With the election behind us and the fact that the legislative and executive branches of government will be controlled by the Republicans, what can we expect in the coming months and next year as it relates to tax reform? Many news sources are reporting the biggest factor motivating voters to secure a Trump victory was the desire for real change, so tax reform is highly likely. So what does this mean for your year-end tax planning?
President-elect Trump has made it clear he would reduce taxes both at the individual level and the corporate level, and implement a partial or full repeal of the Affordable Care Act. The House Republicans have their own tax blueprint and the Senate has also introduced a number of proposals. When you add the fact that a procedural pathway exists known as reconciliation, which limits Senate Democrats’ ability to block Republican legislation, major tax reform looks more likely in the coming year.
Political capital and control
Even though Trump won the Electoral College, he lost the popular vote by a slim margin, thus possibly limiting his political capital. Republicans retain control of the Senate but didn’t reach the 60 members necessary to become filibuster-proof. So their simple majority won’t be enough to pass legislation in the Senate. In the House, Republicans retain control by a margin similar to their current one.
This outcome likely will result in less opposition from Democrats and a greater opportunity to enact significant tax law changes in the coming year. Yet it also likely will require Republicans to compromise on some issues in order to get their legislation through the Senate.
What does this mean now and into the future?
President-elect Trump’s tax reform plan includes the following changes that would affect individuals:
- Reducing the number of income tax brackets from seven to three, with rates on ordinary income of 12%, 25% and 33%, and adapting the current rates on long-term capital gains and qualified dividends for the new brackets
- Eliminating the head of household filing status
- Abolishing the net investment income tax
- Eliminating the personal exemption (though expanding child-related breaks)
- More than doubling the standard deduction, to $15,000 for singles and $30,000 for married couples filing jointly
- Capping itemized deductions at $100,000 for single filers and $200,000 for joint filers
- Abolishing the alternative minimum tax
- Abolishing the federal gift and estate tax, but disallowing the step-up in basis for estates worth more than $10 million
Proposed changes that would affect businesses include:
- Reducing the top corporate income tax rate from 35% to 15%
- Abolishing the corporate alternative minimum tax
- Allowing owners of flow-through entities to pay tax on business income at the proposed 15% corporate rate rather than their own individual income tax rate, although there seems to be ambiguity on the specifics of how this provision would work
- Eliminating the Section 199 deduction, also commonly referred to as the manufacturers’ deduction or the domestic production activities deduction, as well as most other business breaks — but, notably, not the research credit
- Allowing U.S. companies engaged in manufacturing to choose the full expensing of capital investment or the deductibility of interest paid
- Enacting a deemed repatriation of currently deferred foreign profits at a 10% tax rate
His proposal did not contain a lot of detail, so how those details are fleshed out will be very important. However, given his “100-day action plan to Make America Great Again” includes middle class tax relief and simplification, a changing tax landscape is an almost foregone conclusion.
So, what should you be doing now?
The earliest any reform would be effective would be in 2017. However, on the individual side, if rates are scheduled to decline and the alternative minimum tax is repealed, deferring income to 2017 and accelerating deductions into 2016 is certainly a strategy to consider. The possible repeal of the estate tax would also require one to consider your 2017 gifting strategy. On the corporate side, a similar analysis would apply, including a review of your capital spending for 2016 vs. 2017.
While no one can predict what the final tax reform will look like, we at CSH will be watching the developing legislation closely and communicating with you as we know more. In addition, as the year end approaches, the impact of any tax legislation needs to be considered.
Please contact your tax professional for more information.