By: John F. Hager, Attorney at Hager, Dewick & Zuengler, S.C.
Much to everyone’s relief, the presidential election is over. Now it is time to consider the results and effects of the election – an election that was unprecedented, not only in its result, but also in the way we got there. Now is the time to determine whether the rhetoric of the presidential campaign will become proposals that will result in substantive changes in the tax law.
The combination of the incoming Trump administration and the Republican controlled Senate and House of Representatives (albeit with the divisions within the Republican Party) would suggest that the possibility of tax law changes, perhaps even tax simplification at some point, has increased.
Based on the economic plans presented by President-Elect Trump by way of his campaign materials and his statements during the very long campaign, tax reductions should be a significant part, at least with respect to the initial activity. In addition to the Trump economic plans presented during the campaign, the House Republicans released the “Better Way” tax reform blueprint earlier this year. The speed with which any changes are made will also likely depend on the other initiatives that will be pursued early in the Trump administration (i.e. the repeal of all or part of the Affordable Care Act/Obamacare, etc.).
Individual Taxes. As to individual income taxation, following are the major areas that are likely to be pursued:
- The seven current income tax brackets that top out at 39.6% will be replaced by three brackets at 12%, 25% and 33%, respectively.
- Capital gains tax rates of 0%, 15% and 20% will be retained.
- The 3.8% net investment income tax imposed on passive income, including capital gains, and the additional Medicare tax, that were part of Obamacare, will be repealed.
- Standard deductions will increase to $15,000 for single taxpayers (from $6,350) and to $30,000 for married taxpayers (from $12,700). Itemized deductions will be capped at $100,000 for single taxpayers and at $200,000 for married taxpayers. Personal exemptions will be eliminated altogether.
- The Alternative Minimum Tax (AMT) will be repealed.
- Child care and elder care deductions and tax-free savings accounts for children and elderly dependents may be available.
Business Taxes. Following are some of the changes likely to be considered with respect to income taxes for corporations and other business entities:
- The top corporate income tax rate of 35% currently will be reduced to 15%. Some questions remain as to how pass-through entities, that have gained significant popularity over the years, will be treated. These include partnerships, limited liability companies, Subchapter S corporations, etc.
- Certain unspecified corporate tax expenditures will be eliminated, except for the Research and Development (R&D) credit.
- Section 179 expensing for small businesses will be increased to $1,000,000 from $500,000.
- Caps on on-site child care business tax credits will be increased.
- Manufacturing firms will be allowed to immediately deduct all new investments in the business, in lieu of deducting interest expenses.
- A one-time reduced rate may be available to encourage companies to repatriate earnings of foreign subsidiaries that are held offshore.
- The excise tax on medical devices will be repealed.
Estate and Gift Taxes. From the standpoint of individuals and the amount of taxes to be paid upon the transfer of assets, whether during lifetime or at death, the following proposals have been made:
- The Federal Estate and Gift Tax law will be repealed altogether. Currently, the tax law provides that each person will have a unified Federal Estate and Gift Tax credit of $5,490,000, or $10,980,000 for married couples, in 2017.
- The current step-up in income tax basis for the value of assets owned at the date of death will be limited to $10,000,000 per married couple.
- Certain income tax deductions for contributions of appreciated value assets to private charities established by a decedent and/or his family may be disallowed.
Obamacare. Despite promises to fully repeal the Affordable Care Act/Obamacare, recent indications suggest that several key non-tax parts of the Affordable Care Act will likely be retained (i.e. preventing the denial of health insurance coverage for those with pre-existing conditions and allowing children to remain under their parents’ health insurance coverage until age 26). However, the tax-related provisions will likely be repealed, as set forth above.
Significant individual and corporate income tax and individual estate and gift tax changes may be likely in the near future, but it remains to be seen when and how such changes will occur. In the meantime, some of the normal year end income tax planning issues should take into account the likely changes in 2017. Stay tuned for future updates.