The Tax Cuts and Jobs Act (Act) was signed by the president on December 22, 2017, and is the most sweeping tax legislation since the Reagan Era. The Act impacts all taxpayers, from individuals to businesses, and the rules for each category are different. Even though they are different, they unfortunately are uniformly complicated. Generally, the changes made for individual taxpayers, including the pass-through rules for business entities, are effective from January 1, 2018, to December 31, 2025. If no changes are made by December 31, 2025, the tax laws revert back to the 2017 rules. The exception is that the changes that apply to corporations are permanent. Well, as permanent as a tax law can be. Many have indicated that the Act is “fragile” in that it was passed without any Democratic support and a change of control would result in a repeal or further changes. For now, the Act provides opportunities for taxpayers to significantly benefit from paying less tax. A thorough review of your financial and business structures will likely maximize the opportunities that the Act provides. The Act doubles the estate, gift and generation-skipping transfer tax exemption amounts. The new exemption amounts apply to taxpayers dying or making gifts after 2017 and before 2026, and will be adjusted for inflation on an annual basis during this period.
Because the exemption amount is indexed for inflation from a 2010 base year, the expected exemption amount for 2018 is $11,180,000 per individual or $22,360,000 for married couples.
We are still waiting for the Internal Revenue Service to issue the final figures, but are confident these estimates are very close to what will be issued as final for 2018. The changes sunset in 2026 and go back to the $5,000,000 per individual, subject to inflation adjustments.
Subject to certain limitations and qualifications, pass-through entities are eligible for a deduction equal to 20% of taxable income. This applies to partnerships, S corporations, sole proprietorships, other qualified dividends and trusts and estates. Tax for these entities is determined on the individual taxpayer’s personal return and subject to the revised individual tax rates. For a taxpayer in the top tax bracket, the deduction results in a top marginal rate of 29.6%, plus the 3.8% net investment tax, if it applies.
The corporate tax rate is reduced from a top tax rate of 35% to a flat rate of 21%. Dividends from the corporation are taxed at capital gain tax rates. The capital gain rates remain at 0%, 15% and 20%. For a taxpayer in the top tax bracket, the corporate tax in conjunction with the capital gains tax results in a top marginal rate of 39.8% (which includes the 3.8% net investment tax).
