The Tax Cuts and Jobs Act was enacted in late 2017 but individuals are now grappling for the first time with many of its temporary provisions as they prepare their 2018 income tax returns. Wealthy donors may be eyeing the chance to pass more property to their heirs thanks to the law's temporary doubling of the $5 million gift and estate tax exclusion to $10 million (the 2019 inflation-indexed exclusion is $11.4 million for individuals and $22.8 million for married couples).
Although these temporary provisions generally last through 2025, here are some immediate takeaways regarding TCJA and income tax and gift and estate tax.
Many individuals in high-tax states such as New York, New Jersey and California fear that the law's new $10,000 cap on the deduction for state and local taxes (known as "SALT") will significantly increase their taxes, since SALT was previously uncapped.
Yet if those same individuals, pre-TCJA, were subject to the alternative minimum tax they couldn't take the SALT deduction anyway, since the AMT disallows it. So, who is most likely affected by this $10,000 cap? High-income individuals who paid enough "regular" tax to be outside the scope of the AMT and had a sizeable SALT deduction that saved them significant federal income tax. If these individuals vote with their feet and move to lower-tax jurisdictions, high-tax states will lose tax revenue.
The 2018 income tax year has been a test run for taxpayers. Once this filing season is behind us, taxpayers will have a better idea of how TCJA works and what they might do differently in 2019.
Gift and estate tax
Even before this law was enacted, many people were already exempt from federal estate tax, which now affects even fewer people given the 2019 exclusion of $11.4 million ($22.8 million for married couples). Yet those who are wealthy enough to take advantage of this higher exclusion may want to accelerate their timetable for making significant gifts.
If Democrats control the White House, Senate and House after the 2020, 2022 or 2024 elections, they could revisit TCJA's provisions well before they expire in 2026. If the exclusion reverts to $5 million (or lower), for instance, this would be a missed opportunity.
There are also portability considerations. Portability allows the surviving spouse to receive the predeceased spouse's unused exclusion — if an election is made. So, if dad dies in 2019 leaving an $8 million estate and his full $11.4 million exclusion intact, mom will only receive that unused exclusion if dad's executor files a federal estate tax return.
Mom may wonder if it's worth the expense of having someone prepare that return if she doubts she'll have more than, say, $10 million at her death. Although there is no right answer for mom, she might be happy to have dad's leftover exclusion if some of her property appreciates unexpectedly or if, at her death, the exclusion is only $5 million or less.
In other words, portability is like insurance: You may never need it, but if you do, you'll be glad it's there.
Finally, married couples, for example, with assets well north of $22.8 million will find that it is "business as usual" in terms of planning. In other words, it still generally makes sense to reduce future estate tax by moving potential appreciation out of an estate by using sophisticated planning techniques involving trusts and lifetime gifts.
And the humble annual exclusion gift, which lets donors give $15,000 per year to as many people as they wish ($30,000 if the donor's spouse agrees to "split" the gift), can be powerful.
The key point is that TCJA's temporary provisions may end sooner than Dec. 31, 2025, depending on the political landscape. Thus, taxpayers may finally figure out the tax law's income tax provisions just as they disappear, and wealthy donors who are tempted to take advantage of TCJA's higher exclusion may have less time than they think.