There is still considerable uncertainty as to how to interpret many aspects of the new tax law, which results from outright drafting errors and the delegation to the IRS of significant latitude to issue regulations clarifying the law. While our tax advisors remain cautious about suggesting any major tax moves until further guidance -- entering into restructurings could be difficult to unwind -- there are actions you can take today to move your tax planning forward. Read on for seven key considerations that may benefit you.
1. LAWYER UP FOR PARTNERSHIP AND LLC AGREEMENTS.
Even though they weren’t part of the new tax law, you should pay attention to the partnership audit rules, which took effect January 1, 2018 in an effort to streamline the audit of partnership returns. Generally, the audit will occur at the partnership level and the partnership, not the partners, will pay taxes. These new rules also apply to LLCs taxed as partnerships for income tax purposes. These changes require agreements and decisions at the partnership level, which include:
- Consider converting guaranteed payments to priority income allocations;
- Explore separating out qualified businesses from specified service trades or businesses;
- Designate a partnership representative and detail who can make the appointment;
- Find out if the entity is eligible to make an opt-out election. If so, determine if it is mandatory; and
- Determine if some entity members should be restructured to make the partnership opt-out eligible.
2. START GIFT AND ESTATE PLANNING.
Through December 31, 2025, the estate tax exemption is essentially doubled. The same exemption applies to gift taxes. This means, the next eight years are a good time to make what would otherwise be taxable gifts. When the estate and gift tax exemption was reduced in prior years, there was no clawback of excess gifts. Also, many existing estate plans may need revision due to the increased exemption. Contact your estate planner and counsel to review affected documents.
3. CONSIDER 100% BONUS DEPRECIATION.
One of the most significant changes is 100% bonus depreciation and the fact that used property is now eligible. Even more significant is the fact that it applies to 2017 tax returns with respect to eligible property placed in service after September 27, 2017. However, be careful. There are binding contract rules that work to make property under contract before that date ineligible for 100% bonus. Review all invoices and contracts. Remember, state law often determines what constitutes a binding contract – not federal tax law.
4. PLAN TO OVER FUND A 529 PLAN.
The new law allows earnings in a 529 Plan to be withdrawn to pay tuition for K-12 education, which includes private and religious schools. Previously, only post-secondary tuition was allowable. The strategy is to put $200,000 per child in a plan earning 5% per year. This will yield $10,000 per year, which conveniently, is the amount that can be annually used per child without incurring a tax liability. As a result, the first $10,000 of K-12 tuition is paid with dollars that will never be taxed. This is not a big savings but a savings nonetheless.
|TAKE NOTE: Make sure your state law has been amended to conform to the federal change.|
5. LAY THE FOUNDATION ON HOME EQUITY LOANS.
As of December 31, 2017 through December 31, 2025, interest on a home equity loan used for personal expenses is no longer deductible. Under the new law, interest is deductible on up to $750,000 of acquisition indebtedness (at least until 2026 when the limit goes back to $1,000,000). The additional $100,000 limit on home equity indebtedness is similarly suspended until 2026.
|TAKE NOTE: The IRS recently issued a notice indicating that home equity indebtedness incurred to acquire or improve a residence is still deductible. The notice clearly said the interest is not deductible if the loan proceeds are used for personal expenses. The notice was silent, however, on interest deductibility if the proceeds are used to acquire business or investment assets. Until further guidance is issued, we believe such interest should still be deductible under the existing interest tracing rules.|
6. UNDERSTAND CHANGES TO THE ALIMONY RULES.
Changes to the alimony rules – not deductible by the payor and not taxable to the payee – aren’t effective until 2019. Make sure you discuss these changes with your counsel if you are currently negotiating a divorce or separation, which will finalized after December 31, 2018. While this is one of the “permanent” tax treatment changes included in the bill, it is wise to negotiate agreement clauses to accommodate any future amendments to the law.
7. USE NON-GRANTOR TRUSTS FOR FEDERAL AND STATE INCOME TAX SHIFTING.
It may be possible to reduce or eliminate state income tax by creating a trust with a situs in a no-tax state. Ideally, you can create multiple non-grantor trusts to take advantage of deductions under new tax act including the $10,000 per trust state income tax or property tax deduction and the 20% pass-through deduction. With respect to the latter, if taxable income of the trust is below $157,500, the 20% small business deduction is allowed even if it’s a service business or there are no wages or property. The trusts may be incomplete (not a gift) or a completed gift.
|TAKE NOTE: Note that some states, like New York, treat certain other state trusts as grantor trusts, which may limit the benefit of this planning opportunity.|
Similar to the story of the tortoise and the hare – steady, consistent and strategic garners the best results in navigating an evolving tax law. We will continue to inform your strategic tax planning as we receive greater clarity on other aspects of the new law.
If you have any questions, please contact your Friedman LLP tax professional.