By Bernard A. Krooks, Certified Elder Law Attorney
A couple of months ago, I wrote about changes made by the new tax laws and how they affect seniors and those with disabilities. Since the changes are the most significant changes to the tax laws since 1986, I thought it would be helpful to explain a few other provisions in the law. Basically, corporate and individual tax rates were lowered, but many deductions were eliminated that will result in some New Yorkers paying more taxes under the new tax law than under the old law.
Here’s a summary of some of the most important changes that affect individual taxpayers:
Marginal income tax rates have been lowered. The highest federal marginal income tax rate is now 37%, as opposed to 39.6% under prior law. The 37% rate kicks in for single individuals with income above $500,000 and for married couples with income above $600,000. The Net Investment Income Tax of 3.8% still applies on top of the marginal income tax rate to certain investment income. In addition, the Medicare Surtax of .9% also applies. Thus, the top tax rate for some individuals is actually 41.7%. Of course, this does not include New York state income taxes, which can push the combined rate to over 50%.
The Alternative Minimum Tax (“AMT”) is a tax that was implemented to ensure that all taxpayers pay at least a minimum amount of tax. It applies only to those with income above certain thresholds. The AMT has been modified so that it should affect fewer people going forward.
The standard deduction has been increased to $24,000 for married taxpayers filing a joint return. Thus, most taxpayers will no longer itemize their deductions since there will be no benefit to doing so unless the total of all your deductions exceeds $24,000 ($12,000 for single individuals). There is concern that this could affect the amount of charitable contributions that people make. For example, someone whose aggregate deductions is below the standard deduction amount, would get no income tax benefit from making a charitable contribution. This might make the person re-think whether to make the contribution. One strategy might be to bunch your contributions into one year to increase the likelihood that they would be deductible.
Another big change, especially for New Yorkers, relates to the deductibility of state and local income taxes. Previously, state and local income and property taxes were fully deductible as an itemized deduction. The new tax law caps at $10,000 the amount of state and local taxes that may be deducted. Thus, if your property taxes are $15,000, you can deduct only $10,000. This change is expected to have a negative impact on real estate values in New York, especially here in Westchester County. Our state income taxes and real estate taxes are already among the highest in the country. At least, previously, we were able to get some benefit by deducting those taxes on our federal tax return. Now, payment of those taxes will over very little, or no, benefit to us. This may be the straw that “breaks the camel’s back” and leads to many New Yorkers moving to states that do not have income tax or such high property taxes.
Moving on to estate taxes. The federal estate tax exemption has been doubled to about $11,200,000 million per person, or $22,400,000 per couple. The New York state estate tax exemption is currently $5,250,000. Thus, it is possible to owe New York estate tax but not owe any federal estate tax when you die if the value of your estate exceeds the New York exemption amount but is less than the federal exemption amount. This presents some interesting planning opportunities, especially for married couples, which should be discussed with your estate planning attorney. Sometimes, it might even make sense to pay a little New York estate tax now to save taxes later; other times, it might make sense to create an estate plan that does not incur New York estate taxes when the first married spouse dies. Be careful with this. Things can get tricky. One thing that was not changed is the step-up in basis rule. This means that if you own appreciated assets at the time of your death, your heirs will be able to sell them for their date-of-death values and not pay any capital gains taxes.
The foregoing is merely an overview of some of the provisions in the new tax law. There is much more included in this massive piece of legislation. Now would be a good time for you to meet with your advisors to see what changes, if any, you should be implementing to make sure that the new law is working for you (and not against you).
Bernard A. Krooks, Esq., is a founding partner of Littman Krooks LLP and has been honored as one of the “Best Lawyers” in America for each of the last seven year, past President of the National Academy of Elder Law Attorneys (NAELA), past President of the New York Chapter of NAELA and also served as chair of the Elder Law Section of the New York State Bar Association. He has been selected as a “New York Super Lawyer” since 2006. Call 914-684-2100 or visit elderlawnewyork.com.