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Tag Archives: income tax

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Securities Exams: What You Should Know about the “Tax Cut and Jobs Act” of 2017

The new Act made changes in income tax, gift tax, and estate tax laws, but most of these rules will not be tested.  Here are the changes that may affect questions in the securities exams:

 

  • The kiddie tax will continue to be imposed on the unearned income of a child under 19 years of age or up to age 24 if a student. The tax was previously calculated using the parents’ income tax bracket, but the Act changed the calculation to use new estate and trust income tax brackets.

 

  • Under the Act, most income tax rates have been reduced a small amount. For example, the top rate was previously 39.6%, and under the new law the top rate is 37%.  Long term capital gains and qualified dividends are still taxed at the preferential rates of 0%, 15%, and 20%.  In the past the rates at which capital gains and dividends were taxed lined up with the income tax rates, so for example, the 20% rate was applied to taxpayers in the top bracket.  Under the new law, the income tax brackets and capital gains breakpoints no longer are aligned, so the 20% capital gains rate applies to the top income bracket and to part of the income bracket below it.

 

  • 529 plans have been used in the past to pay for qualified education expenses at institutions of higher learning. The Tax Act has changed the definition of “qualified higher education expenses,” so the money in a 529 plan can be used to pay for up to $10,000 of tuition per student at elementary and secondary public, private, and religious schools.  Parents can still “front load” a 529 plan by contributing in the first year of the plan up to 5 times the annual gift tax limit of $15,000 ($30,000 for both parents).

 

  • The new Act doubled the standard deduction, but this improvement was offset by elimination of the personal exemption and by imposition of some new limits on itemized deductions. Taxpayers in some states were particularly affected by the $10,000 limit placed on the combined total amount of state and local income taxes and property taxes that can be deducted. These changes as well as the increase to the Alternative Minimum Tax (AMT) exemption will also mean a reduced number of taxpayers who will be paying AMT next year.

 

  • Under prior law, investment advisory fees were tax deductible as miscellaneous itemized deductions subject to a 2% of AGI floor. The new law has suspended these deductions.

 

  • Although there was some discussion of eliminating the estate tax, Congress instead doubled the estate and gift tax exemption from $5.6 million to $11.2 million in 2018. The annual exclusion will increase to $15,000 for 2018 due to indexing, but the Act did not make this change.

 

Congress discussed a new rule that would require stockholders to sell their shares of stock in the order in which they bought them, but this change was not adopted.  A proposal to reduce the maximum contributions to retirement plans was also not in the final act.

Important Update in Reporting Tax Basis for Income and Estate Tax

Estate Planning Word Cloud Concept on a Blackboard

The reason that these changes will add a layer of complication to this process is they require consistency for reporting of the income tax basis in assets. As a result, it’s more important than ever for executors responsible for estates to hire professional advisors to manage this process. Enlisting the help of professional financial advisors ensures that not only does the required estate tax return get filed, but the income tax basis for the estate in each asset is documented and beneficiaries are informed of their income tax basis in asset received.

 

What Was the Law Before These Changes (And What’s Its Current State)?

 

The new basis reporting rules went into effect on July 31st, 2015. Prior to the rules going into effect, reporting estate values to a beneficiary wasn’t required. Instead, when someone passed away, there were four scenarios that determined if the deceased’s assets tax would change.

 

Based on the new changes, anyone who is an executor or personal representative of an estate needs to be aware that these new rules can directly impact them. The same is true for anyone inheriting assets. For executors, extra attention to detail should be exercised since it’s likely that estate tax returns will require additional information and/or documentation.

 

For those inheriting assets, additional reporting requirements are likely to create an extra burden. The reporting requirements relate to specific disclosures about whether gains or losses were incurred after selling or exchanging property that came from a decedent. That information is only available from an executor, which is why the two parties will need to work closely together.

 

Determining the Valuation of an Estate Asset

 

These recent changes bring up another important issue. That issue is how to determine the value of a decedent’s assets. Because there’s usually a range of amounts that exist when valuing non-marketable assets, coming up with the right number isn’t always a crystal clear process. In the past, this uncertainty has resulted in beneficiaries reporting the value of an inherited asset at a different amount than the estate itself. Since this isn’t something an executor or beneficiary wants to happen under the new rules, the burden to provide the necessary reporting will fall on estate administration.

 

The Bottom Line

 

This is a complicated issue that trained financial advisors not only need to take the time to review in detail, but also need to be sure to clearly communicate to any clients who may be affected by these changes to income and estate tax reporting going into 2016 and beyond.