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Under the Tax Cuts and Jobs Act (TCJA), individual income tax rates generally go down for 2018 through 2025. But that doesn’t necessarily mean your income tax liability will go down. The TCJA also makes a lot of changes to tax breaks for individuals, reducing or eliminating some while expanding others. The total impact of all of these changes is what will ultimately determine whether you see reduced taxes. One interrelated group of changes affecting many taxpayers are those to personal exemptions, standard deductions and the child credit.
For 2017, taxpayers can claim a personal exemption of $4,050 each for themselves, their spouses and any dependents. For families with children and/or other dependents, such as elderly parents, these exemptions can really add up.
For 2018 through 2025, the TCJA suspends personal exemptions. This will substantially increase taxable income for large families. However, enhancements to the standard deduction and child credit, combined with lower tax rates, might mitigate this increase.
Taxpayers can choose to itemize certain deductions on Schedule A or take the standard deduction based on their filing status instead. Itemizing deductions when the total will be larger than the standard deduction saves tax, but it makes filing more complicated.
For 2017, the standard deductions are $6,350 for singles and separate filers, $9,350 for head of household filers, and $12,700 for married couples filing jointly.
The TCJA nearly doubles the standard deductions for 2018 to $12,000 for singles and separate filers, $18,000 for heads of households, and $24,000 for joint filers. (These amounts will be adjusted for inflation for 2019 through 2025.)
For some taxpayers, the increased standard deduction could compensate for the elimination of the exemptions, and perhaps even provide some additional tax savings. But for those with many dependents or who itemize deductions, these changes might result in a higher tax bill — depending in part on the extent to which they can benefit from enhancements to the child credit.
Credits can be more powerful than exemptions and deductions because they reduce taxes dollar-for-dollar, rather than just reducing the amount of income subject to tax. For 2018 through 2025, the TCJA doubles the child credit to $2,000 per child under age 17.
The new law also makes the child credit available to more families than in the past. For 2018 through 2025, the credit doesn’t begin to phase out until adjusted gross income exceeds $400,000 for joint filers or $200,000 for all other filers, compared with the 2017 phaseout thresholds of $110,000 and $75,000, respectively.
The TCJA also includes, for 2018 through 2025, a $500 credit for qualifying dependents other than qualifying children.
Tip of the iceberg
Many factors will influence the impact of the TCJA on your tax liability for 2018 and beyond. And what’s discussed here is just the tip of the iceberg. For example, the TCJA also makes many changes to itemized deductions. For help assessing the impact on your tax situation, please contact us.
It’s common for grandparents to want to help ensure their grandchildren will get a high quality education. And, along the same lines, they also want the peace of mind that their wealth will be preserved for their children and grandchildren after they’re gone. If you’re facing these challenges, one option that can help you conquer both is a 529 plan. And it’s become even more attractive under the Tax Cuts and Jobs Act (TCJA).
529 plan in action
In a nutshell, a 529 plan is one of the most flexible tools available for funding college expenses and it can provide significant estate planning benefits. 529 plans are sponsored by states, state agencies and certain educational institutions. You can choose a prepaid tuition plan to secure current tuition rates or a tax-advantaged savings plan to fund college expenses. The savings plan version allows you to make cash contributions to a tax-advantaged investment account and to withdraw both contributions and earnings free of federal — and, in most cases, state — income taxes for “qualified education expenses.”
Qualified expenses include tuition, fees, books, supplies, equipment, and a limited amount of room and board. And beginning this year, the TCJA has expanded the definition of qualified expenses to include not just postsecondary school expenses but also primary and secondary school expenses. This change is permanent.
529 plan and your estate plan
529 plans offer several estate planning benefits. First, even though you can change beneficiaries or get your money back, 529 plan contributions are considered “completed gifts” for federal gift and generation-skipping transfer (GST) tax purposes. As such, they’re eligible for the annual exclusion, which allows you to make gifts of up to $15,000 per year ($30,000 for married couples) to any number of recipients, without triggering gift or GST taxes and without using any of your lifetime exemption amounts.
For estate tax purposes, all of your contributions, together with all future earnings, are removed from your taxable estate even though you retain control over the funds. Most estate tax saving strategies require you to relinquish control over your assets — for example, by placing them in an irrevocable trust. But a 529 plan shields assets from estate taxes even though you retain the right (subject to certain limitations) to control the timing of distributions, change beneficiaries, move assets from one plan to another or get your money back (subject to taxes and penalties).
529 plans accept only cash contributions, so you can’t use stock or other assets to fund an account. Also, their administrative fees may be higher than those of other investment vehicles. Contact us to help you plan for the distribution of your wealth using various estate planning strategies, such as a 529 plan.
There are many techniques you can use to protect your assets, from giving them to loved ones to placing them in offshore trusts. It’s important to understand that asset protection isn’t about evading legitimate debts, hiding assets or defrauding creditors. Rather, it’s about preserving your hard-earned wealth in the face of unreasonable creditors’ claims, frivolous lawsuits or financial predators.
Assess your risk
The first step is to assess the risk that creditors, former spouses or opportunists will go after your assets or those of your beneficiaries. If your risk is relatively low, but you seek added peace of mind, you might consider simpler techniques, such as changing the way assets are titled or gifting them to your loved ones. However, if your risk is higher — for example, if you own a business, are in a profession with a high degree of malpractice risk or are involved in other activities that expose you to potential financial liability — you might consider more sophisticated approaches.
If you wish to protect assets while retaining some control over them and also shielding them from your loved ones’ creditors, consider an irrevocable trust. Transferring assets to such a trust places them beyond your creditors’ reach (provided it’s not a fraudulent transfer and you’re not a trust beneficiary). And by including a “spendthrift” provision, you can also protect the assets against claims by your beneficiaries’ creditors. A spendthrift provision prohibits your beneficiaries from selling or assigning their interests in the trust, either voluntarily or involuntarily.
To provide even greater protection for your beneficiaries, consider using an independent trustee and giving him or her full discretion over distributions from the trust. Suppose, for example, that you establish a trust for the benefit of your child and authorize the trustee to make scheduled distributions or to distribute funds for your child’s “health, education, maintenance and support.” Typically, a fully discretionary trust avoids inclusion in the marital estate, although in some states this trust type may be treated as part of the marital estate to be divided in divorce.
Start planning now
Whichever strategy you choose, it’s critical to start planning now. The earlier you implement asset protection, the more effective it will be. Contact us to get started.
The Tax Cuts and Jobs Act (TCJA) enhances some tax breaks for businesses while reducing or eliminating others. One break it enhances — temporarily — is bonus depreciation. While most TCJA provisions go into effect for the 2018 tax year, you might be able to benefit from the bonus depreciation enhancements when you file your 2017 tax return.
Pre-TCJA bonus depreciation
Under pre-TCJA law, for qualified new assets that your business placed in service in 2017, you can claim a 50% first-year bonus depreciation deduction. Used assets don’t qualify. This tax break is available for the cost of new computer systems, purchased software, vehicles, machinery, equipment, office furniture, etc.
In addition, 50% bonus depreciation can be claimed for qualified improvement property, which means any qualified improvement to the interior portion of a nonresidential building if the improvement is placed in service after the date the building is placed in service. But qualified improvement costs don’t include expenditures for the enlargement of a building, an elevator or escalator, or the internal structural framework of a building.
The TCJA significantly expands bonus depreciation: For qualified property placed in service between September 28, 2017, and December 31, 2022 (or by December 31, 2023, for certain property with longer production periods), the first-year bonus depreciation percentage increases to 100%. In addition, the 100% deduction is allowed for not just new but also used qualifying property.
The new law also allows 100% bonus depreciation for qualified film, television and live theatrical productions placed in service on or after September 28, 2017. Productions are considered placed in service at the time of the initial release, broadcast or live commercial performance.
Beginning in 2023, bonus depreciation is scheduled to be reduced 20 percentage points each year. So, for example, it would be 80% for property placed in service in 2023, 60% in 2024, etc., until it would be fully eliminated in 2027.
For certain property with longer production periods, the reductions are delayed by one year. For example, 80% bonus depreciation would apply to long-production-period property placed in service in 2024.
Bonus depreciation is only one of the business tax breaks that have changed under the TCJA. Contact us for more information on this and other changes that will impact your business.