Since the November election, a lot has been written and reported regarding the changes President-elect Donald Trump will try to make when he takes office. At the forefront of his and the Republican Party’s priorities is tax reform. While no changes are certain, the prospect of lower taxes in the future looks likely. Below we summarize the changes that are being proposed by President-elect Trump and the Republican House.
Income Tax Rates and Capital Gains
Both the Trump Administration and Republican House propose to simplify and reduce tax rates for individuals and corporations (shown below).
In addition to a reduction in tax rates they propose to:
- Repeal the current 3.8% Medicare Surtax and Alternative Minimum Tax (AMT).
- Increase the Standard Deduction from $6,300 to $15,000 (Joint $12,600 to $30,000).
- Eliminate Personal exemptions (although under Trump’s plan this could be replaced with various child care credits.)
- Reduce Itemized deductions. Under Trump’s plan, itemized deductions are capped at $100k for single filers or $200k for joint. Under the House plan, all itemized deductions would be eliminated except for Charitable gifts and Mortgage Interest.
- Currently only 30% of all tax filers itemize deductions; however, that percentage drastically changes based on net worth – 81% of those making $100k+ itemize.
Estate and Transfer Tax
The gift, estate, and generation skipping tax would be repealed. Instead, Trump’s proposal establishes a carry-over basis system where capital gains on assets would be taxed after death when property is sold. There would be a $5M per person exemption. We see this change as less likely than corporate or personal income tax reform. The estate tax is not a significant revenue generator; however, from a political perspective changes in estate tax have historically been particularly difficult to pass.
Planning for 2016
If something does pass, there is precedent that it could go into effect immediately in 2017: a tax cut in 2001 and tax increase in 1993 both took effect in the same year they were passed. With a potential tax decrease on the horizon below are a few key strategies to consider for 2016:
1) Accelerate Charitable Giving – If tax rates are lower next year it would make sense to accelerate charitable gifts into 2016 to take advantage of the bigger tax deduction.
If you are looking to front load a gift in 2016 but give the funds to charity in the future, a donor advised fund is the perfect tool. A donor advised fund is like your own personal private foundation where you can give money, take a tax deduction today, but distribute funds to qualified charities in future years as you see fit.
2) Delay Income – If you have the ability to delay receiving income until 2017, it probably makes sense to do so. Worst case, you pay similar taxes but delay that tax payment for a year (assuming no drastic change in your income).
3) Limit Capital Gains / Tax Loss Harvesting – BDF is always looking for opportunities to manage your portfolio as tax efficiently as possible. We regularly review our clients’ mutual fund and individual stock holdings to see if there is an opportunity to harvest tax losses that can be used to offset capital gains in the current year. You should be reviewing all outside taxable accounts to see if there are investments you can sell at a loss before year-end.
While there is still a long way to go before any tax legislation is enacted, understanding the proposed changes and some potential tax planning opportunities for this year is important. We can only plan under the uncertainty that currently exists. We will continue to monitor and advise our clients as more clarity is provided.
Neil Teubel, CFP® is a Senior Advisor at BDF and also leads the Financial Planning Committee. The FPC champions the continual improvement of the firm’s planning processes so that every client gets the most comprehensive and thoughtful planning possible. The committee ensures BDF’s team has cutting-edge tools and the latest information covering the entire financial planning landscape to best serve our clients. Neil received an undergraduate degree in Financial Planning from the University of Illinois Urbana-Champaign and a master’s degree in Personal Financial Planning from Texas Tech University, where he earned his CERTIFIED FINANCIAL PLANNER™ certification.