While every new administration brings change, there is a lot of speculation about what President-elect Trump will be able to accomplish once he is inaugurated in January. A recent article from Forbes highlights a few points from Trump’s tax plan and what that could mean for your year-end tax planning.
Your personal tax rate may change. Trump was very vocal on the campaign trail about his hatred for the complexities of the tax code. He proposed many changes, but simplifying the individual tax rate is one. Trump’s plan proposes cutting the tax brackets to just three: 12%, 25% and 33%. His plan would also eliminate the 3.8% surtax on net investment income for Obamacare. While some might argue this sounds well and good, there are some caveats: he also calls for eliminating personal exemptions, capping itemized deductions for married couples at $200,000 and slashing itemized deductions. Consult with your accountant if you think these may impact you; there may be some planning you can do now to minimize your tax burden. If you’ve done irrevocable trust planning to protect assets from the nursing home (often called a “lockbox” in our office), however, you need to be careful. Be very cautious of making any gifts to family members, charities or making payments on behalf of another. For our clients, please consult our office before making any such gifts.
Business tax cuts may be in our future. Trump’s plan would see the tax rate for corporations slashed to 15% from its current 35%. It would also include S-corporations, LLCs and partnerships in the 15% tax rate. If accomplished, these may be the more momentous of his changes, but again, there are a few drawbacks. Among Trump’s proposals for taxing businesses is the recommendation for eliminating most deductions, eliminating deducting the interest on debt and replacing depreciation with up-front deductions. Businesses will need to think through their strategies and may want to take advantage of what they can before any changes are made.
Another hot topic: repatriation of overseas profits. In the last few years, we’ve heard a lot about U.S.-based international companies finding more advantageous tax havens. President-elect Trump would tax any accumulated profits at 10%. That tax would be payable over 10 years with all future profits taxed annually. Trump and his team argue that this would bring a huge inflow of funds from the billions currently escaping the U.S. tax system. For now, corporations will have to wait and see what legislation passes Congress in the months after Trump’s inauguration.
We could say goodbye (again) to the estate tax. In 2010, a series of tax cuts instituted under President George W. Bush led to a year with no federal estate tax. Of course, it didn’t last. Come 2011, the estate tax was back in business. However, under President Trump, that could change. In stark contrast to Hillary Clinton, who wanted to increase the tax to 50% or even 65% for certain estates, Trump would like to repeal it entirely. Opponents of the estate tax have long argued that it’s really a “double tax” because it taxes some assets already taxed. However, due to the step-up in basis at the time of death, some assets today avoid being subject to both income and estate taxes. President-elect Trump’s plan, however, would eliminate the step-up in basis and open up appreciated assets for taxation when sold by beneficiaries. We could see another 2010, but we could see another 2011 if the estate tax is not permanently repealed. It’ll be up to Congress.
Trickle-down economics. Many of Trump’s opponents argue that Trump’s tax plan gives the largest benefits to corporations and the highest earning individuals. Proponents, however, enjoy invoking “Reagan-omics.” They believe this “loosening of capital at the top” will lead to increased investment, job creation and economic growth. Economists continue to argue over the advantages and disadvantages of such a strategy, so the message remains the same: we’ll have to wait and see.
As is always the case with changes in legislation, it’s a wait-and-see situation. Many Presidents’ accomplishments in office look very different from their campaign promises and it’s difficult to predict what any President will be able to do in office. The only constant in politics and legislation is change. It’ll be interesting to see what changes occur in the next four years.
Reference: Forbes.com (November 14, 2016) “Trump Tax Plan Could Impact 2016 Year-End Planning”