Final Bill Raises Threshold For Estate Tax Rather Than Eliminating It
As a presidential candidate, Donald Trump set his sights on eliminating the estate tax. “No family will have to pay the death tax,” his campaign’s tax proposal said.
On Dec. 19 and 20, the Senate and the House passed a final version of the tax bill, which will go to the president for his signature. Let’s take a look at how the final bill treated the estate tax.
The estate tax comes into play when someone dies and the estate is large enough to qualify for the tax. Under existing law, it essentially affects only individuals and families with significant assets.
In 2017, estates worth less than $5.49 million are exempt from the tax, according to the Urban Institute-Brookings Institution Tax Policy Center. Above $5.49 million, the estate is generally taxed at 40 percent. Family-owned farms and closely-held businesses may be able to pay less or pay in low-interest installments.
For 2017, the Tax Policy Center said that “after allowing for deductions and credits, 5,460 estates will owe tax,” the center concluded.
The initial tax bill that passed the House did eliminate the estate tax, but the Senate’s bill did not, instead raising the dollar amount that is exempt from the tax.
The final version of the tax bill kept the estate tax in place but increased the amount to be shielded from the tax. Under the new provision, the tax will affect estates of at least $11.2 million, or $22.4 million for couples. The provision is poised to sunset after 2025.
Individual Income Tax Rates
The TCJA lowered tax rates, but it kept seven income tax brackets. The brackets correspond with more favorable spans of income under the TCJA, however. Each bracket accommodates more income.
The highest tax bracket starts at just over $510,000 in taxable income for single people and $610,000 for married couples as of 2019. These taxpayers are subject to a 37% rate on incomes over these thresholds after exemptions and deductions.
| 2017 Income Tax Rate |
These income levels are adjusted somewhat each year to keep pace with inflation.
The $2 Trillion Scenario
The most pessimistic estimate of the legislation’s budget effects came from the Committee for a Responsible Federal Budget , which argued on Dec. 18, 2017, that Congress is using a flawed baseline to measure the law’s budget effects .
These “gimmicks,” the think tank argues, obscure $570 billion to $725 billion in extra costs over 10 years, bringing the price of the law to $2 to $2.2 trillion. Factoring in expected economic growth , the cost falls to $1.5 trillion to $1.7 trilliontriple the Tax Foundation’s dynamic estimate. That does not count additional debt service costs, though. With interest, the law could cost $1.9 trillion to $2 trillion.
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Impact On Real Estate Professionals And Investors
The Tax Cuts and Jobs Act introduced many benefits for those involved in real estate investing. However, not everyone will benefit from all of these changes. The National Association of Realtors has already noted a slower growth in home prices of 1-3% for 2018. Incentives for home buying have decreased under the tax reform and may not be enticing enough to encourage buying over renting. This could potentially lead to a surge in the rental market over the next few years, and as such, a decrease in rental vacancies.
Rubbing SALT into the wound, those living in high-income tax areas are hit hardest by the tax changes. With the cap on state and local tax deductions, many are moving from those areas to tax-friendly areas such as Florida. Recent estimates show that Floridas housing market for Naples has seen a 25% increase in purchases of homes over $2 million. In contrast, New York has seen a decline of 16.6% in Manhattan over the same period. Be aware that moving expense deductions have also been removed in Trumps tax plan, except for armed forces personnel moving under orders.
Trump Versus Bush And Obama Tax Cuts
The biggest difference between the Trump and Bush or Obama tax cuts is the timing. The Trump tax cut occurred while the economy was solidly in the expansion phase of the business cycle.
The Bush tax cuts occurred during the 2001 recession and the years immediately following. Congress was concerned that the recession would worsen without the cuts.
President Obama cut taxes in the 2009 economic stimulus package. Between that and the government spending, the recession ended that same year The 2010 Obama cuts occurred only two years after the 2008 financial crisis.
The Bush, Obama, and Trump tax cuts increased the deficit and debt.
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Trump Tax Plan Eliminates Alimony Deduction
The tax plan proposed in the U.S. House of Representatives this last week would eliminate the deduction for support alimony payments ordered after 2017. The policy change would not impact alimony obligations ordered prior to 2018, creating immediate urgency for those facing an alimony award in their pending divorce.
Spousal support payments, otherwise known as alimony, are based on one partys need and the other partys ability to pay. Alimony is intended to be a reasonable allowance for the maintenance of the party in need and each award of alimony depends on the unique facts and circumstances of the case. It is intended to cushion the transition and adjustment to gainful employment.
Alimony is currently deductible to the payer and taxable to the recipient, making the payment of alimony easier to stomach for the obligor. As a divorce attorney, the tax deduction available to the obligor is an important tool available during settlement negotiations. The tax ramifications can often make the difference in reaching resolution of a matter when alimony remains the sticking point. The elimination of this benefit is likely to impact divorce negotiations and prolong litigation.
Trump Tax Reform And Real Estate: 8 Things Investors Need To Know
On December 22, 2017, Donald Trump signed into law what has become known as the Tax Cuts and Jobs Act or Public Law 115-97. This act amends the Internal Revenue Code of 1986 in many ways, and for the most part greatly benefits corporations and individual taxpayers, especially those in real estate. Below are eight facts that real estate investors need to know about the tax changes.
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Puerto Rico And Other Us Possessions
A decedent who is a U.S. citizen born in Puerto Rico and resident at the time of death in a U.S. possession is generally treated, for federal tax purposes, as though he or she were a nonresident who is not a citizen of the United States, so the $5 million exemption does not apply to such a person’s estate. For U.S. estate tax purposes, a U.S. resident is someone who had a domicile in the United States at the time of death. A person acquires a domicile by living in a place for even a brief period of time, as long as the person had no intention of moving from that place.
Changes To Tax Credits
The TCJA increased the Child Tax Credit from $1,000 up to $2,000. Even parents who don’t earn enough to pay taxes can claim a refund of the credit up to $1,400.
The TCJA also introduced a $500 credit for other dependents, which helps families whose dependent children no longer meet the strict criteria of child dependents because they’ve aged out, as well as families caring for elderly parents.
These tax credits are fully available to taxpayers with modified AGIs of up to $200,000 for single filers and $400,000 for married taxpayers who file joint returns. They were phased out and eliminated at $75,000 and $110,000 respectively before the TCJA.
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How Wealthy Investors Benefit
One advantage of Trumps estate tax for high net worth individuals is the opportunity to pass on more wealth to loved ones without having to pay taxes.
You should keep in mind, however, that if you sell an inherited estate for profit, you will have to pay capital gains taxes. But the basis or the value of the inherited property is set as of the date of death.
This means that if you inherit a house valued at the time of death at $600,000 and you sell it for $700,000, then you will have to pay capital gains taxes on the $100,000 difference.
For someone who has amassed a sizable amount of wealth, Trumps tax plan may save money on estate taxes, but ultimately their heirs will inherit a built-in tax liability. They could avoid the capital gains tax if they as long as they hang on to the assets. But when they opt to sell, especially if the inherited property has appreciated substantially, theyre going to feel the tax bite at some point.
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Tips For Maximizing Your Tax Savings
- Consider working with a financial advisor. In addition to consulting an accountant about your withholdings, a financial advisor can also help optimize a tax strategy for your financial goals. SmartAssets free tool matches you with financial advisors in five minutes. If youre ready to be matched with advisors that will help you achieve your financial goals, get started now.
- Know if itemizing your taxes is the right decision. Be sure that the best tax decision for you doesnt change after the Trump tax bill changes. Our comprehensive guide walks you through the specifics of the changes and who should itemize deductions going forward.
- Adjust your withholdings. Though many taxpayers look forward to receiving a tax refund, refunds come with a significant financial cost. In fact, filers are often best off if they are paying the correct amount in taxes to the government regularly rather than receiving or owing money during tax season. If youre on an employers payroll, you can adjust the amounts on your Form W-4 to change how much of your paycheck you allocate toward federal, state and local taxes each pay period. Calculate how much will go to the government and how much youll take home using our paycheck calculator.
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Compelling Anecdotes Inspire Fear
The estate tax does create some difficult situations. The most common situation that affects families whom some would see as having an average American lifestyle involves farm and ranch property. Even if farm owners generate relatively little income from the land they own, that land can sometimes be appraised for its potential development value if converted from its current agricultural use to residential or business property. That can cause some farm families to have taxable estates without having any means of paying the tax other than selling off a portion of their property, potentially threatening their livelihood. The same can happen with a closely held family business, as the death of one family member can create a tax burden that requires the sale of the business.
Despite these anecdotal situations, the vast majority of those affected by the estate tax are high-net-worth individuals with extensive holdings of liquid financial assets. They’re in a position in which their estates can afford to pay tax without any substantial disruption to their assets, allowing the remainder to go to heirs in the ordinary course of estate administration.
Arguments that the estate tax only creates inefficiency by forcing high-net-worth families to hire professionals to find ways around paying the tax have their merits. To suggest that eliminating the estate tax does anything for the average American, however, is disingenuous and unsupported by the vast bulk of the evidence.
Other Changes To Corporate Taxes
The TCJA eliminates the corporate AMT. The corporate AMT had a 20% tax rate that kicked in if tax credits pushed a firm’s effective tax rate below 20%. Under the AMT, companies could not deduct research and development.
Trump’s tax plan incorporated elements of a territorial tax system in what was previously a “worldwide” taxation of companies operating abroad. Under the worldwide system, multinationals are taxed on foreign income earned.
They don’t pay the tax until they bring the profits home. As a result, many corporations leave their revenue parked overseas.
The adoption of elements of territorial taxation allows companies to repatriate the approximately $1 trillion they hold in foreign cash stockpiles. They pay a one-time tax rate of 15.5% on liquid assets and 8% on illiquid assets.
The Federal Reserve found that U.S. firms repatriated $777 billion in 2018 that’s 78% of offshore cash holdings. Instead of investing those funds, corporations increased buybacks of their stocks to improve share prices.
The TCJA also allows oil drilling in the Arctic National Wildlife Refuge. The drilling provision is estimated to add around $1.8 billion in revenue over 10 years.
Half of that goes to the state of Alaska. But drilling in the refuge won’t be profitable until oil prices are higher than 2020 levels because the cost to extract the oil is between $45 and $55 a barrel.
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Whod Gain From An Estate Tax Rollback: The 02 Percenters
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Supporters and critics of the Republican tax bills argue over their effect on middle-class Americans, but there is one group that everyone agrees would come out ahead: the millionaires and billionaires who have to reckon with the estate tax.
As Steven Mnuchin, President Trumps Treasury secretary, bluntly declared last month, Obviously, the estate tax, I will concede, disproportionately helps rich people.
As it is now, the estate tax affects a small set of wealthy Americans, applying only when someone leaves assets worth more than $5.49 million to heirs. Together, parents can leave $11 million to their children without paying a penny in estate taxes.
Last year, for example, more than 2.6 million people died in the United States. Of the estates filed with the Internal Revenue Service, 5,219 or 0.2 percent of the total were large enough to qualify for the tax.
The kind of households that could potentially owe money, however, include Mr. Trumps, Mr. Mnuchins, and those of several cabinet members and advisers, including Education Secretary Betsy DeVos, Commerce Secretary Wilbur Ross, Secretary of State Rex W. Tillerson, Transportation Secretary Elaine Chao, Agriculture Secretary Sonny Perdue, Housing Secretary Ben Carson and Gary Cohn, chief of the National Economic Council.
If those rules had been imposed last year, the number of estates owing money under the tax would have been no more than 2,204 fewer than 0.1 percent of the total.
The Life Insurance Option
Life insurance policies have been a popular way to help heirs cover any estate taxes that might be due in conjunction with a large estate in excess of the exemption limits. With the increase in the exemption, the prevalence of these exemptions may wane.
These policies can now serve as a backstop for the estate, allowing grantors to pass assets in a tax-efficient manner and providing liquidity in cases where some of the estate assets are illiquid, such as real estate or an interest in a business.
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