Bessemer Trust Delves Into How Tax Changes Affect HNW Individuals

Stephen A Baxley January 24, 2018

Bessemer Trust Delves Into How Tax Changes Affect HNW Individuals

Bessemer Trust looks at major elements of recent tax changes and how clients should act.

Commentaries continue to flow in about the Tax Cuts and Jobs Act, as the sweeping tax changes enacted into law in late December are known. Recent views have been aired by a variety of organizations, such as from Wilmington Trust (see here.). Here, Bessemer Trust weighs in with its views, penned by Stephen A Baxley, director of tax and financial planning. The editors of this publication don't necessarily endorse comments from guest contributors (see also the disclaimer below). To contribute to the debate, email

Earlier this month, the Tax Cuts and Jobs Act (TCJA) went into effect, impacting taxpayers across the board. While analysis of the changes is still underway, one thing is clear: individuals and families of substantial wealth will be directly – and significantly – impacted in the years ahead.

While understanding the nuances of the law can be complex (and individual circumstances are not one size fits all), the following provisions are top of mind when it comes to the changes in the coming year that will affect higher-income individual taxpayers.

Tax rates and brackets
The top tax rate for individuals has been reduced from 39.6 per cent to 37 per cent. What’s more, the threshold at which the top rate takes effect has been increased, so that in most cases, more income will be taxed at lower rates.

What does this mean? For individuals, the top rate threshold moves from $418,400 to $500,000. Married individuals who file jointly will see the top rate threshold increase from $470,700 to $600,000. This change is an example of what has been referred to as the “marriage penalty,” meaning married taxpayers could see more of their combined income taxed at the highest bracket than if they were not married and filed as single.

Deduction for Qualified Business Income
The TCJA provides a deduction for up to 20 percent of the qualified business income from flow-through entities (to note, this provision is set to expire at the end of 2025). What constitutes as a flow through entity?  Partnerships, S Corporations, LLCs, sole proprietorships and qualified REIT dividends, cooperative dividends and publicly traded partnerships.

The deduction begins to phase out for business income from specified service businesses for taxpayers with taxable income beyond a threshold of $157,500 for single taxpayers and $315,000 for married taxpayers filing jointly. Specified services income is defined to cover income from a trade or business in the following fields: heath, law, consulting, athletics, financial services, or any trade or business where the principal asset of the business is the reputation or skill of one or more of its employees or owners. It also includes businesses involving the performance of services in investing and investment management, trading or dealing in securities, and partnership interests or commodities.

Itemized deductions
One area of substantial change: the new legislation does away with quite a few itemized deductions that help filers reduce their taxable income. However, we expect many ultra-high net worth individuals will continue to itemize deductions. Why? The standard deduction doubles to $24,000 for married couples, which isn’t a very high threshold for many wealthy filers to hit. That said, two notable updates include changes to:

-- State and local taxes: While the plan retains the deduction for state and local taxes, the deductible amount is capped at a total of $10,000. This applies to income, real estate, and sales taxes and will likely have a significant effect on residents of high-tax states such as California, New Jersey and New York.

-- Charitable contributions: Many philanthropically inclined taxpayers will be pleased that the percentage limitation for cash contributions to public charities has increased from 50 per cent of adjusted gross income to 60 per cent.

Alternative Minimum Tax
In 2017, approximately one half of higher income taxpayers were estimated to be affected by the AMT, a supplemental tax that has historically applied to taxpayers who claim high state and local tax deductions and miscellaneous itemized deductions. Since both of these deductions have been greatly scaled back (or fully suspended) in the new law, we believe AMT will affect far fewer taxpayers in the future.

Estate, gift, and generation-skipping transfer taxes
After extensive debate and conversation, the TCJA retains the estate tax, though the exemption amount will be doubled. Beginning this year, the exemptions will total $11.2 million per individual and $22.4 million per couple, with adjustments for inflation moving forward.

The year ahead
Significant tax changes can at first seem daunting, but with change comes opportunity. Though contingent on individual circumstances, numerous tax planning opportunities may exist, including:

-- Consider restructuring: To the extent that business income from flow-through entities does not qualify for the 20 percent deduction, UHNW individuals can consider restructuring for a more favorable result; 

-- Consider paying off outstanding home equity loans: The after-tax interest cost of a home equity loan will increase with the corresponding loss of deduction; and 

-- Take a fresh look at your estate plan: The increased lifetime estate tax exemption presents additional planning opportunities.

To kick-start the new year, set up a meeting with your tax advisor to get a plan of action in place.


This summary is for your general information. The discussion of any tax, charitable giving, or estate planning alternatives and other observations herein are not intended as legal or tax advice.  This summary is based upon information obtained from various sources that Bessemer believes to be reliable, but Bessemer makes no representation or warranty with respect to the accuracy or completeness of such information. Views expressed herein are current only as of the date indicated and are subject to change without notice.

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