On January 20th Donald J Trump took the oath of office to become our 45th President. The President and 115th US Congress will be developing their agendas for the current session over the next couple of weeks and months. Regardless of how you feel about the outcome of the election, you must start preparing for the substantial changes in our tax laws that will have a dramatic impact on your financial and wealth transfer plans. We will be examining these changes to the tax regimes or individuals and businesses in a series of articles geared to help you assess these changes and their impact on you and your business. The information that follows is based on public statements and information currently available. We will continue to update you as bills are introduced and legislation is passed and signed into law.
We will focus on the following tax law issues: Estate and Gift Tax, Impact of Repeal of the Affordable Care Act, Business Tax Reform and Individual Tax Reform. While each of these issues will garner much attention, we are not certain that the administration will be able to address all these areas during this session while tackling potential political battles over international trade pacts, the environment, and labor reform to name just a few. In addition, it is far from certain that the Republican controlled Congress will support the President on all of his tax agenda given the contentious ground work laid during the election. We assume Trump will have to seek compromise in pursuing his tax agenda to avoid continued Washington gridlock. Regardless, some form of these changes will find their way into law.
Estate & Gift Tax Proposal
The transfer tax proposal includes the repeal of the estate and gift tax, as well as the generation-skipping transfer taxes. This tax would be replaced with a “built-in gain” tax. Gains of $5 million ($10 million of a married couple) or less would not be subject to tax at death. What is not clear is if this tax would be applied and due at death or just eliminate the step-up in basis for appreciated capital assets above the threshold. Depending on the application of this new law, large family businesses may find it necessary to continue to plan for the death of a family member.
ACA & the Net Investment Income Tax (NIIT)
The repeal of the Affordable Care Act would eliminate not only the penalty for inadequate coverage, but also the penalty for employers not providing insurance to their employees. Repeal would also eliminate the 3.8% net investment income tax (NIIT) on certain dividends, interest, rentals, royalties and other passive income items as well as the .9% surtax on wages over $200,000.
Individual and Business Tax Proposal
President Trump’s proposed changes to the business tax regime includes the reduction of the top tax rate from 35% to 15%. This reduction may also apply to pass-through entities taxed at the individual level much like capital gains taxes are computed. Corporations would also see the Alternative Minimum Tax eliminated and the elimination of all business credits with the exception of the R&D credit. It has also been speculated that US Corporations who repatriate their foreign earned profits could do so at a one-time tax rate of 10% with the tax proceeds going to fund infrastructure improvements such as roads, bridges, and airports.
The President’s individual tax reform plan seeks to simplify the current tax code while substantially reducing taxes for all income groups. The President’s plan would collapse the current seven tax brackets into three: 12%, 25% and 33%. The top tax bracket for capital gains would remain 20% for those in top bracket, 15% for those in 25% bracket and 0% for those in the 12% bracket. The standard deduction would be significantly expanded and personal exemptions eliminated. High income tax payers would also be impacted by a hard cap on itemized deductions. He also plans to eliminate the alternative minimum tax.
We will continue to keep you updated in a series of articles as changes continue to unfold under the new Trump administration. Make sure you stay up to date by signing up for our Firm newsletter Here.
About the Author
James Snyder, CPA, CSPM is a principal at YHB in the Leesburg, VA office. He provides income and estate planning services, business consulting, and estate and trust administration services to successful individuals in many professions, especially engineering, law, technology and real estate. He also provides strategic guidance and planning for clients involved in stock option transactions and wealth transfer.