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Klingman Insights

Tax Reform – What Does It Mean For You

December 4, 2017

Dear Valued Client:

In the early hours of Saturday morning, the Senate passed its version of tax reform legislation. Republican leaders in the House and Senate will now appoint members of each chamber to work to reconcile the differences and produce a single bill that will then be voted on by both the House and the Senate. While there are differences between the bills, particularly related to the treatment of “pass through vehicles”, they are similar enough that a compromise shouldn’t be that difficult. It is our opinion that it is highly likely that a reconciled bill will be passed and signed into law in the final days of 2017.

The most substantial change is the reduction in corporate tax rates from 35% to 20%. We do believe there is a chance this may be raised by a few percentage points as part of the negotiations and to allow for more individual tax breaks, but it will still be a significant reduction in tax rates for US corporations. This will have a positive effect on corporate earnings in 2018 and beyond. The provision that allows US corporations to repatriate profits back into the United States at a reduced rate has also been positively greeted by the equity markets with the belief that companies will use this cash to increase dividends, buy back shares, and increase mergers and acquisition and other investing activity.

On the individual side, there will be a slight deduction in marginal rates along with a corresponding reduction in itemized deductions. The unified credit for estate planning purposes, at minimum, will be raised to $11 million and the alternative minimum tax may be eliminated. Taxes on interest, dividends and capital gains will probably be unchanged.

Despite the uncertainty around the exact final details of the bill, there are specific actions that many of you should consider:

  • Defer Taxable Income: Evaluate opportunities to defer income to 2018 (or accelerate deductible expenses into 2017). This usually makes sense to consider every year, but may be even more valuable this year given the proposed changes.
  • State and Local Tax Deductions (SALT): Consider accelerating tax payments into 2017 (estimated state taxes, first half property taxes). State and local income taxes will no longer be deductible in 2018 and there will be a cap of $10,000 on property taxes that can be taken as itemized deductions.
  • Charitable Contributions: Charitable deductions can still be used as itemized deductions going forward, but you may be in a lower marginable bracket. Accelerating deductions by using a donor advised fund might be advisable depending on your specific tax situation.
  • Estate Planning: The increase in the lifetime exemption will likely impact many of you. We will reach out to you individually in the new year to discuss potential strategies for taking advantage of this change.
  • Pass Through Income: Full details remain fuzzy at this point as to how pass-through income will ultimately be taxed. The two versions both attempt to give some relief to “pass through vehicles” such as S Corps and LLCs, but have different approaches. For those of you impacted by this aspect of the legislation, we will follow up with you in 2018 to discuss possible strategies to consider once the rules are clearer.

We cannot stress enough that there’s still a chance that nothing will pass before year-end. Having said that, we think the likelihood of tax reform is high and the general structure is in place to start making some financial planning decisions. You should consult with your accountant on any of these decisions related to year-end tax planning. As always, don’t hesitate to reach out to myself, Craig, Tom or anyone else on our team if we can be of any assistance.

Best,
Gerry


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