Post-Election Tax Outlook By Michael Peters, CPA, CFP®
As the dust settles from the presidential election, tax reform becomes a major objective. While uncertainty remains around the details, the results of the election seem to suggest a very real likelihood of significant tax reform in 2017.
When Congress reconvenes in January, the GOP will be in control of both the House and the Senate, potentially allowing President-Elect Donald Trump to more easily move his tax reform proposals forward. Despite anticipated Democratic resistance to any proposed legislation, there is strong bipartisan agreement on the need to reform the antiquated and complex Federal tax code.
Given the current political climate, we are optimistic that comprehensive tax reform will progress in 2017. The timing of actual reform and its details is unclear. If legislation is passed and signed into law sometime next year, it is uncertain whether or not the changes will be made retroactive to January 1, 2017.
President-Elect Trump is gearing up to embark on the biggest tax overhaul in three decades. Trump’s proposals are very similar to the GOP’s “Blueprint” plan, the details of his proposals are outlined below.
· Compression of the current seven ordinary income tax brackets (10%, 15%, 25%, 28%, 33%, 35%, & 39.6%) into three tax brackets (12%, 25%, & 33%)
· Elimination of personal exemptions ($4,050 per person for 2016 & 2017)
· Elimination of head of household filing status
· Increasing the standard deduction from $6,300 (2016) / $6,350 (2017) to $15,000 for single filers and married filing separately and an increase from $12,600 (2016) / $12,700 (2017) to $30,000 for married couples filing jointly
· Itemized deductions would be capped at $100,000 for single filers and $200,000 for married joint filers
· Capital gains rates and qualified dividend rates are likely to remain unchanged
· Repeal of the 3.8% Net Investment Income (NII) Obamacare surtax
· Elimination of the individual Alternative Minimum Tax (AMT)
· Carried interest income may be taxed at the proposed ordinary income tax rates instead of the favorable qualified dividend and capital gain rates
Business and International Taxes:
· Reduction of corporate tax rate from 35% to 15%
· Effect on pass-through entity income to owners is unclear (S-Corps, partnerships, LLCs, LLPs etc.)
- Distributions to individual owners might be subject to the individual’s ordinary tax rates (12%, 25%, or 33%) instead of the proposed corporate rate of 15%
- The proposed corporate 15% rate might only be applicable to business income retained by the pass-through entity
· Elimination of the corporate Alternative Minimum Tax (AMT)
· Elimination of most corporate tax expenditures except the research & development credit
· Increase of Section 179 expenses from $500,000 to $1 million
· Imposition of a one-time 10% deemed repatriation tax on corporate profits held offshore
Estate & Gift Transfer Taxes:
· Repeal of the Federal estate tax, gift tax, and Generation-Skipping Tax (GST)
- The unified Federal estate and gift tax currently applies to estates in excess of $5.45 million (2016) and $5.49 million (2017) for individuals or $10.90 million (2016) and $10.98 million (2017) for married couples
· Trump’s plan would replace the estate tax with a capital gains tax on the appreciation of inherited assets of more than $5 million of gains per decedent or $10 million per married couple, subject to some exemptions for small businesses and family farms
- The proposed repealed estate tax would essentially eliminate the current “step-up” in basis to the date of death value and would replace it with a carryover in basis
· Uncertainty remains regarding whether or not Trump will move to halt the IRS proposed Section 2704 regulations that would severely limit discount strategies for marketability and control over family-owned entities
From a planning perspective, we need to remain flexible and agile in our ability to seize any opportunities which might emerge from the potential tax reform. We will continue to monitor any changes in tax legislation to ensure you remain well-positioned to achieve your goals. Please contact us if you have any questions or would like to discuss how this relates to you. - Michael Peters, CPA, CFP®