The Tax Cuts and Jobs Act of 2017, signed by President Trump on December 22, 2017, made numerous changes to the taxation of trusts and estates for 2018. The new tax act was business focused and overall was helpful to most businesses, but it also contained many provisions relating to the taxation of trusts and estates. Trust and estate income tax rates and brackets changed, along with deductibility of some estate and trust administrative expenses. The exemption amount for the estate, gift and generation skipping transfer taxes have generally doubled. Here’s a look at some of the key elements of the new law that may affect a trust or estate in which you may be a beneficiary or trustee.
Trust and estate income tax rates. The new act reduces the existing five trust and estate income tax brackets to four by combining two of the brackets, increases the rate in one bracket and reduces the rates in the others. The initial bracket on income up to $2,550 has been lowered to 10% from 15%. The new second bracket combines the old second and third brackets on income up to $9,150, and lowers the rate to 24% from 25% and 28%. The rate on the next bracket on income up to $12,500 has been increased to 35% from 33%. The top rate on income over $12,500 has been reduced to 37% from 39.6%. These bracket dollar amounts will now be inflation-adjusted using a chained consumers’ price index. The 3.8% Medicare surtax on net investment income continues in 2018. All of these changes only continue through 2025. In 2026, everything goes back to the way it was in 2017, unless of course, the folks in Washington change it.
Capital gains and qualified dividends rates. The new law retains the 0%, 15% and 20% preferential tax rates on long-term capital gains and qualified dividends from 2018 to 2025. The brackets are modified. The 15% bracket now starts at $2,600 of income, vs. $6,000 in 2017. And the 20% bracket now starts at $12,701 of income vs. $12,501 in 2017. This income continues to be also subject to the 3.8% Medicare surtax .
Miscellaneous itemized deductions suspended. From 2018 to 2025, all miscellaneous itemized deductions that would be subject to the 2% adjusted gross income limitation for individuals are suspended also for trust and estates. You can longer deduct investment management fees for trusts and estates, so it is likely that many trustees and personal representatives will move to commission based investment fees where the fees are deductible since they reduce the net sales proceeds. On its face, the new act does not appear to affect the deductibility of expenses not subject to the 2% floor, which are administration expenses incurred solely because the property is held in a trust or estate, such as trustee fees, however the IRS will have to give some guidance on this.
Estate, gift and generation skipping transfer taxes. The 2012 “permanent” inflation adjusted $5 million estate, gift and generation skipping transfer tax (GST) exemption has been increased to $10 million indexed for inflation through 2025. The exemption for 2018 is $11.18 million. Consequently, most estates will not pay any estate taxes. The top estate, gift, and GST tax rate stays the same at 40%. It also continues the portability feature for you married couples, that allows the estate of the first spouse to die to transfer his or her unused exclusion to the surviving spouse. In 2026, the estate, gift, and GST tax exemption returns to the inflation adjusted $5 million.
To find out how the trust and estate income tax provisions will affect a trust or estate in which you may be a beneficiary or trustee you, run the numbers. Do a calculation or have your tax preparer do a calculation using the 2018 rules with the 2017 income and deductions and compare the tax liability. The new tax act may have helped you, or it may not have.
By Matthew M. Wallace, CPA, JD
Published edited July 1, 2018 in Savvy magazine, Port Huron, Michigan as: New tax rules for trusts and estates start in 2018