Currently, the proposals outlined by both the President-Elect and House Republicans “simplify” the personal income tax code. Key policy proposals include reducing the number of income brackets from seven to three, increasing the standard deduction amounts, and repealing the Alternative Minimum Tax, Net Investment Income Tax, and Estate Tax.
We’re outlining a few of the major proposed changes and potential calculated moves that some are making to prepare for the potential change:
Repeal the Alternative Minimum Tax
President-Elect Donald Trump and the House Republicans have promised to end the Alternative Minimum Tax. The AMT has been a part of the tax code since 1979 and functions alongside the regular income tax. According to the Tax Policy Center, the AMT now affects over four million filers.
If the president-elect and House GOP make good on their promise of repealing the Alternative Minimum Tax, it would make a difference in the tax filings for about 27 percent of households with incomes between $150,000 and $700,000. The repeal of the AMT follows in the vein of the overall proposed plan to simplify the tax code: Without an AMT, these filers will no longer have to calculate their tax liability twice, and would be able to take full advantage of tax loopholes, exemptions, and deductions available to them through the regular tax code.
Repealing the Estate Tax
Another key tax policy proposal of the President-Elect is to repeal the estate or “Death” tax. In addition, his proposal includes an exemption for capital gains held until death and valued over $5 million ($10 million for married filers).
In its present state, the Estate Tax exempts estates worth $5.45 million or less for an individual and $10.9 million for a married couple. An estate valued over $5.45 million is subject to a 40% estate tax rate.
Lower Capital Gains Taxes Through the Repeal of the Net Investment Income Tax
President-Elect Trump’s proposed tax plan also features eliminating the Net Investment Income Tax (NIIT). The Net Investment Income Tax is a part of the Affordable Care Act that that applies a 3.8% rate to net investment incomes of individuals, estates and trusts whose income is above the threshold amounts. The threshold amounts are $200,000 for a single individual or head of household and $250,000 married filing jointly ($125,000 married filing separately).
Reduced Income Tax Rate Under the Newly Proposed Federal Tax Brackets and Reduced Capital Gains Taxes for High Earners
The newly proposed federal tax brackets of 12, 25, and 33% mean a lowered income tax rate for some Americans. The biggest cut would be within the top rate, which would fall from the current 39.6% to 33%. These lower rates are “paid for” by capping the itemized deductions at $200,000 for a married couple and $100,000 for a single person. By capping the deductions, many high income residents of high-tax states (e.g, California) will use their entire allotment of itemized deductions just on items that they cannot control – state income tax and property taxes. This means that items they can control, mortgage interest and charitable contributions may be limited or even eliminated as deductions.
In the same vein, capital gains tax rates are being lowered with the potential of the elimination of the 3.8% Net Investment Income Tax. President-Elect Trump has said that the highest capital gains tax rate under his administration would be 20%. If the NIIT is eliminated, then the newly proposed 20% rate will be lower than the current 23.8% rate (20% capital gains tax rate plus the 3.8% NIIT).
The net effect of the lower rates and the potential limit on deductions makes it imperative for people with income in the highest brackets to defer income into next year (to take advantage of lower rates) and accelerate any planned large charitable contributions into this year (for example, paying multiple year pledges all before the end of the year or funding a donor advised fund).
It is of the utmost importance to remember that each and every one of these proposed changes are currently exactly that- proposed. There is no certainty for which proposals will become enacted into law and in what form they will emerge from the Congressional “meat grinder”. If you plan on altering your tax strategy in light of proposed changes, you should only do so in conjunction with the advice of your financial advisor. Contact the expert team of advisors at Shea Labagh Dobberstein to help answer your questions and advise you on your potential tax moves today.