The new President is now in office and just a few weeks into his presidency there is one hot issue on the front burner that is garnering widespread interest across the country: Taxes. American taxpayers from coast to coast are asking themselves, “What is the likely tax plan?” and “What tax-saving strategies can I implement?”
Okay, perhaps there a few other issues generating more attention than taxes but tax reform is among the top priorities on the President’s agenda. Many elements of the plan, if pushed through Congress, will have a significant impact on millions of American taxpayers. Some proposals may not materialize, however, now is the time for taxpayers to consider tax-saving strategies that hedge on what a final tax reform could look like. By placing their bets now and making their moves before Congress decides taxpayers could save “big-league.”
Below are some highlights from the President’s tax plan and some planning opportunities to consider.
Individual Tax Change Proposals
- Collapse the current seven tax brackets, which range from 10% to 39.6%, into three brackets of 12%, 25%, and 33%.
Planning: The top individual tax rate would reduce from 39.6% to 33%. High income taxpayers would potentially be better off next year in comparison to this year. Your tax planning should take this into account when considering income and deductions..
- Proposed tax brackets
Planning: Manage your tax tiers. The proposed tax brackets are significantly different from the current ones. Taxpayers should take note of where they stand and plan accordingly. For example married filers with taxable income of $233,000 would see no change to their tax rate under President’s proposed plan. However, if they contribute an extra $9,000 to a retirement plan they would drop to the 25% bracket under new plan and 28% under the current plan. Therefore by getting their income under $225,000 they realize a 3% tax break compared to the current brackets and an 8% reduction under the new plan.
- Eliminate the Alternative Minimum Tax (AMT)
Planning: Taxpayers subject to AMT this year may realize tax savings by carefully timing real estate tax payments, state tax payments, and miscellaneous itemized deductions.
- Repeal the 3.8% tax on Net Investment Income (NII)
Planning: Taxpayers should postpone passive and portfolio income, capital gains, and carried interest into the following year. For example, gains from selling stock and real estate may be taxed at a lower rate next year than this year.
- Limit itemized deductions to $100,000 for singles and $200,000 for married joint filers.
Planning: Taxpayers with plans of making an exceptionally large contribution may save some deduction by contributing next year.
- Increase the standard deduction from $6,300 to $15,000 for singles; and from $12,600 to $30,000 for married joint filers.
Planning: The number of taxpayers who itemize deductions will decline sharply because of the higher standard deduction and the proposed limits on itemized deductions. Taxpayers itemizing this year, but with minimal itemized deductions below the proposed standard deduction, should accelerate deductions into the current year.
- Eliminate personal exemptions and exemptions for dependents, and the head-of-household deduction.
Planning: At first glance it would seem as though single parents and large families would be paying more tax by losing their exemptions and head-of-household filing status. The planning options are limited here. However, President’s plan also includes a proposal that makes childcare costs deductible from adjusted gross income for most Americans (above-the-line) up to the average cost of care in their state. The deduction would be phased out for individuals earning more than $250,000 or couples earning more than $500,000. The deduction of childcare costs, combined with the increased standard deduction, likely eliminates the negative impact of losing exemptions and deductions allowed for head-of-household filers.
Estate and Gift Tax Proposals
- Repeal federal estate and gift taxes. The estate tax repeal includes a change to the step up of basis for inherited assets.
Planning: If estate tax is repealed, taxpayers should avoid taxable gifts above the current estate tax exemption. Under the proposal, assets above $5 million would not receive a stepped up basis. Aging taxpayers should recognize gains at least to the extent of capital loss carryovers and passive gains should be recognized to the extent of suspended passive losses. Capital losses and suspended passive losses are generally lost at death. As always, it’s a good idea to see an estate planner, especially when the tax code has been reformed.
Business Tax Proposals
- Reduce the corporate tax rate from 35% to 15% and repeal corporate alternative minimum tax.
Planning: With rates dropping, businesses should accelerate deductions, including timing differences, and utilize section 179 and bonus depreciation deductions this year. Several questions remain regarding S corporation pass-through income, LLC pass-through income, and Schedule C business income. Do lower rates apply to these businesses too? Until more is known, taxpayers forming a new business may want to consider an LLC. The LLC can act as a “place holder” until more is known. They are easy to form, change, or dissolve.
- Eliminate the domestic production activities deduction (section 199) and all other business credits, except for the research and development credit.
Planning: Most credits will disappear with the lower tax rates coming in. However, the one remaining credit – the research and development credit – is quite valuable and saves cash for all eligible entities whether profitable or not, due to recent changes allowing the credit to offset payroll taxes.