In the 2017 Tax Act, Miscellaneous itemized deductions were denied for years 2018 through 2025. This impacts Trusts and Estates in that investment expenses are miscellaneous itemized deductions under Section 67(e) of the Internal Revenue Code. Thus, they are no longer deductible. This creates phantom income to the Trust upon which the Trust will pay tax. The Supreme Court in Knight v. Commissioner (2008) ruled that these fees are miscellaneous itemized deductions. Thus, the new law makes them non-deductible. You may want to discuss with your investment advisor/broker about moving back to old commission based system. At least commissions are added to basis for the purpose of computing capital gains whereas investment advisory fees will be lost.

Tax Brackets:

Tax brackets are 7 in number, and the rates for most taxpayers are reduced. Lowest is 10% highest is 37%.

The top marginal rate for individual taxpayers was reduced to 37%, but the threshold of income to which the rate applies was dropped from $1M to $600,000 for taxpayers that are Married Filing a Joint return (MFJ). These rates do not apply to tax years beginning after December 31, 2025.

Small Business

The pass-through income deduction was reduced from 23% to 20% and retains the limitations on specified service businesses, with a reduction on the levels of income that could qualify to $315,000 MFJ and $157,500 for an individual taxpayer filing Single. The Explanatory Statement issued with the bill provides, “the conferees expect that the reduced threshold amount will serve to deter high-income taxpayers from attempting to convert wages or other compensation for personal services to income eligible for the 20-percent deduction”. THIS WILL NOT AFFECT THE SELF-EMPLOYMENT TAX, BUT WILL CLEARLY IMPACT YOUR BOTTOM LINE. THIS IS EFFECTIVE STARTING IN 2018.

However, S Corporation owners will now face reductions in this deduction if they were not paid reasonable compensation.

Corporate rates:

The corporate tax rate is reduced from 35% to 21% with no special rate for personal service companies and no expiration of these provisions. In addition, the corporate alternative minimum tax (AMT) is repealed.

The bill retains the full ability to expense qualified property acquisitions (not including structures) of new and used property placed in service after September 27, 2017 and before January 1, 2023, with a phase down by 20% per year for property placed in service after December 31, 2022 and before January 1, 2026.

All entertainment related expenses will be fully disallowed for amounts paid or incurred after December 31, 2017.

The 50% deduction for food and beverages is maintained, and expanded to include expenses of the employer associated with providing meals to employees through an eating facility that meets the requirements for minimum fringes and for the convenience of the employer. After December 31, 2025, these amounts will no longer be deductible. Business owners will now have to ensure that caterers and restaurants where parties are held qualify.

Individual Deductions and Credits

Individuals receive a larger standard deduction of $12,000 (single) and $24,000 (join) and $18,500 for head of household. These are doubled for elderly. Thus, a person over the age of 65 can receive an exemption of $24,000 (single) and $48,000 for a couple. However, you lose the exemptions of $4,050 per person.

Child Tax Credit will be enlarged to $2,000 (with maximum of $1,400 for more than one child). Children who qualify are 17 and under. Qualifying income levels are raised from $75,000 for single taxpayers to $200,000 and $110,000 for married to $400,000 for married. This credit is refundable. There is a non-refundable credit of $500 for non-child dependents. To qualify for the full credit the child must have a social security number (not an ITIN).

Fewer will need to itemize, and there are some huge changes in deductions.

No more casualty or theft losses unless you are in a disaster area declared so by the President.
No more Miscellaneous itemized deductions. That means payment to your tax preparer, or for investment guidance or for that safe deposit box are not longer going to be deductible.
Reduced state and local tax deductions to a cap of $10,000 combined. Individual taxpayers will be allowed to deduct state income, property and sales taxes, up to an aggregate cap of $10,000 ($5,000 for a married taxpayer filing a separate return). This cap expires for tax years beginning after December 31, 2025. The bill also makes clear that the prepayment of any state income taxes related to a year beginning after December 31, 2017 will not be deductible in 2017.

The deduction for mortgage interest will be limited to mortgages not exceeding $750,000 for new mortgages incurred after December 31, 2017. For mortgages incurred prior to that date, the limitation is $1M ($500,000 in the case of married taxpayers filing separately). The interest expense deduction for home equity loans has been suspended for tax years beginning after December 31, 2017. The suspension will lift for tax years beginning after December 31, 2025.

Alimony will not longer be deductible nor will it be income to the spouse receiving it.

The individual exclusions and phase-out thresholds for Alternative Minimum Tax are increased, but neither is fully eliminated in the final bill.

Depreciation

Useful lives for calculation have been compressed.
Greater ability to write off entire purchase at time of purchase.

Estate and Gift Taxes

The estate and gift tax exemption is doubled to $10MM (indexed for inflation) for estates and gifts made after December 31, 2017 and before January 1, 2026. This allows $20mm per couple.

POSSIBLE 2017 STRATEGIES:

1. Defer income to 2018.
2. Pay Tax preparer early for 2018 tax return. (Don’t think you should try for years further out).
3. Pay 2018 real estate taxes before 2018.
4. Pay your state estimated taxes before 1/1/18.
5. Buy a new home.

Of course, I haven’t seen one word of the statute proposed, but there are some interesting things in this plan. (1) Lowering Corporate rates and repatriation tax, evening out small business income rates to lower their rates. This is not trickle down if they also attack the huge tax penalty on small businesses. Currently an LLC has a maximum effective rate of 39.6% and unlike large corporations, profits cannot be deferred easily. Also many times this income is subject to self-employment taxes to the effective rate would be closer to 48% plus state taxes. So, obviously the devil is in the details, but this could be a huge benefit for jobs if done. (2) Eliminating deductions. This will have a negative impact on middle income taxpayers in the following ways. Tax deductions (except for Mortgage interest and charitable) will be eliminated. This effectively increases income and property taxes for the amounts taxpayers pay to the States. This may make people pay more attention to the amounts being paid to their states and localities and put some pressure on the states and localities to reduce taxes themselves. This eliminates employee business expenses which means that those deductions for workers who have to buy tools or uniforms will be hit. This also eliminates medical deductions. So, if mom is in a nursing home and having to pay $100,000 a year in long term care expenses, she will not be able to deduct it under this plan. I suspect this will be one area that gets some pushback from Congress. (3) Capital gains rate reduction and elimination of 3.8% surtax on unearned income is geared toward higher income taxpayers. (4) Elimination of estate taxes is popular with Farmers and Small to medium sized businesses whose values are close to $10 Million. So, we’ll wait for the details. But some interesting proposals for sure.

When you gift investment or business property to someone and that person sells that property they owe tax on the gain. The basis in the property for gain purposes is what the basis was in the hands of the donor (the person making the gift). So, if the donor had a basis of $100 and the donee (recipient of the gift) sold the property for $110, there would be a $10 gain.

What is the basis for someone who receives a gift and sells it for a loss. In that circumstance the basis is the LOWER of the basis in the hands of the donor or fair market value at the time of the gift. So let’s say that Fred holds a mortgage note on Blackacre from Mona for $100,000. The mortgage is under-water and there is no way that Mona will ever be able to repay the loan. Fred gifts the note to his son, Bam. Bam immediately forecloses and the property sells for $50,000. Does Bam get a capital loss of $50,000 or a capital loss of zero. That goes to what was the market value of the note on the date of the gift. It would appear that it would no more than $50,000. However, if Bam could have gotten an appraiser or another lender to state that the fair market value of the note was an amount larger than $50,000, then Bam could perhaps take the loss equal to the appraised amount. This is found in Reg. 1015-1 of the IRS regulations.