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Tax Cuts and Jobs Act

The TCJA enacts a number of important tax changes. Stock photo

By Nancy Burner, ESQ.

Nancy Burner, Esq.

The Tax Cuts and Jobs Act increased the federal estate tax exclusion amount from $5 million to $10 million indexed for inflation for decedents dying in years 2018 to 2025. This amount is indexed for inflation back to 2011. The exact amount of the exclusion amount is not yet known for 2018. However, it is estimated to be $11.18 million. This means that an individual can leave $11.18 million and a married couple can leave $22.36 million dollars to their heirs or beneficiaries without paying any federal estate tax.

This also means that an individual or married couple can gift this same amount during their lifetime and not incur a federal gift tax. The rate for the federal estate and gift tax remains at 40 percent.

The doubling of the basic exclusion also means that the generation-skipping transfer tax (GST) exclusion is doubled to match the basic exclusion amount of $11.18 million for an individual and $22.36 million for a married couple.

The sunsetting of the doubled basic exclusion amount after 2025 raises the prospect of exclusions decreasing in 2026. Taxpayers with estates over $11.18 million will want to discuss with their estate planning attorneys the potential for making transfers to take advantage of the larger exclusion amount before the anticipated sunset.

The act does not make changes to the rules regarding step-up basis at death. That means that when you die, your heirs’ cost basis in the assets you leave them are reset to the value at your date of death.

The portability election, which allows a surviving spouse to use his or her deceased spouse’s unused federal estate and gift tax exemption, is unchanged. This means a married couple can use the full $20 million exemption (indexed for inflation). To make a portability election, a federal estate tax return must be timely filed by the executor of the deceased spouse’s estate.

In 2018, the annual gift tax exclusion has increased to $15,000. This means that an individual can give away $15,000 to any person in a calendar year ($30,000 for a married couple) without having to file a federal gift tax return.

Despite the significantly larger federal estate tax exclusion amount, New York State’s estate tax exemption for 2018 remains at $5.25 million. New York State still does not recognize portability.

With the current New York State estate tax law as enacted in 2014, there is a limited three-year look-back period for gifts made between April 1, 2014, and Jan. 1, 2019. This means that if a New York resident dies within three years of making a taxable gift, the value of the gift will be included in the decedent’s estate for purposes of computing the New York estate tax.

The following gifts are excluded from the three-year look-back: (1) gifts made when the decedent was not a New York resident; (2) gifts made by a New York resident before April 1, 2014; (3) gifts made by a New York resident on or after Jan. 1, 2019; and (4) gifts that are otherwise includible in the decedent’s estate under another provision of the federal estate tax law (that is, such gifts aren’t taxed twice).

Under the act’s provisions, most taxpayers will never pay a federal estate tax. Even with the enlarged exemption, however, there are many reasons to engage in estate planning. Those reasons include long-term care planning, tax basis planning and planning to protect your beneficiaries once they inherit the wealth.

In addition, since New York State has a separate estate tax regime with a significantly lower exclusion than that of the federal regime, it is still critical to do estate tax planning if you and/or your spouse have an estate that is potentially taxable under the New York State law.

Nancy Burner, Esq. practices elder law and estate planning from her East Setauket office.

U.S. Reps. Peter King, Lee Zeldin and Tom Suozzi voice bipartisan opposition to the federal Tax Cuts and Jobs Act Nov. 28. Photo by Alex Petroski

Components of the Tax Cuts and Jobs Act, a federal tax reform bill passed by the House of Representatives in November and currently before the U.S. Senate, has achieved the seemingly impossible in finding common ground for Republicans and Democrats.

Members of Long Island’s congressional delegation from both political parties stood in front of the Internal Revenue Service building in Hauppauge Nov. 28 alongside business owners, representatives from local chambers of commerce, and town and county elected officials to deliver a clear and unified message: As currently constituted, both the House and Senate versions of the bill would harm Long Islanders.

“I view it as a geographic redistribution of wealth to propose eliminating [state and local tax deductions],” 1st Congressional District U.S. Rep. Lee Zeldin (R-Shirley) said during the press conference, pointing to the elimination of the SALT deduction as a key sticking point in the bill. “You’re proposing to take more money from a place like New York in order to pay for deeper tax cuts elsewhere.”

“You’re proposing to take more money from a place like New York in order to pay for deeper tax cuts elsewhere.”

— Lee Zeldin

The SALT deduction, which was enacted 100 years ago, is a provision that in the past, through federal tax returns, gave a portion of tax dollars back to individuals in higher income and property tax states like New York, New Jersey and California to avoid double taxation. The deduction was eliminated in the House version of the Tax Cuts and Jobs Act, which the body passed Nov. 16, for individuals’ income taxes, and limited property tax deductions to $10,000. The Senate’s version of the bill, which has not been voted on yet, completely eliminates all SALT deductions. Both the House and Senate versions double the (married filing jointly) standard deduction from $12,000 to $24,000. The bill has been touted by President Donald Trump (R) and other members of Republican leadership as a massive tax cut for middle-class families.

The 2nd District U.S. Rep. Peter King (R-Seaford) and 3rd District U.S. Rep. Tom Suozzi (D-Glen Cove) also attended the press conference to rally support for changes to the bill. Zeldin and King were among 13 Republicans in the House to vote “no” on the bill, with 227 voting to pass it. None of the House Democrats voted in favor of the bill.

“There are some good aspects in both the House bill and the Senate bill,” Zeldin said. “Voters last November, when they went to the polls looking for that tax relief for them, for their families, for their community … this is not the tax relief that they had in mind. We may be upsetting a lot of people in our own party back in Washington right now, but we are not elected to be their congressmen.”

King echoed Zeldin’s position on both versions of the bill, calling the position between the three representatives a “united front.”

“I strongly favor tax cuts across the board,” King said. “I believe they are necessary, but this bill, both the House version and the Senate bill, I am opposed to.”

“We’re not asking for any special benefit, because we’ve gotten a raw deal over the years as far as federal distribution of revenues, but don’t add to that.”

— Peter King

King reiterated that his biggest issue with the bills is the elimination of the SALT deduction.

“This is inequitable, it’s unjust and it’s wrong,” King said. “Long Island is really the main victim of this tax bill. We’re not asking for any special benefit, because we’ve gotten a raw deal over the years as far as federal distribution of revenues, but don’t add to that. Don’t make it worse.”

King, who has been a supporter of Trump and his agenda, also took the opportunity to send a message to the White House.

“My district twice voted for Barack Obama by four points and by five points,” King said. “Donald Trump carried [New York’s 2nd Congressional District] by nine points. That was a 14-point turnaround. The people of Long Island didn’t make that turnaround so the Trump administration could raise their taxes so the rest of the country could get a tax break.”

Suozzi, the lone congressional Democrat at the event, also preached unity on tax reform as it pertains to Long Islanders.

“This would be a punch in the gut to everybody on Long Island if this bill were to pass either in the House form or the Senate form,” he said. Suozzi added that he thought it took guts for Zeldin and King to be among the 13 “no” votes among Republicans in the House. “We’re united 100 percent in recognizing eliminating the state and local tax deduction would be devastating to our constituents.”

New York’s income tax rate is among the highest in America, with members of the top tax bracket paying 8.82 percent in 2017. On average, the state income tax deduction for New Yorkers making between $50,000 and $200,000 in annual income for the 2015 tax year was between $4,049 and $9,330. The same group of earners deducted on average between $5,869 and $8,158 over the same time period in state and local real estate taxes. The 2015 tax year is latest year with available data according to the Urban-Brookings Tax Policy Center, an organization that provides independent analysis of tax policy.

Participants of a protest against the federal tax bill outside of Renaissance Technologies in Setauket Nov. 29. Photo by Kevin Redding

Representatives from local organizations stood outside Renaissance Technologies in East Setauket Nov. 29 to voice their opposition to the bill. Until recently, Robert Mercer was the chief executive officer of the hedge fund, though he is known nationally for his contributions to conservative and right-wing political campaigns.

“It’s clear that there are a lot of changes that are coming and for middle-class folks like us, they’re not going to be good changes,” said Peter Verdon a Suffolk County resident who was present at the protest. “The system is clearly out of whack, tilted towards the extremely wealthy and it’s continuing in that direction and enough’s enough. We can’t allow that to continue to happen.”

Bill Crump, a Lindenhurst resident and member of the Long Island Progressive Coalition political activist group also attended.

“We’re going to have a $1.5 trillion deficit and they’re going to cut our Medicare and our benefits,” he said. “It’s coming out of our pockets. Trump claims he’s going to give a tax cut. Maybe he’s going to give you a quarter while he reaches in and takes your wallet.”

This post was updated Nov. 29 to correct the income tax and mortgage tax deduction amounts under the two bills, and to include information about a Nov. 29 protest in Setauket. Additional reporting contributed by Kevin Redding.

Village Mayor Margot Garant said residents of Port Jefferson Village would get “whacked” by the elimination of the SALT deduction in the federal tax reform bill. File photo by Alex Petroski

Governmental leaders from virtually all levels in New York have come out in opposition to the federal tax reform bill, and now the Port Jefferson Village board can be added to the list.

The village passed a resolution at its Nov. 20 board meeting “expressing its strong opposition to any federal tax reform legislation that would eliminate or limit access to the state and local tax deduction.” The SALT deduction, which was enacted about 100 years ago, is a provision that in the past, through federal tax returns, gave a portion of tax dollars back to individuals in higher income and property tax states like New York, New Jersey and California to avoid “double taxation.” The deduction was eliminated in the House version of the Tax Cuts and Jobs Act, which the body passed Nov. 16, for individuals’ income taxes, and limited property tax deductions to $10,000. The Senate’s version of the bill, which has not been voted on yet, completely eliminates all SALT deductions. Both the House and Senate versions double the (married filing jointly) standard deduction from $12,000 to $24,000. The bill has been touted by President Donald Trump (R) and other members of Republican leadership as a massive tax cut for middle class families.

“We’re going to get whacked,” Village Mayor Margot Garant said of the bill during the board meeting.

New York’s income tax rate is among the highest in America, with members of the top tax bracket paying 8.82 percent in 2017. On average, the state income tax deduction for New Yorkers making between $50,000 and $200,000 in annual income for the 2015 tax year was between $4,049 and $9,330. The same group of earners deducted on average between $5,869 and $8,158 over the same time period in state and local real estate taxes. The 2015 tax year is latest year with available data according to the Urban-Brookings Tax Policy Center, an organization that provides independent analysis of tax policy.

“New York residents already send $41 billion more to the federal treasury than the federal government returns to New York,” the village resolution reads. “The state and local tax deduction is a fundamental principle of federalism and without it our residents would be faced with double taxation, as they would be forced to pay federal income taxes on the taxes they must pay to state and local governments.”

Garant joined New York Gov. Andrew Cuomo (D), New York’s U.S. Sens. Chuck Schumer (D) and Kirsten Gillibrand (D), U.S. Rep. Tom Suozzi (D-Glen Cove), and U.S. Reps. Lee Zeldin (R-Shirley) and Peter King (R-Seaford) in opposing the bill. Zeldin and King were among 13 Republicans in the House to vote “no” on the bill, with 227 voting to pass it.

“I view the elimination of the SALT deduction as a geographic redistribution of wealth, picking winners and losers,” Zeldin said in a statement. “The proposal taxes additional funds from a state like New York in order to pay for deeper tax cuts elsewhere. For anyone who incorrectly argues that the rest of the country subsidizes our state, I would point out that New York is a net contributor to the federal coffers with regards to both tax policy and spending policy and that is even with the SALT deduction.”

According to www.censusreporter.org, about 62 percent of Port Jefferson Village residents earn between $50,000 and $200,000 in annual salary.

The Senate is expected to vote on the bill shortly after Thanksgiving.

This post was updated Nov. 29 to correct the income tax and mortgage tax deduction amounts under the two bills.

The Tax Cuts and Jobs Act would reduce the number of income tax brackets from seven to four; eliminate deductions for state and local income taxes; and would reduce the corporate tax rate from 35 to 20 percent. Stock photo

By Alex Petroski

Last week Republicans in the House of Representatives took a major step toward fulfilling a lynchpin campaign promise that is seemingly decades old.

The House Ways and Means committee released the framework of the Tax Cuts and Jobs Act Nov. 2, a major piece of legislation touted by President Donald Trump (R) as a cut to income taxes for “hardworking, middle-income Americans,” though it would negatively affect New Yorkers if signed into law, according to lawmakers from both sides of the political aisle.

The highlights of the bill, which would require passage by the House and Senate and the president’s signature before becoming law, include a consolidation from seven individual income tax brackets down to four; the elimination of the deduction for state and local income taxes, a provision that in the past through federal tax returns gave a portion of tax dollars back to individuals in higher income tax states like New York; and a reduction of the corporate tax rate from 35 to 20 percent.

“I am a ‘No’ to this bill in its current form,” 1st Congressional District U.S. Rep. Lee Zeldin (R-Shirley) said in a statement. “We need to fix this state and local tax [SALT] deduction issue. Adding back in the property tax deduction up to $10,000 is progress, but not enough progress. If I’m not fighting for New Yorkers, I can’t expect anyone else from another state to do it for me.”

U.S. Rep. for the 2nd District, Tom Suozzi (D-Glen Cove), was even more critical of the bill than Zeldin.

“The goal of tax reform is to help hard-working Americans make more money so they can live the American Dream,” Suozzi said in a statement. “The American people expect us to find a bipartisan solution to tax reform that helps create good paying middle-class jobs. This plan doesn’t achieve that goal. I won’t support it.”

Other New York lawmakers from the Democratic Party voiced harsh opposition to the bill in its current form.

New York’s U.S. senators Kirsten Gillibrand (D-New York) and Chuck Schumer (D-New York) each said via Twitter they viewed the bill as a tax break for corporations that would have a negative impact on middle-class citizens. New York Gov. Andrew Cuomo (D) called the bill a “tax increase plan.”

“The tax reform plan, they call a tax cut plan,” Cuomo said in a statement. “It has a diabolical dimension, which is the elimination of the deductibility of state and local taxes … what makes it an even more gross injustice is, the state of New York contributes more to the federal government than any other state. New York contributes more to Washington than any other state. We’re the No. 1 donor state. We give $48 billion more than we get back. Why you would want to take more from New York is a gross, gross injustice.”

Duncan MacKenzie, chief executive officer of the New York State Association of Realtors said in a statement the bill would harm many New York homeowners.

“It will lessen the value of the property tax deduction and it cuts a host of other key housing-related tax incentives,” he said.

The Committee for a Responsible Federal Budget, a nonpartisan, nonprofit organization founded in the 1980s and dedicated to educating the public on issues with significant fiscal policy impact, estimated the bill would result in a $1.5 trillion increase to the national deficit.

Mark Snyder of Mark J. Snyder Financial Services, a Hauppauge-based personal financial planning and management firm, called the bill a “torpedo aimed at the wallets of Long Islanders” in an email. He also pointed to the elimination of the SALT deduction as clear evidence the bill would harm New Yorkers.

“As a representative from New York, I’d kick this bill to the curb,” he said when asked what he would do if he were tasked with voting on the bill.

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Do we need tax cuts?

Lots of people agree that our current tax rules are outdated, cumbersome and unfair. On the other hand, there will never be total unanimity on how the tax code should read because one person’s tax cut is another’s tax increase, and for sure no one wants to lose whatever benefits they already have. So the prospect of changes is only palatable as a campaign promise if there would be an overall greater good that everyone recognizes. Such a benefit was proposed during the 2016 campaign as a way to recharge the slow economy. And the conversation has continued from there.

But hold on. The circumstances have changed. Our economy is no longer sluggish. In fact, it seems to have taken off. And, unusually, the economies around the globe appear to have also done so, almost in unison. This rare good news bodes well for the United States and others around the world.

So, back to my original question: Why do we need a tax cut?

If the answer is, for political reasons, that stinks. Just because politicians promised to cut taxes, a regular pledge to get votes, is not good enough to shake the ground on which we live. If the answer is to reallocate wealth, that has never been the role of our capitalist democracy. If the answer is to make more equal the lives of the haves and the have-nots going forward, then simply raise the taxes on the haves in proportion to how much they have benefited from our same capitalist society. And finally, if the answer is to raise revenue in order to reduce our unprecedented national debt, then raise taxes across the board proportionately on everyone who enjoys the services provided by life in these United States.

Sometimes one can get too close to a problem and not see the bigger picture. There is a saying that goes: Are we doing things right—or are we doing the right things? To check on whether we are doing things right, we have to engage in the details, the nitty-gritty of the process. In the case of tax reform, we have to hammer out every line to the greater satisfaction of all concerned. But to decide if we are on the right track, that is, if we are doing the right things, we have to stand back and examine the whole picture. Has the situation changed, perhaps rectified itself, or do we still have to help matters along?

I suggest the latter and I’ll explain why.

Businesses, which will reap three-quarters of the tax proposals over the next 10 years as currently presented, are already, for the most part, doing just fine. That is why the stock market keeps hitting new highs. The prices of the stocks are earnings driven, and the companies we can publicly track via the markets are showing record profits. Why do they need more stimulus? To expand and create more jobs, which is a political mantra? More likely companies will reinvest the additional profits in job-saving equipment, which is the way trends are already leaning. If the government wants to create more jobs, it should help create more businesses, which it could do by offering tax breaks to start-up companies. But that doesn’t require broad tax overhaul. That would just take one change. Mr. President, pick up the pen. Furthermore, to encourage companies to add more workers, offer incentives specifically pegged toward those additional salaries, not tax breaks that can simply result in higher profits in the misguided hope of higher tax revenues.

The initial tax proposals include eliminating deductions for large medical expenses; student loan interest; alimony; tax preparation costs; moving to a new job expenses; casualty, disaster and theft losses; and qualified adoption fees, according to CNBC. Are those the changes we want for our society?

What ultimate goal can we all get behind, and do we get there with tax cuts?