The Tax Cuts and Jobs Act has potentially sweeping implications for the American economy, which will take years to fully understand. But, as of this moment, we can already examine a number of the consequences for Washington, D.C. and Maryland residents.
First, let's take a look at some of the provisions that have been popular among my clients:
Now, for some of the less popular provisions:
Of course, there are literally dozens of other ways tax reform can affect your investments. That is why it is important to consult someone who not only understands the law but also takes the time to learn about your unique circumstance.
Hello everyone, I have some big news:
Multiple longstanding clients have pooled their resources to start an investment partnership, and I am now committed to working with them as their reliable legal advisor. Due to this commitment, my practice has closed to the public at large.
This decision does not affect work I may perform under auspices of nonprofits or charitable organizations. I will continue to update my blog with legal news and analysis, focusing on tax and financial matters that affect residents of Washington, D.C. and Maryland.
I also intend to start reviewing books on topics of interest. Recommendations are welcome!
Thank you for your continued support and best regards.
Later this week, we will find out whether federal tax reform has any real chance of happening in time for 2018. Compared to most Americans, people in Washington, D.C. and Montgomery County, Maryland—and other highly taxed jurisdictions—have a lot more to lose or gain, depending on the final contents of the new legislation.
Almost half of my clients have expressed their concerns that tax reform might cause their federal taxes to go up; the main culprit is the inability to deduct state and local taxes. Several popular deductions may disappear depending on last-minute negotiations. For example, the House proposed to cap the property tax deduction at $10,000, whereas the Senate’s latest proposal eliminates deduction completely. Also, we could lose the mortgage interest deduction for newly purchased properties worth more than $500,000. People with existing mortgages need not worry, however, unless they are planning on buying a new home, as their current deductions would be grandfathered in under the proposed law.
Of course, it is by no means clear the tax reform bill will garner support from a minimum of 50 senators. Even if the Senate can push through reform without significant defections from the House GOP rank and file, it remains to be seen whether the House and Senate versions of the bill can be reconciled.
Since the details of tax reform are still being hammered out, I cannot opine on whether I think it is a boon for the American public as a whole or to D.C. and Maryland residents specifically. But there are at least three provisions (in both versions of the bill) that I think most of my clients would be happy about:
1. Federal estate tax exemption increased to $11 million ($22 million for couples). One of the big reasons to hire an attorney who is experienced with estate planning is to minimize or avoid this tax. It has often been the case that well-to-do people avoid the tax entirely, whereas someone whose estate barely qualifies for taxation (and whose family could really use a tax break) passes unexpectedly in some kind of accident, and the law punishes his or her heirs. Not surprisingly, most Americans consider the tax unfair—including people who are usually supportive of taxes on the wealthy. Many people feel the estate tax amounts to double taxation and should be repealed for that reason. Moreover, the tax can discourage potentially hardworking individuals from being productive, since they cannot give their earnings directly to loved ones. The House version of the bill would eventually repeal the estate tax entirely.
2. 1031 exchanges would still be allowed. Also known as a “Like Kind Exchange” or “Starker Exchange”, Section 1031 of the Internal Revenue Code allows a taxpayer to defer capital gains and related federal taxes when swapping certain properties. By doing this, you can more easily finance a new investment because the IRS realizes you are not yet cashing out, so all of your gains are merely paper profit. This was an item of concern for the real estate industry. Indeed, two separate clients told me that if these exchanges were repealed it would cause significant burdens for their businesses. For smaller investors, a 1031 exchange can be the difference between growing their business and being economically stationary.
3. Businesses would continue deducting state and local taxes. Although state and local deductions would be eliminated for individuals under the proposed reform, the good news for businesses owners and entrepreneurs is that businesses would still be able to deduct state and local taxes, including property taxes.
I wish to emphasize that all of this analysis may be void in a few days. The reason I waited so long to comment on issues of tax reform is that I know how quickly legislation can change at the last moment due to deal making and compromise. I will be prepared to discuss the latest developments in detail with my clients as more information arises later this week.
Many people have asked me how estate planning might change if Congress repeals the federal estate tax. As you can imagine, any predictions of this kind are highly speculative. But most people who need an estate plan under today’s laws will still need one in 2018 and onward. Here are the principal reasons why:
(1) Even if the estate tax is repealed it can come back. The estate tax has changed many times over the past 90 years. It is one of America’s most controversial laws and you can be sure that a constituency will exist for rolling back any successful reform, especially if the reform lacks bipartisan agreement.
(2) Washington, D.C. and Maryland impose taxes on sizeable estates. As mentioned in my previous blog post, D.C. and Maryland are increasing their estate tax exemption to be more competitive and attract investors and taxpayers from neighboring states like Virginia. If your net worth exceeds the current federal exemption indexed for inflation, however, an estate plan may be necessary to prevent your beneficiaries from overpaying.
(3) An estate plan is about more than taxes. An estate plan is an opportunity to express your values, make healthcare decisions, and make guardianship arrangements for minors. It also provides beneficiaries with important legal protections during major life events such as debt and divorce. Estate plans often create disincentives for frivolous lawsuits and preserve family unity. For all the above reasons and more, tax reform is unlikely to have a major impact on your need for a personalized estate plan.
We still do not know what the federal estate tax will be in 2018, and this has consequences not only at the federal level, but also at the local or state level. This is because the D.C. Council and Maryland General Assembly have explicitly tied their respective taxes levied on personal estates to the federal exemption, taking effect in 2018 and 2019 respectively.
Absent changes to federal law, in 2018, the District of Columbia will exempt $5.49 million from the local estate tax (or about $11 million for couples who file the right paperwork), effectively repealing the tax for most people.
However, if the federal government increases the exemption or gets rid of the federal version of the tax completely, this will have implications for District of Columbia law. For example, if the federal exemption were to double or triple, the same would happen to D.C.'s exemption.
Following suit, Maryland will increase its exemption to $4 million in 2018 and then plateau at $5.49 million in 2019, assuming no changes to federal law. But like D.C., Maryland's 2019 rates could be influenced by choices made within coming months by Congress.
For the remainder of 2017, D.C. will continue to tax estates with a gross value of more than $2 million and in Maryland the exemption is $3 million.
Laws and budgets can change. So, please always make sure your information is current before making any decisions.