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New Developments in Federal Income Taxation

In December 2017, Congress passed and the President signed into law the Tax Cuts and Jobs Act (TCJA), which made significant changes to the federal individual and corporate income tax structures, as well as the federal estate and gift tax system.  Although this law became effective January 1, 2018, the first tax returns prepared using this new law were not filed until 2019—some as recently as October 15, 2019—and the full, real-world impacts are just now being felt.  Further, Regulations providing guidance as to the implementation were only issued over the Summer of 2019, and many planning opportunities are resulting from those developments.

The most visible impact of the TCJA was the legally-required implementation of a “postcard” Form 1040 for individual filers.  The first postcard Form 1040, covering the 2018 tax year, consisted of two half-page main forms with six new explanatory schedules.  Many common forms of income, such as capital gains from investments, were removed from the main Form 1040 entirely; others such as pensions, annuities and individual retirement account distributions were condensed from multiple lines into one line to save space but, in the process, resulted in difficulty following the sources of income.

For 2019, a revised draft postcard Form 1040 has been released that addresses many of the shortcomings of the 2018 version.  Each of its two pages is slightly over half a page in length, resulting in room to include previously omitted information and providing a much clearer understanding of the sources of income and resulting tax liability.

Of course, another significant change under the TCJA has been the increase in standard deduction amounts (most standard deductions almost doubled from 2017 to 2018) , the limitation of itemized deductions such as state and local taxes and mortgage interest, and the complete elimination of miscellaneous itemized deductions such as tax preparation and investment management fees.  Many planning opportunities have presented themselves with respect to taking advantage of the much larger standard deduction, such as the bunching of what itemized deductions remain into a single year (for example, paying multiple years of medical expenses or charitable contributions in one year).

Along with the significant increases in standard deduction amounts, personal exemption amounts have been eliminated.  For most taxpayers with children under age 17, or with other dependents over age 17, an increased child tax credit and newly-implemented other dependent credit—along with much higher adjusted gross income phaseout limits—are in place and can be taken advantage of.

Opportunities can be found in the different ways various types of investment income are taxed.  For example, because qualified dividend and long-term capital gain income is taxed at preferential rates compared to the ordinary income tax rates to which interest income and retirement plan distributions are taxed, it may make even more sense now to hold interest-bearing investments within qualified plans and individual retirement accounts (IRAs) and maintain equity investments outside of such retirement accounts.

For the past several years, taxpayers age 70.5 or older have been able to make qualified charitable distributions (QCDs) from their IRAs.  IRA distributions of up to $100,000.00 per year, made directly to qualifying charities, can be excluded from gross income for federal income tax purposes.  Such distributions continue to satisfy the required minimum distribution (RMD) requirements.  If the IRA owner so wishes, a check can be given to the IRA owner for personal delivery to the receiving charity—the check must be made payable to the charity, however.  This technique has been popular in past years but makes even more sense now that many taxpayers no longer can itemize deductions in light of the increased standard deductions—the QCD allows an opportunity to make the charitable contribution and still have it excluded from gross income for federal income tax purposes.

Two developments relate specifically to the newly-created-by-TCJA concept of qualified business income (QBI) and the related deduction available under Section 199A of the Internal Revenue Code.  Although Section 199A has been effective since the beginning of 2018, Regulations finally were issued in August of 2019, providing much clearer guidance on eligible sources of income, safe harbors, consequences of elections and the like.  Additionally, new for Form 1040 for tax years beginning on or after January 1, 2019 will be Forms 8995 and 8995-A.  These new forms will provide greater clarity as to the calculation of qualified business income and its resulting reduction in taxable income.

In addition to the many income tax planning opportunities ushered in by the TCJA, changes were made to the federal estate and gift tax regime (the “unified transfer tax”) as well.  These changes interact with pre-existing legislation in ways that allow for helpful planning opportunities.  Currently, there is a unified estate and gift tax exclusion amount of $11,400,000.00 (recall that for a period of time under prior legislation the estate and gift taxes were de-unified) and a related unified credit of $4,505,800.00.  This means that an individual can make a combination of gifts during life and bequests at death totaling $11,400,000.00 and pay no federal estate or gift tax.

In addition to the lifetime exclusion of $11,400,000.00, there is an annual gift tax exclusion of $15,000.00 per donor, per donee, for gifts of current interests in property.  Continuing to be available is the “Deceased Spouse Unused Exclusion” or DSUE.  This is elected by filing a federal estate tax return (Form 706) at the death of the first spouse to die.  Form 706 is not required for gross estates with lifetime gifts added back under the lifetime exclusion amount, but must be filed anyway if it is desired to elect the DSUE.  The result will be that the amount of the deceased spouse’s exclusion amount is added to the surviving spouse’s lifetime exclusion amount.  

In planning for all of the above items, it is important to bear in mind sunset (expiration) provisions as well.  Under current legislation, the TCJA changes affecting individual taxpayers are due to expire at the end of the 2025 tax year.  Planning to take advantage of these benefits will need to take those sunsets into account.

As you will note from the above, there exist many different planning opportunities.  Pursuit of any such opportunity should always be executed to take into account other factors, such as asset needs, family dynamics and charitable intent. Simply saving the maximum amount of tax should never be the only goal.  The professionals of the C&N Wealth Management group can help you analyze your financial situation--and develop the best possible strategy to achieve your goals.

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