Key Provisions of the Tax Cuts and Jobs Act

As you might expect, I receive a ton of questions every day about how the new tax law is going to affect individual, business, trust and estate planning. And, as you might expect, my answer is always quite lawyerly – it depends. It depends on your income level and the value of your assets, it depends on your age, it depends on how many children you have, it depends on whether you own rental property, etc. So, in an effort to provide you with a basic framework within which you might be able to analyze your own situation, this post will be the first in a series that will outline the major individual, business, and estate tax provisions of the Tax Cuts and Jobs Act.

What is the Tax Cuts and Job Act?

The “Tax Cuts and Jobs Act” has largely taken shape at a breakneck speed over a two-month period, with the House passing its version of the bill on November 16, 2017, and the Senate passing its version on December 2, 2017. The two versions were then reconciled into a single piece of legislation which, due to a procedural complication, underwent a number of small revisions prior to final passage by the Senate and House. Among the few last-minute revisions to the bill was a new title: “An Act to provide for reconciliation pursuant to titles II and V of the concurrent resolution on the budget for fiscal year 2018.” This article refers to the law by its commonly used name: “Tax Cuts and Job Act.”

This comprehensive tax overhaul dramatically changes the rules governing the taxation of individual taxpayers for tax years beginning before 2026, providing new income tax rates and brackets, increasing the standard deduction, suspending personal deductions, increasing the child tax credit, limiting the state and local tax deduction, and temporarily reducing the medical expense threshold, among many other changes. The legislation also provides a new deduction for non-corporate taxpayers with qualified business income from pass-throughs. Remember, the individual provisions of the Tax Cuts and Job Act sunset on December 31, 2025, reverting back to the law as it would have existed had the Tax Cuts and Job Act not been passed.

For businesses, the legislation permanently reduces the corporate tax rate to 21%, repeals the corporate alternative minimum tax, imposes new limits on business interest deductions, and makes a number of changes involving expensing and depreciation. The legislation also makes significant changes to the tax treatment of foreign income and taxpayers, including the exemption from U.S. tax for certain foreign income and the deemed repatriation of off-shore income.

On the estate, gift and generation skipping transfer tax side, the Tax Cuts and Job Act significantly increases the exemption amount while holding onto the recently created estate tax portability provisions that have proved increasingly popular and useful.

What Are the Income Tax Rates and Brackets?

For tax years beginning after Dec. 31, 2017 and before Jan. 1, 2026, seven tax rates apply for individuals: 10%, 12%, 22%, 24%, 32%, 35%, and 37%. The Act also provides four tax rates for estates and trusts: 10%, 24%, 35%, and 37%.

Here are several tables detailing how your individual income tax rate is calculated based on whether you are married, single, head of household, or an estate or trust. One thing you will notice is that there is no longer a marriage penalty built into the run up in tax brackets (except for the top tax bracket). In other words, the income levels at which the brackets change rates for married individuals is exactly 2x the single person income tax rate. All tax brackets will be indexed annually by the federal Cost of Living Adjustment (COLA). The estate and trust income tax brackets continue to be incredibly compressed, imposing high levels of tax at nominal income tax rates.

Remember, there are no more corporate tax tables (this is a permanent change), corporations are now taxed at a flat 21%. The permanent reduction to 21% also includes the tax imposed on personal service corporations (e.g., law firms, CPA firms, architecture firms, engineering firms, etc.). So for those businesses, maybe being a C corporation is no longer such a bad idea.

MARRIED INDIVIDUALS FILING JOINT and SURVIVING SPOUSES:

SINGLE INDIVIDUALS: 

HEAD OF HOUSEHOLD:

MARRIED FILING SEPARATELY:

ESTATES AND TRUSTS:

Despite the current estate tax laws which have eliminated the estate tax for the vast majority of people, one of the most popular estate tax planning vehicles (the Irrevocable Life Insurance Trust “ILIT”) still remains a corner piece of many estate plans. Few people realize all the benefits of an ILIT, and assume that without an estate tax liability, the ILIT has become obsolete – untrue.

What Are the Benefits of a Life Insurance Trust?

A properly drafted life insurance trust not only keeps the life insurance proceeds from being taxed in your estate, it also prevents the life insurance proceeds from being taxed in the estate of your surviving spouse. The current estate tax law sunsets in 7 years, and there is no guarantee that the future estate tax exemption amount will be sufficient to exclude all of your surviving spouse’s assets from future estate tax. If properly drafted, the ILIT will also protect the trust beneficiaries (your surviving spouse and children) from their predators and creditors, and provides reliable, independent management for the trust assets. In addition, the ILIT can act as a safety net for you and your spouse if you unexpectedly encounter creditor problems while you are alive.

How Does an Irrevocable Life Insurance Trust Work?

You create an ILIT to be the owner and beneficiary of one or more life insurance policies on your life. You contribute cash to the trust to be used by the trustee to make premium payments on the life insurance policies. If the ILIT is properly drafted, the contributions you make to the trust for premium payments will qualify for the annual gift tax exclusion (currently $15,000 per year), so you won’t have to pay gift tax on the contributions.

While you are alive, the life insurance trust typically provides the trustee with the discretion to distribute principal and income to or for the benefit of your spouse and descendants. This allows you indirect access to the cash surrender value of the life insurance policies owned by the ILIT, and permits the trust to be terminated, if desired, despite its being irrevocable. On your death, the ILIT continues for the benefit of your spouse during his or her lifetime (children and other beneficiaries may also be included). Your spouse is given certain beneficial interests in the trust, such as the right to income, limited invasion rights, and eligibility to receive principal. On the death of your spouse, the trust assets are paid outright to, or held in further trust for the benefit of your descendants.

If you own a life insurance policy with a significant death benefit, an irrevocable life insurance trust may be of substantial benefit to you. Please call us at (757) 687-8888 if you would like to discuss this further.