The tax bill formerly known as the “Tax Cuts and Jobs Act” (H.R. 1) is now Public Law No. 115-97.
The official title of the act is “To provide for reconciliation pursuant to titles II and V of the concurrent resolution on the budget for fiscal year 2018,” and the act will probably be known as the reconciliation act of 2017, or RA2017. (The original short title, “Tax Cuts and Jobs Act,” had to be deleted to comply with Senate rules for reconciliation.)
The following is a summary of the changes applicable to estates and trusts.
Estate and Gift Tax Changes
- The estate tax basic exclusion amount (i.e., the unified credit exclusion) has been doubled, from $5,000,000 to $10,000,000, but only for gifts and estates in the years 2018 through 2025.
- The method used to calculate inflation adjustments for 2018 and later years has been changed, and will use the “chained consumer price index” (C-CPI-U) instead of the regular consumer price index (CPI-U). This change affects income tax brackets and other inflation adjustments in the Internal Revenue Code, including the federal estate and gift tax exclusion amount. The chained CPI tends to increase more slowly than the regular CPI, so the exclusion amount will be $11,180,000 in 2018 instead of $11,200,000 (which would be twice the previously announced exclusion amount of $5,600,000 for 2018). See Rev. Proc. 2018-18, Sec. 3.35, 2018-10 I.R.B. 392, 397 (3/5/2018).
- Although some other inflation adjustments previously announced for 2018 changed due to the application of the chained CPI, other estate and gift tax numbers were not changed by Rev. Proc. 2018-18. Specifically:
- The federal gift tax annual exclusion is still $15,000 for 2018;
- The annual gift tax exclusion for non-citizen spouses is still $152,000;
- The limitation on special use valuations is still $1,140,000.
- The “2-percent portion” for purposes of estate tax deferral under I.R.C. § 6166 is still $1,520,000.
- Because of the way the estate tax is calculated, by adding back adjusted taxable gifts to the taxable estate, calculating the tax on the combined total, and then subtracting the credit amount, there is the danger that the estates of taxpayers who die after 2025 and have made gifts using the increased exclusion amount will owe estate tax on lifetime gifts. A new I.R.C. section 2010(g)(2) directs the Secretary of the Treasury to adopt regulations to take into account the changes in the exclusion amount.
- Because the generation-skipping transfer tax exemption is equal to the basic exclusion amount, the GST exemption will also be doubled for the years 2015 through 2025.
Fiduciary Income Tax Changes
- The income tax rates applicable to estates and trusts will be 10%, 24%, 35%, and 37% instead of 15%, 28%, 31%, 36%, and 39.6%, with the rates applied to approximately the same range of incomes, from $2,550 to $12,500 (had been $2,600 to $12,700). So, there is 5% rate reduction at the lowest bracket, and a 2.6% reduction in the top rate, but because of changes in the brackets there are rate increases in some income ranges, and the average rate reduction is only about 1.6% at $12,700 of taxable income. However, there is some tax reduction at every taxable amount. (See table below for details.)
- The calculation of the income tax on capital gains will remain the same, although the statutory language has changed. The statute had based the upper limit of the 0% rate on the beginning of the 25% bracket, and the limit on the 15% rate on the beginning of the 39.6% bracket, but the rates and brackets have changed. In order for the tax calculation to remain the same, the new law specifies that estates and trusts will use $2,600 (the old 25% bracket in 2018, as adjusted for inflation) as the upper limit on the 0% tax rate and $12,700 (the old 39.6% bracket) as the upper limit on the 15% tax rate.
- Although the rate changes may reduce the tax on taxable income, several of the new limitations on deductions for individuals also apply to estates and trusts, which may increase taxable income and so increase the taxes payable by estates and trusts. Specifically:
- No income tax deductions will be allowed in the years 2018 through 2025 for miscellaneous itemized deductions which are subject to the two-percent floor, so many expenses for the management of income-producing property will no longer be deductible. However, estates and trusts will continue to be able to deduct expenses that were not subject to the 2% floor under I.R.C. section 67(e) because the “would not have been incurred if the property were not held in such trust or estate.” This would include (for example) fiduciary commissions and perhaps tax preparation fees, but would not include investment management fees of the same type that would be paid by individuals. (See “Administration Expenses Still Deductible on Form 1041.”)
- State and local income taxes in excess of $10,000 are also not deductible in the years 2018 through 2025, but the limitation does not apply to taxes paid “in carrying on a trade or business or an activity described in section 212,” so should not apply to taxes properly reportable on a Schedule C (trade or business) or Schedule E (net income from rents and royalties).
- The exemptions for the alternative minimum tax have been increased for individuals, but not for estates and trusts. Some estates and trusts might actually owe additional AMT for the following reasons:
- The adoption of chained CPI should not reduce the AMT exemption for 2018, which will remain at $24,600. However, the income level at which the 28% tax rate applies has gone down, from $191,500 to $191,100, and the amount which determines the phase-out of the exemption should went down, from $82,050 to $81,900. (Rev. Proc. 2018-18, Sec. 3.10, 2018-10 I.R.B. 392, 396 (3/5/2018), stated that the amount for the phase-out was $500,000, but that was an error that was corrected in Rev. Proc. 2018-22, 2018-18 I.R.B. __ (4/30/2018).)
- The disallowance of deductions for administration expenses previously subject to the 2% floor and the limitation on the deduction for state and local taxes (see above) can increase both taxable income and alternative minimum taxable income.
No change has been made to the tax on net investment income under I.R.C. § 1411.
Changes in Fiduciary Tax Rates under the Reconciliation Act of 2017
|Taxable Income||Old Marginal Rate||New Marginal Rate||Difference in Rates||Cumulative Tax Change|
|$0 to $2,550||15%||10%||-5%||-$127.50|
|$2,550 to $2,600||15%||24%||+9%||-$123.00|
|$2,600 to $6,100||25%||24%||-1%||-$158.00|
|$6,100 to $9,150||28%||24%||-4%||-$280.00|
|$9,150 to $9,300||28%||35%||+7%||-$269.50|
|$9,300 to $12,500||33%||35%||+2%||-$205.50|
|$12,500 to $12,700||33%||37%||+4%||-$197.50|
[Revised on 3/3/2018 to reflect the publication of inflation adjustment for 2018 in Rev. Proc. 2018-18, 2018-10 I.R.B. 392 (3/5/2018), and revised again on 4/13/2018 to reflect the publication of Rev. Proc. 2018-22, 2018-18 I.R.B. 524 (4/30/2018), which modified Rev. Proc. 2018-18.]
[Revised on 10/23/2018 to include link to article on deductions for administration expenses under Notice 2018-61.]