Tax Cuts and Jobs Act 2017
The Tax Cuts and Jobs Act of 2017 (2017 Act) is viewed by many as the most sweeping change to the U.S. Tax Code in decades. Although the main impact of the tax bill will likely be felt in corporate America, there are aspects that impact individuals and their estate plans. It’s important to understand both the new law’s provisions for estate planning purposes, and how New York State has responded to the changes.
The original House bill called for the repeal of the federal estate tax and the Generation Skipping Transfer (GST) tax. President Trump referred to this as getting rid of the “death tax.” To win support in the Senate, the federal estate tax was retained, but the exemption amount was increased. Prior to the law being passed, the federal estate tax exemption was an inflation-adjusted $5 million ($5.49 million in 2017), which married couples could combine for a $10 million exemption ($10.98 million in 2017). Under the new law, the exemption is doubled for single individuals and married couples: $11 million for a single individual, and $22 million for a married couple. This undoubtedly means Form 706 federal estate tax returns, which involve computing the GST, will be less commonly used.
After the law passed, many estate planning attorneys and their clients questioned how New York State would respond. The widespread view was that, because New York State raised the state exemption amount in 2014, that the federal exemption amount and the state exemption amount would be the same by 2019: approximately $6 million for a single individual, and $12 million for a married couple.
The state clarified its position, indicating that its estate tax exemption will continue to rise with the consumer price index, a measure of inflation, and not with any changes to the Tax Cuts and Jobs Act. This position rests on a clause from the 2017 state budget, which states that “any reference to the internal revenue code means the United States Internal Revenue Code of 1986, with all amendments enacted on or before January 1, 2014.” According to state lawmakers, this clause insulates the New York estate tax from any changes to federal law. With New York State effectively declining to implement the changes in the new federal law, New Yorkers should still ensure that their estates do not exceed the current $5.45 million exemption for a single individual.
Estate Planning and College Funding
As I discuss with my clients, planning for your children’s education offers estate and income tax benefits. The use of 529 plans tops this list for both purposes. 529 plan account balances are generally not included in the account owner’s gross estate for estate tax purposes. This is contradictory to conventional estate tax rules because a 529 plan account owner may retain control over the account, including changing beneficiaries and liquidating the account.
From an income tax standpoint, the balance of a 529 plan account grows tax-free. 529 plan accounts are available to high-income taxpayers who are ineligible for other education tax incentives such as education savings account contributions, and interest deductions on student loans. Qualified distributions from 529 plan accounts are tax-free, including distributions for tuition, books, supplies, and equipment required for enrollment or attendance.
The 2017 Act modified certain rules related to 529 plan accounts. The new law allows for up to $10,000 of 529 plan account funds to be used for public, private and religious elementary and secondary schools, per year per student. This could be an especially large boost for families who send their children to private schools such as Allendale Columbia School, The Harley School, McQuaid Jesuit High School, The Aquinas Institute, and Our Lady of Mercy School for Young Women.
The new law also allows for 529 plans accounts to be rolled into 529 ABLE accounts. ABLE accounts were introduced in 2014 to help Americans living with disabilities save for education and other living expenses. Like traditional 529 plans, ABLE accounts offer tax-free investment growth and tax-free withdrawals when the funds are used to pay for qualified expenses such as college, job training, healthcare and financial management. Previously, parents who started saving for their child’s education in a traditional 529 plan, and later discovered the child had a disability, would not be able to use funds from the 529 plan for disability care as that was not considered a qualified withdrawal.
Similar to its response to the 2017 Act, New York State has not yet embraced the changes to 529 plans. The New York State Department of Taxation and Finance issued a report finding that K-12 distributions may not be considered qualified distributions for New York 529 plan account holders. The New York State Office of the Comptroller is continuing to evaluate the 2017 Act. and its tax impact in New York.
This publication is intended as an information source for clients, prospective clients, and colleagues and constitutes attorney advertising. The content should not be considered legal advice and readers should not act upon information in this publication without individualized professional counsel.
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