First Look at the Tax Cuts and Jobs Act: Impact on Estates and Trusts

By Delman, Mary T. D.; Kess, Sidney et al. | The CPA Journal, February 2018 | Go to article overview

First Look at the Tax Cuts and Jobs Act: Impact on Estates and Trusts


Delman, Mary T. D., Kess, Sidney, Taylor, Catherine M., The CPA Journal


On December 22, 2017, the Tax Cuts and Jobs Act (TCJA) was signed into law by President Trump. Most of the provisions affecting estates and trusts are temporary; they commence in 2018 and are scheduled to expire after 2025. While there is minimal mention in the new law of its specific applicability to fiduciary income taxation, Internal Revenue Code (IRC) section 641(b) instructs that the taxable income of an estate or trust is to be computed in the same manner as of an individual unless otherwise indicated. Further guidance is anticipated as the IRS begins implementation.

Rate Reduction

Rates/brackets. As under previous tax law, estates and trusts reach the highest bracket quickly. The tax brackets for estates and trusts for 2018 have been changed as follows: for taxable income under $2,550, 10%; for taxable income from $2,550 to $9,149, 24%; from $9,150 to $12,499, 35%; over $12,500, 37%. After 2018, the tax brackets will be adjusted annually for inflation.

Owners of pass-through entities. There is a new 20% deduction for qualified business income from a partnership, LLC, S corporation, or sole proprietorship. This deduction will be available for estates and trusts, and will be passed through to income beneficiaries or retained by the fiduciary in a manner similar to allocating distributable net income. Rules similar to 2017-law IRC Section 199 will apply for allocating between fiduciaries and beneficiaries any W-2 wages and unadjusted basis of qualified property based on W-2 wages and capital. Generally, when a trust or estate owns an interest in an active business, it may be allocated a share of the domestic production activities deduction (DPAD) on a Form K-1 for this business. The DPAD is required to be allocated between the fiduciary and beneficiaries pursuant to the rules set forth under IRC section 199. The same allocation rules apply to the 20% deduction for qualified business income. Further guidance is needed, however, on this allocation as it applies to the 20% deduction.

Capital gains and dividends. The maximum rates of 15% and 20% on long-term capital gains and qualified dividends have remained unchanged, but the income levels for such rates have been modified to provide that capital gains are taxed at 0% when taxable income is under $2,600; at 15% when under $12,700; and at 20% when higher.

Alternative minimum tax (AMT). While corporate AMT has been eliminated and the individual AMT exemption has been, at least temporarily, significantly increased, IRC section 55(d)(1)(D) has remained unchanged, leaving the statutory AMT exemption amount for estates and trusts at $22,500 and the statutory exemption phaseout threshold amount at $75,000 of AMT income. The TCJA will, however, adjust these amounts annually for inflation.

Deductions

The personal exemptions for individuals are repealed, but the TCJA leaves the exemptions for estates and trusts unchanged. IRC section 642(b) extends personal exemptions to estates and trusts; therefore, the personal exemption remains deductible by an estate ($600) and trust ($100 or $300). Personal exemptions for qualified disability trusts have been set at $4,150 for years when the personal exemption is zero.

Itemized deductions. Many of the itemized deduction rules have changed:

* The cap for deducting home mortgage interest has been reduced from $1 million to $750,000 for mortgages incurred after December 15, 2017. Interest on home equity lines is no longer deductible. It is uncertain how this will apply to trusts that own real estate for personal use.

* The deduction for state and local income, property, and sales taxes (SALT) is capped at $10,000 (IRC section 164). No deduction in 2017 is allowed for prepayment of 2018 state and local income taxes. The SALT cap excludes foreign income and all real property taxes paid in connection with carrying on a trade or business or an activity described in IRC section 212 (i.e., relating to expenses for the production of income). …

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