Year-end tax planning with an eye to Trump's proposals

Kevin J. McPherson, BridgeTower Media Newswires

It is that time of year again when we brave the holiday crowds, throw out our backs shoveling snow, and … sharpen our pencils to do some fun year-end tax planning. While this should be done throughout the year, many of us put this off until the very last moment. A little more time and effort may be needed this year with all of President-elect Donald Trump’s tax proposals to consider. The standard thinking of accelerating deductions and deferring income may be a start, but it is important to understand some of the potential tax changes so you can better formulate an effective year-end plan.

Individual Tax Rates: The Trump Plan calls for collapsing the current seven tax brackets into three.

Current:

$0 - $18,550 — 10%

$18,550 - $75,300 — 15%

$75,300 - $151,900 — 25%

$151,900 - $231,450 — 28%

$231,450 - $413,350 — 33%

$413,350 - $466,950 — 35%

more than $466,950 — 39.6%

Trump:

$0 - $75,000 — 12%

$75,000 - $225,000 — 25%

more than $225,000 — 33%

Rates are based on Married-Joint filers. Trump’s plan eliminates Head of Household and the marriage penalty.

Capital Gains Tax Rates: The Trump Plan appears to be similar to the current rate structure with the assumption that the 0% rate will apply to those in the 12% bracket, 15% if in the 25% bracket, and 20% if in the 33% bracket. The House GOP plan calls for 50% of all investment income (dividends, capital gains, and interest income) to be taxed at the ordinary tax rates. Both the Trump and House plans call for the elimination of the 3.8% net investment income tax on investment income of high-income taxpayers.

Itemized Deductions: While the House plan is silent when it comes to itemized deductions, the Trump Plan proposes capping such deductions at $100,000 (single filers) and $200,000 (joint filers).

Standard Deduction: The Trump Plan increases the standard deduction for single filers to $15,000 and $30,000 for joint filers while the House proposal calls for a $12,000 (single filers without children), $18,000 (single filers with children), and $24,000 (joint filers) standard deduction. The current standard deduction is $6,300 (single filers) and $12,600 (joint filers).

Personal Exemptions: The Trump Plan would eliminate the current personal exemption of $4,050 per person. This would be replaced by an above the line deduction for child care and elder care expenses. The details of such deductions are unclear at this point. The House plan would eliminate these as well and introduce an enhanced child tax credit of $1,500 per qualifying child.

Alternative Minimum Tax (AMT): Both the House and Trump Plans would repeal this tax.

Business Tax Rate (C-Corporations): The Trump Plan calls for a reduction from a current maximum federal rate of 35% to 15%, while the House proposes a 20% rate.

Business Tax Rate (Sole Proprietorships & Pass-through Entities): It appears that the Trump Plan would tax the undistributed income of the owners of these entities at 15% with a second layer of tax when the earnings are distributed, similar to the tax on dividends to C-corporation owners. The House plan calls for a 25% tax on income from these entities. However, it is unclear if there would be an additional tax when earnings are distributed to owners. Currently, income from these entities is taxed at the owners’ ordinary individual tax rates.

Depreciation: The Trump Plan offers manufacturers the opportunity to elect to fully expense all capital expenditures in the year of purchase, however, interest on debt used to finance such assets would not be deductible. The House plan would allow for the immediate expensing of all capital purchases in the year of purchase. Currently, businesses are allowed to expense up to $500,000 of qualifying capital expenditures in the year of purchase with the remaining basis being depreciated over the remaining life of the asset.

Repatriation of Foreign Subsidiary Income: Currently income earned by a foreign subsidiary is not taxed by the U.S. until it is repatriated back to the U.S. parent corporation (at the ordinary corporate tax rates - 35%). The Trump Plan would impose a one-time 10% deemed repatriation tax on cash held overseas, paid over 10 years. The House plan calls for a one-time deemed repatriation tax on such accumulated foreign subsidiary earnings of 8.75% to the extent held in cash and 3.5% held otherwise, payable over eight years.

Estate Tax: Both the House and Trump Plan call for the repeal of the estate tax. The House plan is silent regarding the fate of the basis step-up to an asset’s fair market value at the date of death. Trump is considering a proposal that would allow a basis step-up not to exceed $10 million. Small businesses and family farms would most likely not be limited to the $10 million step-up.

These are just a few of the proposed changes to the current tax law. As you can see, there are many unknowns when it comes to what tax laws will be in effect in 2017. These unknowns make year-end tax planning that much more challenging, but having an understanding of the likely changes will help you better plan for 2016 and 2017.

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Kevin J. McPherson, CPA is a Principal with Mengel, Metzger, Barr & Co. LLP. He may be reached at KMcpherson@mmb-co.com.

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