Today, Congress passed a sweeping tax bill, as widely expected over the last few weeks. The bill passed solely along party lines, with no Democrats voting for the bill.  President Trump is expected to sign the bill into law, shortly.

The changes in the transfer tax laws made by this bill are as follows:

  • The gift and estate tax exemption is doubled beginning January 1, 2018, from $5,000,000 per person to $10,000,000, indexed for inflation.  For 2018, this equals $11,200,000 for individuals and $22,400,000 for married couples. The increase applies to the generation-skipping transfer tax exemption, as well
  • The foregoing increase of the gift, estate, and GST exemptions is set to expire in 2026, when the exemptions would revert to $5,000,000/$10,000,000 figures, adjusted for inflation.  This raises the question of whether, upon such expiration, there could be a so-called claw-back/penalty on any gifts made prior to 2026 which exceeded the prior exemption amount but fall below the new, doubled exemption; the Act gives the IRS authority to mitigate any such penalty.
  • The estate and generation-skipping transfer tax will not be repealed in 2024, as originally planned by the House GOP.  The gift tax will also remain in effect.
  • The top gift, estate, and GST tax rates will remain at 40%.
  • “Step-up” in basis for assets (other than retirement accounts) received on death for income tax purposes remains intact.

Other notable changes in the tax laws are as follows:

  • The number of income tax brackets remains at seven, though the top rate of 39.6% is lowered to 37% and applies to income starting at $500,000 for individuals and $600,000 for married couples.  However, the tax rate on the income of single individuals will actually be higher under the new law starting at $157,500 of taxable income until you arrive at $416,700 of taxable income.  A similar increase will occur for married couples, but limited to taxable income between $400,000 and $416,700.
  • The standard deduction is nearly doubled, from $6,350 to $12,000 for singles and from $12,700 to $24,000 for married couples filing jointly.
  • Personal exemptions are eliminated.
  • Instead of a new tax rate, pass-through entities will now receive a deduction equal to 20% of their income.  For pass-through businesses in a service industry, this deduction begins to phase out after the first $157,500 in income for individuals and $315,000 for married couples.
  • The deduction for state and local property and income or general sales taxes is now limited to $10,000.
  • The corporate tax rate is lowered to 21% from 35%.
  • The home mortgage interest deduction will apply only to loans up to $750,000 for newly purchased homes, down from the current $1,000,000 limit. The home interest deduction for home equity loans is eliminated.  The home interest deduction for mortgages in existence as of December 15, 2017 is preserved.  In the event such an existing mortgage is refinanced, the home interest deduction remains except to the extent the loan is extended or the amount of the new loan is greater than the amount refinanced.
  • The corporate alternative minimum tax is repealed.  The individual alternative minimum tax thresholds are raised to $70,300 for singles and $109,400 for married couples, up from the previous $54,300 and $84,500 thresholds.
  • The child tax credit is increased from $1,000 to $2,000 per child.  Of the $2,000, $600 will not be “refundable”, i.e. if your income tax bill is zero, you will not receive a check for the credit. The phase out threshold is increased from $75,000 for single persons to $200,000, and $110,000 for married couples to $400,000.
  • The provision of the Affordable Care Act requiring most Americans to buy health insurance is now repealed, starting in 2019.
  • “1031” like-kind exchanges are now explicitly limited to real property that is not held primarily for sale. Personal property, such as artwork, is now excluded.
  • Tax benefits for charitable contributions remain largely unchanged. However, the income-based percentage limit for charitable cash contributions by individuals to public charities increases from 50 percent to 60 percent.  Note that fewer charitable deductions may be taken due to the doubling of the standard deduction.

Note that there are no changes to pre-tax 401(k) plans, contrary to previous discussions reported.