As we all know, the President signed the sweeping tax reform bill ushering in a broad range of changes including new rules for income tax rates and deductions, college for savings incentives, estate planning and corporate taxes. These new rules are leaving folks scratching their heads and scrambling to find out what the most sweeping tax reform package in decades means and what actions to consider.
In my last article I wrote about the importance of passing on some of the benefits to increase employees’ salaries and 401K’s so I’ll continue in this article by saying that retirement savings incentives apparently will be unaffected. To get a clear understanding, everyone should consult with tax professionals to evaluate their personal circumstances and money management but financial advisers say the new rules do not call for changes to existing retirement savings incentives, preserving the favorable tax treatment and contribution limits to 401 (k)s and other retirement savings accounts.
Below are some key takeaways from tax reform bill:
Temporary increase in federal estate tax exemption
The law will roughly double the federal estate tax exemption to $11 million per person ($22 million per couple). That limit will be indexed to inflation, but would expire and revert back to current law after 2025.
Beneficiaries will still get a step up in basis, meaning there would be no capital gains tax due on inherited assets at the time of the transfer, and the cost basis - the value used to compute tax liability - would be reset to the price at that date.
It is important to note that state level estate tax exemptions are often much lower than the federal level and are unaffected by this law. In addition, the temporary nature of the higher limit means that if you have an estate plan, you should proceed carefully before making any changes.
While a further increase in the estate tax exemption will help some families avoid this tax at the federal level, it remains important for all households to have a current estate plan that helps ensure their wishes are carried out and reduces the cost of transferring assets as part of an estate.
New corporate tax rate and pass-through tax rate
Corporate tax rates will be cut to 21% beginning in this year. That tax cut is not scheduled to expire.
Pass-through businesses, businesses structured as sole proprietorships, partnerships, and S-corporations, will be taxed at individual tax rates, but will be able to deduct 20% of income. To prevent high-income individuals from taking advantage of this deduction, it would only be available to couples filing jointly with incomes below $315,000. For income above that level, the rules are complex but it appears that certain kinds of businesses might still be eligible for a partial deduction.
The plan would let businesses fully expense new equipment right away, but the provision would eventually expire.
The bottom line
There are a few things you may want to consider in light of the new legislation, and may want to consult with a tax professional about, so you can be prepared.
• Rethink your mortgages and deductions: If you have traditionally made charitable gifts or benefited from the mortgage interest or state and local tax deduction, you want to look at how the new standard deduction will impact you. If it no longer makes sense to deduct these expenses, you may want to rethink your mortgage or giving strategy. The imposition of a cap on state and local tax deductions may also impact where some people choose to live in retirement.
• Estate tax: Even in the absence of tax reform, it makes sense to periodically review your estate plan. If the estate tax limit changes are relevant to your plan, it may make even more sense to revisit your strategy. You may want to meet with your estate planning attorney.
• Small-business income: If you own a small business, you may want to reconsider how you structure your income and the form of your enterprise. Depending on the size and particulars of your business, you may want to consider the benefits of incorporation or the restructuring of pass-through organizations. Consult with an expert in small-business taxation.
• Timing corporate expenses: With new rules in place temporarily for expensing capital equipment purchases, business owners may want to review their capital expenditure plans.
I trust the Oxnard business community will find this information useful.
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