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Tax Cuts and Jobs Act of 2017

By R. Zebulon Law, Esq. LL.M., CPA

This morning (December 22, 2017), President Trump signed H.R. 1, the Tax Cuts and Jobs Act.  This is the most significant tax legislation in 30 years, and we wanted to share some of our initial impressions and observations with our clients and friends.

Probably the most signification change is the $10,000 cap on the state and local tax (“SALT”) deduction.  Furthermore, taxpayers will only be able to deduct mortgage interest on new purchases for mortgages of $750,000 or less.  The combination of losing (much) of the SALT deduction, along with the limitation on mortgage interest will likely lead to higher taxes for many of our clients here in Orange County.

However, there is an important tax break included in the new law that will help many clients, which is the rollback of alternate minimum tax (“AMT”).  Many of our clients are subject to AMT.   This (extremely complicated) tax will be limited beginning next year to households generally earning more than $1 million.  We expect that the tax increases resulting from the loss of the SALT deduction will be partially offset by the rollback of the AMT for many Californians.

The estate tax exemptions have doubled to approximately $11 million per person until January 1, 2026.  After that, the exemption will likely decrease to around $6.5 million (unless Congress follows up with more legislation).  The rules involving step-up in basis at death will be unchanged.  Because of these changes, most clients will not have to worry about estate tax consequences.   The increased exemption could lead to some clients unwinding complicated trusts that were set up over the years to save estate tax.

Certain industries, such as retail and manufacturing, should see a healthy reduction in taxes.  Other professional industries, such as realtors, will likely be adversely impacted.

There are numerous summaries of the tax bill being put out by news organizations such as Wall Street Journal and CNN Money, see links at bottom of this article.

One major change in the new legislation involves the taxation of multinational profits.  These rules are extremely complicated.  In general, the U.S. is changing over from a “worldwide” basis of taxation to a “water’s edge” system of taxation, which is the same method used by many other countries.  Incentives have been included for these multinational companies to repatriate funds to the U.S.

Another major change involves the taxation of pass-through entities (partnerships, S corporations, LLC’s, etc.).  This will likely impact many of our clients.  The pass-through entity changes can be categorized in two groups:  (1) service businesses (lawyers, CPA’s, etc.); and (2) everybody else (non-service companies).  Non-service companies will receive favorable 20% deductions on profits.  Service companies can receive certain benefits up to $315,000, but these benefits will phase out very quickly above that amount.  Accordingly, we can expect that most service businesses will not see very much tax benefit.

The tax legislation, when we last checked, is around 497 pages.  It is extremely complicated and will take some time to digest.  I am a tax attorney of nearly 30 years, and I could not guess whether I will be paying higher taxes or lower taxes next year.  Probably within the next week or two, I will build a spreadsheet (which factors in AMT) to get a better handle on the impact of the new changes.

A lot of information on the new tax law will become available within the next two to three months. We will continue to keep our clients and friends informed about this important law.  In the meantime, we encourage clients to contact us with any questions about this bill.  It is extremely important to remember that tax benefits are generally “use it or lose it.”  In other words, the new law presents many opportunities to save tax, but you can only do so if you take advantage of the new rules.

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