Congress has just passed, and President Trump has signed, the Tax Cuts and Jobs Act. Although the continued study of the bill will undoubtedly reveal additional opportunities, I wanted to share some of the immediately available opportunities for your clients.
Significant Changes to Business Taxation
Every business owner must have his or her business ownership structure and tax status reviewed immediately. Relying on old rules of thumb or ignoring this monumental change in business taxation could mean paying enormous amounts of unnecessary taxes. Please read the enclosed thought paper for additional details on the changes to the law ( you can download your copy here). I'd like to focus here on how we can help your business-owning clients reduce their tax burden.
●It is now more important than ever to review business structures for tax efficiency. Any business that is not operating as a pass-through entity should consider doing so to take advantage of the new rules that make pass-through entities even more attractive. For more in-depth analysis on the new pass-through entities, please review the enclosed thought paper.
●Clients that reinvest heavily in the business with plans for a future IPO or another sale may consider operating as C corporations to take advantage of the new 21-percent rate (down from 35 percent) that applies to corporate income.
●For “professional service business” clients (like lawyers, accountants, etc.) we must consider transitioning to a new tax structure, reorganizing operations to shift income into other entities, or forming a defined benefit program, among other potential strategies. Note that professional service businesses with income less than $157,500 (for individuals) or $315,000 (for married filing jointly) can use the new, favorable rates generally available to pass-through entities.
But, professional service businesses exceeding those thresholds are subject to phaseout and may even be left out of the new, favorable rates if their income is high enough. But there are still opportunities to reduce income taxes for all businesses.
Of course, there are no one-size-fits-all approaches or solutions. Each business has a unique tax status that we'll need to consider before making any changes. But delay is the worst possible tactic for your clients. The best thing to do now is call and get on the calendar as soon as possible so we can get the ball rolling on developing a personalized tax-saving plan for your business owner clients.
New Opportunities for Dynasty Planning and Discounted Gifting
The doubling of the estate, gift, and GST tax exemptions to $10 million per person ($20 million per couple) opens a significant, once-in-a-lifetime opportunity for high net worth clients to protect more assets than ever. Combined with the IRS's withdrawal of the anti-discounting section 2704 regulations, tax reform opens the door for dynasty trusts, GRATs, FLPs/FLLCs, and other strategies that could save substantial taxes and shield entire fortunes for beneficiaries.
Although the estate tax and GST tax exemption doubled January 1, 2018, to $10 million per person (and will continue to increase for inflation), this increased exemption expires on December 31, 2025. You (and your clients) may be tempted to wait given that seven years may feel like forever. But remember that this tax legislation is likely to be heavily modified if the political pendulum swings in the other direction. (The clock is ticking steadily towards the 2018 midterms and 2020 Presidential election.)
Of course, we have tools to build flexibility into our plans, including trust protectors, decanting powers, and other strategies to deal with future changes. But those flexibility strategies only work to preserve options if we implement plans while the exemption is available.
I recommend using this new exemption proactively as soon as possible for any client with current estate tax exposure or who's worried about exposure in the future. If in doubt, call now and let's strategize while there's still time.
Changes to Individual Income Taxes The new cap on state and local tax deductions may result in some clients benefitting by shifting income to non-grantor trusts to avoid excessive state income taxes. This is a sophisticated strategy, but we are here to assist your clients with it.
The new law doesn't lower capital gains rates (which remain at 20 percent for most taxpayers and asset types) or repeal the 3.8 percent net investment income tax. This creates continuing opportunities explore charitable planned giving options to reduce taxes.
The increase in the standard deduction ($12,000 for individuals, $18,000 for heads of household, and $24,000 for married couples filing jointly) and removal of some above-the-line deductions (moving expenses and alimony) will probably make the 2019 tax filing season less arduous from many clients. For most wage-earning clients, there are no significant new opportunities for investment or saving, but luckily the deductions for 529 plans, IRAs, and other retirement plans were preserved. With the reduction in rates, now is the time to talk with clients about investing some of their tax savings so that they can receive long-term value from this tax reform.
Altering a business structure, implementing new trusts, and optimizing a client's affairs to the new tax reality won't happen automatically. This legislation opens new opportunities, but also creates traps for the uninformed and those who fail to take action. Help your clients by scheduling an immediate review with us for their estate plan and business structure.
We are available now to answer your questions about tax reform and what it means for your clients. An opportunity for significant tax savings for your clients might only be a phone call away. I look forward to hearing from you and working with you and your clients.