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What Changes Might We Expect with Trump Presidency?

As a result of the recent election, both the executive and legislative branches of the federal government will be under Republican control. President-elect Donald Trump and the House Republicans have formulated their own tax plans, and changes to the tax code are very likely. Although the specifics of what will happen are unknown at this time, here is some of what we may expect during the next couple of years.

Estate and Gift Tax:

The current federal estate and gift tax structure provides that each individual can transfer up to a total of $5.45 million ($5.49 million in 2017) during life and at death. Each individual may also make gifts of up to $14,000 per person per year gift tax-free. At death, any assets held in a decedent’s name receive an adjustment in basis to the fair market value of the asset as of the decedent’s date of death, thus eliminating capital gains on most inherited assets.

Mr. Trump’s plan eliminates the federal estate tax and proposes that “capital gains held until death and valued over $10 million will be subject to tax to exempt small businesses and family farms.”  It is unclear if this means that there will be no adjustment in basis for estates that have gains in excess $10 million, or that there will be no adjustment in basis for estates in excess of $10 million. He has also not specified if death will be deemed a triggering event resulting in an immediate tax bill at death, or if the tax will be deferred until the recipient of the asset sells it. The House Republicans’ plan does not make changes to our current basis rules.

Mr. Trump indicates that his plan will disallow the transfer of appreciated assets at death to private foundations established by a decedent or his or her family members.

The change in administration also presents uncertainty about the proposed IRS regulations eliminating discounts on transfers of interests in family-owned entities – it is unclear whether they will ever be finalized.

The fate of the gift tax and generation skipping transfer tax is still unclear, though the elimination of these taxes would be consistent with Mr. Trump’s plan as well as with the House Republicans’ plan.

Income Tax:

Currently, for 2016, the taxable income brackets and rates, including capital gains rates, are as follows:

CURRENT TAX BRACKETS AND RATES

Single Joint Income Tax Rate Capital Gains Rate
$0 to $9,275 $0 to $18,550 10% 0%
$9,275 to $37,650 $18,550 to $75,300 15% 0%
$37,650 to $91,150 $75,300 to $151,900 25% 15%
$91,150 to $190,150 $151,900 to $231,450 28% 15%
$190,150 to $413,350 $231,450 to $413,350 33% 15%
$413,350 to $415,050 $413,350 to $466,950 35% 15%
$415,050+ $466,950+ 39.6% 20%

Mr. Trump’s plan reduces the number of tax brackets from seven to three but leaves the capital gains rate structure mostly untouched.

TAX BRACKETS AND RATES UNDER MR. TRUMP’S PLAN

Single Joint Income Tax Rate Capital Gains Rate
$0 to $37,500 $0 to $75,000 12% 0%
$37,500 to $112,500 $75,000 to $225,00 25% 15%
$112,500+ $225,000+ 33% 20%

Currently, the personal exemption is $4,050 and this amount is phased out at higher incomes. Mr. Trump plans to eliminate the personal exemption entirely. However, the standard deduction would see a significant increase from $6,300 to $15,000 for single filers and from $12,600 to $30,000 for joint filers. His plan would also limit itemized deductions to a total of $100,000 for single filers and $200,000 for joint filers, rather than phasing out itemized deductions at higher incomes.

The president-elect plans to eliminate both the 3.8% net investment income tax and the alternative minimum tax.

With respect to business income, Mr. Trump has proposed reducing the corporate income tax from 35% to 15% and eliminating most deductions. His website has not elaborated on which deductions will be eliminated. In addition, his plan provides for a deemed repatriation of corporate profits held offshore at a one-time tax rate of 10%.

Planning Strategies:

Clients may wish to consider the following planning strategies in light of the results of November’s election:

  • Contribute to charity this year. If Mr. Trump’s plan is enacted, itemized deductions, including any charitable deductions, may be capped at $100,000 for single taxpayers and $200,000 for married taxpayers. Also, with income rates possibly being reduced, deductions this year may be more valuable
  • Make lifetime transfers of appreciated assets. If death is deemed to be a tax-triggering event, a death of a high net worth individual would result in an immediate tax bill. Making lifetime transfers would remove appreciated assets from your estate.
  • On the other hand, you may wish to postpone taxable gifts until changes to the tax code are more certain. If Mr. Trump’s tax plan eliminates the gift tax in addition to the estate tax, postponing taxable gifts until that time may make financial sense. It is important for taxpayers to determine whether it is more advantageous to avoid a large capital gains tax in the future, or risk paying a gift tax now that may have been avoided later.
  • Defer income if possible. If enacted, a new tax plan may lower income tax rates for many taxpayers.
  • Delay sales of appreciated assets. Trump’s plan may eliminate the net investment income tax on capital gains.
  • Continue to utilize tax planning strategies that do not incur any immediate gift tax. Examples include intrafamily loans, grantor retained annuity trusts or installment sales. This allows for the preservation of wealth should the estate tax remain in existence or later be reinstated.
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