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Trusts & Estates: New Tax Brackets Under the TCJA of 2017

The Tax Cuts and Jobs Act (TCJA) was approved by Congress and signed into law on December 22, 2017. It provides drastic changes to the Internal Revenue Code and affects taxpayers of all different types, including individuals, corporations, partnerships, estates, and trusts. Following are some of the key changes with regard to trusts and estates.

Prior to the TCJA, there were five tax brackets for trusts. The TCJA eliminated one tax bracket and decreased the overall tax rates for each bracket, reducing the top tax rate for trusts from 39.6% to 37%. Under the new law, if taxable income is:

Not over $2,550, the tax is 10% of taxable income;
Over $2,550 but not over $9,150, the tax is $255 plus 24% of the excess over $2,550;
Over $9,150 but not over $12,500, the tax is $1,839 plus 35% of the excess over $9,150;
Over $12,500, the tax is $3,011.50 plus 37% of the excess over $12,500.

While the overall tax rates are now reduced, the tax brackets are still very compressed with the top tax rate taking effect at $12,500.

The TCJA did not change the exemption amounts for trusts and estates. Estates, simple trusts, and complex trusts are still allowed a $600, $300, $100 exemption, respectively.

There are additional changes to trusts and estates under the TCJA, such as the deductibility of some expenses. For instance, trusts and estates are no longer able to deduct miscellaneous itemized deductions subject to the 2% of AGI limitation, such as investment management fees. For additional changes under the TCJA, check the IRS website.

One of the changes to itemized deductions because of the Tax Cuts and Jobs Act of 2017 was the suspension of the deduction on interest on up to $100,000 of home equity indebtedness. The Internal Revenue Service announced that in many cases taxpayers will be able to continue deducting interest paid on home equity loans.

Prior to the Tax Cuts and Jobs Act, taxpayers were able to deduct interest on up to $1 million in mortgage debt and also up to $100,000 of home equity debt. Under the new law, taxpayers are now limited to $750,000 of home acquisition debt with no separate carve out for home equity debt. However, tax filers with mortgage debt taken out prior to December 14, 2017, are still allowed to deduct interest on up to $1 million in mortgage debt (not inclusive of home equity debt).

So, how do you determine if interest on home equity debt is deductible for tax years beginning after 2017? Here are a couple of guidelines:

It is good to see that interest on home equity debt is still available for deduction. Check the IRS’ announcement for some examples to illustrate the new limits.

The Tax Cut and Jobs Act – How does it affect non-corporate taxpayers with business income?

The Tax Cut and Jobs Act decreased the tax rate for corporations from graduated rates of up to 35% to a flat rate of 21% beginning after December 31, 2017. The Act also added a 20% deduction for non-corporate taxpayer with domestic qualified business income from sole proprietorship, partnership, limited liability company (LLC) and S corporations, effective for tax years after December 31, 2017 and before January 1, 2026.

The 20% deduction is allowed as a deduction reducing taxable income and not allowed in computing adjusted gross income. The deduction is limited to the greater of:

  1. 50% of the W-2 wages paid by the business, or
  2. The sum of 25% of the W-2 wages paid by the business plus 2.5%% of the cost basis of the tangible depreciable property of the business at the close of the tax year.

The 20% deduction is also limited to qualified non-personal service businesses income. Qualified non-personal service income is defined as the net amount of domestic qualified items of income, deduction and loss from trade or business other than health, law, consulting, athletics, financial services, brokerage services or any business where the main asset of the business is the reputation or skill of one or more of its employees or owners.

The above limitations do not apply for taxpayers with taxable income below the “threshold amount” ($315,000 for couples filing jointly, $157,000 for other individuals). The 20% deduction is phased in for individuals with taxable income exceeding the threshold amount, over the next $100,000 of taxable income for married individuals filing jointly, $50,000 for other individuals.

Basically, non-corporate taxpayers with taxable income below the $157,000 or $315,000 threshold may generally claim the full 20% deduction. Non-corporate taxpayers with taxable income above the threshold with non-personal service business income may claim the deduction, but may be limited by the wage and capital limit exception or may be completely phased out.

 

On December 20, the House approved H.R. 1, the Tax Cuts and Jobs Act, a sweeping tax reform measure. While much still needs to be determined for tax planning opportunities, we can look at the new income tax rates and how they compare to the pre-Act law.

 

2017 2018
Single
Up to 9,325.00 10.0% Up to 9,525.00 10.0%
Up to 37,950.00 15.0% Up to 38,700.00 12.0%
Up to 91,900.00 25.0% Up to 82,500.00 22.0%
Up to 191,650.00 28.0% Up to 157,500.00 24.0%
Up to 416,700.00 33.0% Up to 200,000.00 32.0%
Up to 418,400.00 35.0% Up to 500,000.00 35.0%
Over 418,400.00 39.6% Over 500,000.00 37.0%
MFJ
Up to 18,650.00 10.0% Up to 19,050.00 10.0%
Up to 75,900.00 15.0% Up to 77,400.00 12.0%
Up to 153,100.00 25.0% Up to 165,000.00 22.0%
Up to 233,350.00 28.0% Up to 315,000.00 24.0%
Up to 416,700.00 33.0% Up to 400,000.00 32.0%
Up to 470,700.00 35.0% Up to 600,000.00 35.0%
Over 470,700.00 39.6% Over 600,000.00 37.0%
As you can see, the majority of the tax rates are lower, where we start to see some discrepancies is when we get to Single filers making over $200,000. With the pre-tax law, an individual making in the range of $200,000 – $420,000, will be taxed at a 33% marginal rate. Under the “Tax Cuts and Jobs Act”, a single person making between $200,000-$420,000 will be taxed at a 35% marginal rate. It appears on its face that these individuals will be paying more in taxes. So let’s look at the real world numbers.

It isn’t until we get to $387,000 where we see the 2018 tax surpass that of the 2017 tax rates. From this point on there is a window of taxpayers (Single filers) who make between $387,000 and $417,000 who, with no other changes, will see their taxes go up for 2018. For the remaining filers, it appears that for the next 8 years you should see a tax rate decrease.

 

 

 

Having just lost my mother this year, there were many lessons I learned.

My mother did not have much in assets when she passed away but she did get a will prepared several years ago. I would strongly encourage that you make sure your parents have a will or trust in place and that you are informed as to their intentions. This can sometimes be a difficult conversation. My mother was 95 years old when she passed away and I was still struggling to get her to even bring up the subject of the eventuality of her death. Not until she was under the care of Hospice did she start informing me of what she wanted done with some of her personal effects.

My mother was a hoarder and had lived in her home for 46 years. One of the things she told me a few weeks before her death was that she felt bad for my husband who would have to deal with all of her things. As it turns out I am the one dealing with all of her things. Note to self – Do not do this to your kids. After this experience I am determined not to leave a mess for my children. My sister shared a Facebook post with me – ‘Death Cleaning’ is the newest way to declutter. Many are decluttering to save their loved ones stress down the road. Highly recommended.

In connection with my going through her things, I have found there is much that I wished we had talked about. Photos found that look precious and old that I don’t know anything about. I always wanted to make time to go through memories with her but never did. This is one of my deepest regrets. Find the time to spend with your parents to document these memories.

And finally, make sure you don’t make any tough decisions until you have had time to get through the grieving process. I was surprised at how hard her death hit me, even though as I said she was 95, and I knew it was eventually going to happen. Make sure you have a support team to help you through any immediate decisions you have to make. I was fortunate to have my daughter and husband with me that first week when I was making arrangements. It was difficult to make even what you would think are easy decisions.

When you lose a loved one, reach out to your Trusted Advisor when you are looking to make any financial decisions. This could be your attorney, financial advisor, or your CPA. I am now a firm believer that you should also have a family or friend support member of your team. Decisions are hard when you are grieving. Take the time to heal. And reach for support.

 

It may not be the first thing on everyone’s mind as we head in to the holiday season but for your local CPA, taxes are certainly on the mind. Year end tax planning is always a good idea for a proactive business owner or individual but this year it may be even more important than ever with tax reform coming down the pipeline.

You can’t open a newspaper lately without seeing talks about tax reform. The back and forth and uncertainties surrounding tax legislation is making for an entertaining situation for your local tax nerd. Both the House and Senate have their own plans that are changing by the second; odds are the analysis you read one day will completely change a week later and many details we are hearing about now may be totally different by the time legislation comes across the President’s desk (if that even happens). As your average everyday business owner and taxpayer, you care about the financial well being of you and your company, but chances are you don’t have the time or patience to keep up on the constant changes happening on Capitol Hill. While you may not think any legislation will affect you in the short term, you may be wrong and there may be moves you need to make by the end of 2017.

With uncertainty in the air and the year quickly coming to an end, right now is a great time to get in touch with your accountant. We can educate you about tax reform and its specific effects on you, and help you make sure you make the right moves by year end. Having a good CPA as part of your advisory team is an invaluable resource during times like this.

 

With the passing of another tax deadline, I thought it would be helpful to go over the consequences of not filing your tax return on time. If you have not filed your 2016 tax return, file it as soon as possible to minimize the penalties that you may owe.

There are three types of payments that could be assessed if you do not pay the tax owed on time. These are late filing penalties, late payment penalties, and interest.

If you owe taxes and don’t file your tax return or extension by the original due date, or if you filed an extension but fail to file your return by the extension due date you will be subject to late filing penalties.

The late filing penalty is 5% of the tax owed for every month your return is late, up to a maximum of 25%. If you fail to file your return for over 60 days after the due date or extended due date, the minimum penalty is the lesser of $205 (for 2016) or 100% of the unpaid tax due.

Late payment penalties could be assessed if you do not pay all of the taxes you owe. These apply if you do not pay all of the taxes owed by the original due date, regardless of whether or not you filed an extension. The late filing penalty is 0.5% of the tax owed for each month the tax remains unpaid, up to a maximum of 25%.

If both penalties apply to you the monthly penalty would be 5%, up to maximum penalty of 25%.

You will also be charged interest on any unpaid taxes starting the day after the return’s due date.

If you correctly expect to get a refund there is no penalty. You have three years to file from the due date or you will no longer be eligible for your refund.

 

 

Between Hurricane Harvey, the fast-approaching Hurricane Irma and the various wildfires ravaging the west, unfortunately natural disasters have been all too common this summer.

The last thing on anyone’s mind living in those areas is taxes, but nonetheless, there are various tax aspects of a disaster that people should be aware of. Fortunately, this is one area that the IRS makes rapid decisions to help those in need. Below is a sampling of the latest relief for victims of Hurricane Harvey from the IRS. Those impacted by disasters should check the IRS’s page frequently as other disasters may get similar relief from the IRS in the near future.

Finally, for those who want to help and support those victims of any natural disaster, be cautious of who you make donations to. In order for donations to be tax deductible, they must be made to recognized charitable organizations under the IRS. For instance, Go Fund Me donations are typically not deductible as they go to a person and not a charitable organization. If you are donating online, make sure you are on the legitimate website for the charity. Unfortunately, it is all too common for charity scams to pop up during disasters with fake websites that are very similar to legitimate ones. You should ensure that the organization clearly has their Employee Identification Number (EIN) posted and you can use that and their name to check their exempt status on the IRS website. If you are donating a significant sum, that little bit of homework on your part is well worth it.

 

Recently I had the delight to visit Graceland, Elvis Presley’s former home and now an excellent place to reflect on Elvis’ life and get taken back in time to the 1970s. There I viewed many of Elvis’ cars including his pink Cadillac, a couple Rolls Royce’s and Mercedes, Lincolns and his Ferrari. His home was just how he left it back in 1977 with his dozen TVs scattered throughout the home, shag carpeting and roof, the colorful kitchen, his dad’s old office, and many other furnishings that were a flashback to the 70s.

As a CPA and tax guy, I was also fascinated with the financial documents that were displayed detailing many of Elvis’ large purchases and even his dad’s tax return after he was born showing he paid 1% tax on his income . Elvis must have trusted his dad immensely as there were dozens of checks signed by Elvis’ father Vernon as Vernon took care of all of his son’s finances. This is surprising given that Vernon spent a year in jail during Elvis’s childhood for check forgery and only had an eighth grade education.

Elvis would have benefited immensely if he would have utilized a CPA to assist his dad in tax planning and financial management. Even though Elvis was the largest U.S. taxpayer in 1973 and the highest paid entertainer for many years, he died with an estate worth “only” $10.2 million dollars. Apparently Elvis didn’t like to utilize pertinent tax deductions and had a horrible deal with his manager Colonel Tom Parker, who received over 50% of Elvis’ earnings . Parker even convinced Vernon to pay him 50% of the income from the Elvis’ estate after he died! With this mismanagement, Elvis’ estate lost $9 million in value over two years, and was only worth $1 million in 1979.

Many lessons can be learned with Elvis, but one financially is the importance of trusts for estate planning in which attorneys can be invaluable and utilizing competent and qualified CPAs to assist with tax, estate and financial planning.

On December 9th, 2016, the IRS announced that the 2017 tax filing season will begin on January 23rd, 2017, when it will start accepting electronic tax returns. Per its website, the IRS is expecting more than 153 million individual tax returns to be filed during 2017, some of which will be affected by recent changes in tax law. Specifically, the IRS is now required to hold refunds claiming the Earned Income Tax Credit (EITC) and the Additional Child Tax Credit (ACTC) until February 15th, 2017. This rule applies to the entire refund, not just the portion of the refund relating to these credits. Furthermore, due to delays in refund processing through financial institutions, weekends, and the Presidents’ Day holiday on Monday, February 20th, 2016, the IRS is warning taxpayers who claim either credit that they most likely will not be receiving their refunds before February 27th, 2017.

How can you check the status of your refund?

There are two easy ways:

– Where’s My Refund on the IRS website – This website will be updated with estimated deposit dates for early EITC and ACTC refund filers after February 15th, 2017. All you need is your social security number or ITIN, filing status, and your exact refund amount.

IRS2Go – This is the official mobile app of the IRS. It can be downloaded from the IRS website. EITC and ACTC refund filers can start checking the status of their refunds after February 15th, 2017.

 

 





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