While the new “permanent” 21% Corporate Tax Rate got most of the headlines- mainly because it was a much simpler story – there are also benefits for self employed people and small businesses in the new tax law. These folks may not get as dramatic a tax break as corporations do, but they do get a 20% reduction of taxable business income. Here’s how that works, and some other benefits they could enjoy in 2018.
With the president’s signing of the “Tax Cuts and Jobs Act” into law in December 2017, there will be major new opportunities starting in 2018 to minimize the tax cost of transferring wealth. The new law doubles the exemption base for gift, estate and generation-skipping transfer taxes.
However, unlike the 21% Corporate Tax Rate which is supposed to be “permanent,” the new tax law provides that starting in 2026, the above exemptions revert back to the pre-2018 levels.
The exemptions would continue to be indexed for inflation but by a different, less generous measure than applicable under current law. That means that the exemption next year will be slightly less than double the $5.6 million that would have been the exemption for 2018 before the new law.
The doubling of the exemption base translates into an opportunity starting in 2018 for those who have used their entire $5.49 million exemptions through 2017 to transfer—without current gift tax or future estate or generation-skipping taxes—an additional $5.69 million for an individual or $11.38 million for a married couple.
For those who have not used the maximum amount of their exemptions, the unused amount continues to be available. This opportunity may only be available for 8 years, until 2026. You should consult with your CPA or estate planning lawyer about using the benefits of the increased exemptions through lifetime transfers and how the increased exemptions will affect your estate plan if you die during the period.
For most families, the estate tax hasn’t come into play since 2014 when the exemption was raised to more than $5 million. Instead of eliminating the estate tax, the new bill raises the estate tax exemption to $11 million for an individual, and $22 million for a married couple that elects portability. Now “the death tax” only applies to the wealthy, but thee are concepts that all families should understand. Let’s take a moment to explain how the estate tax exemption and gift tax work.
The estate tax exemption and the gift tax work together in a sense because the unified lifetime credit for gifts matches the estate tax exemption. The unified credit increases each year, along with the estate tax exemption. Each year there is an amount that you can gift, in a sense that you are removing assets from your taxable estate. For instance, in 2018 the amount that you can gift is $15,000. If you are married and elect to split your gifts, you can give $30,000. These amounts can be given without having to file a gift tax return.
While “the death tax” may not apply to most people, estate planning serves many other useful purposes for virtually all families.
First of all, if you make no plans at all, you die “Intestate.” Your estate goes through a probate process in civil court and your assets pass according to the laws of the state and the decision of the judge. The probate hearings are public, so that creditors or anyone that feels that they have a right to your assets can make a claim against your estate. Possibly embarrassing and definitely very costly.
On the other hand, if you had formed a “Living Trust” and titled your biggest assets to that trust, your assets pass immediately to the intended beneficiaries by an act of law and there can be no claim made against the properly-drafted trust, which is a legal document.
Another reason for estate planning is for the business owner who wants to pass on their business to someone in the most tax advantageous way possible.
With huge changes in tax law this year, it is more important than ever to consult with your CPA, financial planner and estate planning attorney. G&S Law is always ready to help, so call us for personal legal advice or visit our website for more information about our services.
—————————- By Keyla Ayala