Trump Tax Law Most Significant Reform since the Reagan Administration

Trump Tax Law Most Significant Reform since the Reagan Administration

by Richard S. Bernstein on Jan 26, 2018

Estate tax, Estate Planning

By: Richard S. Bernstein & Richard L. DeNapoli, J.D., LL.M., CFP

On December 22, 2017, President Trump signed into law the first significant reform of the US Tax Code since Ronald Reagan was in office. It will impact Americans far and wide, affecting how we make decisions on buying a home, health insurance, setting up a business, and even when to get a divorce. We highlight some of the major parts of the law here.

Personal tax rates and income brackets will be lowered, yet they will sunset in 2025. The top rate falls from 39.6% to 37%, the 35% bracket stays the same, while the 33% bracket falls to 32%, the 28% bracket to 24%, the 25% bracket to 22%, and the 15% bracket to 12%. The lowest bracket remains at 10%. The standard deduction has essentially doubled, while the personal exemption is gone. The law also temporarily raises the exemption amount and exemption phase-out threshold for the alternative minimum tax (AMT), which affects higher earners. All of these changes sunset in 2025. The sunset provision was required to allow the Senate to comply with “Reconciliation” rules that block a Democratic filibuster.

The deduction for state and local income taxes, property taxes and sales tax, or SALT, remains for those who itemize their taxes, but it is now subject to a $10,000 cap. This will likely hurt taxpayers and homeowners in high tax states. The mortgage interest deduction for new home purchases has also been lowered from $1 million to $750,000. The tax deduction for alimony payments will no longer be deductible for the person who writes the checks. This provision will apply to couples who sign divorce or separation paperwork after December 31, 2018.

The new law temporarily doubles the estate tax exemption for single filers to $11.2 million from $5.6 million, indexed for inflation. For a married couple, this means a $22.4 million exemption for 2018. This provision sunsets in 2025, meaning
that since death is unpredictable, wealthy clients will still need to plan for the estate tax using traditional strategies such as purchasing life insurance policies inside Irrevocable Life Insurance Trusts (ILITs).

While the Republicans were not able to repeal Obamacare earlier in 2017, the new tax law does permanently end the Obamacare individual mandate starting in 2019. The individual mandate applied penalties to individuals that did not obtain health insurance coverage.

Another big change is the cut in the corporate tax rate from 35% to 21%. The 35% rate meant that the US had the highest corporate tax rate of any large, developed county. The new law will now place the US just below the weighted average for the European Union countries. The alternative minimum tax for corporations has also been repealed. Owners, partners and shareholders of pass-through entities will also get a break in the form of a 20% deduction for their pass-through income. Unlike the tax breaks for individuals, these corporate tax changes do not expire in 2025.

Richard DeNapoli is the Chief Trust Officer, Fiduciary Counsel, and Managing Director at Coral Gables Trust Company, a Florida-chartered Trust Company with over 1 Billion in assets under administration. He obtained a Masters in Estate Planning Law (LL.M.) at the University of Miami School of Law, earned his law degree at Fordham School of Law, and his undergraduate degree from New York University. He is also a Certified Financial Planner and served as a Florida Real Estate Commissioner from 2007-2013.