On December 22, President Trump signed the Tax Cuts and Jobs Act into law, setting into motion some of the most significant tax changes for individuals and corporations since 1986. So, what exactly do we know at this point? Will your tax rate decrease or increase? Will you be able to take the same deductions or even add new ones?
One thing is for sure, without a carefully-developed tax strategy, high net worth individuals and investors could be missing out on key tax benefits and paying more in taxes than necessary. A higher tax liability can diminish the value of your investment earnings over the long term. Let’s go through a brief overview of the biggest changes.
Estate and Gift Tax
An important change in this new legislation is the increase in the estate and gift tax exemption to roughly $11.2 million ($22.4 million for married couples). This doubles the former exemption of $5.6 million for individuals and $11.2 million for couples.
For high net worth individuals who plan to make significant financial gifts to their heirs, the change is positive, since it can generate tax savings. To fully leverage the tax changes while they’re in place, it’s important to consider whether your current estate plan is structured to allow you to take advantage of the higher estate tax limit, while ensuring that you’re not passing on more (or less) of your wealth to your spouse, children or grandchildren than you intend to during your lifetime.
But remember, these changes will remain in effect only until December 31, 2025.
Another tax issue for high net worth individuals to consider is the introduction of a new 20% deduction on business income for pass-through entities; sole proprietors, LLCs, partnerships and S corporations may be able to deduct this percent of qualified business income, albeit with some limitations.
If you’re a high income earner who owns a business, you may want to explore the advantages of forming a limited liability company to take advantage of this deduction.
IMPORTANT: If your business operates as a C-corporation, you won’t be able to take advantage of this deduction but the tax bill does reduce the corporate tax rate from 35 percent to 21 percent, offering another potential avenue for tax savings.
Tax Bracket Changes
Marginal tax rates under the new tax bill will be lower for many taxpayers starting in 2018 and running through 2025. The top rate has been reduced from 39.5 percent to 37 percent, and will now apply to individuals with over $500,000 in income and couples with over $600,000.
Previously, the top tax rate had applied to individuals making $426,700 or more and couples making $480,050 or more.
A couple filing as “married/joint” with combined income between $237,000 and $351,000, for instance, will see their marginal tax rate fall from 33 percent to 24 percent. Assuming there are no changes in other deductions, this could result in a tax savings of around $10,000.
Wilson & Associates CPAs has over 35 years’ experience dealing with high net worth individuals and their related tax problems. We know wealth brings benefits, but from a tax perspective it creates special challenges, that’s why we are ready to help you take advantage of all the breaks to which you’re entitled.