2018 Tax Updates — How the Tax Cuts and Jobs Act will affect the taxation of businesses and individuals.

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As you likely know, there have been some recent changes to our tax laws based on the December 20 passage of H.R.1 (the “Tax Cuts and Jobs Act”). Those changes have a significant impact on the taxation of businesses and some individuals. Since the bill is approximately 440 pages long, I will not go into too much detail here, but I do want to highlight some of the more widespread changes that result from passage of this bill.

Because many of the changes discussed below have not yet been tested in practice, and regulations still need to be developed to interpret some of these changes, the practical impact could be quite different from my analysis. It’s also important to note that many of these changes expire in 2025, and the expiring provisions will revert back to current law at that time.

Estate Tax Changes

Gift Taxes. The annual exclusion amount increased to $15,000 in 2018, up from the $14,000 figure that has been in place since 2013.

Estate and Gift Taxes. The exemption equivalent for estate, gift, and GST taxes (generation-skipping transfer taxes) doubled in 2018, and is now $11.2 million per spouse, or $22.4 million per married couple. Portability remains intact, and other than the increased exemption amount this area is largely unchanged. Note that this increased exemption is set to expire in 2025, and it’s possible (depending on the sentiments of Congress at the time) that there could be a “clawback” for large gifts — or transfers to irrevocable trusts — made between 2018 and 2025.

Income Tax Changes

Tax Rates and Brackets. Most taxpayers will see their marginal rate decline under the new law. We still have seven tax brackets, but the maximum marginal rate has dropped from 39.6% to 37%, and many of the intervening brackets now have lower rates and wider income bands. The AMT (alternative minimum tax) exemption has also increased, so they should provide relief to many taxpayers previously hit by this tax.

Deductions/Exemptions. The personal exemption of $4,150 per person no longer exists, but has been replaced by a much higher standard deduction of $24,000 for married taxpayers filing jointly. The higher standard deduction means fewer taxpayers will find it beneficial to itemize deductions in 2018 and forward.

Itemized Deductions. As you’ve likely heard in the news, there are some significant changes to the itemized deduction rules; namely, the state and local tax deduction is now limited to $10,000 for married taxpayers filing jointly, or $5,000 for a single taxpayer. Many of the miscellaneous itemized deductions (those subject to the 2% floor) have been eliminated, and some others — such as the medical expense deduction — have been expanded so the adjusted gross income floor is now 7.5% instead of 10% (which arguably provides more benefit to low-income workers with high medical expenses, such as the elderly). The mortgage interest deduction is another change that hits many taxpayers, as the cap on indebtedness was decreased to $750,000 from $1 million, effective as of December 16, 2017. Existing mortgages are generally grandfathered.

Section 529 Plans. These plans were formerly known as college savings plans, but have now been expanded such that funds can be used (up to $10,000 per year) for any elementary or secondary public, private, or religious school. If you’re a Virginia resident then you also get a state income tax deduction for contributions (within limits). Many other states also offer similar tax deductions.

Charitable Deductions. Very little has changed in this area, except that you can now contribute a greater percentage of your adjusted gross income (60% now, versus 50% in prior years). As you might expect, this affects very few taxpayers.

Child Tax Credit. The child tax credit doubled to $2,000 and the phase-out limits have increased so the credit will be available to more taxpayers in 2018 and forward.

Health Insurance Mandate. The only significant change here is that the IRS can no longer fine you for not having insurance.

Business Taxes

Pass-Through Entities. Partnerships, LLCs, S-corporations, and even sole proprietorships may see significant benefits from a new 20% deduction for qualified business income. That said, the regulations ultimately implemented by the IRS could change the landscape significantly and I would hold off on any business entity conversions until the dust settles. Also note that this deduction is aimed at small and mid-sized businesses. Taxpayers should expect to see anti-abuse rules that prevent the application of this deduction to professional service groups (e.g., law firms, accounting firms, doctors) and publicly traded partnerships.

Corporations. Corporations will see their top tax rate drop to 21% from 35%.

Section 179. The Section 179 expensing limit will be raised to $1 million (up from $500,000) for qualifying asset purchases.

Other Changes. Repatriation of off-shore assets (whether liquid or illiquid) is encouraged by special tax rates, the corporate alternative minimum tax has been revised, net operating loss carrybacks have been eliminated while carryforwards are now limited to 80% of taxable income, and there are new limits on the deductibility of net interest.

As always, you should discuss your particular situation with your CPA (or with me) prior to engaging in any tax planning strategy, and as previously noted, it is still too early to understand how some of these provisions will be implemented or interpreted. If you have any questions or wish to discuss your situation in more detail, please let me know.


Speaking to an attorney or accountant who is well-versed in tax law will help you make the right decisions for your business and personal real estate investments. To learn more, please contact Charles E. McWilliams, Jr. by email or call (540) 667-4912.

Completing Action Items Ensures an Effective, Efficient Process for Estate Planning

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I recently met with the daughter of one of my estate planning clients. The last time we spoke was more than three years ago when we held an emergency estate planning meeting at the hospital before her mother’s heart surgery. At that point, the family—and doctors—were concerned my client might not make it through the surgery and she wanted to make sure all her estate planning documents were just right before the operation. Fortunately, the surgery went smoothly, recovery went well, and she returned to normality for several years.

After the documents were executed, I provided my client and her daughter a list of “next steps” they needed to complete to ensure all assets would pass according to the terms of the trust agreement that was implemented. To be sure, that list entails a fair amount of work for the client, but it is essential to ensuring the estate administration process goes smoothly. All too often I have families come into my office with documents prepared by another attorney expecting the estate administration to be very simple because they were told that would be the case. Yet, when I examine the binder of estate planning documents and review the decedent’s asset information, I find the family never completed the retitling work the attorney requested. In such a case, at a minimum, the planning they paid the attorney to do was meaningless; at worst, the assets may be distributed in an entirely unintended manner.

When I met my client’s daughter, I found she had followed all of my directions to the letter. All of the pay-on-death and transfer-on-death designations had been added to accounts, separate accounts had been titled in her mother’s trust, and all of the appropriate beneficiary designations had been added to retirement accounts. Even her mother’s car had been retitled in the trust—and that’s a rare occurrence! In this instance, I was able to meet with the daughter for less than an hour, give her some direction on how to distribute the assets, and send her on her way. The entire estate administration process for the daughter took a few days from start to finish, as compared to the year or more it often takes to administer an estate when assets pass through probate.

It does take a lot of time to complete all the retitling the estate planning attorney requests, but it is imperative to ensuring the plan works in nearly all circumstances. This client’s situation is illustrative of exactly how easy it can be when everything is done properly. If you’ve done estate planning in the last few years, please take the time to look at the retitling directions your attorney provided and follow through with them. If you need help with the retitling—or if you haven’t planned at all—please feel free to email me at cmcwilliams@thelandlawyers.com or give me a call so I can work with you to ensure the estate administration process goes as smoothly as possible.

Planning Lessons from the Real Estate Industry

Planning Lessons

I work with real estate developers, investors, and Realtors on nearly a daily basis, and I am always impressed by the transformation newcomers to the industry undergo from the time they start their first project to when their business is thriving. These professionals learn many lessons the hard way. Some seek counsel from the start, and others wait until they can “afford” professional advice from attorneys and accountants. The fact is, most investors on a budget can’t afford not to obtain professional advice!

Furthermore, even those who seek professional advice sometimes do not get what they bargained for. For example, I recently received an email from a “business coach” who is assisting one of my growing developer clients. This person was questioning the requirement for depreciation of the developer’s property based on a review of IRS publications. Now, the first red flag is that we have a business coach reading the IRS publications, which are useless for all but a cursory (and often confusing) overview of the subject matter. Simply stated, depreciation is not optional. You can choose whether to take a deduction, but your property depreciates, and your adjusted basis continues to decrease, regardless. I did not charge my client to set the issue straight, but had he listened to his business coach, it would have cost him tens of thousands of dollars per year.

The lesson here is to always make certain you are receiving quality advice in real estate endeavors and that your advisors have the credentials to support what they charge. Too often, entrepreneurs (and occasionally very experienced investors) make grave mistakes because they did not seek the counsel of a qualified attorney or accountant. To help you avoid these mistakes, here are a few pointers to keep in mind for every real estate deal.

  • Always discuss the project with your attorney and accountant well in advance of the anticipated closing – preferably at least 30 days prior (more for larger projects). Although it may be an extraordinary transaction for you, remember that your attorney sees these deals on a regular basis. If there are no red flags, you may only need a short phone call.
  • Make sure you understand all of the immediate tax consequences and how they will play out over the long-term. Make a plan and project the tax consequences and cash flows for at least 10 years, preferably longer. Ask yourself these questions: Will there be taxable income? Will the property generate a tax loss? Is this loss deductible?
  • Make sure you understand what will happen when or if you sell the property. Will there be a capital gain or capital loss? What about depreciation recapture?
  • What happens if you are incapacitated or die? Can the project function without you? Who will take over the management? Are there any tax consequences (estate taxes, basis step-up) or will your partners have any right to buy your interest? If your partners can (or are required to) buy you out, what is the price and how will it be calculated? Should your spouse be in this deal with your partners? Is this fair to everyone?
  • Have an exit strategy and understand the tax and financial implications.
  • Plan for contingencies. What happens if the property doesn’t sell? What if the tenants move out? What if rental rates drop or interest rates increase dramatically? Can you bring on a partner if needed or engage in a cash-out refinancing?

Speaking to an attorney or accountant who is well-versed in tax law will help you make the right decisions for your business and personal real estate investments. To learn more, please visit our Estate Planning & Administration page, or call Chuck McWilliams at (703) 680-4664.

Saving Money by Planning

Our clients, a husband and wife, owned a sizable family farm comprised of numerous parcels of real estate, and also owned various other agricultural operations in Virginia. Their initial objectives were to reduce or eliminate estate taxes, and transfer the assets to their children.

Mr. McWilliams was recommended to the clients by their financial advisor, who knew of Mr. McWilliams’ expertise in these matters.

Upon review of the clients’ existing estate planning documents, Mr. McWilliams discovered that not only did their current planning documents subject all their property to probate, but they could subject the property to estate taxes upon the death of the first spouse. The probate and administration costs associated with their estate would have been in excess of a hundred thousand dollars, but the prior attorney – who is a well-respected general practitioner in their locality – failed to use revocable trusts and other non-probate transfer mechanisms in their estate plan. Mr. McWilliams was ultimately retained to prepare new wills, trust agreements, powers of attorney and advance medical directives, and also assisted with family business and succession planning advisory services.

The planning undertaken by the client will ultimately save them hundreds of thousands of dollars in probate fees and estate taxes (while costing a very small fraction of that amount to implement), reduce their annual insurance expenses, reduce their liability exposure, and streamline the transfer of assets to the next two generations of their family. They are also continuing their relationship with the financial advisor who generated the referral; who has now invested their assets in an appropriately balanced portfolio; and they are considering moving their accounting work to a new firm that is well-respected and can likely provide the more comprehensive services they need at a lower cost than their current accountant.

Tax Code Changes – Will They Impact You?

by Charles E. McWilliams, Jr.

As tax season approaches I receive more frequent questions from my clients about what impact, if any, the American Taxpayer Relief Act of 2012 (“ATRA”) will have on them this year. The short answer is, “it depends”, but for some clients, the impact may be dramatic. For those of you who do not know about this legislation, ATRA is the new tax legislation that was signed into law on January 2, 2013, and it includes some very significant changes, some of which are summarized below.

Estate Taxes. The unified credit against estate taxes remains indexed for inflation and will be $5.25 million per person in 2013, with a rate of 40% on the excess. Fortunately, “portability” — the ability of spouses to share their unused exclusion amount — remains intact, but just as before, you must file an estate tax return (Form 706) to elect portability of the deceased spouse’s unused exclusion amount.

The annual gift tax exclusion amount increased to $14,000 per person for 2013, and Congress remained silent on family limited partnerships and other discounting strategies which still remain viable.

Investment Income. The 15% long-term capital gain bracket is retained for many taxpayers, but the ATRA also enacted a 0% bracket for certain low-income taxpayers, and a 20% bracket for taxpayers with an adjusted gross income (“AGI”) in excess of $400,000 for single taxpayers and $450,000 for couples. Worse yet, these capital gain brackets are combined with a new Medicare Tax on Investment Income equal to 3.8% for individuals with AGI in excess of $200,000 and couples in excess of $250,000. That means you could pay up to 23.8% on long-term capital gains in 2013, not including state taxes — that is a 59% increase in the tax rate on long-term capital gains!

Income Taxes. The ATRA added a new top tax bracket of 39.6% for single taxpayers with AGI in excess of $400,000, and $450,000 for couples. The phase out of itemized deductions beginning at $250,000 of AGI will also serve to increase the effective tax rate for many taxpayers, and the new Hospital Insurance Tax of 0.9% will be deducted from the payroll of single taxpayers making more than $200,000 ($250,000 for couples). Combining the above changes with an end to the payroll tax holiday and additional limitations on itemized deductions, most taxpayers earning more than $200,000 will pay several thousand dollars more in taxes in 2013.

This is not a comprehensive analysis of the ATRA changes, as there were literally hundreds of other changes to the tax code, but these are the most relevant changes for most taxpayers. Unfortunately, these changes will result in a net tax increase for most of our clients, but I cannot stress enough how important it is for you to have a relationship with a knowledgeable and experienced accountant who can help you navigate through these changes. There are numerous strategies that can be used to reduce your effective tax rate both during your lifetime and at death, but neither your accountant nor I can help you if you do not seek our assistance. In that light, please let me know if you would like to discuss your estate or business tax concerns in more detail, and I will gladly refer you to a qualified accountant if needed.

The Estate Tax and Gifting Game of 2012

Nearly every time I go into an estate planning meeting the first question my client asks is, “What’s going to happen with the estate tax next year.” Unfortunately, I cannot provide my clients with an answer I would be willing to bet on. For those of you who do not understand what prompts the initial question, I will enlighten you. Today, you could gift (or die with) up to $5.12 million and not owe a penny in estate taxes, but on January 1, 2013, this number drops to a mere $1 million unless Congress passes new estate tax laws. Worse yet, any money above that $1 million threshold will be subject to tax at a 55% rate.

One thing that is nearly certain is that Congress will not pass any new estate tax laws until after the elections, and I would be surprised if we see them do anything before mid-December. Even then, I do not expect to see Congress make any groundbreaking moves. In other words, they will not abolish the estate tax, and I do not think Congress will let it fall back to a $1 million exemption, as that would hit far too many of their constituents throughout major metropolitan areas such as northern Virginia. Even so, I have many clients who want to take advantage of the increased exemption now in case the exemption amount is lower in the future.

So, the next question is: How can I gift millions of dollars and yet retain control of the money? Technically, the answer is that you cannot because such a gift would constitute a retained interest in violation of Internal Revenue Code §2036; however, there are some ways to work within the bounds of the law and minimize the effect on your budget. Please note these are complex strategies that you should implement only with the counsel of an experienced estate planning attorney, as there are many traps for the unwary.

The goal is to set up a trust that utilizes nearly all of the donor’s estate tax exemption today so he will have transferred more money free of estate taxes if he dies at a time when the exemption is lower. If the exemption is higher when he dies, then the donor will have more money to give away tax-free. If the donor can set this up so he receives the income from a trust established by his wife and she receives the income from a similar trust established by her husband, it would be a win-win situation for the donor; but as we all know, the IRS does not like to lose. Ultimately, the IRS would declare these trusts to be in violation of the reciprocal trust doctrine. In layman’s terms, the IRS looks at the two trusts together, and if both spouses are in the same relative position before and after the creation of the trusts, then the IRS will take the position that nothing of substance happened. Based on existing precedent, the IRS will prevail in their argument, but there are ways to adjust to trusts to accomplish similar objectives with a lower risk of losing an IRS challenge.

If you are like the vast majority of Americans and cannot afford to give up $10 million this year, there are still options available. You can take advantage of annual exclusion gifts of $13,000 per beneficiary, per year, and a married couple can employ gift splitting to increase this to $26,000. Further, you can pay certain medical and educational expenses in unlimited amounts if the payment is made directly to the educational institution or health care provider. If that is not enough inducement to pay for your grandchild’s educational expenses, you could also take advantage of the 5-year election for contributions to §529 educational savings accounts. This means a married couple can contribute up to $65,000 each ($130,000 total) to a §529 plan in any one year, and that contribution is treated (for tax purposes) as having been made pro rata over a 5-year period. The election is not automatic, and you must file Form 709 to elect the 5-year option, but this is a wonderful option for grandparents to provide funds that will grow tax-free until they are used to pay educational expenses.