THE TAX CUTS AND JOBS ACT OF 2017

Transcription

1 THE TAX CUTS AND JOBS ACT OF 2017 WHAT EVERY LAWYER CAN KNOW AND WHAT EVERY LAWYER SHOULD KNOW ABOUT IT BY: SYDNEY COOK SYDNEY COOK & ASSOCIATES, LLC PHONE:

2 2017 TAX CUTS AND JOBS ACT OVERVIEW Bill signed into law on December 22, Effective date is January 1, 2018, with few exceptions (listed below). Majority of individual provisions end on December 31, Expiration of corporate and international provisions possibly set for December 31, New deduction changes on itemized deductions for medical expenses (effective ), alimony (effective ) and mortgage deductions (for debt incurred after December 15,2017). Property expensing for acquisitions after September 27, 2017, through December 31, 2022 with phase-out through December 31, Grecian Magnesite overrule effective for sales after November 27, New provisions still being provided and will be made available for public view on the Internal Revenue Service website, irs.gov. Regulations to be promulgated by the IRS but when is not known.

3 TABLE OF CONTENTS New provisions of the 2017 Tax Cuts and Jobs Act and how these new provisions will affect estate and income tax planning in Income Tax Rates Individuals, Trusts and Estates. Pass-Through Entity Taxation Pass-Through Entity Taxation Limitations C Corporation Taxation Limitations on Itemized Deductions Tax Effects Related to Loss of Itemized Deductions Interest Deductibility Limitations Interest Deductibility Limitations Exceptions Use of Net Operating Losses Alternative Minimum Tax Charitable Contributions Estate, Gift and Generation Skipping Taxes

4 TABLE OF CONTENTS (Continued) International Tax Changes Sleepers with Potential Impact Simplification? Estate Planning Review of Existing Estate Planning Documents Estate Planning Non-Transfer Tax Reasons Estate Planning Now or Wait? New Income Tax Planning Concepts Entity Selection New Income Tax Planning Concepts Leverage Limitations Income Tax Planning / Itemized Deductions Effects on Investment Planning Summary of 2017 Tax Cuts and Jobs Act. Q&A.

5 NEW PROVISIONS OF THE 2017 TAX CUTS AND JOBS ACT THAT WILL AFFECT ESTATE AND INVESTMENT PLANNING Income Tax Rates Pass Through Entity Taxation C Corporation Taxation Estate, Gift and Generation Skipping Taxes Internal Taxation Limitations on Itemized Deductions Interest Deductibility Use of Net Operating Losses Alternative Minimum Tax Charitable Contributions

6 INCOME TAX RATES Individuals, Trusts and Estates Rates remain in 7 brackets ranging from 10% to 37%, with 37% rate above $500,000 for singles and above $600,000 for joint filers. Note that the marriage penalty remains for high-bracket taxpayers Head of household rates essentially blend with single rates above $82,500. No Bubble Tax to unwind lower bracket benefits. Net investment income tax remains at 3.8% on NII Estates and trusts reach the 37% bracket at $12,500. Capital gains (20%), depreciation recapture (25%) and collectibles (28%) tax rates are unchanged but income threshold for 20% capital gains rate increased. Future inflation adjustments now utilize chained CPI approach, a permanent change that will result in more modest inflation adjustments going forward. Rate changes apply for all taxable years beginning after December 31, 2017 (estates with fiscal years).

7 PASS-THROUGH ENTITY TAXATION Domestic qualified business income eligible for 20% of QBI deductions (limited to 20% of taxable income plus numerous other limits outlined below). QBI is domestic business income but excludes investment interest, capital gains and commodity gains. QBI includes rental and royalty income plus REIT dividends and qualified publicly traded partnership income. QBI excludes pass-through income from specified services business (health law, accounting, consulting, financial and brokerage services but not engineering or architecture (why the difference?)) unless less than $315,000 joint taxable income ($157,500 single). QBI deduction reduces taxable income (not AGI) and therefore taxpayers in states with income tax based on AGI have no state tax benefit. QBI deduction can be claimed by all non-corporate taxpayers. QBI deduction unavailable for NII tax.

8 LIMITATIONS ON PASS-THROUGH ENTITY TAXATION Section 199A QBI deduction is limited based on W-2 wages of QBI or combination of W-2 wages plus qualified property if joint taxable income exceeds $315,000 joint or $157,500 single). QBI deduction is limited to greater of (i) 50% of W-2 wages paid with respect to qualified trade or business or (ii) sum of 25% of W-2 wages plus 2.5% of the unadjusted basis of qualified property. Reasonable compensation from an S Corporation and guaranteed payments to a partner are not taken into account in determining W-2 wages paid. Unadjusted basis of qualified property is full acquisition cost of depreciable tangible property used in the qualified trade or business. QBI deduction limits may change employment and investment planning. QBI deduction at top rates result in 29.6% effective rate compared to 21% C Corporation rate. Therefore, there is an entity choice to be made.

9 LIMITATIONS ON PASS-THROUGH ENTITY TAXATION (Continued) Income derived from specified service trades or businesses is ineligible for Section 199A deductions. Specified trades or business include health, law, accounting, consulting, performing arts, investment management but not engineering or architecture. Did the latter two have a better lobby? Specific services also includes any business where principal asset is the reputation or skill of employees or owners. Not involved in the creation of infrastructure? Wage limits and specified service limits do not apply if taxable income less than $315,000 joint (phased out until $415,000)

10 TAXATION ON C CORPORATIONS Corporate tax rates reduced from 35% to 21% flat rate. No special rate for personal service corporations (formerly a flat 35% rate). Dividends received deductions reduced from 80% to 65% and 70% to 50%. C Corporations can use cash method accounting if average gross receipts less than $25 million over prior 3 years. Contributions to capital under Section 118 are limited such that government grants are taxed.

11 LIMITATIONS ON ITEMIZED DEDUCTIONS New standard deduction is $24,000 joint and $12,000 single and personal exemptions are eliminated, but extra $1300 if over age 65. Only itemized deductions are for mortgage interest, charitable contributions, up to $10, 000 state and local income/sales/property taxes, and medical (all former miscellaneous itemized deductions are eliminated starting in 2018). Mortgage deduction for interest reduced to $750,000 acquisition indebtedness and is eliminated for home equity indebtedness. However, the $750,000 threshold is not indexed for inflation. Deductions for miscellaneous itemized, casualty (unless federally-declared disaster), moving and alimony (from 2019 through 2025) are eliminated. Medical expenses for 2017 and 2018 are deductible subject to 7.5% AGI floor.

12 TAX EFFECTS RELATED TO LOSS OF ITEMIZED DEDUCTIONS Loss of state and local tax ( SALT ) deduction overwhelmingly effects high income tax rate states (e.g., NY, CA, NJ, MA) State income taxation could be significantly impacted (payroll taxes, charitable alternatives); some states get windfall. Mortgage interest deduction limits will effect major urban areas and, together with SALT deduction limits, could depress residential property values there. Could this mortgage interest deduction limitation cause a shift away from home ownership? The cut back on itemized deductions with increased standard deduction could significantly influence charitable contributions. Uncertainty remains as to whether and to what extent deductions remain available to trusts and estates. Regulations to be developed by the IRS.

13 INTEREST DEDUCTIBILITY LIMITATIONS No changes to investment interest or passive loss deductions. Major changes limit net interest expense deduction for all taxpayers to sum of (i) business interest income, (ii) 30 % of business adjusted taxable income and (iii) floor plan financing (Section 163(j)). Adjusted taxable income is essentially EBITDA through 2021 and EBIT thereafter. However, disallowed business interest deductions are carried forward indefinitely. No grandfathering of existing indebtedness from new treatment. Can potentially disadvantage businesses in down years(s) when deduction is needed financially.

14 INTEREST DEDUCTIBILITY LIMITATIONS (Exceptions) Taxpayers with average annual gross revenues over prior 3 year period of less than $25 million are not covered by Section 163(j) limits. If taxpayer elects, virtually all real estate businesses can have Section 163(j) limits not apply (also includes farming businesses and some utility businesses). Cost of Section 163(j) opt out election is use of ADS depreciation (30 years residential and 40 years commercial).

15 USE OF NET OPERATING LOSSES Net operating loss ( NOL ) deduction is limited to 80% of taxable income. No NOL carrybacks and unlimited carryforward. With rapid expensing, could this create unsheltered income in future years? Excess business losses for non-corporate taxpayers cannot offset more than $500,000 (joint taxpayers) of non-business income. $500,000 limit can effect high income real estate developers.

16 ALTERNATIVE MINIMUM TAX ( AMT ) AMT fully repealed for corporate taxpayers. Potentially positive for corporations considering corporate-owned life insurance on shareholders in order to fund a buy-sell agreement. Individual AMT is retained but AMT exemption amounts increase to $109,400 joint and $70,300 single, and phase-out threshold increased to $1,000,000 joint and $50,000 single. AMT repeal impact lessened with new limitations on itemized deductions (particularly SALT and miscellaneous itemized) but ISO trap remains.

17 CHARITABLE CONTRIBUTIONS New 60% (formerly 50%) AGI limit for cash contributions, although ordering rules remain for carryforwards. Deductions for athletic seating rights are eliminated. How would that effect UA? Rules for contemporaneous written acknowledgement are tightened. New excise taxes for certain private universities and for excess compensation amounts payable to employees of non-profits. Charitable planning may change with higher standard deductions and decreased estate/gst taxation. Non-tax reasons to give? Direct charitable contributions from IRA to satisfy Required Minimum Distribution requirements up to $100,000 annually remain available. Charitable contributions by partnerships are now subject to outside basis limitations applicable to partner losses.

18 ESTATE, GIFT AND GENERATION SKIPPING TAX Doubling of exclusion amount from $5.6 million to about $11.2 million. Increase of annual exclusion gift tax exclusion amount to $15,000 per donee (from $14,000 in 2017). Step up in basis for assets at death remains (planning for it will be important to the recipient). Increased annual gift tax exclusion amount reverts to 2017 level in 2026, and the Act directs the issuance of regulations by IRS to address potential clawback (BYRD Rule effect). Tax rates are unchanged, as are exclusion amounts for non-resident aliens.

19 INTERNATIONAL TAXATION 100% deduction for foreign source dividends received from 10% owned foreign corporations owned by US corporate taxpayers (one year holding period). One time deemed repatriation tax of 15.5% on cash or cash equivalents and 8% on other assets. Applicable to all taxpayers (but for S Corporations) with tax payable over 8 years. US ECI partnership interest sales are taxable to0 non-us taxpayers (repeals Grecian Magnesite). New Base Erosion provisions (GILTI and BEAT). Tightening of CFC ownership provisions.

20 SLEEPERS WITH POTENTIAL IMPACT CFC 30 day rule impacts US situs asset planning for non-resident aliens. US shareholders for CFC purposes now include US persons with 10% vote or value. Like-kind exchanges are limited to only real property exchanges. ESBT rules now permit non-us shareholders. Carried interest limitations (3 year holding period for preferential rates) unlikely to trigger major impact on private equity and real estate managers. Elimination of employer deduction for qualified transportation fringe benefits. Temporary loss of deduction for alimony payments (through 2025). Divorce activity in late 2018 might be interesting.

21 SLEEPERS WITH POTENTIAL IMPACT (Continued) Gain or loss for disposition of self-created patent, invention or secret formula/process is ordinary instead of capital gain or loss. PFIC insurance company definition is tightened. Deferred compensation taxation of equity based compensation was dropped but performance based compensation exemptions were repealed for covered employees. 529 Plans now permit up to $10,000 annual withdrawal for pre-college private education (previously not allowed). Partnership technical termination rules are repealed. Domestic production activities deductions are eliminated. Kiddie Tax now at rates for trusts and estates.

22 WHAT HAPPPENED TO SIMPLIFICATION? Where do tax advisors and wealth management professionals go from here? Key questions for business and investment structuring will involve entity selection and debt/equity structuring. Use of expanded transfer tax exemption amount offers multiple options through 2025 but beware of the possible clawback. Many provisions of the Act require further guidance to implement appropriately. Expect informal guidance (FAQs, Notices) from IRS due to two-for-one Executive Order and voluminous technical corrections which are expected.

23 ESTATE PLANNING UNDER THE NEW TAX CUTS AND JOBS ACT FOR Use of additional $5.6 million exemption (indexed) per person permits variety of transactions. Engage in planning that has no serious gift or income tax risks. Note sale transactions with grantor trusts. Funding of dynasty trusts with expanded gift and GST exemptions. Allocation of increased GST exemptions to existing transfers. Consider resettling GST non-exempt trusts by utilizing beneficiary exemptions. Spousal limited access trusts. Upstream gifting, i.e., to parents to receive gift asset back at their death. Continue to use grantor trusts for basis swap planning.

24 REVIEW OF EXISTING ESTATE PLANNING DOCUMENTS Existing estate plans need to be reviewed to determine whether new exemption amounts will change dispositive plans. Watch funding of marital transfers and credit shelter trusts by formula may not be needed for estate tax purposes. Be aware of state estate or transfer taxes and funding of trusts to minimize state estate or transfer tax effect. Portability election remains unchanged but GST exemptions are not portable.

25 ESTATE PLANNING CONTINUES FOR NON- TRANSFER TAX REASONS Family business governance and succession planning. Asset protection and wealth preservation. Privacy and limits on information sharing with beneficiaries. State income tax planning (particularly important with repeal of the SALT deduction). Some states have already taken action (NY). Insurance planning for estate and business liquidity. Is life insurance really needed for estate tax funding purposes? Split interest trust charitable planning.

26 SHOULD PRACTITIONERS PUSH ESTATE PLANNING NOW OR WAIT? Increased estate tax exemption sunsets at December 31, 2025 with remote possibility of clawback effect. Will possible changes in Congress with mid-term elections undo expanded exclusion and exemption? Earlier planning implementation allows future asset growth to escape transfer taxation. What happens to Chapter 14 regulations? Increasing interest rates may favor current leveraged planning.

27 NEW CONCEPTS IN INCOME TAX PLANNING ENTITY SELECTION Should businesses use C Corporation or new flow-through entity (LLC or partnership) tax benefits? Tax rate comparison using closely held C Corporation still may favor flowthrough entities. Flow-through entity flexibility for contribution and distribution planning. Use of partnerships with C Corporations and flow-through entities as partners. Managing the Section 199A deduction limitations with payroll and capital expenditures. Splitting specified service income from royalty income. Creating multiple entities when only one was used in the past.

28 NEW CONCEPTS IN INCOME TAX PLANNING LEVERAGE LIMITATIONS New Section 163(j) interest deduction limitations will effect many businesses that typically use high leverage. Managing gross receipts and debt/equity mix. Most advisors project that less than 5-1 debt/equity ratio should be safe but this test will be pushed with rising interest rates or economic downturns. Should debt in a multi-national group be shifted offshore because of new US rules on capital expensing and lower tax rates?

29 INCOME TAX PLANNING / ITEMIZED DEDUCTIONS Use of complex trusts with income not taxed in home state, particularly with lost SALT deductions. Use of ING trusts. Comparison of grantor trust to complex trust with bracket sizing. Bunching of charitable deductions in one year using charitable lead trusts and donor advised funds. Prenuptial and divorce agreements under current negotiation with change in alimony tax treatment need to be analyzed with tax changes in effect from

30 EFFECTS ON INVESTMENT PLANNING Maximum Federal tax on long term gains and qualified dividends remains at 23.8% and on short term gains, non-qualified dividends and interest ins now 40.8%. Elimination of Section 212 deductions for investment expenses as miscellaneous itemized deduction means gross taxation for investment income. Will investment advisors characterize their fees? Increased use of carried interests for investment funds to permit functional deduction equivalent for profit sharing in investment funds. Increased emphasis on trading business funds rather than passive funds. Expanding interest in Private Placement Life Insurance and deferred Variable Annuities.

31 ACKNOWLEDGMENTS

32 Q&A