The Tax Cuts and Jobs Act of 2017. Key year-end tax planning tips.
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.