Top Take Aways:

• The base applicable exclusion amount (and generation-skipping tax exemption) will be $11,700,000 (was $11,580,000 for 2020).
• The annual gift tax exclusion will be $15,000 (unchanged).
• The annual gift tax exclusion for a non-citizen spouse will be $159,000 (was $157,000).
• The “2 percent” amount for purposes of section 6166 will be $1,590,000 (was $1,570,000).
• The top (37%) income tax bracket for estates and trusts will begin at $13,050 (was $12,950).
• The alternative minimum tax exemption for estates and trusts will be $25,700 (was $25,400), and the phaseout of the exemption will start at $85,650 (was $84,800).

Business Meals & Entertainment Expense Deduction –

Effective January 1, 2018!

Previously, a taxpayer could deduct 50% of business meals and entertainment.

The New Tax Law effectively would serve to disallow business meals and entertainment expenses!

It’s So Hard to Say Good-Bye to Yesterday…

Breaking it down a little more –>

BUSINESS RELATED – NOT DEDUCTIBLE

Entertainment. Employer tax deductions for business entertainment expenses are removed by the new tax law.  Bye Bye deduction for dues to social, athletic or sporting clubs — even if the membership is used primarily in furtherance of the taxpayer’s business. That also means no deduction for luxury boxes at stadiums/arenas, theatre and concert tickets, or hosting golf outings.

In general, the 50% employer tax deductions for business entertainment expenses are removed.

Business meals. Bye bye deductible power lunches! Employer tax deductions for business meals are removed by the new tax law, with a temporary exception.

Exception – business meals will be deductible up to 50% (previously 100%) if provided through an in-house cafeteria or meals, or if provided as a de-minimis fringe benefit by the employer for the convenience of the employer, until 2025 when that deduction goes away entirely as well.

EMPLOYEE RELATED – DEDUCTIBLE

Business meal and entertainment expenses remain deductible if incurred for recreational, social, or similar activities (including facilities, but not club, dues) primarily for the benefit of employees (except those employees that are highly compensated); e.g., an office holiday party and meals employees consume while traveling for work.

Said anther way, employee related business meals remain 50% deductible and recreational and social employee expenses remain 100% deductible.

Employees can still exclude the benefit of employee meals from income.

The Joint Committee on Taxation estimates the change will bring in $23.5 billion in tax revenue over the next decade.

PLANNING POINTER – Over time there will be technical corrections and clarifications, but for now it is important to focus on appropriately classifying deductions as advertising (e.g., sponsorship of an event) vs. entertainment and tracking what expenses are travel meals of employees (partially deductible) vs. entertainment (non-deductible).

SO, WHAT DOES IT CHANGE?

Corporate (permanent) and Pass Through Entity (temporary) Income Tax:

Corporate Tax Rates are reduced from 35% to 21%.

Business Income from Pass Through Entities: provides for a 20% deduction for individuals and trust and estates on domestic qualified business income from pass-through entities.

• Effectively reduces the top tax rate for those eligible to 29.6% (f
• Wages paid to owners and certain income from specified service businesses (i.e. attorney and accounting firms) are excluded from the deduction.

Individual Income Tax: Temporary (most)

Individual Tax Top Rate is reduced from 39.6% to 37%.

Other Individual Tax Rates are changed as follows:*

Standard Deduction for Single Individuals is increased from $6,500 to $12,000.

Standard Deduction for Married Couples is increased from $13,000 to $24,000.

Personal Exemption is reduced from $4,050 to $0.

For Those Who Itemize:

State and Local Tax Deduction and Real Property Taxes – capped at $10,000.

Cap on Deduction for Mortgage Interest decreases from $1,000,000 to $750,000 (mortgages prior to 2018 are grandfathered under the $1,000,000 limit).

Home Equity Line (HELOC) – interest no longer deductible, whether new or existing loans.

Charitable Contribution Deduction – AGI limit for cash contributions is increased from 50% to 60%.

Alimony – not deductible to the payor and not taxable to the payee after 2019.  Applies to divorce or separation agreements executed (or modified) after December 31, 2018.

All other deductions are disallowed, e.g., unreimbursed employee expenses, investment advisory fees, tax preparation fees, etc.

Individual Mandate for Health Insurance: Eliminates the coverage/penalty requirements as of 2019.

Transfer Tax:

Gift/Estate/GST Tax Exemptions: doubles the basic exclusion amount from $5 to $10 million.

• For 2018, the inflation adjusted amount will equal around $11.2 million (or $22.4 million per married couple.
• On January 1, 2026, the basic exclusion amount will return to $5 million, as indexed for inflation from 2010 to 2026.
• “Clawback” unlikely.

What doesn’t it change?

Individual Income Tax:

Long Term Capital Gains and Qualified Dividends is retained at 0%, 15% and 20% (top rate).

Net Investment Income Tax is retained at 3.8%.

Gain on Sale of Principal Residence – Exclusion still allowed for gain up to $250,000 (single) and $500,000 (joint) on sale of principal residence.

Transfer Tax:

Transfer Tax rate (Gift, Estate and GST) is retained at 40%

Step Up in Basis remains unchanged.  Meaning estate assets will continue to receive an income tax basis step up (or down) to the asset’s fair market value at a decedent’s death.

Almost all of these changes will sunset in 2026.  The corporate changes are permanent.

(*chart credits to MBAF)

Beginning after 2023, the estate and generation-skipping taxes are repealed while maintaining a beneficiary’s stepped-up basis in estate property.

The gift tax is lowered to a top rate of 35 percent and retains a basic exclusion amount of $10 million and an annual exclusion of $14,000 (as of 2017), also indexed for inflation.

Senate version due by Thanksgiving, then they must negotiate a compromise (i.e., reconciliation).

I stumbled upon this joke:

Dan was a single guy living at home with his father, and working in the family business. When he found out he was going to inherit a fortune when his sickly father died, he decided he needed a wife with whom to share his fortune.

One evening at an investment meeting, he spotted the most beautiful woman he had ever seen. Her natural beauty took his breath away. “I may look like just an ordinary man,” he said to her, “but in a short time my father will die, and I’ll inherit 20 million dollars.” 

Impressed, the woman obtained his business card and three days later, she married his father.

On October 16, 2017, the  Supreme Judicial Court of Massachusetts ruled favorably on a Personal Representative’s access to a deceased user’s online accounts and digital property (Ajemian v. Yahoo). This is the first reported case with respect to access to digital assets by a fiduciary.

The conundrum: Email are part of a deceased user’s estate.  But a personal representative (aka executor) can’t read them without violating Federal privacy or anti-hacking law.  The Ajemian case is the first to permit access and will empower fiduciaries though out the US.

10 Things You Need to Know

(1) This is the first case in the country to answer the specific question of “lawful consent” by a fiduciary under the Stored Communications Act (SCA).*

(2) SCA = protection of privacy.

(3) Privacy protections = significant obstacle for personal representatives trying to gain access to a deceased users online accounts and digital property, including and more specifically emails.

(4) When the SCA applies, the online company (think Yahoo, Google, Facebook, Microsoft…) is prohibited from disclosing the contents of electronic communications or files to anyone (this includes family members and fiduciaries) other than the user.

(5) SCA Exceptions = online company may voluntarily disclose such information, but IS NOT required.

(7) Voluntary disclosure is restricted unless a statutory exception under the SCA applies.**

(8) Enter the Lawful Consent Exception to the SCA.***

The text of the SCA does not explicitly answer whether a fiduciary of a deceased user may grant “lawful consent” on behalf of such deceased user in order for the online company to voluntarily disclose account contents. This is the first case to answer that question. This case answered that question by holding – a personal representative of a deceased user may provide lawful consent on the deceased user’s behalf in order for the online company to release the contents of a deceased user’s email account.

(9) Note – Ajemian means that the “lawful consent” exception to the SCA applies to personal representatives, and thus while the online company is not required to disclose the contents, the Court held that it may disclose.

(10) Enter RUFADAA (Revised Uniform Fiduciary Access to Digital Assets Act).  RUFADAA provides state law procedures for fiduciaries to request disclosure from online companies, including obtaining a court order if necessary.  38 states have a digital asset act (36 enacted RUFADAA). Massachusetts, whose law applied in the Ajemian, has neither. RUFADAA works best when certain “magic”words are in the relevant estate planning documents – Will, Trust and Power of Attorney.

Questions? Email me! Sasha@warddamon.com

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• *SCA is found at U.S.C. §§2701 – 2712
• **§2702(b) – Exceptions to the SCA.
• ***§2702(b)(3) Lawful consent exception.