As we all know, Congress just passed and President Trump just signed a massive new federal tax law. The law contains a number of provisions that will affect many if not most of us. Unfortunately, the press has decided to report on this new tax law from a political point of view. Many articles are slanted by the political leanings of the writer.
So today, and in the following weeks, I intend to report on some of the more significant aspects of that this new federal tax law and try to give you an impartial point of view from a tax lawyer perspective.
So here goes:
- Estate Tax
When we die, the federal government imposes a punitive tax on our assets. If we had more than $5 million in assets, the taxes have been as much as 40 percent of that value.
This punitive tax imposes great hardship upon many, such as farmers whose land had increased in value, small business persons whose stock in their company was more valuable, and others. Forced sales of valuable assets to pay estate taxes created hardship for many families.
To avoid these confiscatory taxes, a burdensome estate planning industry arose. Smart tax people came up with novel and obscure plans to create phantom reductions in value. These plans were often enormously complicated, extremely expensive, and frequently litigated by the IRS. People often had to rearrange their assets or business operations to implement these plans.
Fortunately, the new tax law raises the exemption from estate taxes from $5 million to 11.2 million. For married couples the exemption increases to $22.4 million. The law also keeps in place the unlimited marital deduction. This means a successful couple can exclude $22.4 million from the estate tax, and the tax on any excess balance is not due until the second spouse passes away.
As a result of this new federal estate tax exemption amount, and the continuing unlimited marital deduction, the estate tax now applies only to the extremely wealthy, a very few number who die each year. It appears the estate planning cottage industry, which serves no useful purpose in the eyes of many, will be significantly reduced.
The new law also means that regular lawyers can draft simple wills and focus on the needs of the client rather than the demands of the IRS.
I think this is a great provision, a significant step in the right direction, and will provide enormous simplicity for an untold number of people in the United States.
2. Standard Deduction
In the past we could reduce our income either by the standard deduction or our itemized deductions. The standard deduction amounts were $6,500 for single individuals and $13,000 for married individuals filing jointly.
Under the new law, the standard deduction is nearly doubled to $12,000 for singles and $24,000 for married couples. This is an extraordinarily important change and I want to discuss it in just a little bit more detail.
Over the last 40 years I have heard a continuous barrage of complaints that our federal tax system is far too complicated and unwieldy and that it needs to be simplified. The complainers (who obviously are justified) advocate for an alternative tax system- perhaps a value added tax (VAT) or a flat rate tax -to replace our system.
The press argues this new tax law creates additional complexity, not simplicity, and thereby has defeated the very purpose for which it was adopted.
Here is the simple answer to all of this.
The federal tax laws are not and will never be simple or fair. There is too much complexity in life and in all of our circumstances to allow for a system to be simple and fair. In fact, many consider the VAT and the Flat Tax to be regressive, hitting the poor especially hard.
However, doubling the standard deduction will create enormous simplicity for many people in this country. While the Code stays in place and may well be more complicated, the number of people it affects will be significantly reduced. Those electing the standard deduction will no longer run into many of those code provisions. Instead they will file a simple form on a simple document free of all of those complexities. And that is the heart and soul to simplifying our system. The system stays the same, it just doesn’t apply to millions who have elected out of it by using the new standard deduction.
President Trump may not have simplified the code, but he significantly restricted its application to a large number of people and thereby, as a practical matter, it did in fact simplify it’s application to them.
In the following weeks I will address other portions of the new tax law that may be of interest to us.
David Leeper is a Board Certified federal tax attorney with 38 years of experience. He can be reached at 915-581-8748, by email at email@example.com, or visit leepertaxlaw.com