News & Features

By Katie Watson and Katelyn M. Eaves

The Tax Cuts and Jobs Act (2017 Tax Act) may have been signed into law a few months ago, but many are still left with questions on how the changes will affect them personally and professionally. Below we provide a summary of the income and tax provisions in the 2017 Tax Act and what affect they may have on individuals.

On December 22, 2017, after months of negotiations between the House and the Senate, the 2017 Tax Act was signed into law honoring one of President Trump’s campaign promises. The provisions of the 2017 Tax Act that are listed below apply to tax years beginning in 2018 and are set to expire in 2025 unless extended by Congress unless otherwise noted.  

Income Tax Provisions

• Tax Brackets - Prior to 2018, individual, ordinary income tax rates ranged from 10 percent to 39.6 percent. Beginning in 2018, the new rates range from 10 percent to 37 percent, as set forth in the table below.

• Standard Deduction - An individual may reduce his or her adjusted gross income by the applicable standard deduction or itemized deductions, whichever is greater. Beginning in 2018, the standard deduction will almost double for many individuals, thereby making it unnecessary to itemize deductions and easier for most individuals to prepare a tax return. The increase in the different standard deductions are as follows:      

• Itemized Deductions - There are a number of changes to the deductions available on Schedule A as itemized deductions for a taxpayer including:
  • Pease Limitation - The total amount of otherwise allowable itemized deductions was previously limited for taxpayers with a higher adjusted gross income. This limitation is suspended altogether.
  • Mortgage Interest Deduction -  The amount of mortgage interest allowed as an itemized deduction is now limited to $750,000 of acquisition indebtedness for debt incurred after Dec. 15, 2017, as opposed to the $1,000,000 limitation prior to that date. The 2017 Tax Act also suspends mortgage interest deductions available for interest charged on a home equity loan.
  • State and Local Tax Deduction - Previously, taxpayers could claim a deduction for state and local income and property taxes paid (or state and local sales tax, alternatively). The 2017 Tax Act limits this deduction to $10,000 ($5,000 for married filing separately) per year. This change may have a profound effect on taxpayers in high income and property tax states.
  • Medical Expense Deduction - Taxpayers are allowed to claim as a deduction out-of-pocket medical, dental and related expenses for the taxpayer and his or her family that are not compensated by insurance. The deduction allowed is only the amount above the threshold, which is 7.5 percentage of adjusted gross income for all taxpayers in years 2017 and 2018, reverting back to 10 percent of adjusted gross income for those under 65 years of age after 2018.
  • Charitable Contributions - The 2017 Tax Act increased the deduction an individual can take for contributions to a public charity from 50 percent of adjusted gross income to 60 percent of adjusted gross income. The 80 percent deduction for contributions made to a university for preferred seating at athletic events is no longer allowed; this is a permanent change.
  • Miscellaneous Itemized Deductions - Sometimes known as the 2 percent floor, all of the deductions available for a taxpayer of certain expenses exceeding 2 percent of the taxpayers adjusted gross income, including unreimbursed employee expenses and tax preparation fees, are suspended altogether.
• Personal Exemption - In 2017, taxpayers were entitled to claim a personal exemption for the taxpayer, the taxpayer’s spouse (if filing jointly), and any dependents claimed on the return. This exemption allowed for $4,050 per individual to be excluded from taxable income. The 2017 Tax Act suspends this exemption altogether; however, the suspension sunsets at the end of 2025.
• Child Tax Credit -   Individuals could previously claim a $1,000 tax credit for each qualifying child under age 17. However, this credit began to phase out at $75,000 (single) and $110,000 (married filing jointly) of adjusted gross income. Beginning in 2018, the credit increases to $2,000 of credit per child with the phase out beginning at $200,000 (single) and $400,000 (married filing jointly) of adjusted gross income.
• Affordable Care Act Individual Mandate -  Under the Affordable Care Act, all individuals are personally responsible for obtaining healthcare coverage for themselves and their dependents to meet the requirements for minimum essential coverage. Prior to 2019, the taxpayer would receive a penalty on his or her personal income tax return for anything less than minimum essential coverage or no healthcare coverage whatsoever. Although the mandate remains in force, the 2017 Tax Act reduces the penalty to $0 beginning in 2019; this is a permanent provision.
• 529 Plans - The 2017 Tax Act permits distributions up to $10,000 per year from a 529 plan for tuition at a private elementary, middle or high school to be considered qualified educational expenses. Formerly, penalty-free distributions from a 529 plan could only be made for post-secondary educational expenses.  Additionally, taxpayers may now transfer funds from a 529 plan to an ABLE account without penalty if the designated beneficiary owns the ABLE account, subject to certain limitations.
• Alimony Payments Deduction - Prior to 2018, the payer of alimony received an above-the-line deduction for alimony payments and the recipient of alimony payments reported alimony payments as income, unless designated differently in a divorce decree or separation agreement. For all divorce decrees, separation agreements and most modifications entered into after 2018, the payer of alimony will not receive a deduction, and the recipient of alimony will not include payments received in income.

 Transfer Tax Provisions

• Basic Exclusion Amount - The 2017 Tax Act increases the basic exclusion amount from $5 million to $10 million (indexed for inflation after 2011) for decedents dying after Dec. 31, 2017.  The increase in the basic exclusion amount applies to estate, gift and generation-skipping transfer (GST) taxes.  For decedents dying in 2018, the basic exclusion amount (indexed for inflation) is anticipated to be $11.2 million.

• No Estate Tax Repeal - Although the basic exclusion amount increased significantly, the 2017 Tax Act did not repeal the estate tax. 

• Annual Exclusion Gifts - The annual exclusion amount has been increased to $15,000 per donor per year (up from $14,000 in previous years). Keep in mind that payments made directly to educational institutions and medical care providers do not count against a taxpayer’s annual exclusion amount.

• Estate Planning Considerations - The following are a few estate planning techniques to consider given the large increase in the basic exclusion amount:

• Gifting - Individuals with taxable estates (even those who have previously made large gifts) should consider utilizing the increased exemption amount to make gifts. Generation-skipping trusts and intentionally defective grantor trusts are generally recommended when making large gifts. 

• What’s the rush? The transfer tax provisions in the 2017 Tax Act, including the increase in the basic exclusion amount, expire at the end of 2025 (which means the exemption amount could potentially fall to $5 million in 2026).  This brings back memories of December 2012, when tax attorneys, appraisers and accountants rushed to finalize year-end gifts for their high-net worth clients, fearing that the exemption amount would be reduced to $1 million in 2013. Because the transfer tax provisions in the 2017 Tax Act are set to expire at the end of 2025 (and with the pendulum swings that have plagued Washington in recent years) individuals should consider making gifts sooner rather than later if they would like to take advantage of the increased exemption.

• Clawback - With sunsetting transfer tax provisions comes the fear of “clawback” (i.e., if a decedent makes a gift during a higher exemption regime, and dies during a lower exemption regime, the gifts made in excess of the lower exemption amount will be pulled back into the decedent’s estate).  Most commentators believe that “clawback” was not intended by the proponents of the 2017 Act and will not come to fruition.

• Formula Clauses - Some married clients, usually those with children from a previous marriage, choose to pass assets equal in value to their exemption amount or some other amount to their children and leave the balance of their estate to a qualified terminable interest property (QTIP) trust for their spouse. A potential problem with a formula approach stating that the exemption amount is to go to certain beneficiaries and the balance of the assets are to go to another beneficiary is that the “exemption beneficiaries” (who are typically descendants) will be fully funded or potentially overfunded, and the remainder beneficiary (who is the spouse in many cases) will be left out entirely. 

Consider the following example: Husband has a $10 million estate. When the exemption amount was $5 million, husband’s attorney prepared estate planning documents pursuant to which assets equal to husband’s exemption amount would pass to his children in trust, and the balance of his estate would be retained in a QTIP trust for his wife (who is not the mother of his children).  His intent was to give his children $5 million off th top and support his wife with the balance of his assets. Under the current transfer tax regime, 100 percent of husband’s assets will pass to his children and his wife will receive nothing.

If your documents use a no-cap formula approach with the exemption amount going to certain beneficiaries and the balance going to your spouse, you may want to contact your tax attorney and discuss the ramifications of that approach given the change in the law.  Note that capped formula approaches (i.e., the lesser of the exemption amount or $5 million to my children) and non-bifurcated formula provisions (the exemption amount will be held in trust for spouse and descendants and the balance will be held in a QTIP trust for spouse) should still work.

• Drafting Considerations - With the greatly increased exemption amount, income tax considerations have taken a larger role in estate planning.

Consider the following example: Husband and wife have been married 30 years, have two kids together and have approximately $10 million in combined assets. Contrary to prior approaches, we may consider causing inclusion in both husband’s and wife’s estates so that their children will get a stepped-up basis in all assets at the last survivor’s death.  Even in a blended family situation, a QTIP trust can be used to “freeze” the plan on the first spouse’s death. This means the surviving spouse will benefit from the QTIP trust during his or her lifetime, and upon the death of the surviving spouse, the assets will go as directed in the deceased spouse’s estate planning documents. The assets of the QTIP trust will be included in the surviving spouse’s estate and thus will receive a stepped-up basis on the surviving spouse’s death.

• Portability - Portability remains a part of the transfer tax regime.  Portability permits the deceased spouse’s unused exemption amount to be “ported” over to the surviving spouse. 

Consider the following example: Husband dies in 2018 with $8 million in assets and he has his full estate tax exemption available which is $11.2 million. If an estate tax return is filed within two years of his death, the $3.2 million in exemption that husband did not use can be preserved and added to wife’s exemption amount. This may be particularly important if the exemption amount goes down after 2025.

The information provided above is created by the Attorneys Katie Watson and Katelyn Eaves of Friday, Eldredge & Clark, LLP.

Katie is an associate in the Trust and Estate Planning Practice Group and holds a master’s degree in taxation from the University of Florida. Her areas of practice include estate planning, estate and trust administration, estate and gift taxation, tax planning for individuals, entity formation, probate matters and formation and planning for exempt organizations.

Katelyn  is an associate in the firm’s Trust and Estate Planning Practice Group. She received a master’s degree in taxation from the University of Florida. Katelyn concentrates her practice in estate planning, trust and estate administration, probate matters, estate and gift taxation, formation and planning for exempt organizations, entity formation, and family business planning.

This is not a substitute for legal advice and should be considered for general guidance only. For more information or if you have further questions, please contact one of our Trust and Estate Planning Attorneys.