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TAX BULLETIN 2018-1
JANUARY 2, 2018
0BTAX REFORM SIGNED INTO LAW
OVERVIEW
Without much fanfare but with typical political controversy, the House and Senate successfully reconciled their
respective tax bills and the new tax legislation (the “Act”), was signed into law by President Trump on December
nd
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P, 2017. House and Senate conference committee members leaned in favor of many provisions contained in
the Senate proposal. A significant move in that direction was retaining the elimination of the Affordable Care
Act’s individual mandate (the penalty for failing to maintain minimum essential health care coverage) and using
the Senate’s methodologies for taxing income from pass-through businesses (though some elements of the House
bill entered into the computation). In other circumstances, a true compromise was reached, such as meeting in
the middle on modifications to mortgage interest deductibility.
In order to abide by Senate budget reconciliation rules and ensure the Act does not result in budget deficits outside
the 10-year budget window, the Act makes almost all changes to individual income tax provisions temporary –
nearly all expire at the end of 2025. No doubt, this will create tax complexity and political difficulties. On the other
hand, most corporate provisions are permanent. This Tax Bulletin 2018-1 summarizes certain provisions of the
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Act and adds observations on income, estate and pass-through taxation.P0F P
INDIVIDUAL TAXES
2017 LawP1F
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2018 LawP2F
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Individual Tax Rates
Standard Deduction
Kiddie Tax
Personal Exemption
Child / Dependent Tax Credits
Top Capital Gains/Dividend
Tax Rate
10, 15, 25, 28, 33, 35, 39.6% 10, 12, 22, 24, 32, 35, 37%
Top rate would apply to income over $600,000
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for married filing jointly; $500,000 for singleP3F
$12,700 ($6,350 if single) $24,000 ($12,000 if single), enhanced for
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elderly and blindP
Unearned income of a child taxed at parents’ tax
rate if higher than child’s rate
Simplifies kiddie tax by applying trust rates to
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unearned income of a childP
$4,050, subject to phase-out Eliminates; merged with higher standard
$1,000, per qualifying child subject to phase-out
beginning at $110,000 (married) and $75,000
(single taxpayers)
deductionP
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$2,000 per qualifying child, $500 per non-child
dependent; subject to phase-out beginning at
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$400,000 (married) and $200,000 othersP
20% (plus 3.8% surtax) Maximum rate of 20% is retained; same
breakpoints as current law
TAX BULLETIN 2018-1: TAX REFORM SIGNED INTO LAW
INDIVIDUAL TAXES (continued)
2017 Law 2018 Law
Itemized Deductions
Retirement Savings
AMT
Carried Interest
Under the “Pease” limitation, up to 80% of
most itemized deductions are lost when
adjusted gross income exceeds $313,800
($261,500 for single taxpayers)
Contributions can be placed into deferred
account, up to contribution cap
Parallel tax calculation with top rate of 28%
and $84,500 exemption for married taxpayers
($54,300 others); phase out of exemption
begins at $160,900 for married taxpayers
($120,700 others)
Retains character as capital gain and eligible
for preferential tax rates
Repeals the Pease limitation on itemized
deductions
Mortgage interest deduction: $750,000 limit
on acquisition indebtedness retained
(principal or secondary residence);
deduction for home equity loan repealed
Deduction for state and local income, sales
tax and real property taxes limited to
$10,000 in aggregate ($5,000 for married
filing separately); deduction allowed for
state and local taxes on trade or business or
if related to production of income. Payment
of income taxes in 2017 for a subsequent
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year would not be deductible in 2017.P
Deduction for medical expenses retained
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and liberalized for 2017 and 2018 P
Unchanged
Retains and modifies AMT; exemptions
raised to $109,400 (married) and $70,300
(others); phase-out of exemption begins at
$1 million for married taxpayers ($500,000
others)P
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Requires three-year holding period to attain
long-term capital gains rate
Investment
Surtax
3.8% tax on “net investment income” Unchanged – continues to apply
OBSERVATIONS – INDIVIDUAL TAXES
Under the Act, there will be winners and losers on the personal income tax side. Generally, wage earners from
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no-tax statesP4F P could see tax savings under the Act. For instance, a Florida taxpayer earning $1 million with
moderate itemized deductions may see a tax savings of about $30,000 under the Act. A similar taxpayer in New
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York State may see a savings of about $3,500 according to our preliminary analysis.P5F P
Conversely, very high-wage earners from high-tax states could see a higher tax bill. A taxpayer earning $3 million
in New York City may see a significant tax increase: $44,000 under the Act, due in part to the loss of significant
deductions. A similar taxpayer in Florida would see a tax savings of about $91,000 under the Act (primarily due
to the lower top rate, elongated 35% tax bracket and regaining itemized deductions that are no longer phasedout),
according to our preliminary analysis.
Married couples could fare worse than two single taxpayers with a similar amount of income. The so-called
marriage penalty hits particularly hard under the new tax brackets. The penalty is also exacerbated by permitting
married couples only a $10,000 state income/real estate tax deduction, but allowing each of two single filers a
deduction in the same amount ($20,000 combined). Under the changes, a single taxpayer with $500,000 of wages
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living in a state that imposes a state income tax (and $10,000 of charitable deductions) would pay a federal tax of
about $143,690. Two single taxpayers would pay a total of twice that, or $287,380. However, if these two
taxpayers were married, their joint tax liability would jump to $298,280, an increase of $10,900.
It appears that state of residence, type of income (wages versus new “qualified business income”), and mortgage
interest will be among the most important factors for determining whether one is better or worse off under the
Act.
UCapital GainsU. Although income tax rates and tax brackets will significantly change in 2018, the long- term
capital gains rate will remain the same. The income limits for imposing the 15% and 20% capital gain rates
will also remain the same; the 20% rate will apply when taxable income exceeds $479,000 (for married
filing jointly). However, the Act’s combination of lower rates and fewer deductions could mean that a
taxpayer’s “taxable income” could rise in 2018, meaning the taxpayer would expose more capital gain to
the 20% bracket.
U3.8% Surtax. U The Act does not directly change the 3.8% surtax imposed on “net investment
income.” However, it indirectly changes it. When calculating a taxpayer’s net investment income, a
taxpayer can deduct investment expenses (UafterU application of the 2% floor) and deductible state income
taxes, to the extent those are properly allocable to net investment income. The deductibility of those two
expenses changes in 2018 -- investment expenses are nondeductible, and state income taxes (with other
state taxes) are limited to $10,000. Those expenses might not reduce net investment income in 2018, and
as a result the 3.8% surtax might increase.
WEALTH TRANSFER TAXES
2017 Law 2018 Law
Estate /
Gift / GST Tax
40% rate, $5,490,000 exemption (indexed for
inflation)
Commencing 2018, exemption for estate, gift
and GST tax doubled from $5.6 million to $11.2
million (indexed for inflation)
Enhanced exemption expires at the end of 2025
Tax Basis Upon Death Step-up for estate property Same as current; step-up for estate property
OBSERVATIONS – WEALTH TRANSFER
The transfer tax proposals in the Act extend the already limited reach of the federal estate, gift and GST taxes to
even a smaller subset of only the wealthiest of taxpayers. There would be a temporary doubling of the exemptions
until the end of 2025, reverting to current law in 2026. The step-up in basis at death would continue the entire
time. Given the high exemption amounts ($11.2 million for individuals and $22.4 million for a married couple in
2018), that would effectively repeal the tax for most people. This change would have a significant effect on both
testamentary and lifetime estate planning.
UTestamentary planningU. It is common for wills and other testamentary documents (such as revocable trusts) to
contain dispositions that reference the estate (and GST) exemptions that are in effect at death. These so-called
“formula” provisions would automatically adjust for changes in the exemption amounts. While this may achieve
a beneficial tax result, the temporary doubling of the exemptions may also cause unintended consequences to
the dispositive plan. For example, a common plan is to leave an amount equal to the estate exemption to a bypass
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trust, and the balance for the surviving spouse, either outright or in a marital trust. For a hypothetical $10 million
estate, if death occurred in 2017 that would result in roughly half to the bypass trust and half to the
spouse. However, if death occurs in 2018 to 2025, that would result in the entire estate being left to the bypass
trust. Complications could further arise for individuals living in certain states which impose their own estate
tax. Wills and other testamentary documents should be reviewed to make certain they accurately reflect the
testator’s wishes. As always, documents should be drafted with flexible provisions that can be adjusted for future
changes.
ULifetime planningU. Lifetime gifts are often made in order to reduce the estate tax that would otherwise be
incurred at death. While the doubling of the exemptions may avoid the need for lifetime gifting for certain
individuals, that may only be the case if death occurs before 2026. Accordingly, the tax consequences of making
a current gift may have to be compared with alternative estate tax scenarios. The temporary nature of the
increase in transfer tax exemptions also raises the issue of whether it is advisable to lock-in the higher exemption
by making a lifetime gift before 2026. (Similar issues arose in 2012, when there was uncertainty whether the $5
million estate exemption would continue in 2013.) This raises the question of whether the gift could be
structured in a manner that could be “undone” if the higher exemption is made permanent. It also raises the
question of whether there would be recapture (so-called “clawback”) if a lower exemption is in effect at death. In
that regard, it appears that the new legislation would eliminate the concern about recapture. In sum, the
uncertainty of the estate exemption amount at death will make lifetime planning more challenging.
CORPORATE TAXES
2017 Law 2018 Law
Top C-Corporate Rate 35% 21% (effective 2018)
AMT Parallel tax calculation with top rate of 20% Eliminates corporate AMT
Business Investments
Limited immediate expensing; balance subject to
depreciation
Immediate expensing for new and used
qualified property acquired and placed in
service after September 27, 2017 and before
January 1, 2023 (Jan. 1, 2024 for certain
property) and partial expensing for other
property acquired after 2022 and before 2027.
Interest Expense
No limitation Limited to business interest income, plus 30%
of a business’s adjusted taxable income
(EBITDA for 2017-2021 and EBIT thereafter);
with special rules for “floor plan financing
indebtedness”; full deduction for small
businesses with gross receipts of $25 million or
less
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PASS-THROUGH ENTITY TAXES
2017 Law 2018 Law
Top Rate: Pass-Through
Entities (S-corporations,
LLCs, LLPs and
Partnerships) / Sole
Proprietorships
Pass-Through Entities –
Service Businesses
Subject to tax at individual rates up to 39.6%
An individual taxpayer generally may deduct
20% of domestic qualified business income
from a partnership, S corporation, or sole
proprietorshipP4
In the case of a taxpayer who has qualified
business income from a partnership, S
corporation or sole proprietorship, the
amount of the deduction is limited to the
greater of (i) 50% of the W-2 wages paid by
business or (ii) sum of 25% of W-2 wages paid
by business and 2.5% of business capital. This
wage limitation (i) does not apply if
taxpayer’s taxable income is less than
$157,500 ($315,000 for joint return); (ii)
applies fully if taxable income exceeds
$207,500 ($415,000 for joint return); and (iii)
applies proportionately if taxable income is
between those two limits
Trusts and estates that own business interests
qualify for this deduction
Deduction is a post-AGI item, even for
taxpayers not itemizing deductions
Subject to tax at individual rates up to 39.6% For “specified service business,” (i) the 20%
deduction applies fully if taxpayer’s taxable
income is less than $157,500 ($315,000 for
joint return); (ii) there is no deduction if
taxable income exceeds $207,500
($415,000 for joint return); and (ii) there is
a partial deduction if taxable income is
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between those two limits.P
Service business includes accounting, law,
consulting, investing, etc., but excludes
engineering and architecture services
OBSERVATIONS – PASS-THROUGH ENTITIES
As originally proposed, the House and Senate took fundamentally different approaches to the taxation of passthrough
entities (sole proprietorships, partnerships, LLCs, LLPs and S-corporations). While they differed from each
other, they shared the goal of creating preferential treatment for certain pass-through business income. The Act
largely took the Senate’s approach but adopted a few elements of the House’s approach. The Act approaches
small business relief by permitting a non-itemized deduction of 20% of qualified business income; the remaining
80% would then be subject to normal tax rates. Therefore, the top tax rate for business income would be 29.6%
(80% x 37% = 29.6%). The provision is riddled with a host of complex limitations. For taxpayers not in the top
income tax bracket, the value of the deduction will depend on the marginal bracket that would otherwise be
imposed on the income.
Owners of service businesses (e.g., law, accounting and consulting, etc., but not engineering or architectural
services) generally would be eligible for the 20% deduction unless taxable income exceeds $315,000 for married
filing jointly ($157,500 for others). The benefit of the 20% deduction is phased out and fully eliminated over the
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next $100,000 of taxable income for married filing jointly ($50,000 for others). The following is a simple example
for a pass-through entity.
EXAMPLE
H and W file a joint return on which they report taxable income of $200,000 (determined without regard
to this provision). H has a sole proprietorship that is a qualified business and is a “specified service
business.” W is an employee and receives only W-2 wages from her job.
H’s qualified business income is $150,000. 20 percent of the qualified business income is $30,000.
Because H and W’s taxable income is below the $315,000 threshold amount for a joint return, (i) the wage
limit does not apply to H’s qualified business, and (ii) the limitation applicable to specified service
businesses does not apply. H’s deductible amount for qualified business income is $30,000.
On their joint return, H & W would qualify for a $30,000 deduction, reducing their taxable income from
$200,000 to $170,000. That taxable income would then be subject to regular income rates.
While upper-income wage earners in high-tax states generally do not fare well under the Act, taxpayers with
substantial income from pass-through businesses should see a tax benefit compared with current law, since the
weighted average rate of business income would be approximately 30%. Capital gains, dividends, and other
preferential income from a business would not be considered “business income” and would continue to be taxed
at preferential tax rates.
Under the initial Senate version, the pass-through deduction was not available to trusts or estates. Under the Act,
however, trusts and estates can benefit from the pass-through deduction.
CORPORATE INTERNATIONAL TAXES
2017 Law 2018 Law
International Corporate
Tax – Scope
One-Time Deemed
Repatriation of Foreign
Earnings
Worldwide with deferral available
No
100% of foreign-source portion of dividends
paid by foreign corporation to U.S. corporate
shareholder (that owns at least 10%) would
be exempt from U.S. taxation
U.S. shareholders owning at least 10% of a
foreign corporation would be taxed on post-
1986 net foreign earnings and profits (15.5%
on earnings and profits comprising cash or
cash equivalents; 8% on remaining earnings
and profits); may elect to pay tax over a
period of up to 8 years, in annual installments
that allow more to be paid at the back end
OTHER PROVISIONS
The Act has other provisions of note that are not included in the charts above.
• URoth recharacterization no longer allowedU. Under 2017 law, if you converted a traditional IRA to a
Roth IRA, you could “recharacterize” that conversion within certain time limits, in effect undoing it.
For tax years beginning after 2017, the Act repeals this rule, meaning you can no longer recharacterize
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a Roth conversion. From the current language of the effective date, it is unclear whether this would
prevent a 2017 Roth conversion from being recharacterized in 2018.
• UTaxation of alimonyU. Under 2017 law, alimony and separate maintenance payments were deductible
by the payor and includible in income by the recipient. (Child support payments are not treated as
alimony.) The House bill proposed to reverse this treatment, making alimony and separate
maintenance payments non-deductible to the payor and non-taxable to the recipient. The Senate bill
had no similar provision. The Act generally follows the House bill but delays the effective date by one
year, generally being effective for any divorce or separation instrument executed after December 31,
2018.
• USale of principal residence exclusionU. Under 2017 law, up to $250,000 of gain ($500,000 if filing
jointly) on the sale of a principal residence could be excluded from income. Among the requirements
is that the principal residence be owned and used as your principal residence for two out of the last
five years. You could use this rule only once every two years. This exemption was available regardless
of income. Both the House and Senate Bills proposed that (i) the principal residence must be owned
and used as your principal residence for five out of the last eight years and (ii) you can use this rule
only once every five years. The House proposal also contained a limit to the exclusion if income
exceeded a certain amount. In a surprise, none of these modifications were included in the Act. As
a result, no changes were made to the principal residence exclusion rules.
• UIdentification of securities sold, exchanged and giftedU. Gain or loss generally is recognized for
Federal income tax purposes on the sale of property. A taxpayer’s gain or loss on a disposition of
property is the difference between the amount realized on the sale and the taxpayer’s cost basis in
the property. Under 2017 law, if a taxpayer has acquired stock in a corporation on different dates or
at different prices and sells or transfers some of the shares of that stock, and the lot from which the
stock is sold or transferred is not adequately identified, the shares sold are deemed to be from the
earliest acquired shares (the “first-in-first-out” rule; FIFO). However, under 2017 law, if a taxpayer
specifically identifies the shares of stock to be sold, the shares of stock treated as sold are the shares
that have been identified. The same rules apply to charitable gifts and gifts to trusts or family
members. Although the Senate bill had proposed eliminating the ability to specifically identify lots
and mandating that the FIFO rule be used, the Act makes no changes; the 2017 rules will remain in
place.
• ULike-kind exchangesU. Under 2017 law, real estate and personal property could qualify for a taxdeferred
like-kind exchange. The property had to be held either for investment or for use in a trade
or business. Under the Act, like-kind exchanges will be available only for real estate, not personal
property. This will end, for example, like-kind exchanges of art. This new rule is effective for transfers
after 2017. However, there is a transition rule to allow like-kind exchanges of personal property to
be completed on a tax-free basis if you either disposed of the relinquished property or acquired the
replacement property on or before December 31, 2017.
• U529 Savings PlansU. Under 2017 law, funds in 529 Saving Plans could be withdrawn tax-free if used for
higher education expenses. The Act expands the type of expense that can be paid via a 529 Savings
Plan and allows up to $10,000 per year to be used for elementary and high school tuition and
specifically allows funds to be used for private and religious schools. A provision that would have also
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allowed funds to be used for home schooling was dropped at the last minute and is not in the final
legislation.
• UCharitable gifts U. A charitable contribution deduction is limited to a certain percentage of the
individual’s adjusted gross income (AGI), and this limitation varies depending on the type of property
contributed and the type of exempt organization receiving the property. Under 2017 law, cash
contributed to public charities, private operating foundations, and certain non-operating private
foundations generally could be deducted up to 50% of the donor’s AGI. Under the Act, this 50%
limitation is increased to 60%. The provision retains the 5-year carryover period to the extent that the
contribution amount exceeds 60% of the donor’s AGI.
• UInvestment expenses and investment interestU. Under 2017 law, investment expenses were
deductible as a “miscellaneous itemized deduction” if, and to the extent, they exceed 2% of AGI. The
Act repeals the deduction for “miscellaneous itemized deductions” that are subject to the 2% AGI
limitation, such as investment management expenses. Under 2017 law and current law, investment
interest is not a “miscellaneous itemized deduction.” Therefore, the deduction for investment interest
remains untouched and continues to be deductible to the extent of investment income.
CONCLUSION
Given the significant tax changes in 2018, planning will be a challenge. It is important to understand the
implications that the Act can have on your particular tax situation.
National Wealth Planning Strategies
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Tax Bulletin 2017-5 summarized the key tax provisions in HR1, known as the Tax Cuts and Jobs Act (the “House Bill”), which
was passed (227-205) by the House on November 16, 2017. Tax Bulletin 2017-6 summarized the key tax provisions in the
initial Senate bill HR1, also known as the Tax Cuts and Jobs Act, which was subsequently amended and passed (51-49) by the
full Senate on December 2, 2017. The final Senate version was similarly summarized in Tax Bulletin 2017-7. Tax Bulletin 2017-
8 summarized the reconciled bill agreed to by both chambers. Tax Bulletin 2017-9 summarized the final legislation, including
some year-end planning ideas that are no longer relevant.
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Inflation-adjusted amounts for 2017.
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The name “Tax Cut and Jobs Act” had to be removed; this legislation was signed into law by President Trump on December
22, 2017.
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This proposed change would be effective starting in 2018 and would not apply to taxable years beginning after December
31, 2025 (e.g. sunsets at the beginning of 2026).
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There are nine states that impose no state income tax: AK, FL, NH, NV, SD, TN, TX, WA and WY (NH and TN impose a tax only
on dividends and interest).
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This illustration assumes the following itemized expenses: charitable gifts $10,000, real estate tax $30,000 (limited to
$10,000 under the proposal), mortgage interest of $15,000, and appropriate state income taxes, where applicable.
IMPORTANT: This publication is designed to provide general information about ideas and strategies. It is for discussion
purposes only since the availability and effectiveness of any strategy are dependent upon your individual facts and
circumstances. Clients should always consult with their independent attorney, tax advisor, investment manager, and
insurance agent for final recommendations and before changing or implementing any financial, tax, or estate planning
strategy.
Neither U.S. Trust nor any of its affiliates or advisors provide legal, tax or accounting advice. Clients should consult with their
legal and/or tax advisors before making any financial decisions.
U.S. Trust operates through Bank of America, N.A., and other subsidiaries of Bank of America Corporation.
Bank of America, N.A., Member FDIC.
© 2018 Bank of America Corporation. All rights reserved. | NWPSTaxAct | January 2018
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