Can You “Trump” the IRS Under the President-Elect’s Proposed Tax Plan?

President-elect Donald Trump’s agenda places tax changes as a high priority item. Some of the proposed changes are a radical departure from where the tax code stands now and will significantly impact both individuals and businesses. Keep in mind that the proposals outlined below are just that – proposals. They will probably change in substance and scope as they make their way through Congress.

Simple and Low – Tax Brackets and Rates

Right now, everyone pays taxes on their ordinary income under a tiered tax bracket system. The tax brackets are scaled on a graduated basis, meaning that as income increases so does the tax rate. Currently there are seven rate brackets ranging from a low of 10 percent to a maximum of 39.6 percent. And the top tax rate is actually higher than 39.6 percent because the Obamacare 3.8 percent surtax kicks in on certain kinds of income at certain levels. But for the sake of examining the proposals, let’s put that aside.

Trump’s proposal includes eliminating four of the seven brackets, leaving only three at 12 percent, 25 percent and 33 percent. His plan would also eliminate the net investment income tax (the Obamacare tax), resulting in a true top rate of 33 percent. 

Death to the Estate Tax

If you were to die right now, there would be good news and bad news. First, the bad news: the portion of your estate valued over $5.45 million would be taxed at a 40 percent rate. The good news is that any unrealized appreciation on your estate assets is “stepped-up” in basis. For example, if you bought a stock at $10 per share and when you died it was worth $50 per share, your heirs would have a basis of $50 per share. This means that no one will have to pay the capital gains tax on the $40 of appreciation. Not such a bad deal.

Trump’s proposal would eliminate the estate tax, but that doesn’t mean your estate would pass 100 percent tax free. Under his plan, estate assets valued over $10 million would not receive a set-up in basis, so the unrealized appreciation would eventually have taxes paid on those gains. But not until they are sold.

Business Tax Cuts & Undoing Deductions

Corporate tax rates would be cut from their current rate of 35 percent down to 15 percent under Trump’s plan. This is not as radical as it seems when you add in the fact that many business deductions would also be eliminated.

One of the more dramatic changes would impact depreciation. There would no longer be a depreciation deduction; instead, you could deduct the entire cost of the asset purchased. This greatly accelerates the tax advantages of acquiring capital assets; however, there is yet another twist. Assets with cost fully deducted in the year of acquisition but acquired through debt financing would not be allowed to deduct the interest expense associated with the debt. The idea is to discourage corporate dependence on debt.

Under, Over or In the Middle

Another major change under the president-elect’s tax plan is the alterations to the treatment of “pass through” taxation. Currently, partnerships and S corporations do not pay taxes at the entity level. The activity instead passes through to the partners or shareholders, who include the activity on their individual income taxes.

Trump’s change would provide a unified business tax rate of 15 percent. This means that ordinary income that passed through would only be taxed at the 15 percent rate even as it reaches the individual level instead of being taxed at the individual tax brackets. This means that a taxpayer earning business income could benefit from a drop in their top tax rate from 39.6 percent to 15 percent.

Conclusion

As you can see, President-elect Trump’s tax plan consists of a number of simple but significant changes to business as usual. Regardless of how you feel about the election results, it is important to understand where tax law may be heading and prepare accordingly.

Tax Planning Guide for 2017

This 2017 personal tax planning guide aims to provide you with information and planning tips to assist you in understanding and making the most of the laws affecting your tax situation. Using the guidance in this article will help ensure that you retain the tax benefits to which you are entitled and protect the wealth you have created. Below we look at some new tips based on the tax law changes of 2016 – and then revisit some tried and true tactics.

New Tax Tips for Filing in 2017

Here are some new items to consider as we close out the 2016 tax year and move into filing season.

  • Reduced Business Mileage Expenses: In responses to lower gasoline prices, the IRS lowered the standard mileage rate for business travel from 57.5 cents down to 54 cents. Depending on your situation, it might warrant re-examining taking the actual auto expenses versus the standard mileage deduction.
  • Retirement Giving and Planning: Remember that Qualified Charitable Distributions are back on the table. These have been permitted on an on-again, off-again basis since 2007. QCDs allow taxpayers who are 70½ or older and have a traditional IRA to make charitable donations of up to $100,000 out of the IRA. 
  • New Depreciation Categories: There is a new category of depreciable property that gets depreciated over a 15-year period called Qualified Improvement Property. Generally, QIP is any non-residential interior building improvement to already in service real property originally placed in service after Dec. 31, 2015. QIP is similar to Qualified Leasehold Improvements; however, there are subtle distinctions. For example, QIP is not restricted to expenditures under a lease between non-related parties. The rules can be nuanced and complex, so it is best to consult your tax advisor regarding details and how they impact your business.
  • Limits on Transfers: Many companies are family owned, and often families own assets through investment or holding companies. Traditionally, these types of assets often were transferred from one family member to another with discounted valuations, resulting in significant tax savings. Currently, both the IRS and U.S. Treasury have issued proposed regulations that may curtail or even end these valuation-related tax breaks for family-controlled entities. 

Evergreen Tax Tips

This past year did not see a substantial number of major changes to tax rules, and as a result you may benefit most from revisiting the tried and true strategies and tactics, including the following.

  • Do you pay the Alternative Minimum Tax? If so, don’t worry about paying your fourth-quarter state estimated tax payment until after year ends since you won’t get to deduct it as an itemized deduction anyway. Just make sure to pay it soon enough to avoid interest and penalties.
  • If you are thinking about selling taxable assets, consider taking action before Dec. 31 so the losses are available to offset other sources of capital gains – and potentially up to $3,000 of ordinary income.
  • Do you already own a home or plan on buying one? Do you also owe debts that are not deductible? If both are true, then consider the potential advantages of paying off the non-deductible debt by either financing a larger portion of the new home or taking out a home equity loan on your existing residence.
  • You may not be allowed to deduct your time or the value of services you donate to charity; however, you can deduct out-of-pocket expenses related to charitable activities such as mileage on the use of your own car.
  • Do you need child care? You may be able to pay a relative to care for your children and have the payments qualified for the child and dependent-care credit. However, this works only if the relative you pay reports the payments as income on her return as well. There can be significant tax advantages depending on the tax rate arbitrage between your and her tax rates, as well as other factors.
  • Married couples, particularly those 65 or older, may benefit from filing separately when one spouse has high medical expenses. This is because medical expenses are deductible only after they exceed a certain threshold of adjusted gross income, and it is harder to exceed it when married filing jointly if you and your spouse have a high AGI.

Remember that while there are no major changes anticipated between now and the end of 2016, there is no guarantee of what will actually happen. Use this guide as a starting point for a dialogue with your tax professional to ensure that you plan now and plan smart for the upcoming tax filing season.

Stock Market: Trump’s Election Creates Ups and Downs

Long before Donald Trump’s election victory, individual investors were already concerned about market uncertainties, Europe and the global economy. Prior to Trump’s surprise election, stocks declined only to surge again once the results were in. It’s safe to say that the election’s outcome took the markets by surprise.

Conventional Wall Street wisdom was that Hillary Clinton would win the presidency. Many market gurus shared the belief that if the unexpected happened and Trump won (and this was deemed unlikely) that we’d see a major stock market slide. In this latter prediction, they were correct. The market slid – but only for a few hours. Then we saw a strong rally that has continued, but at a less dramatic pace. In the first day following the announcement of Trump’s victory, we saw stock futures plunge – then reverse and surge. Bonds strengthened initially and then dropped as yields jumped higher. Among specific industry segments, we also saw sharp reversals – utility stocks fell out of favor while financial stocks took off after a long time in the doldrums. But are we through with this roller-coaster?

Change and More Change
So where are we headed? Truth is, no one really knows. Most experts don’t read much into these early market gyrations. Investors don’t like uncertainty, and there’s more happening than investors have seen for decades. These changes extend way beyond the White House. Interest rates, geopolitical issues in the Middle East, ISIS, and economic slowdowns in Brazil, China, as well as in Europe have investors scratching their heads and worrying about what to do.

It is expected that post-election, the Republican-controlled government might undo regulations, and that this might be good for some companies’ profit margins. But there also are worries that a Trump administration might curtail, or even shutter, regulatory watchdogs like the Consumer Financial Protection Bureau. A move like this would be great for bank stocks, but might not be good news for consumers or the economy. (Think: Wells Fargo.) For the most part, investment analysts urge caution and patience before investors make any significant changes. It’s still very early, and we simply don’t know what will happen.

On the upside, the election might act as a positive catalyst for the economy. Recent data shows the labor market has been improving for quite some time and that economic growth is accelerating. Some traders expect to see bond yields increase under this scenario. Short-term interest rates are expected to rise. Federal Reserve Chairwoman Janet Yellen has stated that an interest rate increase is “relatively likely” to happen – perhaps at the Fed’s next meeting. Rising rates would help banks and financial stocks and help support a stronger dollar.

Of course, risks remain for both domestic and worldwide markets – as they always have. For most individual investors, the experts recommend a wait-and-see approach and generally favor broad portfolio diversification.

The comments above are general in nature and are not intended to replace the advice of professional tax and investment advisors.