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Trump’s and House Republicans’ Tax Proposals – Actions to Consider Before Year End

Attempting to predict proposed tax rules before they are enacted into law can be fraught with peril. Nevertheless, 2017 is likely to see a seismic shift in federal income tax, and possibly gift and estate tax rules.

Beginning January 20, 2017, the Republican Party will be in control of both the House and Senate as well as the Presidency. On November 9, the day after the election, House Ways and Means Committee Chairman Kevin Brady (R-TX) and Senate Majority Leader Mitch McConnell (R-KY) indicated that they want to take up tax reform early in the next session of Congress.

There is a possibility that new tax laws passed next year will be retroactively effective January 1, 2017. Both the Trump and House Republican proposals are broad brush outlines.[1] Following is a list of the major proposals, and actions our individual and business clients may want to consider before year end.

Individual Taxpayers

  • Both plans reduce the top bracket from 39.6% to 33% and eliminate the 3.8% “Obamacare tax”. Therefore, the marginal rate for high income taxpayers could be reduced from 43.4% to 33%.
  • Under the Trump plan, the existing capital gains rate structure (maximum rate of 20%) would be maintained. The House plan provides for reduced and progressive tax rates on capital gains, dividends and interest income.
  • Under the Trump plan, itemized deductions would be capped at $200,000 for married-joint filers and $100,000 for single filers. The House plan eliminates all itemized deductions except the mortgage interest deduction and charitable contribution deduction.
  • Both plans eliminate the personal exemption and increase the standard deduction.
  • Under both plans, the alternative minimum tax (AMT) would be repealed.
  • Under the Trump plan, carried interest would be taxed as ordinary income.
  • Under the Trump plan, the estate tax would be repealed, but capital gains on property held until death and valued over $10 million would be subject to tax, with an exemption for small businesses and family farms. The House plan repeals the estate and gift tax.

Actions for individuals to consider before year end – If you are expecting to be in a high tax bracket this year, consider deferring income to next year and accelerating deductions into 2016. For example,

  • It may benefit you to accelerate planned post 2016 charitable contributions into 2016. A donor advised fund [2] can be used to take a deduction for future donations this year. Also consider donating appreciated stock before year end.
  • Consider accelerating payment of property taxes and/or state income taxes into 2016. However, you should only do this to the extent the AMT is not triggered.

Business Taxpayers

  • Under Trump’s plan, the business tax rate would decrease from 35% to 15%. The house plan reduces the corporate income tax rate from 35% to 20%; and taxes income derived from pass-through businesses at a maximum rate of 25%.
  • Under both plans, the corporate AMT would be eliminated.
  • Under the Trump plan, there would be a deemed repatriation of corporate profits held offshore at a one-time tax rate of 10%.
  • Under the House plan, net operating losses (NOLs) would be adjusted for inflation, no longer be applied to prior tax years, and carried forward indefinitely.

Actions for businesses to consider before year end – Similar to individuals, regular corporations should generally consider deferring income to next year and accelerating deductions into 2016.

In general, both individuals and businesses with complex tax situations should work closely with their tax and financial advisors to monitor the progress of these tax proposals and how they might impact decisions such as:

  • Estate and gift planning.
  • Planned charitable giving.
  • Purchasing or selling a home or other real estate.
  • Formation, reorganization or liquidation of business entity.
  • Purchase or sale of business.
  • Capital structure of business entity.
  • Use of debt.
  • Capital expenditures.

Feel free to contact us to discuss how these tax proposals may apply to your situation.

 


[1] Trump Tax Plan per his web site https://www.donaldjtrump.com/policies/tax-plan

Details and Analysis of the 2016 House Republican Tax Reform Plan – http://taxfoundation.org/article/details-and-analysis-2016-house-republican-tax-reform-plan

House Republican Health Care plan – https://abetterway.speaker.gov/_assets/pdf/ABetterWay-HealthCare-PolicyPaper.pdf

[2] https://www.irs.gov/charities-non-profits/charitable-organizations/donor-advised-funds

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