There’s a wonderful exchange in Blazing Saddles where Howard Johnson states, “Y’know, Nietzsche says: ‘Out of chaos comes order’,” which provokes a very rude but funny response from another character. The new tax act, the “Tax Cuts and Jobs Act of 2017,” feels kind of like that; like Congress threw out a mass of chaotically random tax law changes in hopes that some semblance of order arises from it, as to which we tax professionals wish to tell Congress to go do something unhygienic.
Changes to Tax Law in 2017
For example, the main theme of the new tax act is the reduction of corporate tax rates which is supposed to stimulate the economy, but the act also eliminates the alimony deduction and limits the mortgage interest deduction for individuals. The corporate tax changes are permanent, but the individual changes are temporary. Corporations no longer pay the alternative minimum tax, and married couples with less than $22 million no longer pay the federal estate tax, provided death occurs in the next 7 years. And people who own their own businesses can deduct up to 20% of their business income subject to a phase-out for total income over a certain limit which is more of a phase-cliff if the business is service-oriented (lawyers, doctors, accountants, etc.).
So what planning opportunities are available under the new tax act?
If you own a business that isn’t taxed as a corporation, you may be able to take advantage of the 20% business income deduction. If your total income puts you near the phase-out level then consider maximizing pre-tax contributions to retirement or health-savings accounts to reduce that income.
If you are getting divorced and alimony is part of the final settlement, get the divorce finalized before the end of 2018 to maximize the leverage of shifting income from a high-tax-bracket spouse to a lower-bracket one. The less tax the high-earning spouse pays the more there is to funnel to the low-earning spouse.
Estate Planning Changes Under the New Tax Law
From the estate planning perspective, the increase in the estate tax credit to $11.2 million per individual means even fewer families will have to plan to avoid the tax. That may mean more planning flexibility for high (but not too high) net-worth families since the complicated trust and family business structures that helped minimize the size of the estate won’t be needed anymore. Families that have such complicated plans in place should not be quick to abandon them, however, because that increased exemption is scheduled to go away by 2026. The law may change in the interim, but until that happens, or unless the family knows the estate plan will be needed before then, families should consult with their professional advisors before making any changes to their plans.
And, of course, families without estate plans, whether subject to estate taxes or not, should consult with their attorneys to create one. The chaos of life ends in death for all of us, but the chaos that our death causes can be limited with an estate plan.
Andrew is a partner with the law firm of Chiumento Dwyer Hertel Grant