By: Barry E. Haimo, Esq.
December 27, 2018
Will Your Estate Plan Be Impacted by the New Tax Law? It’s Going into Effect This Year
This is a big year in tax reform. The Tax Cuts and Jobs Act (TCJA) was passed last year, and taxpayers will feel its effects this coming tax season. The TCJA mainly offers benefits to the process of filing tax returns as an individual or business, but it also impacts estate plans.
If you have an estate plan in place, it is worth looking over the changes made by the TCJA and how it may affect your future. Although the provisions of the TCJA are set to end in 2025, you might find some ways to give away more to future generations and avoid hefty estate taxes in the next coming years.
There are many other important parts of the new law, but here are many of the main provisions of the Tax Cuts and Jobs Act that will affect estate plans in Florida.
Generation-Skipping Tax Exemption Increase
The most notable changes have been applied to the generation-skipping tax and estate tax exemptions. First drafts of the new tax bill repealed these taxes altogether. Now the tax law just lifts the burden of the generation-skipping and estate taxes for a select group of wealthier people.
Previously, if you planned on transferring less than $5 million of gifts or inheritance to grandchildren or family members that are at least 37 ½ years younger than you, you would be exempt from federal taxes. (This number was adjusted with inflation rates.)
At least, that was the exemption level up until 2018. The Tax Cuts and Jobs Act has increased this exemption to $10 million. At current inflation rates, the exemption amounts have been adjusted to $11.18 million for individuals and $23.36 for married couples. If you transfer a higher amount, the gifts will be taxed at 40%.
This amount is a lifetime exemption. Gift amounts are collected and added up over time. People who give away $15,000 through gifts or through trusts while they are alive must report this on their tax returns each year. (This is another change made by the TCJA; previously; this amount was $14,000.) When the person passes away, the remaining amount will be considered alongside gifts that have already been given.
Charitable Donations Deductions
If charitable donations has been a part of your financial planning, or you plan to donate large sums of money to charities in the next few years, you could potentially see more of that money back in your pocket. The TCJA increases the deductions for cash donations to charitable organizations to 60% (up from 50% in previous years.)
Changes to the “Kiddie Tax”
If you have previously taken advantage of the “kiddie tax” (tax on a child’s net unearned income), then it is important to speak to an estate planning attorney. The Tax Cuts and Jobs Act has made changes to the “kiddie tax,” which could result in higher payments.
Now, unearned income over $2,100 will be subject to taxes at the rates for trusts and estates, rather than the marginal rate for income and capital gains.
For most taxpayers, they will have to pay less on the “kiddie tax” in upcoming years. But families who have not properly considered the “kiddie tax” in their overall strategy under the TCJA may be making a costly move.
These Rules Don’t Last Forever
These changes have deadlines. At the end of 2025, most increases and tax breaks will end. Exemption levels will go back to the levels we are currently experiencing, although they may be adjusted based on the rate of inflation. But these inflation rates will also changes – or at least the way we calculate inflation will change. The rate of inflation will now be measured by chained CPI rather than traditional CPI.
The new tax law provides opportunities to give away more money to beneficiaries without the burden of taxes, but these opportunities may not last forever. For example, Florida may impose state tax in response to the TCJA, increasing the amount that you will have to pay in the future.
Have questions about how the TCJA impacts your estate plan or see an opportunity to further support your beneficiaries in the next few years? Talk to a Florida estate planning attorney about updating your estate plan and adjusting your financial strategy.
Barry E. Haimo, Esq.
Strategic Planning With Purpose®
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