What the New Trump Tax Law Means for Your Estate Plan
When the Tax Cuts and Jobs Act of 2017 passed and was signed into law late last year, it was the most sweeping overhaul to the tax code in more than 30 years. While there are many estate planning strategies that have remained in place, this also opened the door to new opportunities, and so it may be wise to revisit your estate plan.
Increased Limits on the Estate Tax
The Tax Cut and Jobs Act temporarily doubles the exemption amount for estate, gift and generation-skipping taxes from the $5 million base, set in 2011, to a new $10 million base, good for tax years 2018 through 2025. The exemption is indexed for inflation, so an individual can shelter $11.2 million in assets from these taxes. Another federal estate law provision called portability lets couples who do proper planning double that exemption. So, a couple could exclude $22.4 million for 2018. The law’s sunset provision means that, absent further Congressional action, the exemption amount would revert to the $5 million base, indexed.
529 Plans
Under previous regulations, 529 withdrawals were tax-free as long as the funds were spent toward qualified higher education expenses, which included tuition, room and board, and computer software and equipment at any eligible post-secondary institution.
With the new tax act, parents who send their children to private elementary and high school will have more options when it comes to saving for tuition. The new tax plan allows 529 plans to be used for up to $10,000 per year in K-12 tuition expenses, giving more families an opportunity to save tax-free for private and religious schools.
There have been some changes at the state level in Ohio as well - not as a result of the tax cut and jobs act - but as a result of Ohio’s biennial budget bill. Starting in 2018, contributions, including rollover contributions, to an Ohio 529 plan of up to $4,000 per beneficiary per year (with any filing status) are deductible in computing Ohio taxable income, with an unlimited carryforward of excess contributions. This doubles the previous limits from $2,000.
Changes to Charitable Giving
The new law almost doubles the standard deduction amounts, starting in 2018. However, personal and dependent exemption deductions, which would have been $4,150 each for 2018, are eliminated.
Starting next year, the new law limits your deduction for state and local income and property taxes to a combined total of $10,000 ($5,000 if you use married filing separate status).
These two changes will reduce the number of taxpayers eligible to itemize their deductions in 2018 and beyond, which could remove the tax advantage of charitable contributions.
If possible, you may want to consider ‘bunching’ donations from several years into one year. For example, you might consider giving twice as much to charities in one year, even if that means giving nothing the following year. This will help taxpayersaccumulate enough deductions to itemize and write off more than the standard deduction.
If you’re 70½ or older, you might also consider a qualified charitable distribution (QCD.) This doesn’t relate specifically to the new tax law, but, after years of uncertainty, the qualified charitable distribution (QCD) was made permanent in late 2015. The QCD allows people aged 70½ and older to rollover up to $100,000 from retirement accounts to the charity of their choice. Those same taxpayers also must withdraw a “required minimum distribution” from their retirement accounts, and the QCD fulfills that obligation. The money is subtracted from taxable income, which alleviates some tax burden. The QCD also has the added benefit of keeping some taxpayers’ incomes low enough to possibly avoid paying Medicare premiums — the additional fees that higher-income consumers must pay for Medicare coverage.
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