Congress passed the Tax Cut and Jobs Act (TCJA) at the end of 2017, which resulted in the adjustment or elimination of many common itemized deductions, an increase in the standard deduction and a shift in income tax brackets.
TCJA also significantly enhanced the lifetime exemptions that allow individuals and married couples to transfer assets to children and grandchildren estate and gift tax free. You may be able to benefit from these income and estate tax changes, but you may also need to act quickly.
The TCJA is set to end at the end of 2025. However, there are proposals in Congress that could result in significant changes to the tax code, which could result in many of these provisions reverting back to the prior law even soon.
Here are a couple major takeaways from the TCJA.
Be strategic about estate planning
One of the biggest changes from the TCJA involves the lifetime exemption for the estate tax. The exemption essentially doubled, which is currently $12.06 million for individuals and $24.12 million for married couples.
You can take advantage of these elevated lifetime exemptions by transferring assets outside of your estate to a trust prior to the existing or potentially revised sunset date. The IRS has already ruled that a reversion back to old law will not cause these gifts to be “clawed back” into the estate.
Depending on your net worth, taking steps now could save you and your family a great deal of money in the long run. If you’re married and your net worth is:
- More than $23 million, consider making a substantial gift to a trust as soon as possible under the current exemption. Due to the increased exemption amounts, try to make gifts of high basis assets, if possible.
- $7 million to $23 million, or if you’re close to $10 million and think you could top that mark before 2025 (or earlier, if the sunset date is accelerated), you’ll want to work with a tax or financial professional to figure out a strategy. You’ll likely want to put money in a trust now to take advantage of the higher exemption, but you’ll want to make sure you don’t tie up so much of your wealth that you’re without liquid funds. There are a number of trust strategies you can consider to help find a balance. Generally, Spousal Lifetime Access Trusts (SLATs) work well here.
- Less than $7 million, it’s best to take a wait and see approach.
For single individuals, divide these numbers in half to figure out whether you’d benefit from creating a trust under current tax law.
Changes in tax brackets offset loss of itemized deductions
Many of the most commonly used itemized tax deductions were eliminated or severely reduced by the TCJA, including:
- State and local income and non-business property taxes are capped at $10,000.
- The mortgage interest deduction is limited to interest on mortgage loans up to $750,000 that were taken out after December 31, 2017.
- Home equity loan interest has generally been eliminated.
Despite this, you may have seen a lower income tax bill the last few years, as the reduction in the marginal income tax brackets offset the loss of itemized deductions. The alternative minimum tax (AMT) is also less of a factor, as the elimination of the deductions and exemptions makes it more difficult to be subject to AMT. Additionally, the AMT exemption amount is higher now than it previously was and increases each year on a cost-of-living basis.