam calls. When private collectors begin calling taxpayers regarding back taxes, it will add to the confusion and make consumers more vulnerable to these scams. Consumer advocate groups are seeking further protections, such as excluding from the program low-income taxpayers and those who owe taxes under the Affordable Care Act. read more…
Article contributed by John Paul Turner, Esq.
It may be hard to imagine, but that home you worked so hard to obtain can be taken by the government for the benefit of the greater good.
In fact, the power of eminent domain has been a fundamental part our of Constitution from the very beginning. Originally adopted by the American colonies from the common law, James Madison included as part of the Fifth Amendment the premise that “nor shall private property be taken for public use, without just compensation.” And, if you think about it, there would be no highways, schools, bridges or parks without the ability of our federal, state and local governments to acquire the real estate necessary to make those public projects a reality.
Condemnation is the legal process by which eminent domain is accomplished and every state has developed a unique set of statues and case law establishing the way in which your property can be taken. However, before any private property can be put to a public use the government agency involved must first prove their project is truly “public” and then establish the property they seek is “necessary” for that public use. Some cases like state highways and train corridors are more obvious public uses than say a convention center or shopping mall with quasi public/private investment. Ultimately, a judge will render a decision on the public use and necessity requirements of each case by examining the facts in evidence and the prior actions of the government in deeming your property necessary for their project. read more…
Now that Donald Trump is transitioning to the Presidency and we have a republican controlled House and Senate we can anticipate some “Reagan like” tax law changes.  When Reagan came into office, tax rates on unearned income were at 70% and the prime rate was at an all-time high of 21.5% and averaged 12.65% over the decade of the 80’s.  The Reagan administration lowered the tax rate on unearned income to individual rates on earned income and long-term capital gains were taxed at a reduced rate of 40%. Now with a Trump administration we might see rates as low as 15% on interest and dividends.
This article will discuss the “clues” that were revealed during the campaign  as to what changes we can expect and how to protect our assets going forward.
What changes can we expect?
- Repeal of the Obamacare surtax – The Patient Protection and Affordable Care Act of 2010 surcharge is equal to 3.8% of a taxpayers “net investment income” from dividends, rents and capital gains. 
- Lower corporate income tax rates. – Currently we have the highest corporate tax rate in the world, at 38.82 %, The next highest is France at 34.43% and the lowest is the United Kingdom at 20%. Expect Trump to push for a corporate tax as low as 15%. Businesses can also expect to benefit from an election that allows fully expensing plant and equipment costs by waiving the deduction to write off interest on business loans.
- Lower individual tax rates – Tax brackets will be reduced from 7 to 3 with tax rates at 12%, 25% or 33%, down from 39.6%.
- Taxes on imports – You can expect higher consumer prices through tariffs on imported goods which leads to inflation which in turn leads to higher interest rates.
- Child Care Credits – even for the wealthy. These credits are a central part of his tax reduction plan.
What are the key planning tips for protecting assets?
- Consider deferring sales of assets such as income producing real estate as these will become more valuable if the surtax is repealed and your net proceeds after tax will be higher if the sale is deferred to 2017.
- May make sense to use C corporations to lower your overall tax rate. With corporate tax rates at 15% and your individual rates as high as 33%, the C Corporation can be used to shelter your income from income taxes while you grow equity in your C corporation.
- Increased job creation through government funded infrastructure type public improvements – see article by John Paul Turner below on The Power of Eminent Domain and the Government’s Right to Take Your Property.
- Protect investment accounts by diversifying into inflationary hedges and investments that do well as interest rates rise while avoiding health care and related industry investments that presents obvious risks due to the uncertainty in the industry.
- Refinance floating rate loans to fixed rates. Lock in these historic low interest rates!
- Defer income into 2017 and accelerate expenses into 2016. Income will be taxed at lower rates and expenses taken in 2016 will be more valuable.
- Defer gains on sales and even consider a 1031 exchange on sales of real estate assets. Even the sale of a conservation easement qualifies as a sale of a “real property interest” that would allow the net proceeds to be reinvested in income producing real estate assets with the rental income being spared of the surtax charge.
- Defer major capital equipment purchase to 2017 to take advantage of the write-offs. Pay cash if possible to avoid the loss of the business interest deduction.
General Recommendations – We can expect change and with change comes uncertainty, which makes investors nervous and more cautious, so it is a good time to re-evaluate your investment portfolio to make sure you have good diversification, including assets and liabilities that grow in value as interest rates increase, such as adjustable rate assets (adjustable rate bonds or annuities) and fixed rate liabilities (on your home loan, for example). Time to lock in these historically low interest rates!
1. I was 30 years old when Reagan took over the oval office. The prospect of change was exciting for young professionals at the time.
2. The Prime Rate is the rate banks charge their best customers on loans. See http://www.fedprimerate.com/wall_street_journal_prime_rate_history.htm.
3. You can also visit the Donald J. Trump website at https://www.donaldjtrump.com/policies/tax-plan/
4. Or, alternatively, taxable income minus a threshold amount of $250,000 for married couples filing jointly, $125,000 for single filers, and $200,000 for all others.