With tax reform being a major part of President Trump’s platform and both houses controlled by the Republicans, many are wondering “how the tax environment will change.” All professionals in the financial services industry will be asked about this hot topic because it directly impacts financial plans our clients are implementing.
It is important to understand that tax reform is complex. It has been 31 years since the last major overhaul. With the deficit at 21 trillion dollars, any changes will need to be relatively revenue neutral. Changes will also require that the executive and legislative branches be on the same page. There are many differing views on this subject, even for members of the same party. Nevertheless, there is a better chance that significant changes will be made than at any time in recent history.
An important planning concept in a potentially changing tax landscape is flexibility. It will also be important to keep in close contact with clients to monitor planning solutions in light of changes that are being made.
Let’s focus on some of the proposals being made. 1The most important change to personal income taxes would be the simplification of rates to 12%, 25%, and 33%. The cutoff points for Joint filers would be at $75,000 and $225,000, and for Single filers, it would be $37,500 and $137,500.
There are several provisions slated for repeal, the Medicare Hospital Insurance of .9%, the 3.8% tax on investment income, and the Alternative Minimum Tax.
Aside from mortgage interest, charitable contributions, and state and local taxes, itemized deductions would be lost. Even these deductions would be capped at $100,000 for single filers and $200,000 for joint filers.
To compensate for lost deductions, personal exemptions would increase to $30,000 for joint filers and $15,000 for single filers.
The Federal Estate tax would be repealed. However, gift and generation skipping taxes would remain intact. Revenue would be boosted by eliminating the step up in basis for capital gains to the extent that the value of the estate exceeds $10 million. However, transfer of appreciated property to relatives or a private charity would not be allowed.
From a business standpoint, corporate rates could be reduced from 35% to about 20%. Pass-through income would come down from the current 40% rate to 25%. Revenue loss would be made up by a 20% tax on imports and a 10% tax by repatriating foreign profits of U. S. corporations.
If these changes come into play, there is no guarantee that they will continue in future administrations. It is still prudent to provide financial security in estate planning situations regardless of the current estate tax environment. Fortunately, the retirement planning space has not been changed and is still provided with the incentives we are all familiar with for annuities and life insurance. The major takeaways are to provide clients with flexible solutions and make sure that you are monitoring client accounts frequently.
Contact William “Bill” Jackson, Sr. Advanced Markets Consultant at 888-251-5525, ext. 361 with any advanced case design questions or concerns. He’s here to
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1Deloitte, 2017 Essential Tax and Wealth Planning Guide, Post-election tax policy update - Impact of the 2016 elections, Installment Two.
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