Tax Reform 2017: What Can We Expect?

How Will Estate Planning and Business Be Impacted by Tax Reform?

While there hasn’t been a bill that has passed both chambers of Congress just yet, let’s break down how the House and Senate bills, which have passed in their respective chambers, may impact your estate and your business.

Estate Taxes

Regardless of which version of tax reform passes and is ultimately signed into law by the President, there is one consistent theme on the issue of the Estate (or “Death”) Tax. Both bills, at least at the outset, will double the current Federal Estate Tax exemptions. You read that correctly. The current exemptions for 2017 are $5.49M and $10.98M for individuals and married couples respectively. Under both bills, we will see those amounts double. That means the number of families actually impacted by the Estate Tax will be substantially reduced. What’s more, the House Bill has the Estate Tax ultimately being repealed in 2024 – the Senate Bill does not. These changes will be consistent for the Gift Tax and the Generation-Skipping Transfer Tax. There does not appear to be any changes being made the the portability rule for decedent’s unused exemptions passing to the surviving spouse. Both bills seem to maintain the charitable deduction for taxes as well, which can be beneficial for estate planning generally, but more so for families facing an Estate Tax liability.

Business Taxes

Business tax benefits seems to be spread amongst large corporations and small businesses. For the purposes of this articles, I’ll only be focusing on small business tax reform.

Let’s look at the winners and losers of the potential changes:

Winners: These types of individuals stand to benefit from the tax changes,

1. Small business owners who use pass-through entities like LLCs and S-Corps. Small business pass-through income tax will be capped at 25% and under the House bill the first $75,000 will be taxed at only 9%. This is a significant change from the current tax structure, which taxes income at the individual level (hence, pass-through);
2. Business owners who currently take the standard deduction instead of itemizing their deductible expenses. Under the proposed changes, the standard deduction will almost double;
3. Companies who intend to buy equipment in the next five (5) years. Under the proposed changes, 100% of the expense can be written-off immediately instead of depreciating the expense over several year;
4. Small business owners making less than $37,500 (or $75,000) annually. Under the House Bill, the tax rate for the first $37,500 (single) or $75,000 (married filing jointly) of business income will be lowered to 9%;
5. Passive investors in small businesses will be allowed a 25% tax rate on all passive income;
6. Small business owners making over $260,000 annually will pay 25% tax on the first 30% of their income.

Losers: These types of individuals stand to be harmed by the tax changes,

1. Non-profits. Higher standard deductions may mean that fewer people will donate to their favorite charities;
2. Professional service businesses like doctors, lawyers, CPAs, financial services, engineers, etc. are specifically denied a lower pass-through tax rate;
3. Realtors and other real estate professionals. Less favorable capital gains treatment on house sales, and the potential elimination of property tax deductions may make home ownership less attractive;
4. Businesses and residents that pay local (or state) income taxes. They will no longer be able to deduct those payments;
5. Owners and employees in tech and startup companies. Stock option benefits may now be taxed upon vesting rather than when sold;

Not So Fast

Neither bill has passed, and the final version of the combined bill has not even been drafted. There are some significant differences between both the House and Senate bills, so it’s not clear which provisions will carry the day. Look for updates from our office over the next few weeks as we await a final bill.