Everything You Need To Know About The New Proposed Tax Changes
Ethan R. Okura & Carroll Dortch
On November 2, 2017, the Tax Cuts and Jobs Act was released. It is a Republican-sponsored bill from the House of Representatives that is intended to simplify the tax code. There are quite a few changes that this bill brings to the table and we’ll look at some of them here.
The change that is most relevant to estate planning is a proposal to eventually eliminate the estate tax, as was the case in 2010 when the estate tax was eliminated for one year. Currently, there is a $5.49 million exemption from estate tax at death (or the exemption may be used for gifts made during life). This means a married couple with proper planning can pass away with $10.98 million going to their heirs free of estate tax. Assets above the exemption amount at the time of death are taxed by the federal government at 40%. (The same applies to amounts given away during life in excess of the exemption amount). The Tax Cuts and Jobs Act immediately doubles the exemption amount to $10.98 million per person and eliminates the estate tax completely by the year 2024…unless Congress undoes this change after the next election cycle.
In 1917 when the estate tax was first introduced, it was only a tax for the super ultra-wealthy. It was a 10% tax on excess assets in the estate over $5 million. When we adjust for inflation using the Consumer Price Index, that’s equivalent to only taxing 10% on the excess assets in estates worth more than $104 million today (in 2017 dollars). By comparison, doubling the $5.49 million exemption and still charging the 40% tax doesn’t seem like much of a tax break for the somewhat wealthy. But given that the estate tax only accounts for less than 1% of federal revenue, this change shouldn’t affect the budget very much.
On another note, the bill proposes to keep the “step-up” in basis for capital gains tax purposes on assets in the estate. So heirs will still be able to sell inherited assets with little to no capital gains tax, using the asset value on the owner’s date of death as the basis rather than what the owner paid for the asset.
Another big change and simplification is reducing the 7 current tax brackets into just 4 brackets. The highest bracket would still be 39.6%, but everyone currently in the 10% bracket would pay no income tax and the lowest taxable bracket would be 12% for those making $12,000-$45,000 (for married filing jointly it’s $24,000-$90,000). The other two brackets in the new plan would be 25% and 35%. There are a few people who are currently in the 33% bracket who would get bumped into the new 35% bracket, but it’s a tax savings for most all other income earners in lower brackets.
Although the standard deduction would be significantly increased, benefitting many low-to-middle income tax filers, any low income households with multiple children could be hurt by the elimination of the deduction for each child that is currently allowed.
Some other proposed changes to the tax code include eliminating most itemized deductions including, medical expenses, student loan interest, alimony, moving expenses, losses from theft or casualty, and even tax preparation fees. Deductions for State and Local Taxes will be limited to $10,000.
In addition, the mortgage interest deduction would only apply to home buyers on mortgage loans of up to $500,000 to purchase a home. Under current law, interest can be deducted on loans up to $1 million. The deduction would not apply for home equity loans or for second/vacation homes.
On the bright side, this bill would do away with the Alternative Minimum Tax, which is an excessive complication. It would also reduce the maximum tax rate on business income to 25% for small business owners with pass-through taxation in the form of a partnership, sole proprietorship, or S-corporation.
The Tax Foundation estimates that these tax cuts will stimulate the economy to the tune of a 3.9% higher GDP in the long term, 3.1% higher wages, and the creation of 975,000 jobs. Even though the marginal tax rates would be significantly reduced, their estimate is that the increase in economic growth would increase the overall federal tax revenues by almost $1 trillion over the next 10 years, bringing the plan to a net neutral effect on government revenues, and yet increasing after tax incomes of tax payers by 4.4% in the long run.
Although at the time of writing, this bill has yet to pass through Congress and then be signed by the president to become law, it appears to have some support from Democrats as well as the sponsoring Republican party. Whether this law gets passed or not, and whether it is good for the US or not, are both yet to be seen. But one thing I think almost all of us can agree on is that simplifying the tax code and the tax preparation process would be a tremendous improvement.
© OKURA & ASSOCIATES, 2017