The Election is over. Despite its finality, the barrage of political posts and satires have yet to simmer down. Let’s put the social media posts and political memes aside for a moment to take advantage of what taxpayers might expect with Donald J. Trump serving in the Oval Office.
President Elect Trump’s tax reform proposals aim to shake things up quite a bit, all in an effort to reduce taxes. However, even with a Republican controlled Senate and House, tax reform is not guaranteed smooth sailing. There is a long road from proposal to enactment and unless our legislative and executive branches work together, tax reform should not be expected for the foreseeable future. At this juncture, the only prediction that can be made is that the future of tax reform is unpredictable. The best course of action is to seek the guidance of our tax, trust, and estate department and tax professionals. We continue to stay up-to-date with the status of tax law changes so that you and your family are fully prepared to take advantage of them to preserve your family business and assets.
Ordinary Income Taxes and Capital Gains
Trump proposes a plan that would collapse the current seven tax bracket system into three. The highest bracket under today’s law sits at 43.4 % (39.6% plus an additional 3.8% for those qualifying for the Obamacare Tax surcharge). For married taxpayers ling jointly, Trump’s three bracket proposal is as follows: a 12% tax rate for income less than $75,000; a 25% tax rate for more than $75,000 but less than $225,000; a 33% tax rate for income more than $225,000. Brackets for single filers are half these amounts. The plan would also more than double the size of the standard deduction on individual income taxes for most workers, a move that would effectively shield millions more Americans from paying federal taxes. The standard deduction would increase from $6,300 to $15,000 per taxpayer, double for married taxpayers ling jointly. Capital gains rates would remain somewhat similar to those currently in effect. Taxpayers in the lowest bracket would pay no capital gains taxes. Taxpayers in the 25% income tax bracket would pay a 15% capital gains tax rate, and taxpayers in the highest income tax bracket would pay a 20% capital gains tax.
Currently, an additional 3.8% tax is assessed on certain net investment income including interest, dividends, capital gains, and rental income for taxpayers with income in excess of $250,000 (married) and $200,000 (single). The Obamacare Tax effectively increases the top tax bracket by an additional 3.8% for qualifying individuals. Trump would eliminate the Obamacare Tax.
The End of Death Taxes? Not Quite.
While Trump proposes to eliminate federal and estate gift taxes, this does not necessarily leave families free and clear of death taxes. Rather than gift and estate taxes, Trump may impose a capital gains tax upon death. A deemed sale of all estate assets would occur on death triggering recognition of capital gains taxes. The step up in basis would be preserved at the expense of immediate capital gains treatment. In essence, the death tax would not be eliminated; it would instead take on a different form. A baseline gross estate, or federal exemption if you will, may be established to determine whether an estate would be subject to capital gains recognition upon death. The possibility of a capital gains tax on death should be carefully considered by those evaluating prior estate planning transfers and transfers currently in process. The tax implications of transferring assets out
of an estate into an irrevocable trust or outright gifting should be carefully considered. The precise treatment of capital gains taxes upon death, if any, could be vitally important in evaluating existing and current estate plans.
In order to take advantage of this income, gift, and estate tax planning, please give our tax, trusts, and estate department a call to discuss how we can help you, your family, and business.
The aforementioned proposals are not current law and will only become law if passed by Congress and the President. Further, they lack the detail and speci city of Internal Revenue Code tax statutes and regulations. As of the publication of this newsletter, these proposals do not have the depth and speci city of tax statutes and regulations. This article and all articles in this newsletter are not designed or intended to provide nancial, tax, legal, accounting, or other professional advice since such advice always requires consideration of individual circumstances.