Colorado Probate Blog - Wade Ash Woods Hill & Farley, P.C.

Overview of 2018 Tax Act

President Trump signed the 2018 Tax Act into law on December 22, 2017. Most of the provisions apply only to taxable years starting January 1, 2018 through December 31, 2025. The changes in the corporate tax rates are permanent. Wade Ash intends to send out a newsletter in February that will summarize more fully the provisions of the Act, especially as affecting estate planning. The following is a list of some of the major provisions:

    • The estate, gift and generation-skipping transfer tax exemption is doubled from $5 million to $10 million and still indexed for inflation since 2011. The 2018 exemption will be about $11.2 million.
    • The individual standard deduction is also nearly doubled to $24,000 for married filing jointly, and $12,000 for single taxpayers; the income tax rates are slightly reduced.
    • No more deductions for personal exemptions on individual returns (although they apparently do still apply for trusts and estates).
    • Many itemized deductions for individuals were eliminated or reduced:
      • $10,000 limit on the deduction for state and local taxes
      • no deduction for interest on home equity loans, including current loans
      • the deduction for mortgage interest on new loans is only allowed up to $750,000 in indebtedness
      • No deduction for alimony on divorces finalized after 12/31/2018 (and the receipt of alimony will not be taxable income)
      • medical expenses may still be deducted over 10% of AGI
      • charitable contributions may still be deducted (up to 60% of AGI instead of only 50% for cash contributions to public charities)
      • NO miscellaneous itemized deductions, including investment advisor fees, accountants’ fees, attorney fees
    • 529 plan accounts may make qualified distributions for elementary and high school education up to $10,000 per year per student
    • C corporation changes are permanent and include:
      • corporate tax rate reduced to 21% from 35%
      • corporate Alternative Minimum Tax repealed
      • 100% expensing of new and used property used in the business, except for buildings
      • Business expense deductions include state and local taxes without the $10,000 limit
    • New 20% deduction for "qualified business income" under pass-through entities such as partnerships, LLCs and Sub-S corporations
      • Must be income earned in a "trade or business"
      • Deduction excludes income from capital gains, dividends, interest
      • If total income is less than $315,000 for married filing jointly ($157,500 for single taxpayers), no further limit on the deduction.
      • If more than the threshold, subject to limitation of greater of (a) 50% of taxpayer’s share of W-2 wages, or 25% of taxpayer’s share of W-2 wages plus 2.5% of depreciable property
      • If income is over the threshold, no 20% deduction for income from pass- through service companies, including health, law, accounting, performing arts, athletics, financial services, "reputation/skill-based" services, investment management
    • Many issues have not been addressed in the Act, and will need to be clarified in regulations
  • no deduction for business entertainment expenses (except if employees are included, like holiday parties)
  • changes to fiduciary income tax (trusts and estates):
    • miscellaneous itemized deductions (subject to the 2% floor) are NOT deductible
    • items that are deductible are those NOT subject to the 2% floor and include trustee fees, attorney fees to administer the trust or estate, preparation of estate tax returns and fiduciary income tax returns (but not gift tax returns), and administrative expenses such as probate filing fees, appraisals and preparation of accountings
    • state and local taxes up to $10,000 are deductible
    • charitable contributions are deductible if required by the governing instrument
    • trusts and estates still have the personal exemption ($600 for estates, $100 for simple trusts and $300 for complex trusts)
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Late Portability Election

“Portability” allows a surviving spouse to add a deceased spouse’s unused estate tax exemption onto his or her own exemption. Each spouse has an estate tax exemption amount of $5 million, which is indexed for inflation after 2011. In 2017, the exemption is $5,490,000. To elect portability, a client must timely file Form 706, United States Estate (and Generation-Skipping Transfer) Tax Return, which is due 9 months after the decedent’s date of death, but the due date can be extended for six months if a request for extension is timely filed.

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Don’t Defer Planning Your Estate Because The Estate Tax Might Be Repealed

In 2001, when the estate tax exemption was $675,000 and George W. Bush was President, Congress “repealed” the estate tax. But the repeal was phased in over ten years and was then scheduled to last for only one year. Instead of actual repeal, what we got, under President Obama, was a reinstated estate tax with a much higher exemption of $5 million, indexed for inflation. The Republican party now controls both houses of Congress as well as the White House, and we are again hearing calls for repeal of the estate tax.

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Year-End Tax Planning

Annual Exclusion Gifts. The gift tax annual exclusion is $14,000 for 2016, and stays the same for 2017. You can make gifts of this amount to each of any number of people in a calendar year and not have to file a gift tax return, and the gifts will not use up part of your estate tax exemption. You can also make gifts of an unlimited amount by directly paying a donee's medical expenses to the provider, or tuition to the educational institution. If you make the gift by a check, the donee must deposit the check and the amount must clear your account prior to the end of the year.

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2016 Cost-of-Living Adjustments

The Colorado Department of Revenue recently posted the 2016 cost-of-living adjustments (tied to inflation). The exempt property and family allowance each stayed at $32,000 and the small estates affidavit stayed at $64,000.  For more information, go to 2016 COLA Adjustments.

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Don't Forget Your Annual Exclusion Gifts!

A donor may give up to $14,000 per year per donee that qualifies for the annual exclusion from federal gift tax (generally, a gift of a present interest). Earlier in the year, it had been anticipated that amount would increase to $15,000 in 2016, but that turned out not to be true because of a low rate of inflation. So if you have not made annual exclusion gifts for 2015, and you are in a program of giving to reduce the size of your estate, you should make your $14,000 gifts before the end of the year, and you can make 2016 gifts of the same amount in January. If spouses intend to "split their gifts" by doubling the amount of the annual exclusion gifts, the election to split gifts must be made on a U.S. Gift Tax Return (form 709) filed with the IRS. The federal estate tax exemption is $5,430,000 in 2015, and it is increasing to $5,450,000 for decedents dying in 2016.

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2013 Probate Numbers Indexed for Inflation

The 2013 numbers have been posted by the Colorado Department of Revenue: Small Estate Affidavit is $63,000; Exempt Property is $31,000; Family Allowance is $31,000; Elective Share supplemental amount is $52,000.
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