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TAX BULLETIN 2018-1: TAX REFORM SIGNED INTO LAW 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. Capital Gains. 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. 3.8% Surtax. The Act does not directly change the 3.8% surtax imposed on “net investment u income.” However, it indirectly changes it. When calculating a taxpayer’s net investment income, a taxpayer can deduct investment expenses (after. 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 40% rate, $5,490,000 exemption (indexed for Commencing 2018, exemption for estate, gift Estate / inflation) and GST tax doubled from $5.6 million to $11.2 Gift / GST Tax 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. Testamentary planning. 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, acommon plan is to leave an amount equal to the estate exemption to a bypass HOUSE_OVERSIGHT_029440