Just as the characters in Game of Thrones unequivocally know Winter is coming, we also know Change is coming with President Trump. During his speech to Congress on February 28th very little details were revealed of his new tax plan. According to Mick Mulvaney he expects a full budget proposal will not come until May. Summarized below is a review of President Trump’s proposals in the past as we speculate what changes might come for our tax system. Note we do not discuss the House GOP’s blueprint which differs from Trump.

Personal Income Tax
Trump wants to consolidate and simplify the current tax brackets. Whether the impact of the proposed changes will be good, bad or ugly will depend on your present tax situation. Notice in the table below the capital gains rate may actually increase for many taxpayers from 15% to 20%. Those in the higher end of the 28% bracket will see increased tax rates for both income and capital gains.
Current tax rates vs Trup's proposed tax rates
Other notable proposals would be to repeal the Alternative Minimum Tax (AMT) and the 3.8% Medicare Surtax on net investment income. The personal exemption would be eliminated and in its place the standard deduction would be increased to $15,000 for single filers and $30,000 for married filing joint. On the other hand for those who itemize, deductions would be capped at $100,000 for single filers and $200,000 for married filing joint.

Corporate Taxation
A big portion of Trump’s focus has been to slash the corporate tax rate from 35% to 15%. This would apply only to C corporations and not pass thru entities. Most small business owners in the United States are pass-thru entities and will not benefit from this reduction. These small business owners may benefit from the breaks given on personal income tax rates.

Estate Taxation Currently, each person can transfer $5.49 million free from gift or estate taxation. Any wealth above the limit is taxed with the top federal estate and gift tax rate at 40%. Trump has suggested eliminating the estate tax. Instead estates would be taxed if capital gains exceed $10 million. This could reduce the benefit of holding on to low basis asset for the basis step-up at death.

Planning Strategies
The ultimate change to the tax landscape is still to be determined. As changes are announced we will send new updates. The tax changes would most likely become effective in 2018 but some speculate they could be retroactive to 2017. Here are a few strategies to begin discussing with your financial planner and tax advisor.

  • Defer income: If the new proposed tax rates will reduce your tax bracket, consider deferring income. For example bonus payments, deferred compensation payouts, utilize installment sale strategy, delay the sale of a major asset, hold off on Roth IRA conversions and maximize retirement contributions.
  • Accelerate income: If the new proposed tax rates will increase your tax bracket, consider accelerating some income. For example harvesting gains this year if your capital gains bracket will increase. The balance for accelerating income is to be mindful not to inadvertently bump yourself up into a high income tax bracket.
  • Deductions: Since Trump’s proposal will cap itemized deductions, it may make sense for some taxpayers to accelerate deductions in 2017. Gifting to charity via donor advised funds is a great way to accelerate the charitable deduction up to 50% of AGI in a year. Special first year bonus depreciation allowance at 50% is still available in 2017. This is especially advantageous for taxpayers subject to AMT.
  • Qualified charitable distributions (QCD): Individuals over 70 1⁄2 can contribute to charity directly from their IRA and apply the amount towards the annual required minimum distribution. This will reduce the recognition of income and avoid the cap on itemized deductions. The QCD strategy is beneficial in both the current tax environment and under Trump’s proposed tax regime.
  • Risk Management: Having the proper life and disability insurance coverage to protect your family is vital regardless of what is happening in politics. The tax benefits to the recipient may be even more valuable under Trump’s tax plan.

 

Submitted by Petra Chien, Wealth Strategist, First Bank Wealth Management. Petra may be contacted at 424-343-5209 or via email at Petra.Chien@fbol.com.