In December 2017, Congress passed and President Trump signed the Tax Cuts and Job Act of 2017 (TCJA). Effective as of Jan. 1, 2018, the TCJA is a wide-ranging change to the Internal Revenue Code of 1986 (the Tax Code) affecting individual, corporate, and international taxation.
The applicable federal rates (AFRs) under Internal Revenue Code (Code) Section 1274(d) and the Code Section 7520 rate (7520 rate) for a particular month are published by the Internal Revenue Service (IRS) in a Revenue Ruling that is released around the 18th day of the immediately preceding month. Advance knowledge of the rates for the future month provides a window of opportunity for the quick or delayed implementation of income, gift, and estate-tax planning in response to upward or downward trends. The effective implementation and management of interest-sensitive estate planning techniques also involves numerous other factors in addition to the relevant AFR or 7520 rate, including a client’s particular circumstances and should be undertaken with the advice of competent tax counsel and financial advisors.
This week the U.S. Supreme Court heard oral arguments for South Dakota v. Wayfair, regarding whether physical presence is required within a state for sales and use tax purposes, specifically addressing internet sellers. The case is challenging the Court’s 1992 decision in Quill v. North Dakota, 504 US 298, which upheld a decision from 1967 (National Bellas Hess v. Illinois, 386 US 753) and requires physical presence within a state in order to impose an obligation to collect sales and use tax on a vendor.
California’s Documentary Transfer Tax Act (Rev. & Tax. Code §§ 11901, et seq.) is based upon the former federal Documentary Stamp Tax Act first enacted by Congress to raise revenues for the Spanish-American War. The federal law was repealed, effective Jan. 1, 1968, and simultaneously California, like many other states, picked up the tax with conforming legislation authorizing counties and cities to adopt their own documentary stamp tax on transferring of interests in real property. This means that in California, in most situations, there are three levels of code related to any imposition of tax: state, county, and city.
The Tax Cuts and Jobs Act (TCJA) limited the deduction for state and local taxes (SALT) to $10,000 for federal tax purposes. For those living in states that impose a personal income tax, this limitation may result in an increase in federal tax if their deductions for property taxes and income taxes paid to states and localities exceed the $10,000 limit.
Marvin Kirsner, a shareholder at Greenberg Traurig, is quoted in a The Wall Street Journal article titled, “Crack and Pack: How Companies Are Mastering the New Tax Code.” In the article, Kirsner discusses tax planning for pass-through businesses. Click here to read more.
James Lang, a shareholder at Greenberg Traurig, is quoted in a Family Wealth Report article titled, “Muni Bonds And Tax Breaks – Old, New Forces In Impact Investing.” In the article, Lang discusses one of the tax incentive measures in the U.S. Tax Cuts and Jobs Act, which is both of interest to investors and impacting family offices. Additionally, Lang discusses qualified opportunity zones and its benefits. Click here to read more.
Many blockchain companies are using a largely unregulated means of raising funds, commonly known as an initial coin offering (ICO). An ICO consists of the issuance of a newly generated cryptocurrency (generally referred to as a token) that runs on blockchain technology, in exchange for fiat currency (such as U.S. dollars) or other cryptocurrencies like bitcoin or ethereum. Broadly, tokens can either be classified as “utility tokens,” which provide users with access to the blockchain platform developed by the issuer or products or services provided by the issuer, or “security tokens,” which represent certain rights with respect to an entity, either as equity or debt. This GT Alert discusses the potential tax implications of the so-called utility tokens.
The Internal Revenue Service (IRS) publishes a monthly update to the applicable federal rates (AFRs) and 7520 rates.
Planning professionals and their clients should take note of fluctuations in these rates and be mindful of planning opportunities that come with rate changes.
The AFR is calculated by the IRS under Section 1274(d) of the Internal Revenue Code (Code) and is used for many purposes. One of its most common applications is to establish the minimum interest rate that can be charged on an intra-family loan without income or gift tax consequences. These “safe harbor rates” are dependent upon two factors: (i) the term of the loan and (ii) the frequency of compounding of interest.
For these purposes:
- Demand notes and notes with a term of three years or less are considered short-term obligations,
- Notes with a term of more than three years but less than nine years are considered mid-term obligations, and
- Notes with a term of more than nine years are considered long-term obligations.
The AFR rates for April 2018 and the preceding six months are as follows:
The 7520 rates are used to calculate the present value of an annuity, an interest for life or for a term of years, or a remainder or a reversionary interest. They are calculated by the IRS under Code Section 7520 (hence, the name 7520 rates) and are always 120% of the AFR for mid-term obligations with semi-annual compounding.
The 7520 rates for April 2018 and the preceding six months are as follows:
Rates are typically published by the 20th day of each month and provide planning opportunities for certain estate planning vehicles which are interest rate sensitive. For example:
- Lower rates are generally preferable for intra-family loans, grantor retained annuity trusts (GRATs), installment sales to grantor trusts and charitable lead annuity trusts (CLATs).
- Higher rates are generally preferable for qualified personal residence trusts (QPRTs) and charitable remainder annuity trusts (CRATs).
As rates continue to change, advisors and clients should maintain an open dialogue so that clients can take advantage of any planning opportunities tied to increasing or decreasing rates.
On Dec. 22, 2017, the Tax Cuts and Jobs Act (the Act) was signed into law. It is the most sweeping federal tax legislation in decades and significantly changes the landscape of individual, corporate, partnership, international, and trust and estate taxation. In general, the changes made by the Act take effect as of Jan. 1, 2018, with most of the provisions affecting individual taxpayers being scheduled to sunset at the end of 2025. The implications of the Act are far-reaching. Residents of states that impose a state income tax and/or a state estate tax will face greater planning challenges in order to mitigate their tax burden.
As with all significant tax law changes, it will be important for clients to review the effects of the Act on their personal planning with their advisors. The changes bring significant opportunities to engage in beneficial estate planning. Many of those opportunities are scheduled to expire at the end 2025, and could expire sooner by future legislative action.
To read the full GT Alert, click here.