Will Comprehensive Tax Reform Finally become a Reality?

Taxes & Tax Planning | Financial Planning

 Brian King By: Brian King

With a surprise win by Donald Trump in the presidential election and control maintained by Republicans in both houses of Congress, we may be on the verge of our nation’s first comprehensive tax reform since 1986. Since that time, the Federal tax law has grown from 26,000 pages to 70,000 pages.  So, you could say we are due.

The biggest questions about reform include when legislation will be passed, when will it be effective and what will it look like. While at this point answers to these questions are at best a guess, here’s what we know so far.

1. When Will Legislation Be Passed?

Republicans appear confident that they can have legislative text ready in early 2017, in which case it would possibly be retroactive to the first of the year.  It is unclear how much support they’ll receive from Democrats.

While Republicans control both houses of Congress, Democrats control enough seats in the Senate to filibuster. Tax reform would need 60 votes to pass the Senate unless the budget reconciliation used to pass the Affordable Care Act was used to push legislation through.

2. What Would Tax Reform Actually Look Like?

It is difficult to say, but we can take some signals from House Republicans’ “Better Way” tax proposals released in June and president-elect Trump’s comments during his campaign.

Individual Income Tax Changes

The proposals for individual income taxes are very similar.  They both compress the seven current tax brackets into three:

Proposed Individual Income Tax Rates

Current Rates

Proposed Rates

Joint Filers

Single Filers

10% & 15%

0% & 12%

Up to $75,300

Up to $37,650

25% & 28%

25%

Up to $231,450

Up to $190,150

33%, 35% & 39.6%

33%

Above $231,450

Above $190,150

Current Rates

Proposed Rates

Joint Filers

Single Filers

10% & 15%

0% & 12%

Up to $75,300

Up to $37,650

25% & 28%

25%

Up to $231,450

Up to $190,150

33%, 35% & 39.6%

33%

Above $231,450

Above $190,150

Trump’s plan maintains the current rate on capital gains and qualified dividends. The House GOP plan subjects investment income to proposed marginal tax rates but allows taxpayers to exclude half of their investment income from tax leading to lower effective tax rates.  Both plans also eliminate the 3.8% Net Investment Income Tax as they propose repealing the Affordable Care Act.

Standard Deduction Increases

Both plans also increase the standard deduction to limit the number of taxpayers that will need to itemize their deductions. The House GOP proposal hopes to simplify tax filings for many taxpayers onto a postcard. Trump’s plan proposes an overall limit on itemized deductions at $100,000 for single filers and $200,000 for joint filers. The House GOP plan does not propose a hard cap but itemized deductions would possibly be limited to mortgage interest and charitable deductions.

Other Tax Changes

The similarities continue as both plans propose to augment the Earned Income Tax Credit, increase/simply benefits to families with children, eliminate the Alternative Minimum Tax (AMT) and repeal estate and gift taxes.

The plans diverge somewhat when it comes to taxes on business, and this may be where compromise comes into play.  However, there is speculation on Capitol Hill that President-Elect Trump might be willing to accept most of the House GOP Better Way plan in return for expediency.

3. As a Taxpayer, What Should I Do?

Despite what our political leaders tell us, past experience shows that tax reform is unlikely to be permanent. Before making any brash changes, take these considerations into account.

Wealth Transfer Planning in Progress

Many taxpayers with taxable estates under current law might be in the middle of plans to transfer additional wealth out of their estates to future generations. This is especially true for those utilizing valuation discounts which would be eliminated under proposed Treasury regulations. As long as these plans do not include paying any gift or Generation Skipping Tax (GST) currently, it likely makes sense to proceed.

Future Wealth Transfer Plans

Many think that gift and estate tax repeal might be one piece of the proposed plan that is not passed. These taxes only affect a small number of wealthy taxpayers and therefore become an attractive bargaining chip. Also, there is no guarantee that repeal would be permanent.  If your plan includes paying gift or GST tax, it may be prudent to hold off on moving forward.

Charitable Contributions

One item we will be discussing with clients in the highest brackets is the acceleration of itemized deductions into 2016, especially charitable contributions. If Trump’s plan were passed, joint filers would be subject to a $200,000 limit on itemized deductions. The House GOP plan does not cap deductions, but it would provide less benefit due to lower marginal tax rates.

So, if you are in the highest current tax brackets (35% and 39.6%), and plan significant charitable contributions it might be worth frontloading those contributions into 2016 to receive a higher benefit. If you are nervous about giving money to a particular charity early, or you simply don’t know what organizations you would want to support, you could make a contribution to a donor advised fund.

There is still a lot of uncertainty around tax reform. If you’d like to discuss how tax reform might impact you personally, please contact your Wealth Manager.

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Brian King joined the Plancorp team from PricewaterhouseCoopers, LLP in 2008. Now our Chief Planning Officer, he brings his advanced income tax and estate planning experience to Plancorp’s family office practice, where he helps families understand, grow and preserve their wealth. More »