1. Domestic Provisions of the TCJA
The TCJA was signed into law on December 22, 2017, and was passed by the House and the Senate without any Democratic support. 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,” but the Treasury, IRS and general population continue to refer to the Act as the Tax Cuts and Jobs Act.
Most of the Act’s provisions are effective for taxable years beginning after Most of the individual tax reform provisions are effective for only 8 years – from 2018 – They sunset after 2025 in order to satisfy the “Byrd rule” so that the Act could be passed with just a majority vote in the Senate under the reconciliation process. Most of the business tax reform provisions are permanent, however.
One of the state purposes of the tax reform was simplification, but, as you will see, many of the provisions add significant complexity.
2018 Midland Estate Planning Seminar

2. Topics Individual Tax Reform Individual Income Tax Rates
Estate and Trust Tax Rates
Standard Deduction
Personal Exemptions
Qualified Business Income (QBI) Deduction
Limitation on Losses
Education Savings Rules

3. Topics Individual Tax Reform (cont.) Pease Limitation
Home Mortgage Interest
Taxes
Casualty and Theft Losses
Charitable Contributions
Miscellaneous Itemized Deductions
Alimony Payments
Moving Expenses

4. Topics Individual Tax Reform (cont.)
Recharacterization of IRA Contributions
Estate, Gift, and GSTT Exemption
Alternative Minimum Tax
Electing Small Business Trusts

5. Topics Business Tax Reform Corporate Tax Rates Cost Recovery
Accounting Methods
Interest Expense
Net Operating Losses
Like-Kind Exchanges
Domestic Production Activities Deduction
Entertainment Expenses

6. Topics Business Tax Reform (cont.) Qualified Transportation Fringe
Technical Terminations
Applicable Partnership Interests
Excessive Employee Remuneration
Qualified Equity Grants

7. Individual Tax Reform

8. Individual Tax Rates 2017 2018 Ordinary Income Rate Married Single 10%
Not Over $18,650
Not Over $9,325
Not Over $19,050
Not Over $9,525
15%
$18,651 - $75,900
$9,326 – 37,950
12%
$19,051- $77,400
$9,526 – 38,700
25%
$75,901 - $153,100
$37,951 - $91,900
22%
$77,401 - $165,000
$38,701 - $82,500
28%
$153,101 - $233,350
$91,901 - $191,650
24%
$165,001 - $315,000
$82,501 - $157,500
33%
$233,351 - $416,700
$191,651 - $416,700
32%
$315,001 - $400,000
$157,501 -$200,000
35%
$416,701 - $470,700
$416,701 - $418,400
$400,001 - $600,000
$200,001-$500,000
39.6%
Over $470,700
Over $418,400
37%
Over $600,000
Over $500,000
Ordinary Income

9. Long-Term Capital Gain and Qualified Dividend Income
Individual Tax Rates (cont.)
2017
2018
Rate
Married
Single 0%
Not Over $75,900
Not Over $37,950
Not over$77,200
Not over $38,600
15%
$75,901 - $470,700
$37,951– $418,400
$77,201- $479,000
$38,601 – $425,800
20%
Over $470,700
Over $418,400
Over $479,000
Over $425,800
Long-Term Capital Gain and Qualified Dividend Income

10. Estate and Trust Tax Rates
2017
2018
Rate
Taxable Income
15%
$1 – 2,550
10%
$1 - $2,550
25%
$2,551 - $6,000
24%
$2,551- $9,150
28%
$6,001 - $9,150
35%
$9,151 - $12,500
33%
37%
Over $12,500
39.6%
Ordinary Income

11. Long-Term Capital Gain and Qualified Dividend Income
Estate and Trust Tax Rates (cont.)
2017
2018
Rate
Taxable Income 0%
$1 – 2,550
$0 - $2,600
15%
$2,551 - $12,500
$2,601 – 12,700
20%
Over $12,500
Over $12,700
Long-Term Capital Gain and Qualified Dividend Income

12. Standard Deduction $24,000 for Married Filing Jointly
Up from $12,700 for 2017
$18,000 for Head of Household
Up from $9,350 for 2017
$12,000 for Single
Up from $6,350 for 2017
Because of the increased standard deduction and the fact that many deductions for individuals are eliminated or limited, the percentage of taxpayers that will itemize is expected to decline from about 30% to about 5%. As a result, many taxpayers will not realize any income tax benefit from charitable contributions, home mortgage interest, state and local taxes, or other expenses still qualifying as deductions to those who itemize.
Taxpayers will likely start “bunching” deductions into a particular year. For example, a taxpayer might make a large charitable contribution in a single year to a donor advised fund. The taxpayer could itemize deductions in the year that the large contribution is made, and use the increased standard deduction in other years.

13. Personal Exemptions Deduction is suspended for 2018 – 2024
Was $4,050 in 2017
But phased out beginning at $313,800 of AGI for MFJ
Available again in 2025

14. QBI Deduction
Individuals, estates, and trusts generally may deduct 20% of “qualified business income” from a partnership, S corporation, or sole proprietorship
Plus 20% of aggregate qualified REIT dividends, qualified cooperative dividends, and qualified publicly traded partnership income
Effective tax rate of 29.6%
Two limitations apply to “higher-income” taxpayers
Higher income taxpayers:
$315,000 of taxable income for MFJ
$157,500 of taxable income for all others

15. QBI Deduction (cont.)
Qualified business income is the net amount of domestic income, gain, deduction and loss from a qualified trade or business
Does not include investment income
Does not include wages or guaranteed payments
A qualified trade or business (QTB) is any trade or business other than
The trade or business of being an employee
A “specified service trade or business” for higher-income taxpayers

16. QBI Deduction (cont.) Higher income limitations:
W-2 wages paid and capital
Specified service trade or business income
W-2 wages paid and capital limitation equals the greater of
50% of W-2 wages paid by the QTB OR
25% of W-2 wages paid by the QTB plus 2.5% of the unadjusted basis of qualified property
Specified service trade or business limitation prevents income from such a trade or business as being treated as QBI

17. QBI Deduction (cont.) W-2 wages
Total wages subject to wage withholding, elective deferrals, and deferred compensation
Paid by a QTB to its employees during the year
Do not include any amount:
Not properly allocable to QBI
Not properly and timely reported on Forms W-2 and W-3 filed with the SSA
What about wages paid to a professional employer organization (POE)?

18. QBI Deduction (cont.) Qualified property
Tangible property that is subject to depreciation
Is held by the QTB at the close of the year
Is used at any point during the year to produce QBI
For which the depreciable period has not ended
Depreciable period is the later of:
10 years from the original placed-in-service date
The last day of the last full year in the applicable recovery period

19. QBI Deduction (cont.)
A specified service trade or business is any trade or business involving the performance of services in the fields of:
Health - Law
Accounting - Actuarial science
Performing arts - Consulting
Athletics - Brokerage and financial services*
Any trade or business where the principal asset is the reputation or skill of one or more employees
* Includes investing and investment management, and trading or dealing in securities, partnership interests, or commodities

20. QBI Deduction (cont.) Limitations are phased in
Between $315,000 and $415,000 of taxable income for MFJ ($100,000 phase-in range)
Between $157,500 and $207,500 of taxable income for all others ($50,000 phase-in range)
Phase-in rule for the W-2 wages and capital limitation works differently than the phase-in rule for the specified services trade or business limitation
Best explained with an example
See Example 2 below

21. QBI Deduction Example 1
H and W file a joint return on which they report taxable income of $200,000 (before the QBI deduction). H has a sole proprietorship QTB (Business A) and W is a partner in a QTB (Business B). H and W also have a carryover qualified business loss of $50,000. H’s QBI from Business A is $150,000. Since H and W’s taxable income is below $315,000, the W-2 wages and capital limitation does not apply. Thus, H’s QBI amount from Business A is $30,000 ($150,000 x .2). W’s allocable share of qualified business loss from Business B is $40,000. Since the W-2 wages and capital limitation does not apply, W’s QBI amount from Business B is a loss of $8,000 (($40,000) x .2).

22. QBI Deduction Example 1 (cont.)
H and W’s combined QBI amount is $12,000, determined as follows:
$30,000 of QBI from Business A
($8,000) of QBL from Business B
($10,000) of QBL from the loss carryover ($50,000 x .2)
H and W’s QBI deduction is limited to the lesser of their $12,000 combined QBI amount ($30,000 - $8,000 - $10,000) or 20 percent of their taxable income for the year ($200,000 x .2 = $40,000). Thus, H and W’s QBI deduction is $12,000.

23. QBI Deduction Example 2
H and W file a joint return on which they report taxable income of $380,000 (before the QBI deduction). H is a partner in a QTB (Business C) and W has a sole proprietorship trade or business that is a specified service business (Business D). H and W also received $10,000 in qualified REIT dividends during the tax year. H’s allocable share of QBI, W-2 wages paid, and unadjusted basis of qualified property from Business C is $275,000, $50,000, and $300,000, respectively. Since H and W’s taxable income is above the $315,000 threshold amount for a joint return, the W-2 wages and capital limitation applies and is phased-in.

24. QBI Deduction Example 2 (cont.)
Accordingly, H’s QBI amount from Business C is $35,500, determined as follows:
20% of QBI from Business C = $275,000 x .2 = $55,000
50% of W-2 wages from Business C = $50,000 x .5 = $25,000
25% of W-2 wages from Business C = $50,000 x .25 = $12,500
2.5% of unadjusted basis of qualified property from Business C = $300,000 x .025 = $7,500
$12,500 + $7,500 = $20,000, which is less than $25,000, so the $25,000 limit applies
Phase-in percentage = [($380,000 - $315,000)/$100,000] = .65
QBI amount from Business C = $55,000 – [($55,000 - $25,000) x .65] = $35,500

25. QBI Deduction Example 2 (cont.)
W’s QBI and W-2 wages from Business D are $125,000 and $40,000, respectively. (Assume Business D has no qualified property.) Since the specified services trade or business limitation applies to Business D and is phased in, W’s QBI amount from Business D is $7,000, determined as follows:
Phase-in percentage = [($380,000 - $315,000)/$100,000] = .65
Inclusion percentage = = .35
Includible QBI form Business D = $125,000 x .35 = $43,750
Includible W-2 wages from Business D = $40,000 x .35 = $14,000
20% of includible QBI = $43,750 x .2 = $8,750
50% of includible W-2 wages = $14,000 x .5 = $7,000
QBI amount for Business D = lesser of $8,750 or $7,000, so $7,000

26. QBI Deduction Example 3
Assume the same facts as in Example 2, except that H and W’s taxable income for the year is $500,000 (before the QBI deduction). Since H and W’s taxable income exceeds the $315,000 threshold for married-filing-jointly taxpayers by more than $100,000, the W-2 wages and capital limitation and the specified services business limitation are applicable and fully phased-in. Thus, H’s QBI amount from Business C is $25,000 (the lesser of 20 percent of QBI from Business C or 50% of W-2 wages from Business C), and W’s QBI amount from Business D is zero (because the inclusion percentage for QBI and W-2 wages from Business D is zero).

27. QBI Deduction Example 3 (cont.)
Therefore, H and W’s combined QBI amount is $25,000 and their QBI deduction is also $25,000 (the lesser of combined QBI amount ($75,000) or 20 percent of taxable income ($76,000)).

28. QBI Deduction Example 2 (cont.)
H and W’s combined QBI amount of $44,500 is comprised of the QBI amount from Business C ($35,500), plus the QBI amount from Business D ($7,000), plus 20 percent of the $10,000 of qualified REIT dividends ($2,000). H and W’s QBI deduction is also $44,500, determined as follows:
Combined QBI amount = $44,500
20% of taxable income = $380,000 x .2 = $76,000
QBI deduction = lesser of $44,500 or $76,500, so $44,500

29. Limitation on Losses
“Excess business losses” are not allowed in the current taxable year
Such losses are carried forward and treated as part of the taxpayer’s NOL carryforward
An excess business loss is an aggregate net loss from trades or businesses in excess of:
$500,000 for MFJ filers
$250,000 for other filers

30. Education Savings Rules
Section 529 plan funds may now be used to pay for tuition at elementary and secondary schools
Limit of $10,000 per year per student
School may be public, private or religious

31. Pease Limitation
The overall limitation on itemized deductions is repealed
This limitation was commonly referred to as the “Pease limitation”
For 2017, certain itemized deductions are reduced when a taxpayer’s AGI exceeds:
$313,000 for MFJ filers
$261,500 for single filers

32. Home Mortgage Interest
No more than $750,000 of debt may be treated as “acquisition indebtedness”
In the case of acquisition indebtedness incurred before December 15, 2017, the limitation is still $1,000,000
Interest on home equity indebtedness is not deductible
However, acquisition indebtedness includes debt incurred to “substantially improve” a qualified residence
An improvement is substantial if it adds to the value of the residence, prolongs the residence’s useful life, or adapts the residence to new uses
See IRS IR

33. Taxes
A taxpayer may claim an itemized deduction of up to $10,000 for the aggregate of:
State and local property taxes
But not foreign property taxes
What about pre-paid 2018 property tax?
State and local income taxes
State and local sales taxes
Property and sales taxes paid in connection with carrying on a trade or business remain fully deductible

34. Casualty and Theft Losses
Personal casualty and theft losses are no longer deductible
Except if attributable to a federally declared disaster area
10% of AGI threshold still applies

35. Charitable Contributions
Deduction for contributions by an individual of cash to a public charity is now limited to 60% of the individual’s contribution base for the year
Up from 50% of contribution base
No deduction is allowed for a payment to a university in exchange for the right to purchase tickets or seating at an athletic event
The technical language of the Act results in the new 60% limit being applicable if only cash gifts are made to public charities. In other words, if one dollar of non-cash assets is donated, the traditional 50% limitation would still apply.

36. Misc Itemized Deductions
Miscellaneous itemized deductions subject to the 2% of AGI floor are no longer deductible
Investment fees and expenses
Tax preparation expenses
Unreimbursed employee business expenses
Excess deductions at termination
Executor and trustee fees?
Section 642(h)(2) states that on termination of an estate or trust any deductions for the last taxable year of the estate or trust (other than the deduction in lieu of personal exemption and other than the charitable deduction) in excess of gross income for the year shall be allowed as a deduction to the beneficiaries succeeding to the property of the estate or trust. Those deductions are miscellaneous itemized deductions and, therefore, are not deductible for 2018 – 2025 under new Section 67(g).
Does the suspension of deductibility of miscellaneous itemized deductions apply to executor and trustee fees? The answer is not clear. Executor and trustee fees and other miscellaneous estate and trust expenses are deductible under Section 67(e) to the extent they satisfy the requirement of being expenses that would not have been incurred if the property were not held in the trust or the estate. New Section 67(g) says that miscellaneous itemized deductions are not allowed “notwithstanding Section 67(a),” but it makes no reference to Section 67(e). The specific reference to Section 67(a) but not to Section 67(e) leaves the implication that miscellaneous itemized deductions could be allowed under Section 67(e).

37. Alimony Payments
Alimony and separate maintenance payments are not deductible by the payor spouse
Nor are they includible in the recipient spouse’s income
Effective for any divorce or separation agreement executed after December 31, 2018
And for agreements executed before December 31, 2018, but modified after that date
If the modification expressly provides

38. Moving Expenses
The deduction for moving expenses is suspended for years 2018 through 2025
Suspension does not apply to members of the Armed Forces on active duty that move pursuant to a military order

39. Conversion Contributions
A conversion contribution establishing a Roth IRA can no longer be recharacterized as a contribution to a traditional IRA
Recharacterization is still permitted for regular contributions
For example, an individual still may make a contribution to a Roth IRA and susbsequently recharacterize it to a traditional IRA
And an individual may still make a contribution to a traditional IRA and convert the traditional IRA to a Roth IRA

40. Estate, Gift, and GSTT Exemption
The estate, gift, and GSTT exemption is doubled from $5 million to $10 million
$11,180,000 per person for 2018 (adjusted for inflation)
$22,360,000 per married couple
The increased estate, gift, and GSTT exemption is scheduled to expire in Thus, taxpayers may be motivated to make transfers over the next 8 years to take advantage of the large exclusion amount.
The Act directs Treasury to prescribe regulations as necessary to address any difference in the exemption amount at the time of a gift and at the time of death. This is to deal with the possibility of a “clawback” – i.e., a prior gift that was covered by the gift tax exclusion at the time of the gift might result in estate tax if the estate tax exemption amount has decreased by the time of the donor’s death. This is the same issue that existed in 2012 when it looked like the gift tax exclusion amount was going to be reduced from $5 million to $1 million. Presumably, the regulations will also address a potential “reverse clawback” problem that can arise when exemption amounts are increasing. For example, assume a donor makes a $2 million gift in a year in which the gift tax exemption is only $1 million, but the estate tax exemption is later increased to $5 million. In making the estate tax calculation, if the hypothetical gift tax payable on the $1 million gift is merely based on the exemption amount in the year of death, there would be no hypothetical gift tax on the $2 million gift, so there would be estate tax imposed on the full estate plus adjusted taxable gifts, without any credit for the gift tax that was actually paid on the $2 million gift.

41. Alternative Minimum Tax
Was not repealed for individuals, estates, or trusts
But it was repealed for corporations
The exemption amount is increased for individuals
$109,400 for MFJ filers
$54,700 for MFS filers
70,300 for all other filers
Only about $24,600 for estates and trusts
The exemption phase-out thresholds are increased for individuals
$1,000,000 for MFJ filers
$500,000 for all other filers
Only about $82,050 for estates and trusts

42. Electing Small Business Trusts
A nonresident alien individual may now be a beneficiary of an ESBT
A charitable contribution attributable to the “S-portion” of an ESBT is subject to the percentage limitations and carryforward provisions applicable to individuals
Presumably qualify for the Section 199A deduction

43. Business Tax Reform

44. Corporate Tax Rates Reduced to a flat rate of 21%
21% rate applies to personal service corporations too
But don’t forget about the accumulated earnings tax and the personal holding company tax
Max corporate tax rate of 36.8% if either tax applies

45. Cost Recovery
100% bonus depreciation deduction available for new and used property placed in service after September 27, 2017, and before January 1, 2023
Bonus % is phased down during the period
The maximum amount a taxpayer may expense under Section 179 during a taxable year is increased to $1,000,000, and the phase-out threshold amount is increased to $2,500,000
Expanded to include
Qualified real property
Tangible personal property used in connection with furnishing lodging

46. Cost Recovery (cont.) Qualified improvement property
Replaces qualified leasehold improvement property, qualified restaurant property, and qualified retail improvement property
Supposed to have MACRS recovery period of 15 years
But Section 168(e)(3)(E) was not revised correctly
So not currently clear what recovery period applies

47. Accounting Methods
Taxpayers with annual average gross receipts that do not exceed $25 million for the three prior taxable years:
May use the cash method of accounting
May account for inventories by treating them as non-incidental materials and supplies
Are exempt from the uniform capitalization rules
Are not required to use the percentage-of-completion method for real property construction contracts expected to be completed within two years

48. Interest Expense
The deduction for business interest is limited to the sum of:
“Business interest income”
30 percent of the taxpayer’s “adjusted taxable income”
“Floor plan financing interest” paid or accrued
Disallowed interest expense generally may be carried forward indefinitely
Limitation does not apply to:
Taxpayers that meet the $25 million gross receipts test
Electing real property trades or businesses
Must use ADS depreciation lives for real property

49. Interest Expense (cont.)
Business interest income is the amount of interest includible in gross income for the taxable year which is properly allocable to a trade or business
It does not include investment income
Adjusted taxable income is taxable income computed without regard to:
Income, gain, deduction, or loss which is not allocable to a trade or business
Business interest or business interest income
A NOL deduction
Deductions for depreciation, amortization, and depletion
But only through 2021 for depreciation, amortization, and depletion deductions

50. Interest Expense (cont.)
Floor plan financing interest is interest paid or accrued on debt used to finance the acquisition of motor vehicles held for sale to retail customers and secured by the inventory so acquired
A motor vehicle includes an automobile, a truck, a recreational vehicle, a motorcycle, a boat, farm machinery and equipment, and construction machinery and equipment
By including floor plan financing interest in the limitation base, the rule operates to allow floor plan financing to be fully deductible

51. Net Operating Losses
The NOL deduction is limited to 80% of taxable income for NOLs arising in taxable years beginning after 12/31/17
NOLs incurred in taxable years beginning after 12/31/17 generally may not be carried back, but may be carried forward indefinitely

52. Like-Kind Exchanges
Like-kind exchanges completed after 12/31/17 will qualify for nonrecognition treatment only if the properties exchanged are real property that are not held primarily for sale

53. DPAD
The deduction for income attributable to domestic production activities is repealed:
For taxable years beginning after 12/31/17 for non-corporate taxpayers
For taxable years beginning after 12/31/18 for C corporations

54. Entertainment Expenses
Business “entertainment” expenses are no longer deductible
Entertainment includes “providing food and beverages”
It appears that TCJA also eliminated the deduction for most business-related meals (e.g., client and prospect breakfasts, lunches and dinners)
If business-related meals are no longer deductible, reimbursement of such expenses by an employer to an employee will now be taxable income to the employee

55. Qualified Transportation Fringe
Expenses associated with providing any “qualified transportation fringe” to employees are no longer deductible
A qualified transportation fringe includes “qualified parking”
Qualified parking includes access to parking provided to employees on or near the employer’s business premises
Thus, it appears employers may no longer deduct the cost of parking provided to employees unless such cost is included in the employees’ incomes as wages

56. Technical Terminations
A partnership will not be treated as terminated when, within any 12-month period, there is a sale or exchange of 50% or more of the total interest in partnership capital and profits
A partnership will still be considered as terminated if no part of any business, financial operation, or venture of the partnership continues to be carried on

57. Applicable Partnership Interest
Gain allocable to an “applicable partnership interest” will be treated as short-term capital gain unless the partnership’s holding period in the property that generated the gain is more than three years
Does not apply to Section 1231 gain?
An applicable partnership interest is any interest in a partnership that was transferred to a taxpayer in connection with the performance of services in any “applicable trade or business”
Does not include a capital interest
Does not include an interest held by a corporation
But does include an interest held by an S corporation per IRS IR

58. App Partnership Interest (cont.)
An applicable trade or business is any activity that consists of:
Raising or returning capital AND
Investing in (or disposing of) “specified assets” OR
Developing “specified assets”
Specified assets are:
Securities
Commodities
Real estate held for rental or investment
Cash and cash equivalents
Derivative and options contracts
An interest in a partnership to the extent of the partnership’s proportionate interest in specified assets

59. Employee Remuneration
The exception for “performance-based compensation” is eliminated
Such compensation is now taken into account in determining the amount of compensation that exceeds $1 million
Compensation in excess of $1 million paid by a publicly traded corporation to a covered employee is not deductible
A covered employee is:
CEO
CFO
Three most highly compensated officers

60. Qualified Equity Grants
A “qualified employee” may elect to defer income inclusion associated with the value of “qualified stock”
Income inclusion may be deferred for up to five years after the first date the employee’s right to the stock becomes substantially vested
Deferral election must be made no later than 30 days after the first time the employee’s right to the stock is substantially vested or is transferrable
The election is made in a manner similar to the manner in which a Section 83(b) election is made

61. Qualified Equity Grants (cont.)
A qualified employee is any employee of an “eligible corporation” other than any individual:
Who was a 1% owner of the corporation at any time during the preceding 10 calendar years
Who is or has been the CEO or CFO of the corporation
Who is a family member of an individual described above
Who has been one of the four highest compensated officers of the corporation for any of the 10 preceding taxable years

62. Qualified Equity Grants (cont.)
Qualified stock is stock of an “eligible corporation” that an employee receives in connection with the exercise of an option or in settlement of a restricted stock unit (RSU)
An eligible corporation is a corporation in which:
No stock was readily tradeable on an established securities market during any preceding calendar year
The corporation has a written plan under which not less than 80% of all employees who provide services to the corporation in the United States are granted stock options or RSUs

63. That’s All Folks! Any Questions?