While Trump’s specific agenda for his administration is still being formed, one significant proposal on the table is a major overhaul of the tax code. In fact, both Trump and the Republican-led House have laid out designs to both lower tax rates and simplify the rules. There are, of course, significant differences between what the House GOP and Trump are proposing, implying that we have a long way to go before anything is finalized. Nonetheless, since December is tax planning month we thought it would be helpful to review what proposals are in the works and what you should do now (if anything) in light of the changes.
Lower Tax Rates
Both Trump and the House GOP are proposing a tax rate reduction and simplification of the tax brackets, from the current seven tiers to three: 12%, 25%, and a top rate of 33% that starts at $225,000 for married couples and $112,500 for individuals. The implication is that most taxpayers will have a lower tax rate in 2017 and therefore, should receive a significant benefit for deferring income into next year. Of course, deferring income is almost always a good strategy, but this year should be particularly important. Business owners or other taxpayers who are able to defer income into next year could receive a significant benefit for doing so.
Capital Gains Tax Rates
Trump’s plan and the House GOP plan diverge significantly when it comes to the treatment of capital gains. Trump would keep the current brackets: 0%, 15%, and 20%, while the House GOP would simply exclude 50% of investment income and then apply the regular tax rate, resulting in an effective tax rate that is about half of that of the ordinary rates: 6%, 12.5%, and 16.5%. Given the uncertainty, it is difficult to suggest any tangible planning steps, but the odds are that capital gains rates will be at the same rate or lower next year. Therefore, deferring the recognition of capital gains is likely the best course. Waiting as long as possible to recognize capital gains is not new, but it does take on a more significant urgency for 2016.
Changes to Personal Exemptions, Standard Deductions, and Itemized Deductions
Once again, Trump and the House GOP differ on what to do with Personal Exemptions, Standard Deduction and Itemized Deductions. Trump would keep all the current itemized deductions but begin phasing out many deductions at the higher income levels. Trump’s current proposal would cap itemized deductions at $200,000. Obviously, this would only impact the most wealthy, but it does imply that those who are planning to make large charitable donations should consider making them in 2016. If you are not sure yet what charities to donate to, consider opening a Donor Advised Fund (“DAF”) in 2016. This vehicle would allow you to make a contribution in 2016, receive a deduction in 2016, and then decide at a later date which charities will receive the funds. (You can learn more about DAF’s from our article here).
In contrast, the House GOP proposal would keep the mortgage deduction and charitable deduction but eliminate almost all other itemized deductions. The House proposal would also increase the standard deduction to $12,000 for individuals, $18,000 for individuals with a child, and $24,000 for married couples. In effect, the higher standard deduction could significantly lessen the benefit of the mortgage deduction. However, don’t go paying off your mortgage yet. There is too much uncertainty to take any significant action on these proposals for 2016.
Will it happen?
There are other changes that I have not covered, but the above list represents some of the more significant and far-reaching proposals. Remember that despite the GOP sweep of the White House and Congress, tax reform is far from assured. Not only do Trump and the rest of the Republicans need to agree, Democrats still retain enough seats in the Senate to filibuster and therefore some compromise will be needed between the parties. With just a few weeks left in 2016, a good strategy will be to defer any income that you can and advance deductions that you can. Most taxpayers should be taking these steps as part of good tax planning. If you would like to discuss your specific situation, please don’t hesitate to give us a call.
"Details and Analysis of the Donal Trump Tax Reform Plan." Taxfoundation.org. 2016. http://taxfoundation.org/article/details-and-analysis-donald-trump-tax-reform-plan-september-2016