The pendulum has swung. The shift to a Republican President next year, working with a Republican House and Senate, increases the likelihood for tax reform.
For individual taxpayers, the tax plan envisioned by President-elect Trump ("Trump Tax Plan") correlates in many ways with the House Republican Tax Reform Task Force Blueprint issued on June 24, 2016 ("Blueprint").
Although there are differences, here are some of the highlights:
- Reduce individual income tax rates to three brackets of 12%, 25%, and 33%, and (per the Trump Tax Plan) end the current tax treatment of carried interests.
- Eliminate the 3.8% net investment income tax.
- Repeal individual and corporate alternative minimum tax.
- Set capital gains rates at 0%, 15% and 20% corresponding to the new individual income tax brackets (per the Trump Tax Plan), or use the new brackets to exclude half of all capital gains, dividends and interest (per the Blueprint).
- Substantially increase the standard deduction and eliminate personal exemptions, and (per the Trump Tax Plan) eliminate head-of-household status.
- "Cap" itemized deductions (per the Trump Tax Plan) or eliminate them entirely, other than mortgage interest and charitable contributions (per the Blueprint).
- Repeal the estate tax. The Trump Tax Plan refers to "death tax," and the Blueprint refers to estate and generation skipping transfer taxes. The Trump Tax Plan would impose an immediate capital gains tax on the value of a decedent's estate in excess of $10 million (excluding certain small businesses and family farms). The Blueprint is silent on the tax basis of a decedent's assets – whether these assets will acquire a new tax basis equal to their fair market value at the time of death (the so-called step-up), or a "carryover" basis where the estate beneficiaries succeed to the decedent's tax basis.
- The Trump Tax Plan, in the section on death tax, also proposes that "contributions of appreciated assets to private charities established by the decedent or the decedent's relatives will be disallowed," and it is unclear how this may relate to income tax.
It is impossible to predict how and when these proposals will evolve. Much depends on the relative priority of non-tax items on the agenda, as well as budgetary factors. Moreover, not all legislators – even those in the same political party – are of one mind on how best to achieve tax reform. However, conventional wisdom is that any tax reform would be enacted during 2017, before attention shifts to the 2018 mid-term elections.
In the individual income tax area, if tax rates fall next year, it may be prudent to postpone income realization (including deferring gains) to years when the tax rates may be lower. Similarly, individuals may want to accelerate to this year (i) expenditures that might be capped or eliminated in the future, and (ii) charitable contributions or mortgage interest payments that may become less valuable in the future if tax rates fall.
In the individual transfer tax area, taxpayers contemplating intra family sales or gifts should continue to consider all of the non-tax factors driving their decisions, such as succession planning, centralized management, and asset protection. In addition, there remains the state-level estate and inheritance tax for individuals domiciled in jurisdictions that have retained these taxes. These important reasons for engaging in intra-family transactions continue even if the proposed regulations limiting valuation discounts for family entities (such as partnerships and limited liability companies) are now unlikely to be finalized.
We are reminded that the estate and gift tax has a long history of enactment, repeal, and re-enactment. Anyone operating on the assumption that the estate tax is gone forever fails to consider a tax, first enacted in 1797, that has repeatedly found a new life in the Internal Revenue Code. The one-year repeal in 2010 comes immediately to mind. Similarly, others may recall individual income tax rates as high as 70% in the 1970s. Thus, flexibility should remain part of any tax planning in order to adapt to future changes in the law.