By: Leah Del Percio, Esq. and Steven A. Loeb, Esq.
It is undeniable that there are big changes afoot in Washington for 2017. The success of President-elect Donald J. Trump and the Republican majority in both houses of Congress could allow for significant federal change to be made in a very short amount of time. As you may already suspect, some of the most significant changes relate to income and transfer tax. President-elect Trump has proposed sweeping changes to our current system of federal taxation. Though they may disagree on some points, the congressional Republican majority will likely move major parts of Trump’s agenda forward, resulting in significant tax reform.
The Trump plan and House Republican plan (the “Ryan Plan”) both contain significant rate reductions for individual taxpayers. In both plans, there would be only three (3) brackets, and under Trump’s plan, the rates themselves would be as follows:
- For married couples filing jointly, these three (3) brackets would become twelve percent (12%) for combined taxable incomes below $75,000, twenty five percent (25%) for combined taxable incomes between $75,000 and $225,000, and thirty three percent (33%) for combined taxable incomes above $225,000.
- For single taxpayers, these three (3) brackets would become twelve percent (12%) for combined taxable incomes below $37,500, twenty five percent (25%) for combined taxable incomes between $37,500 and $112,500, and thirty three percent (33%) for combined taxable incomes above $112,500.
For capital gains (long term) and qualified dividend income, Trump would keep the current maximum rate of twenty percent (20%). The Ryan plan differs with respect to this as it proposes that 50% of gains are excluded from tax entirely, and requires the remaining 50% be taxed at ordinary income rates, at the three proposed brackets discussed above. Under Trump’s plan, carried interest income would be treated as ordinary income. The Ryan plan does not address re-characterizing carried interest.
Both the Trump and Ryan plans repeal the three and 80/100 percent (3.8%) “Medicare Surtax” on net investment income that was enacted as part of the Affordable Care Act.
The Trump plan puts a ceiling on the amount of permitted deductions for itemized expenses of $100,000 for single taxpayers and $200,000 for married couples filing jointly. The Ryan plan eliminates all deductions for itemized expenses except for charitable donations and mortgage interest.
Trump’s plan proposes the establishment of Dependent Care Savings Accounts where taxpayers can contribute annually up to $2,000 per year per child. The Trump plan would also create new benefits for families with income of under $250,000 by allowing a child care deduction that would be capped at the average cost of care for the state of residence.
Estates and Transfers
A hallmark of Trump’s plan is to repeal the estate and generation-skipping taxes. In order to still generate revenue, Trump’s plan calls for a deemed capital gain realization at death on asset appreciation of over ten million dollars ($10,000,000), except if the asset is passing to charity (or a private charity created by the decedent). The Ryan plan is similar in that it replaces the estate and gift tax with the imposition of capital gains tax on transferees.
It remains unclear as to how Trump’s plan and the Ryan plan will affect gift taxation, if at all. Both Trump and the House have not set forth a comprehensive position on the proposed regulations under Sec. 2704 and forthcoming finalized regulations. If adopted in their current form, these regulations would prohibit certain discounts that are used when valuing certain transfers of an interest in a family-owned or closely held business which are currently available and widely used in family wealth transfer planning.
Both the Trump and Ryan plan mandate repatriation of profits earned by US companies abroad. Profits held offshore would be subject to a one-time deemed repatriation at a ten percent (10%) rate.
Both the Trump and Ryan plan abolish the corporate AMT. Trump’s plan provides for the elimination of most corporate tax expenditures, subject to some limited exceptions such as the research credit and capital investment expensing for manufacturing companies.
Trump’s plan also gets rid of most corporate deductions and credits. The Trump plan however, decreases the corporate tax rate by twenty percent (20%), resulting in a fifteen percent (15%) corporate tax rate. The Ryan plan reduces the corporate tax rate by fifteen percent (15%), resulting in a twenty percent (20%) corporate tax rate.
For partnerships, LLCs and S corps, Trump’s plan proposes a new flat tax of 15% of reinvested earnings. The Ryan plan provides that active business income of these entities, when reported on the interest holder’s return, would be taxed at a maximum of 25 percent (the middle bracket). However to the extent that the income is considered reasonable compensation for the interest holder’s services to the entity, it could be taxed at up to the maximum bracket depending on the individual’s income.
For more information please contact via email Steven A. Loeb, Esq. or by phone at 973-538-4700 ext. 229.
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