Trump’s Tax Plan: Our Initial Thoughts

President Trump and his economic advisors released broad outlines of their tax plan on Wednesday. Our purpose in this blog is to provide an overview of the potential changes and some planning concepts that may be applicable.

  • This is a very preliminary plan which does not have many specific details. More importantly, to get tax legislation passed and enacted into law is a difficult process. The actual law, if enacted, may be quite different than these concepts. You should not make actual decisions or actions based on this plan, until a law is enacted or legislation is much closer to reality.
    • Planning point: there has not been a discussion of an effective date of these proposals. We assume it would apply to 2018, but we will keep you informed. In general, if tax reductions are enacted that apply to 2018, specific strategies would make sense by this year-end.
  • Tax rates should be dropping: They have proposed three individual tax rates (10%, 25% and 35%) from the current seven tax brackets, but have not defined at what taxable income levels they will apply to. The top rate would drop to 35% from the current rate of 39.6% for married couples with income above $470,000.
    • Planning point: if applicable beginning in 2018, you would want to defer income, if possible, to 2018 and move deductions forward into 2017.
      • If rates do drop for 2018, and your income is expected to be unusually high in 2017, you may want to consider strategies like large charitable contributions in 2017 to a charitable foundation or specific charities.
  • The key are the details, what goes away: While tax rates are expected to decline, deductions such as state and local income taxes, property taxes and miscellaneous itemized deductions are eliminated in the proposal. Some of the reduction in tax rates may be offset by eliminating deductions.
    • Planning point: if the above items are eliminated for future tax years, it would make sense to prepay state income taxes, property taxes and itemized deductions in 2017.
    • As proposed, deductions for mortgage interest and charitable contributions will remain the same.
  • Increase in standard deductions: The plan would double the standard deduction, so fewer taxpayers would need to itemize. This simplification makes sense.
    • Planning point: If this was enacted and impacted you, we would encourage you to pre-pay items which would not be deductible in the future, to get the tax benefit in 2017.
  • Repeal of Investment income tax: There is a 3.8% surcharge tax for couples with taxable income over $250,000 on investment income, such as dividends, interest and capital gains. This is proposed to be eliminated. If enacted, this would be another significant tax reduction to those taxpayers.
    • Planning point: As this gets discussed further, the timing of capital gain transactions should be monitored. If enacted for next year, it would make sense to take losses against gains this year and delay some capital gain sales until 2018. However, we would caution anyone to delay stock sales into the future just to save a 3.8% tax, as stock prices are much more volatile and the price movement is more relevant than the change in this tax rate.
    • There has not been any proposal discussed to change the actual capital gain tax rate, which is 20%, not counting the net investment income tax above.
  • Repeal of AMT: This would benefit those who have high deductions or large capital gains, which tend to reduce their federal tax below the AMT tax base. Both the House and Trump plan call for the AMT repeal.
  • Repeal of Federal Estate Tax: Both the House and Trump plan call for the repeal of the Federal estate tax. However, based on how the legislation is enacted, this could likely be temporary for only 10 years, if the legislation is not “revenue neutral” and passes Congress through the reconciliation process. We have not seen any discussion as to whether the step up in basis of assets upon someone’s death will be changed.
    • Planning point: If the estate tax repeal is not permanent, depending on your age and health, you should not make major changes to your estate planning. Remember, the estate tax could be repealed and then enacted again in the future.
    • Planning point: If repealed, for those with large estates (couples with estates above $11 million), there may be planning opportunities if you are impacted by the Generation Skipping Tax or would consider gifts to grandchildren.
  • Reduction in corporate tax rate: The Trump plan calls for lowering the corporate tax rate from 35% to 15%. The House plan calls for a 20% corporate tax rate.
    • A major topic will be the impact on pass-through entities, such as partnerships, master limited partnerships and LLCs, whose income is passed through to individuals and taxed at each person’s respective tax rate. If enacted, this pass-through income may be taxed at much lower corporate rates than the higher individual income tax rates.
    • Planning point: If enacted, this will be an area of significant tax planning for all types of businesses and earners.

As we are financial advisors who are also CPAs with strong tax backgrounds, we are uniquely qualified to provide you with comprehensive financial advice during periods of significant tax law changes.

We will keep you updated through this blog, as these proposals become closer to legislation which may be enacted. If you have specific questions, please contact us.

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