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How will tax reform affect your clients?

How will tax reform affect your clients?



The new tax bill maintains the current number of tax brackets but drops the tax rates for all but the lowest income levels. The chart below compares last year’s tax rates with the 2018 rates.


Prior to the tax changes, corporate tax rates were between 15% and 35%. In 2018, the top rate will be set at 21%, the lowest Federal corporate tax rate since 1939. In addition, the Corporate Alternative Minimum Tax (AMT) of 20% is repealed.  Unlike individual tax law changes, these changes are permanent – at least until the next time Congress changes.

What to do?

For businesses that are incorporated with net income over $50,000, the new lower tax rate could offer tax relief, leaving more profits for possible benefit or protection planning related to top employees – these can include Key Person protection or Executive Benefit programs. You may want to talk to your clients about permanent cash value life insurance as a way to both help plan for these needs and build cash values for other retirement needs.


With the new law, small businesses that are taxed as pass-through entities may deduct 20% of their pass-through income from their personal income taxes, but there are limitations.  Once you hit an income threshold of $157,500 (single) or $315,000 (married), there are limitations or tests depending on the type of business you have.  For manufacturing and sales businesses, there is a cap of 50% of the total payroll W-2 income or 2.5% of their depreciable assets. For professional service firms, such as doctors and lawyers, the 20% deduction is phased out for incomes over $157,500 (single) or $315,000 (joint).

What to do?

With more available cash in hand, pass-through entities may want to use the additional funds to help their business planning.  If they have top managers, they may want to consider Key Person protection and Executive Compensation plans.  Your business owner clients may look to purchase life insurance policies to max fund individually owned cash value/accumulation contracts on a tax preferred basis and supplement their retirement income.

Because the 20% deduction for pass-through entities will expire at the end of 2025, you may want to consider working with your client sooner rather than later to put this planning in place.  Financial professionals may also want to talk to their clients about converting their entity from a pass-through to a C-Corporation (their tax changes remain permanent), or whether it makes sense to break the entity into multiple entities to take advantage of new rules around real estate and depreciable property. Keep in mind that future Congress can always reverse the laws so any major changes should be done with careful planning.


As of 2018, the lifetime exemption for estate and gift taxes will be $11,200,000 for individuals and $22,400,000 for married couples – double what it was in 2017. These provisions will sunset in 2025 and revert to the prior rates.

What to do?

While these changes only affect a small portion of America’s population and will sunset after 2025, they may be important to some of your clients. Therefore, you may want to help your clients plan for any asset and estate transfer with an aim toward flexibility.


Sales Concepts

Using Life Insurance to Help Minimize Taxes in Retirement

If your clients expect to be in a high tax bracket in retirement or are worried about taxes rising, they can use cash value life insurance to help supplement their retirement income.

Discover

Life with inSight – Podcast Series

Featured Podcast: 2017 Tax Cut and Jobs Act - Tune in to hear about the major provisions in and planning opportunities coming out of the tax bill as they relate to individual taxpayers, businesses and business owners.

Please be advised that this webpage is not intended as legal or tax advice. Accordingly, any tax information is not intended or written to be used, and cannot be used, by any taxpayer for the purpose of avoiding penalties that may be imposed on the taxpayer. The tax information was written to support the promotion or marketing of the transaction(s) or matter(s) addressed, and clients should seek advice based on their particular circumstances from an independent tax advisor. Neither AXA Equitable nor its affiliates provide legal or tax advice.

IU-134180 (03/2018)

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