With President Trump having signed the GOP tax bill today, new tax planning opportunities are now available – but you must take advantage of many of them within the next nine days, before 2018. John O. McManus, founder of top-rated estate planning law firm McManus & Associates, makes the following time-sensitive recommendations in light of tax reform and the reduction of income tax rates:
Accelerate your income tax deductions. Certain itemized deductions, i.e. income tax and real estate tax deductions, will be capped at $10,000. Pay your January estimated taxes in December; make your January mortgage payment in December; deduct any unreimbursed medical expenses; make your 2018 charitable donations in 2017. Some commentators suggest prepaying property taxes that have been assessed, such as the 2/1/18 and 5/1/18 installments – but it depends on the state. Also, the American Institute of Certified Public Accountants has opined that CPAs should advise clients that payments in 2017 of state tax liabilities projected for 2018 are not deductible on their 2017 federal income tax returns. You should be mindful of the fact that these additional payments could cause you to be subject to the alternative minimum tax, which results in you losing the benefits of these state and local taxes.
Prepay in 2017 any business entertainment expenses, such as sports tickets or green fees, and membership dues for clubs organized for business. The final tax reform bill disallows these expenses; it will continue to allow the deduction of 50% for food and beverages associated with a trade or business.
Postpone/defer receipt of income until 2018 to take advantage of the lower tax rates.
Review your potential capital expenditures. Under the final tax reform bill, until January 1, 2023, a business will be able to expense 100% of the cost of the non-real estate property as first-year additional depreciation (bonus depreciation). (There is the possibility that 100% expensing may be available for property placed into service after September 27, 2017). Starting in 2023, the allowance of 100% is phased out by 20% each year.
While rates are higher in 2017, make gifts to charities and family foundations with appreciated assets. Because of the lower limitation of 20% of AGI for appreciated stock to a foundation, you should split your gift between this year and next.
Consider gifting low-basis stock instead of selling to raise cash for gifting that could lead to gains.
Fund a charitable remainder trust with concentrated positions in appreciated securities in order to diversify without adverse tax consequences associated with selling appreciated securities.
Harvest your losses to offset capital gains.
Establish and fund qualified plans. Consider making a gift of up to $5,500 to either a traditional or Roth IRA for your children or grandchildren who are not funding their own IRAs, but have enough earned income to report.
Contribute up to $28,000 gift-tax free per married couple ($30,000 for gifts made in 2018) to a 529 Plan, which grows free of income tax. The final tax reform bill will allow withdrawals for private, elementary and secondary school expenses up to $10,000 per year.
Make annual exclusion gifts to chosen loved ones of $28,000 per married couple ($30,000 for gifts made in 2018).
Make gifts into trusts for children/grandchildren.
Make unlimited gifts directly to educational institutions and medical facilities.
Make distributions of income from trust accounts and estate accounts to lower the income tax liability. Estates and trusts are taxed at the highest income tax rate (and a lower threshold at which the 3.8% Medicare surtax applies). Therefore, it may make sense to distribute income to the beneficiaries to be taxed at the beneficiaries’ lower income tax rates.
“Trump’s new tax bill creates tax planning opportunities before year-end,” commented McManus. “Find time for last-minute tax planning as soon as you finish your last-minute holiday shopping.”
For trusted advice on tax and estate planning, call McManus & Associates at 908-898-0100. Learn more about the award-winning firm at www.mcmanuslegal.com.
There are a limited number of days left in 2017. McManus & Associates Founding Principal John O. McManus recently discussed imperatives before year-end for the firm’s clients, in light of significant current events, concerns, and considerations, and amidst a changing tax and economic environment. Listen to the call below, as well as review the list of topics that are covered.
1.Tax Reform – How will potential estate tax repeal impact you?
2. Estate Freezes – You have exhausted much of your lifetime gift exemption; how can a GRAT aid in shifting wealth in a tax-effective manner?
3. Low Interest Rates and the Market – How does the continued low-interest rate environment support the transfer of investments to the next generation?
4. Leveraging Existing Trusts – How can you deploy previously gifted assets to participate in other estate tax minimization strategies?
5. Family Limited Partnerships – What actions should you be taking in light of the new Partnership Audit rules?
6. Estate Tax – Can estate tax be eliminated if you have taken full advantage of all wealth transfer opportunities but still have a sizable net worth?
7. Asset Protection – Are you confident in your protections against exposure to personal and professional liability?
8. Life Insurance – How does premium financing of life insurance by a family member or bank shift wealth and minimize tax?
9. Planning with Basis – Can you take advantage of upstream gifting to an older family member to minimize capital gains tax?
10. Compliance – Are you certain that you have met the IRS requirements for reporting gifts that you have made in 2016 and prior to 2016?
Karen DeMasters of Financial Advisor magazine recently spoke with John O. McManus for a slideshow article that offers “tips for what estate planners can do while the world waits for ‘U.S. tax reform’ to take shape.” The feature, titled “Fidgety About Tax Reform? Here Are 10 Things Estate Planners Can Do Now,” starts by flipping a common adage on its head – from the piece:
The only thing certain used to be death and taxes, but now the taxes are coming into question.
President Donald Trump and the Republican-dominated Congress are expected to revamp taxes and maybe change gift and estate tax rules, but no one knows what that will entail or when it might happen
According to McManus:
There is much uncertainty about particular aspects of the Republican tax proposal—including a replacement tax on the wealthy—and there is already concern about the likely impermanence of any new legislation. These factors highlight the importance of flexibility in preparing an estate plan and proceeding with wealth transfers suited to the current political and economic circumstances.
Even if tax legislation passes, it’s likely that the rules of the game will continue to change, perhaps frequently, going forward. It’s essential to stay in the know regarding the potential impact of new laws, in addition to tools currently available to protect your wealth.
As pointed out by DeMasters, “McManus says the following strategies are good for the long or short term, and most can be used advantageously by mass affluent as well as the ultra-wealthy.”
Annual Exclusion Gifts
Lifetime Exemption Gifts
Short-Term And Mid-Term Grantor Retained Annuity Trusts (GRATs)
Estate Freeze Installment Sales
Family Limited Partnerships
Community Property Trusts
Charitable Remainder Trusts (CRTs)
Drafting Flexibility in Core Planning Documents
Check out the full article for more details on McManus’ list of “10 Must-Do Estate Planning Strategies” that advisors can use while waiting for decisive legislative action.
The election of Donald J. Trump to the presidency and Republican control of both houses of Congress make estate tax reform extremely probable in the next two years. However, given the new administration’s other proclaimed priorities, including the repeal of Obamacare, minimization of illegal immigration, increases in defense spending and infrastructure improvements, there are likely several months before Congress turns its attention to a tax system overhaul.
The election of Donald Trump to the presidency and Republican control of both houses of Congress make estate tax reform extremely likely in the next two years. However, given the incoming administration’s other proclaimed priorities, including the repeal of Obamacare, minimization of illegal immigration, increases in defense spending and infrastructure improvements, there are already questions about the feasibility of adopting all of the proposed tax initiatives. Furthermore, there is much uncertainty about particular aspects of the Republican tax proposal (including a replacement tax on the wealthy), and there is already concern about the likely impermanence of any new legislation. These factors highlight the importance of flexibility in preparing an estate plan and proceeding with wealth transfers suited to the current political and economic circumstances.
In a recent conference call with clients, McManus & Associates Founding Principal John O. McManus highlighted the current appealing strategies and opportunities available as part of an estate plan. Click below to hear him discuss the following list: