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Wealth Planning Advisory 3Q18

Lingering Questions Regarding The Tax Cuts and Jobs Act

The Tax Cuts and Jobs Act (the “Tax Act”) was signed into law by President Trump on December 22, 2017. It represents the biggest revision of the Internal Revenue Code since 1986. Most of the Tax Act’s provisions are effective for taxable years beginning after December 31, 2017.

Unfortunately, there are many lingering questions surrounding the Tax Act. Some of these questions include, but are not limited to the following:

  1. Was the goal of simplification of the Internal Revenue Code achieved? For example, the Tax Act and Committee Reports contain 1,097 pages and several extremely complex provisions.
  2. Will income tax be cut for most taxpayers? While the tax cuts for corporations are permanent, many of the benefits for individuals expire after 2025.
  3. What impact will the Tax Act have on states? Will some states raise taxes, and will there be an exodus of residents from high tax states? Will some states without an income tax enact one?
  4. How will the Tax Act impact the economy? Proponents of the Tax Act argue that a reduction in tax rates will enhance economic growth and create jobs. In the past, this particular economic theory has not proven to be true.
  5. Will taxpayers still be able to itemize deductions? The Tax Act caps state and local tax deductions at $10,000 for taxable years 2018-2025. In addition, the Tax Act suspends miscellaneous itemized deductions above 2% of Adjusted Gross Income for taxable years 2018-2025. Consequently, fewer taxpayers will be eligible to itemize deductions.
  6. If itemized deductions are not available to many taxpayers, what option do they have? The Tax Act increases the standard deduction for married taxpayers filing jointly from $12,700 to $24,000, and from $6,350 to $12,000 for single taxpayers. These increases in the standard deduction are for taxable years 2018-2025. It is estimated that 80% or more of taxpayers will use the standard deduction during taxable years 2018-2025.
  7. What effect will increasing the Estate/Gift Tax Exemption from $5,490,00 in 2017 to $11,180,000 in 2018 have on estate planning? In 2017, 5,000 estates paid estate tax. For 2018, it is projected that only 1,800 estates will pay estate tax. However, that does not mean that most U.S. taxpayers should not engage in estate planning. First of all, the increase in the Estate/Gift Tax Exemption is only effective through taxable year 2025. Secondly, it’s important to be cognizant of tax law changes that can occur if the current makeup of Congress and the White House changes. Finally, taxes are simply one of the reasons to have an estate plan. Some key non-tax reasons for estate planning include: (a) controlling the disposition of your property during lifetime and at death; (b) protecting your assets from potential creditors; (c) retirement planning; (d) planning for disability and incompetency; and (e) planning for the transition of a family business.

This Planning Advisory is not intended as tax or legal advice. Also, it is not intended to offer penalty protection or to promote, market, or recommend any information contained herein. Before acting on the information in this Planning Advisory, a competent professional should be consulted.